Filed pursuant to Rule 424(b)(4)
Registration No. 333-52763
1,800,000 SHARES
[LOGO]
CLASS A COMMON STOCK
------------------------
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. For information that was considered in
determining the initial public offering price, see "Underwriting." The Class A
Common Stock has been accepted for quotation 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 94.9% 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."
An estimated $6,500,000 of the proceeds of the Offering will be used to
repay a portion of floor plan indebtedness of which $3,600,000 has been
guaranteed by certain affiliates of the Company. See "Use of Proceeds" and
"Certain Transactions."
------------------------
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 11.
---------------------
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.
------------------------
UNDERWRITING DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2)
Per Share.................................... $9.00 $.6525 $8.3475
Total(3)..................................... $16,200,000 $1,174,500 $15,025,500
(1) Does not include additional consideration payable to Paulson Investment
Company, Inc., as representative of the several Underwriters (the
"Representative"), consisting of: (a) a non accountable expense allowance
equal to 2% of the gross proceeds of the Offering and (b) warrants entitling
the Representative to purchase up to an aggregate of 180,000 shares of Class
A Common Stock from the Company (the "Representative's Warrants") for $10.80
per share. The Company has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended.
(2) Before deducting expenses payable by the Company (not including the
Representative's non-accountable expense allowance) estimated at $900,000.
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to 270,000 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 $18,630,000, $1,350,675 and $17,279,325, 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 Greenberg
Traurig in New York, New York on or about July 31, 1998.
PAULSON INVESTMENT COMPANY, INC. EBI SECURITIES CORPORATION
The date of this Prospectus is July 28, 1998
This Prospectus includes trademarks of companies other than Hometown Auto
Retailers, Inc., which trademarks are the property of their respective holders.
------------------------
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 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.
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.
------------------------
2
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 AUTHORIZED FREE
STANDING SERVICE CENTER (THE "EXCHANGE") AND (II) THE CASH ACQUISITION OF THREE
ADDITIONAL DEALERSHIPS (THE "ACQUISITIONS"), ALL OF WHICH TRANSACTIONS SHALL BE
CONSUMMATED ON THE CLOSING OF THE OFFERING. UNTIL THE CLOSING OF THE OFFERING,
HOMETOWN AUTO RETAILERS, INC. WILL CONDUCT NO OPERATIONS UNDER ITS OWN NAME AND
ALL REVENUES WILL BE GENERATED BY ITS PREDECESSOR COMPANIES. 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 9
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 that it is one of the five largest automotive dealers in New England.
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 also
believes that more than 80% of the factory approved 1998 model year livery
vehicles sold as new vehicles to livery operators were Lincoln Town Cars and
limousines. 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. During 1997 and the quarter ended
March 31, 1998, on a pro forma combined basis, 5.4% and 8.1%, respectively, of
the Company's revenues were attributable to the sale, financing and maintenance
of livery vehicles. 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. During
1997 and the quarter ended March 31, 1998, on a pro forma combined basis, 0.4%
and 0.3%, respectively, of the Company's revenues were generated at its free
standing neighborhood service center. 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
3
by operating during extended hours, servicing vehicles without prior 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:
- an established customer base and name recognition for each of its existing
dealerships;
- a high ratio of retail used car to new car sales;
- a strong regional focus permitting cross-marketing of used and same brand
new vehicles;
- management and control efficiencies;
- 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;
- brand diversity;
- potential cost savings from centralized financing and administrative
functions; and
- the ability to source high quality used vehicles cost-effectively through
coordinated auction buying, trade-ins and off-lease programs.
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
4
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 3,760,000 shares of Class B Common Stock (the
"Exchange"). Until the closing of the Offering, Hometown Auto Retailers, Inc.
will conduct no operations under its own name and all revenues will be generated
by its predecessor companies. In 1997 and the three months ended March 31, 1998,
the Core Operating Companies had pro forma combined revenues of $178,433,000 and
$45,521,000, respectively, and income before income taxes of $2,761,000 and
$687,000, respectively. In addition, the Company has entered into agreements to
acquire three operating dealerships in Connecticut, Massachusetts and Vermont
for an aggregate consideration of $6.7 million plus the assumption of certain
liabilities (the "Acquisitions") which added $61,732,000 and $12,532,000 to pro
forma revenues for 1997 and the quarter ended March 31, 1998 and $2,248,000 and
$595,000 to income before income taxes for such periods. 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.
5
THE OFFERING
Common Stock offered by the Company.......... 1,800,000 shares of Class A Common Stock
Common Stock to be outstanding after the 2,040,000 shares of Class A Common Stock(1)
offering................................... 3,760,000 shares of Class B Common Stock
Use of proceeds.............................. Finance the acquisition of three automobile
dealerships; repay certain indebtedness;
working capital and general corporate
purposes, including additional acquisitions.
An estimated $6,500,000 of the proceeds of
the Offering will be used to repay a portion
of floor plan indebtedness of which
$3,600,000 has been guaranteed by certain
affiliates of the Company. See "Use of
Proceeds" and "Certain Transactions."
Nasdaq National Market symbol................ HCAR
- ------------------------
(1) Does not include: (a) an aggregate of 480,000 shares reserved for issuance
under the Company's Stock Option Plan, 295,556 of which are subject to
outstanding options exercisable at the initial public offering price per
share; and (b) 270,000 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 11 for a description of the above and
certain other risks relevant to an investment in the Class A Common Stock.
6
SUMMARY PRO FORMA FINANCIAL DATA
The following summary pro forma financial data presents, for the year ended
December 31, 1997 and the three months ended March 31, 1998, certain historical
pro forma financial data and combined 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) COMBINED
----------------------------------- CORE OPERATING ACQUISITIONS PRO FORMA
SHAKER (3) WESTWOOD MULLER COMPANIES (2) (3)(4)
----------- ----------- --------- --------------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED PRO FORMA
INCOME STATEMENT DATA (1):
Revenues
New vehicle sales........................... $ 29,345 $ 45,470 $ 33,308 $ 108,123 $ 26,365 $ 134,488
Used vehicle sales.......................... 21,800 8,396 19,996 50,192 28,835 79,027
Parts and service sales..................... 6,727 4,352 4,907 15,986 5,314 21,300
Other dealership revenues, net.............. 1,624 731 1,777 4,132 1,218 5,350
----------- ----------- --------- --------------- ------------- -----------
Total revenues............................ 59,496 58,949 59,988 178,433 61,732 240,165
Cost of sales................................. 51,226 52,770 51,641 155,637 53,386 209,023
----------- ----------- --------- --------------- ------------- -----------
Gross profit................................ 8,270 6,179 8,347 22,796 8,346 31,142
Amortization of excess of purchase price over
net book value of assets acquired........... -- -- -- -- -- 399(5)
Selling, general and administrative expenses
(2)......................................... 7,076 4,931 6,936 18,943 5,651 24,595
----------- ----------- --------- --------------- ------------- -----------
Income from operations...................... 1,194 1,248 1,411 3,853 2,695 6,148
Other income (expense)
Interest expense, net (2)................... (427) (295) (420) (1,142) (412) (532)
Other income (expense), net................. 116 (39) (27) 50 (35) 15
----------- ----------- --------- --------------- ------------- -----------
Income before taxes....................... $ 883 $ 914 $ 964 $ 2,761 $ 2,248 5,631
----------- ----------- --------- --------------- -------------
----------- ----------- --------- --------------- -------------
Provision for income taxes......................................................................................... 2,252(5)
----------
Net income..................................................................................................... $ 3,379
----------
----------
Earnings per share, basic and diluted.............................................................................. $ 0.58
Weighted average shares............................................................................................ 5,800,000
UNAUDITED PRO FORMA OTHER DATA (1):
Gross margin.................................. 13.9% 10.5% 13.9% 12.8% 13.5% 13.0%
Operating margin.............................. 2.0% 2.1% 2.4% 2.2% 4.4% 2.6%
Pre-tax margin................................ 1.5% 1.6% 1.6% 1.5% 3.6% 2.3%
Retail new vehicles sold...................... 1,297 1,473 1,511 4,281 1,150 5,431
Retail used vehicles sold..................... 1,256 377 1,301 2,934 1,791 4,725
7
FOR THE THREE MONTHS ENDED MARCH 31, 1998
--------------------------------------------------------------------------------
CORE OPERATING COMPANIES (2) COMBINED
----------------------------------- CORE OPERATING ACQUISITIONS PRO FORMA
SHAKER (3) WESTWOOD MULLER COMPANIES (2) (3)(4)
----------- ----------- --------- --------------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED PRO FORMA
INCOME STATEMENT DATA (1):
Revenues
New vehicle sales........................... $ 5,967 $ 12,599 $ 7,133 $ 25,699 $ 5,731 $ 31,430
Used vehicle sales.......................... 5,723 4,273 4,470 14,466 5,395 19,861
Parts and service sales..................... 1,613 1,121 1,311 4,045 1,217 5,262
Other dealership revenues, net.............. 441 397 473 1,311 189 1,500
----------- ----------- --------- --------------- ------------- -----------
Total revenues............................ 13,744 18,390 13,387 45,521 12,532 58,053
Cost of sales................................. 11,612 16,502 11,473 39,587 10,688 50,275
----------- ----------- --------- --------------- ------------- -----------
Gross profit................................ 2,132 1,888 1,914 5,934 1,844 7,778
Amortization of excess of purchase price over
net book value of assets acquired........... -- -- -- -- -- 100(5)
Selling, general and administrative expenses
(2)......................................... 1,762 1,393 1,663 4,818 1,170 5,988
----------- ----------- --------- --------------- ------------- -----------
Income from operations...................... 370 495 251 1,116 674 1,690
Other income (expense)
Interest expense, net (2)................... (92) (132) (159) (383) (114) (240)
Other income (expense), net................. (6) (9) (31) (46) 35 (11)
----------- ----------- --------- --------------- ------------- -----------
Income before taxes....................... $ 272 $ 354 $ 61 $ 687 $ 595 1,439
----------- ----------- --------- --------------- -------------
----------- ----------- --------- --------------- -------------
Provision for income taxes......................................................................................... 576(5)
----------
Net income..................................................................................................... $ 863
----------
----------
Earnings per share, basic and diluted.............................................................................. $ .15
Weighted average shares............................................................................................ 5,800,000
UNAUDITED PRO FORMA OTHER DATA (1):
Gross margin.................................. 15.5% 10.3% 14.3% 13.0% 14.7% 13.4%
Operating margin.............................. 2.7% 2.7% 1.9% 2.5% 5.4% 2.9%
Pre-tax margin................................ 2.0% 1.9% 0.5% 1.5% 4.7% 2.5%
Retail new vehicles sold...................... 259 378 325 962 233 1,195
Retail used vehicles sold..................... 363 133 294 790 304 1,094
8
AS OF MARCH 31, 1998
--------------------------------------
COMBINED
CORE OPERATING PRO FORMA
SHAKER COMPANIES AS ADJUSTED
(6) (6) (7)
--------- -------------- -----------
(IN THOUSANDS)
UNAUDITED PRO FORMA BALANCE SHEET DATA (1):
Working capital (deficit)................................................ $ 2,153 $ 1,938 $ 9,339
Inventories.............................................................. 8,321 23,587 29,560
Total assets............................................................. 12,814 46,144 57,996
Total debt............................................................... 7,877 25,992 24,043
Stockholders' equity..................................................... 3,823 16,043 29,725
Notes:
(1) For financial presentation purposes, the Unaudited Pro Forma Income
Statement Data gives effect to the Exchange, the Acquisitions and the
Offering as if they had occurred as of January 1, 1997. The Exchange and the
Acquisitions will occur simultaneously with the Closing of the Offering.
(2) Pro forma adjustments made to the historical financial statements of the
Core Operating Companies and the Acquisitions are as follows:
FOR THE YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------------------------------
SHAKER WESTWOOD MULLER BAY STATE BRATTLEBORO PRIDE OTHER (C) TOTAL
--------- ----------- --------- ----------- ----------- --------- ----------- ---------
(IN THOUSANDS)
Selling, general and
administrative expenses:
Historical................ $ 7,715 $ 5,594 $ 7,283 $ 1,934 $ 3,314 $ 1,452 $ 1 $ 27,293
Pro forma adjustments
(a)..................... (639) (663) (347) 32 (549) (532) -- (2,698)
--------- ----------- --------- ----------- ----------- --------- ----------- ---------
Pro forma total........... $ 7,076 $ 4,931 $ 6,936 $ 1,966 $ 2,765 $ 920 $ 1 $ 24,595
--------- ----------- --------- ----------- ----------- --------- ----------- ---------
--------- ----------- --------- ----------- ----------- --------- ----------- ---------
Interest income (expense),
net:
Historical................ $ (189) $ (295) $ (512) $ (272) $ (72) $ (54) $ -- $ (1,394)
Pro forma adjustments
(b)..................... (238) -- 92 (50) 33 3 1,022 862
--------- ----------- --------- ----------- ----------- --------- ----------- ---------
Pro forma total........... $ (427) $ (295) $ (420) $ (322) $ (39) $ (51) $ 1,022 $ (532)
--------- ----------- --------- ----------- ----------- --------- ----------- ---------
--------- ----------- --------- ----------- ----------- --------- ----------- ---------
FOR THE THREE MONTHS ENDED MARCH 31, 1998
------------------------------------------------------------------------------------------------
SHAKER WESTWOOD MULLER BAY STATE BRATTLEBORO PRIDE OTHER (C) TOTAL
--------- ----------- --------- ----------- ------------- --------- ----------- ---------
(IN THOUSANDS)
Selling, general and
administrative expenses:
Historical............... $ 4,194 $ 1,432 $ 1,726 $ 481 $ 511 $ 332 $ -- $ 8,676
Pro forma adjustments
(a).................... (2,432) (39) (63) 9 (28) (135) -- (2,688)
--------- ----------- --------- ----------- ------ --------- ----------- ---------
Pro forma total.......... $ 1,762 $ 1,393 $ 1,663 $ 490 $ 483 $ 197 $ -- $ 5,988
--------- ----------- --------- ----------- ------ --------- ----------- ---------
--------- ----------- --------- ----------- ------ --------- ----------- ---------
Interest income (expense),
net:
Historical............... $ (57) $ (132) $ (181) $ (54) $ (42) $ (12) $ 1 $ (477)
Pro forma adjustments
(b).................... (35) -- 22 (8) 2 -- 256 237
--------- ----------- --------- ----------- ------ --------- ----------- ---------
Pro forma total.......... $ (92) $ (132) $ (159) $ (62) $ (40) $ (12) $ 257 (240)
--------- ----------- --------- ----------- ------ --------- ----------- ---------
--------- ----------- --------- ----------- ------ --------- ----------- ---------
(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. See Unaudited Pro Forma Financial
Statements and the notes thereto for a more detailed description of these
pro forma adjustments.
9
(b) Reflects a pro forma reduction to interest income earned on the cash
that is being distributed to the Shaker stockholders prior to the
Offering and of Bay State on cash and cash equivalents not realized as
part of the Exchange and the Acquisitions. Also includes reductions in
interest expense on (i) long-term debt incurred by Muller prior to the
Exchange that will be liquidated out of proceeds of the Offering and (ii)
on leases and debt not assumed as part of the acquisition of Brattleboro
and Pride. See Unaudited Pro Forma Financial Statements and the notes
thereto for a more detailed description of these pro forma adjustments.
(c) For the year ended December 31, 1997, includes $1,000 of selling,
general and administrative expenses incurred by Hometown during 1997. For
the three months ended March 31, 1998, includes $1,000 of interest income
accrued by Hometown during the same period. Both periods also include the
12 months and 3 months pro forma decreases in interest expenses resulting
from the repayment of certain floor plan obligations with proceeds from
the Offering and the decrease in interest expenses resulting from
refinancing the balance of the floor plan obligations with a commercial
lender. See Unaudited Pro Forma Financial Statements and the notes
thereto 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"), 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
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 (2) 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 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 book value of assets acquired;" (ii) the decrease in interest
expenses of $618,000 for 1997 and $155,000 for the three months ended March
31, 1998 resulting from the repayment of certain floor plan obligations with
proceeds from the Offering, and the decrease in interest of $404,000 for
1997 and $101,000 for the three months ended March 31, 1998 resulting from
refinancing 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 and $1,000 of interest income for the three
months ended March 31, 1998. See Unaudited Pro Forma Financial Statements
and the notes thereto 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 set forth in Note 4 "Unaudited Pro Forma Balance
Sheets--Purchase and Accounting Adjustments" of the Notes to the Unaudited
Pro Forma Financial Statements.
(7) Gives effect to the Exchange and the Acquisitions on an historical basis and
the pro forma balance sheets adjustments set forth in Note 4 "Unaudited Pro
Forma Balance Sheets--Purchase and Accounting Adjustments" and Note 5
"Unaudited Pro Forma Balance Sheets--Offering Proceeds" of the Notes to the
Unaudited Pro Forma Financial Statements.
10
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.
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 59%, 16%, and 16% 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 obtain sufficient quantities of
the most popular makes and models, its profitability could be adversely
affected.
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.
LACK OF EXCLUSIVE MARKET AREA
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.
11
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 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. Further, the consents from Ford Motor and Chrysler are subject to
conditions subsequent with respect to the submission by the Company of
supporting documents of the type generally contained in new dealer appointment
packages and such Manufacturer's approval thereof. Although various principals
of the Company have previously been approved by these Manufacturers in
connection with the franchises held by the Core Operating Companies and the
Company believes that such conditions subsequent will be satisfied, there is no
assurance that acceptable final consents will be obtained. The Manufacturers'
consents include restriction on: (i) the acquisition of more than a specified
percentage of the Common Stock (20% in the case of GM and Toyota Motor and 50%
in
12
the case of Ford Motor) 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. The Company believes it
has approached two percent of Lincoln/Mercury retail sales in Connecticut and
New Jersey and two percent of Ford retail sales in Connecticut. Because retail
sales numbers are constantly changing this number is also subject to change. All
of the Company's Lincoln/ Mercury and Ford dealerships operate in markets having
three or less Ford or Lincoln/Mercury authorized dealerships and the Company
does not operate in any markets having four or more authorized Ford or Lincoln
dealerships. Notwithstanding the numerical limitations on the acquisition of
additional Lincoln/ Mercury and Ford dealerships in certain of the Company's
existing market areas, the Company believes that Ford Motor will be cooperative
in the Company's attempts to acquire additional dealerships in both these and
other market areas, but there can be no assurance that this will be the case. If
the Company is unable to comply with the foregoing restrictions or satisfy the
conditions subsequent, 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 to 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.
In the case of Ford Motor Company, the Company may not acquire more than two
Ford and two Lincoln Mercury Dealerships during the first 12-month period after
execution of the Dealer Sales and Service Agreement and thereafter may not
acquire an additional dealership unless and until the Company's Ford and Lincoln
Mercury dealerships, as the case may be, are meeting Ford's performance
criteria. Additionally, the Company may not: (a) acquire an additional Ford or
Lincoln Mercury dealership, as the case may be, if the Company would then own or
control authorized Ford or Lincoln Mercury dealerships with total retail sales
of new vehicles for the preceding calendar year of more than 2% of the total
Ford or Lincoln Mercury, as the case may be, retail sales volume in the United
States or more than 2% of the total Ford or Lincoln Mercury retail sales volume
in any state; or (b) acquire an additional Ford or Lincoln Mercury dealership,
as the case may be, if the Company would own or control more than one authorized
dealership in those market areas (defined by Ford) having three or less Ford or
Lincoln Mercury authorized dealerships in them or acquire more than 25% of the
Ford or Lincoln Mercury authorized dealerships in a market area having four or
more authorized Ford or Lincoln Mercury dealerships in them.
In the case of Toyota Motor Sales, U.S.A., Inc., the Company may not: (a)
acquire greater than a specified number of dealerships per region (e.g. four in
the Boston region and five in the New York region); (b) acquire the greater of
one or 20% of the Toyota dealerships in any metro market (as defined by Toyota);
(c) own or control dealerships in contiguous market areas; or (d) acquire Toyota
dealerships more frequently than every nine months.
In the case of General Motors, provided that the Company meets certain
managerial requirements, the Company may acquire up to five General Motor
dealerships during the period ending 24 months after the effective date of the
dealer sales and service agreement.
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
13
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 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
14
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 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. In furtherance of this plan, Ford Motor has recently announced
a proposed joint venture with Republic Industries under which Ford Motor would
acquire a 51% interest and Republic Industries a 49% interest in a joint venture
entity that will acquire one Lincoln Mercury and eight Ford dealerships in the
Rochester, New York area to create a retail network. The dealerships would be
operated by Republic Industries. 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.
GOODWILL
The Company's balance sheet immediately following the Offering and
consummation of the Exchange and the Acquisitions" will include an amount
designated as "goodwill" that represents 28% of assets and 54% of stockholders'
equity.
Goodwill arises when an acquirer pays more for a business then the fair
value of the tangible and separately measurable intangible net assets. Generally
Accepted Accounting Principles requires that this and all other intangible
assets be amortized over the period benefitted. Management has determined that
period to be no less than 40 years.
If management were not to separately recognize a material intangible asset
having a benefit period less than 40 years, or were not to give effect to
shorter benefit periods of factors giving rise to a material portion of the
goodwill, earnings reported in periods immediately following an acquisition
would be overstated. In later years, the Company would be burdened by a
continuing charge against earnings without the associated benefit to income
valued by management in arriving at the consideration paid for the business.
Earnings in later years could be significantly affected if management determined
then that the remaining balance of goodwill was impaired.
Management has reviewed with its independent accountants all of the factors
and related future cash flows which it considered in arriving at the amount
incurred to acquire each of the founding companies. Management concluded that
the anticipated future cash flows associated with intangible assets recognized
in the acquisitions will continue indefinitely, and there is no persuasive
evidence that any material portion will dissipate over a period shorter than 40
years.
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."
15
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. The Company
believes that new vehicle sales in North America will be at levels slightly
under 1997 during 1998 and 1999 and at levels increasingly higher than 1997 in
the years 2000 through 2002. The Company does not believe that future expected
sales levels through 2002 will have a negative impact on its business. During
the past five years the Company's sales of new and used vehicles have not been
materially affected by overall industry levels of vehicle sales but have been
more significantly affected by the timing of introduction of new models by
particular Manufacturers and changes in consumer preferences for particular
brands or models.
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.
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."
16
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 64.8% of the
Company's outstanding Common Stock of all classes, will control 94.9% 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 54.8% 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 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 $6.5 million or 47.1%, ($8.7
million or 54.4% 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
2,040,000 shares of Class A Common Stock outstanding (2,310,000 shares if the
Underwriters' over-allotment option is exercised in full). Of these shares, the
1,800,000 shares of Class A Common Stock offered hereby (2,070,000 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
17
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,
295,556 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's executive officers and directors have agreed not to
offer, sell or otherwise dispose of any shares of Common Stock for a period of
365 days from the date of this Prospectus without the consent of the
representatives of the Underwriters. 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 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.
18
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."
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.
On May 28, 1998, the Company entered into an agreement to purchase the
business and certain assets of Pride Auto Center, Inc. ("Pride"), a Jeep/Eagle
dealer, for an estimated purchase price of approximately $925,000, including a
$55,000 deposit previously paid and $200,000 to be paid through the issuance of
an 8% promissory note payable in installments over a 36-month period and the
assumption of Pride's floor plan and certain other liabilities. As soon as
practicable following the closing, Hometown intends to close the Pride facility
and to consolidate its operations with those of another Hometown Jeep/Eagle
dealership located less than two miles away.
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
19
simultaneously with the closing of the Offering and with the closing of the
Exchange, but not later than July 31, 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 1,800,000 shares of Common
Stock offered hereby, based upon the initial public offering price of $9.00 per
share, are estimated to be $13.8 million ($16 million if the Underwriters'
over-allotment option for an additional 270,000 shares is exercised in full)
after deducting the underwriting discount and estimated expenses of the
Offering. Of the net proceeds, $6.4 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 $6.5 million or 47.1% ($8.7 million or 54.4% if the
Underwriters' 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 $6.5 million ($8.7 million if the
Underwriters' 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.
As of March 31, 1998, the Company had aggregate liability of $28,437,000
under its floor plan financing lines of credit, including liability of its
subsidiaries, Muller Chevrolet, Muller Toyota and Westwood in the amounts of
$4,148,000, $4,268,000 and $7,493,000, respectively. The floor plan liabilities
of these subsidiaries are guaranteed by affiliates of the Company as follows:
Muller Chevrolet by William Muller Sr. and William Muller Jr; Muller Toyota by
William Muller Sr., William Muller Jr. and James Christ; and Westwood by
Salvatore A. Vergopia. Hometown plans to reduce its floor plan obligations by
$6,500,000 using a portion of the proceeds of the Offering, of which an
estimated $3,600,000 will be used to reduce liabilities guaranteed by these
affiliates. To the extent that floor plan finance obligations guaranteed by
affiliates are reduced or eliminated through the use of a portion of the
proceeds of the Offering, these affililates will benefit through the reduction
of contingent liability on their guarantees. See "Certain Transactions."
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."
20
DILUTION
The pro forma net tangible book value of Shaker as of March 31, 1998, 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 $2.03 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 $.66 per share to $1.37 After giving effect to the sale by Hometown
of the 1,800,000 shares of Class A Common Stock offered hereby and the receipt
of an estimated $13.8 million of net proceeds from the Offering (based on the
initial public offering price of $9.00 per share, the application of $6.4
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 March 31, 1998 would have been $2.34 per share. This
represents an immediate increase in pro forma net tangible book value of $.97
per share to existing stockholders and an immediate dilution of $6.66 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............................. $ 9.00
Pro forma net tangible book value of Shaker............................... $ 2.03
Decrease in pro forma net tangible book value per share attributable to
balance of Exchange..................................................... $ (.66)
Increase in pro forma net tangible book value per share attributable to
the Offering and the Acquisitions....................................... $ .97
Pro forma net tangible book value per share after giving effect to the
Offering.................................................................. 2.34
---------
Dilution per share to new investors......................................... $ 6.66
---------
---------
The following table sets forth, on a pro forma basis as of March 31, 1998,
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 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 32.4% $ 3,823,000 16.2% $ 2.03
Westwood, Muller and Other Stockholders............... 2,120,000 36.6% $ 1,855,000 7.8% $ 0.88
New Investors......................................... 1,800,000 31.0% $ 18,000,000 76.0% $ 9.00
------------- ----- ------------- -----
Total................................................. 5,800,000(1) 100.0% $ 23,678,000 100.0%
------------- ----- ------------- -----
------------- ----- ------------- -----
- ------------------------
(1) Assumes no exercise of 295,556 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, 184,444 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
2,070,000 or 34.1% of the total number of shares of Common Stock outstanding
after the Offering.
21
CAPITALIZATION
The following table sets forth, as of March 31, 1998, (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 1,800,000 shares of Class A Common Stock at the initial public
offering price of $9.00 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 MARCH 31, 1998
----------------------------------------
PRO FORMA
COMBINED
CORE OPERATING PRO FORMA
SHAKER COMPANIES AS ADJUSTED
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(1) (2) (3)
----------- -------------- -----------
(IN THOUSANDS)
Short-term debt (including current portion of long-term debt).......... $ 353 $ 1,764 $ 1,658
----------- ------- -----------
----------- ------- -----------
Long-term debt, less current maturities................................ 107 902 448
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); 2,040,000 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 26,084
Retained earnings.................................................... 3,754 3,754 3,635
----------- ------- -----------
Total stockholders' equity............................................. 3,823 16,043 29,725
----------- ------- -----------
Total capitalization................................................... $ 3,930 $ 16,945 $ 30,173
----------- ------- -----------
----------- ------- -----------
- ------------------------
(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 1,800,000 shares of Class A Common Stock, and the payment of certain
existing indebtedness. Excludes (i) an aggregate of 480,000 shares of Class
A Common Stock reserved for issuance under the Company's Stock Option Plan,
of which options to purchase 295,556 shares are outstanding and (ii) 270,000
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, 1994 and 1995
and for the three months ended March 31, 1997 and 1998 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 THREE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues............................. $ 43,492 $ 52,644 $ 52,020 $ 62,222 $ 59,496 $ 14,103 $ 13,744
Cost of sales........................ 37,418 45,778 44,189 53,076 51,226 11,857 11,612
--------- --------- --------- --------- --------- --------- ---------
Gross profit..................... 6,074 6,866 7,831 9,146 8,270 2,246 2,132
Selling, general and administrative
expenses........................... 5,836 6,433 6,961 8,049 7,715 1,770 4,194
--------- --------- --------- --------- --------- --------- ---------
Income from operations........... 238 433 870 1,097 555 476 (2,062)
Other income (expense)
Interest income (expense), net..... (131) (204) (555) (384) (189) (76) (57)
Other income (expense), net........ 189 73 16 1 116 6 (6)
--------- --------- --------- --------- --------- --------- ---------
Income before taxes.............. 296 302 331 714 482 406 (2,125)
Provision for income taxes........... 102 136 118 321 166 162 (850)
--------- --------- --------- --------- --------- --------- ---------
Net income....................... $ 194 $ 166 $ 213 $ 393 $ 316 $ 244 $ (1,275)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings per share, basic and
diluted............................ $ 7.68 $ 6.57 $ 8.43 $ 15.56 $ 12.51 $ 9.66 $ (50.47)
Weighted average shares.............. 25,263 25,263 25,263 25,263 25,263 25,263 25,263
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficit)............ $ 2,585 $ 2,789 $ 3,138 $ 4,138 $ 4,563 $ 4,540 $ 2,821
Inventories.......................... 6,295 9,618 9,769 8,504 7,609 9,193 8,321
Total assets......................... 10,388 14,137 14,719 14,798 14,042 16,036 16,052
Total debt........................... 5,571 9,102 9,167 8,201 7,231 8,862 7,877
Stockholders' equity................. 4,011 4,177 4,390 4,782 5,098 5,026 3,823
23
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 and the three months ended March 31, 1998 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 included elsewhere in this Prospectus.
FOR THE YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------------------------------
CORE OPERATING COMPANIES (2) ACQUISITIONS (2)
------------------------------- ---------------------------------
PRO FORMA
SHAKER (3) WESTWOOD MULLER BAY STATE BRATTLEBORO PRIDE (3)(4)
---------- -------- ------- --------- ----------- ------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED PRO FORMA
INCOME STATEMENT DATA (1):
Revenues
New vehicle sales............................ $29,345 $45,470 $33,308 $ 9,890 $ 9,038 $ 7,437 $ 134,488
Used vehicle sales........................... 21,800 8,396 19,996 12,459 12,928 3,448 79,027
Parts and service sales...................... 6,727 4,352 4,907 2,066 2,024 1,224 21,300
Other dealership revenues, net............... 1,624 731 1,777 301 594 323 5,350
---------- -------- ------- --------- ----------- ------- -------------
Total revenues............................. 59,496 58,949 59,988 24,716 24,584 12,432 240,165
Cost of sales.................................. 51,226 52,770 51,641 21,502 20,986 10,898 209,023
---------- -------- ------- --------- ----------- ------- -------------
Gross profit............................... 8,270 6,179 8,347 3,214 3,598 1,534 31,142
Amortization of excess of purchase price
over net book value of assets acquired....... -- -- -- -- -- -- 399(5)
Selling, general and administrative
expenses (2)................................. 7,076 4,931 6,936 1,966 2,765 920 24,595
---------- -------- ------- --------- ----------- ------- -------------
Income from operations..................... 1,194 1,248 1,411 1,248 833 614 6,148
Other income (expense)
Interest expense, net (2).................... (427) (295) (420) (322) (39) (51) (532)
Other income (expense), net.................. 116 (39) (27) 9 (41) (3) 15
---------- -------- ------- --------- ----------- ------- -------------
Income before taxes........................ $ 883 $ 914 $ 964 $ 935 $ 753 $ 560 5,631
---------- -------- ------- --------- ----------- -------
---------- -------- ------- --------- ----------- -------
Provision for income taxes........................................................................ 2,252(5)
------------
Net income.................................................................................... $ 3,379
------------
------------
Earnings per share, basic and diluted............................................................. $ .58
Weighted average shares........................................................................... 5,800,000
UNAUDITED PRO FORMA OTHER DATA (1):
Gross margin................................... 13.9% 10.5% 13.9% 13.0% 14.6% 12.3% 13.0%
Operating margin............................... 2.0% 2.1% 2.4% 5.0% 3.4% 4.9% 2.6%
Pre-tax margin................................. 1.5% 1.6% 1.6% 3.8% 3.1% 4.5% 2.3%
Retail new vehicles sold....................... 1,297 1,473 1,511 370 449 331 5,431
Retail used vehicles sold...................... 1,256 377 1,301 748 794 249 4,725
24
FOR THE THREE MONTH ENDED MARCH 31,1998
----------------------------------------------------------------
CORE OPERATING COMPANIES (2) ACQUISITIONS (2)
------------------------------- -------------------------------
SHAKER (3) WESTWOOD MULLER BAY STATE BRATTLEBORO PRIDE
---------- -------- ------- --------- --------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED PRO FORMA INCOME
STATEMENT DATA (1):
Revenues
New vehicle sales......................................... $ 5,967 $12,599 $ 7,133 $ 1,980 $ 2400 1,351
Used vehicle sales........................................ 5,723 4,273 4,470 2,356 2,598 441
Parts and service sales................................... 1,613 1,121 1,311 555 362 300
Other dealership revenues, net............................ 441 397 473 80 65 44
---------- -------- ------- --------- --------- -------
Total revenues.......................................... 13,744 18,390 13,387 4,971 5,425 2,136
Cost of sales............................................... 11,612 16,502 11,473 4,133 4,735 1,820
---------- -------- ------- --------- --------- -------
Gross profit............................................ 2,132 1,888 1,914 838 690 316
Amortization of excess of purchase price
over net book value of assets acquired.................... -- -- -- -- -- --
Selling, general and administrative
expenses (2).............................................. 1,762 1,393 1,663 490 483 197
---------- -------- ------- --------- --------- -------
Income from operations.................................. 370 495 251 348 207 119
Other income (expense)
Interest expense, net (2)................................. (92) (132) (159) (62) (40) (12)
Other income (expense), net............................... (6) (9) (31) 9 26 --
---------- -------- ------- --------- --------- -------
Income before taxes..................................... $ 272 $ 354 $ 61 $ 295 $ 193 $ 107
---------- -------- ------- --------- --------- -------
---------- -------- ------- --------- --------- -------
PRO FORMA
(3)(4)
-----------
UNAUDITED PRO FORMA INCOME
STATEMENT DATA (1):
Revenues
New vehicle sales......................................... $31,430
Used vehicle sales........................................ 19,861
Parts and service sales................................... 5,262
Other dealership revenues, net............................ 1,500
-----------
Total revenues.......................................... 58,053
Cost of sales............................................... 50,275
-----------
Gross profit............................................ 7,778
Amortization of excess of purchase price
over net book value of assets acquired.................... 100(5)
Selling, general and administrative
expenses (2).............................................. 5,988
-----------
Income from operations.................................. 1,690
Other income (expense)
Interest expense, net (2)................................. (240)
Other income (expense), net............................... (11)
-----------
Income before taxes..................................... 1,439
Provision for income taxes........................................................................ 576
------------
Net income.................................................................................... $ 863
------------
------------
Earnings per share, basic and diluted............................................................. $ .15
Weighted average shares........................................................................... 5,800,000
UNAUDITED PRO FORMA OTHER DATA (1):
Gross margin................................ 15.5% 10.3% 14.3% 16.9% 12.7% 14.8% 13.4%
Operating margin............................ 2.7% 2.7% 1.9% 7.0% 3.8% 5.6% 2.9%
Pre-tax margin.............................. 2.0% 1.9% 0.5% 5.9% 3.6% 5.0% 2.5%
Retail new vehicles sold.................... 259 378 325 65 110 58 1,195
Retail used vehicles sold................... 363 133 294 137 130 37 1,094
AS OF MARCH 31, 1998
-----------------------------------
COMBINED
CORE
OPERATING PRO FORMA
SHAKER COMPANIES AS ADJUSTED
(6) (6) (7)
--------- ----------- -----------
(IN THOUSANDS)
UNAUDITED PRO FORMA BALANCE SHEET DATA:
Working capital.............................................................. $ 2,153 $ 1,938 $ 9,339
Inventories.................................................................. 8,321 23,587 29,560
Total assets................................................................. 12,814 46,144 57,996
Total debt................................................................... 7,877 25,992 24,043
Stockholders' equity......................................................... 3,823 16,043 29,725
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.
25
(2) Pro forma adjustments made to the historical financial statements of the
Core Operating Companies and the Acquisitions are as follows:
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------------------------
SHAKER WESTWOOD MULLER BAY STATE BRATTLEBORO PRIDE OTHER (C)
----------- ----------- --------- ----------- ----------- --------- -----------
(IN THOUSANDS)
Selling, general and
administrative expenses:
Historical......................... $ 7,715 $ 5,594 $ 7,283 $ 1,934 $ 3,314 $ 1,452 $ 1
Pro forma adjustments(a)........... (639) (663) (347) 32 (549) (538) --
----------- ----------- --------- ----------- ----------- --------- -----------
Pro forma total.................... $ 7,076 $ 4,931 $ 6,936 $ 1,966 $ 2,765 $ 920 $ 1
----------- ----------- --------- ----------- ----------- --------- -----------
----------- ----------- --------- ----------- ----------- --------- -----------
Interest income (expense), net:
Historical......................... $ (189) $ (295) $ (512) $ (272) $ (72) $ (54) $ --
Pro forma adjustments (b).......... (238) -- 92 (50) 33 3 1,022
----------- ----------- --------- ----------- ----------- --------- -----------
Pro forma total.................... $ (427) $ (295) $ (420) $ (322) $ (39) $ (51) $ 1,022
----------- ----------- --------- ----------- ----------- --------- -----------
----------- ----------- --------- ----------- ----------- --------- -----------
FOR THE THREE MONTHS ENDED MARCH 31, 1998
-------------------------------------------------------------------------------------
SHAKER WESTWOOD MULLER BAY STATE BRATTLEBORO PRIDE OTHER (C)
----------- ----------- --------- ----------- ----------- --------- -----------
(IN THOUSANDS)
Selling, general and
administrative expenses:
Historical......................... $ 4,194 $ 1,432 $ 1,726 $ 481 $ 511 $ 332 --
Pro forma adjustments (a).......... (2,432) (39) (63) 9 (28) (135) --
----------- ----------- --------- ----------- ----------- --------- -----------
Pro forma total.................... $ 1,762 $ 1,393 $ 1,663 $ 490 $ 483 $ 197 --
----------- ----------- --------- ----------- ----------- --------- -----------
----------- ----------- --------- ----------- ----------- --------- -----------
Interest income (expense), net:
Historical......................... $ (57) $ (132) $ (181) $ (54) $ (42) $ (12) $ 1
Pro forma adjustments (b).......... (35) -- 22 (8) 2 -- 256
----------- ----------- --------- ----------- ----------- --------- -----------
Pro forma total.................... $ (92) $ (132) $ (159) $ (62) $ (40) $ (12) $ 257
----------- ----------- --------- ----------- ----------- --------- -----------
----------- ----------- --------- ----------- ----------- --------- -----------
TOTAL
---------
Selling, general and
administrative expenses:
Historical......................... $ 27,293
Pro forma adjustments(a)........... (2,698)
---------
Pro forma total.................... $ 24,595
---------
---------
Interest income (expense), net:
Historical......................... $ (1,394)
Pro forma adjustments (b).......... 862
---------
Pro forma total.................... $ (532)
---------
---------
TOTAL
---------
Selling, general and
administrative expenses:
Historical......................... $ 8,676
Pro forma adjustments (a).......... (2,688)
---------
Pro forma total.................... $ 5,988
---------
---------
Interest income (expense), net:
Historical......................... $ (477)
Pro forma adjustments (b).......... 237
---------
Pro forma total.................... $ (240)
---------
---------
(a) Reflects a pro forma reduction to compensation expense, management fees
and rent expenses based on contractual arrangements to be effective
simultaneously with the closing of the Offering. See Unaudited Pro Forma
Financial Statements and the notes thereto for a more detailed
description of these pro forma adjustments.
(b) Reflects the pro forma reduction to interest income earned on the cash
being distributed to the Shaker stockholders prior to the Offering, and
on cash and cash equivalents of Bay State not realized as part of the
Acquisitions. Also includes reductions in interest expense as follows:
(i) certain long-term debt incurred by Muller prior to the Closing will
be liquidated out of proceeds of the Offering; and (ii) on leases and
debt not assumed as part of the acquisition of Brattleboro and Pride. See
Unaudited Pro Forma Financial Statements and the notes thereto for a more
detailed description of these pro forma adjustments.
(c) For the year ended December 31, 1997, includes $1,000 of selling,
general and administrative expenses incurred by Hometown during 1997. For
the three months ended March 31, 1998, includes $1,000 of interest income
accrued by Hometown during the same period. Both periods also include the
12 months and three months pro forma decreases in interest expenses
resulting from the repayment of certain floor plan obligations with
proceeds from the Offering and the decrease in interest expenses
resulting from refinancing the balance of the floor plan obligations with
a commercial lender. See Unaudited Pro Forma Financial Statements and the
notes thereto 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"), 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
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 (2) above and (5) below, to the historical financial
statements.
26
(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 book value of assets acquired;" (ii) the decrease in interest
expenses of $618,000 for 1997 and $155,000 for the three months ended March
31, 1998 resulting from the repayment of certain floor plan obligations with
proceeds from the Offering, and the decrease in interest of $404,000 for
1997 and $101,000 for the three months ended March 31, 1998 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 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 set forth in Note 4 "Unaudited Pro Forma Balance
Sheets--Purchase and Accounting Adjustments" of the Notes to the Unaudited
Pro Forma Financial Statements.
(7) Gives effect to the Exchange and the Acquisitions on an historical basis and
the pro forma balance sheets adjustments set forth in Note 4 "Unaudited Pro
Forma Balance Sheets--Purchase and Accounting Adjustments" and Note 5
"Unaudited Pro Forma Balance Sheets--Offering Proceeds" of the Notes to the
Unaudited Pro Forma Financial Statements.
27
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.
Until the closing of the Offering, Hometown and each of the Core Operating
Companies and Acquisitions are autonomous and independent without any common
ownership.
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. Until the closing of the Offering, Hometown Auto Retailers, Inc. will
conduct no operations under its own name and all revenues will be generated by
its predecessor companies.
OPERATING STRATEGY
The Company, which has conducted no business to date other than in
connection with the Exchange, 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 by category and the percent of
total revenue for Hometown for 1997 and the first quarter of 1998 are as
follows:
FOR THE YEAR ENDED FOR THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
-------------------------- --------------------------
REVENUE REVENUE
(IN % OF TOTAL (IN % OF TOTAL
THOUSANDS) REVENUE THOUSANDS) REVENUE
------------- ----------- ------------- -----------
New vehicle.......................................... $ 134,488 56.0% $ 31,430 54.1%
Used vehicle......................................... 79,027 32.9% 19,861 34.2%
Parts and service.................................... 21,300 8.9% 5,262 9.1%
F&I and other........................................ 5,350 2.2% 1,500 2.6%
------------- ----- ------------- -----
Total Revenue........................................ $ 240,165 100.0% $ 58,053 100.0%
------------- ----- ------------- -----
------------- ----- ------------- -----
Used vehicle and F&I revenues increased from 32.9% and 2.2% of total
revenues for the year ended December 31, 1997 to 34.2% and 2.6% of total
revenues for the three months ended March 31, 1998 as the Company focused its
efforts on higher margin business. The favorable effect on gross profit is
discussed below.
28
On a pro forma combined basis, the gross profit by category and the percent
of total gross profit for Hometown for 1997 and the first quarter of 1998 are as
follows:
FOR THE YEAR ENDED FOR THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
-------------------------- --------------------------
GROSS PROFIT % OF TOTAL GROSS PROFIT % OF TOTAL
(IN GROSS (IN GROSS
THOUSANDS) PROFIT THOUSANDS) PROFIT
------------- ----------- ------------- -----------
New vehicle.......................................... $ 8,392 26.9% $ 1,807 23.2%
Used vehicle......................................... 7,307 23.5% 1,993 25.6%
Parts and service.................................... 10,093 32.4% 2,478 31.9%
F&I and other........................................ 5,350 17.2% 1,500 19.3%
------------- ----- ------ -----
Total Gross Profit................................... $ 31,142 100.0% $ 7,778 100.0%
------------- ----- ------ -----
------------- ----- ------ -----
Used vehicle and F&I gross profit as a percent of total gross profit
increased from 23.5% and 17.2% for the year ended December 31, 1997 to 25.6% and
19.3% for the three months ended March 31, 1998 revenues. Both of these increase
are the effect of the favorable change in the mix of the various revenues of the
Company.
PRO FORMA COMBINED NEW VEHICLE REVENUES AND UNITS BY MANUFACTURER
On a pro forma combined basis, the new vehicle revenue and units by
Manufacturer for Hometown for 1997 are as follows:
FOR THE YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------
REVENUE
(IN % OF TOTAL % OF TOTAL
THOUSANDS) REVENUE UNITS UNITS
------------- ----------- --------- -----------
Ford Motor.................................................. $ 79,561 59.2% 2,939 54.1%
Chrysler.................................................... 21,619 16.1% 981 18.1%
Toyota Motor................................................ 21,604 16.1% 960 17.7%
GM.......................................................... 9,784 7.3% 455 8.4%
All Other................................................... 1,920 1.3% 96 1.7%
------------- ----- --------- -----
Total Revenue/units......................................... $ 134,488 100.0% 5,431 100.0%
------------- ----- --------- -----
------------- ----- --------- -----
New vehicle revenues from sales of Ford Motor products of $79,561,000 for
the year ended December 31, 1997, was 59.2% of Hometown's total pro forma new
vehicle revenues. Brand diversity with-in Hometown is an important consideration
as is evidenced by the fact that two of Hometown's initial acquisitions brought
in Chrysler brand vehicles.
SELLING, GENERAL AND ADMINISTRATION
The pro forma combination of Hometown's selling, general and administration
expenses takes into account various adjustments made to the Company's historical
financial statements for changes for compensation of the owners and adjustments
for the negotiated fair market valued leases.
UNIT SALES
For the year ended December 31, 1997, the Company sold 5,431 new vehicles
for an average sales price and gross profit per vehicle of approximately $24,750
and $1,550, respectively. Retail used vehicle units sold for 1997 were 4,725.
Average sales price and gross profit per retail used vehicle were approximately
$12,900 and $1,550, 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 credits, totaled approximately $2.5 million for
the year ended December 31, 1997 and $.7 million for the three months ended
March 31, 1998. Manufacturer interest credits, which is recorded as a reduction
of interest expense, totaled approximately $1.2 million for the year ended
December 31, 1997 and $.3 million for the three months ended March 31, 1998.
Interest credits received from the Manufacturers represent the equivalent of 30
to 45 days of imputed interest costs on the vehicle purchases and are not
dependant on any other factors or conditions. The pro forma balance of the
Company's floor plan lines at March 31, 1998 was $28,437,000 before the pay-down
of floor plan obligations. It is anticipated that $6,500,000 of the proceeds
from the Offering will be applied to the floor plan liability accounts until the
funds are needed for future acquisitions.
COMMITMENTS, CONTINGENCIES AND GUARANTEES
Westwood is a guarantor of various credit lines and portfolios used
primarily for financing the sale of new and used limousines and for guaranteeing
loans to customers with below average credit. The amounts outstanding at
December 31, 1997 against these guarantees are as follows: (i) SEC Funding
Corp., a company in which the majority stockholder of Westwood is also a
stockholder, for loans aggregating approximately $935,000; (ii) Ford Motor
Credit Company, for loans aggregating $6,768,000 and a limited guarantor on
loans aggregating approximately $800,000; and (iii) Ford Motor Credit Company,
for loans aggregating approximately $754,000. During the year ended December 31,
1997, Westwood experienced a 2.61% customer default rate on these loans, which
is less than the industry average. For the year ended December 31, 1997,
Westwood incurred net losses of approximately $70,000 as a result of the
difference between amounts paid pursuant to its guarantees and the net amount
recovered on the resale of repossessed vehicles. The financial institutions to
which Westwood extends its guarantee hold perfected security interests in the
financed vehicles and when Westwood is required to make payment under the
guarantee, the vehicle is returned by such institution to Westwood.
During the course of normal business, the owners of Westwood, Muller Toyota
and Muller Chevrolet provide personal guarantees on the floor plan financing
arrangements for their vehicle purchases dependent upon the new and used vehicle
sales and inventory levels. The aggregate amount of floor plan liability that is
guaranteed by these owners was $15,909,000 at March 31, 1998.
PROPERTY LEASES
Hometown has executed leases for the premises occupied by various
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, generally, provide for a consumer price index ("CPI") increase to the base
rent for the five-year periods commencing January 1, 2004 and 2009.
On a pro forma basis for the year ended December 31, 1997, these new leases
represent an aggregate savings of approximately $44,000 in lease and rent
expenses as compared to the reported historical financials. These savings are
reflected in the pro forma adjustments to selling, general and administration
expenses.
EMPLOYMENT CONTRACTS
In April 1998, Hometown entered into five-year employment agreement,
effective as of the closing of the Offering, for the following key positions:
Chairman and Chief Executive Officer; President and Chief
30
Operating Officer; Vice President--New Jersey Operations; Vice
President--Connecticut Operations; Vice President--Fleet Operations; General
Manager--Muller Toyota; Vice President--Parts and Services; and Vice
President--Mergers and Acquisitions. Each agreement provides for an annual base
salary of $200,000, except that the agreement for the General Manager 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 for Vice President--Parts
and Service provides for an annual base salary of $100,000 and the agreement for
Vice President--Mergers and Acquisitions 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.
On a pro forma basis for the year ended December 31, 1997, these new
employment contracts represent an aggregate savings of approximately $1,725,000
in owners' salaries, bonuses and benefits as compared to the reported historical
financials. These savings are reflected in the pro forma adjustments to selling,
general and administration expenses.
ACQUISITIONS
Since the Company was organized, in March 1997, it has entered into three
acquisition agreements providing for the purchase, at an aggregate price of $6.7
million plus the assumption of certain liabilities, of three dealerships located
in Connecticut, Massachusetts and Vermont. These three acquisitions add
$61,732,000 and $2,248,000, 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 acquired company of certain levels
of income, the receipt of factory consents from all Manufacturers whose
franchises are held by each acquired company and the Closing of the Offering on
or prior to July 31, 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 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 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.
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 ("Bay State"), 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.
31
The Company has agreed to enter into fifteen-year lease for property owned
by an affiliate of Bay State at a monthly rental of $30,000 during the first
five years, $35,000 during the second five years and $38,000 during the final
five years.
PRIDE. On May 28, 1998, the Company entered into an agreement to purchase
the business and certain assets of Pride, a Jeep/Eagle dealer, for an estimated
purchase price of approximately $925,000, including a $55,000 deposit previously
paid and $200,000 to be paid through issuance of an 8% promissory note payable
in installments over a 36-month period plus the assumption of floor plan and
certain other liabilities. As soon as practicable following the closing,
Hometown intends to close the Pride facility and to consolidate its operations
with those of another Hometown Jeep/Eagle dealership located less than two miles
away.
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,800,000 shares of Class A
Common Stock offered hereby, based upon an assumed initial public offering price
of $9.00 per share, are estimated to be $13.8 million after deducting the
underwriting discount and estimated expenses of the Offering. Of the net
proceeds, $6.4 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 $6.5 million, 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 $6.5 million of the net proceeds will be used to
pay down a portion of the Company's floor plan indebtedness. 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.
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.
32
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 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.
33
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 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.
The following table sets forth certain selected financial data and data as a
percentage of revenues for Shaker for the periods indicated:
FOR THE THREE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------------------------- ----------------------
1995 1996 1997 1997
---------------------- ---------------------- ---------------------- ----------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
----------- --------- ----------- --------- ----------- --------- ----------- ---------
(IN
(IN THOUSANDS) THOUSANDS)(UNAUDITED)
Revenues:
New vehicle............ $ 25,713 49.4% $ 30,511 49.0% $ 29,345 49.3% $ 6,945 49.2%
Used vehicle........... 18,260 35.1% 22,429 36.0% 21,800 36.6% 5,105 36.2%
Parts and service...... 6,565 12.6% 7,406 11.9% 6,727 11.3% 1,674 11.9%
F&I and Other, net..... 1,482 2.8% 1,876 3.0% 1,624 2.7% 379 2.7%
----------- --------- ----------- --------- ----------- --------- ----------- ---------
Total revenues....... 52,020 100.0% 62,222 100.0% 59,496 100.0% 14,103 100.0%
Cost of sales............ 44,189 84.9% 53,076 85.3% 51,226 86.1% 11,857 84.1%
----------- --------- ----------- --------- ----------- --------- ----------- ---------
Gross profit............. 7,831 15.1% 9,146 14.7% 8,270 13.9% 2,246 15.9%
Selling, general &
administrative
expenses............... 6,961 13.4% 8,049 12.9% 7,715 13.0% 1,770 12.6%
----------- --------- ----------- --------- ----------- --------- ----------- ---------
Income from operations... 870 1.7% 1,097 1.8% 555 0.9% 476 3.4%
Other income and expense:
Interest expense....... 555 1.1% 384 0.6% 189 0.3% 76 0.5%
Other income (expense)
net.................. 16 0.0% 1 0.0% 116 0.2% 6 0.0%
----------- --------- ----------- --------- ----------- --------- ----------- ---------
Income before income
taxes.................. 331 0.6% 714 1.1% 482 0.8% 406 2.9%
Provision for income
taxes.................. 118 0.2% 321 0.5% 166 0.3% 162 1.1%
----------- --------- ----------- --------- ----------- --------- ----------- ---------
Net income............... $ 213 0.4% $ 393 0.6% $ 316 0.5% $ 244 1.7%
----------- --------- ----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- --------- ----------- ---------
1998
----------------------
AMOUNT %
----------- ---------
Revenues:
New vehicle............ $ 5,967 43.4%
Used vehicle........... 5,723 41.6%
Parts and service...... 1,613 11.7%
F&I and Other, net..... 441 3.2%
----------- ---------
Total revenues....... 13,744 100.0%
Cost of sales............ 11,612 84.5%
----------- ---------
Gross profit............. 2,132 15.5%
Selling, general &
administrative
expenses............... 4,194 30.5%
----------- ---------
Income from operations... (2,062) -15.0%
Other income and expense:
Interest expense....... 57 0.4%
Other income (expense)
net.................. (6) 0.0%
----------- ---------
Income before income
taxes.................. (2,125) -15.5%
Provision for income
taxes.................. (850) -6.2%
----------- ---------
Net income............... ($ 1,275) -9.3%
----------- ---------
----------- ---------
34
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. The Company believes that 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 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.
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
35
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.
Refer to the discussion of F&I in the revenue section for details of the F&I
gross profit. Salespersons' commissions on these revenues are charged directly
to selling, general and administration expenses. There are no other costs
associated with revenue from F&I.
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 does
not increase the sales price of the vehicle and is not otherwise 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.
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
36
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.
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.
37
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.
Refer to the discussion of F&I in the revenue section for details of the F&I
gross profit. Salespersons' commissions on these revenues are charged directly
to selling, general and administration expenses. There are no other costs
associated with revenue from F&I.
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 does not increase sales price
and is not otherwise 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 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.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31,
1997
REVENUES
Shaker's revenues decreased by $359,000, or 2.5%, from $14,103,000 for the
three months ended March 31, 1997 to $13,744,000 for the three months ended
March 31, 1998. Most of the decrease was due to a decline in the sales of new
cars and trucks, partially offset by an increase in sales of used cars and
trucks.
New vehicle sales at Family Ford decreased by $907,000, or 22.3%, for the
three months ended March 31, 1998, compared to 1997. The decrease is due to a
decline in new vehicle unit sales of 43 vehicles, primarily Ford brand light
trucks and utility vehicles for which demand was lower as a result of mild
winter weather conditions. Used vehicle sales at Family Ford increased by
$362,000, or 16.7%, for the three months ended March 31, 1998, compared to 1997,
reflecting increased unit sales as a result of increased advertising and
promotion.
At Shaker Lincoln Mercury, new vehicle sales declined by $71,000, or 2.5%,
for the three months ended March 31, 1998, when compared to 1997. The decrease
is due to a decrease in new vehicle unit sales of six vehicles, offset by an
increase in the average revenue per new vehicle of $766.00. Used vehicle sales
at Shaker Lincoln Mercury increased by $256,000, or 8%, for the three months
ended March 31, 1998, compared to 1997, reflecting increased unit sales as a
result of increased advertising and promotion.
GROSS PROFIT
Shaker gross profit decreased $114,000 or 5.1%, from $2,246,000 for the
three months ended March 31, 1997 to $2,132,000 for the three months ended March
31, 1998.
38
At Family Ford, gross profit from the sale of new cars and trucks decreased
by $65,000, or 23.7%, for the three months ended March 31, 1998, compared to
1997 due, primarily, to a decline in unit sales of new cars and trucks as a
result of an unfavorable change in product mix. At Shaker Lincoln Mercury, gross
profit from the sale of new cars and trucks increased by $29,000, or 21.1%, for
the three months ended March 31, 1998, compared to 1997 primarily as a result of
increased selling prices.
At Family Ford, gross profit from the sale of used cars and trucks decreased
by $75,000, or 20.7%, for the three months ended March 31, 1998, compared to
1997. The $75,000 decrease consists of an increase of $61,000 due to increased
sales of used cars and trucks offset by a decrease in gross profit of $134,000
reflecting higher trade-in allowances and lower sales prices relative to cost.
At Shaker Lincoln Mercury, gross profit from the sale of used cars and trucks
decreased by $28,000, reflecting higher trade-in allowances and lower sales
prices relative to cost.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Shaker selling, general and administrative expenses increased by $2,424,000,
or 136.9%, from $1,770,000, to $4,194,000, for the three months ended March 31,
1998, compared to 1997. The principal difference was an increase in owners
compensation consisting of a one time bonus distributed among all owner
employees of $2,500,000. All other expenses decreased by $76,000.
INTEREST EXPENSES, NET
Shaker net interest expense decreased by $19,000, or 25.0%, from $76,000,
for the three months ended March 31, 1997, to $57,000, for the three months
ended March 31, 1998. Net floor plan interest, net of floor plan assistance
credits, declined from $127,000 for the three months ended March 31, 1997, to
$105,000 for the three months ended March 31, 1998, a decline of 17.3%,
primarily reflecting the lower first quarter 1998 new vehicle sales volume. Net
floor plan interest was offset by net interest income which decreased 5.9%, from
$51,000 for the three months ended March 31, 1997, to $48,000 for the three
months ended March 31, 1998.
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 March 31, 1998 were $3.6
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.
For the three months ended March 31, 1998, Shaker generated $8,000 in cash
from operating activities as compared to $350,000 for the three months ended
March 31, 1997. The $342,000 decrease was primarily due to unfavorable timing of
collections on finance contracts on new and used vehicles as compared to the
prior year.
39
The following table sets forth historical selected information from the
statements of cash flow:
FOR THE YEARS ENDED DECEMBER 31, FOR THE THREE MONTHS
MARCH 31,
----------------------------------- --------------------------------
1995 1996 1997 1997 1998
----------- --------- ----------- --------------- ---------------
AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
----------- --------- ----------- --------------- ---------------
(IN THOUSANDS) (IN THOUSANDS)(UNAUDITED)
Net Cash Provided by Operating Activities............... $ 389 $ 1,017 $ 334 $ 350 $ 8
Net Cash Provided by (Used) in Investing Activities..... (419) (18) (102) (57) 23
Net Cash Provided by (Used) in Financing Activities..... 373 339 226 12 38
Net Increase (Decrease) in Cash and
Cash Equivalents...................................... $ 343 $ 1,338 $ 458 $ 305 $ 69
FLOOR PLAN FINANCING
Shaker obtains floor plan financing for its vehicle inventory from Ford
Motor Credit Corporation. As of March 31, 1998, Shaker had approximately $7.4
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, $0.8 million $0.2 million and $0.2 million for the years ended December
31, 1995, 1996 and 1997 and the three months ending March 31, 1997 and 1998,
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 $0.1 million and $0.1 million for the years ended December 31, 1995,
1996, and 1997 and the three months ending March 31, 1997 and 1998,
respectively. Interest credits received from the Manufacturers represent the
equivalent of 30 to 45 days of imputed interest costs on the vehicle purchases
and are not dependent on any other factors or conditions.
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 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 that it is one of the five largest automotive dealers in
New England. 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.
To date Hometown Auto Retailers, Inc. has conducted no combined or
coordinated operations, other than in connection with the Exchange and the
Acquisitions, and all revenues have been generated by its predecessor companies.
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 by franchised
dealerships. The following table excludes sales of used vehicles by
nonfranchised dealerships
41
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.
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
42
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:
- 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.
- 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.
- 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.
- PRESENCE IN HIGHER PROFIT MARGIN BUSINESSES
- 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 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.
- 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
43
also operates during extended hours, provides comfortable customer
waiting areas and quickly services vehicles without prior appointment.
- FOCUS ON HIGHER MARGIN OPERATIONS
- 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.
- 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
8,879 used vehicles (combined retail and wholesale) compared to 5,431
new vehicles. The Company seeks to attract customers and enhance buyer
satisfaction by offering multiple financing options and extended
warranties on used vehicles.
- 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.
- 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.
- 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
dealerships. Additional cost savings are believed possible through
centralizing accounting, personnel, employee benefits and other functions.
- 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
44
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 three dealerships
in Connecticut, Massachusetts and Vermont adding $61,732,000 and $2,248,000,
respectively, to combined pro forma 1997 revenues and income before income taxes
for an aggregate cash consideration of $6.4 million, which will be paid from
proceeds of the Offering, plus the issuance of a $200,000 promissory note and
the assumption of certain liabilities. 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 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.
45
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:
NUMBER OF NEW VEHICLES SOLD
FOR THE YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------------------------
SHAKER WESTWOOD MULLER BAY STATE BRATTLEBORO PRIDE
BRANDS (CONN.) (NEW JERSEY) (NEW JERSEY) (MASS.) (VERMONT) (CONN.)
- --------------------------------- ----------- ------------- ------------- ------------- --------------- -------------
LINCOLN/MERCURY.................. 331 1,473 -- 370 -- --
TOYOTA........................... -- -- 960 -- -- --
FORD............................. 765 -- -- -- -- --
DODGE............................ -- -- -- -- 396 42
JEEP............................. 200 -- -- -- 188
CHEVROLET........................ -- -- 377 -- -- --
OLDSMOBILE....................... -- -- 78 -- -- --
PLYMOUTH......................... -- -- -- -- 43 32
CHRYSLER......................... -- -- -- -- 10 68
ISUZU............................ -- -- 62 -- -- --
GEO.............................. -- -- 34 -- -- --
EAGLE............................ 1 -- -- -- -- 1
----- ----- ----- --- --- ---
1,297 1,473 1,511 370 449 331
----- ----- ----- --- --- ---
----- ----- ----- --- --- ---
BRANDS TOTAL PERCENTAGE
- --------------------------------- --------- -----------
LINCOLN/MERCURY.................. 2,174 40.0%
TOYOTA........................... 960 17.7%
FORD............................. 765 14.1%
DODGE............................ 438 8.1%
JEEP............................. 388 7.1%
CHEVROLET........................ 377 7.0%
OLDSMOBILE....................... 78 1.4%
PLYMOUTH......................... 75 1.4%
CHRYSLER......................... 78 1.4%
ISUZU............................ 62 1.2%
GEO.............................. 34 0.6%
EAGLE............................ 2 0.0%
--------- -----
5,431 100.0%
--------- -----
--------- -----
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.
46
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.
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.......................................................... 3,339 3,309 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
47
1994 1995 1996 1997
--------- --------- --------- ---------
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
PRIDE (CONNECTICUT)
Used Vehicles -- Retail.................................................... 230 245 249 249
Used Vehicles -- Wholesale................................................. 163 124 154 146
New Vehicles............................................................... 352 299 362 331
--------- --------- --------- ---------
Total Sales.......................................................... 745 668 765 726
TOTAL HOMETOWN
Used Vehicles -- Retail.................................................... 4,025 4,542 5,107 4,725
Used Vehicles -- Wholesale................................................. 3,053 3,573 3,867 4,154
New Vehicles............................................................... 5,680 4,843 5,450 5,431
--------- --------- --------- ---------
Total Sales.......................................................... 12,758 12,958 14,424 14,310
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 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
48
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.
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. During 1997, Hometown arranged financing for
approximately 37% of new cars and 55% of used cars sold at retail to its
customers. 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.
49
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 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
50
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.
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.
In addition to competition for the sale of vehicles, the Company competes
with publicly and privately owned dealership groups for the acquisition of other
dealerships. The Company believes that it is currently the only dealer group
with public ownership located in the Northeast. It currently faces only limited
competition in this region from other purchasers of dealerships. Publicly owned
dealerships with significantly greater capital resources have acquired a limited
number of dealerships in the Company's current and targeted market areas
including Republic Industries, Inc. and United Auto Group, Inc. which have,
respectively, purchased a dealer group in southern New Jersey and a limited
number of dealerships in New Jersey and the Danbury, Connecticut and Nyack, New
York areas. The Company expects increased future competition for dealerships in
its markets.
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."
51
OCCUPANT/TRADE NAME LOCATION USE LEASE/OWN
- --------------------------- --------------------------- --------------------------- ---------------------------
Shaker's Lincoln Mercury 831 Straits Turnpike New and used car sales; Lease expires in 2013;
Watertown, CT 06795 service; F & I $240,000 per year with CPI
increases in 2004 and 2009
Lincoln Mercury Autocare 1189 New Haven Rd. Service Owned by dealership
Naugatuck, CT 06770
Family Ford 1200 Wolcott Street New and used car sales; Lease expires in 2013;
Waterbury, CT 06705 service; F & I $240,000 per year with CPI
increases in 2004 and 2009
Shaker's Jeep Eagle 1311 South Main St. New and used car sales; Lease expires in 2013;
Waterbury, CT 06706 service; F & I $72,000 per year with CPI
increases in 2004 and 2009
Westwood Lincoln Mercury 55 Kinderkamack Rd. New and used car sales; Lease expires in 2013;
Emerson, NJ 07630 service; F & I; livery $360,000 per year with CPI
sales increases in 2004 and 2009
Muller Toyota Route 31 and Van Sickles New and used car sales; Lease expires in 2013;
Rd. Clinton, NJ 08809 service; F & I $360,000 per year with CPI
increases in 2004 and 2009
Muller Toyota Route 31 and Spruce St. Used car sales Lease expires in 2000;
Glen Gardner, NJ 08826 $60,000 per year with
increases up to $72,000 per
year
Muller Chevrolet, Route 173 and Voorhees Rd. New and used car sales; Lease expires in 2013;
Oldsmobile, Isuzu Stewartsville, NJ 08865 service; F & I $396,000 per year with CPI
increases in 2004 and 2009
Muller Chevrolet 135 Fifth Street Auto collision repairs Lease expires in 2000 at
Phillipsburg, NJ 08865 $48,000 per year
Bay State Lincoln Mercury 571 Worcester Road New and used car sales; Lease expires in 2013 at
Framingham, MA 01701 service; F & I $360,000 per year for the
first 5 years, $420,000 for
the next 5 years and
$456,000 for the last 5
years; two five-year
options at $480,000 per
year
Brattleboro Chrysler Route 5, Putney Rd. N. New and use car service; F Lease expires in 2003 at
Plymouth Dodge Sales; Brattleboro, VT 05304 & I $240,000 per year; one five
year renewal option at the
same rent and option to
purchase at fair market
value of not less than $1.5
million.
52
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.
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
53
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 March 31, 1998, the Company (after giving effect to the Exchange and
the Acquisitions) employed 349 people, of whom approximately 79 were employed in
managerial positions, 72 were employed in non-managerial sales positions, 111
were employed in non-managerial parts and service positions and 87 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.
54
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................................. 56 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
Northern Arizona 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
55
the pilot free-standing neighborhood Autocare Center which has become the model
for free-standing neighborhood auto maintenance centers established by Ford
Motor with certain of its other dealers. 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.
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 merger
56
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.
57
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 five highest paid other officers by the Core Operating
Companies for services provided to such Core Operating Companies:
NAME AND PRINCIPAL POSITION SALARY(1) BONUS(2) OTHER ANNUAL 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) The dollar value of perquisites and other personal benefits are included in
Other Annual Compensation.
(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
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.
58
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 295,556 shares, exercisable at the Offering price during a five-year period,
were granted to eight officers and ten 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. These options,
which will be exercisable at the fair market value per share on the date of
grant, will be exercisable for 50% of the shares covered immediately upon grant
and for the remainder of the shares following one year's service.
59
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 a
principal stockholder of the Company. Corey Shaker is Vice
President--Connecticut Operations and a principal stockholder of the Company.
Steven Shaker is Vice President--Parts and Service and a principal stockholder
of the Company. Janet Shaker is a principal stockholder of the Company.
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, Westwood: (a) lent: (i) $769,000 to
Salvatore A. Vergopia, increasing the amount owed by him to Westwood to
$940,000, which is offset by $1,000,000 previously advanced by Salvatore A.
Vergopia to such company, leaving a net balance of $60,000 owed 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. In fiscal 1997, Westwood also
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. Salvatore
A. Vergopia is Chairman of the Board and Chief Executive Officer and a principal
stockholder of the Company. Edward A. Vergopia is Vice President--Fleet
60
Operations and a director and principal stockholder of the Company. 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.
As at March 31, 1998, the Company had aggregate liability of $28,437,000
under its floor plan financing lines of credit, including liabilities of its
subsidiaries, Muller Chevrolet, Muller Toyota and Westwood in the amounts of
$4,148,000, $4,268,000 and $7,493,000, respectively. The floor plan liabilities
of these subsidiaries are guaranteed by affiliates of the Company as follows:
Muller Chevrolet by William Muller Sr. and William Muller Jr; Muller Toyota by
William Muller Sr., William Muller Jr. and James Christ and Westwood by
Salvatore A. Vergopia. Hometown plans to reduce floor plan obligations by
$6,500,000 using a portion of the proceeds of the Offering, of which
approximately $3,600,000 million will be used to reduce liabilities guaranteed
by these affiliates. To the extent that floor plan finance obligations
guaranteed by affiliates are reduced or eliminated through the use of a portion
of the proceeds of the Offering, these affiliates will benefit through the
reduction of contingent liability on their guarantees.
61
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.
SHARES BENEFICIALLY SHARES BENEFICIALLY PERCENT OF
OWNED OWNED AGGREGATE
BEFORE THIS OFFERING AFTER THIS OFFERING VOTING
----------------------- ----------------------- RIGHTS OF
NAME OF BENEFICIAL OWNER(1) NUMBER(3) PERCENT(2) NUMBER(3) PERCENT(2) ALL CLASSES
- ---------------------------------------------------- ---------- ----------- ---------- ----------- -----------
Salvatore A. Vergopia(4)............................ 705,000 17.63 705,000 12.16 17.79
Joseph Shaker....................................... 206,612 5.17 206,612 3.56 5.21
William C. Muller Jr................................ 470,034 11.75 470,034 8.10 11.86
Corey Shaker........................................ 249,100 6.23 249,100 4.29 6.28
Edward A. Vergopia.................................. 235,000 5.88 235,000 4.05 5.93
James Christ........................................ 93,248 2.33 93,248 1.61 2.35
Steven Shaker....................................... 206,424 5.17 206,424 3.56 5.21
Paul Shaker......................................... 218,268 5.46 218,268 3.76 5.51
Janet Shaker........................................ 227,668 5.69 227,668 3.93 5.74
William C. Muller Sr................................ 376,718 9.42 376,718 6.50 9.50
All Officers and Directors as a group
(8 persons)(5).................................... 2,225,418 55.64 2,225,418 38.37 54.78
- ------------------------
(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 July 27, 1999. After that date, an
aggregate of shares of Common Stock will become eligible for sale pursuant to
Rule 144 and the limitations specified therein.
62
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:
NUMBER OF
UNDERWRITERS SHARES
- -------------------------------------------------------------------------------- ------------
Paulson Investment Company, Inc................................................. 980,000
EBI Securities Corporation...................................................... 300,000
Klein Maus & Shire.............................................................. 210,000
Laidlaw Global Securities, Inc.................................................. 200,000
American Fronteer Financial Corporation......................................... 110,000
Total..................................................................... 1,800,000
------------
------------
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 $.36 per share. The
Underwriters may allow, and such dealers may allow, a concession not in excess
of $.10 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 270,000 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 180,000 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 at an exercise price of $10.80 per
share. The Representative's Warrants provide for protection against dilution in
the event of stock splits, stock dividends, mergers and other changes in
capitalization. The Representative's 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."
66
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, 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.
67
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.
68
HOMETOWN AUTO RETAILERS, INC.
INDEX TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Basis of Presentation................................................................... F-2
Unaudited Pro Forma Balance Sheets, March 31, 1998...................................... F-4
Unaudited Pro Forma Statements of Operations, December 31, 1997......................... F-5
Unaudited Pro Forma Statements of Operations, March 31, 1998............................ F-6
Notes to the Unaudited Pro Forma Financial Statements................................... F-7
THE COMPANIES
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
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.
PRIDE:
Pride Auto Centers, 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
HOMETOWN AUTO RETAILERS, INC.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
BASIS OF PRESENTATION
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership. 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, and May 1998 under the direction of its Core
Operating Companies, the Company entered into three agreements (the
"Acquisitions") to acquire certain assets and liabilities of three dealerships
in Connecticut, Massachusetts and Vermont for an aggregate consideration of $6.7
million plus the assumption of certain liabilities. 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 31, 1998.
INITIAL PUBLIC OFFERING (THE OFFERING)
The net proceeds to the Company from the sale of 1,800,000 shares of Class A
Common Stock, based upon an assumed initial public offering price of $9.00 per
share, are estimated to be $13.8 million ($16 million if the Underwriters'
over-allotment option for an additional 270,000 shares is exercised in full)
after deducting the underwriting discount and estimated expenses of this
Offering. Of the net proceeds, approximately $6.4 million will be used to pay
the cash portion of 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.
F-2
HOMETOWN AUTO RETAILERS, INC.
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. 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 and the three months ended March
31, 1998 give effect to these transactions as if they had occurred at 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 and March 31, 1998,
respectively. 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
HOMETOWN AUTO RETAILERS, INC.
UNAUDITED PRO FORMA BALANCE SHEETS
AS OF MARCH 31, 1998
(IN THOUSANDS)
MULLER
---------------------- BAY STATE BRATTLEBORO
HOMETOWN SHAKER WESTWOOD TOYOTA CHEVY (8) (8)
------------- --------- ----------- ----------- --------- ----------- -------------
Current Assets
Cash and cash equivalents............ $ 52 $ 3,608 $ 284 $ 314 $ 200 -- --
Accounts receivable, net............. -- 1,249 1,844 1,020 164 -- --
Inventories.......................... -- 8,321 7,889 3,626 3,751 1,070 2,534
Prepaid expenses and other current
assets............................. 273 462 256 30 105 -- --
Deferred income taxes................ -- 167 213 -- -- -- --
----- --------- ----------- ----------- --------- ----------- ------
Total current assets............. 325 13,807 10,486 4,990 4,220 1,070 2,534
Property and equipment, net............ -- 1,277 227 800 289 252 50
Receivable from finance companies...... -- -- -- 1,002 290 -- --
Due from related parties............... -- 278 193 932 -- -- --
Deferred income taxes.................. -- 683 -- -- -- -- --
Excess of purchase price over net book
value of assets acquired............. -- -- -- -- -- -- --
Other assets........................... -- 7 203 -- 208 -- --
----- --------- ----------- ----------- --------- ----------- ------
Total assets..................... $ 325 $ 16,052 $ 11,109 $ 7,724 $ 5,007 $ 1,322 $ 2,584
----- --------- ----------- ----------- --------- ----------- ------
----- --------- ----------- ----------- --------- ----------- ------
Current Liabilities
Floor plan notes payable............. $ -- $ 7,417 $ 7,493 $ 4,268 $ 4,148 $ 955 $ 2,142
Accounts payable and accrued
expenses........................... -- 3,070 1,005 1,098 341 -- --
Current maturities of long-term
debt............................... -- 253 2 69 140 -- --
Other current bank borrowings........ -- 100 1,000 -- 200 -- --
Advances from officers and
affilitates........................ 325 -- -- -- -- 367 442
Income taxes pabale.................. -- 146 132 208 -- -- --
----- --------- ----------- ----------- --------- ----------- ------
Total current liabilities........ 325 10,986 9,632 5,643 4,829 1,322 2,584
Long-term debt......................... -- 107 6 563 226 -- --
Long-term deferred income taxes........ -- 164 -- -- -- -- --
Due to related parites................. -- 920 -- 5 875 -- --
Other long-term liabilities............ -- 52 -- 206 -- -- --
Stockholders' Equity
Common stock......................... -- 69 60 30 345 -- --
Additional paid-in capital........... -- -- 76 96 811 -- --
Treasury stock, at cost.............. -- -- -- (890) -- -- --
Retained earnings (deficit).......... -- 3,754 1,335 2,071 (2,079) -- --
----- --------- ----------- ----------- --------- ----------- ------
Total stockholders' equity
(deficit)...................... -- 3,823 1,471 1,307 (923) -- --
----- --------- ----------- ----------- --------- ----------- ------
Total liabilities and
stockholders' equity........... $ 325 $ 16,052 $ 11,109 $ 7,724 $ 5,007 $ 1,322 $ 2,584
----- --------- ----------- ----------- --------- ----------- ------
----- --------- ----------- ----------- --------- ----------- ------
PURCHASE &
ACCOUNTING I.P.O.
PRIDE ADJUSTMENTS PROCEEDS PRO FORMA
(8) SUB-TOTAL (4) (5) AS ADJUSTED
--------- ----------- ------------- ----------- -------------
Current Assets
Cash and cash equivalents............ -- $ 4,458 $ (2,975) $ 347 $ 1,830
Accounts receivable, net............. -- 4,277 -- -- 4,277
Inventories.......................... 2,388 29,579 (19) -- 29,560
Prepaid expenses and other current
assets............................. -- 1,126 (325) (414) 387
Deferred income taxes................ -- 380 -- -- 380
--------- ----------- ------------- ----------- -------------
Total current assets............. 2,388 39,820 (3,319) (67) 36,434
Property and equipment, net............ 50 2,945 -- -- 2,945
Receivable from finance companies...... -- 1,292 -- -- 1,292
Due from related parties............... -- 1,403 (1,138) -- 265
Deferred income taxes.................. -- 683 -- -- 683
Excess of purchase price over net book
value of assets acquired............. -- -- 15,959 -- 15,959
Other assets........................... -- 418 -- -- 418
--------- ----------- ------------- ----------- -------------
Total assets..................... $ 2,438 $ 46,561 $ 11,502 $ (67) $ 57,996
--------- ----------- ------------- ----------- -------------
--------- ----------- ------------- ----------- -------------
Current Liabilities
Floor plan notes payable............. $ 2,014 $ 28,437 $ -- $ (6,500) $ 21,937
Accounts payable and accrued
expenses........................... -- 5,514 (2,325) (175) 3,014
Current maturities of long-term
debt............................... -- 464 61 (167) 358
Other current bank borrowings........ -- 1,300 -- -- 1,300
Advances from officers and
affilitates........................ 424 1,558 4,875 (6,433) --
Income taxes pabale.................. -- 486 -- -- 486
--------- ----------- ------------- ----------- -------------
Total current liabilities........ 2,438 37,759 2,611 (13,275) 27,095
Long-term debt......................... -- 902 139 (593) 448
Long-term deferred income taxes........ -- 164 119 -- 283
Due to related parites................. -- 1,800 (1,613) -- 187
Other long-term liabilities............ -- 258 -- -- 258
Stockholders' Equity
Common stock......................... -- 504 (500) 2 6
Additional paid-in capital........... -- 983 11,302 13,799 26,084
Treasury stock, at cost.............. -- (890) 890 -- --
Retained earnings (deficit).......... -- 5,081 (1,446) -- 3,635
--------- ----------- ------------- ----------- -------------
Total stockholders' equity
(deficit)...................... -- 5,678 10,246 13,801 29,725
--------- ----------- ------------- ----------- -------------
Total liabilities and
stockholders' equity........... $ 2,438 $ 46,561 $ 11,502 $ (67) $ 57,996
--------- ----------- ------------- ----------- -------------
--------- ----------- ------------- ----------- -------------
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
The accompanying Notes to Unaudited Pro Forma Financial Statements are an
integral part of this Balance Sheet.
F-4
HOMETOWN AUTO RETAILERS, INC.
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
------------- --------- ----------- --------- ---------
Revenues
New vehicle sales............................................. $ -- $ 29,345 $ 45,470 $ 21,604 $ 11,704
Used vehicle sales............................................ -- 21,800 8,396 14,454 5,542
Parts and service sales....................................... -- 6,727 4,352 3,096 1,811
Other dealership revenues, net................................ -- 1,624 731 1,102 675
----- --------- ----------- --------- ---------
Total revenues.............................................. -- 59,496 58,949 40,256 19,732
Cost of sales................................................... -- 51,226 52,770 34,760 16,881
----- --------- ----------- --------- ---------
Gross profit................................................ -- 8,270 6,179 5,496 2,851
Amortization of excess of purchase price over
net book value of assets acquired............................. -- -- -- -- --
Selling, general and administrative expenses.................... 1 7,715 5,594 4,569 2,714
----- --------- ----------- --------- ---------
Income (loss) from operations............................... (1) 555 585 927 137
Other income (expense)
Interest expense, net......................................... -- (189) (295) (219) (293)
Other income (expense), net................................... -- 116 (39) 26 (53)
----- --------- ----------- --------- ---------
Income (loss) before taxes.................................. (1) 482 251 734 (209)
Provision for income taxes...................................... -- 166 106 36 --
----- --------- ----------- --------- ---------
Net income (loss)........................................... $ (1) $ 316 $ 145 $ 698 $ (209)
----- --------- ----------- --------- ---------
----- --------- ----------- --------- ---------
Earnings per share, basic and diluted (note 7)...............................................................................
Weighted average shares......................................................................................................
BAY PRO FORMA
STATE BRATTLEBORO PRIDE SUB- ADJUSTMENTS
(8) (8) (8) TOTAL (6)
--------- ----------- --------- --------- -----------
Revenues
New vehicle sales............................................. $ 9,890 $ 9,038 $ 7,437 $ 134,488 $ --
Used vehicle sales............................................ 12,459 12,928 3,448 79,027 --
Parts and service sales....................................... 2,066 2,024 1,224 21,300 --
Other dealership revenues, net................................ 301 594 323 5,350 --
--------- ----------- --------- --------- -----------
Total revenues.............................................. 24,716 24,584 12,432 240,165 --
Cost of sales................................................... 21,502 20,986 10,898 209,023 --
--------- ----------- --------- --------- -----------
Gross profit................................................ 3,214 3,598 1,534 31,142 --
Amortization of excess of purchase price over
net book value of assets acquired............................. -- -- 399
Selling, general and administrative expenses.................... 1,934 3,314 1,452 27,293 (2,698)
--------- ----------- --------- --------- -----------
Income (loss) from operations............................... 1,280 284 82 3,849 2,299
Other income (expense)
Interest expense, net......................................... (272) (72) (54) (1,394) 862
Other income (expense), net................................... 9 (41) (3) 15 --
--------- ----------- --------- --------- -----------
Income (loss) before taxes.................................. 1,017 171 25 2,470 3,161
Provision for income taxes...................................... 52 -- -- 360 1,892
--------- ----------- --------- --------- -----------
Net income (loss)........................................... $ 965 $ 171 25 $ 2,110 $ 1,269
--------- ----------- --------- --------- -----------
--------- ----------- --------- --------- -----------
Earnings per share, basic and diluted (note 7)..................
Weighted average shares.........................................
PRO FORMA
AS
ADJUSTED
-----------
Revenues
New vehicle sales............................................. $ 134,488
Used vehicle sales............................................ 79,027
Parts and service sales....................................... 21,300
Other dealership revenues, net................................ 5,350
-----------
Total revenues.............................................. 240,165
Cost of sales................................................... 209,023
-----------
Gross profit................................................ 31,142
Amortization of excess of purchase price over
net book value of assets acquired............................. 399
Selling, general and administrative expenses.................... 24,595
-----------
Income (loss) from operations............................... 6,148
Other income (expense)
Interest expense, net......................................... (532)
Other income (expense), net................................... 15
-----------
Income (loss) before taxes.................................. 5,631
Provision for income taxes...................................... 2,252
-----------
Net income (loss)........................................... $ 3,379
-----------
-----------
Earnings per share, basic and diluted (note 7).................. $ 0.58
Weighted average shares......................................... 5,800,000
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
The accompanying Notes to Unaudited Pro Forma Financial Statements are an
integral part of this statement.
F-5
HOMETOWN AUTO RETAILERS, INC.
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MULLER
--------------------
HOMETOWN SHAKER WESTWOOD TOYOTA CHEVY
------------- --------- ----------- --------- ---------
Revenues
New vehicle sales.............................................. $ -- $ 5,967 $ 12,599 $ 4,598 $ 2,535
Used vehicle sales............................................. -- 5,723 4,273 3,265 1,205
Parts and service sales........................................ -- 1,613 1,121 848 463
Other dealership revenues, net................................. -- 441 397 354 119
----- --------- ----------- --------- ---------
Total revenues............................................... -- 13,744 18,390 9,065 4,322
Cost of sales.................................................... -- 11,612 16,502 7,763 3,710
----- --------- ----------- --------- ---------
Gross profit................................................. -- 2,132 1,888 1,302 612
Amortization of excess of purchase price over
net book value of assets acquired.............................. -- -- -- -- --
Selling, general and administrative expenses..................... -- 4,194 1,432 1,097 629
----- --------- ----------- --------- ---------
Income (loss) from operations................................ -- (2,062) 456 205 (17)
Other income (expense)
Interest expense, net.......................................... 1 (57) (132) (68) (113)
Other income (expense), net.................................... -- (6) (9) (7) (24)
----- --------- ----------- --------- ---------
Income (loss) before taxes................................... 1 (2,125) 315 130 (154)
Provision (benefit) for income taxes............................. -- (850) 132 8 --
----- --------- ----------- --------- ---------
Net income (loss)............................................ $ 1 $ (1,275) $ 183 $ 122 $ (154)
----- --------- ----------- --------- ---------
----- --------- ----------- --------- ---------
Earnings per share, basic and diluted (note 7)................................................................................
Weighted average shares.......................................................................................................
BAY PRO FORMA
STATE BRATTLEBORO PRIDE SUB- ADJUSTMENTS
(8) (8) (8) TOTAL (6)
--------- ----------- --------- --------- -----------
Revenues
New vehicle sales.............................................. $ 1,980 $ 2,400 $ 1,351 $ 31,430 $ --
Used vehicle sales............................................. 2,356 2,598 441 19,861 --
Parts and service sales........................................ 555 362 300 5,262 --
Other dealership revenues, net................................. 80 65 44 1,500 --
--------- ----------- --------- --------- -----------
Total revenues............................................... 4,971 5,425 2,136 58,053 --
Cost of sales.................................................... 4,133 4,735 1,820 50,275 --
--------- ----------- --------- --------- -----------
Gross profit................................................. 838 690 316 7,778 --
Amortization of excess of purchase price over
net book value of assets acquired.............................. -- -- 100
Selling, general and administrative expenses..................... 481 511 332 8,676 (2,688)
--------- ----------- --------- --------- -----------
Income (loss) from operations................................ 357 179 (16) (898) 2,588
Other income (expense)
Interest expense, net.......................................... (54) (42) (12) (477) 237
Other income (expense), net.................................... 9 26 -- (11) --
--------- ----------- --------- --------- -----------
Income (loss) before taxes................................... 312 163 (28) (1,386) 2,825
Provision (benefit) for income taxes............................. 18 -- -- (692) 1,268
--------- ----------- --------- --------- -----------
Net income (loss)............................................ $ 294 $ 163 (28) $ (694) $ 1,557
--------- ----------- --------- --------- -----------
--------- ----------- --------- --------- -----------
Earnings per share, basic and diluted (note 7)...................
Weighted average shares..........................................
PRO FORMA
AS
ADJUSTED
-----------
Revenues
New vehicle sales.............................................. $ 31,430
Used vehicle sales............................................. 19,861
Parts and service sales........................................ 5,262
Other dealership revenues, net................................. 1,500
-----------
Total revenues............................................... 58,053
Cost of sales.................................................... 50,275
-----------
Gross profit................................................. 7,778
Amortization of excess of purchase price over
net book value of assets acquired.............................. 100
Selling, general and administrative expenses..................... 5,988
-----------
Income (loss) from operations................................ 1,690
Other income (expense)
Interest expense, net.......................................... (240)
Other income (expense), net.................................... (11)
-----------
Income (loss) before taxes................................... 1,439
Provision (benefit) for income taxes............................. 576
-----------
Net income (loss)............................................ $ 863
-----------
-----------
Earnings per share, basic and diluted (note 7)................... $ 0.15
Weighted average shares.......................................... 5,800,000
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
The accompanying Notes to Unaudited Pro Forma Financial Statements are an
integral part of this statement.
F-6
HOMETOWN AUTO RETAILERS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. HOMETOWN AUTO RETAILERS, INC.
Hometown Auto Retailers, Inc. has conducted no operations to date. It will
acquire the Core Operating Companies and Acquisitions on the closing of the
Offering. Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
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, (e) Brattleboro and (f) Pride (the
"Acquisitions"); the pro forma adjustments necessitated by the combinations; and
the consummation of the Offering of 1,800,000 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 book value of 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 PRIDE COSTS TOTAL
----------- --------- ----------- ----------- --------- ----------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
Cash......................................... $ -- $ -- $ 3,000 $ 2,708 $ 725 $ 175 $ 6,608
Common Stock................................. 6,110 6,110 -- -- -- -- 12,220
Promissory Note.............................. -- -- -- -- 200 -- 200
Other Consideration.......................... -- -- -- -- 19 -- 19
----------- --------- ----------- ----------- --------- ----------- ----------
Total.................................. 6,110 6,110 3,000 2,708 944 175 19,047
Less: Book value of net tangible assets
acquired................................... 1,471 384 367 442 424 -- 3,088
----------- --------- ----------- ----------- --------- ----------- ----------
Excess of purchase price over net book value
of assets acquired......................... $ 4,639 $ 5,726 $ 2,633 $ 2,266 $ 520 $ 175 $ 15,959
----------- --------- ----------- ----------- --------- ----------- ----------
----------- --------- ----------- ----------- --------- ----------- ----------
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 July 27, 1999. 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-7
HOMETOWN AUTO RETAILERS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
3. CONSIDERATION PAID TO CORE OPERATING COMPANIES AND THE ACQUISITIONS
(CONTINUED)
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 book value of 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, the settlement of certain related
party payables and a distribution to the owners of Shaker and pro forma tax
adjustments. For presentation purposes, Muller represents the total of Muller
Toyota, Muller Chevrolet and William Chevrolet:
ASSOCIATED
COSTS &
RELATED
DEBIT (CREDIT) SHAKER WESTWOOD MULLER BAY STATE BRATTLEBORO PRIDE PARTIES(A)
- --------------------------------------- ----------- ----------- --------- ----------- ----------- --------- -----------
ASSETS:
Cash and cash equivalents.............. $ -- $ -- $ -- $ -- $ -- $ -- $ (2,975)
Inventories............................ -- -- -- -- -- (19) --
Prepaid expenses and other current
assets............................... -- -- -- -- -- -- (325)
Due from related parties............... -- -- -- -- -- -- (1,138)
Excess of purchase price over net book
value of assets acquired............. -- 4,639 5,726 2,633 2,266 520 175
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued
expenses............................. -- -- -- -- -- -- 2,325
Current maturities of long-term debt... -- -- -- -- -- (61) --
Advances from officers and
affiliates........................... -- -- -- (2,633) (2,266) (301) 325
Long-term debt......................... -- -- -- -- -- (139) --
Long-term deferred income taxes........ -- -- -- -- -- -- --
Due to related parties................. -- -- -- -- -- -- 1,613
Common stock........................... 67 59 374 -- -- -- --
Additional paid-in capital............. (67) (6,033) (5,202) -- -- -- --
Treasury stock at cost................. -- -- (890) -- -- -- --
Retained earnings (deficit)............ -- 1,335 (8) -- -- -- --
----- ----------- --------- ----------- ----------- --------- -----------
Total purchase adjustments......... $ -- $ -- $ -- $ -- $ -- $ -- $ --
----- ----------- --------- ----------- ----------- --------- -----------
----- ----------- --------- ----------- ----------- --------- -----------
TAX
DEBIT (CREDIT) ADJUST(B) TOTAL
- --------------------------------------- ------------- ---------
ASSETS:
Cash and cash equivalents.............. $ -- $ (2,975)
Inventories............................ -- (19)
Prepaid expenses and other current
assets............................... -- (325)
Due from related parties............... -- (1,138)
Excess of purchase price over net book
value of assets acquired............. -- 15,959
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued
expenses............................. -- 2,325
Current maturities of long-term debt... -- (61)
Advances from officers and
affiliates........................... -- (4,875)
Long-term debt......................... -- (139)
Long-term deferred income taxes........ (119) (119)
Due to related parties................. -- 1,613
Common stock........................... -- 500
Additional paid-in capital............. -- (11,302)
Treasury stock at cost................. -- (890)
Retained earnings (deficit)............ 119 1,446
----- ---------
Total purchase adjustments......... $ -- $ --
----- ---------
----- ---------
- ------------------------
(a) Includes the pro forma adjustments to reflect the accrual of the Associated
Transaction costs, the settlement of certain Related Party Payables,
elimination of offseting related party accounts and a payment of an accrued
bonus to the owners of Shaker before closing of the offering.
(b) Includes pro forma adjustments to reflect the effect of the S Corporations
changing to C Corporations and the tax effect of inventory conformity
adjustments.
F-8
HOMETOWN AUTO RETAILERS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
5. UNAUDITED PRO FORMA BALANCE SHEETS--OFFERING PROCEEDS:
The following table sets forth adjustments based on receipt of the net
Offering Proceeds:
MARCH 31, 1998
-------------------------------------------------------------------
DEBIT (CREDIT) (A) (B) (C) (D) (E) (F) TOTAL
- ---------------------------------------------- ---------- --------- --------- --------- ---------- ---------- ----------
(IN THOUSANDS)
ASSETS:
Cash and cash equivalents..................... $ 14,215 $ (3,000) $ (2,708) $ (725) $ (935) $ (6,500) $ 347
Prepaid expenses and other current assets..... (414) -- -- -- -- -- (414)
LIABILITIES AND SHAREHOLDERS' EQUITY:
Floor plan notes payable...................... -- -- -- -- -- 6,500 6,500
Accounts payable and accrued expenses......... -- -- -- -- 175 -- 175
Current maturities of long-term debt.......... -- -- -- -- 167 -- 167
Advances from officers and affiliates......... -- 3,000 2,708 725 -- -- 6,433
Long-term debt................................ -- -- -- -- 593 -- 593
Common stock.................................. (2) -- -- -- -- -- (2)
Additional paid-in capital.................... (13,799) -- -- -- -- -- (13,799)
---------- --------- --------- --------- ---------- ---------- ----------
Total pro forma adjustments............... $ -- $ -- $ -- $ -- $ -- $ -- $ --
---------- --------- --------- --------- ---------- ---------- ----------
---------- --------- --------- --------- ---------- ---------- ----------
- ------------------------
(a) Reflects the proceeds from the issuance of 1,800,000 shares of Hometown
Auto Retailers, Inc. Class A Common Stock net of estimated Offering
costs. Offering costs consist primarily of underwriting discounts and
commissions, accounting fees, legal fees and printing expenses.
(b)(c)(d) Reflects the settlement of the acquisition of (b) Bay State (c)
Brattleboro and (d) Pride 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.
(e) Reflects the pay-down of certain long-term debt and the settlement of
the Associated Transaction Costs with the proceeds from the Offering.
(f) Reflects the pay-down of floorplan obligations with proceeds from the
Offering of which $3,600,000 will be used to repay indebtedness that
has been guaranteed by certain affiliates of the Company.
F-9
HOMETOWN AUTO RETAILERS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
6. UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS--PRO FORMA ADJUSTMENTS
The following table sets forth the components of the pro forma adjustments:
FOR THE YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------
DEBIT (CREDIT) (A) (B) (C) (D) (E)
- ------------------------------------------------------------------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
Amortization of excess purchase price over net book value of assets
acquired......................................................... $ 399 $ -- $ -- $ -- $ --
Selling, general and administrative expenses....................... -- (2,654) (44) -- --
Other income (expense) Interest expense, net....................... -- -- -- 160 (1,022)
Provision for income taxes......................................... -- -- -- -- --
--------- --------- --------- --------- ---------
Net income......................................................... $ 399 $ (2,654) $ (44) $ 160 $ (1,022)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
DEBIT (CREDIT) (F) TOTAL
- ------------------------------------------------------------------- --------- ---------
Amortization of excess purchase price over net book value of assets
acquired......................................................... $ -- $ 399
Selling, general and administrative expenses....................... -- (2,698)
Other income (expense) Interest expense, net....................... -- (862)
Provision for income taxes......................................... 1,892 1,892
--------- ---------
Net income......................................................... $ 1,892 $ (1,269)
--------- ---------
--------- ---------
FOR THE THREE MONTHS ENDED MARCH 31, 1998
-----------------------------------------------------
DEBIT (CREDIT) (A) (B) (C) (D) (E)
- ------------------------------------------------------------------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
Amortization of excess purchase price over net book value of assets
acquired......................................................... $ 100 $ -- $ -- $ -- $ --
Selling, general and administrative expenses....................... -- (2,683) (5) -- --
Other income (expense) Interest expense, net....................... -- -- -- 19 (256)
Provision for income taxes......................................... -- -- -- -- --
--------- --------- --------- --------- ---------
Net income......................................................... $ 100 $ (2,683) $ (5) $ 19 $ (256)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
DEBIT (CREDIT) (F) TOTAL
- ------------------------------------------------------------------- --------- ---------
Amortization of excess purchase price over net book value of assets
acquired......................................................... $ -- $ 100
Selling, general and administrative expenses....................... -- (2,688)
Other income (expense) Interest expense, net....................... -- (237)
Provision for income taxes......................................... 1,268 1,268
--------- ---------
Net income......................................................... $ 1,268 $ (1,557)
--------- ---------
--------- ---------
- ------------------------
(a) Reflects the amortization of the "excess purchase price over net book value
of 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
repayment of floor plan obligations with proceeds from the Offering in the
amount of $6.5 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-10
HOMETOWN AUTO RETAILERS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
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-11
HOMETOWN AUTO RETAILERS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
8. RECONCILIATION OF THE ACQUISITIONS' HISTORICAL BALANCE SHEET AND STATEMENT OF
OPERATIONS
The following table sets forth the pro forma accounting adjustments required
to reflect the purchase of the Acquisitions (in thousands):
BAY STATE BRATTLEBORO PRIDE
------------------------------------- ------------------------------------- ------------------------
PURCHASE PURCHASE PURCHASE
ADJUSTMENT ADJUSTED ADJUSTMENT ADJUSTED ADJUSTMENT
HISTORICAL (A) TOTAL HISTORICAL (A) TOTAL HISTORICAL (A)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
ASSETS:
Cash and cash
equivalents..... $ 1,091 $ (1,091) $ -- $ 446 $ (446) $ -- $ 83 $ (83)
Accounts
receivable,
net............. 221 (221) -- 151 (151) -- 189 (189)
Inventories....... 1,886 (816) 1,070 2,534 -- 2,534 2,388 --
Prepaid expenses
and other
current assets.. 13 (13) -- 2 (2) -- 60 (60)
Property and
equipment,
net............. 252 -- 252 381 (331) 50 49 1
Due from related
parties......... 214 (214) -- -- -- -- -- --
Other assets...... 173 (173) -- 13 (13) -- 6 (6)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total
Assets...... $ 3,850 $ (2,528) $ 1,322 $ 3,527 $ (943) $ 2,584 $ 2,775 $ (337)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND
STOCKHOLDERS'
EQUITY:
Floor plan notes
payable......... 2,008 (1,053) $ 955 2,429 (287) $ 2,142 2,178 (164)
Accounts payable
and accrued
Expenses........ 234 (234) -- 261 (261) -- 113 (113)
Current maturities
of long-term
debt............ 26 (26) -- 70 (70) -- -- --
Other current bank
borrowings...... -- -- -- 57 (57) -- -- --
Advances from
officers and
Affiliates...... 511 (144) 367 -- 442 442 -- 424
Income taxes
payable......... 8 (8) -- -- -- -- -- --
Long-term debt.... 40 (40) -- 134 (134) -- -- --
Due to related
parties......... -- -- -- 252 (252) -- 50 (50)
Other long-term
liabilities..... 12 (12) -- -- -- -- -- --
Common stock...... 25 (25) -- 33 (33) -- 2 (2)
Additional paid-in
capital......... 310 (310) -- -- -- -- 529 (529)
Retained earnings
(deficit)....... 676 (676) -- 291 (291) -- (97) 97
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total
liabilities
and
stockholders'
equity...... $ 3,850 $ (2,528) $ 1,322 $ 3,527 $ (943) $ 2,584 $ 2,775 $ (337)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
ADJUSTED
TOTAL
-----------
ASSETS:
Cash and cash
equivalents..... $ --
Accounts
receivable,
net............. --
Inventories....... 2,388
Prepaid expenses
and other
current assets.. --
Property and
equipment,
net............. 50
Due from related
parties......... --
Other assets...... --
-----------
Total
Assets...... $ 2,438
-----------
-----------
LIABILITIES AND
STOCKHOLDERS'
EQUITY:
Floor plan notes
payable......... $ 2,014
Accounts payable
and accrued
Expenses........ --
Current maturities
of long-term
debt............ --
Other current bank
borrowings...... --
Advances from
officers and
Affiliates...... 424
Income taxes
payable......... --
Long-term debt.... --
Due to related
parties......... --
Other long-term
liabilities..... --
Common stock...... --
Additional paid-in
capital......... --
Retained earnings
(deficit)....... --
-----------
Total
liabilities
and
stockholders'
equity...... $ 2,438
-----------
-----------
- ------------------------
(a) Purchase adjustments reflect the adjustments necessary to present only the
assets and liabilities being acquired. The acquired assets exclude cash,
accounts receivable, inventories of used vehicles (Bay State only) and other
miscellaneous assets. The liabilities assumed include only the floor plan
notes payable related to the vehicles inventories being acquired. The
advances from officers and affiliates amounts have been adjusted to reflect
the cash amounts due to the seller at closing relating to the net assets
being acquired. Assets not acquired and liabilities not assumed will be
retained by the sellers. No purchase adjustments are
F-12
HOMETOWN AUTO RETAILERS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
8. RECONCILIATION OF THE ACQUISITIONS' HISTORICAL BALANCE SHEET AND STATEMENT OF
OPERATIONS (CONTINUED)
necessary to the pro forma statement of operations due to the fact that all
assets required to continue the business in the same fashion are being
acquired and leases for the dealership locations have been executed.
9. UNAUDITED PRO FORMA DEFERRED TAX ASSETS AND LIABILITIES
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:
3/31/98
-----------
DEFERRED TAX ASSETS
Reserves and accruals not deductible until paid................................ $ 831
Net operating loss carry forward............................................... 845
Depreciation................................................................... 5
Other.......................................................................... 8
DEFERRED TAX LIABILITIES
Depreciation................................................................... (72)
Inventory...................................................................... (745)
Other.......................................................................... (92)
-----------
Net deferred tax asset......................................................... $ 780
-----------
-----------
F-13
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants............................................. F-16
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-17
Statements of Operations, Hometown and Brattleboro for the year ended December 31,
1997, and Shaker, Westwood, Muller Toyota, Muller Chevrolet and Bay State for the
years ended December 31, 1997, 1996 and 1995....................................... F-18
Statements of Stockholders' Equity, Hometown and Brattleboro for the year ended
December 31, 1997, and Shaker, Westwood, Muller Toyota, Muller Chevrolet and Bay
State for the years ended December 31, 1997, 1996 and 1995......................... F-19
Statements of Cash Flows, Hometown and Brattleboro for the year ended December 31,
1997, and Shaker, Westwood, Muller Toyota, Muller Chevrolet and Bay State for the
years ended December 31, 1997, 1996 and 1995....................................... F-20
Notes to the Financial Statements.................................................... F-21
F-14
INDEX TO CORE OPERATING COMPANIES AND ACQUISITIONS
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
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)
- ------------------------
(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 SAB 80.
F-15
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-14. 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-14, are in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
New York, NY
March 6, 1998
F-16
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 $ 312 $ 260 $ 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 68 251 286 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
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
The accompanying Notes to Financial Statements are an integral part of these
Balance Sheets.
F-17
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
MULLER
HOMETOWN SHAKER WESTWOOD TOYOTA
----------- ------------------------------------- ------------------------------------- -----------
12/31/97 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... $ -- $ 29,345 $ 30,511 $ 25,713 $ 45,470 $ 43,211 $ 41,507 $ 21,604
Used vehicle
sales............. -- 21,800 22,429 18,260 8,396 7,990 7,189 14,454
Parts and service
sales............. -- 6,727 7,406 6,565 4,352 4,586 4,193 3,096
Other dealership
revenues, net..... -- 1,624 1,876 1,482 731 742 669 1,102
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total
revenues........ -- 59,496 62,222 52,020 58,949 56,529 53,558 40,256
Cost of sales
New vehicle sales... -- 27,505 28,316 23,668 42,985 41,124 39,663 20,095
Used vehicle
sales............. -- 20,048 20,855 16,969 7,651 7,579 6,925 13,117
Parts and service
sales............. -- 3,673 3,905 3,552 2,134 2,363 2,129 1,548
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Cost of sales......... -- 51,226 53,076 44,189 52,770 51,066 48,717 34,760
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit........ -- 8,270 9,146 7,831 6,179 5,463 4,841 5,496
Selling, general and
administrative
expenses............ 1 7,715 8,049 6,961 5,594 4,699 4,463 4,569
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations........ (1) 555 1,097 870 585 764 378 927
Other income (expense)
Interest expense,
net............... -- (189) (384) (555) (295) (360) (184) (219)
Other income
(expense), net.... -- 116 1 16 (39) (36) 6 26
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss)
before taxes.... (1) 482 714 331 251 368 200 734
Provision (benefit)
for income taxes.... -- 166 321 118 106 160 88 36
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)... $ (1) $ 316 $ 393 $ 213 $ 145 $ 208 $ 112 $ 698
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
S-Corporation pro
forma provision
(benefit) for income
taxes (unaudited)... -- -- -- -- -- -- -- 251
-----------
Pro forma net income
(loss)
(unaudited)......... $ 447
-----------
-----------
MULLER CHEVROLET BAY STATE
------------------------------------- -------------------------------------
12/31/96 12/31/95 12/31/97 12/31/96 12/31/95 12/31/97 12/31/96 12/31/95
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Revenues
New vehicle sales... $ 19,142 $ 17,776 $ 11,704 $ 13,818 $ 11,687 $ 9,890 $ 9,640 $ 4,258
Used vehicle
sales............. 12,604 7,963 5,542 6,711 5,372 12,459 12,879 14,708
Parts and service
sales............. 3,013 2,906 1,811 1,812 1,336 2,066 1,847 1,306
Other dealership
revenues, net..... 1,227 1,267 675 964 962 301 205 211
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total
revenues........ 35,986 29,912 19,732 23,305 19,357 24,716 24,571 20,483
Cost of sales
New vehicle sales... 17,761 16,554 10,918 13,101 11,103 9,198 8,921 4,057
Used vehicle
sales............. 11,503 7,072 5,025 6,327 4,805 11,271 11,474 13,609
Parts and service
sales............. 1,605 1,599 938 962 776 1,033 933 600
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Cost of sales......... 30,869 25,225 16,881 20,390 16,684 21,502 21,328 18,266
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit........ 5,117 4,687 2,851 2,915 2,673 3,214 3,243 2,217
Selling, general and
administrative
expenses............ 4,293 4,276 2,714 2,792 3,174 1,934 1,687 1,228
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations........ 824 411 137 123 (501) 1,280 1,556 989
Other income (expense)
Interest expense,
net............... (257) (494) (293) (251) (287) (272) (265) (193)
Other income
(expense), net.... (21) (48) (53) (12) (20) 9 (5) 1
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss)
before taxes.... 546 (131) (209) (140) (808) 1,017 1,286 797
Provision (benefit)
for income taxes.... 216 (55) -- -- -- 52 67 44
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)... $ 330 $ (76) $ (209) $ (140) $ (808) $ 965 $ 1,219 $ 753
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
S-Corporation pro
forma provision
(benefit) for income
taxes (unaudited)... -- -- (66) (42) (276) 345 434 271
----------- ----------- ----------- ----------- ----------- -----------
Pro forma net income
(loss)
(unaudited)......... $ (143) $ (98) $ (532) $ 620 $ 785 $ 482
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
BRATTLEBORO
-------------
12/31/97
-------------
Revenues
New vehicle sales... $ 9,038
Used vehicle
sales............. 12,928
Parts and service
sales............. 2,024
Other dealership
revenues, net..... 594
------
Total
revenues........ 24,584
Cost of sales
New vehicle sales... 8,371
Used vehicle
sales............. 11,459
Parts and service
sales............. 1,156
------
Cost of sales......... 20,986
------
Gross profit........ 3,598
Selling, general and
administrative
expenses............ 3,314
------
Income (loss) from
operations........ 284
Other income (expense)
Interest expense,
net............... (72)
Other income
(expense), net.... (41)
------
Income (loss)
before taxes.... 171
Provision (benefit)
for income taxes.... --
------
Net income (loss)... $ 171
------
------
S-Corporation pro
forma provision
(benefit) for income
taxes (unaudited)... 67
------
Pro forma net income
(loss)
(unaudited)......... $ 104
------
------
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-18
STATEMENTS OF STOCKHOLDERS' EQUITY
(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
------------- ----------- ----------- ----------- ----------- ----------- -----------
Common Stock:
Balance........................ $ -- $ 69 $ 69 $ 69 $ 60 $ 60 $ 60
----- ----------- ----------- ----------- ----------- ----------- -----
Additional Paid-in Capital
Balance, Beginning of period... $ -- $ -- $ -- $ -- $ 76 $ 76 $ 76
Capital contribution
(disbursement)............... -- -- -- -- -- -- --
----- ----------- ----------- ----------- ----------- ----------- -----
Balance, End of period......... $ -- $ -- $ -- $ -- $ 76 $ 76 $ 76
----- ----------- ----------- ----------- ----------- ----------- -----
Treasury Stock, at cost
Balance........................ $ -- $ -- $ -- $ -- $ -- $ -- $ --
----- ----------- ----------- ----------- ----------- ----------- -----
Retained Earnings (Deficit)
Balance, Beginning of period... $ -- $ 4,713 $ 4,320 $ 4,107 $ 1,007 $ 799 $ 687
Net Income (Loss).............. (1) 316 393 213 145 208 112
Dividends...................... -- -- -- -- -- -- --
----- ----------- ----------- ----------- ----------- ----------- -----
Balance, End of period......... $ (1) $ 5,029 $ 4,713 $ 4,320 $ 1,152 $ 1,007 $ 799
----- ----------- ----------- ----------- ----------- ----------- -----
Total Stockholders' Equity
(Deficit).................... $ (1) $ 5,098 $ 4,782 $ 4,389 $ 1,288 $ 1,143 $ 935
----- ----------- ----------- ----------- ----------- ----------- -----
----- ----------- ----------- ----------- ----------- ----------- -----
MULLER TOYOTA MULLER CHEVROLET BAY STATE
------------------------------------- ------------------------------------- -----------
12/31/97 12/31/96 12/31/95 12/31/97 12/31/96 12/31/95 12/31/97
----------- ----------- ----------- ----------- ----------- ----------- -----------
Common Stock:
Balance........................ $ 30 $ 30 $ 30 $ 345 $ 345 $ 345 $ 25
----------- ----------- ----- ----------- ----------- ----------- -----------
Additional Paid-in Capital
Balance, Beginning of period... $ 96 $ 96 $ 207 $ 811 $ 811 $ 811 $ 310
Capital contribution
(disbursement)............... -- -- (111) -- -- -- --
----------- ----------- ----- ----------- ----------- ----------- -----------
Balance, End of period......... $ 96 $ 96 $ 96 $ 811 $ 811 $ 811 $ 310
----------- ----------- ----- ----------- ----------- ----------- -----------
Treasury Stock, at cost
Balance........................ $ (890) $ (890) $ (890) $ -- $ -- $ -- $ --
----------- ----------- ----- ----------- ----------- ----------- -----------
Retained Earnings (Deficit)
Balance, Beginning of period... $ 1,251 $ 921 $ 997 $ (1,716) $ (1,576) $ (768) $ 1,359
Net Income (Loss).............. 698 330 (76) (209) (140) (808) 965
Dividends...................... -- -- -- -- -- -- (1,830)
----------- ----------- ----- ----------- ----------- ----------- -----------
Balance, End of period......... $ 1,949 $ 1,251 $ 921 $ (1,925) $ (1,716) $ (1,576) $ 494
----------- ----------- ----- ----------- ----------- ----------- -----------
Total Stockholders' Equity
(Deficit).................... $ 1,185 $ 487 $ 157 $ (769) $ (560) $ (420) $ 829
----------- ----------- ----- ----------- ----------- ----------- -----------
----------- ----------- ----- ----------- ----------- ----------- -----------
BRATTLEBORO
-------------
12/31/96 12/31/95 12/31/97
----------- ----------- -------------
Common Stock:
Balance........................ $ 25 $ 25 $ 33
----------- ----- -----
Additional Paid-in Capital
Balance, Beginning of period... $ -- $ -- $ --
Capital contribution
(disbursement)............... 310 -- --
----------- ----- -----
Balance, End of period......... $ 310 $ -- $ --
----------- ----- -----
Treasury Stock, at cost
Balance........................ $ -- $ -- $ --
----------- ----- -----
Retained Earnings (Deficit)
Balance, Beginning of period... $ 732 $ 513 $ 192
Net Income (Loss).............. 1,219 753 171
Dividends...................... (592) (534) (220)
----------- ----- -----
Balance, End of period......... $ 1,359 $ 732 $ 143
----------- ----- -----
Total Stockholders' Equity
(Deficit).................... $ 1,694 $ 757 $ 176
----------- ----- -----
----------- ----- -----
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-19
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
HOMETOWN SHAKER WESTWOOD
------------- ------------------------------------- ------------------------
12/31/97 12/31/97 12/31/96 12/31/95 12/31/97 12/31/96
------------- ----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ (1) $ 316 $ 393 $ 213 $ 145 $ 208
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
Deferred income taxes........................ -- 14 (2) 215 12 (94)
Provision for finance reserves............... -- -- -- -- -- --
Changes in assets and liabilities:
Accounts receivable, net................... -- 177 (142) 136 (353) (51)
Inventories................................ -- 895 1,265 (152) (4,067) (197)
Prepaid expenses and other current assets.. (103) (166) (77) 174 35 (243)
Receivable from finance company............ -- -- -- -- -- --
Other assets............................... -- (38) 30 (77) (76) (15)
Floor plan notes payable................... -- (888) (811) (162) 4,176 (505)
Accounts payable and accrued expenses...... 1 12 (31) (99) 512 (29)
Income taxes payable....................... -- (194) 227 (7) (104) 30
Other long term liabilities................ -- 23 16 14 -- --
------ ----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities................................. (103) 335 1,017 389 309 (833)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........... -- (102) (18) (419) (9) (113)
Proceeds from sale of property and
equipment.................................. -- -- -- -- 22 7
------ ----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities................................. -- (102) (18) (419) 13 (106)
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)
Other current bank borrowings, net of
repayments................................. -- (16) (67) 10 500 500
Advance to/from officers and affiliates...... 150 -- -- -- -- 137
Due from/to related parties.................. -- 307 495 146 (766) (168)
Capital contributions and (disbursements).... -- -- -- -- -- --
Dividends paid............................... -- -- -- -- -- --
------ ----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities................................. 150 225 339 373 (270) 464
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS........................... 47 458 1,338 343 52 (475)
CASH AND CASH EQUVALENTS, beginning of
period....................................... -- 3,081 1,743 1,400 260 735
------ ----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUVALENTS, end of period........ $ 47 $ 3,539 $ 3,081 $ 1,743 $ 312 $ 260
------ ----------- ----------- ----------- ----------- -----------
------ ----------- ----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for--Interest...................... $ -- $ 427 $ 595 $ 736 $ 302 $ 386
Cash paid for--Taxes......................... -- 245 96 49 186 230
MULLER TOYOTA MULLER CHEVROLET
------------------------------------- ------------------------
12/31/95 12/31/97 12/31/96 12/31/95 12/31/97 12/31/96
----------- ----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ 112 $ 698 $ 330 $ (76) $ (209) $ (140)
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................ 57 37 29 10 128 50
Deferred income taxes........................ (109) 128 (43) (4) -- --
Provision for finance reserves............... -- -- 175 780 -- 125
Changes in assets and liabilities:
Accounts receivable, net................... (81) (287) 24 (194) 17 (145)
Inventories................................ 638 (229) (508) 907 (1,108) (187)
Prepaid expenses and other current assets.. 138 (11) 19 (15) (11) 12
Receivable from finance company............ -- (117) (420) (1,252) (63) 161
Other assets............................... 32 5 39 (58) 4 (6)
Floor plan notes payable................... 310 177 723 (392) 1,041 1
Accounts payable and accrued expenses...... 170 50 33 222 (107) (90)
Income taxes payable....................... 73 (117) 154 (50) -- --
Other long term liabilities................ -- 202 (80) 167 -- --
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating 536
activities................................. 1,340 475 45 (248) (219)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........... (86) (26) (155) (9) (23) (355)
Proceeds from sale of property and --
equipment.................................. -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing (26)
activities................................. (86) (155) (9) (23) (355)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt borrowings...... -- -- 180 -- -- 545
Principal payments of long-term debt......... (12) (155) (97) (91) (224) (131)
Other current bank borrowings, net of 200
repayments................................. (950) -- -- 200 --
Advance to/from officers and affiliates...... (140) -- -- -- -- --
Due from/to related parties.................. 293 (520) (63) (218) 414 99
Capital contributions and (disbursements).... -- -- -- (111) -- --
Dividends paid............................... -- -- -- (111) -- --
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing (475)
activities................................. (809) 20 (420) 390 513
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS........................... 445 35 340 (384) 119 (61)
CASH AND CASH EQUVALENTS, beginning of 579
period....................................... 290 239 623 29 90
----------- ----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUVALENTS, end of period........ $ 735 $ 614 $ 579 $ 239 $ 148 $ 29
----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for--Interest...................... $ 207 $ 219 $ 257 $ 494 $ 211 $ 264
Cash paid for--Taxes......................... 124 26 62 63 16 --
BAY STATE BRATTLEBORO
------------------------------------- -------------
12/31/95 12/31/97 12/31/96 12/31/95 12/31/97
----------- ----------- ----------- ----------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ (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.......... -- -- -- -- --
Depreciation and amortization................ 57 98 74 10 10
Deferred income taxes........................ -- -- -- -- --
Provision for finance reserves............... 145 -- -- -- --
Changes in assets and liabilities:
Accounts receivable, net................... 671 57 13 (85) (52)
Inventories................................ 970 1,095 (2,137) 438 (791)
Prepaid expenses and other current assets.. (12) 22 4 (10) --
Receivable from finance company............ 17 -- -- -- --
Other assets............................... -- -- (200) 8 9
Floor plan notes payable................... (994) (815) 1,846 (432) 993
Accounts payable and accrued expenses...... 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................................. 70 1,157 1,030 775 184
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........... (6) (4) (304) (9) (107)
Proceeds from sale of property and
equipment.................................. -- -- -- -- --
----------- ----------- ----------- ----------- ------
Net cash provided by (used in) investing
activities................................. (6) (4) (304) (9) (107)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt borrowings...... 153 46 -- 42 280
Principal payments of long-term debt......... (67) (20) (48) (35) (61)
Other current bank borrowings, net of
repayments................................. -- -- -- -- --
Advance to/from officers and affiliates...... -- 474 -- -- --
Due from/to related parties.................. (78) 13 77 (46) (207)
Capital contributions and (disbursements).... -- -- 310 -- --
Dividends paid............................... -- -- 310 -- --
----------- ----------- ----------- ----------- ------
Net cash provided by (used in) financing
activities................................. 8 (1,317) (253) (572) (208)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS........................... 72 (164) 473 194 (131)
CASH AND CASH EQUVALENTS, beginning of
period....................................... 18 1,052 579 385 185
----------- ----------- ----------- ----------- ------
CASH AND CASH EQUVALENTS, end of period........ $ 90 $ 888 $ 1,052 $ 579 $ 54
----------- ----------- ----------- ----------- ------
----------- ----------- ----------- ----------- ------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for--Interest...................... $ 302 $ 323 $ 284 $ 210 $ 72
Cash paid for--Taxes......................... -- 111 17 61 --
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and without any common ownership.
The accompanying Notes to Financial Statements are an integral 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.
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
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
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
1. BUSINESS AND ORGANIZATION: (CONTINUED)
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's 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, 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.
F-22
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
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.
F-23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
CASH EQUIVALENTS, FLOOR PLAN NOTES PAYABLE AND OTHER CURRENT BANK BORROWINGS
The carrying amount approximates fair value because of the short maturity of
those instruments.
LONG-TERM DEBT
The fair value of long-term debt is estimated based on the quoted market
prices for the same or similar issues or on the current rates offered for debt
of the same remaining maturities.
ADVERTISING AND PROMOTION
The Companies expense advertising and promotion as incurred.
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.
F-24
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 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.
F-25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
3. SUMMARY OF MATERIAL RISK FACTORS: (CONTINUED)
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
and 50% in the case of Ford Motor) 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.
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
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
ACCOUNTS RECEIVABLE CONSIST OF THE FOLLOWING:
MULLER
SHAKER WESTWOOD TOYOTA
------------------------ ------------------------ -----------
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Amounts due from manufacturers............................. $ 218 $ 211 $ 678 $ 406 $ 61
Parts and service receivables.............................. 440 350 211 115 361
Warranty receivables....................................... 25 19 79 68 47
Due from finance companies................................. 171 452 788 777 69
Other...................................................... 60 59 210 214 57
----- ----------- ----------- ----------- -----
Sub-total............................................ 914 1,091 1,966 1,580 595
Less: Allowance for doubtful accounts...................... -- -- (33) -- (100)
----- ----------- ----------- ----------- -----
Total receivables.................................... $ 914 $ 1,091 $ 1,933 $ 1,580 $ 495
----- ----------- ----------- ----------- -----
----- ----------- ----------- ----------- -----
12/31/96
-----------
Amounts due from manufacturers............................. $ 70
Parts and service receivables.............................. 119
Warranty receivables....................................... 14
Due from finance companies................................. 32
Other...................................................... 73
-----
Sub-total............................................ 308
Less: Allowance for doubtful accounts...................... (100)
-----
Total receivables.................................... $ 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:
MULLER
SHAKER WESTWOOD TOYOTA
------------------------ ---------------------- -----------
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
----------- ----------- --------- ----------- -----------
(IN THOUSANDS)
New Vehicles............................................. $ 4,623 $ 4,936 $ 9,037 $ 5,406 $ 2,346
Used Vehicles............................................ 2,420 3,044 1,115 709 1,139
Parts, accessories and other............................. 566 524 393 363 487
----------- ----------- --------- ----------- -----------
Total Inventories.................................. $ 7,609 $ 8,504 $ 10,545 $ 6,478 $ 3,972
----------- ----------- --------- ----------- -----------
----------- ----------- --------- ----------- -----------
12/31/96
-----------
New Vehicles............................................. $ 2,498
Used Vehicles............................................ 1,024
Parts, accessories and other............................. 221
-----------
Total Inventories.................................. $ 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
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
F-27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS: (CONTINUED)
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.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES CONSIST OF THE FOLLOWING:
MULLER
SHAKER WESTWOOD TOYOTA
------------------------ ------------------------ -----------
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Accounts payable, trade.................................... $ 233 $ 173 $ 157 $ 134 $ 568
Accrued compensation costs................................. 44 76 311 73 49
Customer deposits.......................................... 39 35 129 41 --
Reserve for finance, insurance and service contracts
charge-backs............................................. 40 51 305 238 38
Other accrued expenses..................................... 107 116 305 209 458
----- ----- ----------- ----- -----------
Total................................................ $ 463 $ 451 $ 1,207 $ 695 $ 1,113
----- ----- ----------- ----- -----------
----- ----- ----------- ----- -----------
12/31/96
-----------
Accounts payable, trade.................................... $ 574
Accrued compensation costs................................. 39
Customer deposits.......................................... --
Reserve for finance, insurance and service contracts
charge-backs............................................. 73
Other accrued expenses..................................... 377
-----------
Total................................................ $ 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-28
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
5. PROPERTY AND EQUIPMENT:
PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING:
ESTIMATED
USEFUL SHAKER WESTWOOD MULLER TOYOTA
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
USEFUL MULLER CHEVROLET BAY STATE BRATTLEBORO
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 on a non-recourse basis 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-29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
7. FLOOR PLAN NOTES PAYABLE:
Floor plan notes payable reflects amounts payable for the purchase of
specific vehicle inventory and consists of the following:
MULLER
SHAKER WESTWOOD TOYOTA
------------------------ ---------------------- -----------
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
----------- ----------- --------- ----------- -----------
(IN THOUSANDS)
New vehicles............................................. $ 4,895 $ 5,094 $ 9,098 $ 5,667 $ 2,989
Used vehicles............................................ 1,866 2,555 879 227 1,129
Rental and other vehicles................................ -- -- 202 109 374
----------- ----------- --------- ----------- -----------
Total.................................................... $ 6,761 $ 7,649 $ 10,179 $ 6,003 $ 4,492
----------- ----------- --------- ----------- -----------
----------- ----------- --------- ----------- -----------
Floor plan obligations related to sold vehicles not yet
remitted to financial institutions..................... $ -- $ -- $ 101 $ 277 $ 520
----------- ----------- --------- ----------- -----------
----------- ----------- --------- ----------- -----------
12/31/96
-----------
New vehicles............................................. $ 3,279
Used vehicles............................................ 800
Rental and other vehicles................................ 236
-----------
Total.................................................... $ 4,315
-----------
-----------
Floor plan obligations related to sold vehicles not yet
remitted to financial institutions..................... $ 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-30
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
7. FLOOR PLAN NOTES PAYABLE: (CONTINUED)
Information about the floor plan accounts is as follows:
AS OF DECEMBER 31, 1997
------------------------------------------------------------------------------------------------
FLOOR PLAN LIABILITY
INTEREST RATE FLOOR PLAN INTEREST -------------------------------------
-------------------- ----------------------------------- MAXIMUM CURRENT CURRENT
RANGING FROM EXPENSE CREDITS NET AVAILABILITY AVAILABILITY OUTSTANDING
-------------------- ----------- ----------- --------- ----------- ----------- -----------
(IN THOUSANDS)
(IN THOUSANDS)
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
------------------------------------------------------------------------------------------------
FLOOR PLAN LIABILITY
INTEREST RATE FLOOR PLAN INTEREST -------------------------------------
-------------------- ----------------------------------- MAXIMUM CURRENT CURRENT
RANGING FROM EXPENSE CREDITS NET AVAILABILITY AVAILABILITY OUTSTANDING
-------------------- ----------- ----------- --------- ----------- ----------- -----------
(IN THOUSANDS) (IN THOUSANDS)
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
------------------------------------------------------------------------------------------------
FLOOR PLAN LIABILITY
INTEREST RATE FLOOR PLAN INTEREST -------------------------------------
-------------------- ----------------------------------- MAXIMUM CURRENT CURRENT
RANGING FROM EXPENSE CREDITS NET AVAILABILITY AVAILABILITY OUTSTANDING
-------------------- ----------- ----------- --------- ----------- ----------- -----------
(IN THOUSANDS) (IN THOUSANDS)
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.
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.
F-31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
8. OTHER CURRENT BANK BORROWINGS: (CONTINUED)
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(1)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(1)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-32
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
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
-----
-----
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
--
--
-----
-----
F-33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
9. LONG TERM DEBT: (CONTINUED)
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
--
--
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
10.3% to 13.1%, 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-34
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
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..................................................................... 187
-----
$ 401
-----
-----
F-35
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
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
---
---
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
-----
-----
F-36
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
9. LONG TERM DEBT: (CONTINUED)
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
STATED
SHARES SHARES SHARES VALUE TREASURY
AUTHORIZED ISSUED OUTSTANDING PER SHARE STOCK
----------- --------- ----------- --------- ----------
E.R.R. Enterprises, Inc............................... 10,000 7,218 7,218 $ 5.00 --
Class A...............................................
E.R.R. Enterprises, Inc............................... 18,045 18,045 18,045 --
Class B............................................... 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 --
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-37
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
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. (Repaid in 1997).................................................... -- 364
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-38
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
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
----------- -----------
----------- -----------
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 to 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-39
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
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 to 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-40
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
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-41
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
14. INCOME TAXES:
Federal and state income taxes are as follows:
HOMETOWN SHAKER WESTWOOD
------------- ------------------------------------- ------------------------
12/31/97 12/31/97 12/31/95 12/31/95 12/31/97 12/31/96
------------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Federal--
Current................................. $ -- $ 103 $ 220 $ (117) $ 73 $ 198
Deferred................................ -- 7 (7) 192 9 (74)
State--
Current................................. -- 49 103 20 21 55
Deferred................................ -- 7 5 23 3 (19)
----- ----- ----- ----- ----- -----
Total Taxes............................... $ -- $ 166 $ 321 $ 118 $ 106 $ 160
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
12/31/95
-----------
Federal--
Current................................. $ 154
Deferred................................ (86)
State--
Current................................. 43
Deferred................................ (23)
-----
Total Taxes............................... $ 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-42
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
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
--------------- ----------- ------------- ----------- ------------- -------------
(IN THOUSANDS)
Provision at the statutory rate........... 0% 34% 34% 34% 34% 34%
Increase (decrease) resulting from--
Income of S Corporation................. 0% 0% 0% 0% 0% 0%
State income tax, net of benefit for
federal deduction..................... 0% 6% 6% 6% 6% 6%
Other................................... 0% -6% 5% -4% 2% 3%
- -- -- --
--- ---
Total Taxes............................... 0% 34% 45% 36% 42% 43%
- -- -- --
- -- -- --
--- ---
--- ---
12/31/95
-------------
Provision at the statutory rate........... 34%
Increase (decrease) resulting from--
Income of S Corporation................. 0%
State income tax, net of benefit for
federal deduction..................... 6%
Other................................... 4%
--
Total Taxes............................... 44%
--
--
MULLER TOYOTA MULLER CHEVROLET
----------------------------------------- ------------------------
12/31/97 12/31/96 12/31/95 12/31/97 12/31/96
----------- ------------- ------------- ----------- -----------
(IN THOUSANDS)
Provision at the statutory rate....................... 34% 34% 34% 34% 34%
Increase (decrease) resulting from--
Income of S Corporation............................. -34% 0% 0% -34% -34%
State income tax, net of benefit for federal
deduction......................................... 6% 6% 6% 6% 6%
Other............................................... -1% 0% 2% -6% -6%
-- -- -- -- --
Total Taxes........................................... 5% 40% 42% 0% 0%
-- -- -- -- --
-- -- -- -- --
12/31/95
-----------
Provision at the statutory rate....................... 34%
Increase (decrease) resulting from--
Income of S Corporation............................. -34%
State income tax, net of benefit for federal
deduction......................................... 6%
Other............................................... -6%
--
Total Taxes........................................... 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-43
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
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:
MULLER
HOMETOWN SHAKER WESTWOOD TOYOTA
------------- ------------------------ ------------------------ -----------
12/31/97 12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
------------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Deferred tax assets--
Reserves and accruals not deductible until
paid.................................... $ -- $ 5 $ 7 $ 192 $ 204 $ --
Depreciation............................ -- -- -- 5 3 --
Other................................... -- -- -- 8 10 --
--- ----- ----- ----- ----- ---
Total................................... -- 5 7 205 217 --
Deferred tax liabilities--
Depreciation............................ -- (72) (52) -- -- --
Other................................... -- (97) (105) -- -- --
--- ----- ----- ----- ----- ---
Total................................... -- (169) (157) -- -- --
--- ----- ----- ----- ----- ---
Net deferred tax asset (liability)........ $ -- $ (164) $ (150) $ 205 $ 217 $ --
--- ----- ----- ----- ----- ---
--- ----- ----- ----- ----- ---
12/31/96
-----------
Deferred tax assets--
Reserves and accruals not deductible until
paid.................................... $ 128
Depreciation............................ --
Other................................... --
-----
Total................................... 128
Deferred tax liabilities--
Depreciation............................ --
Other................................... --
-----
Total................................... --
-----
Net deferred tax asset (liability)........ $ 128
-----
-----
MULLER CHEVROLET BAY STATE BRATTLEBORO
-------------------------- ------------------------ ---------------
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
------------- ----------- ----------- ----------- ---------------
(IN THOUSANDS)
Deferred tax assets--
Reserves and accruals not deductible until paid.......... $ -- $ -- $ -- $ -- $ --
Depreciation............................................. -- -- -- -- --
Other.................................................... -- -- -- -- --
--- --- --- --- ---
Total.................................................... -- -- -- -- --
Deferred tax liabilities--
Depreciation............................................. -- -- -- -- --
Other.................................................... -- -- -- -- --
--- --- --- --- ---
Total.................................................... -- -- -- -- --
--- --- --- --- ---
Net deferred tax asset (liability)......................... $ -- $ -- $ -- $ -- $ --
--- --- --- --- ---
--- --- --- --- ---
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.
F-44
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
15. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
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,
and the restricted cash is included in prepaid expenses and other current
assets.
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.
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.
F-45
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
16. RETIREMENT PLANS: (CONTINUED)
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.
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
F-46
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
18. PROPOSED ACQUISITION BY SHAKER: (CONTINUED)
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-47
INDEX TO UNAUDITED CONDENSED FINANCIAL PAGES
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
Balance Sheets, Hometown, Shaker, Westwood, Muller Toyota, Muller Chevrolet, Bay
State, Brattleboro and Pride as of March 31, 1998 and 1997......................... F-49
Statements of Operations, Hometown, Shaker, Westwood, Muller Toyota, Muller
Chevrolet, Bay State, Brattleboro and Pride for the three months ended March 31,
1998 and 1997...................................................................... F-50
Statements of Stockholders' Equity, Hometown, Shaker, Westwood, Muller Toyota, Muller
Chevrolet, Bay State, Brattleboro and Pride for the three months ended March 31,
1998
and 1997........................................................................... F-51
Statements of Cash Flows, Hometown, Shaker, Westwood, Muller Toyota, Muller
Chevrolet, Bay State, Brattleboro and Pride for the three months ended March 31,
1998 and 1997...................................................................... F-52
Notes to the Unaudited Condensed Financial Statements................................ F-53
F-48
UNAUDITED BALANCE SHEETS
(IN THOUSANDS)
HOMETOWN SHAKER WESTWOOD
------------- -------------------- ----------------------
3/31/98 3/31/98 3/31/97 3/31/98 3/31/97
------------- --------- --------- --------- -----------
Current Assets
Cash and cash equivalents.................................... $ 52 $ 3,608 $ 3,386 $ 284 $ 695
Accounts receivable, net..................................... -- 1,249 1,122 1,844 1,278
Inventories.................................................. -- 8,321 9,193 7,889 5,879
Prepaid expenses and other current assets.................... 273 462 266 256 318
Deferred income taxes........................................ -- 167 -- 213 54
----- --------- --------- --------- -----------
Total current assets....................................... 325 13,807 13,967 10,486 8,224
Property and equipment, net.................................... -- 1,277 1,439 227 279
Receivable from finance companies.............................. -- -- -- -- --
Due from related parties....................................... -- 278 552 193 472
Deferred income taxes.......................................... -- 683 -- -- --
Other assets................................................... -- 7 78 203 29
----- --------- --------- --------- -----------
Total Assets............................................... $ 325 $ 16,052 $ 16,036 $ 11,109 $ 9,004
----- --------- --------- --------- -----------
----- --------- --------- --------- -----------
Current Liabilities
Floor plan notes
payable.................................................... $ -- $ 7,417 $ 8,310 $ 7,493 $ 5,880
Accounts payable and accrued expenses........................ -- 3,070 700 1,005 726
Current maturities of long-term debt......................... -- 253 65 2 4
Other current bank borrowings................................ -- 100 123 1,000 300
Advances from officers and affilities........................ 325 -- -- -- --
Income taxes payable......................................... -- 146 229 132 --
----- --------- --------- --------- -----------
Total current
liabilities.............................................. 325 10,986 9,427 9,632 6,910
Long-term debt................................................. -- 107 364 6 7
Long-term deferred income taxes................................ -- 164 338 -- --
Due to related parties......................................... -- 920 851 -- 1,000
Other long-term liabilities.................................... -- 52 30 -- --
Stockholders' Equity
Common stock................................................. -- 69 69 60 60
Additional paid-in
capital.................................................... -- -- -- 76 76
Treasury stock, at cost...................................... -- -- -- -- --
Retained earnings (deficit).................................. -- 3,754 4,957 1,335 951
----- --------- --------- --------- -----------
Total stockholders' equity (deficit)....................... -- 3,823 5,026 1,471 1,087
----- --------- --------- --------- -----------
Total liabilities and stockholders' equity................. $ 325 $ 16,052 $ 16,036 $ 11,109 $ 9,004
----- --------- --------- --------- -----------
----- --------- --------- --------- -----------
MULLER CHEVROLET
MULLER TOYOTA BAY STATE
------------------------ ------------------------ -----------
3/31/98 3/31/97 3/31/98 3/31/97 3/31/98
----------- ----------- ----------- ----------- -----------
Current Assets
Cash and cash equivalents.................................... $ 314 $ 671 $ 200 $ 108 $ 1,091
Accounts receivable, net..................................... 1,020 641 164 34 221
Inventories.................................................. 3,626 2,974 3,751 3,842 1,886
Prepaid expenses and other current assets.................... 30 18 105 7 13
Deferred income taxes........................................ -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total current assets....................................... 4,990 4,304 4,220 3,991 3,211
Property and equipment, net.................................... 800 811 289 421 252
Receivable from finance companies.............................. 1,002 891 290 308 --
Due from related parties....................................... 932 726 -- 4 214
Deferred income taxes.......................................... -- 113 -- -- --
Other assets................................................... -- -- 208 228 173
----------- ----------- ----------- ----------- -----------
Total Assets............................................... $ 7,724 $ 6,845 $ 5,007 $ 4,952 $ 3,850
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Current Liabilities
Floor plan notes
payable.................................................... $ 4,268 $ 3,575 $ 4,148 $ 4,309 $ 2,008
Accounts payable and accrued expenses........................ 1,098 1,382 341 273 234
Current maturities of long-term debt......................... 69 62 140 126 26
Other current bank borrowings................................ -- -- 200 -- --
Advances from officers and affilities........................ -- -- -- -- 511
Income taxes payable......................................... 208 289 -- -- 8
----------- ----------- ----------- ----------- -----------
Total current
liabilities.............................................. 5,643 5,308 4,829 4,708 2,787
Long-term debt................................................. 563 716 226 513 40
Long-term deferred income taxes................................ -- -- -- -- --
Due to related parties......................................... 5 73 875 341 --
Other long-term liabilities.................................... 206 25 -- -- 12
Stockholders' Equity
Common stock................................................. 30 30 345 345 25
Additional paid-in
capital.................................................... 96 96 811 811 310
Treasury stock, at cost...................................... (890) (890) -- -- --
Retained earnings (deficit).................................. 2,071 1,487 (2,079) (1,766) 676
----------- ----------- ----------- ----------- -----------
Total stockholders' equity (deficit)....................... 1,307 723 (923) (610) 1,011
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders' equity................. $ 7,724 $ 6,845 $ 5,007 $ 4,952 $ 3,850
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
BRATTLEBORO PRIDE
------------------------ ----------------------
3/31/97 3/31/98 3/31/97 3/31/98 3/31/97
----------- ----------- ----------- ----------- ---------
Current Assets
Cash and cash equivalents.................................... $ 1,580 $ 446 $ 294 $ 83 $ 114
Accounts receivable, net..................................... 206 151 101 189 86
Inventories.................................................. 4,318 2,534 1,725 2,388 2,528
Prepaid expenses and other current assets.................... 8 2 2 60 51
Deferred income taxes........................................ -- -- -- -- --
----------- ----------- ----------- ----------- ---------
Total current assets....................................... 6,112 3,133 2,122 2,720 2,779
Property and equipment, net.................................... 265 381 334 49 48
Receivable from finance companies.............................. -- -- -- -- --
Due from related parties....................................... 219 -- -- -- --
Deferred income taxes.......................................... -- -- -- -- --
Other assets................................................... 186 13 22 6 --
----------- ----------- ----------- ----------- ---------
Total Assets............................................... $ 6,782 $ 3,527 $ 2,478 $ 2,775 $ 2,827
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
Current Liabilities
Floor plan notes
payable.................................................... $ 4,451 $ 2,429 $ 1,185 $ 2,178 $ 2,106
Accounts payable and accrued expenses........................ 198 261 322 113 177
Current maturities of long-term debt......................... 17 70 73 -- 20
Other current bank borrowings................................ -- 57 -- -- --
Advances from officers and affilities........................ -- -- -- -- --
Income taxes payable......................................... -- -- -- -- --
----------- ----------- ----------- ----------- ---------
Total current
liabilities.............................................. 4,666 2,817 1,580 2,291 2,303
Long-term debt................................................. 5 134 191 -- --
Long-term deferred income taxes................................ -- -- -- -- --
Due to related parties......................................... -- 252 128 50 50
Other long-term liabilities.................................... 16 -- -- -- --
Stockholders' Equity
Common stock................................................. 25 33 33 2 2
Additional paid-in
capital.................................................... 310 -- -- 529 563
Treasury stock, at cost...................................... -- -- -- -- --
Retained earnings (deficit).................................. 1,760 291 546 (97) (91)
----------- ----------- ----------- ----------- ---------
Total stockholders' equity (deficit)....................... 2,095 324 579 434 474
----------- ----------- ----------- ----------- ---------
Total liabilities and stockholders' equity................. $ 6,782 $ 3,527 $ 2,478 $ 2,775 $ 2,827
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
The accompanying Notes to unaudited Condensed Financial Statements are an
integral part of these Balance Sheets.
F-49
UNAUDITED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
HOMETOWN SHAKER WESTWOOD
--------------- ---------------------- ----------------------
3/31/98 3/31/98 3/31/97 3/31/98 3/31/97
--------------- --------- ----------- --------- -----------
Revenues
New vehicle sales............................................. $ -- $ 5,967 $ 6,945 $ 12,599 $ 9,716
Used vehicle sales............................................ -- 5,723 5,105 4,273 1,694
Parts and service sales....................................... -- 1,613 1,674 1,121 1,005
Other dealership revenues, net................................ -- 441 379 397 145
--- --------- ----------- --------- -----------
Total revenues.............................................. -- 13,744 14,103 18,390 12,560
Cost of sales
New vehicle sales............................................. -- 5,590 6,532 11,970 9,209
Used vehicle sales............................................ -- 5,137 4,417 3,980 1,589
Parts and service sales....................................... -- 885 908 552 517
--- --------- ----------- --------- -----------
Cost of sales................................................... -- 11,612 11,857 16,502 11,315
--- --------- ----------- --------- -----------
Gross profit................................................ -- 2,132 2,246 1,888 1,245
Selling, general and administrative expenses.................... -- 4,194 1,770 1,432 1,268
--- --------- ----------- --------- -----------
Income (loss) from operations............................... -- (2,062) 476 456 (23)
Other income (expense)
Interest income (expense), net ............................... 1 (57) (76) (132) (64)
Other income (expense), net................................... -- (6) 6 (9) (9)
--- --------- ----------- --------- -----------
Income (loss) before taxes.................................. 1 (2,125) 406 315 (96)
Provision (benefit) for income taxes............................ -- (850) 162 132 (40)
--- --------- ----------- --------- -----------
Net income (loss)........................................... $ 1 $ (1,275) $ 244 $ 183 $ (56)
--- --------- ----------- --------- -----------
--- --------- ----------- --------- -----------
S-Corporation pro forma provision (benefit) for income taxes.... -- -- -- -- --
Pro forma net income (loss).....................................
MULLER CHEVROLET
MULLER TOYOTA BAY STATE
------------------------ ------------------------ -----------
3/31/98 3/31/97 3/31/98 3/31/97 3/31/98
----------- ----------- ----------- ----------- -----------
Revenues
New vehicle sales............................................. $ 4,598 $ 5,087 $ 2,535 $ 2,896 $ 1,980
Used vehicle sales............................................ 3,265 3,651 1,205 1,458 2,356
Parts and service sales....................................... 848 735 463 323 555
Other dealership revenues, net................................ 354 378 119 203 80
----------- ----------- ----------- ----------- -----------
Total revenues.............................................. 9,065 9,851 4,322 4,880 4,971
Cost of sales
New vehicle sales............................................. 4,343 4,682 2,386 2,721 1,837
Used vehicle sales............................................ 3,001 3,383 1,056 1,321 2,005
Parts and service sales....................................... 419 378 268 156 291
----------- ----------- ----------- ----------- -----------
Cost of sales................................................... 7,763 8,443 3,710 4,198 4,133
----------- ----------- ----------- ----------- -----------
Gross profit................................................ 1,302 1,408 612 682 838
Selling, general and administrative expenses.................... 1,097 1,103 629 654 481
----------- ----------- ----------- ----------- -----------
Income (loss) from operations............................... 205 305 (17) 28 357
Other income (expense)
Interest income (expense), net ............................... (68) (58) (113) (79) (54)
Other income (expense), net................................... (7) 4 (24) 1 9
----------- ----------- ----------- ----------- -----------
Income (loss) before taxes.................................. 130 251 (154) (50) 312
Provision (benefit) for income taxes............................ 8 15 -- -- 18
----------- ----------- ----------- ----------- -----------
Net income (loss)........................................... $ 122 $ 236 $ (154) $ (50) $ 294
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
S-Corporation pro forma provision (benefit) for income taxes.... 44 84 (52) (16) 105
----------- ----------- ----------- ----------- -----------
Pro forma net income (loss)..................................... $ 78 $ 152 $ (102) $ (34) $ 189
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
BRATTLEBORO PRIDE
------------------------ ------------------------
3/31/97 3/31/98 3/31/97 3/31/98 3/31/97
----------- ----------- ----------- ----------- -----------
Revenues
New vehicle sales............................................. $ 2,172 $ 2,400 $ 1,813 $ 1,351 $ 1,495
Used vehicle sales............................................ 3,124 2,598 3,851 441 694
Parts and service sales....................................... 522 362 530 300 291
Other dealership revenues, net................................ 91 65 187 44 76
----------- ----------- ----------- ----------- -----------
Total revenues.............................................. 5,909 5,425 6,381 2,136 2,556
Cost of sales
New vehicle sales............................................. 2,030 2,227 1,675 1,270 1,410
Used vehicle sales............................................ 2,684 2,307 3,254 382 611
Parts and service sales....................................... 260 201 304 168 164
----------- ----------- ----------- ----------- -----------
Cost of sales................................................... 4,974 4,735 5,233 1,820 2,185
----------- ----------- ----------- ----------- -----------
Gross profit................................................ 935 690 1,148 316 371
Selling, general and administrative expenses.................... 444 511 765 332 356
----------- ----------- ----------- ----------- -----------
Income (loss) from operations............................... 491 179 383 (16) 15
Other income (expense)
Interest income (expense), net ............................... (75) (42) (20) (12) (12)
Other income (expense), net................................... 4 26 7 -- --
----------- ----------- ----------- ----------- -----------
Income (loss) before taxes.................................. 420 163 370 (28) 3
Provision (benefit) for income taxes............................ 19 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)........................................... $ 401 $ 163 $ 370 $ (28) $ 3
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
S-Corporation pro forma provision (benefit) for income taxes.... 142 59 131 (8) 3
----------- ----------- ----------- ----------- -----------
Pro forma net income (loss)..................................... $ 259 $ 104 $ 239 $ (20) $ --
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
The accompanying Notes to Unaudited Condensed Financial Statements are an
integral part of these Statements.
F-50
UNAUDITED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
HOMETOWN SHAKER WESTWOOD
----------- ------------------------ ------------------------
3/31/98 3/31/98 3/31/97 3/31/98 3/31/97
----------- ----------- ----------- ----------- -----------
Common Stock:
Balance...................................................... $ -- $ 69 $ 69 $ 60 $ 60
----------- ----------- ----------- ----------- -----------
Additional Paid-in Capital
Balance, Beginning of period................................. $ -- $ -- $ -- $ 76 $ 76
Capital contribution (disbursement).......................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, End of period....................................... $ -- $ -- $ -- $ 76 $ 76
----------- ----------- ----------- ----------- -----------
Treasury Stock, at cost
Balance...................................................... $ -- $ -- $ -- $ -- $ --
----------- ----------- ----------- ----------- -----------
Retained Earnings (Deficit)
Balance, Beginning of period................................... $ (1) $ 5,029 $ 4,713 $ 1,152 $ 1,007
Net Income (Loss)............................................ 1 (1,275) 244 183 (56)
Dividends.................................................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, End of period....................................... $ -- $ 3,754 $ 4,957 $ 1,335 $ 951
----------- ----------- ----------- ----------- -----------
Total Stockholders' Equity (Deficit)........................... $ -- $ 3,823 $ 5,026 $ 1,471 $ 1,087
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
MULLER CHEVROLET
MULLER TOYOTA BAY STATE
------------------------ -------------------- -----------
3/31/98 3/31/97 3/31/98 3/31/97 3/31/98
----------- ----------- --------- --------- -----------
Common Stock:
Balance...................................................... $ 30 $ 30 $ 345 $ 345 $ 25
----------- ----------- --------- --------- -----------
Additional Paid-in Capital
Balance, Beginning of period................................. $ 96 $ 96 $ 811 $ 811 $ 310
Capital contribution (disbursement).......................... -- -- -- -- --
----------- ----------- --------- --------- -----------
Balance, End of period....................................... $ 96 $ 96 $ 811 $ 811 $ 310
----------- ----------- --------- --------- -----------
Treasury Stock, at cost
Balance...................................................... $ (890) $ (890) $ -- $ -- $ --
----------- ----------- --------- --------- -----------
Retained Earnings (Deficit)
Balance, Beginning of period................................... $ 1,949 $ 1,251 $ (1,925) $ (1,716) $ 494
Net Income (Loss)............................................ 122 236 (154) (50) 294
Dividends.................................................... -- -- -- -- (112)
----------- ----------- --------- --------- -----------
Balance, End of period....................................... $ 2,071 $ 1,487 $ (2,079) $ (1,766) $ 676
----------- ----------- --------- --------- -----------
Total Stockholders' Equity (Deficit)........................... $ 1,307 $ 723 $ (923) $ (610) $ 1,011
----------- ----------- --------- --------- -----------
----------- ----------- --------- --------- -----------
BRATTLEBORO PRIDE
------------------------ ------------------------
3/31/97 3/31/98 3/31/97 3/31/98 3/31/97
----------- ----------- ----------- ----------- -----------
Common Stock:
Balance...................................................... $ 25 $ 33 $ 33 $ 2 $ 2
----------- ----- ----- ----- -----------
Additional Paid-in Capital
Balance, Beginning of period................................. $ 310 $ -- $ -- $ 539 $ 587
Capital contribution (disbursement).......................... -- -- -- (10) (24)
----------- ----- ----- ----- -----------
Balance, End of period....................................... $ 310 $ -- $ -- $ 529 $ 563
----------- ----- ----- ----- -----------
Treasury Stock, at cost
Balance...................................................... $ -- $ -- $ -- $ -- $ --
----------- ----- ----- ----- -----------
Retained Earnings (Deficit)
Balance, Beginning of period................................... $ 1,359 $ 143 $ 192 $ (69) $ (94)
Net Income (Loss)............................................ 401 163 370 (28) 3
Dividends.................................................... -- (15) (16) -- --
----------- ----- ----- ----- -----------
Balance, End of period....................................... $ 1,760 $ 291 $ 546 $ (97) $ (91)
----------- ----- ----- ----- -----------
Total Stockholders' Equity (Deficit)........................... $ 2,095 $ 324 $ 579 $ 434 $ 474
----------- ----- ----- ----- -----------
----------- ----- ----- ----- -----------
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
The accompanying Notes to Unaudited Condensed Financial Statements are an
integral part of these Statements.
F-51
UNAUDITED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
HOMETOWN SHAKER WESTWOOD
------------- ---------------------- ------------------------
3/31/98 3/31/98 3/31/97 3/31/98 3/31/97
------------- --------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ 1 $ (1,275) $ 244 $ 183 $ (56)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities--
Depreciation and amortization.................................. -- 46 46 40 18
Deferred income taxes.......................................... -- (850) 188 (8) 163
Changes in assets and liabilities:
Accounts receivable, net..................................... -- (335) (31) 89 302
Inventories.................................................. -- (712) (689) 2,656 599
Prepaid expenses and other current assets.................... (170) (228) (198) (5) (32)
Receivable from finance company.............................. -- -- -- -- --
Other assets................................................. -- 99 (10) (101) (3)
Floor plan notes payable..................................... -- 656 661 (2,686) (123)
Accounts payable and accrued expenses........................ (1) 2,607 249 (202) 31
Income taxes payable......................................... -- -- (111) 132 (104)
Other long term liabilities.................................. -- -- 1 -- --
----- --------- ----------- ----------- -----
Net cash provided by (used in) operating activities............ (170) 8 350 98 795
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................. -- (3) (57) (29) (26)
Proceeds from sale of property and equipment................... -- 26 -- -- 9
----- --------- ----------- ----------- -----
Net cash provided by (used in) investing activities............ -- 23 (57) (29) (17)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt borrowings........................ -- -- -- -- --
Principal payments of long-term debt........................... -- (25) (22) -- (1)
Other current bank borrowings, net of repayments............... -- 15 22 -- (200)
Advance to/from officers and affiliates........................ 175 -- -- -- --
Due from/to related parties.................................... -- 48 12 (97) (142)
Dividends paid................................................. -- -- -- -- --
----- --------- ----------- ----------- -----
Net cash provided by (used in) financing activities............ 175 38 12 (97) (343)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............. 5 69 305 (28) 435
CASH AND CASH EQUVALENTS, beginning of period.................... 47 3,539 3,081 312 260
----- --------- ----------- ----------- -----
CASH AND CASH EQUVALENTS, end of period.......................... $ 52 $ 3,608 $ 3,386 $ 284 $ 695
----- --------- ----------- ----------- -----
----- --------- ----------- ----------- -----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for--
Interest....................................................... $ -- $ 57 $ 76 $ 134 $ 66
Taxes.......................................................... -- -- 85 8 --
MULLER CHEVROLET
MULLER TOYOTA BAY STATE
------------------------ ------------------------ -----------
3/31/98 3/31/97 3/31/98 3/31/97 3/31/98
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ 122 $ 236 $ (154) $ (50) $ 294
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities--
Depreciation and amortization.................................. 41 44 10 14 26
Deferred income taxes.......................................... -- 15 -- -- --
Changes in assets and liabilities:
Accounts receivable, net..................................... (525) (433) (8) 139 (46)
Inventories.................................................. 346 769 1,418 219 919
Prepaid expenses and other current assets.................... (14) (13) (94) (7) 5
Receivable from finance company.............................. (12) (18) 4 (77) --
Other assets................................................. -- 5 2 6 4
Floor plan notes payable..................................... (224) (740) (1,257) (55) (964)
Accounts payable and accrued expenses........................ (15) 319 55 (120) 47
Income taxes payable......................................... 171 135 -- -- 5
Other long term liabilities.................................. (82) (61) -- -- (1)
----- ----- ----------- --- -----------
Net cash provided by (used in) operating activities............ (192) 258 (24) 69 289
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................. (33) (36) (10) (1) --
Proceeds from sale of property and equipment................... -- -- -- -- --
----- ----- ----------- --- -----------
Net cash provided by (used in) investing activities............ (33) (36) (10) (1) --
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt borrowings........................ -- -- -- 50 --
Principal payments of long-term debt........................... (132) (141) (35) (36) (11)
Other current bank borrowings, net of repayments............... (200) -- -- -- --
Advance to/from officers and affiliates........................ -- -- -- -- 37
Due from/to related parties.................................... 257 11 121 (3) --
Dividends paid................................................. -- -- -- -- (112)
----- ----- ----------- --- -----------
Net cash provided by (used in) financing activities............ (75) (130) 86 11 (86)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............. (300) 92 52 79 203
CASH AND CASH EQUVALENTS, beginning of period.................... 614 579 148 29 888
----- ----- ----------- --- -----------
CASH AND CASH EQUVALENTS, end of period.......................... $ 314 $ 671 $ 200 $ 108 $ 1,091
----- ----- ----------- --- -----------
----- ----- ----------- --- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for--
Interest....................................................... $ 68 $ 58 $ 113 $ 79 $ 62
Taxes.......................................................... -- -- -- -- 13
BRATTLEBORO PRIDE
------------------------ ------------------------
3/31/97 3/31/98 3/31/97 3/31/98 3/31/97
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ 401 $ 163 $ 370 $ (28) $ 3
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities--
Depreciation and amortization.................................. 73 7 5 3 4
Deferred income taxes.......................................... -- -- -- -- --
Changes in assets and liabilities:
Accounts receivable, net..................................... 26 (16) (18) (83) 38
Inventories.................................................. (418) 872 890 (705) (574)
Prepaid expenses and other current assets.................... 32 (2) (2) 23 15
Receivable from finance company.............................. -- -- -- -- --
Other assets................................................. 5 1 -- 2 --
Floor plan notes payable..................................... 664 (759) (1,010) 700 419
Accounts payable and accrued expenses........................ (190) 103 9 19 71
Income taxes payable......................................... (62) -- -- -- --
Other long term liabilities.................................. (2) -- -- -- --
----------- ----- ----------- --- -----------
Net cash provided by (used in) operating activities............ 529 369 244 (69) (24)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................. -- (5) (53) (8) (2)
Proceeds from sale of property and equipment................... 19 -- -- -- --
----------- ----- ----------- --- -----------
Net cash provided by (used in) investing activities............ 19 (5) (53) (8) (2)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt borrowings........................ -- -- 280 -- --
Principal payments of long-term debt........................... (28) (14) (16) (7) (3)
Other current bank borrowings, net of repayments............... -- 57 -- -- --
Advance to/from officers and affiliates........................ -- -- -- -- --
Due from/to related parties.................................... 8 -- (330) -- --
Dividends paid................................................. -- (15) (16) (10) (24)
----------- ----- ----------- --- -----------
Net cash provided by (used in) financing activities............ (20) 28 (82) (17) (27)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............. 528 392 109 (94) (53)
CASH AND CASH EQUVALENTS, beginning of period.................... 1,052 54 185 177 167
----------- ----- ----------- --- -----------
CASH AND CASH EQUVALENTS, end of period.......................... $ 1,580 $ 446 $ 294 $ 83 $ 114
----------- ----- ----------- --- -----------
----------- ----- ----------- --- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for--
Interest....................................................... $ 90 $ 42 $ 20 $ 12 $ 12
Taxes.......................................................... 81 -- -- -- --
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
The accompanying Notes to Unaudited Condensed Financial Statements are an
integral part of these Statements.
F-52
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The financial information included herein for the three month ended March
31, 1998 and 1997 is unaudited; however, such information reflects all
adjustments consisting only of normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods. These
interim financial statements should be read in conjunction with the Audited
Financial Statements and related notes thereto.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
2. INVENTORIES
New, used and demonstrator vehicles are stated at the lower of cost or
market, determined on a specific unit basis. Parts and accessories are stated at
the lower of cost (determined on a first-in, first-out basis) or market.
INVENTORIES CONSIST OF THE FOLLOWING:
MULLER
SHAKER WESTWOOD MULLER TOYOTA CHEVROLET
-------------------- -------------------- -------------------- ---------
3/31/98 3/31/97 3/31/98 3/31/97 3/31/98 3/31/97 3/31/98
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
New Vehicles................................... $ 5,623 $ 5,618 $ 6,886 $ 5,158 $ 2,135 $ 1,623 $ 2,997
Used Vehicles.................................. 2,151 3,029 540 386 996 1,017 558
Parts, accessories and other................... 547 546 463 335 495 334 196
--------- --------- --------- --------- --------- --------- ---------
Total Inventories............................ $ 8,321 $ 9,193 $ 7,889 $ 5,879 $ 3,626 $ 2,974 $ 3,751
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
3/31/97
---------
New Vehicles................................... $ 3,145
Used Vehicles.................................. 528
Parts, accessories and other................... 169
---------
Total Inventories............................ $ 3,842
---------
---------
BAY STATE BRATTLEBORO PRIDE
-------------------- -------------------- --------------------
3/31/98 3/31/97 3/31/98 3/31/97 3/31/98 3/31/97
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
New Vehicles.................................................... $ 936 $ 2,449 $ 1,721 $ 889 $ 1,974 $ 1,972
Used Vehicles................................................... 816 1,723 709 756 306 425
Parts, accessories and other.................................... 134 146 104 80 108 131
--------- --------- --------- --------- --------- ---------
Total Inventories............................................. $ 1,886 $ 4,318 $ 2,534 $ 1,725 $ 2,388 $ 2,528
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
3. 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.
F-53
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
3. 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:
SHAKER WESTWOOD
3/31/98 3/31/98
----------- -----------
Deferred tax assets--
Reserves and accruals not deductible until paid............................................. $ 5 $ 200
Net operating loss carry forward............................................................ 845 --
Depreciation................................................................................ -- 5
Other....................................................................................... -- 8
----- -----
Total....................................................................................... 850 213
Deferred tax liabilities--
Depreciation................................................................................ (72) --
Other....................................................................................... (92) --
----- -----
Total....................................................................................... (164) --
----- -----
Net deferred tax asset (liability).......................................................... $ 686 $ 213
----- -----
----- -----
4. SUBSEQUENT EVENTS:
LEASES
Hometown has executed leases for the premises occupied by certain of the
companies. 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, 2002 and 2007.
SHAKER
Hometown will lease, for an initial annual base rental of $552,000, the
premises occupied by the Shaker dealerships from Shaker Enterprises, a related
party through common ownership.
The following table represents the estimated minimum annual rental payments
under such lease:
(IN THOUSANDS)
---------------
1998............................................................................................... $ 184
1999............................................................................................... 552
2000............................................................................................... 552
2001............................................................................................... 552
2002............................................................................................... 552
Thereafter......................................................................................... 6,072
MULLER
Hometown will lease, for an initial annual base rental of $864,000 the
premises occupied by Muller Toyota and Muller Chevrolet from Rellum Realty
Company, a related party through common ownership.
F-54
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
4. SUBSEQUENT EVENTS: (CONTINUED)
The following table represents the estimated minimum annual rental payments
under such lease:
(IN THOUSANDS)
---------------
1998............................................................................................... $ 288
1999............................................................................................... 864
2000............................................................................................... 864
2001............................................................................................... 816
2002............................................................................................... 816
Thereafter......................................................................................... 8,976
WESTWOOD
Hometown will lease, for an initial annual base rental of $360,000 the
premises occupied by Westwood from Salvatore A. Vergopia, a stockholder of
Westwood.
The following table represents the estimated minimum annual rental payments
under such lease:
(IN THOUSANDS)
---------------
1998............................................................................................... $ 120
1999............................................................................................... 360
2000............................................................................................... 360
2001............................................................................................... 360
2002............................................................................................... 360
Thereafter......................................................................................... 3,960
BAY STATE
Hometown will lease, for an initial annual base rental of $360,000 the
premises occupied by Baystate from the shareholders of Bay State.
The following table represents the estimated minimum annual rental payments
under such lease:
(IN THOUSANDS)
---------------
1998............................................................................................... $ 120
1999............................................................................................... 360
2000............................................................................................... 360
2001............................................................................................... 360
2002............................................................................................... 360
Thereafter......................................................................................... 4,860
BRATTLEBORO
Hometown will lease, for an initial annual base rental of $360,000 the
premises occupied by Brattleboro from the shareholders of Brattleboro.
F-55
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
4. SUBSEQUENT EVENTS: (CONTINUED)
The following table represents the estimated minimum annual rental payments
under such lease:
(IN THOUSANDS)
-----------------
1998............................................................................................... $ 80
1999............................................................................................... 240
2000............................................................................................... 240
2001............................................................................................... 240
2002............................................................................................... 240
Thereafter......................................................................................... 160
EMPLOYMENT CONTRACTS
In April 1998, Hometown entered into five-year employment agreements,
effective as of the closing of the acquisitions, for the following key
positions: Chairman and Chief Executive Officer, President and Chief Operating
Officer, Vice President -- New Jersey Operations, Vice President -- Connecticut
Operations, Vice President -- Fleet Operations, General Manager -- Muller
Toyota, Vice President -- Parts and Service, and Vice President -- Mergers and
Acquisitions. Each agreement provides for an annual base salary of $200,000,
except that the agreement for the General Manager 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 for Vice President -- Parts and Service
provides for an annual base salary of $100,000 and the agreement for Vice
President -- Mergers and Acquisitions 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.
ACQUISITION
On May 28, 1998, the Company entered into an agreement to purchase the
business and certain assets of Pride Auto Center, Inc. ("Pride"), a Jeep/Eagle
dealer, for an estimated purchase price of approximately $925,000, including a
$55,000 deposit previously paid and $200,000 to be paid through the issuance of
an 8% promissory note payable in installments over a 36-month period and the
assumption of Pride's floor plan and certain other liabilities. As soon as
practicable following the closing, Hometown intends to close the Pride facility
and to consolidate its operations with those of another Hometown Jeep/Eagle
dealership located less than two miles away.
F-56
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.............................. 3
Risk Factors.................................... 11
The Company..................................... 19
Use of Proceeds................................. 20
Dividend Policy................................. 20
Dilution........................................ 21
Capitalization.................................. 22
Selected Financial Data......................... 23
Unaudited Pro Forma Financial Data.............. 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 28
Business........................................ 41
Management...................................... 55
Certain Transactions............................ 60
Principal Stockholders.......................... 62
Description of Capital Stock.................... 63
Shares Eligible for Future Sale................. 65
Underwriting.................................... 66
Legal Matters................................... 67
Experts......................................... 67
Available Information........................... 68
Index to Unaudited Pro Forma Financial
Statements.................................... F-1
Index to Financial Statements................... F-14
UNTIL AUGUST 22, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A
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.
1,800,000 SHARES
[LOGO]
CLASS A COMMON STOCK
---------------------
PROSPECTUS
---------------------
PAULSON INVESTMENT
COMPANY, INC.
EBI SECURITIES CORP.
DATED JULY 28, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------