UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c)
of the Securities Exchange Act of 1934
Check the appropriate box:
[X] Preliminary Information Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule
14c-5(d)(2))
[_] Definitive Information Statement
Hometown Auto Retailers, Inc.
-----------------------------
(Name of Registrant as Specified in its Charter)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title of each class of securities to which transaction applies:
Class A & Class B Common Stock
(2) Aggregate number of securities to which transaction applies:
801,736 Class A Common Stock and 1,802,500 Class B Common Stock
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing is calculated and state how it was determined):
Class A Common Stock calculated at average of the bid and asked
price on June 9, 2005 of $0.99 and Class B Common Stock calculated
at book value of $1.58 per share
(4) Proposed maximum aggregate value of securities: $3,641,669
(5) Total fee paid: $470.80
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid: __________________________________
(2) Form, Schedule or Registration Statement No.: ________________________
(3) Filing party: __________________________________
(4) Date filed: __________________________________
HOMETOWN AUTO RETAILERS, INC.
1309 South Main Street
Waterbury, CT 06706
NOTICE OF ACTION BY
WRITTEN CONSENT OF STOCKHOLDERS
WE ARE NOT ASKING YOU FOR A PROXY
AND YOU ARE REQUESTED NOT TO SEND US A PROXY
To our Stockholders:
This Information Statement is being furnished by the Board of Directors of
Hometown Auto Retailers, Inc., a Delaware corporation (the "Company"), to the
holders of record of the Company's Class A common stock, par value $.001 per
share, and Class B common stock, par value $.001 per share, at the close of
business on June 2, 2005. The purpose of the Information Statement is to inform
the Company's stockholders of certain actions taken by the written consent,
dated June 2, 2005, of the holders of a majority of the voting power of the
Company's stock. The Information Statement is being provided pursuant to Rule
14c-2 promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and is intended to be the notice required under Section 228(e)
of the General Corporation Law of Delaware.
The actions taken by the Company's stockholders will not become effective
until at least twenty (20) days after the initial mailing of the Information
Statement.
THIS IS NOT A NOTICE OF A SPECIAL MEETING OF STOCKHOLDERS, AND NO
STOCKHOLDER MEETING WILL BE HELD TO CONSIDER ANY MATTER WHICH IS DESCRIBED
HEREIN.
By order of the Board of Directors:
Corey E. Shaker
President and Chief Executive Officer
June_____, 2005
HOMETOWN AUTO RETAILERS, INC.
1309 South Main Street
Waterbury, CT 06706
INFORMATION STATEMENT
Hometown Auto Retailers, Inc. (the "Company") is a Delaware corporation
with its principal executive offices located at 1309 South Main Street,
Waterbury, CT 06706. The Company's telephone number is (203) 756-1300. This
Information Statement is being sent to the Company's stockholders by the Board
of Directors to notify them about actions that the holders of a majority of the
voting power of the Company's outstanding capital stock have taken by written
consent, in lieu of a special meeting of the stockholders. The action was taken
on June 2, 2005, and will be effective twenty (20) days after the initial
mailing of this Information Statement.
Copies of this Information Statement are being mailed on or before
June_____, 2005 to the holders of record on June 2, 2005 of the outstanding
shares of the Company's Class A common stock, par value $.001 per share (the
"Class A Common Stock") and Class B common stock, par value $.001 per share (the
"Class B Common Stock") (collectively, the "Common Stock").
The following actions have been taken pursuant to the written consent of a
majority of the voting power of the Company's capital stock in lieu of a special
meeting of the stockholders:
o The tax-free exchange of all of the outstanding shares of common stock of
the New England Subsidiaries of the Company, plus $5 million in cash (as
adjusted), for all of the outstanding shares of common stock of Shaker
Auto Group, Inc., a newly-organized Connecticut corporation (the "First
Exchange"); and
o The tax-free exchange of all of the outstanding shares of Common Stock of
the Company owned by the Shaker Group for all of the outstanding shares of
common stock of Shaker Auto Group, Inc. (the "Second Exchange")
Following the exchanges, the Shaker Group will be the beneficial owners of all
of the outstanding shares of common stock of Shaker Auto Group, Inc. and the New
England Subsidiaries, and will cease to own any shares of Common Stock of the
Company. In addition, the Muller Group will control a majority of the voting
power of the shares of Common Stock of the Company, and the Company will cease
to own any shares of common stock of Shaker Auto Group, Inc. or the New England
Subsidiaries.
The New England Subsidiaries of the Company consist of the following
subsidiaries of the Company: ERR Enterprises, Inc., Family Ford, Inc., Shaker's,
Inc., Shaker's Lincoln/Mercury Auto Care, Inc., Hometown Brattleboro, Inc.,
Hometown Auto Framingham, Inc., Bay State Realty Holdings, Inc. and Brattleboro
Realty Holdings, Inc. The Shaker Group consists of the following individuals and
trusts: Corey Shaker (individually and as custodian for Lindsay Shaker, Kristen
Shaker and Edward Shaker), Edward Shaker Family Trust, Joseph Shaker, Shaker
Irrevocable Trust, Richard Shaker Family Trust, Steven Shaker, Janet Shaker,
Paul Shaker, Edward D. Shaker, Edward Shaker, Lillian Shaker, Richard Shaker and
Rose Shaker. The Muller Group consists of the following individuals and trust:
William C. Muller, Jr., Douglas D. Muller, Angela P. Muller, Rose Muller Trust,
Robert Scott Doyle, Andrea L. Pantuso and Michelle Muller.
TABLE OF CONTENTS
Summary Term Sheet ...........................................................1
The Company ..................................................................7
Hometown Auto Retailers, Inc. .......................................7
Description of the Company's Capital Stock ..........................8
Security Ownership of Certain Beneficial Owners and Management ......9
Selected Financial Data for the Company ............................12
The Exchanges ...............................................................14
Background to the Exchanges ........................................14
Reasons for the Exchanges ..........................................17
Parties to the Exchanges ...........................................18
Hometown Auto Retailers, Inc. .............................18
Shaker Auto Group, Inc. ..................................18
New England Subsidiaries ..................................18
Shaker Group ..............................................19
Muller Group ..............................................19
Tax-Free Exchange of Stock of New England Subsidiaries .............19
Tax-Free Exchange of Company Stock of Shaker Group .................20
Conditions to the Consummation of the Exchanges ....................21
Opinion of the Financial Advisor to the Special Committee ..........23
Tax Consequences of the Exchanges ..................................38
Accounting Treatment ...............................................40
Termination of the Exchanges .......................................41
Pro Forma Financial Data ...........................................41
Interest of Certain Persons in Matters to Be Acted Upon .....................55
No Dissenters' Rights .......................................................55
Cost of Exchanges ...........................................................55
Stockholder Proposals .......................................................56
Forward-Looking Statements and Information ..................................56
Where You Can Find More Information About the Company .......................56
Documents Incorporated by Reference .........................................57
Appendix A - Exchange Agreement
Appendix B - Fairness Opinion
SUMMARY TERM SHEET
This summary term sheet, which is in question and answer format,
summarizes selected information contained elsewhere in this Information
Statement, but may not contain all of the information that may be important to
you. The Company urges you to read the entire Information Statement carefully,
including the attached appendices. The Company has included section references
to direct you to a more complete description of the topics contained in this
summary.
o Why do the Shaker Group and the Muller Group wish to split-up the Company?
Certain factors have led the Shaker Group and the Muller Group to decide
to split-up the Company.
First, Toyota Motor Sales, U.S.A., Inc. ("Toyota") has notified the
Company that the Company must correct certain operational
deficiencies or make substantial progress toward rectifying such
deficiencies. Toyota has expressed concerns that the financial
resources of the Company's Toyota dealerships are being used to
finance the cash flow deficits of the Company's other dealerships.
Toyota also has expressed concerns about the impact on the Toyota
dealerships of the financing terms that the Company has with Ford
Motor Company Credit. The Company has been in regular contact with
Toyota to review the Company's efforts to resolve Toyota's concerns.
Second, certain disputes have arisen between the Shaker Group and
the Muller Group regarding the Company's business operations. The
split-up of the Company is intended to resolve these disputes by
permitting the Shaker Group to devote their undivided attention to
the business of Shaker Auto Group independent of the Muller Group.
In this regard, the Shaker Group and the Muller Group each agree
that a failure to carry out the split-up would result in corporate
deadlock and adversely affect business operations.
See "The Exchanges - Background to the Exchanges" and "The Exchanges -
Reasons for the Exchanges".
o How will the assets of the Company be divided?
The Company will transfer all of its New England dealerships, along with
$5 million in cash (subject to adjustment for fluctuations in the value of
certain of the assets and liabilities of the New England dealerships), to
a newly-formed corporation called Shaker Auto Group, Inc., and the Company
will acquire all of the outstanding shares of common stock of Shaker Auto
Group, Inc. Immediately following this exchange, the Shaker Group will
transfer to the Company all of its shares of Class A Common Stock and
Class B Common Stock, and will receive all of the outstanding shares of
common stock of Shaker Auto Group, Inc. Following these exchanges, the
Shaker Group will be the owners of the New England dealerships, and the
Company will retain only its New York and New Jersey dealerships. See "The
Exchanges - Tax-Free Exchange of Stock of New England Subsidiaries" and
"The Exchanges - Tax-Free Exchange of Company Stock of Shaker Group".
- 1 -
o How will the Company obtain the $5 million in cash which it will transfer
to Shaker Auto Group, Inc.?
The Company will borrow the funds needed to make the transfer of the $5
million in cash to Shaker Auto Group. See "The Exchanges - Tax-Free
Exchange of Stock of New England Subsidiaries".
o Are the exchanges supported by the Board of Directors of the Company?
A special committee of the Board of Directors of the Company, composed of
three of the outside directors of the Company, was formed to review the
proposed exchanges. The special committee retained Duff & Phelps LLC, a
Chicago-based investment banking and financial advisory firm, to serve as
its independent financial advisor and render an opinion as to the
fairness, from a financial point of view, to the unaffiliated public
stockholders of the Company (i.e., the stockholders of the Company who are
not directors or officers of the Company and who are not affiliated with
the Shaker Group or any entities that the Shaker Group or any member
thereof controls) of the exchanges (without giving effect to any impact of
the exchanges on any particular stockholder other than in its capacity as
a stockholder). In its opinion dated as of June 1, 2005, Duff & Phelps LLC
concluded that the exchanges are fair, from a financial point of view, to
the unaffiliated public stockholders of the Company (i.e., the
stockholders of the Company who are not directors or officers of the
Company and who are not affiliated with the Shaker Group or any entities
that the Shaker Group or any member thereof controls). See "The Exchanges
- Fairness Opinion".
On June 1, 2005, following its consideration of the exchanges (including
its review of the fairness opinion rendered by Duff & Phelps LLC), the
Board of Directors of the Company unanimously approved the exchanges and
recommended that the stockholders approve the exchanges. On June 2, 2005
the stockholders approved the exchanges by the written consent of the
holders of a majority of the voting power of the Class A Common Stock and
the Class B Common Stock, as permitted by Section 228(e) of the General
Corporation Law of Delaware. See "The Exchanges - Conditions to the
Consummation of the Exchanges".
o What will happen to my shares of Class A Common Stock of the Company
following the exchanges?
Following the exchanges, all of the stockholders of the Company other than
the Shaker Group will continue to own the same number of shares of Common
Stock of the Company that they own prior to the exchanges. However,
because the shares of Common Stock owned by the Shaker Group will be
acquired by the Company and will no longer be outstanding after the
consummation of the exchanges, the percentage ownership interest of each
of the stockholders of the Company other than the Shaker Group will
increase as a result of the exchanges. See "The Exchanges - Tax-Free
Exchange of Company Stock of Shaker Group".
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o What will happen to any outstanding stock options following the exchanges?
Following the exchanges, any persons other than the Shaker Group who own
stock options will continue to own them, and they will continue to be
exercisable in accordance with their terms. However, all stock options
owned by the Shaker Group will be terminated prior to the exchanges. See
"The Exchanges - Tax-Free Exchange of Company Stock of Shaker Group".
o Will there be a market for the Company's Class A Common Stock following
the exchanges?
The Company's Class A Common Stock currently trades over the counter as a
Bulletin Board stock under the symbol "HCAR.OB". Following the exchanges,
the Company anticipates that its Class A Common Stock will continue to be
traded in the same manner. See "The Company - Description of the Company's
Capital Stock".
o Will I have the right to assert dissenters' appraisal rights for my shares
of Class A Common Stock following the exchanges?
No. Under Delaware law, the exchanges do not create a statutory right to
demand payment of the judicially-appraised fair value of the Class A
Common Stock held by you. See "No Dissenters' Rights".
o When will the exchanges be completed?
The exchanges are expected to be completed promptly after the expiration
of twenty (20) days from the date on which this Information Statement is
mailed to stockholders. See "The Exchanges - Conditions to the
Consummation of the Exchanges".
o What is the market value of the Company's Class A Common Stock as of a
recent date?
On June 13, 2005, the high and low bid prices of the Class A Common Stock
as quoted by the NASD OTC Bulletin Board were $1.25 and $1.20. See "The
Company - Description of the Company's Capital Stock" for recent high and
low bid prices for Class A Common Stock.
o What are the benefits of the exchanges for the Company, the Shaker Group,
the Muller Group and the other stockholders of the Company?
Following the exchanges, the Company will retain the more profitable New
York and New Jersey dealerships. As a result, the Company will be able to
address the concerns expressed by Toyota regarding the financial impact on
the Toyota dealerships of the Company's other dealerships. In addition,
the Muller Group, which will control the Company after the exchanges, will
be able to focus all of its attention on the management of the Company's
remaining dealerships in a geographical area in which it has had extensive
business experience, independent of the Shaker Group.
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The Shaker Group will acquire sole control of the New England dealerships,
and will be able to focus all of its attention on the management of these
dealerships in a geographic area in which it has had extensive business
experience, independent of the Muller Group.
The stockholders of the Company other than the Shaker Group and the Muller
Group will obtain a greater percentage interest in the Company, and
indirectly in the more profitable New York and New Jersey dealerships. See
"The Exchanges - Reasons for the Exchanges".
o What are the detriments of the exchanges for the Company, the Shaker
Group, the Muller Group and the other stockholders of the Company?
Following the completion of the exchanges, the business of the Shaker
Group will be less geographically dispersed, thereby making it more
susceptible to regional fluctuations in business activity. In addition,
the business of the Shaker Group will no longer have the benefit of the
revenue generated by the New York and New Jersey dealerships.
Following the completion of the exchanges, the business of the Company
(and, indirectly, the Muller Group and the other stockholders of the
Company) will also be less geographically dispersed. In addition, the
ratio of the Company's outstanding debt to its total stockholders' equity
will increase significantly. See "The Exchanges - Reasons for the
Exchange".
o What are the tax consequences of the exchanges to me?
Based on the opinion issued by BDO Seidman, LLP, the Company's independent
registered public accountants, none of the stockholders of the Company
will recognize any gain, loss or income for federal income tax purposes as
a result of the exchanges. However, tax matters are very complex, and the
tax consequences of the exchanges to you will depend on the facts of your
own situation. You should consult your tax advisor for a full
understanding of the tax consequences of the exchanges to you. See "The
Exchanges - Tax Consequences of the Exchanges".
o Has the Company received any competing proposals to purchase the New
England dealerships or any other assets of the Company?
The Company is not interested in selling all or any portion of its assets,
and the Company has not solicited, initiated or encouraged any competing
proposals to the exchanges. However, the Board of Directors of the Company
may furnish information or engage in discussions in response to any
unsolicited inquiry regarding a proposal for a competing transaction.
Following receipt of a bona fide proposal, the Board of Directors of the
Company may withdraw or modify its recommendation regarding the exchanges
and/or disclose to the stockholders of the Company its position or
recommendation on the competing transaction. See "The Exchanges -
Background for the Exchanges".
- 4 -
o What are the conditions to the exchanges?
If certain conditions are not satisfied or waived, the exchanges will not
be completed. These conditions include: (a) the Company's transfer of the
New England dealerships and $5 million in cash or cash equivalents (as
adjusted) to Shaker Auto Group, Inc.; (b) the release of the Company and
the Muller Group from any obligations, either as guarantor or otherwise,
relating to the liabilities of the New England dealerships; (c) the
release of the Shaker Group from any obligations, either as guarantor or
otherwise, relating to the liabilities of the Company; (d) the delivery of
the opinion of Duff & Phelps LLC indicating that the exchanges are fair,
from a financial point of view, to the unaffiliated public stockholders of
the Company (i.e., the stockholders of the Company who are not directors
or officers of the Company and who are not affiliated with the Shaker
Group or any entities that the Shaker Group or any member thereof
controls); (e) the delivery of the opinion of BDO Seidman, LLP, the
Company's independent registered public accountants, that the exchanges
will qualify as tax-free exchanges under the Internal Revenue Code and
will not cause the recognition of income by either the Company or the
Shaker Group for federal income tax purposes; (f) the approval of the
exchanges by the written consent of stockholders holding a majority of the
voting power of the outstanding shares of common stock of the Company; (g)
the approval of the exchanges by all necessary parties, including but not
limited to manufacturers, lenders and lessors; (h) the resignation of each
member of the Shaker Group and each individual related to any member of
the Shaker Group as an employee, director and/or officer of the Company;
and (i) the delivery of this Information Statement to the stockholders of
the Company and the expiration of the required twenty (20) day waiting
period. See "The Exchanges - Conditions to the Consummation of the
Exchanges".
o Can the exchange agreement be amended or terminated?
The exchange agreement can be amended or terminated at any time before the
effective date of the exchanges by the written agreement of the Company,
the Shaker Group and the Muller Group. See "The Exchanges - Termination of
the Exchanges".
o Who must pay the fees and expenses relating to the exchanges?
The exchange agreement provides that each party to the agreement will bear
its respective expenses incurred in connection with the preparation,
execution and performance of the transactions contemplated by the
agreement, including all fees and expenses of agents, representatives,
counsel, and accountants. However, the Company will reimburse Shaker Auto
Group for up to $37,500 of the out-of-pocket costs of Shaker Auto Group
relating to the refinancing of a certain loan if the refinancing results
in a reduction in certain fees payable by the Company in connection with
the refinancing. See "Cost of Exchanges".
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o Do the Company's directors and executive officers (other than the members
of the Shaker Group and the Muller Group) have interests in the exchanges
that are different from, or in addition to, mine?
Yes. It is anticipated that the current directors and executive officers
of the Company who are members of the Shaker Group or who are related to
any member of the Shaker Group will cease to be directors or executive
officers of the Company following the consummation of the exchanges. See
"Interest of Certain Persons in Matters to be Acted Upon".
o What do I need to do now?
You should read this Information Statement, including the appendices,
carefully and should consider how the exchanges will affect you. DO NOT
SEND YOUR STOCK CERTIFICATES TO THE COMPANY. FOLLOWING THE EXCHANGES, YOU
WILL CONTINUE TO OWN THE SAME SHARES IN THE COMPANY THAT YOU CURRENTLY
OWN.
o How can I learn more about the exchanges?
The exchange agreement, including the conditions to the consummation of
the exchanges, is described under the caption "The Exchanges", and the
exchange agreement is attached as Appendix A to this Information
Statement. You should carefully read the entire exchange agreement,
because it is the legal document that governs the exchanges.
o Who can answer any questions I may have?
If you would like additional copies of this Information Statement (which
will be provided to you without charge) or if you have any questions about
the exchanges, you should contact: Charles F. Schwartz, Chief Financial
Officer and Secretary, Hometown Auto Retailers, Inc., 1309 South Main
Street, Waterbury, Connecticut 06706 (203) 756-1300.
- 6 -
THE COMPANY
Hometown Auto Retailers, Inc.
The Company sells new and used cars and light trucks, provides maintenance
and repair services, sells replacement parts, and provides related financing,
insurance and service contracts through eight franchised dealerships located in
New Jersey, New York, Connecticut, Massachusetts and Vermont. The Company's
dealerships offer eight American and Asian automotive brands, including Ford,
Chrysler/Dodge/Jeep, Lincoln/Mercury, Mazda, Toyota and Chevrolet.
The Company was founded on June 27, 1997 by the merger of Dealer-Co.,
Inc., a New York corporation organized on March 10, 1997, and Hometown Auto
Retailers, Inc., a Delaware corporation organized on June 6, 1997. Until the
closing of its initial public offering on July 31, 1998, the Company conducted
no operations under its own name and all revenues were generated by its
predecessor companies. On July 31, 1998, the Company acquired three dealerships
and the predecessor companies, which operate six dealerships, a collision repair
center and a factory authorized freestanding service center. In 1999, the
Company also acquired freestanding Lincoln Mercury and Toyota dealerships, and
added both a Mazda and a Jeep dealership to existing locations. In 2000, the
Company acquired a high-end used car operation, which was added to its
Massachusetts location. In 2001, the Company sold its Morristown, New Jersey
dealership, a Lincoln-Mercury franchise, back to Lincoln-Mercury. In 2002, the
high-end used car operation was significantly scaled down. In 2003, the Company
sold the Chrysler/Jeep sales and service franchise for its Waterbury,
Connecticut location.
On or about February 7, 2001, Salvatore A. Vergopia and Edward A.
Vergopia, former directors and executive officers of the Company, and Janet
Vergopia, the wife of Salvatore A. Vergopia (the "Vergopias") filed a complaint
in the Superior Court of New Jersey in Bergen County, against the Company, its
officers and directors, certain holders of its Class B Common Stock, and certain
other unnamed persons, alleging breach of two employment agreements, wrongful
termination of employment, breach of a stockholders' agreement and certain other
wrongful conduct, including age discrimination and breach of fiduciary duty. The
Vergopias sought back pay and front pay, and compensatory, consequential and
punitive damages, for an unspecified amount, as well as reinstatement,
injunctive and other legal and equitable relief. Salvatore A. Vergopia and
Edward A. Vergopia also commenced a second action for defamation against the
Company and its Chief Executive Officer, and a third lawsuit claiming defamation
and tortious interference with contract arising out of a letter allegedly sent
to one of the Company's automobile manufacturers. Litigation counsel was
retained by the Company's insurers to represent the Company in these actions. In
addition, the Company filed counterclaims to recover damages associated with the
Vergopias' breaches of certain agreements, as well as breaches of their
fiduciary duties. On December 7, 2004, the Company announced that it had settled
all of its litigation matters with the Vergopias. As part of the settlement, the
Company agreed to transfer certain Westwood Lincoln-Mercury Sales, Inc. assets
to the Vergopias, to transfer the Westwood Lincoln-Mercury franchise to the
Vergopias (subject to manufacturer approval), and to terminate the Company's
Westwood, New Jersey lease. In return, the Vergopias agreed to transfer to the
Company all of their shares of Common Stock of the Company. These transactions
have already been consummated.
- 7 -
Description of the Company's Capital Stock
The Company's authorized capital stock consists of 17,760,000 shares of
stock, of which 12,000,000 shares are Class A Common Stock, 3,760,000 shares are
Class B Common Stock, and 2,000,000 shares are preferred stock. At the close of
business on June 2, 2005, the Company had 3,870,137 shares of Class A Common
Stock issued and outstanding, 2,579,252 shares of Class B Common Stock issued
and outstanding, and no shares of preferred stock issued and outstanding.
The Company's Class A Common Stock and Class B Common Stock vote together
as a single class of stock on all matters to be voted on by the stockholders of
the Company, except as otherwise expressly provided by law. The holders of the
Class A Common Stock are entitled to one vote per share, and the holders of the
Class B Common Stock are entitled to ten votes per share. Therefore, the issued
and outstanding shares of Class A Common Stock have an aggregate of 3,870,137
votes, the issued and outstanding shares of Class B Common Stock have an
aggregate of 25,792,520 votes, and all of the outstanding shares of Common Stock
have an aggregate of 29,662,657 votes. Directors are elected by a plurality of
the votes cast at a meeting at which a quorum is present. Except as otherwise
required by law, for all other matters presented to the stockholders for their
approval, a majority of the votes cast at a meeting at which a quorum is present
is required.
The Company's Class A Common Stock trades on the National Association of
Securities Dealers Automated Quotation System over the counter bulletin board
(the "NASD OTC Bulletin Board") under the symbol "HCAR.OB"
The following table sets forth the high and low bid prices as quoted by
the NASD OTC Bulletin Board. Such quotations reflect inter-dealer prices,
without retail mark-up, markdown or commission, and may not necessarily
represent actual transactions.
Year Ended 2003 High Low
First Quarter $0.55 $0.31
Second Quarter $0.55 $0.28
Third Quarter $0.88 $0.41
Fourth Quarter $1.60 $0.67
Year Ended 2004 High Low
First Quarter $2.00 $1.05
Second Quarter $1.40 $0.95
Third Quarter $1.25 $0.71
Fourth Quarter $0.87 $0.68
Year Ended 2005 High Low
First Quarter $1.35 $0.76
Second Quarter (through June 13, 2005) $1.41 $0.85
- 8 -
On June 2, 2005, the date immediately prior to the public announcement of the
exchanges, the high and low bid prices of the Class A Common Stock as quoted by
the NASD OTC Bulletin Board were $1.20 and $1.20 and on June 13, 2005, the high
and low bid prices were $1.25 and $1.20.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information known to the Company
regarding the beneficial ownership of Common Stock as of May 31, 2005 by (a)
each person known to the Company to be the beneficial owner of more than 5% of
its outstanding shares of Common Stock; (b) each director of the Company; (c)
each named executive officer of the Company; and (d) all directors and executive
officers of the Company as a group. Except as otherwise indicated, the persons
or entities listed below have sole voting and investment power with respect to
all shares of Common Stock owned by them.
A person is deemed to be a beneficial owner of securities that can be
acquired by such person within 60 days from the filing of this Information
Statement upon the exercise of options and warrants or conversion of convertible
securities. Each beneficial owner's percentage ownership is determined by
dividing the number of shares beneficially owned by that person by the total
number of shares beneficially owned, increased to reflect the shares underlying
the options, warrants and convertible securities that are held by such person,
but not held by any other person.
The total number of votes is based on the combined total of Class A Common
Stock and Class B Common Stock beneficially owned by the beneficial owner. The
voting power percentage of each beneficial owner is determined by dividing the
number of votes held by that person by the total number of votes outstanding,
increased to reflect the number of votes of the shares underlying the options,
warrants and convertible securities that are held by such person, but not held
by any other person.
- 9 -
Common Stock Beneficially % of Outstanding Equity % of
Owned Owned Aggregate
---------------------------- ----------------------------- voting Power
Class Class Class Class Total of all
Name of Beneficial Owner A B A B Classes
- ------------------------------------- ------------- ----------- --------- -------- ---------- -------------
Officers and Directors
- ----------------------
Corey E. Shaker 220,214 265,080 5.55 10.28 7.41 9.65
William C. Muller, Jr. 392,000 761,752 10.05 29.53 17.81 26.97
Steven Shaker 145,142 206,424 3.72 8.00 5.43 7.44
Joseph Shaker 147,826 321,812 3.82 12.48 7.28 11.35
Charles F. Schwartz 83,333 - 2.11 - 1.28 **
Bernard J. Dzinski Jr. 21,667 - ** - ** **
Steven A. Fournier 35,834 - ** - ** **
H. Dennis Lauzon 16,667 - ** - ** **
Timothy C. Moynahan 35,834 - ** - ** **
All Directors, and Executive
Officers as a group (9 persons) 1,098,517 1,555,068 26.01 60.29 39.01 55.47
5% Beneficial Owners
- --------------------
Janet Shaker 71,428 227,668 1.85 8.83 4.64 7.92
Paul Shaker - 218,268 - 8.46 3.38 7.36
Edward D. Shaker 124,642 206,612 3.21 8.01 5.12 7.38
Edward Shaker 125,842 175,404 3.25 6.80 4.67 6.34
Richard Shaker 131,642 175,404 3.39 6.80 4.75 6.35
Steven N. Bronson 381,817 - 9.87 - 5.92 1.29
** Ownership is less than 1%
Corey Shaker has an address at c/o Hometown Auto Retailers, Inc., 1309 South
Main Street, Waterbury, Connecticut 06706. His beneficial ownership of Company
common stock includes:
o 265,080 shares of Class B common stock, of which 15,980 shares are
held by the Edward Shaker Family Trust of which he is the Trustee
and a beneficiary;
o 120,214 shares of Class A common stock, including 72 shares (24
shares each for his children, Lindsay, Kristen and Edward) of which
he is custodian;
o Options exercisable within the next 60 days to purchase shares of
Class A common stock as follows:
o 25,000 shares at $2.25 per share;
o 25,000 shares at $1.25 per share;
o 50,000 shares at $0.48 per share;
William Muller, Jr. has an address at c/o Muller Toyota Inc., Route 31, PO Box
J, Clinton, New Jersey 08809. His beneficial ownership of Company common stock
includes:
o 761,752 shares of Class B common stock;
o 360,750 shares of Class A common stock;
o 1,250 shares of Class A common stock owned by his wife, Michele;
o Options exercisable within the next 60 days to purchase shares of
Class A common stock as follows:
o 15,000 shares at $2.25 per share;
o 15,000 shares at $1.25 per share;
- 10 -
Steven Shaker has an address at c/o Family Ford, Inc., 1200 Wolcott Street,
Waterbury, Connecticut 06705. His beneficial ownership of Company common stock
includes:
o 206,424 shares of Class B common stock;
o 115,142 shares of Class A common stock;
o Options exercisable within the next 60 days to purchase shares of
Class A common stock as follows:
o 15,000 shares at $2.25 per share;
o 15,000 shares at $1.25 per share;
Joseph Shaker has an address at c/o Bay State Lincoln Mercury, 571 Worcester
Road, Framingham, Massachusetts 01701. His beneficial ownership of Company
common stock includes:
o 321,812 shares of Class B common stock of which 15,980 shares are
held by the Richard Shaker Family Trust which Mr. Shaker is the
Trustee and a beneficiary; and 40,000 shares are held by the Shaker
Irrevocable Trust of which Mr. Shaker is Trustee;
o 147,826 shares of Class A common stock;
Charles F. Schwartz has an address at c/o Hometown Auto Retailers, Inc., 1309
South Main Street, Waterbury, Connecticut 06706. His beneficial ownership of
Company common stock consists of options exercisable within the next 60 days to
purchase shares of Class A common stock as follows:
o 50,000 shares at $0.68 per share;
o 33,333 shares at $0.34 per share.
Bernard J. Dzinski Jr. has an address at 141 East Main Street, Waterbury, CT
06721. His beneficial ownership of Company common stock consist of options
exercisable within the next 60 days to purchase shares of Class A common stock
as follows:
o 1,667 shares at $1.05 per share;
o 20,000 shares at $0.42 per share.
Steven A. Fournier has an address at 238 Water Street, Naugatuck, Connecticut
06770. His beneficial ownership of Company common stock consist of options
exercisable within the next 60 days to purchase shares of Class A common stock
as follows:
o 1,667 shares at $1.05 per share;
o 30,000 shares at $0.58 per share;
o 4,167 shares at $0.42 per share.
H. Dennis Lauzon has an address at 854 Sunset Avenue, Haworth, New Jersey 07641.
His beneficial ownership of Company common stock consists of options exercisable
within the next 60 days to purchase shares of Class A common stock as follows:
o 1,667 shares at $1.05 per share;
o 5,000 shares at $0.65 per share;
o 10,000 shares at $0.42 per share.
Timothy C. Moynahan has an address at 141 East Main Street, Waterbury,
Connecticut 06722. His beneficial ownership of Company common stock consist of
options exercisable within the next 60 days to purchase shares of Class A common
stock as follows:
o 1,667 shares at $1.05 per share;
o 30,000 shares at $0.48 per share;
o 4,167 shares at $0.42 per share;
Janet Shaker has an address at c/o Family Ford, Inc., 1200 Wolcott Street,
Waterbury, Connecticut 06705.
- 11 -
Paul Shaker has an address at 210 Munson Road, Middlebury, Connecticut 06762.
Edward D. Shaker has an address at c/o Shakers Lincoln Mercury, Inc. 831 Straits
Turnpike, Watertown, Connecticut 06795. His beneficial ownership of Company
common stock includes:
o 206,612 shares of Class B common stock;
o 107,142 shares of Class A common stock; and
o Options exercisable within the next 60 days to purchase shares of
Class A common stock as follows:
o 8,750 shares at $2.25 per share;
o 8,750 shares at $1.25 per share;
Edward Shaker has an address at c/o Hometown Auto Retailers, Inc., 1309 South
Main Street, Waterbury, Connecticut 06706. His beneficial ownership of Company
common stock includes 13,700 shares of Class A common stock owned by his wife,
Lillian.
Richard Shaker has an address at c/o Shakers Lincoln Mercury, Inc. 831 Straits
Turnpike, Watertown, Connecticut 06795. His beneficial ownership of Company
common stock includes:
o 175,404 shares of Class B common stock;
o 114,142 shares of Class A common stock; and
o Options exercisable within the next 60 days to purchase shares of
Class A common stock as follows:
o 8,750 shares at $2.25 per share;
o 8,750 shares at $1.25 per share;
Steven N. Bronson has an address at 100 Mill Plain Road, Danbury, Connecticut
06811.
All of the above disclaim any beneficial ownership in shares of the
Company owned by other family members.
Selected Financial Data for the Company
The following table sets forth certain selected historical consolidated
data of the Company as of and for the years ended December 31, 2004, 2003, 2002,
2001 and 2000 that has been derived from the Company's audited consolidated
financial statements. The selected historical consolidated data of the Company
as of and for the three months ended March 31, 2005 and 2004 has been derived
from the Company's unaudited consolidated interim financial statements, which in
the opinion of management reflect all material adjustments, necessary for a fair
presentation of such data. The table is based on, and should be read in
conjunction with, the Company's historical consolidated financial statements and
notes thereto incorporated by reference in this Information Statement. See
"Documents Incorporated by Reference".
- 12 -
For the periods ended March 31 As of and for the year ended December 31
------------------------------ -----------------------------------------------------------------------
(In thousands, except per
share data) 2005 2004 2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Revenues $ 61,766 $ 65,878 $ 265,281 $ 279,777 $ 269,739 $ 275,760 $ 279,382
Gross profit 9,306 9,520 37,974 39,747 38,667 39,815 37,881
Amortization of goodwill -- -- -- -- -- 704 661
Selling, general and
administrative expenses 8,009 8,648 33,371 34,840 34,152 35,114 37,946
Income (loss) from operations 1,297 872 4,603 4,907 4,515 3,997 (726)
Interest expense (920) (774) (3,281) (3,037) (3,205) (4,225) (5,069)
Net income (loss) before
cumulative effect of
accounting change 268 102 3,748 2,378 776 (2,136) (3,800)
Cumulative effect of
accounting change -- -- -- -- (23,708) -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ 268 $ 102 $ 3,748 $ 2,378 $ (22,932) $ (2,136) $ (3,800)
=========== =========== =========== =========== =========== =========== ===========
Earnings (loss) per share,
basic
Before cumulative effect
of accounting change $ 0.04 $ 0.01 $ 0.51 $ 0.33 $ 0.10 $ (.32) $ (.63)
Cumulative effect of
accounting change -- -- -- -- (3.30) -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) per share,
basic $ 0.04 $ 0.01 $ 0.51 $ 0.33 $ (3.20) $ (.32) $ (.63)
=========== =========== =========== =========== =========== =========== ===========
Earnings (loss) per share,
diluted
Before cumulative effect of
accounting change $ 0.04 $ 0.01 $ 0.50 $ 0.33 $ 0.10 $ (.32) $ (.63)
Cumulative effect of
accounting change -- -- -- -- (3.30) -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) per share,
diluted $ 0.04 $ 0.01 $ 0.50 $ 0.33 $ (3.20) $ (.32) $ (.63)
=========== =========== =========== =========== =========== =========== ===========
Weighted average shares,
Basic 7,086,500 7,175,105 7,286,931 7,175,105 7,175,105 6,592,436 5,995,996
Diluted 7,210,990 7,471,259 7,439,024 7,215,492 7,175,105 6,592,436 5,995,996
Balance Sheet Data:
Working capital $ 2,331 $ 6,147 $ 2,900 $ 6,039 $ 4,085 $ 4,029 $ 1,663
Inventories 42,930 44,531 43,440 37,774 39,169 31,887 40,170
Total assets 73,982 72,761 74,223 65,264 63,816 81,842 91,572
Total debt 56,571 58,040 56,600 51,075 52,745 46,234 54,133
Stockholders' equity $ 10,158 $ 7,030 $ 10,933 $ 6,928 $ 4,550 $ 27,452 $ 28,643
- 13 -
THE EXCHANGES
Background to the Exchanges
At various times in recent years, the Shaker Group and the Muller Group
have discussed informally among themselves the merits of splitting-up the assets
of the Company by transferring the New England dealerships to the Shaker Group,
while retaining the New York and New Jersey dealerships in the Company subject
to the control of the Muller Group. The New England dealerships are owned by the
following subsidiaries of the Company: ERR Enterprises, Inc., Family Ford, Inc.,
Shaker's, Inc., Shaker's Lincoln/Mercury Auto Care, Inc., Hometown Brattleboro,
Inc., Hometown Auto Framingham, Inc., Bay State Realty Holdings, Inc. and
Brattleboro Realty Holdings, Inc. (the "New England Subsidiaries"). The New York
and New Jersey dealerships are owned by the following subsidiaries of the
Company: Muller Chevrolet, Oldsmobile, Isuzu, Inc., Muller Automotive Group,
Inc., Hometown Newburgh, Inc., Newburgh Realty Holding Co., Inc., Morristown
Auto Sales, Inc. and Hometown New Windsor, Inc. (the "New York/New Jersey
Subsidiaries").
The factors that prompted these discussions concerning the split-up of the
Company included the following:
o Toyota Motor Sales, U.S.A., Inc. ("Toyota") extended the Company's
current Toyota dealership agreement, but only on a month-to-month
basis pending resolution of certain concerns expressed by Toyota. In
March 2003, Toyota was notified by the Company in writing that the
Company must correct certain operational deficiencies or make
substantial progress toward rectifying such deficiencies. Toyota has
expressed concerns that the financial resources of the Company's
Toyota dealerships are being used to finance the cash flow deficits
of the Company's other dealerships. Toyota also has expressed
concerns about the impact on the Toyota dealerships of the financing
terms that the Company has with Ford Motor Company Credit. The
Company has been in regular contact with Toyota to review the
Company's efforts to resolve Toyota's concerns. In order to improve
the Company's relationship with Toyota and avoid a potential
termination of its franchise agreement, the Company has informed
Toyota of its proposed plan to separate certain of the dealerships
from the Company's corporate structure.
o Certain disputes have arisen between the Shaker Group and the Muller
Group regarding the Company's business operations. The split-up of
the Company is intended to resolve these disputes by permitting the
Shaker Group to devote their undivided attention to the business of
the New England Subsidiaries independent of the Muller Group, and by
permitting the Muller Group to devote their undivided attention to
the business of the New York/New Jersey Subsidiaries independent of
the Shaker Group. In this regard, the Shaker Group and the Muller
Group each agree that a failure to carry out the split-up of the
Company would result in corporate deadlock and adversely affect
business operations.
- 14 -
Discussions between the Shaker Group and the Muller Group intensified in
late 2004 and early 2005, following the Company's settlement of its litigation
with the Vergopias. The members of the Shaker Group and the Muller Group
ultimately concluded that the split-up of the Company would be appropriate at
this time.
On December 15, 2004, the Board of Directors of the Company appointed
Steven A. Fournier, Bernard J. Dzinski, Jr. and Timothy C. Moynahan, three of
the outside directors of the Company, to serve as a special committee (the
"Special Committee") to consider the split-up of the Company. The Special
Committee met with the Company's outside counsel to discuss the mechanics of
splitting-up the Company. On February 4, 2005, the Special Committee engaged
Duff & Phelps LLC, a Chicago-based investment banking and financial advisory
firm, to advise the Special Committee in its consideration and evaluation of the
split-up of the Company. On February 7, 2005, the Company signed an engagement
letter with Duff & Phelps LLC that provided for, among other things, the payment
of professional fees consisting of: (a) $50,000 payable upon execution of such
engagement letter; (b) $50,000 payable upon Duff & Phelps LLC informing the
Special Committee it is prepared to deliver its opinion, regardless of the
conclusions reached in such opinion; and (c) $25,000 if the opinion is included
in the Company's SEC filings, inclusive of any time incurred in reviewing and
assisting in the preparation of such materials.
In its consideration and evaluation of the split-up of the Company, Duff &
Phelps LLC was not requested to, and did not, solicit indications of interest
from, or conduct an auction with, third parties relating to the potential sale
of all or a portion of the Company to a third party. Both the Shaker Group and
the Muller Group indicated to the Special Committee and to Duff & Phelps LLC
that they had no interest in participating in alternative transactions, such as
selling their interests in the Company or selling any portion of the Company's
business to a third party. Accordingly, any solicitation of third party interest
in the Company would have been futile, given that both the Shaker Group and the
Muller Group are not willing to sell their interests.
On June 1, 2005, Company management, the Company's outside counsel, and
representatives of Duff & Phelps LLC discussed with the Special Committee the
potential split-up of the Company. Duff & Phelps LLC reviewed the information
that it had considered and presented its analysis of the following proposal for
the split-up of the Company:
o All of the outstanding shares of common stock of the New England
Subsidiaries of the Company, along with $5 million in cash (subject
to adjustment for fluctuations in certain of the assets and
liabilities of the New England Subsidiaries) would be exchanged in a
tax-free exchange for all of the shares of common stock of Shaker
Auto Group, Inc., a newly-organized Connecticut corporation ("Shaker
Auto Group").
o All of the outstanding shares of common stock of Shaker Auto Group
would then be exchanged in a tax-free exchange for all of the
outstanding shares of Class A Common Stock and Class B Common Stock
of the Company that are owned by the Shaker Group.
- 15 -
Following the exchanges, the Shaker Group would be the beneficial owner of all
of the outstanding shares of common stock of Shaker Auto Group and the New
England Subsidiaries, and would cease to own any shares of Common Stock of the
Company. In addition, the Muller Group would control the Company through its
ownership of a majority of the outstanding shares of Common Stock of the
Company, and the Company would cease to own any shares of common stock of Shaker
Auto Group or the New England Subsidiaries.
Duff & Phelps LLC informed the Special Committee of its opinion that the
exchanges are fair, from a financial point of view, to the unaffiliated public
stockholders of the Company (i.e., the stockholders of the Company who are not
directors or officers of the Company and who are not affiliated with the Shaker
Group or any entities that the Shaker Group or any member thereof controls)
The members of the Special Committee and the representatives of Duff &
Phelps LLC then discussed the information presented. After discussion and
consideration of the exchanges (including its review of the fairness opinion
rendered by Duff & Phelps LLC) and other relevant factors considered by the
Special Committee, the Special Committee unanimously determined that the
proposed transactions regarding the split-up of the Company were fair to the
unaffiliated stockholders of the Company and unanimously recommended that the
entire Board of Directors of the Company approve the transactions.
On June 1, 2005, the Special Committee presented to the full Board of
Directors of the Company its recommendation regarding the split-up of the
Company. After discussion and consideration of the exchanges (including its
review of the fairness opinion rendered by Duff & Phelps LLC) and other relevant
factors considered by the Board of Directors, the Board of Directors unanimously
determined that the proposed transactions regarding the split-up of the Company
were fair to the unaffiliated stockholders of the Company and unanimously
recommended that the stockholders approve the transactions.
Pursuant to Section 228(e) of the General Corporation Law of Delaware, the
written consent of stockholders holding a majority of the voting power of the
outstanding shares of stock of a corporation is sufficient to approve any
actions submitted to the stockholders for their approval. Pursuant to Rule 14c-2
under the Securities Exchange Act of 1934, as amended, every stockholder who is
entitled to vote on a matter at a meeting or who is entitled to give his or her
written consent to a corporate action must be sent or given an information
statement at least twenty (20) calendar days prior to the meeting date or the
earliest date on which the corporate action will be effective.
By a written consent dated June 2, 2005, persons holding shares of Class A
Common Stock and Class B Common Stock representing a majority of the voting
power of the Company's Common Stock approved the proposed transactions regarding
the split-up of the Company. As required by the federal securities laws, the
transactions will become effective twenty (20) days after the initial mailing of
this Information Statement to the stockholders of the Company.
- 16 -
On June 2, 2005, the Company issued a press release disclosing the
approval of the transactions by the Board of Directors and by a majority of the
voting power of the Company's Common Stock. The Company also filed a copy of the
press release with the Securities and Exchange Commission on Form 8-K. The
Company's press release included a description of the general terms of the
transactions.
The members of the Board of Directors of the Company were sent a letter
dated June 14, 2005 signed by Steven Bronson, Louis J. Meade and Leonard Hagan,
and included in an amendment to a Schedule 13D filed by Steven Bronson with the
Securities and Exchange Commission on June 15, 2005. In the letter, Messrs.
Bronson, Meade and Hagan (the "Holders") state that they own an aggregate of
16.31% of the Company's Class A Common Stock. In the letter, the Holders also
state their belief that the Exchanges will have a material adverse effect on the
Company and the Shareholders who are not parties to the Exchanges, and are not
in the best interests of the Company and its shareholders. They further state
their belief that the Exchanges violate the Board's statutory and common law
fiduciary duties and demand that the Company abandon the Exchanges, that the
Board appoint a new Compensation Committee, that the President of the Company
resign, that the Board appoint a Special Committee to explore all options for
maximizing shareholder value, including conversion of the Company's Class B
Common Stock into Class A Common Stock, that the provision be made for minority
shareholder representation on the Board and that the Shaker Group reimburse the
Company for its costs in pursuing the Exchange.
Reasons for the Exchanges
In arriving at its decision to proceed with the split-up of the Company,
the Company, the Shaker Group and the Muller Group considered the same factors
that had prompted them to discuss the split-up of the Company. See "The
Exchanges - Background to the Exchanges". In addition, the Company, the Shaker
Group and the Muller Group considered the following benefits of the
transactions:
o Following the completion of the transactions, the Company will
retain the more profitable New York and New Jersey dealerships. The
Muller Group, which will control the Company after the exchanges,
will be able to focus all of its attention on the management of
these dealerships in a geographical area in which it has had
extensive business experience, independent of the Shaker Group.
o The Shaker Group will acquire sole control of the New England
dealerships, and will be able to focus all of its attention on the
management of these dealerships in a geographic area in which it has
had extensive business experience, independent of the Muller Group.
o The stockholders of the Company other than the Shaker Group and the
Muller Group will obtain a greater percentage interest in the
Company, and indirectly in the more profitable New York and New
Jersey dealerships.
The Company, the Shaker Group and the Muller Group also considered the
following potential detriments of the transactions:
o Following the completion of the transactions, the ratio of the
Company's outstanding debt to its total stockholders' equity will
increase significantly. As a result, the Company will become more
highly leveraged and will be burdened by a significant amount of
debt.
o Following the completion of the transactions, the business of the
Company (and, indirectly, the Muller Group and the other
stockholders of the Company) will be less geographically dispersed.
o Following the completion of the transactions, the business of the
Shaker Group will also be less geographically dispersed, thereby
making it more susceptible to regional fluctuations in business
activity. In addition, the business of the Shaker Group will no
longer have the benefit of the revenue generation provided by the
more profitable New York and New Jersey dealerships.
- 17 -
Parties to the Exchanges
Hometown Auto Retailers, Inc. The Company, with offices at 1309 South Main
Street, Waterbury, CT 06706, sells new and used cars and light trucks, provides
maintenance and repair services, sells replacement parts, and provides related
financing, insurance and service contracts through eight franchised dealerships
located in New Jersey, New York, Connecticut, Massachusetts and Vermont. See
"The Company - Hometown Auto Retailers, Inc."
Shaker Auto Group, Inc. Shaker Auto Group will be a corporation that the
Company will organized under the laws of the State of Connecticut for the
purpose of owning all of the Company's New England dealerships.
New England Subsidiaries. The following subsidiaries of the Company sell
new and used cars and light trucks, provide maintenance and repair services,
sell replacement parts, and provide related financing, insurance and service
contracts at the following locations in New England:
ERR Enterprises, Inc. 1309 South Main Street
Waterbury, CT 06706
Family Ford, Inc. 1200 Wolcott Street
Waterbury, CT 06705
Shaker's, Inc. 1309 South Main Street
Waterbury, CT 06706
Shakers' Lincoln/Mercury Auto Care, Inc. 831 Straits Turnpike
Watertown, CT 06795
Hometown Brattleboro, Inc. Route 5, Putney Road
North Brattleboro, VT 05304
Hometown Auto Framingham, Inc. 571 Worcester Road
Framingham, MA 01701
Brattleboro Realty Holdings, Inc. Route 5, Putney Road
North Brattleboro, VT 05304
Bay State Realty Holdings, Inc. 571 Worcester Road
Framingham, MA 01701
- 18 -
The Company owns, directly or indirectly, 100% of the issued and outstanding
shares of stock of each of the New England Subsidiaries.
Shaker Group. The Shaker Group consists of the following individuals and
trusts: Corey Shaker (individually and as custodian for Lindsay Shaker, Kristen
Shaker and Edward Shaker), Edward Shaker Family Trust, Joseph Shaker, Shaker
Irrevocable Trust, Richard Shaker Family Trust, Steven Shaker, Janet Shaker,
Paul Shaker, Edward D. Shaker, Edward Shaker, Lillian Shaker, Richard Shaker and
Rose Shaker.
Corey Shaker is the Chief Executive Officer, a director and a principal
stockholder of the Company. Steven Shaker is the Regional Vice President - North
Division and a principal stockholder of the Company. Joseph Shaker is the
Regional Vice President - East Division, a director and a principal stockholder
of the Company. Richard Shaker is the father of Steven Shaker, Edward D. Shaker
and Joseph Shaker and a principal stockholder of the Company. Edward Shaker and
Lillian Shaker are the parents of Corey Shaker, Janet Shaker and Paul Shaker and
principal stockholders of the Company. Edward D. Shaker, Janet Shaker and Paul
Shaker are principal stockholders of the Company. Rose Shaker is the sister of
Richard Shaker and Edward Shaker.
Muller Group. The Muller Group consists of following individuals and
trust: William C. Muller, Jr., Douglas D. Muller, Angela P. Muller, Rose Muller
Trust, Robert Scott Doyle, Andrea L. Pantuso and Michelle Muller. William C.
Muller Jr. is Regional Vice President - South Division, a director and a
principal stockholder of the Company. Douglas D. Muller is William C. Muller
Jr.'s brother. Angela P. Muller is Douglas D. Muller Jr.'s wife. The trustee of
the Rose Muller Trust is Rose Muller, who is William C. Muller Jr.'s stepmother.
Robert Scott Doyle is William C. Muller Jr.'s brother-in-law. Andrea L. Pantuso
is William C. Muller Jr.'s sister-in-law. Michelle Muller is William C. Muller
Jr.'s wife.
Tax-Free Exchange of Stock of New England Subsidiaries
On June 1, 2005 the Board of Directors of the Company approved the
organization of Shaker Auto Group as a wholly-owned subsidiary of the Company.
Following the organization of Shaker Auto Group, the Company will contribute to
Shaker Auto Group all of the issued and outstanding shares of stock of each of
the New England Subsidiaries, along with an amount of cash, and will receive in
exchange therefor all of the issued and outstanding shares of stock of Shaker
Auto Group. In addition, immediately following the organization of Shaker Auto
Group: (a) the Company will cause Shaker Auto Group to transfer all of the stock
of Brattleboro Realty Holdings, Inc. to Hometown Brattleboro, Inc.; (b) the
Company will cause Shaker Auto Group to transfer all of the stock of Bay State
Realty Holdings, Inc. to Shaker Auto Group; (c) the Company will transfer all of
the stock of Newburgh Realty Holding Co., Inc. to Hometown Newburgh, Inc.; (d)
the Company will transfer all of the stock of Hometown New Windsor, Inc. to
Hometown Newburgh, Inc.; and (e) the Company either will liquidate Morristown
Auto Sales, Inc. or will transfer all of the stock of Morristown Auto Sales,
Inc. to Muller Chevrolet, Oldsmobile, Isuzu, Inc. These transactions are
collectively referred to as the "First Exchange".
- 19 -
As part of the First Exchange, the Company will make a cash payment to
Shaker Auto Group in order to: (a) equalize the value of the Shaker Group's
stock interest in the Company with the value of the stock of Shaker Auto Group
that the Shaker Group will receive in the transactions; and (b) provide Shaker
Auto Group with necessary working capital. The amount of cash that the Company
will contribute to Shaker Auto Group will equal $5 million. However, this amount
will be adjusted as follows:
o the $5 million will be increased to the extent that, on the
effective date of the First Exchange: (a) the value of the used cars
held in inventory by the New England Subsidiaries in excess of the
outstanding indebtedness secured by such used cars is less than
$500,000; (b) the cost basis value of the parts and accessories held
in inventory by the New England Subsidiaries is less than $515,000;
or (c) the accounts receivable of the New England Subsidiaries is
less than the accounts payable and accrued expenses of the New
England Subsidiaries; and
o the $5 million will be decreased to the extent that, on the
effective date of the First Exchange: (a) the value of the used cars
held in inventory by the New England Subsidiaries in excess of the
outstanding indebtedness secured by such used cars is greater than
$500,000; (b) the cost basis value of the parts and accessories held
in inventory by the New England Subsidiaries is greater than
$515,000; or (c) the accounts receivable of the New England
Subsidiaries is greater than the accounts payable and accrued
expenses of the New England Subsidiaries.
In order to consummate the exchanges, the Company anticipates that it will
borrow up to $6.5 million from Comerica Bank. Of the proceeds of the loan, it is
anticipated that $5 million will be used to make the required cash contribution
to Shaker Auto Group, $700,000 will be used for financing the costs associated
with the exchanges, and the remaining $800,000 will be used as working capital
by the Company.
Following the consummation of the First Exchange, Shaker Auto Group will
be the parent corporation of the New England Subsidiaries, and the Company will
be the parent corporation of Shaker Auto Group and the indirect parent
corporation of the New England Subsidiaries.
Tax-Free Exchange of Company Stock of Shaker Group
On June 1, 2005 the Board of Directors of the Company also authorized
that, immediately following the consummation of the First Exchange, all of the
outstanding shares of stock of Shaker Auto Group will be exchanged for all of
the outstanding shares of Class A Common Stock and Class B Common Stock that are
owned by the members of the Shaker Group. This transaction is referred to as the
"Second Exchange". Prior to the Second Exchange, the Company will pay to Corey
Shaker $50,000 in consideration of the Company's purchase of all of the stock
options which he received from the Company. In addition, all other outstanding
options to acquire shares of Common Stock of the Company that are owned by the
members of the Shaker Group will be terminated.
- 20 -
The shares of stock of Shaker Auto Group received by the Shaker Group will
be allocated to each member of the Shaker Group in the proportion that the sum
of his or her shares of Class A Common Stock and Class B Common Stock bears to
the total number of shares of Class A Common Stock and Class B Common Stock
owned by all of the members of the Shaker Group.
Following the consummation of the Second Exchange, the Shaker Group will
be the owners of Shaker Auto Group and the New England Subsidiaries, and will no
longer have any interest in the Company. In addition, following the consummation
of the Second Exchange, the Muller Group will be the controlling stockholders of
the Company, and the Company will no longer have any interest in Shaker Auto
Group or any of the New England Subsidiaries. Moreover, due to the Second
Exchange, the stockholders of the Company other than the Shaker Group and the
Muller Group will obtain a greater percentage interest in the Company, and
indirectly in the New York/New Jersey Subsidiaries.
Conditions to the Consummation of the Exchanges
The obligations of the Company, the Shaker Group and the Muller Group to
consummate the First Exchange and the Second Exchange are subject to the
conditions set forth in the Exchange Agreement, a copy of which is attached to
this Information Statement as Appendix A. Those conditions include the
following:
Approval of the Exchanges by the Stockholders The stockholders of the
Company approved the First Exchange and the Second Exchange on June 2,
2005 through the written consent of the holders of a majority of the
voting power of the Class A Common Stock and the Class B Common Stock.
Pursuant to Section 228(e) of the General Corporation Law of Delaware, the
written consent of stockholders holding a majority of the voting power of
the outstanding shares of stock of the Company is sufficient to approve
any actions submitted to the stockholders for their approval. NO SPECIAL
MEETING OF THE STOCKHOLDERS WILL BE HELD TO CONSIDER THE APPROVAL OF THE
EXCHANGES.
Cash Shaker Auto Group must have cash totaling not less than $5 million
(as adjusted based on the value, as of the effective date of the First
Exchange, of the used cars held in inventory by the New England
Subsidiaries, the parts and accessories held in inventory by the New
England Subsidiaries, and the accounts receivable, accounts payable and
accrued expenses of the New England Subsidiaries). See "The Exchanges -
Tax-Free Exchange of Stock of New England Subsidiaries".
Approval of Transfer of Franchises Ford, Chrysler/Dodge/Jeep,
Lincoln/Mercury, Mazda, Toyota and Chevrolet must have approved Shaker
Auto Group as the transferee of the franchises held by the New England
Subsidiaries. In addition, Shaker Auto Group must have obtained floor plan
financing.
- 21 -
Release of Certain Liabilities The Shaker Group must obtain the release of
the Company and the Muller Group from any obligation, either as a
guarantor or otherwise, relating to the liabilities of Shaker Auto Group
and the New England Subsidiaries (including the obligations of the Company
relating to the real property leased by the New England Subsidiaries for
their business operations). In particular, the Shaker Group must obtain
the release of the Company and the Muller Group from any liabilities
relating to: (a) the debt related to the rental cars used in the business
of the New England Subsidiaries; (b) that portion of the debt owed to The
First National Bank of Chicago, as Trustee For The Registered Holders of
Falcon Franchise Loan Trust 1991-1 Franchise Loan Backed Bonds (as
successor in interest to Falcon Financial, LLC) referred to in the letter
dated April 30, 2005 and identified as loan number 815010 as evidenced by
a promissory note from Bay State Realty Holdings, Inc. dated April 16,
1999 in the original principal amount of $5,800,000.00; (c) the debt owed
to Merchants Bank as evidenced by a promissory note from Brattleboro
Realty Holdings, Inc. dated June 10, 2004 in the original principal amount
of $1,050,000.00; (d) the debt owed to Ford Motor Company Credit in
connection with floor plan financing; (e) the debt owed to Ford Motor
Company Credit that is financing certain Daewoo Motor Co., Ltd. vehicles;
(f) the debt owed to Bank of America, N.A., as evidenced by a promissory
note from Shaker's Inc. dated December 23, 2004 in the original principal
amount of $225,000.00; and (g) the debt owed to Consenzi Automotive Realty
Limited Partnership, as evidenced by a promissory note from Brattleboro
Realty Holdings, Inc. dated June 10, 2004 in the original principal amount
of $300,000.00.
Other Approvals of the Exchanges The Company, Shaker Auto Group, the New
England Subsidiaries, the Shaker Group, and/or the Muller Group must
obtain all other approvals that are necessary to effectuate the
consummation of the First Exchange and the Second Exchange, including but
not limited to any required approvals of manufacturers, lenders, and
lessors. No federal or state regulatory approvals are required in
connection with the exchanges.
Fairness Opinion On June 1, 2005, the Special Committee of the Board of
Directors of the Company obtained an opinion from Duff & Phelps LLC
indicating that the exchanges are fair, from a financial point of view, to
the unaffiliated public stockholders of the Company (i.e., the
stockholders of the Company who are not directors or officers of the
Company and who are not affiliated with the Shaker Group or any entities
that the Shaker Group or any member thereof controls).
Tax-Free Exchange Opinion On June 1, 2005, the Company obtained an opinion
from BDO Seidman, LLP, the independent registered public accountants for
the Company, indicating that the consummation of the First Exchange and
the Second Exchange will qualify as tax-free exchanges under the Internal
Revenue Code of 1986, as amended, and will not cause the recognition of
income by either the Company, Shaker Auto Group, the New England
Subsidiaries, or the Shaker Group.
- 22 -
Information Statement Pursuant to Rule 14c-2 issued under the Securities
Exchange Act of 1934, as amended, every stockholder of the Company must be
provided a copy of this Information Statement at least twenty (20)
calendar days prior to the date on which the First Exchange and the Second
Exchange will become effective. The Company anticipates that these actions
will become effective during the third quarter of 2005. The Company has
asked brokers and other custodians, nominees and fiduciaries to forward
this Information Statement to the beneficial owners of the Common Stock
held of record by such persons, and will reimburse such persons for
out-of-pocket expenses incurred in forwarding such material.
Opinion of the Financial Advisor to the Special Committee of the Board of
Directors
Duff & Phelps LLC, a Chicago-based investment banking and financial
advisory firm, served as financial advisor to the Special Committee of the Board
of Directors of the Company. Founded in 1932, Duff & Phelps LLC is one of the
leading middle market investment banking and independent financial advisory
firms in the United States. Duff & Phelps LLC has significant expertise and
experience in fairness opinions, business valuations, solvency opinions,
structuring ESOP/ERISA transactions, buy-side and sell-side merger and
acquisition advisory services, and intangible asset and intellectual property
valuations. Headquartered in Chicago, Duff & Phelps LLC has offices in New York,
Los Angeles, San Francisco, Seattle, and Atlanta. Each year, Duff & Phelps LLC
renders approximately 400 opinions, including fairness opinions, business
valuation opinions, solvency opinions, tax-related financial opinions, and other
financial opinions.
As part of its engagement as independent financial advisor to the Special
Committee, Duff & Phelps LLC was asked to render an opinion with respect to the
fairness of the consideration to be received by the Company as a result of the
exchanges, from a financial point of view, to the unaffiliated public
stockholders of the Company (i.e., the stockholders of the Company who are not
directors or officers of the Company and who are not affiliated with the Shaker
Group or any entities that the Shaker Group or any member thereof controls).
Duff & Phelps LLC rendered a written opinion to the Special Committee that, on
June 1, 2005, the exchanges are fair, from a financial point of view, to the
unaffiliated public stockholders of the Company (i.e., the stockholders of the
Company who are not directors or officers of the Company and who are not
affiliated with the Shaker Group or any entities that the Shaker Group or any
member thereof controls), without giving effect to any impact of the proposed
exchanges on any particular stockholder other than in its capacity as a
stockholder.
The opinion of Duff & Phelps LLC is attached as Appendix B to this
Information Statement and is incorporated herein by reference. THE STOCKHOLDERS
OF THE COMPANY ARE ENCOURAGED TO READ THIS OPINION IN ITS ENTIRETY FOR A
DESCRIPTION OF THE ASSUMPTIONS MADE, MATTERS CONSIDERED, AND LIMITATIONS ON THE
REVIEW UNDERTAKEN.
- 23 -
The opinion of Duff & Phelps LLC is directed to the Special Committee, and
does not constitute a recommendation with respect to any matter relating to the
proposed exchanges. Furthermore, Duff & Phelps LLC does not address the relative
merits of the proposed exchanges and any other transactions or business
strategies discussed by the Company's Board of Directors as alternatives to the
exchanges, or the underlying business decision of the Company's Board of
Directors to proceed with or effect the exchanges.
While this summary describes the analysis and factors that Duff & Phelps
LLC deemed material in its presentation to the Special Committee, it is not a
comprehensive description of all analyses and factors considered by Duff &
Phelps LLC. The preparation of a fairness opinion is a complex process that
involves various determinations as to the most appropriate and relevant methods
of financial analysis and the application of these methods to the particular
circumstances. Therefore, a fairness opinion is not readily susceptible to
partial analysis or a summary description. In arriving at its opinion, Duff &
Phelps LLC did not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor. Accordingly, Duff & Phelps LLC
believes that its analyses must be considered as a whole, and that selecting
portions of its analyses and of the factors considered by it, without
considering all analyses and factors, could create a misleading or incomplete
view of the evaluation process underlying its opinion. Several analytical
methodologies were employed, and no one method of analysis should be regarded as
critical to the overall conclusion reached by Duff & Phelps LLC. Each analytical
technique has inherent strengths and weaknesses, and the nature of the available
information may further affect the value of particular techniques. The
conclusion reached by Duff & Phelps LLC is based on all analyses and factors
taken, as a whole, and also on the application of Duff & Phelps LLC's own
experience and judgment. This conclusion may involve significant elements of
subjective judgment and qualitative analysis. Duff & Phelps LLC gives no opinion
as to the value or merit, standing alone, of any one or more parts of the
analysis it performed. In performing its analyses, Duff & Phelps LLC made
numerous assumptions with respect to the industry outlook, general business and
other conditions and matters, many of which are beyond the control of the
Company or Duff & Phelps LLC. Any estimates contained in these analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than those suggested
by these analyses. Accordingly, analyses relating to the value of businesses do
not purport to be appraisals or to reflect the prices at which these businesses
actually may be sold in the future, and these estimates are inherently subject
to uncertainty.
Listing of Items Reviewed by Duff & Phelps LLC. In connection with its
opinion, Duff & Phelps LLC made such reviews, analyses and inquiries as it
deemed necessary and appropriate under the circumstances. No limits were placed
on Duff & Phelps LLC by the Company, the Special Committee or the Board of
Directors in terms of the information to which Duff & Phelps LLC had access or
the matters it could consider. The due diligence of Duff & Phelps LLC with
regards to the proposed exchange included, but was not limited to, the actions
summarized below:
- 24 -
o Conducted meetings with members of the senior management team of the
Company on February 23-25, 2005, including Corey Shaker, President,
Chief Executive Officer and Chief Operating Officer; Charles F.
Schwartz, Chief Financial Officer & Secretary; William C. Muller,
Jr., Regional Vice President - South Division; Joseph Shaker,
Regional Vice President - East Division; and Steven Shaker, Regional
Vice President - North Division. Additionally, Duff & Phelps LLC
toured the respective dealerships located in Wellesley and
Framingham, Massachusetts; Brattleboro, Vermont; Waterbury,
Watertown and Naugatuck, Connecticut; New Windsor, New York; and
Clinton and Stewartsville, New Jersey.
o Reviewed the Company's consolidated and consolidating financial
statements and SEC filings, including the annual report on Form 10-K
for the fiscal years ended December 31, 2000 through December 31,
2004, and the quarterly report on Form 10-Q for the three months
ended March 31, 2005.
o Reviewed the Company-prepared budget for fiscal 2005, and
projections for fiscal years 2006 through 2011.
o Reviewed summary information, provided by management, regarding the
Company's overhead allocations.
o Reviewed Company-prepared pro-forma March 31, 2005 balance sheets,
reflecting adjustments related to the proposed transactions.
o Reviewed information provided by management regarding franchisee
working capital and cash requirements for certain dealerships.
o Analyzed the historical trading price and trading volume of the
Company's common stock.
o Reviewed drafts of the Exchange Agreement and Information Statement.
o Reviewed a draft of the tax opinion prepared by BDO Seidman, LLP
dated May 31, 2005.
o Reviewed a real estate appraisal for Bay State Lincoln-Mercury,
dated October 3, 2002, and prepared by Landauer Realty Group.
o Reviewed certain other relevant, publicly available information,
including economic, industry, and investment information.
In connection with its fairness opinion, with the Company's permission and
without any independent verification, Duff & Phelps LLC assumed that all
information reviewed by it with respect to the Company and the proposed
exchanges, whether supplied by the Company or its advisors, or obtained by Duff
& Phelps LLC from publicly available sources, is true, correct and complete in
all material respects and does not contain any untrue statements of material
fact or omit to state a material fact necessary to make the information supplied
to Duff & Phelps LLC not misleading. Duff & Phelps LLC did not make an
independent valuation or appraisal of the assets or liabilities of the Company
and was not furnished with such valuation or appraisal. Any inaccuracies in, or
omissions from, the information on which Duff & Phelps LLC relied could
materially affect its fairness opinion.
- 25 -
Opinion and Analysis of Duff & Phelps LLC. Set forth below is a summary of
the analyses performed by Duff & Phelps LLC in reaching its fairness conclusions
as of June 1, 2005. Although developments following the date of the Duff &
Phelps LLC opinion may affect the opinion, Duff & Phelps LLC assumes no
obligation to update, revise, or reaffirm its opinion. The Duff & Phelps LLC
opinion is necessarily based upon market, economic and other conditions that
were in effect on, and information made available to Duff & Phelps LLC as of,
the date of the opinion. As a result, subsequent developments may affect the
conclusion expressed in the Duff & Phelps LLC opinion, and Duff & Phelps LLC
disclaims any undertaking or obligation to advise any person of any change in
any fact or matter affecting its opinion. The Duff & Phelps LLC opinion is
limited to the fairness of the terms of the proposed exchanges to the
unaffiliated common stockholders of the Company, from a financial point of view,
as of June 1, 2005.
Duff & Phelps LLC performed a valuation analysis of the Company's common
stock to determine whether the consideration to be received by the Company is
adequate relative to the value of the assets and liabilities transferred to the
Shaker Group.
As part of the valuation analysis of the Company's common stock, Duff &
Phelps LLC performed the following analyses: current and historical stock price
analysis, discounted cash flow analysis, comparable public company analysis, and
liquidation analysis for certain unprofitable dealerships.
Current and Historical Stock Price Analysis
Duff & Phelps LLC analyzed the closing price and trading volume of the
Class A common stock of the Company over the past 12 months and three years.
The Company's Class A common stock trades on the National Association of
Securities Dealers Automated Quotation System over-the-counter bulletin board
(the "NASD OTC Bulletin Board") under the symbol "HCAR.OB." The Company's Class
B common stock is not publicly traded.
As part of its analysis, Duff & Phelps LLC analyzed the historical daily
stock prices and daily trading volume levels for the Company's Class A common
stock for: (i) the one-year period from May 25, 2004, to May 25, 2005; and (ii)
the three-year period from May 25, 2002, to May 25, 2005.
During the time period in (i) above, the Company's common stock traded
between its 52-week low of $0.68 on November 3, 2004, and its 52-week high of
$1.39 on May 17, 2005, with an average reported per share closing price of $1.23
over the previous three-month period ending May 25, 2005.
Although there are 3,870,137 Class A common shares outstanding, the Shaker
Group owns or controls approximately 63.0% of the shareholder vote through its
combined ownership of Class A and Class B common shares. There has also been
limited trading volume in the Company's common stock during the previous 52
weeks.
- 26 -
Comparable Public
Company Company Median
------- --------------
Average daily trading volume for
previous 12 months: 11,077 shares 172,000 shares
Public float: 2.7 million shares 24.9 million shares
Out of a possible 262 total trading days during the last 12 months, the
Company's Class A common stock traded on only 176 days. On the days the Class A
common stock did trade, average daily trading volume was only 11,077 shares. In
its analysis, Duff & Phelps LLC also considered the lack of analyst coverage for
the Company's Class A common stock.
Based on these analyses, Duff & Phelps LLC observed that the Company's
Class A common stock trades less actively than the comparable public companies,
and that the Company's common stock has a significantly smaller float.
Additionally, the Company's stock price may reflect the adverse impact of recent
litigation and an implicit discount due to the Company's dual class equity
structure and unequal voting rights with respect thereto.
While Duff & Phelps LLC did not rely on the public share price for the
Company's Class A common stock, Duff & Phelps LLC did note that the average
trading price for the Class A common stock during the three-month period ended
May 25, 2005, was $1.23.
Discounted Cash Flow Analysis
The discounted cash flow ("DCF") analysis determines the net present value
of future free cash flows, assuming a weighted average cost of capital for the
discount rate. Duff & Phelps LLC performed a discounted cash flow ("DCF")
analysis of the projected free cash flows of the Company on a consolidated,
going concern basis. Free cash flow is defined as cash that is available to
either reinvest or to distribute to security holders.
The projected free cash flows are discounted to the present at a rate
which reflects the relative risk associated with these cash flows as well as the
rates of return that security holders could expect to realize on alternative
investment opportunities. Duff & Phelps LLC discounted the resulting free cash
flows and terminal value at rates of 15.0% to 17.0%.
The Company's management provided Duff & Phelps LLC with a budget for the
fiscal year ending December 31, 2005. Based on an extrapolation of the Company's
historical performance and the 2005 budget, Duff & Phelps LLC estimated the
Company's future performance for the fiscal years ending December 31, 2006
through 2014. Beyond the projection period, Duff & Phelps LLC estimated the
"continuing value" of the Company by utilizing a commonly-accepted perpetuity
formula. This continuing value is equivalent to the present value of all cash
flows after the projection period. The "continuing value" calculation is
supported by implied multiples of terminal year EBITDA and revenues.
- 27 -
Duff & Phelps LLC's DCF analysis results in a concluded enterprise value
for the Company of $31.2 million (including $5.4 million of capitalized
operating leases), or $2.18 per share, on a fully diluted basis.
Comparable Public Company Analysis
Duff & Phelps LLC selected a set of publicly traded companies based on
comparability to the Company. Although no single company chosen is identical to
the Company, these companies share many of the same operating characteristics
and are affected by many of the same economic forces.
In the selection of the comparable companies, Duff & Phelps LLC used
multiple databases to identify domestic companies with primary Standard
Industrial Classification Codes of 5500 (auto dealers). Duff & Phelps LLC
identified six companies that were considered to be reasonably comparable to the
Company.
Using publicly available information, Duff & Phelps LLC analyzed the
historical financial performance of the comparable companies for the latest
twelve months ("LTM"), as well as projected financial performance using
regularly published earnings estimates from securities analysts.
Duff & Phelps LLC compared the Company's recent financial performance to
the financial performance of the comparable companies. The table below shows the
Company and the comparable companies along with their respective LTM revenues;
earnings before interest, taxes, depreciation, amortization and rent expense
("EBITDAR"); and growth, as of May 25, 2005.
- 28 -
- ----------------------------------------------------------------------------------------------------
Company (Ticker) LTM Revenues LTM EBITDAR 3-Year Revenue LTM EBITDAR
(in millions) Margin Compound Annual Growth
Growth
- ----------------------------------- -------------- ---------------- ----------------- --------------
Asbury Automotive Group, Inc. (ABG) $ 5,431.5 3.8% 10.2% 20.1%
AutoNation, Inc. (AN) $19,344.6 4.3% 0.6% 0.7%
Group 1 Automotive, Inc. (GPI) $ 5,684.7 3.7% 10.8% 11.2%
Lithia Motors, Inc. (LAD) $ 2,778.7 4.3% 15.8% 17.3%
Sonic Automotive, Inc. (SAH) $ 7,516.7 4.1% 10.9% 3.8%
United Auto Group, Inc. (UAG) $10,086.8 3.6% 23.0% 15.3%
Mean $ 8,473.8 4.0% 11.9% 11.4%
Median $ 6,600.7 3.9% 10.8% 13.2%
Hometown (1) $ 223.4 3.1% -1.7% 0.0%
- ----------------------------------------------------------------------------------------------------
(1) Hometown performance based on pro forma financial performance excluding
Westwood Lincoln-Mercury.
Due to significant differences in size, product and geographic diversity,
capitalization, and management depth between the Company and comparable
companies, Duff & Phelps LLC determined the comparable public company method to
be less meaningful than the DCF methodology. Thus, the comparable public company
analysis was utilized to confirm the DCF value conclusion. As such, Duff &
Phelps LLC compared valuation multiples implied by the DCF enterprise value
conclusion for the Company with valuation multiples for the comparable
companies. This comparison is summarized in the table below.
- -----------------------------------------------------------------------------------------------------
Company (Ticker) Enterprise Value Enterprise Value as a Enterprise Value as
as a Multiple of Multiple of Projected a Multiple of LTM
LTM EBITDAR EBITDAR Revenue
- ------------------------------------ -------------- ---------------- --------------------------------
Asbury Automotive Group, Inc. (ABG) 5.9x 5.6x 0.22x
AutoNation, Inc. (AN) 7.8x 7.3x 0.34x
Group 1 Automotive, Inc. (GPI) 5.2x 4.7x 0.19x
Lithia Motors, Inc. (LAD) 7.2x 5.7x 0.31x
Sonic Automotive, Inc. (SAH) 7.6x 6.9x 0.31x
United Auto Group, Inc. (UAG) 7.8x 7.2x 0.28x
Mean 6.9x 6.2x 0.28x
Median 7.4x 6.3x 0.29x
Hometown (1) 4.5x 3.5x 0.14x
- -----------------------------------------------------------------------------------------------------
(1) Hometown multiples based on a DCF enterprise value of $31.2 million and pro
forma financial performance excluding Westwood Lincoln-Mercury
- 29 -
Liquidation Analysis
Since certain of the Company's dealerships are operating at a loss and
thus contributing negative value in the consolidated DCF analysis, Duff & Phelps
LLC also performed a liquidation analysis (also known as a net asset value
analysis) for these dealerships. This involves an analysis of the estimated
market value of the respective dealerships' operating assets and liabilities and
related transaction costs that the Company may reasonably expect to realize in
an orderly liquidation of these dealerships (excluding mortgage debt, which is
captured separately in long-term debt and subtracted from adjusted enterprise
value to determine an equity value; see the table in "Hometown Equity Value"
below).
The liquidation analysis indicates that the values for Wellesley Mazda,
Bay State Lincoln-Mercury, and Brattleboro Chrysler-Jeep are higher on a net
asset value basis than as a going-concern in Duff & Phelps LLC's DCF models. The
liquidation analyses for these dealerships are summarized below.
Wellesley Mazda Liquidation Analysis
- -------------------------------------------------------------------------------------------------------------
Assets March 31, 2005 Estimated % Estimated
Balance Sheet Realized Liquidation
(1) Proceeds
- ------------------------------------------------ ---------------- ---------------- -----------------
Cash and Equivalents $ 0 100% $ 0
Accounts Receivable 200,000 90% 180,000
Inventory 2,500,000 95% 2,375,000
Prepaid Expenses 0%
0 0
Real Estate at Market Value 100%
0 0
Other Deferred Charges 0%
0 0
-----------
Estimated Liquidation Value of Assets 2,555,000
Less: Estimated Liquidation Costs and Fees(2) (255,500)
-----------
Estimated Liquidation Proceeds Available for
Distribution $ 2,299,500
===========
- -------------------------------------------------------------------------------------------------------------
(1) Represents post-closing estimated balance sheet
(2) Duff & Phelps LLC estimate at 10% of asset liquidation value
- -------------------------------------------------------------------------------------------------------------
Liabilities Amount of Claim Available to Estimated %
Satisfy Claim Recovery
- ------------------------------------------------ ---------------- ---------------- -----------------
Estimated Proceeds Available for Distribution $ 2,299,500
Accrued Expenses $ 50,000 $ 50,000 100%
Floor Plan Debt 2,500,000 2,500,000 100%
Accounts Payable 50,000 50,000 100%
--------- ------------ ----
Total Claims 2,600,000 2,600,000 100%
Amount Available to Pay Long-Term Debt and
Equity ($ 300,500)
============
- -------------------------------------------------------------------------------------------------------------
- 30 -
Duff & Phelps LLC's liquidation value for Wellesley Mazda is ($300,500),
compared to a DCF value of ($789,030).
Bay State Lincoln-Mercury Liquidation Analysis
- -------------------------------------------------------------------------------------------------------------
Assets March 31, Estimated % Estimated
2005 Balance Realized Liquidation
Sheet (1) Proceeds
- -------------------------------------------------- -------------- ---------------- -----------------
Cash and Equivalents ($ 33,693) 100% ($ 33,693)
Accounts Receivable 779,645 90% 701,681
Inventory 5,021,166 95% 4,770,108
Prepaid Expenses 39,712 0% 0
Real Estate at Market Value(2) 6,200,000 100% 6,200,000
Other Deferred Charges 6,500 0% 0
-----------
Estimated Liquidation Value of Assets 11,638,095
Less: Estimated Liquidation Costs and Fees(3) (1,163,810)
Less: Prepayment Penalty and Related Costs (1,400,000)
-----------
Estimated Liquidation Proceeds Available for
Distribution $ 9,074,286
===========
- -------------------------------------------------------------------------------------------------------------
(1) Represents post-closing estimated balance sheet
(2) Based on information provided by management
(3) Duff & Phelps LLC estimate at 10% of asset liquidation value
- -------------------------------------------------------------------------------------------------------------
Liabilities Amount of Available to Estimated %
Claim Satisfy Claim Recovery
- -------------------------------------------------- -------------- ---------------- -----------------
Estimated Proceeds Available for Distribution $9,074,286
Accrued Expenses $ 122,137 $ 122,137 100%
Floor Plan Debt 5,169,025 5,169,025 100%
Accounts Payable 179,242 179,242 100%
---------- ---------- ----
Total Claims 5,470,404 5,470,404 100%
Amount Available to Pay Long-Term Debt and Equity $3,603,882
==========
- -------------------------------------------------------------------------------------------------------------
Duff & Phelps LLC's liquidation value for Bay State Lincoln-Mercury is $3.6
million, compared to a DCF value of ($1.4 million).
- 31 -
Brattleboro Chrysler-Jeep Liquidation Analysis
- -------------------------------------------------------------------------------------------------------------
Assets March 31, 2005 Estimated % Estimated
Balance Sheet Realized Liquidation
(1) Proceeds
- ------------------------------------------------ ---------------- ---------------- -----------------
Cash and Equivalents $ 89,924 100% $ 89,924
Accounts Receivable 451,856 90% 406,670
Inventory 3,272,233 95% 3,108,621
Prepaid Expenses 18,147 0% 0
Real Estate at Market Value(2) 1,500,000 100% 1,500,000
Other Deferred Charges 0 0% 0
----------
Estimated Liquidation Value of Assets 5,105,216
Less: Estimated Liquidation Costs and Fees(3) (510,522)
Estimated Liquidation Proceeds Available for
Distribution $4,594,694
==========
- -------------------------------------------------------------------------------------------------------------
(1) Represents post-closing estimated balance sheet
(2) Based on recent purchase price of property
(3) Duff & Phelps LLC estimate at 10% of asset liquidation value
- -------------------------------------------------------------------------------------------------------------
Liabilities Amount of Claim Available to Estimated %
Satisfy Claim Recovery
- ------------------------------------------------ ---------------- ---------------- -----------------
Estimated Proceeds Available for Distribution $ 4,594,694
Accrued Expenses $ 69,649 $ 69,649 100%
Floor Plan Debt 3,312,215 3,312,215 100%
Accounts Payable 103,528 103,528 100%
---------- ----------- ----
Total Claims 3,485,392 3,485,392 100%
Amount Available to Pay Long-Term Debt and
Equity $ 1,109,302
===========
- -------------------------------------------------------------------------------------------------------------
Duff & Phelps LLC's liquidation value for Brattleboro Chrysler-Jeep is
$1.1 million, compared to a DCF value of ($159,391).
Incorporating the higher of the net asset value from the liquidation
analyses and the adjusted enterprise value from the DCF analyses for the
respective dealerships in Duff & Phelps LLC's valuation of the Company's common
stock results in an enterprise value of $37.9 million (including $5.4 million of
capitalized operating leases).
- 32 -
Hometown Equity Value
Duff & Phelps LLC determined the value of the shares held by the Shaker
Group based on its $31.2 million to $37.9 million enterprise value range for the
Company. Enterprise value was then adjusted for cash, debt, and certain other
assets and liabilities, based on the Company's balance sheet as of March 31,
2005, including:
o Subtracted the $5.4 million value of the capitalized operating
leases.
o Added an estimated $1.4 million value for the Company's tax assets,
which include a net operating loss and tax-deductible goodwill
amortization. Duff & Phelps LLC estimated the value of these tax
assets based on an analysis of the Company's ability to utilize
these assets over their remaining lives.
o Subtracted $629,443 related to working capital deficiencies from the
adjusted enterprise value, and added $896,734 in excess working
capital to the higher of adjusted enterprise value or net asset
value.
o Subtracted $3.6 million related to minimum dealer cash requirements
from the adjusted enterprise value, and subtracted $2.4 million
related to minimum dealer cash requirements from the higher of
adjusted enterprise value or net asset value.
The Company's respective automotive manufacturers (the "Manufacturers")
require their dealer franchisees to maintain certain minimum levels of working
capital and cash. Manufacturers determine these requirements for each auto
dealership individually. Several of the Company's auto dealerships have working
capital and cash deficiencies per their respective Manufacturer requirements.
The DCF enterprise value reflects fully capitalized dealerships. To the
extent that the Company's dealerships have working capital and cash
deficiencies, Duff & Phelps LLC has made adjustments to the enterprise value to
reflect the additional investment necessary to meet Manufacturer requirements.
Summary details of Duff & Phelps LLC's equity value range of $1.23 to
$3.64 for the Company's common stock are included in the following table.
- 33 -
- -------------------------------------------------------------------------------------------------------------
3-Month Adjusted Higher of Adjusted
Average Common Enterprise Enterprise Value or
Stock Price (1) Value Net Asset Value
- -------------------------------------------------- ------------------- ---------------- ---------------------
Enterprise Value (2) $ 31,204,663 $ 37,930,128
Plus: Cash 5,336,398 5,336,398
Plus: Tax Asset Value 1,386,096 1,386,096
Less: Working Capital Deficiency (629,443) 896,734
Less: Minimum Dealer Cash Requirement (3,552,862) (2,360,806)
Less: Value of Capitalized Operating Leases (5,377,219) (5,377,219)
Less: Long-Term Debt(3) (13,998,073) (13,998,073)
------------ ------------
Aggregate Equity Value 14,369,559 23,813,258
Less: Management Options (307,318) (307,318)
------------ ------------
Common Equity Value 14,062,241 23,505,940
Common Shares Outstanding (Including A and B 6,449,389 6,449,389
Classes) ------------ ------------
Value Per Common Share $ 1.23 $ 2.18 $ 3.64
========== ============ ============
Value of Common Stock Held by the Shaker Group $3,203,210 $ 5,677,234 $ 9,479,419
========== ============ ============
- -------------------------------------------------------------------------------------------------------------
(1) Average trading price for the Class A common stock for the three month
period ended May 25, 2005
(2) Enterprise Value includes $5.38 million value of capitalized operating
leases
(3) Includes mortgage debt
Valuation Analysis of Assets and Liabilities to be Received by the Shaker
Group
Duff & Phelps LLC performed an individual valuation analysis for each of
the auto dealerships to be received by the Shaker Group.
Duff & Phelps LLC utilized a discounted cash flow ("DCF") analysis of the
projected free cash flows of each auto dealership to determine the enterprise
value of each on a going concern basis. Free cash flow is defined as cash that
is available to either reinvest or to distribute to security holders. The
projected free cash flows are discounted to the present at a ratethat reflects
the relative risk associated with these cash flows as well as the rates of
return which security holders could expect to realize on alternative investment
opportunities. Duff & Phelps LLC discounted the resulting free cash flows and
terminal value for each dealership at rates of 15.0% to 17.0%.
The Company's management provided Duff & Phelps LLC with a budget for the
fiscal year ending December 31, 2005, for each of the auto dealerships and the
service center. Based on the historical performance and budget for each
dealership and the service center, Duff & Phelps LLC estimated the respective
auto dealerships' performance for the fiscal years ending December 31, 2006
through 2014. Beyond the projection period, Duff & Phelps LLC estimated the
"continuing value" of each auto dealership and the service center by utilizing a
commonly accepted perpetuity formula. This continuing value is equivalent to the
present value of all cash flows after the projection period.
- 34 -
The DCF enterprise values determined for each dealership (and the
consolidated DCF discussed previously) reflect fully capitalized dealerships. To
the extent that a dealership has working capital and cash deficiencies, Duff &
Phelps LLC has made adjustments to the enterprise value to determine the
adjusted enterprise value of each dealership. These adjustments reflect the
additional investment necessary to meet Manufacturer requirements.
Duff & Phelps LLC's DCF analysis results in a concluded adjusted
enterprise value of $926,404 for the dealerships to be received by the Shaker
Group, as summarized below.
- ------------------------------------------------------------------------------------------------------------
Enterprise Working Capital Cash, Net of Adjusted Enterprise
Value (1) Deficiency Requirement Value
- ----------------------------- --------------- ------------------ --------------------- ---------------------
Wellesley Mazda $ 99,955 ($ 492,408) ($ 396,577) ($ 789,030)
Bay State Lincoln-Mercury 20,114 (669,091) (715,383) (1,364,360)
Brattleboro Chrysler-Jeep 285,383 (364,679) (80,095) (159,391)
Shaker Lincoln-Mercury 1,117,265 555,416 (129,777) 1,542,904
Shaker Auto Care 417,870 0 0 417,870
Family Ford $1,885,880 ($ 104,309) ($ 503,159) $ 1,278,412
---------- ----------- ----------- -----------
Shaker Group Dealerships $ 926,404
===========
- ------------------------------------------------------------------------------------------------------------
(1) Enterprise Value excludes value of capitalized operating leases
As discussed previously, certain of the Company's dealerships are
operating at a loss, and thus contributing negative value in the consolidated
DCF analysis. Duff & Phelps LLC performed a liquidation analysis for these
dealerships. The liquidation analysis results in net asset values that are
greater than the adjusted enterprise values from the DCF analyses for Wellesley
Mazda, Bay State Lincoln-Mercury, and Brattleboro Chrysler-Jeep. These
dealerships are included in the assets and liabilities to be received by the
Shaker Group.
In the aggregate, the higher of adjusted enterprise value (from the DCF
analysis) or net asset value (from the liquidation analysis) for the dealerships
to be received by the Shaker Group is $7.7 million, as summarized in the
following table:
- 35 -
- ------------------------------------------------------------------------------------------------------------
Adjusted Net Asset Value Higher of Adjusted
Enterprise Value Enterprise Value or
Net Asset Value
-------------------- ------------------- ----------------------
Wellesley Mazda ($ 789,030) $ 300,500 $ 300,500
Bay State Lincoln-Mercury (1,364,360) 3,564,782 3,603,882
Brattleboro Chrysler-Jeep (159,391) 1,109,302 1,109,302
Shaker Lincoln-Mercury 1,542,904 N/A 1,542,904
Shaker Auto Care 417,870 N/A 417,870
Family Ford 1,278,412 N/A 1,278,412
------------- ----------
Shaker Group Dealerships $ 926,404 $7,651,869
============= ==========
- ------------------------------------------------------------------------------------------------------------
The adjusted enterprise value and the higher of adjusted enterprise value
or net asset value were then adjusted for cash, debt, and certain other assets
and liabilities (per the terms of the Exchange Agreement), based on the
Company's balance sheet as of March 31, 2005, to derive a per share equity value
range of ($0.38) to $2.02 for the assets and liabilities to be received by the
Shaker Group. This analysis is summarized in the table below:
- --------------------------------------------------------------------------------
Adjusted Higher of
Enterprise Value Adjusted
Enterprise Value
or Net Asset Value
------------------ ------------------
Shaker Group Dealerships $ 926,404 $ 7,651,869
Less: Long-Term Debt (6,327,757) (6,327,757)
Less: Cash Adjustment (1,193,123) (1,193,123)
Less: Receivables Adjustment (1,113) (1,113)
Plus: Shaker Tax Asset Value 485,696 0
Plus: Inventory Adjustment 75,672 75,672
Plus Cash Consideration 5,050,000 5,050,000
--------- ---------
Total Value of Assets and Liabilities
to be Received by the Shaker Group ($ 984,220) $ 5,255,548
=========== ===========
Shaker Group Shares 2,604,236 2,604,236
========= =========
Value Per Common Share ($ 0.38) $ 2.02
======== ======
- --------------------------------------------------------------------------------
- 36 -
Valuation Conclusions. Based on the preceding analysis, Duff & Phelps LLC
has concluded that the value of the common stock held by the Shaker Group is
between $1.23 and $3.64 per common share, or approximately $3.2 million to $9.5
million in the aggregate, and that the value of the assets and liabilities to be
received by the Shaker Group is between ($0.38) and $2.02 per common share, or
approximately ($1.0million) to $5.3 million in the aggregate.
Summary Analysis. Based on the foregoing analysis, Duff & Phelps LLC
concluded that, as of the date of its fairness opinion, the consideration to be
received by the Company in the exchanges is fair, from a financial point of
view, to the unaffiliated public stockholders of the Company (i.e., the
stockholders of the Company who are not directors or officers of the Company and
who are not affiliated with the Shaker Group or any entities that the Shaker
Group or any member thereof controls), without giving effect to any impact of
the proposed exchanges on any particular stockholder other than in its capacity
as a stockholder.
In its review and analysis, and in arriving at its opinion, Duff & Phelps
LLC assumed and relied upon the accuracy and completeness of all the financial
and other information provided to it (including information furnished to it
orally by the management of the Company) or publicly available, and neither
attempted independently to verify, nor assumed responsibility for verifying, any
of such information. Duff & Phelps LLC relied upon the assurances of the
management of the Company that they were not aware of any facts that would make
the information inaccurate or misleading. Furthermore, Duff & Phelps LLC did not
make or obtain, or assume responsibility for making or obtaining, any
independent evaluation or appraisal of the properties, assets or liabilities
(contingent or otherwise) of the Company, nor was it furnished with any such
evaluations or appraisals.
No company used in the above analyses is identical to the Company.
Accordingly, an analysis of the results of the foregoing is not mathematical;
rather, it involves complex considerations and judgments concerning differences
in financial and operating characteristics of the companies and other facts that
could affect the public trading value of the companies to which they are being
compared.
The material analyses performed by Duff & Phelps LLC have been summarized
above. Nonetheless, the summary set forth above does not purport to be a
complete description of the analyses performed by Duff & Phelps LLC. The
preparation of a fairness opinion involves various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
these methods to the particular circumstances. Therefore, such an opinion is not
readily susceptible to a summary description. Duff & Phelps LLC did not form a
conclusion as to whether any individual analysis, considered in isolation,
supported or failed to support an opinion as to fairness. Rather, in reaching
its conclusion, Duff & Phelps LLC considered the results of the analyses in
light of each other and ultimately reached its opinion based on the results of
all analyses taken as a whole. Duff & Phelps LLC did not place a particular
reliance or weight on any particular analysis, but instead concluded that its
analyses, taken as whole, supported its determination.
- 37 -
In performing its analyses, Duff & Phelps LLC made numerous assumptions
with respect to the Company's performance, general business and economic
conditions, and other matters. The analyses performed by Duff & Phelps LLC are
not necessarily indicative of future actual values or future results, which may
be significantly more or less favorable than suggested by such analyses. The
analyses do not purport to be appraisals or to reflect prices at which a company
might actually be sold or the prices at which any securities may trade at the
present time or at any time in the future. Duff & Phelps LLC relied on
management-prepared projections of future performance for the Company and on
discussions with the management of the Company. The projections were based on
numerous variables and assumptions, which are inherently unpredictable and must
be considered not certain of occurrence as projected. Accordingly, actual
results could vary significantly from those assumed in the projections and any
related analyses. The opinion of Duff & Phelps LLC does not address the relative
merits of the proposed exchange transaction as compared to any alternative
business strategies that might exist for the Company or the effect of any other
business combination in which the Company might engage.
The opinion of Duff & Phelps LLC to the Special Committee was one of many
factors taken into consideration by the Board of Directors of the Company in
making its determination to approve the proposed exchanges.
Tax Consequences of the Exchanges
The following is a summary of United States federal income tax
consequences of the First Exchange, the Second Exchange and the other
transactions contemplated by the Exchange Agreement relevant to the stockholders
of the Company other than the Shaker Group and the Muller Group. The discussion
does not purport to consider all aspects of federal income taxation that might
be relevant to the transactions. The discussion is based on current provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), existing,
proposed and temporary regulations promulgated thereunder, and rulings,
administrative pronouncements and judicial decisions, changes to which could
materially affect the tax consequences described herein and could be made on a
retroactive basis.
The discussion applies only to beneficial holders of Common Stock of the
Company in whose hands the shares are capital assets within the meaning of Code
Section 1221, and may not apply to beneficial holders who acquired their shares
pursuant to the exercise of employee stock options or other compensation
arrangements with the Company or who are subject to special tax treatment under
the Code (such as dealers in securities, insurance companies, other financial
institutions, regulated investment companies and tax-exempt entities). In
addition, this discussion does not discuss the federal income tax consequences
to a beneficial holder of Common Stock of the Company who, for United States
federal income tax purposes, is a non-resident alien individual, a foreign
corporation, a foreign partnership, or a foreign estate or trust, nor does it
consider the effect of any state, local or foreign tax laws. Because individual
circumstances may differ, each beneficial holder of Common Stock of the Company
is urged to consult such beneficial holder's own tax advisor as to the
particular tax consequences to such beneficial holder of the transactions,
including the application and effect of state, local, foreign and other tax
laws.
- 38 -
The Company has obtained from BDO Seidman, LLP, its independent registered
public accountants, its opinion regarding whether the First Exchange, the Second
Exchange and the other transactions contemplated by the Exchange Agreement will
qualify for tax-free treatment under the Code. In providing this opinion, BDO
Seidman, LLP reviewed copies of documents related to such transactions and
relied upon the Company's description of the transactions, as well as the
representations which the Company provided to BDO Seidman, LLP in its letter
dated June 1, 2005, none of which BDO Seidman, LLP considers to be unreasonable.
BDO Seidman, LLP also relied on the Company's Form 10-Ks, as filed with the
Securities and Exchange Commission for the periods ending December 31, 2000
through December 31, 2004. In rendering its opinion, BDO Seidman, LLP assumed,
and it did not independently verify, the accuracy of the facts, the authenticity
and completeness of each of the documents, and the due capacity, authorization
and power of each party to execute such documents and to make such
representations. If any of such facts or assumptions are inaccurate in any
material respect, or the documents prove not to be authentic, the opinions
provided by BDO Seidman, LLP may not be relied upon.
Based upon and subject to the assumptions set forth in its opinion and the
analysis of the relevant statutory provisions and other legal authority in
effect on the date of the First Exchange, the Second Exchange, and the other
transactions contemplated by the Exchange Agreement, BDO Seidman, LLP is of the
opinion that, for federal income tax purposes, it is more likely than not that:
o The First Exchange, followed by the Second Exchange, will qualify as
a "reorganization" under Code Section 368(a)(1)(D). The Company and
Shaker Auto Group each would be a "party to a reorganization" within
the meaning of Code Section 368(b).
o No gain or loss will be recognized by the Company on the First
Exchange, pursuant to Code Section 361(a).
o No gain or loss will be recognized by the Company on the Second
Exchange, pursuant to Code Section 361(c).
o No gain or loss will be recognized by Shaker Auto Group on the
receipt of the New England Subsidiaries solely in exchange for
Shaker Auto Group's voting common stock, pursuant to Code Section
1032.
o No gain or loss will be recognized by (and no amount should
otherwise be included in the income of) the Shaker Group on their
receipt of voting common stock of Shaker Auto Group in the Second
Exchange, pursuant to Code Section 355(a).
o The basis of the stock of Shaker Auto Group in the hands of a member
of the Shaker Group after the Second Exchange will equal, in each
case, the individual's basis in the Company stock held immediately
before the Second Exchange, pursuant to Code Section 358(a)(1).
o The holding period of Shaker Auto Group stock received by a member
of the Shaker Group will equal, in each case, the individual's
holding period in the Company stock held immediately before the
Second Exchange provided that the stock was held by such individual
as a capital asset on the date of the Second Exchange, pursuant to
Code Section 1223(1).
- 39 -
o Earnings and profits will be allocated between the Company and
Shaker Auto Group in accordance with Code Section 312(h) and
Treasury Regulations Section 1.312-10(a) and Section
1.1502-33(e)(3).
o The states in which the Company conducts business (New Jersey, New
York, Connecticut, Massachusetts, and Vermont) each incorporate the
rules of Code Section 355 and Code Section 368. Accordingly, it is
more likely than not that the above opinions will apply for state
income tax purposes.
The opinion of BDO Seidman, LLP does not address the tax impact to the
Company or Shaker Auto Group of the Company's payment to Shaker Auto Group of
$37,500 to reimburse certain out-of-pocket costs relating to the refinancing of
a certain loan. See "Cost of Exchanges".
The opinion of BDO Seidman, LLP is not binding upon the Internal Revenue
Service or the courts, and there can be no assurance that the Internal Revenue
Service or the courts will accept the positions expressed above.
THE ABOVE DISCUSSION IS A BRIEF SUMMARY OF THE EFFECTS OF FEDERAL INCOME
TAXATION UPON THE COMPANY, SHAKER AUTO GROUP AND THE MEMBERS OF THE SHAKER GROUP
WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED BY THE EXCHANGE AGREEMENT. THIS
SUMMARY DOES NOT PURPORT TO BE COMPLETE AND DOES NOT ADDRESS THE FEDERAL INCOME
TAX CONSEQUENCES TO TAXPAYERS WITH SPECIAL TAX STATUS. IN ADDITION, THIS SUMMARY
DOES NOT DISCUSS THE PROVISIONS OF THE INCOME TAX LAWS OF ANY MUNICIPALITY,
STATE OR FOREIGN COUNTRY IN WHICH A TAXPAYER MAY RESIDE, AND DOES NOT DISCUSS
ESTATE, GIFT OR OTHER TAX CONSEQUENCES OTHER THAN INCOME TAX CONSEQUENCES. THE
COMPANY ADVISES EACH STOCKHOLDER TO CONSULT HIS OR HER OWN TAX ADVISOR REGARDING
THE TAX CONSEQUENCES OF THE EXCHANGES AND TO REFER TO THE APPLICABLE PROVISIONS
OF THE INTERNAL REVENUE CODE.
Accounting Treatment
The Company will record the 2,604,236 shares of Company common stock
received in the Second Exchange at fair market value on the effective date of
the transaction. It will be shown as a reduction of stockholders' equity as
treasury stock. The assets and liabilities being transferred under the Exchange
Agreement will be recorded as a reduction of those accounts at book value. If
the fair market value of Company common stock is less than the net book value of
the net assets being transferred, a loss will result in the transaction. See
"Pro Forma Financial Data".
- 40 -
Subsequent to the effective date of the transaction, the historical
operations of the New England Subsidiaries will be treated as discontinued
operations for financial reporting purposes.
Termination of the Exchanges
The Exchange Agreement can be terminated at any time before the effective
date of the exchanges pursuant to an amendment to the Exchange Agreement
executed by the Company, the Shaker Group and the Muller Group.
Pro Forma Financial Data
The following pro forma balance sheet presents the financial position of
the Company as if the settlement of the litigation with the Vergopias (see "The
Company - Hometown Auto Retailers, Inc."), the First Exchange, the Second
Exchange, and the other transactions contemplated by the Exchange Agreement had
occurred as of March 31, 2005. Such pro forma information is based on the
historical consolidated balance sheet data of the Company as of that date,
treating the exchanges as a tax-free reorganization for accounting and financial
reporting purposes. In the opinion of management, the accompanying pro forma
condensed consolidated balance sheet includes all material adjustments necessary
to reflect, on a pro forma basis, the effect of the above transactions on the
historical consolidated balance sheet of the Company. The pro forma consolidated
balance sheet is presented for informational purposes only, and is not
necessarily indicative of the consolidated balance sheet of the Company that
would have been reported if the transactions had been consummated on March 31,
2005, or which may be reported in the future.
- 41 -
Hometown Auto Retailers, Inc.
Unaudited Pro Forma Consolidated Balance Sheet
March 31, 2005 (in thousands, except per share amounts)
Historical |-----------Exchange Transactions----------| Pro Forma
Consolidated |--Litigation Consolidated
Balance Sheet Settlement--| Balance Sheet
(a) (b) (c) (d) (e) (f)
-------------- ----------- ---------- ------------- ----------- ------------ ---------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 5,336 $ (141) $ - $ (4,001) $ (584) $ 6,500 $ - $ 7,110
Accounts receivable, net 6,320 - - (2,900) - - 298 3,718
Inventories, net 42,930 (5,890) - (19,408) - - 292 17,924
Prepaid expenses and other
current assets 2,209 - - (199) - - (134) 1,876
----------- ----------- ---------- ------------- ----------- ------------ ---------- ---------------
Total current assets 56,795 (6,031) 30,628
- (26,508) (584) 6,500 456
Property and equipment, net 13,663 (195) - (8,857) - - - 4,611
Other assets 3,524 (11) - (459) (13) - (340) 2,701
----------- ----------- ---------- ------------- ----------- ------------ ---------- ---------------
Total assets $73,982 $ (6,237) $ - $(35,824) $ (597) $ 6,500 $ 116 $ 37,940
=========== =========== ========== ============= =========== ============ ========== ===============
LIABILITIES AND
SHAREHOLDERS EQUITY
Current liabilities:
Floor plan notes payable $42,573 $ (5,748) $ - $(18,744) $ - $ - $ - $ 18,081
Accounts payable and
accrued expenses 5,750 - (943) (1,289) - - (149) 3,369
Current maturities of
long-term debt and
capital lease obligations 5,477 (43) - (4,828) - 770 - 1,376
Deferred revenue 664 - - (510) - - - 154
----------- ----------- ---------- ------------- ----------- ------------ ---------- ---------------
Total current liabilities 54,464 22,980
(5,791) (943) (25,371) - 770 (149)
Long-term debt and capital
lease obligations 8,521 (97) - (1,498) - 5,730 - 12,656
Other long-term liabilities 839 - - (777) - - - 62
----------- ----------- ---------- ------------- ----------- ------------ ---------- ---------------
Total liabilities 63,824 (5,888) (943) (27,646) - 6,500 (149) 35,698
Commitments and contingencies
Stockholders' Equity
Common stock, Class A,
$.001 par value, 12,000,000
shares authorized,
authorized, 3,870,137
shares issued 4 - - - - - - 4
Common stock, Class B,
$.001 par value, 3,760,000
shares authorized,
3,519,252 shares issued 3 - - - - - - 3
Additional paid-in-capital 30,017 - - - - - - 30,017
Accumulated deficit (18,823) (349) 943 (5,053) (597) - 265 (23,614)
Less: treasury stock,
801,736 Class A shares
and 2,742,500 Class B shares (1,043) - - (3,125) - - - (4,168)
----------- ----------- ---------- ------------- ----------- ------------ ---------- ---------------
Total stockholders' equity 10,158 (349) 943 (8,178) (597) - 265 2,242
----------- ----------- ---------- ------------- ----------- ------------ ---------- ---------------
Total liabilities and
stockholders' equity $73,982 $ (6,237) $ - $ (35,824) $ (597) $ 6,500 $ 116 $ 37,940
=========== =========== ========== ============= =========== ============ ========== ===============
See accompanying notes to unaudited pro forma consolidated balance sheet.
- 42 -
Notes to Unaudited Pro forma Consolidated Balance Sheet As of March 31, 2005
(a) Reflects the assets and liabilities of Westwood Lincoln Mercury ("WLM")
transferred to the Vergopias on May 11, 2005 as part of the litigation
settlement agreement dated March 3, 2005, as if the transaction occurred
on March 31, 2005. The net assets transferred were $349,000 and is shown
as a debit to accumulated deficit.
(b) As part of the litigation settlement, the Company received 940,000 shares
of Class B Common Stock. The 940,000 shares of Company stock was recorded
at fair market value on March 3, 2005, the date of the executed settlement
agreement, and is shown as a reduction of Stockholder's Equity as Treasury
Stock of $1,043,000 in the historical balance sheet. The historical
balance sheet also reflects the $1,043,000 as a liability, pending the
assets and liability transfer to the Vergopias, reduced by transaction
costs of $100,000. The net liability of $943,000 is reclassified to
Accumulated Deficit resulting in a net gain on the recording of the
transaction of $594,000. (Net proceeds of $943,000 less net assets
transferred of $349,000.) The Company wrote off the goodwill associated
with this franchise in 2002 and expensed a $600,000 settlement payment
made in March 2005 in prior periods.
(c) Represents the assets and liabilities of the New England Subsidiaries
("NES") included in the First Exchange as if the transaction occurred on
March 31, 2005. The NES begin with $5,000,000 in cash that is adjusted up
or down according to the terms of the Exchange Agreement, determined by
the book value of assets and liabilities as of the transaction date. At
March 31, 2005, the net assets transferred exceeded the agreed upon amount
resulting in net cash included in the exchange being reduced to
$4,001,000. The net assets of the NES are $8,178,000 as of March 31, 2005.
The amount recorded as treasury stock of $3,125,000, represents the fair
market value of the 801,736 Class A and 1,802,500 Class B shares of
Company Common Stock as of March 31, 2005 received in the Second Exchange.
(d) Represents the estimated transaction costs of the exchanges and the
Comerica Bank loan of $662,000. The March 31, 2005 historical balance
sheet reflects $78,000 of these costs incurred and is reflected in other
assets. $65,000 of the transaction costs will be recorded as a financing
fee and will be amortized over the life of the loan. The remaining
$597,000 will be expensed and is shown as a debit to accumulated deficit.
(e) Represents the $6,500,000 in cash received from the loan from Comerica
Bank and the recording of the current and long-term portions of the
related loan obligation.
(f) Represents the reversal of various allowances, reserves and certain other
adjustments recorded in consolidation, associated with the NES that are
not included in the transaction. Also included is the expensing of certain
intangible assets not included in the transaction. The result of these
adjustments is an increase in retained earnings of $265,000.
- 43 -
The following pro forma consolidated statements of operations present the
financial position of the Company as if the settlement of the litigation with
the Vergopias (see "The Company - Hometown Auto Retailers, Inc."), the First
Exchange, the Second Exchange, and the other transactions contemplated by the
Exchange Agreement had occurred as of January 1, 2004. Such pro forma
information is based on the historical consolidated statements of operations
data of the Company as of that date, treating the exchanges as a tax-free
reorganization for accounting and financial reporting purposes. In the opinion
of management, the accompanying pro forma condensed consolidated statements of
operations includes all material adjustments necessary to reflect, on a pro
forma basis, the effect of the above transactions on the historical consolidated
statements of operations of the Company. The pro forma consolidated statements
of operations are presented for informational purposes only, and are not
necessarily indicative of the consolidated statements of operations of the
Company that would have been reported if the transactions had been consummated
on January 1, 2004, or which may be reported in the future. Since the
transaction will be reported as discontinued operations, statements of
operations for 2002 and 2003 have been presented for comparative purposes.
- 44 -
Hometown Auto Retailers, Inc.
Unaudited Pro Forma Consolidated Statements of Operations
For the Year Ended December 31, 2004
Historical Litigation Exchange Other Pro Forma
Consolidated Settlement Transactions Adjustments Consolidated
Income Income
Statement (a) (b) Statement
-------------- -------------- --------------- --------------- ---------------
Revenues $ 265,281 $ (41,105) $ (98,730) $ 3,957 (c) $ 129,403
Cost of sales 227,307 (36,633) (83,928) $ 3,957 (c) 110,703
-------------- -------------- --------------- --------------- ---------------
Gross profit
37,974 (4,472) (14,802) - 18,700
Selling, general and
administrative expenses 33,371 (4,101) (13,357) (853) (d) 15,060
-------------- -------------- --------------- --------------- ---------------
Income from operations 4,603 (371) (1,445) 853 3,640
Interest expense, net (3,077) 319 1,390 (177) (e) (1,545)
Other income, net 126 - 1 - 127
-------------- -------------- --------------- --------------- ---------------
Pre-tax income 1,652 (52) (54) 676 2,222
Provision (benefit) for
income taxes (2,096) - - 228 (f) (1,868)
-------------- -------------- --------------- --------------- ---------------
Net Income $ 3,748 $ (52) $ (54) $ 448 $ 4,090
============== ============== =============== =============== ===============
Earnings per share, basic $ 0.51 $ 1.06 (g)
============== ===============
Earnings per share, diluted $ 0.50 $ 1.03 (g)
============== ===============
Weighted average shares
outstanding, basic 7,286,931 3,845,153 (g)
Weighted average shares
outstanding, diluted 7,439,024 3,954,817 (g)
See accompanying notes to unaudited pro forma consolidated statements of
operations.
- 45 -
Notes to Unaudited Pro Forma Consolidated Statements of Operations For the Year
Ended December 31, 2004
(a) Reflects the operations of WLM including certain adjustments made at the
corporate level for the year ended December 31, 2004.
(b) Reflects the operations of NES including certain adjustments made at the
corporate level for the year ended December 31, 2004.
(c) Reflects the reversal of the elimination of intercompany sales for WLM and
the NES for the year ended December 31, 2004.
(d) Reflects savings associated with: (i) a reduction in salaries, payroll
taxes and employee benefits of $690,000 associated primarily with a
reduction in corporate headcount, (ii) a reduction in audit, tax and
consulting costs of $97,000 due to the reduction in number of dealerships,
and (iii) a reduction in office costs of $66,000. The headcount reductions
are permanent reductions for employees who will now be employed by the NES
and those positions that will be eliminated for which those employees will
be notified.
(e) Reflects additional interest expense associated with: (i) interest expense
from the Comerica term loan of $369,000, (ii) less a reduction in
floorplan interest expense of $263,000 due to lower interest rates from
Comerica than the companies current floorplan lender and (iii) a reduction
in interest income of $71,000 associated with investing excess cash in an
account tied to the rate paid for floorplan interest which is lower than
the rate of the company's current floorplan lender.
(f) Reflects the expected effective income tax rate of 40% times the changes
in pre-tax income.
(g) Weighted average shares outstanding, basic reflects a reduction of shares
outstanding due to the retiring of shares associated with the litigation
settlement with the Vergopias (940,000 shares) and the Exchanges
(2,604,236 shares) as if the retirement of shares took place at January 1,
2004. Weighted average shares outstanding, diluted reflects a reduction of
the shares included in the basic calculation further reduced due to a
forfeiture of stock options associated with the Exchanges. The earnings
per share basic and diluted reflect the effect of the adjusted net income
divided by the weighted average shares outstanding basic and diluted,
respectively.
- 46 -
Hometown Auto Retailers, Inc.
Unaudited Pro Forma Consolidated Statements of Operations
For the Year Ended December 31, 2003
Historical Litigation Exchange Other Pro Forma
Consolidated Settlement Transactions Adjustments Consolidated
Income Income
Statement (a) (b) Statement
-------------- -------------- --------------- --------------- ---------------
Revenues $ 279,777 $(39,864) $(108,825) $ 3,334 (c) $ 134,422
Cost of sales 240,030 (35,020) (92,580) 3,334 (c) 115,764
-------------- -------------- --------------- --------------- ---------------
Gross profit 39,747 (4,844) (16,245) - 18,658
Selling, general and
administrative expenses 34,840 (4,250) (14,250) - 16,340
-------------- -------------- --------------- --------------- ---------------
Income from operations 4,907 (594) (1,995) - 2,318
Interest expense, net (2,955) 236 1,290 - (1,429)
Other income, net 953 (9) (942) - 2
-------------- -------------- --------------- --------------- ---------------
Pre-tax income 2,905 (367) (1,647) - 891
Provision (benefit) for
income taxes 527 - - (365) (d) 162
-------------- -------------- --------------- --------------- ---------------
Net Income $ 2,378 $ (367) $ (1,647) $ 365 $ 729
============== ============== =============== =============== ===============
Earnings per share, basic $ 0.33 $ 0.19 (e)
============== ===============
Earnings per share, diluted $ 0.33 $ 0.19 (e)
============== ===============
Weighted average shares
outstanding, basic 7,175,105 3,870,853 (e)
Weighted average shares
outstanding, diluted 7,215,492 3,901,530 (e)
See accompanying notes to unaudited pro forma consolidated statements of
operations.
- 47 -
Notes to Unaudited Pro Forma Consolidated Statements of Operations For the Year
Ended December 31, 2003
(a) Reflects the operations of WLM including certain adjustments made at the
corporate level for the year ended December 31, 2003.
(b) Reflects the operations of NES including certain adjustments made at the
corporate level for the year ended December 31, 2003.
(c) Reflects the reversal of the elimination of intercompany sales for WLM and
the NES for the year ended December 31, 2003.
(d) Reflects the expected effective income tax rate of 18.1% times the changes
in pre-tax income.
(e) Weighted average shares outstanding, basic reflects a reduction of shares
outstanding due to the retiring of shares associated with the litigation
settlement with the Vergopias (940,000 shares) and the Exchanges
(2,604,236 shares) as if the retirement of shares took place at January 1,
2003. (Actual amount of shares outstanding related to the Exchanges in
2003 was 2,364,252 shares.) Weighted average shares outstanding, diluted
reflects a reduction of the shares included in the basic calculation
further reduced due to a forfeiture of stock options associated with the
Exchanges. The earnings per share basic and diluted reflect the effect of
the adjusted net income divided by the weighted average shares outstanding
basic and diluted, respectively.
- 48 -
Hometown Auto Retailers, Inc.
Unaudited Pro Forma Consolidated Statements of Operations
For the Year Ended December 31, 2002
Historical Litigation Exchange Other Pro Forma
Consolidated Settlement Transactions Adjustments Consolidated
Income Income
Statement (a) (b) Statement
-------------- -------------- --------------- --------------- ---------------
Revenues $ 269,739 $ (35,147) $(113,645) $ 2,789 $ 123,736
(c)
Cost of sales 231,072 (30,768) (97,528) 2,789 (c) 105,565
-------------- -------------- --------------- --------------- ---------------
Gross profit 38,667 (4,379) (16,117) - 18,171
Selling, general and
administrative expenses 34,152 (3,990) (14,169) - 15,993
-------------- -------------- --------------- --------------- ---------------
Income from operations 4,515 (389) (1,948) - 2,178
Interest expense, net (3,162) 276 1,436 - (1,450)
Other expense, net (106) (40) 5 - (141)
-------------- -------------- --------------- --------------- ---------------
Income (loss) before taxes
and cumulative effect of
accounting change 1,247 (153) (507) - 587
Provision (benefit) for
income taxes 471 - - (249) (d) 222
-------------- -------------- --------------- --------------- ---------------
Income (loss) before
cumulative effect of
accounting change 776 (153) (507) 249 365
Cumulative effect of
accounting change (23,708) 4,611 7,771 - (11,326)
-------------- -------------- --------------- --------------- ---------------
Net income (loss) $ (22,932) $ 4,458 $ 7,264 $ 249 $ (10,961)
============== ============== =============== =============== ===============
Earnings (loss) per share,
basic
Before cumulative effect of
accounting change $ 0.10 $ 0.10
Cumulative effect of
accounting change (3.30) (2.93)
-------------- ---------------
Earnings (loss) per share,
basic $ (3.20) $ (2.83)
============== ===============
Earnings (loss) per share,
diluted
Before cumulative effect of
accounting change $ 0.10 $ 0.10
Cumulative effect of
accounting change (3.30) (2.93)
-------------- ---------------
Earnings (loss) per share,
diluted $ (3.20) $ (2.83)
============== ===============
Weighted average shares
outstanding, basic 7,175,105 3,870,853
Weighted average shares
outstanding, diluted 7,175,105 3,870,853
See accompanying notes to unaudited pro forma consolidated statements of
operations.
- 49 -
Notes to Unaudited Pro Forma Consolidated Statements of Operations For the Year
Ended December 31, 2002
(a) Reflects the operations of WLM including certain adjustments made at the
corporate level for the year ended December 31, 2002.
(b) Reflects the operations of NES including certain adjustments made at the
corporate level for the year ended December 31, 2002.
(c) Reflects the reversal of the elimination of intercompany sales for WLM and
the NES for the year ended December 31, 2002.
(d) Reflects the expected effective income tax rate of 37.8% times the changes
in pre-tax income.
(e) Weighted average shares outstanding, basic reflects a reduction of shares
outstanding due to the retiring of shares associated with the litigation
settlement with the Vergopias (940,000 shares) and the Exchanges
(2,604,236 shares) as if the retirement of shares took place at January 1,
2002. (Actual amount of shares outstanding related to the Exchanges in
2003 was 2,364,252 shares.) Weighted average shares outstanding, diluted
reflects a reduction of the shares included in the basic calculation
further reduced due to a forfeiture of stock options associated with the
Exchanges. The earnings per share basic and diluted reflect the effect of
the adjusted net income divided by the weighted average shares outstanding
basic and diluted, respectively.
- 50 -
Hometown Auto Retailers, Inc.
Unaudited Pro Forma Consolidated Statements of Operations
For the Three Months Ended March 31, 2005
Historical Litigation Exchange Other Pro Forma
Consolidated Settlement Transactions Adjustments Consolidated
Income Income
Statement (a) (b) Statement
---------------- ---------------- ------------------ ----------------- ----------------
Revenues $ 61,766 $ (7,147) $ (23,043) $ 736 (c) $ 32,312
Cost of sales 52,460 (6,121) (19,438) $ 736 (c) 27,637
---------------- ---------------- ------------------ ----------------- ----------------
Gross profit
9,306 (1,026) (3,605) - 4,675
Selling, general and
administrative expenses 8,009 (869) (3,182) (243) (d) 3,715
---------------- ---------------- ------------------ ----------------- ----------------
Income from operations 1,297 (157) (423) 243 960
Interest expense, net (850) 78 387 (32) (e) (417)
Other income, net 2 - (2) - -
---------------- ---------------- ------------------ ----------------- ----------------
Pre-tax income 449 (79) (38) 211 543
Provision for income taxes 181 - - 38 (f) 219
---------------- ---------------- ------------------ ----------------- ----------------
Net Income $ 268 $ (79) $ (38) $ 173 $ 324
================ ================ ================== ================= ================
Earnings per share, basic $ 0.04 $ 0.08 (g)
================ ================
Earnings per share, diluted $ 0.04 $ 0.08 (g)
================ ================
Weighted average shares
outstanding, basic 7,086,500 3,845,153 (g)
Weighted average shares
outstanding, diluted 7,210,990 3,941,024 (g)
See accompanying notes to unaudited pro forma consolidated statements of
operations.
- 51 -
Notes to Unaudited Pro Forma Consolidated Statements of Operations For the Three
Months Ended March 31, 2005
(a) Reflects the operations of WLM including certain adjustments made at the
corporate level for the three months ended March 31, 2005.
(b) Reflects the operations of NES including certain adjustments made at the
corporate level for the three months ended March 31, 2005.
(c) Reflects the reversal of the elimination of intercompany sales for WLM and
the NES for the three months ended March 31, 2005.
(d) Reflects savings associated with: (i) a reduction in salaries, payroll
taxes and employee benefits of $172,000 associated primarily with a
reduction in corporate headcount, (ii) a reduction in office costs of
$47,000 and (iii) a reduction in audit, tax and consulting costs of
$24,000 due to the reduction in number of dealerships. The headcount
reductions are permanent reductions for employees who will now be employed
by the NES and those positions that will be eliminated for which those
employees will be notified.
(e) Reflects additional interest expense associated with: (i) interest expense
from the Comerica term loan of $81,000, (ii) less a reduction in floorplan
interest expense of $67,000 due to lower interest rates from Comerica than
the companies current floorplan lender and (iii) a reduction in interest
income of $18,000 associated with investing excess cash in an account tied
to the rate paid for floorplan interest which is lower than the rate of
the company's current floorplan lender.
(f) Reflects the expected effective income tax rate of 40% times the changes
in pre-tax income.
(g) Weighted average shares outstanding, basic reflects a reduction of shares
outstanding due to the retiring of shares associated with the litigation
settlement (940,000 shares) and Exchanges (2,604,236 shares) as if the
retirement of shares took place at January 1, 2004. Weighted average
shares outstanding, diluted reflects a reduction of the shares included in
the basic calculation further reduced due to a forfeiture of stock options
associated with the Exchanges. The earnings per share basic and diluted
reflect the effect of the adjusted net income divided by the weighted
average shares outstanding basic and diluted, respectively.
- 52 -
Hometown Auto Retailers, Inc.
Unaudited Pro Forma Consolidated Statements of Operations
For the Three Months Ended March 31, 2004
Historical Litigation Exchange Other Pro Forma
Consolidated Settlement Transactions Adjustments Consolidated
Income Income
Statement (a) (b) Statement
---------------- ---------------- ------------------ ----------------- ----------------
Revenues $ 65,878 $(10,460) $ (24,770) $ 1,320 (c) $ 31,968
Cost of sales 56,358 (9,277) (20,983) 1,320 (c) 27,418
---------------- ---------------- ------------------ ----------------- ----------------
Gross profit 9,520 (1,183) (3,787) - 4,550
Selling, general and
administrative expenses 8,648 (1,084) (3,543) (222) (d) 3,799
---------------- ---------------- ------------------ ----------------- ----------------
Income from operations 872 (99) (244) 222 751
Interest expense, net (730) 66 319 (39) (e) (384)
Other expense, net (2) - (2) - (4)
---------------- ---------------- ------------------ ----------------- ----------------
Pre-tax income 140 (33) 73 183 363
Provision for income taxes 38 - - 60 (f) 98
---------------- ---------------- ------------------ ----------------- ----------------
Net Income $ 102 $ (33) $ 73 $ 123 $ 265
================ ================ ================== ================= ================
Earnings per share, basic $ 0.01 $ 0.07 (g)
================ ================
Earnings per share, diluted $ 0.01 $ 0.07 (g)
================ ================
Weighted average shares
outstanding, basic 7,175,105 3,845,153 (g)
Weighted average shares
outstanding, diluted 7,471,259 4,042,194 (g)
See accompanying notes to unaudited pro forma consolidated statements of
operations.
- 53 -
Notes to Unaudited Pro Forma Consolidated Statements of Operations For the Three
Months Ended March 31, 2004
(a) Reflects the operations of WLM including certain adjustments made at the
corporate level for the three months ended March 31, 2004.
(b) Reflects the operations of NES including certain adjustments made at the
corporate level for the three months ended March 31, 2004.
(c) Reflects the reversal of the elimination of intercompany sales for WLM and
the NES for the three months ended March 31, 2004.
(d) Reflects savings associated with: (i) a reduction in salaries, payroll
taxes and employee benefits of $180,000 associated primarily with a
reduction in corporate headcount, (ii) a reduction in office costs of
$18,000 and (iii) a reduction in audit, tax and consulting costs of
$24,000 due to the reduction in number of dealerships. The headcount
reductions are permanent reductions for employees who will now be employed
by the NES and those positions that will be eliminated for which those
employees will be notified.
(e) Reflects additional interest expense associated with: (i) interest expense
from the Comerica term loan of $92,000, (ii) less a reduction in floorplan
interest expense of $70,000 due to lower interest rates from Comerica than
the companies current floorplan lender and (iii) a reduction in interest
income of $17,000 associated with investing excess cash in an account tied
to the rate paid for floorplan interest which is lower than the rate of
the company's current floorplan lender.
(f) Reflects the expected effective income tax rate of 27% times the changes
in pre-tax income.
(g) Weighted average shares outstanding, basic reflects a reduction of shares
outstanding due to the retiring of shares associated with the litigation
settlement (940,000 shares) and Exchanges (2,604,236 shares) as if the
retirement of shares took place at January 1, 2004. Weighted average
shares outstanding, diluted reflects a reduction of the shares included in
the basic calculation further reduced due to a forfeiture of stock options
associated with the Exchanges. The earnings per share basic and diluted
reflect the effect of the adjusted net income divided by the weighted
average shares outstanding basic and diluted, respectively.
- 54 -
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
The Company's directors and executive officers collectively beneficially
own 1,098,517 shares of Class A Common Stock and 1,555,068 shares of Class B
Common Stock. Upon the consummation of the Second Exchange described in this
Information Statement, the Shaker Group will beneficially own all of the
outstanding stock of Shaker Auto Group and the New England Subsidiaries, and
will no longer have any interest in the Company. In addition, the Muller Group
will be the controlling stockholders of the Company, and the Company and the
Muller Group will no longer have any beneficial interest in Shaker Auto Group or
any of the New England Subsidiaries.
It is anticipated that the current directors and executive officers of the
Company who are members of the Shaker Group will cease to be directors or
executive officers of the Company following the consummation of the
transactions.
Except as stated above, no director, executive officer, associate of any
director or executive officer, or any other person has any substantial interest,
direct or indirect, by security holdings or otherwise, resulting from the
transactions described herein which is not shared by all other stockholders pro
rata, and in accordance with their respective interests.
NO DISSENTERS' RIGHTS
Stockholders do not have the statutory right to dissent and obtain an
appraisal of their shares under Delaware law in connection with the First
Exchange, the Second Exchange or the other transactions contemplated by the
Exchange Agreement and described in this Information Statement.
COST OF EXCHANGES
The Exchange Agreement provides that each party to the agreement will bear
its respective expenses incurred in connection with the preparation, execution
and performance of the transactions contemplated by the agreement, including all
fees and expenses of agents, representatives, counsel, and accountants. However,
the Company will reimburse Shaker Auto Group for up to $37,500 of the
out-of-pocket costs of Shaker Auto Group relating to the refinancing of a
certain loan if the refinancing results in a reduction in certain fees payable
by the Company in connection with the refinancing.
The Company will pay all of the costs and expenses associated with the
preparation and mailing of this Information Statement. There will be no
solicitations made. The Company will reimburse banks, brokerage firms, other
custodians, nominees and fiduciaries for reasonable expenses incurred in sending
the Information Statement to beneficial owners of the Company's Common Stock.
- 55 -
STOCKHOLDER PROPOSALS
The Company's Board of Directors has not yet determined the date on which
the 2005 annual meeting of stockholders will be held. Stockholder proposals
intended to be presented at the Company's 2005 annual meeting had to be received
by the Company for inclusion in the Company's proxy statement relating to that
meeting no later than March 15, 2005. The deadline for submitting stockholder
proposals intended to be presented at the Company's 2006 annual meeting will be
indicated in the proxy statement for the Company's 2005 annual meeting. Any
stockholder proposals should be addressed to Charles F. Schwartz, Chief
Financial Officer and Secretary, Hometown Auto Retailers, Inc. 1309 South Main
Street, Waterbury, CT 06706.
FORWARD-LOOKING STATEMENTS AND INFORMATION
This Information Statement includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. You can identify the
forward-looking statements by the words "expects," "projects," "believes,"
"anticipates," "intends," "plans," "predicts," "estimates" and similar
expressions.
The forward-looking statements are based on management's current
expectations, estimates and projections about the Company. The Company cautions
you that these statements are not guarantees of future performance and involve
risks, uncertainties and assumptions that the Company cannot predict. In
addition, the Company has based many of these forward-looking statements on
assumptions about future events that may prove to be inaccurate. Accordingly,
actual outcomes and results may differ materially from what the Company has
expressed or forecast in the forward-looking statements.
You should rely only on the information the Company has provided in this
Information Statement. The Company has not authorized any person to provide
information other than that provided herein. The Company has not authorized
anyone to provide you with different information. You should not assume that the
information in this Information Statement is accurate as of any date other than
the date on the front of the document.
WHERE YOU CAN FIND MORE INFORMATION ABOUT THE COMPANY
The Company files annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission (the "SEC").
You can read and copy any materials that the Company files with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
You can obtain information about the operation of the SEC's Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a Web site
that contains information the Company files electronically with the SEC, which
you can access over the Internet at http://www.sec.gov. Copies of these
materials may also be obtained by mail from the Public Reference Section of the
SEC, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.
- 56 -
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by the Company with the SEC (File No.
000-24669) under the Securities Exchange Act of 1934, as amended, are hereby
incorporated by reference in this Information Statement: (a) the Company's
annual report on Form 10-K for the fiscal year ended December 31, 2004 filed
with the SEC on March 24, 2005; (b) the Company's quarterly report on Form 10-Q
for the period year ended March 31, 2005 filed with the SEC on May 16, 2005; and
(c) the Company's periodic report on Form 8-K filed with the SEC on June 2,
2005.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15 of the Securities Exchange Act of 1934, as amended, on the date of or
subsequent to the date of this Information Statement and prior to the
consummation of the transactions contemplated by the Exchange Agreement shall be
deemed to be incorporated by reference in this Information Statement.
Any statement contained in a document incorporated or deemed incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Information Statement to the extent that a statement contained herein or in
any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute part of this Information Statement.
The Company will provide without charge to each person to whom a copy of
this Information Statement is delivered, upon written or oral request of such
person, a copy of any or all of the documents incorporated herein by reference
and not delivered herewith (other than exhibits to such documents which are not
specifically incorporated by reference into the text of such documents). This
Information Statement incorporates documents by reference which are not
presented herein or delivered herewith. These documents are available upon
request directed to Charles F. Schwartz, Chief Financial Officer and Secretary,
Hometown Auto Retailers, Inc. 1309 South Main Street, Waterbury, Connecticut
06706 (203) 756-1300.
By order of the Board of Directors:
Corey E. Shaker
President and Chief Executive Officer
- 57 -
APPENDIX A
EXCHANGE AGREEMENT
This EXCHANGE AGREEMENT ("Agreement") is made and entered into as of the
2nd day of June, 2005, by and among HOMETOWN AUTO RETAILERS, INC. (the
"Company"), a Delaware corporation with an office and place of business at 1309
South Main Street, Waterbury, Connecticut 06706; ERR ENTERPRISES, INC., ("ERR"),
FAMILY FORD, INC. ("Family Ford"), SHAKER'S, INC. ("Shaker's"), SHAKER'S
LINCOLN/MERCURY AUTO CARE, INC. ("Shaker's Lincoln/Mercury"), HOMETOWN
BRATTLEBORO, INC. ("Hometown Brattleboro"), HOMETOWN AUTO FRAMINGHAM, INC.
("Hometown Framingham") BAY STATE REALTY HOLDINGS, INC. ("Bay State") and
BRATTLEBORO REALTY HOLDINGS, INC. ("Brattleboro") (collectively the "New England
Subsidiaries"), and the INDIVIDUALS LISTED ON EXHIBIT A attached hereto who are
shareholders of Hometown and who are members of the Shaker family (the "Shaker
Group").
WHEREAS, the Company sells new and used cars and light trucks, provides
maintenance and repair services, sells replacement parts, and provides related
financing, insurance and service contracts through franchised dealerships
located in New Jersey, New York, Connecticut, Massachusetts and Vermont which
sell American and Asian automotive brands, including Ford, Chrysler/Dodge/Jeep,
Lincoln/Mercury, Mazda, Toyota and Chevrolet; and
WHEREAS, the Company desires to transfer its business operations and real
estate holdings located in the States of Connecticut, Massachusetts and Vermont,
and to simultaneously assign the franchises relating to those business
operations and real estate holdings, to the Shaker Group in exchange for all of
their outstanding shares of common stock of the Company; and
WHEREAS, the Company shall establish a Connecticut corporation called
Shaker Auto Group, Inc. ("Shaker Auto Group") and shall transfer all of the
shares of stock of the New England Subsidiaries, plus cash (in the amount
determined herein) to Shaker Auto Group in exchange for all of the outstanding
shares of common stock of Shaker Auto Group, and immediately thereafter the
Company shall transfer all of the outstanding shares of common stock of Shaker
Auto Group to the Shaker Group in exchange for all of their shares of common
stock of the Company, subject to the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the representations, warranties and
mutual promises contained herein, the parties agree as follows:
A-1
1. DEFINITIONS
For purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1:
"Assumed Liabilities" -- present obligations of the Company that Shaker Auto
Group will assume and take assignment. Such obligations are more particularly
set forth on the Balance Sheet described in Section 2.4. Shaker Auto Group shall
not assume any obligation not identified on the Balance Sheet.
"Balance Sheet" - statement of financial position listing assets owned and
liabilities owed as of a specific date, as described in Section 2.4.
"Best Efforts"-- the efforts that a prudent Person desiring to achieve a result
would use in similar circumstances to ensure that such result is achieved as
expeditiously as possible; provided, however, that an obligation to use Best
Efforts under this Agreement does not require the Person subject to that
obligation to take actions that would result in a materially adverse change in
the benefits to such Person of this Agreement and the Contemplated Transactions.
"Breach"-- a "Breach" of a representation, warranty, covenant, obligation, or
other provision of this Agreement or any instrument delivered pursuant to this
Agreement will be deemed to have occurred if there is or has been (a) any
inaccuracy in or breach of, or any failure to perform or comply with, such
representation, warranty, covenant, obligation, or other provision or (b) any
claim (by any Person) or other occurrence or circumstance that is or was
inconsistent with such representation, warranty, covenant, obligation, or other
provision, and the term "Breach" means any such inaccuracy, breach, failure,
claim, occurrence, or circumstance.
"Chevrolet" -- General Motors Corporation Chevrolet Division.
"Chrysler/Dodge/Jeep" - DaimlerChrysler.
"Closing" -- as defined in Section 2.3
"Closing Date"-- the date and time as of which the Closing actually takes place.
"Contemplated Transactions"-- all of the transactions contemplated by this
Agreement, including:
(a) the formation of Shaker Auto Group;
(b) the exchanges, transfers and adjustments as provided in Section 2.1
and Section 2.2; and
A-2
(c) the performance by the Company and the Shaker Group of their
respective covenants and obligations under this Agreement.
"Contract"-- any agreement, contract, obligation, promise, or undertaking
(whether written or oral and whether express or implied) that is legally
binding.
"Ford" -- Ford Motor Company
"Franchises" - (a) the Ford franchise operated through ERR and its subsidiary,
Family Ford; (b) the Lincoln/Mercury franchise operated through ERR and its
subsidiary, Shaker's, Inc.; (c) the Auto Care franchise operated through ERR and
its subsidiary, Shaker's Lincoln/Mercury; (d) the Chrysler/Dodge/Jeep franchise
operated through Hometown Brattleboro; and (e) the Lincoln/Mercury and Mazda
franchises operated through Hometown Framingham (collectively referred to as the
"Franchises").
"GAAP"-- generally accepted United States accounting principles, applied on a
basis consistent with the basis on which the Company's Balance Sheet was
prepared.
"Legal Requirement"-- any federal, state, local, municipal, foreign,
international, multinational, or other administrative order, constitution, law,
ordinance, principle of common law, regulation, statute, or treaty.
"Lincoln/Mercury" - Ford Motor Company Lincoln Mercury Division.
"Mazda" - Mazda Motor of America, Inc.
"Order"-- any award, decision, injunction, judgment, order, ruling, subpoena, or
verdict entered, issued, made, or rendered by any court, administrative agency,
or other governmental body or by any arbitrator.
"Organizational Documents"-- (a) the articles or certificate of incorporation
and the bylaws of a corporation; (b) any charter or similar document adopted or
filed in connection with the creation, formation, or organization of a Person;
and (c) any amendment to any of the foregoing.
"Person"-- any individual, corporation (including any non-profit corporation),
general or limited partnership, limited liability company, joint venture,
estate, trust, association, organization, labor union, or other entity or
governmental body.
"Proceeding"-- any action, arbitration, audit, hearing, investigation,
litigation, or suit (whether civil, criminal, administrative, investigative, or
informal) commenced, brought, conducted, or heard by or before, or otherwise
involving, any governmental body or arbitrator.
A-3
"Securities Exchange Act"-- the Securities Exchange Act of 1934 or any successor
law, and regulations and rules issued pursuant to that Act or any successor law.
"Transferred Assets" -- The assets which the New England Subsidiaries must own
at the time of the transfer of all of their shares of outstanding stock to
Shaker Auto Group. Such assets are more particularly set forth in Section 2.1.2.
The New England Subsidiaries shall not own any assets not identified in said
Section 2.1.2.
"Tax Return"-- any return (including any information return), report, statement,
schedule, notice, form, or other document or information filed with or submitted
to, or required to be filed with or submitted to, any governmental body in
connection with the determination, assessment, collection, or payment of any tax
or in connection with the administration, implementation, or enforcement of or
compliance with any Legal Requirement relating to any tax.
"Threatened"-- a claim, Proceeding, dispute, action, or other matter will be
deemed to have been "Threatened" if any demand or statement has been made
(orally or in writing) or any notice has been given (orally or in writing).
"Toyota" - Toyota Motor Sales USA, Inc.
"Working Capital" -- the amount of working capital of Shaker Auto Group as of
the date of Closing shall be the amount calculated by adding the amount of cash
plus Accounts Receivable plus New Motor Vehicles plus Rental Cars, plus Used
Motor Vehicles plus Parts and Accessories Inventory plus prepaid expenses plus
deposits, and then reducing that amount by floorplan notes payable, debt related
to Rental Cars, accounts payable and accrued expenses.
2. EXCHANGES; CLOSING
2.1 Transfer of New England Subsidiaries to Shaker Auto Group
2.1.1 Exchange of Stock. Subject to the terms and conditions
of this Agreement, on or prior to the Closing Date: (a) the Company shall,
assign, transfer, convey and deliver to Shaker Auto Group all of the Company's
right, title and interest in and to all of the outstanding shares of stock of
the New England Subsidiaries; and (b) the Company shall cause Shaker Auto Group
to transfer to the Company 2,604,236 shares of common stock of Shaker Auto Group
(representing all of the outstanding shares of common stock of Shaker Auto
Group).
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In addition, subject to the terms and conditions of this
Agreement, on or prior to the Closing Date: (a) the Company shall cause Shaker
Auto Group to assign, transfer, convey and deliver to Hometown Brattleboro all
of Shaker Auto Group's right, title and interest in and to all of the
outstanding shares of stock of Brattleboro; (b) the Company shall cause Shaker
Auto Group to assign, transfer, convey and deliver to Hometown Framingham all of
Shaker Auto Group's right, title and interest in and to all of the outstanding
shares of stock of Bay State; (c) the Company shall, assign, transfer, convey
and deliver to Hometown Newburgh, Inc. all of the Company's right, title and
interest in and to all of the outstanding shares of stock of Newburgh Realty
Holding Co., Inc.; (d) the Company shall, assign, transfer, convey and deliver
to Hometown Newburgh, Inc. all of the Company's right, title and interest in and
to all of the outstanding shares of stock of Hometown New Windsor, Inc.; and (e)
the Company shall, assign, transfer, convey and deliver to Muller Chevrolet,
Oldsmobile, Isuzu, Inc. all of the Company's right, title and interest in and to
all of the outstanding shares of stock of Morristown Auto Sales, Inc.
2.1.2 Transferred Assets. On the Closing Date, the New England
Subsidiaries shall possess the full right, title and interest in and to all of
the following assets which are used by the New England Subsidiaries in
conducting their business operations, free and clear of all liens and
encumbrances; provided, however, that such assets shall remain subject to any
liabilities to which the New England Subsidiaries are already subject, and to
any liabilities which will be assumed by the New England Subsidiaries pursuant
to Section 2.1.6 (collectively, the "Transferred Assets"):
(a) Franchises. All of the Franchises.
(b) Furniture, Fixtures and Equipment. All machinery,
equipment, tools, supplies, leasehold improvements, furniture and
fixtures, factory brand signs, factory brand special tools, lifts,
compressors and front end alignment equipment, the computer system used by
the New England Subsidiaries (or by the Company with regard to the
operations of the New England Subsidiaries) to record its accounts
payable, accounts receivable and general ledger, the telephone system and
any other fixed assets owned by the New England Subsidiaries (or by the
Company with regard to the operations of the New England Subsidiaries)
(the "Furniture, Fixtures and Equipment") (as reflected on the Balance
Sheet described in Section 2.4).
(c) Intangible Assets; Books and Records. True and complete
copies of all of the New England Subsidiaries' business records, technical
data, asset ledgers, customer lists and records, supplier records,
telephone numbers, computer programs, correspondence and other files of
the New England Subsidiaries created or maintained in connection with
their business, the Franchises and the Transferred Assets (including
information in the Company's computer database in such electronic format
as will allow Shaker Auto Group to adapt such information for use in
Shaker Auto Group's computer system).
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(d) New Motor Vehicles. Upon Shaker Auto Group's floor plan
lender paying off the Company's floor plan lender, the Company shall
transfer to Shaker Auto Group or its lender all "New Motor Vehicles,"
which shall be defined to mean all model Ford, Chrysler/Dodge/Jeep,
Lincoln/Mercury and Mazda motor vehicles owned by each of the New England
Subsidiaries (or by the Company with regard to the operations of the New
England Subsidiaries).
(e) Rental Cars. The Company shall transfer to Shaker Auto
Group all "Rental Cars" used in the business operations of Shaker Auto
Group and the New England Subsidiaries, subject to any debt related to the
"Rental Cars" that is on the books of the Company, the New England
Subsidiaries or any of the Company's other affiliates.
(f) Used Motor Vehicles. All of the New England Subsidiaries'
inventory of "Used Motor Vehicles", which shall be defined to mean any
used motor vehicles belonging to the New England Subsidiaries and held by
the New England Subsidiaries for resale and which shall have an aggregate
cost basis value of not more than Five Hundred Thousand ($500,000.00)
Dollars in excess of the floor plan amount at the time of Closing. The
value of any inventory of Used Motor Vehicles transferred that is in
excess of Five Hundred Thousand ($500,000.00) Dollars shall result in a
deduction from the payment to be made under Section 2.1.3 by the amount of
such excess. The value of any inventory of Used Motor Vehicles transferred
that is less than Five Hundred Thousand ($500,000.00) Dollars shall result
in an increase in the payment to be made under Section 2.1.3 by the amount
of such deficiency.
(g) Parts and Accessories. All of the New England
Subsidiaries' inventory of parts and accessories, which is defined to mean
any Ford, Chrysler/Dodge/Jeep, Lincoln/Mercury or Mazda parts and
accessories, including parts and accessories purchased from any of their
authorized manufacturers and/or third-party distributors (collectively,
the "Parts and Accessories Inventory"). The Parts and Accessories
Inventory shall have a cost basis value of not less than Five Hundred and
Fifteen Thousand ($515,000.00) Dollars. If the value of the Parts and
Accessories Inventory (as reflected on the Balance Sheet described in
Section 2.4) is in excess of Five Hundred and Fifteen Thousand
($515,000.00) Dollars, the excess shall be deducted from the payment to be
made under Section 2.1.3. If the value of the Parts and Accessories
Inventory (as reflected on the Balance Sheet described in Section 2.4) is
less than Five Hundred and Fifteen Thousand ($515,000.00) Dollars, the
deficiency shall be added to the payment to be made under Section 2.1.3.
(h) Accounts Receivable. All of the New England Subsidiaries'
Accounts Receivable, which is defined to mean all claims, accounts, notes
and loans receivable and any other rights to receive money for payment for
goods sold or leased or services rendered, or otherwise, including without
limitation all accounts, accounts receivable, contract rights, chattel
paper and instruments; provided, however, that any holdback monies not
collected by the New England Subsidiaries from the manufacturers at the
time of the Closing shall be excluded from Accounts Receivable. The
Accounts Receivable shall have a value of not less than the amount of the
accounts payable and accrued expenses assumed by Shaker Auto Group under
Section 2.1.6. If the value of the Accounts Receivable (as reflected on
the Balance Sheet described in Section 2.4) is greater than the amount of
the accounts payable and accrued expenses assumed by Shaker Auto Group
under Section 2.1.6, the excess will be deducted from the payment to be
made under Section 2.1.3. If the value of the Accounts Receivable (as
reflected on the Balance Sheet described in Section 2.4) is less than the
amount of the accounts payable and accrued expenses assumed by Shaker Auto
Group under Section 2.1.6, such deficiency shall be added to the payment
to be made under Section 2.1.3.
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(i) Trade Names, Internet Access and Telephone Numbers. All
right, title and interest of the Company in and to the names of the New
England Subsidiaries, together with any trade name, service mark, domain
name, software (including but not limited to any internet website computer
program with necessary code, passwords and documentation to access e-mail
and links to and from the business of any of the New England Subsidiaries,
or to or from Ford, Chrysler/Dodge/Jeep, Lincoln/Mercury or Mazda), and
the telephone numbers of the businesses of the New England Subsidiaries,
so that Shaker Auto Group can continue the operations of the businesses of
the New England Subsidiaries without delay or interruption.
2.1.3 Cash Payment to Shaker Auto Group. Immediately prior to
the exchange of stock described in Section 2.1.1, the Company shall transfer to
Shaker Auto Group in exchange for the stock of Shaker Auto Group the sum of Five
Million ($5,000,000.00) Dollars by bank or certified check or by wire transfer
as directed by Shaker Auto Group for the purposes provided in Section 5.3,
subject, however, to adjustment as described in Section 2.1.2(f), Section
2.1.2(g) and Section 2.1.2(h).
2.1.4 Allowances and Credits The parties agree as follows with
respect to all New Motor Vehicles and Rental Cars to be transferred to Shaker
Auto Group hereunder (collectively the "Motor Vehicle Inventory"):
(a) As to the transferred Motor Vehicle Inventory relating to
the operations of the New England Subsidiaries and invoiced by Ford,
Chrysler/Dodge/Jeep, Lincoln/Mercury or Mazda to the New England
Subsidiaries (or the Company with regard to the operations of the New
England Subsidiaries) on or before Closing, the Company does hereby assign
to Shaker Auto Group the value of any holdbacks (whether paid to the
Company or otherwise) as reflected on the dealer invoice. The parties
agree to remit to each other promptly any such sum due to the other, which
payment was made in error by Ford, Chrysler/Dodge/Jeep, Lincoln/Mercury or
Mazda and not already paid to the other.
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(b) As to transferred Motor Vehicle Inventory invoiced by
Ford, Chrysler/Dodge/Jeep, Lincoln/Mercury or Mazda to the New England
Subsidiaries (or the Company with regard to the operations of the New
England Subsidiaries) on or before Closing, the Company does hereby assign
to Shaker Auto Group any pre-delivery credit and/or allowances pertaining
to such vehicles (as reflected on the Balance Sheet described in Section
2.4). The parties agree to remit to each other promptly any such sum due
to the other, which payment was made in error by Ford,
Chrysler/Dodge/Jeep, Lincoln/Mercury or Mazda and not already paid to the
other.
(c) The parties agree to remit to each other promptly any
other sums that may be due to the other, which payment was made in error
by Ford, Chrysler/Dodge/Jeep, Lincoln/Mercury or Mazda and not already
paid to the other.
2.1.5 Excluded Assets Notwithstanding anything herein to the
contrary, the assets of the New England Subsidiaries as of the Closing Date
shall exclude all assets not described in Section 2.1.2, Section 2.1.3 and
Section 2.1.4. If any assets that are not described in Section 2.1.2, Section
2.1.3 or Section 2.1.4 are owned by the New England Subsidiaries prior to the
Closing Date, the New England Subsidiaries do hereby transfer, assign and convey
such assets to the Company (or to any assignee of the Company).
2.1.6 Assumed Liabilities. As of the Closing Date, the New
England Subsidiaries or Shaker Auto Group shall assume and agree to pay,
discharge or arrange to discharge and perform when lawfully due, all of the
obligations, duties and liabilities that relate to the business of the New
England Subsidiaries (as reflected on the Balance Sheet described in Section
2.4), including but not limited to: (a) the debt related to the Rental Cars, as
described in Section 2.1.2(e); (b) that portion of the debt owed to The First
National Bank of Chicago, as Trustee For The Registered Holders of Falcon
Franchise Loan Trust 1991-1 Franchise Loan Backed Bonds (as successor in
interest to Falcon Financial, LLC) referred to in the letter dated April 25,
2005 and identified as loan number 815010 as evidenced by a promissory note from
Bay State Realty Holdings, Inc. dated April 16, 1999 in the original principal
amount of $5,800,000.00; (c) the debt owed to Merchants Bank as evidenced by a
promissory note from Brattleboro Realty Holdings, Inc. dated June 10, 2004 in
the original principal amount of $1,050,000.00; (d) the debt owed to Ford Motor
Company Credit in connection with floor plan financing; (e) the debt owed to
Ford Motor Company Credit that is financing certain Daewoo Motor Co., Ltd.
vehicles; (f) the debt owed to Bank of America, N.A., as evidenced by a
promissory note from Shaker's Inc. dated December 23, 2004 in the original
principal amount of $225,000.00; and (g) the debt owed to Consenzi Automotive
Realty Limited Partnership, as evidenced by a promissory note from Brattleboro
Realty Holdings, Inc. dated June 10, 2004 in the original principal amount of
$300,000.00. The Company shall have no liability or obligation with respect to
any obligations, duties and liabilities assumed by the New England Subsidiaries
or Shaker Auto Group pursuant to this Section 2.1.6.
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The Shaker Group shall execute such documents as are necessary
to release the Company from any obligations relating to the real property leased
by the New England Subsidiaries and identified on Exhibit B and to enter into
lease agreements for such properties with Shaker Auto Group or the New England
Subsidiaries.
2.1.7 Excluded Liabilities. Except as set forth in Section
2.1.6, the parties expressly agree that Shaker Auto Group and the New England
Subsidiaries shall not assume, agree to pay, perform, discharge or otherwise
have any responsibility for any liability or obligation of the Company, fixed or
contingent, and whether arising or to be performed prior to, on or after the
Closing Date, that does not relate to the business of the New England
Subsidiaries. Unless otherwise set forth herein and without limiting the
generality of the foregoing, Shaker Auto Group and the New England Subsidiaries
do not assume, and the Company shall pay, perform and discharge the following
liabilities and obligations:
(a) All liabilities and obligations of the Company for taxes,
assessments, interest or penalties thereon, and other similar governmental
charges arising out of or related to the Company's operation of its
business prior to the Closing Date; and
(b) All other liabilities and obligations of the Company,
other than the Assumed Liabilities.
2.2 Exchange of Stock of Shaker Auto Group for Stock of the Shaker
Group.
Subject to the terms and conditions of this Agreement, immediately
following the exchange described in Section 2.1, the Company shall assign,
transfer, convey and deliver to the Shaker Group all of the Company's right,
title and interest in and to all of the outstanding shares of stock of Shaker
Auto Group, and the Shaker Group shall transfer to the Company all of the
outstanding shares of common stock of the Company which they own (representing
801,736 shares of Class A common stock of the Company and 1,802,500 shares of
Class B common stock of the Company). The shares of common stock of Shaker Auto
Group shall be transferred to each member of the Shaker Group in the amount set
forth in Exhibit A.
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2.3 Closing
The Closing will take place at the offices of the Company or at such
other location as shall be mutually agreeable to the parties hereto. The closing
shall take place no later than fourteen (14) days after the satisfaction or
waiver of all of the conditions set forth in Section 6 and Section 7 of this
Agreement, provided that all material authorizations, consents, approvals,
waivers and releases necessary for the Company to consummate the transactions
contemplated hereby shall have been obtained, including, without limitation, the
obtaining of shareholder and director approvals pursuant to the requirements of
the Delaware General Corporation Law and applicable provisions of the Securities
Exchange Act, as amended.
2.4 Balance Sheet
As of a date prior to the Closing Date, the Company shall cause to
be prepared a statement of financial position listing the assets owned and the
liabilities owed of Shaker Auto Group and the New England Subsidiaries,
determined as if such entities were the only members of a controlled group of
corporations on such date and excluding therefrom the assets owned and the
liabilities owed of the Company not attributable to Shaker Auto Group and the
New England Subsidiaries (the "Interim Balance Sheet"). The Interim Balance
Sheet shall fairly present, in all material respects, the assets and liabilities
of Shaker Auto Group and the New England Subsidiaries as at the date thereof.
Within sixty (60) days following the Closing Date, the Company and
the Shaker Group shall jointly perform such reasonable "true-up" procedures to
the Interim Balance Sheet as they may reasonably agree to prior to the Closing
Date to establish the financial position of Shaker Auto Group and the New
England Subsidiaries as of the Closing Date. Such procedures shall take into
account, among other things: (a) information made available to the Company and
the Shaker Group after the Closing Date regarding inventory in transit or
located at seller locations as of the Closing Date; (b) the payment of invoices
by Shaker Auto Group and the New England Subsidiaries through to and including
the Closing Date; and (c) the quantification of the sale and purchase of
inventory through to and including the Closing Date. As a result of such
"true-up" procedures, the Company and the Shaker Group shall cause to be
prepared a final statement of financial position listing the assets owned and
the liabilities owed of Shaker Auto Group and the New England Subsidiaries as of
the Closing Date (the "Final Balance Sheet"). The Final Balance Sheet shall be
deemed to be the Balance Sheet for all purposes of this Agreement, including but
not limited to making the adjustments required by Section 2.1.2(f), Section
2.1.2(g) and Section 2.1.2(h).
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3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Shaker Group as follows:
3.1 Organization and Good Standing
The Company and the New England Subsidiaries are each corporations
duly organized, validly existing, and in good standing under the laws of their
respective jurisdictions, with full corporate power and authority to own,
operate and/or lease the Transferred Assets and to conduct their businesses as
they are now being conducted and to perform all their obligations under this
Agreement.
3.2 Authority
This Agreement constitutes the legal, valid, and binding obligation
of the Company, enforceable against the Company in accordance with its terms.
Upon the execution and delivery by the Company of the documents identified in
Section 8.1 (collectively, the "Company's Closing Documents"), the Company's
Closing Documents will constitute the legal, valid, and binding obligations of
the Company, enforceable against the Company in accordance with their respective
terms. The Company has the absolute and unrestricted right, power, authority,
and capacity to execute and deliver this Agreement and the Company's Closing
Documents and to perform its obligations under this Agreement and the Company's
Closing Documents.
Additionally, neither the execution and delivery of this Agreement
by the Company nor the consummation or performance of any of the Contemplated
Transactions by the Company will give any Person the right to prevent, delay, or
otherwise interfere with any of the Contemplated Transactions pursuant to:
(i) any provision of the Company's Organizational Documents;
(ii) any resolution adopted by the board of directors or the
stockholders of the Company;
(iii) any Legal Requirement or Order to which the Company may be
subject; or
(iv) any Contract to which the Company is a party or by which the
Company may be bound.
The Company is not and will not be required to obtain any consent
from any Person in connection with the execution and delivery of this Agreement
or the consummation or performance of any of the Contemplated Transactions,
except for the consent and approval of Ford, Chrysler/Dodge/Jeep,
Lincoln/Mercury, Mazda, Toyota, Chevrolet, The First National Bank of Chicago,
as Trustee For The Registered Holders of Falcon Franchise Loan Trust 1991-1
Franchise Loan Backed Bonds (as successor in interest to Falcon Financial, LLC),
Merchants Bank, Ford Motor Company Credit, Comerica Bank, Bank of America, N.A.
and Consenzi Automotive Realty Limited Partnership. Except as set forth herein,
no consent, authorization or approval of, or filing with or exemption by any
governmental, corporate, public or self-regulatory body or authority or any
other person is required in connection with the execution and delivery by the
Company of this Agreement or any ancillary agreements, or the consummation by
the Company of any of the Contemplated Transactions.
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3.3 Title to Assets; Encumbrances
The Company has good and marketable title to all of the Transferred
Assets and owns such assets, free and clear of any Liens or other encumbrances
and any rights of third parties, other than: (a) the floor plan financing on the
Company's New Motor Vehicles; (b) the debt related to the Rental Cars; (c) the
debt owed to The First National Bank of Chicago, as Trustee For The Registered
Holders of Falcon Franchise Loan Trust 1991-1 Franchise Loan Backed Bonds (as
successor in interest to Falcon Financial, LLC); (d) the debt owed to Merchants
Bank; (e) the debt owed to Ford Motor Company Credit in connection with floor
plan financing; (f) the debt owed Ford Motor Company Credit that is financing
certain Daewoo Motor Co., Ltd. vehicles; (g) the debt owed to Bank of America,
N.A.; (h) the debt owed to Consenzi Automotive Realty Limited Partnership; and
(i) any other Assumed Liabilities. "Lien" means any mortgage, pledge, security
interest, encumbrance, lien or charge of any kind (including but not limited to,
any conditional sale or other title retention agreement, any lease in the nature
thereof and the filing of an agreement to give any financing statement under the
Uniform Commercial Code or comparable law of any jurisdiction in connection with
a mortgage, pledge, security interest, encumbrance, lien or charge).
3.4 Taxes
(a) There are no, and by reason of the consummation of the
transactions contemplated hereby, there will be no, tax liabilities of the
Company which could result in any transferee liability to Shaker Auto Group, the
New England Subsidiaries or the Shaker Group, or which could attach to the
Transferred Assets.
As used in this Agreement, "tax" or "taxes" shall mean taxes of any
kind payable to any taxing authority of the United States (Federal, state or
local) or any country or jurisdiction including, without limitation: (a) income,
gross receipts, ad valorem, value added, sales, use, service, franchise,
profits, real or personal property, capital stock, license, payroll,
withholding, employment, social security, workers' compensation, unemployment
compensation, utility, severance, production, excise, stamp, occupation,
premium, windfall profits, transfer and gains taxes; (b) customs duties,
imports, charges, levies or other assessments of any kind; (c) interest,
penalties, and addition to tax imposed with respect to the above taxes; and (d)
any damages, costs, expenses, fees or other liabilities arising from such tax or
taxes.
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(b) The Company has filed or caused to be filed all Tax Returns that
are or were required to be filed. The Company has paid, or made provision for
the payment of, all taxes that have or may have become due pursuant to those Tax
Returns or otherwise, or pursuant to any assessment received by the Company,
except such taxes, if any, as are being contested in good faith and as to which
adequate reserves (determined in accordance with GAAP) have been provided in the
Balance Sheet described in Section 2.4. All Tax Returns filed by (or that
include on a consolidated basis) the Company are true, correct, and complete.
There is no tax sharing agreement that will require any payment by the Company
after the date of this Agreement.
3.5 No Material Adverse Change
Since the date of the Company's balance sheet dated March 31, 2005,
there has not been any material adverse change in the business, operations,
properties, prospects, assets, or condition of the Company (excluding the
business, operations, properties, prospects, assets or condition of the New
England Subsidiaries), and no event has occurred or circumstance exists that may
result in such a material adverse change.
3.6 Legal Proceedings
There is no action, suit, Proceeding, arbitration, claim,
investigation or inquiry ("Litigation") the purpose of which is to prevent the
consummation of the transactions contemplated by this Agreement that is ongoing,
pending or, to the best of the Company's knowledge, Threatened, before or by any
foreign or United States Federal, state, municipal or other governmental,
administrative or self-regulatory instrumentality or agency (or any private
arbitration tribunal).
The Company has not received notice of any Order, judgment or decree
of any court, tribunal, agency or self-regulatory body enjoining the Company
from taking (or requiring the Company to take) action of any kind, or to which
the Company is bound (excluding any Order, judgment or decree relating to the
business, operations, properties, prospects, assets or condition of the New
England Subsidiaries).
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3.7 Employee Benefit Plans, etc.
The Company shall assist Shaker Auto Group in establishing benefit
plans for the employees of the New England Subsidiaries following the Closing
Date that are comparable to the benefit plans maintained by the Company.
3.8 Easycare Service Warranties
Shaker Auto Group and the New England Subsidiaries shall continue to
service Easycare Service Warranties until such time as the current advance on
such warranties has been repaid. Any revenues from Easycare Service Warranties
sold after the Closing Date, as well as any retroactive premiums paid, will be
allocated to Shaker Auto Group to the extent it is sold at one of the New
England Subsidiaries, and to the Company to the extent it is sold at the
retained dealerships of the Company.
4. REPRESENTATIONS AND WARRANTIES OF SHAKER GROUP
The Shaker Group represents and warrants to the Company as follows:
4.1 Authority
This Agreement constitutes the legal, valid, and binding obligation
of the Shaker Group, enforceable against the Shaker Group in accordance with its
terms. Upon the execution and delivery by the Shaker Group of the documents
identified in Section 8.2 (collectively, the "Shaker Group's Closing Documents")
the Shaker Group's Closing Documents will constitute the legal, valid, and
binding obligations of the Shaker Group, enforceable against the Shaker Group in
accordance with their respective terms. The Shaker Group has the absolute and
unrestricted right, power, authority and capacity to execute and deliver this
Agreement and the Shaker Group's Closing Documents and to perform their
obligations under this Agreement and the Shaker Group's Closing Documents.
Additionally, neither the execution and delivery of this Agreement
by the Shaker Group nor the consummation or performance of any of the
Contemplated Transactions by the Shaker Group will give any Person the right to
prevent, delay, or otherwise interfere with any of the Contemplated Transactions
pursuant to:
(i) any Legal Requirement or Order to which the Shaker Group may
be subject; or
(ii) any Contract to which the Shaker Group is a party or by which
the Shaker Group may be bound.
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The Shaker Group is not and will not be required to obtain any
consent from any Person in connection with the execution and delivery of this
Agreement or the consummation or performance of any of the Contemplated
Transactions, except for the consent and approval of Ford, Chrysler/Dodge/Jeep,
Lincoln/Mercury, Mazda, Toyota, Chevrolet, The First National Bank of Chicago,
as Trustee For The Registered Holders of Falcon Franchise Loan Trust 1991-1
Franchise Loan Backed Bonds (as successor in interest to Falcon Financial, LLC),
Merchants Bank, Ford Motor Company Credit, Comerica Bank, Bank of America, N.A.
and Consenzi Automotive Realty Limited Partnership. Except as set forth herein,
no consent, authorization or approval of, or filing with or exemption by any
governmental, corporate, public or self-regulatory body or authority or any
other person is required in connection with the execution and delivery by the
Shaker Group of this Agreement or any ancillary agreements, or the consummation
by the Shaker Group of any of the Contemplated Transactions.
4.2 Legal Proceedings
There is no action, suit, Proceeding, arbitration, claim,
investigation or inquiry ("Litigation") the purpose of which is to prevent the
consummation of the transactions contemplated by this Agreement that is ongoing,
pending or, to the best of the Shaker Group's knowledge, Threatened, before or
by any foreign or United States Federal, state, municipal or other governmental,
administrative or self-regulatory instrumentality or agency (or any private
arbitration tribunal).
The Shaker Group has not received notice of any Order, judgment or
decree of any court, tribunal, agency or self-regulatory body enjoining the
Shaker Group from taking (or requiring the Shaker Group to take) action of any
kind, or to which the Shaker Group is bound, relating to the business,
operations, properties, prospects, assets or condition of the New England
Subsidiaries.
5. CERTAIN AGREEMENTS AND CERTAIN PRE- AND POST-CLOSING COVENANTS OF THE
PARTIES
5.1 Operation of the Business of the Company
Between the date of this Agreement and the Closing Date, each party
to this Agreement shall use its reasonable Best Efforts to ensure that the
Company conducts its business only in the ordinary course, and shall use its
reasonable Best Efforts to preserve intact the business of the Company.
5.2 Access to Business
Between the date of this Agreement and the Closing Date, each party
shall afford the other parties and the other parties' accountants, counsel,
consultants and other representatives reasonable access to the party's premises
and to all of its books, contracts, commitments, records, and personnel, to the
extent required by the other parties' lending institutions.
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5.3 Plan of Reorganization
The parties hereto intend that the transactions contemplated by this
Agreement constitute a reorganization under Section 355 and Section 368 of the
Internal Revenue Code of 1986, as amended, and that this Agreement constitute a
plan of reorganization within the meaning of such provisions. The transactions
contemplated by this Agreement are an ordinary and necessary incident of the
conduct of the Company's corporate enterprise.
The primary purpose of the cash payment to Shaker Auto Group
required by Section 2.1.3 is: (a) to equalize the value of the Shaker Group's
stock interest in the Company with the value of the stock of Shaker Auto Group
that the Shaker Group is to receive in the transactions; and (b) to provide
Shaker Auto Group with necessary working capital.
6. CONDITIONS PRECEDENT TO THE SHAKER GROUP'S OBLIGATION TO CLOSE
The Shaker Group's obligation to acquire Shaker Auto Group and the New
England Subsidiaries in exchange for its shares of common stock of the Company,
and to take the other actions required to be taken by the Shaker Group at the
Closing, is subject to the satisfaction, at or prior to the Closing, of each of
the following conditions (any of which may be waived by the Shaker Group, in
whole or in part):
6.1 Representations and Warranties True as of the Closing Date.
The representations and warranties made by the Company in this
Agreement, or in any schedule, certificate or document delivered by the Company
to the Shaker Group pursuant to the provisions hereof, shall have been true in
all material respects on the date hereof, without regard to any schedule updates
furnished by the Company after the date hereof, and shall be true and correct in
all material aspects on and as of the Closing Date with the same force and
effect as though such representations and warranties were made as of the Closing
Date.
6.2 Compliance with this Agreement.
The Company shall have performed and complied with in all material
respects all agreements, conditions, covenants and obligations required by this
Agreement to be performed or complied with by it prior to or by the Closing
Date.
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6.3 Compliance with the Securities Laws.
The Company, with the cooperation of the Shaker Group, shall have
filed an information statement with the Securities and Exchange Commission (the
"SEC"), and the Company and the Shaker Group shall have taken such other actions
as are necessary under the Federal and state securities laws to permit the
consummation of the transactions contemplated by this Agreement.
6.4 No Threatened or Pending Litigation.
On the Closing Date, no suit, action or other Proceeding, or
injunction or final judgment relating thereto, shall be threatened or pending
before any court or governmental or regulatory official, body or authority in
which it is sought to restrain or prohibit, or to obtain damages or other relief
in connection with, this Agreement or the consummation of the transactions
contemplated by this Agreement, and no investigation that might result in any
such suit, action or Proceeding shall be pending or threatened.
6.5 Opinion of Duff & Phelps LLC.
The Special Committee of the board of directors of the Company shall
have obtained an opinion from Duff & Phelps LLC, in form and substance
satisfactory to the Special Committee, indicating that the consideration to be
received by the Company as a result of the transactions contemplated by this
Agreement is fair, from a financial point of view, to the unaffiliated public
stockholders of the Company (i.e., the stockholders of the Company who are not
directors or officers of the Company and who are not affiliated with the Shaker
Group or any entities that the Shaker Group or any member thereof controls).
6.6 Tax-Free Exchange Opinion.
The Company and the Shaker Group shall have obtained an opinion from
BDO Seidman, LLP, the Company's certified public accountants, in form and
substance satisfactory to the Company and the Shaker Group, indicating that the
transactions contemplated by this Agreement will qualify as tax-free exchanges
under the Internal Revenue Code of 1986, as amended, and will not cause the
recognition of income by either the Company or the Shaker Group for federal
income tax purposes. In order to obtain such opinion, on the Closing Date the
Shaker Group shall not have any options to acquire shares of common stock of the
Company.
6.7 Consents and Approvals.
(a) The stockholders of the Company shall have approved the
transactions contemplated by this Agreement in accordance with the requirements
of the General Corporation Law of the State of Delaware.
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(b) Ford, Chrysler/Dodge/Jeep, Lincoln/Mercury, Mazda, Toyota and
Chevrolet shall have approved Shaker Auto Group as the transferee of the
Franchises in accordance with the terms of this Agreement.
(c) Shaker Auto Group shall have obtained floor plan financing in
accordance with the terms of this Agreement.
(d) Each obligee of the Assumed Liabilities under Section 2.1.6
shall have consented to the release of the Company from any and all liability
relating to the Assumed Liabilities to the extent required by the terms of the
Assumed Liabilities, without such release being deemed to be an event of default
and without imposing any material loan modifications unless approved by the
Shaker Group and the Company. In particular and not by way of limitation, the
obligee of the debt related to the Rental Cars, The First National Bank of
Chicago, as Trustee For The Registered Holders of Falcon Franchise Loan Trust
1991-1 Franchise Loan Backed Bonds (as successor in interest to Falcon
Financial, LLC), Merchants Bank, Ford Motor Company Credit, Bank of America,
N.A. and Consenzi Automotive Realty Limited Partnership shall each have
consented to the release of the Company from any and all liability relating to
the debt owed to such obligee in connection with the business operations of the
New England Subsidiaries.
6.8 Working Capital
Immediately following the Closing, Shaker Auto Group will have
Working Capital of $6,015,000.
6.9 Additional Documents
The Company must have delivered to the Shaker Group such documents
as the Shaker Group may reasonably request for the purpose of (a) evidencing the
accuracy of any of the Company's representations and warranties, (b) evidencing
the performance by the Company of, or the compliance by the Company with, any
covenant or obligation required to be performed or complied with by the Company,
and (c) otherwise facilitating the consummation or performance of any of the
transactions contemplated by this Agreement.
6.10 No Prohibition
Neither the consummation nor the performance of any of the
transactions contemplated by this Agreement will, directly or indirectly (with
or without notice or lapse of time), materially contravene, or conflict with, or
result in a material violation of, or cause the Shaker Group or any Person
affiliated with the Shaker Group to suffer any material adverse consequence
under any applicable Legal Requirement or Order.
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7. CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATION TO CLOSE
The Company's obligation to make the exchanges described in Section 2.1
and Section 2.2, and to take the other actions required to be taken by the
Company at the Closing, is subject to the satisfaction, at or prior to the
Closing, of each of the following conditions (any of which may be waived by the
Company, in whole or in part):
7.1 Representations and Warranties True as of the Closing Date.
The representations and warranties made by the Shaker Group in this
Agreement, or in any schedule, certificate or document delivered by the Shaker
Group to the Company pursuant to the provisions hereof, shall have been true in
all material respects on the date hereof, without regard to any schedule updates
furnished by the Shaker Group after the date hereof, and shall be true and
correct in all material aspects on and as of the Closing Date with the same
force and effect as though such representations and warranties were made as of
the Closing Date.
7.2 Compliance with this Agreement.
The Shaker Group shall have performed and complied with in all
material respects all agreements, conditions, covenants and obligations required
by this Agreement to be performed or complied with by it prior to or by the
Closing Date.
7.3 Compliance with the Securities Laws.
The Company, with the cooperation of the Shaker Group, shall have
filed an information statement with the Securities and Exchange Commission (the
"SEC"), and the Company and the Shaker Group shall have taken such other actions
as are necessary under the Federal and state securities laws to permit the
consummation of the transactions contemplated by this Agreement.
7.4 No Threatened or Pending Litigation.
On the Closing Date, no suit, action or other Proceeding, or
injunction or final judgment relating thereto, shall be threatened or pending
before any court or governmental or regulatory official, body or authority in
which it is sought to restrain or prohibit, or to obtain damages or other relief
in connection with, this Agreement or the consummation of the transactions
contemplated by this Agreement, and no investigation that might result in any
such suit, action or Proceeding shall be pending or threatened.
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7.5 Opinion of Duff & Phelps LLC.
The Special Committee of the board of directors of the Company shall
have obtained an opinion from Duff & Phelps, LLC, in form and substance
satisfactory to the Special Committee, indicating that the consideration to be
received by the Company as a result of the transactions contemplated by this
Agreement is fair, from a financial point of view, to the unaffiliated public
stockholders of the Company (i.e., the stockholders of the Company who are not
directors or officers of the Company and who are not affiliated with the Shaker
Group or any entities that the Shaker Group or any member thereof controls).
7.6 Tax-Free Exchange Opinion.
The Company and the Shaker Group shall have obtained an opinion from
BDO Seidman, LLP, the Company's certified public accountants, in form and
substance satisfactory to the Company and the Shaker Group, indicating that the
transactions contemplated by this Agreement will qualify as tax-free exchanges
under the Internal Revenue Code of 1986, as amended, and will not cause the
recognition of income by either the Company or the Shaker Group for Federal
income tax purposes. In order to obtain such opinion, on the Closing Date the
Shaker Group shall not have any options to acquire shares of common stock of the
Company.
7.7 Consents and Approvals.
(a) The stockholders of the Company shall have approved the
transactions contemplated by this Agreement in accordance with the requirements
of the General Corporation Law of the State of Delaware.
(b) Ford, Chrysler/Dodge/Jeep, Lincoln/Mercury, Mazda, Toyota and
Chevrolet shall have approved Shaker Auto Group as the transferee of the
Franchises in accordance with the terms of this Agreement.
(c) Shaker Auto Group shall have obtained floor plan financing in
accordance with the terms of this Agreement.
(d) Each obligee of the Assumed Liabilities under Section 2.1.6
shall have consented to the release of the Company from any and all liability
relating to the Assumed Liabilities to the extent required by the terms of the
Assumed Liabilities, without such release being deemed to be an event of default
and without imposing any material loan modifications unless approved by the
Shaker Group and the Company. In particular and not by way of limitation, the
obligee of the debt related to the Rental Cars, The First National Bank of
Chicago, as Trustee For The Registered Holders of Falcon Franchise Loan Trust
1991-1 Franchise Loan Backed Bonds (as successor in interest to Falcon
Financial, LLC), Merchants Bank, Ford Motor Company Credit, Bank of America,
N.A. and Consenzi Automotive Realty Limited Partnership shall each have
consented to the release of the Company from any and all liability relating to
the debt owed to such obligee in connection with the business operations of the
New England Subsidiaries.
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(e) Each member of the Shaker Group, and each individual related to
any member of the Shaker Group who is listed in Exhibit C, shall have resigned
as an employee, director and/or officer of the Company and each affiliate of the
Company other than the New England Subsidiaries, effective as of the Closing
Date.
7.8 Working Capital
Immediately following the Closing, Shaker Auto Group will have
Working Capital of $6,015,000.
7.9 Additional Documents
The Shaker Group must have delivered to the Company such documents
as the Company may reasonably request for the purpose of (a) evidencing the
accuracy of any of the Shaker Group's representations and warranties, (b)
evidencing the performance by the Shaker Group of, or the compliance by the
Shaker Group with, any covenant or obligation required to be performed or
complied with by the Shaker Group, and (c) otherwise facilitating the
consummation or performance of any of the transactions contemplated by this
Agreement.
7.10 No Prohibition
Neither the consummation nor the performance of any of the
transactions contemplated by this Agreement will, directly or indirectly (with
or without notice or lapse of time), materially contravene, or conflict with, or
result in a material violation of, or cause the Company or any Person affiliated
with the Company to suffer any material adverse consequence under any applicable
Legal Requirement or Order.
8. DELIVERIES AT CLOSING
8.1 The Company's Documents. Subject to the Shaker Group's
satisfaction of its obligations hereunder, the Company shall execute and/or
deliver to the Shaker Group at the Closing, the following instruments and
documents, all of which shall be in form and substance as set forth in an
applicable Exhibit hereto or, if not so set forth, otherwise as may be
reasonably acceptable to the Shaker Group:
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(a) The Company shall organize Shaker Auto Group and shall deliver
to Shaker Auto Group all of the outstanding shares of stock of the New England
Subsidiaries, together with such assignments and instruments of transfer as
shall be necessary and reasonably requested by the Shaker Group in order to
assign and transfer, or to evidence the assignment and transfer of, the shares
of stock of the New England Subsidiaries to Shaker Auto Group, all in a form and
substance satisfactory to the Shaker Group and its counsel.
(b) The Company shall deliver to the Shaker Group all of the
outstanding shares of stock of Shaker Auto Group, together with such assignments
and instruments of transfer as shall be necessary and reasonably requested by
the Shaker Group in order to assign and transfer, or to evidence the assignment
and transfer of, the shares of stock of Shaker Auto Group to the Shaker Group,
all in a form and substance satisfactory to the Shaker Group and its counsel.
(c) The Company shall deliver to the Shaker Group a certificate of
the Company stating that all representations and warranties of the Company set
forth in Article 3 herein are true and correct in all material respects on and
as of the Closing Date with the same force and effect as if such representations
and warranties had been made on and as of the Closing Date in the form as
attached as Exhibit D, which is incorporated herein by reference.
(d) The Company shall deliver to the Shaker Group copies of the
following documents certified by an authorized corporate officer of the
respective corporation to be true, correct and complete: (i) certificate of good
standing of the Company, Shaker Auto Group and the New England Subsidiaries from
the Secretary of State of their respective states of incorporation; (ii)
resolutions approved by the board of directors and stockholder(s) of the
Company, Shaker Auto Group and the New England Subsidiaries in connection with
the execution of this Agreement and the consummation of the transactions
contemplated hereby; (iii) Certificate of Incorporation of the Company, Shaker
Auto Group and the New England Subsidiaries; and (iv) Bylaws of the Company,
Shaker Auto Group and the New England Subsidiaries.
(e) The Company shall deliver to the Shaker Group a duly executed
Assumption of Liabilities Agreement in the form as attached as Exhibit E.
(f) The Company shall deliver to the Shaker Group all client lists
and data bases relating to either the sales and/or service and parts operations
currently maintained by the New England Subsidiaries.
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(g) The Company shall deliver to the Shaker Group all of the
Company's books and records, including, but not limited to, all of the Company's
licenses and permits, relating to Shaker Auto Group and the New England
Subsidiaries.
(h) The Company shall deliver to the Shaker Group such other
documents as shall reasonably be requested by the Shaker Group in order to
effectively carry out the transactions contemplated by this Agreement, duly
executed by the Company where appropriate.
8.2 The Shaker Group's Documents
Subject to the Company's satisfaction of its obligations hereunder,
the Shaker Group shall execute and/or deliver to the Company at the Closing, the
following instruments and documents, all of which shall be in form and substance
as set forth in an applicable Exhibit hereto or, if not so set forth, otherwise
as may be reasonably acceptable to the Company:
(a) The Shaker Group shall deliver to the Company all of the
outstanding shares of stock of the Company which the Shaker Group owns, together
with such assignments and instruments of transfer as shall be necessary and
reasonably requested by the Company in order to assign and transfer, or to
evidence the assignment and transfer of, the shares of stock of the Company
which the Shaker Group owns to the Company, all in a form and substance
satisfactory to the Company and its counsel.
(b) The Shaker Group shall deliver to the Company a certificate of
the Shaker Group stating that all representations and warranties of the Shaker
Group set forth in Article 4 herein are true and correct in all material
respects on and as of the Closing Date with the same force and effect as if such
representations and warranties had been made on and as of the Closing Date in
the form as attached as Exhibit F, which is incorporated herein by reference.
(c) The Shaker Group shall deliver to the Company such other
documents as shall reasonably be requested by the Company in order to
effectively carry out the transactions contemplated by this Agreement, duly
executed by the Shaker Group where appropriate.
9. INDEMNIFICATION
9.1 Indemnification by the Company
The Company shall indemnify, defend and hold harmless the Shaker
Group from, against, and with respect to any and all losses, damages, claims,
obligations, liabilities, costs and expenses (including without limitation
reasonable attorneys' fees and costs, consequential damages, and expenses
incurred in investigating, preparing, defending against or prosecuting any
litigation, claims, proceeding or demand), of any kind or character (a "Loss")
arising out of or in connection with any of the following:
A-23
(a) any Breach of any of the representations or warranties of the
Company contained in or made pursuant to this Agreement;
(b) any failure by the Company to perform or observe, in full, or in
part, any covenant, agreement or condition to be performed or observed by it
pursuant to this Agreement;
(c) any and all liabilities and obligations of the Company (other
than the Assumed Liabilities) of any kind or nature whatsoever, whether accrued,
absolute, contingent or otherwise, known or unknown; or
(d) any action brought by one or more of the stockholders of the
Company against any member of the Shaker Group which is based on the
Contemplated Transactions or upon any violation of Sections 9.1(a), (b) or (c)
above; provided, however, that such indemnification shall not apply to any claim
based upon the operations of the New England Subsidiaries or upon the fraud or
misrepresentation of any member of the Shaker Group.
9.2 Indemnification by the Shaker Group
The Shaker Group shall indemnify, defend and hold harmless the
Company (or such individual or legal entity as it may designate) and its
shareholders, officers, directors, agents, employees, affiliates, and assigns,
from, against, and with respect to any and all losses, damages, claims,
obligations, liabilities, costs and expenses (including without limitation
reasonable attorneys' fees and costs, consequential damages, and expenses
incurred in investigating, preparing, defending against or prosecuting any
litigation, claims, proceeding or demand), of any kind or character (a "Loss")
arising out of or in connection with any of the following:
(a) any Breach of any of the representations or warranties of the
Shaker Group contained in or made pursuant to this Agreement;
(b) any failure by the Shaker Group to perform or observe, in full,
or in part, any covenant, agreement or condition to be performed or observed by
it pursuant to this Agreement; or
(c) any and all liabilities and obligations of the Shaker Group
(including but not limited to the Assumed Liabilities) of any kind or nature
whatsoever, whether accrued, absolute, contingent or otherwise, known or
unknown.
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10. GENERAL PROVISIONS
10.1 Brokers or Finders
Neither party, nor their officers and agents, have incurred any
obligations or liabilities, contingent or otherwise, for brokerage or finders'
fees or agents commissions or other similar payment in connection with this
Agreement, and each party will indemnify and hold the other harmless from any
such payment alleged to be due as a result of the transfer.
10.2 Expenses
Each party to this Agreement will bear its respective expenses
incurred in connection with the preparation, execution, and performance of this
Agreement and the Contemplated Transactions, including all fees and expenses of
agents, representatives, counsel, and accountants in connection with this
Agreement and the Contemplated Transactions; provided, however, that, in the
event that the Shaker Group refinances any debt owed to The First National Bank
of Chicago, as Trustee For The Registered Holders of Falcon Franchise Loan Trust
1991-1 Franchise Loan Backed Bonds (as successor in interest to Falcon
Financial, LLC) which results in a reduction in the "loan modification fee" or
in the "Due Diligence Deposit" payable by the Company pursuant to that certain
April 25, 2005 proposal letter from Falcon Financial II, LLC to the Company (any
such reduction to be determined by Falcon Financial II, LLC, at its discretion,
and being hereinafter referred to as the "Savings"), then the Company will
reimburse the Shaker Group for its actual out of pocket (incurred and paid)
refinancing costs up to an amount not to exceed the lesser of : (i) such
Savings; or (ii) $37,500; and provided, further, that it is understood and
agreed that the Company shall bear all costs incurred in completing the
transactions contemplated under the aforesaid April 25, 2005 proposal letter
from Falcon Financial II, LLC to the Company, so long as the same do not include
any prepayments or prepayment fees related to debts owed by the Shaker Group
and/or the New England Subsidiaries.
10.3 Public Announcements
Any public announcement or similar publicity with respect to this
Agreement or the Contemplated Transactions will be issued, if at all, at such
time and in such manner as both parties mutually agree. Unless consented to by
the Company in advance or required by Legal Requirements, prior to the Closing
the Company and the Shaker Group shall keep this Agreement strictly confidential
and may not make any disclosure of this Agreement to any Person. The Company and
the Shaker Group will consult with each other concerning the means by which the
Company' employees, customers, and suppliers and others having dealings with the
Company will be informed of the Contemplated Transactions, and both parties will
have the right to be present for any such communication.
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10.4 Confidentiality
Between the date of this Agreement and the Closing Date, the Company
and the Shaker Group will maintain in confidence, exercising Best Efforts, and
will cause the directors, officers, employees, agents, and advisors of the
Company to maintain in confidence (and will not use to the detriment of the
other party) any written, oral, or other information obtained in confidence from
written information stamped "confidential" when originally furnished by the
other party in connection with this Agreement or the Contemplated Transactions,
unless (a) such information is already known to such party or to others not
bound by a duty of confidentiality or such information becomes publicly
available through no fault of such party, (b) the use of such information is
necessary or appropriate in making any filing or obtaining any consent or
approval required for the consummation of the Contemplated Transactions, or (c)
the furnishing or use of such information is required by or necessary or
appropriate in connection with legal proceedings. If the Contemplated
Transactions are not consummated, each party will return or destroy as much of
such written information as the other party may reasonably request.
10.5 Notices
All notices, consents, waivers, and other communications under this
Agreement must be in writing and will be deemed to have been duly given when (a)
delivered by hand (with written confirmation of receipt), (b) sent by telecopier
(with written confirmation of receipt), provided that a copy is mailed by
registered mail, return receipt requested, or (c) when received by the
addressee, if sent by a nationally recognized overnight delivery service
(receipt requested), in each case to the appropriate addresses and telecopier
numbers set forth below (or to such other addresses and telecopier numbers as a
party may designate by notice to the other parties):
Company: Hometown Auto Retailers, Inc.
1309 South Main Street
Waterbury, Connecticut 06706
Attention: William C. Muller, Jr.
Facsimile No.: (203) 756-1339
With a copy to:
Richard L. Emerson, Esq.
Gager, Emerson, Rickart, Bower & Scalzo, LLP
2 Stony Hill Road
Suite 208
Bethel, Connecticut 06801
Facsimile No.: (203) 207-5407
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Shaker Group: Corey E. Shaker
1309 South Main Street
Waterbury, CT 06706
With a copy to:
Robert S. Cooper, Esq.
Zeldes, Needle & Cooper
1000 Lafayette Boulevard
Bridgeport, Connecticut 06601-1740
Facsimile No.: (203) 333-1489
10.6 Jurisdiction; Service of Process
Any action or proceeding seeking to enforce any provision of, or
based on any right arising out of, this Agreement may be brought against any of
the parties in the courts of Connecticut or, if it can acquire jurisdiction, in
the United States District Court for the District of Connecticut, and each of
the parties consents to the jurisdiction of such courts (and of the appropriate
appellate courts) in any such action or proceeding and waives any objection to
venue laid therein. Process in any action or proceeding referred to in the
preceding sentence may be served on any party anywhere in the world. The
prevailing party in any action or proceeding shall be entitled to reasonable
attorney's fees and costs.
10.7 Further Assurances
The parties agree (a) to furnish upon request to each other such
further information, (b) to execute and deliver to each other such other
documents, (c) to do such other acts and things, all as the other party may
reasonably request for the purpose of carrying out the intent of this Agreement
and the documents referred to in this Agreement and (d) to provide information
to the other after the Closing to assist the other in responding to claims,
disputes and litigation.
10.8 Waiver
The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by any party
in exercising any right, power, or privilege under this Agreement or the
documents referred to in this Agreement will operate as a waiver of such right,
power, or privilege, and no single or partial exercise of any such right, power,
or privilege will preclude any other or further exercise of such right, power,
or privilege or the exercise of any other right, power, or privilege. To the
maximum extent permitted by applicable law, (a) no claim or right arising out of
this Agreement or the documents referred to in this Agreement can be discharged
by one party, in whole or in part, by a waiver or renunciation of the claim or
right unless in writing signed by the other party; (b) no waiver that may be
given by a party will be applicable except in the specific instance for which it
is given; and (c) no notice to or demand on one party will be deemed to be a
waiver of any obligation of such party or of the right of the party giving such
notice or demand to take further action without notice or demand as provided in
this Agreement or the documents referred to in this Agreement.
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10.9 Entire Agreement and Modification
This Agreement supersedes all prior agreements between the parties
with respect to its subject matter and constitutes (along with the documents
referred to in this Agreement) a complete and exclusive statement of the terms
of the agreement between the parties with respect to its subject matter. This
Agreement may not be amended except by a written agreement executed by the party
to be charged with the amendment.
10.10 Severability
If any provision of this Agreement is held invalid or unenforceable
by any court of competent jurisdiction, the other provisions of this Agreement
will remain in full force and effect. Any provision of this Agreement held
invalid or unenforceable only in part or degree will remain in full force and
effect to the extent not held invalid or unenforceable.
10.11 Section Headings; Construction
The headings of Sections in this Agreement are provided for
convenience only and will not affect its construction or interpretation. All
references to "Section" or "Sections" refer to the corresponding Section or
Sections of this Agreement. All words used in this Agreement will be construed
to be of such gender or number as the circumstances require. Unless otherwise
expressly provided, the word "including" does not limit the preceding words or
terms.
10.12 Governing Law
This Agreement will be governed by the laws of the State of
Connecticut without regard to conflicts of laws principles.
10.13 Counterparts
This Agreement may be executed in one or more counterparts, each of
which will be deemed to be an original copy of this Agreement and all of which,
when taken together, will be deemed to constitute one and the same agreement.
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10.14 Arm's Length Negotiations
Each party herein expressly represents and warrants to all other
parties hereto that (a) before executing this Agreement, said party has fully
informed itself of the terms, contents, conditions and effects of this
Agreement; (b) said party has relied solely and completely upon its own judgment
in executing this Agreement; (c) said party has had the opportunity to seek and
has obtained the advice of counsel before executing this Agreement; (d) said
party has acted voluntarily and of its own free will in executing this
Agreement; (e) said party is not acting under duress, whether economic or
physical, in executing this Agreement; and (f) this Agreement is the result of
arm's length negotiations conducted by and among the parties and their
respective counsel.
10.15 Bulk Transfer Laws
The Company and the Shaker Group shall comply in all respects with
the notification requirements of any State Taxing Authority with respect to a
bulk transfer to the extent applicable to the transactions contemplated by this
Agreement.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first written above.
COMPANY:
HOMETOWN AUTO RETAILERS, INC. ATTESTED:
By:/s/ William C. Muller, Jr. /s/Charles F. Schwartz
--------------------------------------- ----------------------
William C. Muller, Jr. Charles F. Schwartz
Its Vice President Its Secretary
NEW ENGLAND SUBSIDIARIES:
ERR ENTERPRISES, INC. ATTESTED:
By:/s/ Corey Shaker /s/Charles F. Schwartz
--------------------------------------- ----------------------
Corey Shaker Charles F. Schwartz
Its President Its Secretary
FAMILY FORD, INC. ATTESTED:
By:/s/ Corey Shaker /s/Charles F. Schwartz
--------------------------------------- ----------------------
Corey Shaker Charles F. Schwartz
Its President Its Secretary
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SHAKER'S, INC. ATTESTED:
By:/s/ Corey Shaker /s/Charles F. Schwartz
--------------------------------------- ----------------------
Corey Shaker Charles F. Schwartz
Its President Its Secretary
SHAKER'S LINCOLN/MERCURY AUTO CARE ATTESTED:
INC.
By:/s/ Corey Shaker /s/Charles F. Schwartz
--------------------------------------- ----------------------
Corey Shaker Charles F. Schwartz
Its President Its Secretary
HOMETOWN BRATTLEBORO, INC. ATTESTED:
By:/s/ Corey Shaker /s/Charles F. Schwartz
--------------------------------------- ----------------------
Corey Shaker Charles F. Schwartz
Its President Its Secretary
HOMETOWN AUTO FRAMINGHAM, INC. ATTESTED:
By:/s/ Corey Shaker /s/Charles F. Schwartz
--------------------------------------- ----------------------
Corey Shaker Charles F. Schwartz
Its President Its Secretary
BAY STATE REALTY HOLDINGS, INC. ATTESTED:
By:/s/ Corey Shaker /s/Charles F. Schwartz
--------------------------------------- ----------------------
Corey Shaker Charles F. Schwartz
Its President Its Secretary
BRATTLEBORO REALTY HOLDINGS, INC. ATTESTED:
By:/s/ Corey Shaker /s/Charles F. Schwartz
--------------------------------------- ----------------------
Corey Shaker Charles F. Schwartz
Its President Its Secretary
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THE SHAKER GROUP:
WITNESSED:
/s/ Corey Shaker /s/ Lillian Shaker
- --------------------------------------- ----------------------
Corey Shaker Lillian Shaker
WITNESSED:
/s/ Corey Shaker /s/ Lillian Shaker
- --------------------------------------- ----------------------
Corey Shaker, Custodian for Lindsay Shaker Lillian Shaker
WITNESSED:
/s/ Corey Shaker /s/ Lillian Shaker
- --------------------------------------- ----------------------
Corey Shaker, Custodian for Kristen Shaker Lillian Shaker
WITNESSED:
/s/ Corey Shaker /s/ Lillian Shaker
- --------------------------------------- ----------------------
Corey Shaker, Custodian for Edward Shaker Lillian Shaker
Edward Shaker Family Trust WITNESSED:
By /s/ Corey Shaker /s/ Lillian Shaker
- --------------------------------------- ----------------------
Corey Shaker Lillian Shaker
Its Trustee
WITNESSED:
/s/ Joseph Shaker /s/ Judy Austin
- --------------------------------------- ----------------------
Joseph Shaker Judy Austin
Shaker Irrevocable Trust WITNESSED:
By /s/ Joseph Shaker /s/ Judy Austin
------------------------------------ ----------------------
Joseph Shaker Judy Austin
Its Trustee
Richard Shaker Family Trust WITNESSED:
By /s/ Joseph Shaker /s/ Judy Austin
------------------------------------ ----------------------
Joseph Shaker Judy Austin
Its Trustee
A-31
WITNESSED:
/s/ Steven Shaker /s/ Lillian Shaker
- --------------------------------------- ----------------------
Steven Shaker Lillian Shaker
WITNESSED:
/s/ Janet Shaker /s/ Lillian Shaker
- --------------------------------------- ----------------------
Janet Shaker Lillian Shaker
WITNESSED:
/s/ Paul Shaker /s/ Lillian Shaker
- --------------------------------------- ----------------------
Paul Shaker Lillian Shaker
WITNESSED:
/s/ Edward D. Shaker /s/ Labebe Shaker
- --------------------------------------- ----------------------
Edward D. Shaker Labebe
WITNESSED:
/s/ Edward Shaker /s/ Labebe Shaker
- --------------------------------------- ----------------------
Edward Shaker Labebe Shaker
WITNESSED:
/s/ Lillian Shaker /s/ Janet Shaker
- --------------------------------------- ----------------------
Lillian Shaker Janet Shaker
A-32
WITNESSED:
/s/ Richard Shaker /s/ Labebe Shaker
- --------------------------------------- ----------------------
Richard Shaker Labebe Shaker
WITNESSED:
/s/ Rose Shaker /s/ Lillian Shaker
- --------------------------------------- ----------------------
Rose Shaker Lillian Shaker
A-33
EXHIBIT A
Shaker Group
Company Class A Company Class B Shaker Auto Group
Name Common Stock Common Stock Common Stock
- ---- --------------- --------------- ---------------
Corey Shaker 120,142 249,100 369,242
Corey Shaker,
Custodian for
Lindsay 24 24
Corey Shaker,
Custodian for
Kristen 24 24
Corey Shaker,
Custodian for
Edward 24 24
Edward Shaker
Family Trust 15,980 15,980
Joseph Shaker 147,826 265,832 413,658
Shaker Irrevocable
Trust 40,000 40,000
Richard Shaker
Family Trust 15,980 15,980
Steven Shaker 115,142 206,424 321,566
Janet Shaker 71,428 227,668 299,096
Paul Shaker 218,268 218,268
Edward D. Shaker 107,142 206,612 313,754
Edward Shaker 112,142 175,404 287,546
Lillian Shaker 13,700 13,700
Richard Shaker 114,142 175,404 289,546
Rose Shaker 5,828 5,828
Totals: 801,736 1,802,500 2,604,236
A-34
EXHIBIT B
Leases
Lessee/Location of Property: Lessor:
Shaker's Lincoln/Mercury Shaker Enterprises, a Connecticut
831 Straits Turnpike general partnership
Watertown, CT 06795
Family Ford, Inc. Joseph Shaker Realty, a Connecticut
1200 Wolcott Street general partnership
Waterbury, CT 06705
Hometown Auto Retailers, Inc. Joseph Shaker Realty, a Connecticut
1309 South Main Street general partnership
Waterbury, CT 06706
Wellesley Mazda Regan and Stapleton, Inc.
965 Worcester Road
Wellesley, MA 02181
A-35
Exhibit C
Individuals Related to Shaker Group
Who Will Resign as Employees, Officers and/or Directors
of the Company and its Affiliates
o Corey Shaker, President, Chief Executive Officer and Director of the
Company
o Joseph Shaker, Regional Vice President and Director of the Company
o Steven Shaker, Regional Vice President of the Company
o Edward Shaker, Employee
o Lillian Shaker, Employee
o Edward D. Shaker, Employee
o Janet Shaker, Employee
o Richard Shaker, Employee
o Rose Shaker, Employee
A-36
Exhibit D
Certification of Representations and Warranties
of the Company set forth in Article 3
The undersigned does hereby certify, pursuant to Section 8.1(c) of the
Exchange Agreement dated _____________, 2005 among Hometown Auto Retailers,
Inc., ERR Enterprises, Inc., Family Ford, Inc., Shaker's, Inc., Shaker's
Lincoln/Mercury Auto Care, Inc., Hometown Brattleboro, Inc., Hometown Auto
Framingham, Inc., Bay State Realty Holdings, Inc., Brattleboro Realty Holdings,
Inc. and the Shaker Group (the "Agreement") that:
(1) The undersigned is the duly-elected ______________ of Hometown Auto
Retailers, Inc. (the "Company") and, as such, is authorized to make this
certificate on behalf of the Company.
(2) The representations and warranties of the Company set forth in Article
3 of the Agreement are true and correct in all material respects on and as of
this date with the same force and effect as if such representations and
warranties had been made on and as of the date hereof.
(3) The Company has performed and complied in all material respects with
all of the terms, covenants, and conditions contained in the Agreement that are
required to be performed or complied with by the Company on or before the date
hereof.
Dated: _________________ ________________________
Name:
Title:
A-37
Exhibit E
Assumption of Liabilities Agreement
By Shaker Auto Group and the New England Subsidiaries
Relating to the Assumed Liabilities
The undersigned do hereby agree, pursuant to Section 8.1(e) of the
Exchange Agreement dated _____________, 2005 among Hometown Auto Retailers,
Inc., ERR Enterprises, Inc., Family Ford, Inc., Shaker's, Inc., Shaker's
Lincoln/Mercury Auto Care, Inc., Hometown Brattleboro, Inc., Hometown Auto
Framingham, Inc., Bay State Realty Holdings, Inc., Brattleboro Realty Holdings,
Inc. and the Shaker Group (the "Agreement") to the following:
(1) Hometown Auto Retailers, Inc. (the "Company") hereby assigns to Shaker
Auto Group, Inc. ("Shaker Auto Group") and to ERR Enterprises, Inc., Family
Ford, Inc., Shaker's, Inc., Shaker's Lincoln/Mercury Auto Care, Inc., Hometown
Brattleboro, Inc., Hometown Auto Framingham, Inc., Bay State Realty Holdings,
Inc. and Brattleboro Realty Holdings, Inc. (the "New England Subsidiaries") all
of its duties and obligations with respect to, and Shaker Auto Group and the New
England Subsidiaries hereby assume and agree to pay, discharge or perform, as
appropriate, all of the duties and obligations of the Company arising in
connection with or relating to, the Assumed Liabilities as described in Section
2.1.6 of the Agreement.
(2) Shaker Auto Group and the New England Subsidiaries hereby indemnify
and hold harmless the Company, its directors, officers, employees, agents,
stockholders, successors and assigns, and all persons claiming through them,
from any and all costs, claims, liabilities or expenses (including reasonable
attorneys fees) which the Company may incur with respect to the liabilities and
obligations of the Company which have been specifically assumed hereby by Shaker
Auto Group and the New England Subsidiaries, but only to the extent set forth in
the Agreement.
(3) This Assumption of Liabilities Agreement shall be governed by and
construed in accordance with the laws of the State of Connecticut.
IN WITNESS WHEREOF, the parties hereto have duly executed and sealed this
Assumption of Liabilities Agreement as of the _________ day of _____________,
2005.
COMPANY:
HOMETOWN AUTO RETAILERS, INC. ATTESTED:
By: ___________________________ ______________________________
William C. Muller, Jr.
A-38
SHAKER AUTO GROUP:
SHAKER AUTO GROUP, INC. ATTESTED:
By: ___________________________ ______________________________
NEW ENGLAND SUBSIDIARIES:
ERR ENTERPRISES, INC. ATTESTED:
By: ___________________________ ______________________________
FAMILY FORD, INC. ATTESTED:
- ----------------
By: ___________________________ ______________________________
SHAKER'S, INC. ATTESTED:
By: ___________________________ ______________________________
SHAKER'S LINCOLN/MERCURY AUTO CARE ATTESTED:
INC.
By: ___________________________ ______________________________
HOMETOWN BRATTLEBORO, INC. ATTESTED:
By: ___________________________ ______________________________
A-39
HOMETOWN AUTO FRAMINGHAM, INC. ATTESTED:
By: ___________________________ ______________________________
BAY STATE REALTY HOLDINGS, INC. ATTESTED:
By: ___________________________ ______________________________
BRATTLEBORO REALTY HOLDINGS, INC. ATTESTED:
By: ___________________________ ______________________________
A-40
Exhibit F
Certification of Representations and Warranties
of the Shaker Group set forth in Article 4
The undersigned do hereby certify, pursuant to Section 8.2(b) of the
Exchange Agreement dated _____________, 2005 among Hometown Auto Retailers,
Inc., ERR Enterprises, Inc., Family Ford, Inc., Shaker's, Inc., Shaker's
Lincoln/Mercury Auto Care, Inc., Hometown Brattleboro, Inc., Hometown Auto
Framingham, Inc., Bay State Realty Holdings, Inc., Brattleboro Realty Holdings,
Inc. and the Shaker Group (the "Agreement") that:
(1) The undersigned are the members of the Shaker Group.
(2) The representations and warranties of the Shaker Group set forth in
Article 4 of the Agreement are true and correct in all material respects on and
as of this date with the same force and effect as if such representations and
warranties had been made on and as of the date hereof.
(3) Each member of the Shaker Group has performed and complied in all
material respects with all of the terms, covenants, and conditions contained in
the Agreement that are required to be performed or complied with by the members
of the Shaker Group on or before the date hereof.
Dated:
---------------------- ------------------------------
Corey Shaker
Dated:
------------------------ ------------------------------
Corey Shaker, Custodian for Lindsay Shaker
Dated:
------------------------ ------------------------------
Corey Shaker, Custodian for Kristen Shaker
Dated:
------------------------ ------------------------------
Corey Shaker, Custodian for Edward Shaker
A-41
Edward Shaker Family Trust
Dated: By
------------------------ ---------------------------
Its Trustee
Dated:
------------------------ ------------------------------
Joseph Shaker
Shaker Irrevocable Trust
Dated: By
------------------------ ---------------------------
Its Trustee
Richard Shaker Family Trust
Dated: By
------------------------ ---------------------------
Its Trustee
Dated:
------------------------ ------------------------------
Steven Shaker
Dated:
------------------------ ------------------------------
Janet Shaker
Dated:
------------------------ ------------------------------
Paul Shaker
Dated:
------------------------ ------------------------------
Edward D. Shaker
A-42
Dated:
----------------------- ------------------------------
Edward Shaker
Dated:
----------------------- ------------------------------
Lillian Shaker
Dated:
----------------------- ------------------------------
Richard Shaker
Dated:
----------------------- ------------------------------
Rose Shaker
A-43
APPENDIX B
FAIRNESS OPINION
DUFF & PHELPS, LLC
June 1, 2005
Special Committee of the Board of Directors
Hometown Auto Retailers, Inc.
1309 S. Main St.
Waterbury, CT 06706
Gentlemen:
Duff & Phelps, LLC ("Duff & Phelps") has been engaged by the special committee
(the "Special Committee") of the board of directors (the "Board of Directors")
of Hometown Auto Retailers, Inc. ("Hometown" or the "Company"), as financial
advisor to the Special Committee, in connection with a contemplated transaction
(the "Proposed Transaction"), as described below. Specifically, Duff & Phelps
has been engaged to provide an opinion (the "Opinion") as to the fairness to the
unaffiliated public stockholders of the Company (i.e. stockholders other than
directors and officers of the Company or affiliated with the Shaker family or
entities that they control (the "Shaker Group")), from a financial point of
view, of the consideration received by the Company in a Proposed Transaction
(without giving effect to any impacts of the Proposed Transaction on any
particular stockholder other than in its capacity as a stockholder). Previously,
Duff & Phelps has not provided financial advisory services to the Company.
Description of the Proposed Transaction
The Proposed Transaction involves a transfer by the Company of all of its New
England dealerships, along with $5 million in cash (subject to adjustment for
fluctuations in the value of certain of the assets and liabilities of the New
England dealerships), to a newly-formed corporation called The Shaker Auto
Group, Inc., and the Company will acquire all of the outstanding shares of
common stock of The Shaker Auto Group, Inc. Immediately following this exchange,
the Shaker Group will transfer to the Company all of its shares of Class A
common stock and Class B common stock, and will receive all of the outstanding
shares of common stock of The Shaker Auto Group, Inc. Following these exchanges,
the Shaker Group will be the owners of the New England dealerships, and the
Company will retain only its New York and New Jersey dealerships.
B-1
Scope of Analysis
In connection with this Opinion, we have made such reviews, analyses and
inquiries, as we have deemed necessary and appropriate under the circumstances.
Our due diligence with regards to the Proposed Transaction included, but was not
limited to, the items summarized below.
1. Conducted meetings with members of the senior management team of
Hometown on February 23 - 25, 2005, including Corey Shaker,
President, CEO and COO, Chuck Schwartz, CFO & Secretary, Bill
Muller, Regional VP, South Division, Joseph Shaker, Regional VP,
East Division, and Steven Shaker, Regional VP, North Division.
Additionally, we toured the Company's dealerships located in
Wellesley and Framingham, MA, Brattleboro, VT, Waterbury and
Watertown, CT, New Windsor, NY, and Clinton and Stewartsville, NJ,
and a Ford factory authorized service center in Naugatuck, CT;
2. Reviewed Hometown's financial statements and SEC filings, including
the annual report on Form 10-K for the fiscal year ended December
31, 2000 to 2004 and quarterly report on Form 10-Q for the three
months ended March 31, 2005;
3. Reviewed Company-prepared budget for fiscal 2005 and projections for
fiscal years 2006 through 2011;
4. Reviewed Company-prepared budget for fiscal 2005 and projections for
fiscal years 2006 through 2011;
5. Reviewed summary information, provided by management, regarding the
Company's overhead allocations;
6. Reviewed company-prepared pro-forma March 31, 2005 balance sheets,
reflecting adjustments related to the Proposed Transaction;
7. Reviewed information provided by management regarding franchisee
working capital and cash requirements for certain dealerships;
8. Analyzed the historical trading price and trading volume of
Hometown's common stock;
9. Reviewed drafts of the Exchange Agreement and Information Statement;
10. Reviewed a draft of tax opinion prepared by BDO Siedman, LLP dated
May 31, 2005;
11. Reviewed a real estate appraisal for Bay State Lincoln-Mercury,
dated October 3, 2002, and prepared by Landauer Realty Group; and
12. Reviewed certain other relevant, publicly available information,
including economic, industry, and investment information.
B-2
Duff & Phelps also took into account its assessment of general economic, market
and financial conditions, as well as its experience in securities and business
valuation, in general, and with respect to similar transactions, in particular.
Duff & Phelps did not make any independent evaluation, appraisal or physical
inspection of the Company's solvency or of any specific assets or liabilities
(contingent or otherwise). This Opinion should not be construed as a valuation
opinion, credit rating, solvency opinion, an analysis of the Company's
creditworthiness or otherwise as tax advice or as accounting advice. In
rendering this Opinion, Duff & Phelps relied upon the fact that the Company has
been advised by counsel as to all legal matters with respect to the Proposed
Transaction, including whether all procedures required by law to be taken in
connection with the Proposed Transaction have been duly, validly and timely
taken; and Duff & Phelps has not made, and assumes no responsibility to make,
any representation, or render any opinion, as to any legal matter.
In preparing its forecasts, performing its analysis and rendering its Opinion
with respect to the Proposed Transaction, Duff & Phelps (i) relied upon the
accuracy, completeness, and fair presentation of all information, data, advice,
opinions and representations obtained from public sources or provided to it from
private sources, including Company, and did not attempt to independently verify
such information, (ii) assumed that any estimates, evaluations and projections
furnished to Duff & Phelps were reasonably prepared and based upon the last
currently available information and good faith judgment of the person furnishing
the same, and (iii) assumed that the final version of all documents reviewed by
us in draft form conform in all material respects to the drafts reviewed. Duff &
Phelps' Opinion further assumes that information supplied and representations
made by Company management are substantially accurate regarding the Company and
the Proposed Transaction. The Company has not placed any limitation upon Duff &
Phelps with respect to the procedures followed or factors considered by Duff &
Phelps in rendering its Opinion.
In our analysis and in connection with the preparation of this Opinion, Duff &
Phelps has made numerous assumptions with respect to industry performance,
general business, market and economic conditions and other matters, many of
which are beyond the control of any party involved in the Proposed Transaction.
Duff & Phelps has also assumed that all of the conditions precedent required to
implement the Proposed Transaction will be satisfied and that the Proposed
Transaction will be completed in accordance with the draft Agreement dated as of
May 31, 2005.
The basis and methodology for this Opinion have been designed specifically for
the express purpose of the Special Committee and may not translate to any other
purpose.
Duff & Phelps has prepared this Opinion effective as of June 1, 2005. The
Opinion is necessarily based upon market, economic, financial and other
conditions as they exist and can be evaluated as of such date, and Duff & Phelps
disclaims any undertaking or obligation to advise any person of any change in
any fact or matter affecting the Opinion which may come or be brought to the
attention of Duff & Phelps after the date hereof. Notwithstanding and without
limiting the foregoing, in the event that there is any change in any fact or
matter affecting the Opinion after the date hereof and prior to the completion
of the Proposed Transaction, Duff & Phelps reserves the right to change, modify
or withdraw the Opinion.
B-3
This letter should not be construed as creating any fiduciary duty on Duff &
Phelps' part to any party.
It is understood that this Opinion is for the information of the Special
Committee in connection with its consideration of the Proposed Transaction and
may not be used for any other purpose without our prior written consent, except
that this Opinion may be included in its entirety in any filing made by the
Company with the Securities and Exchange Commission in respect of the Proposed
Transaction and you may summarize or otherwise reference the existence of this
Opinion in such documents provided that any such summary or reference language
shall be subject to prior approval by Duff & Phelps. This Opinion is not a
recommendation as to how any stockholder should vote or act with respect to any
matters relating to the Proposed Transaction, or whether to proceed with the
Proposed Transaction or any related transaction, nor does it indicate that the
consideration paid is the best possible attainable under any circumstances.
Instead, it merely states whether the price in the Proposed Transaction is
within a range suggested by certain financial analysis. The decision as to
whether to proceed with the Proposed Transaction or any related transaction may
depend on an assessment of factors unrelated to the financial analysis on which
this Opinion is based.
Conclusion
Based upon and subject to the foregoing, Duff & Phelps is of the opinion that
the consideration received by the Company in the Proposed Transaction is fair to
the unaffiliated public stockholders of Hometown (i.e. stockholders other than
directors and officers of the Company or affiliated with the Shaker family or
entities that they control), from a financial point of view (without giving
effect to any impact of the Proposed Transaction on any particular stockholder
other than in its capacity as a stockholder).
Respectfully submitted,
/s/ DUFF & PHELPS, LLC
- -----------------------
DUFF & PHELPS, LLC
B-4