SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission file number: 000-24669
HOMETOWN AUTO RETAILERS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 06-1501703
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
774 Straits Turnpike
Watertown, CT 06795
(Address of principal executive offices) (Zip code)
(860) 945-6900
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Title Outstanding
- ------------------------------------------------ --------------
Common Stock, Class A, par value $.001 per share 3,563,605
Common Stock, Class B, par value $.001 per share 3,611,500
1
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. Consolidated Balance Sheets at June 30, 2002 (Unaudited)
and December 31, 2001 (Audited) 3
Unaudited Consolidated Statements of Operations for three and six
months ended June 30, 2002 and 2001(Restated) 4
Unaudited Consolidated Statements of Stockholders' Equity for the
six months ended June 30, 2002 and 2001 (Restated) 5
Unaudited Consolidated Statements of Cash Flows for the six
months ended June 30, 2002 and 2001 (Restated) 6
Notes to Unaudited Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
FORWARD LOOKING STATEMENTS
Certain statements made in this Quarterly Report on Form 10-Q are
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of management
for future operations. Such statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of Hometown Auto Retailers, Inc. ("Hometown") to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. The forward-looking statements
included herein are based on current expectations that involve numerous risks
and uncertainties. Hometown's plans and objectives are based, in part, on
assumptions involving the continued expansion of business. Assumptions relating
to the foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of Hometown. Although Hometown believes that its assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
forward-looking statements included in this Report will prove to be accurate. In
light of the significant uncertainties inherent in the forward-looking
statements included herein particularly in view of Hometown's limited history of
operating multiple dealerships in a combined entity, the inclusion of such
information should not be regarded as a representation by Hometown or any other
person that the objectives and plans of Hometown will be achieved. Factors that
could cause actual results to differ materially from those expressed or implied
by such forward-looking statements include, but are not limited to, the factors
set forth herein under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
2
PART I. FINANCIAL INFORMATION
HOMETOWN AUTO RETAILERS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
June 30, December 31,
ASSETS 2002 2001
(Unaudited)
-------- --------
Current Assets:
Cash and cash equivalents $ 4,136 $ 4,446
Accounts receivable, net 6,295 5,656
Inventories, net 37,746 31,887
Prepaid expenses and other current assets 381 344
Deferred income taxes and taxes receivable 955 1,681
-------- --------
Total current assets 49,513 44,014
Property and equipment, net 12,630 11,889
Goodwill, net 23,708 23,708
Other assets 2,718 2,231
-------- --------
Total assets $ 88,569 $ 81,842
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Floor plan notes payable $ 39,210 $ 32,553
Accounts payable and accrued expenses 5,824 6,160
Current maturities of long-term debt and capital
lease obligations 758 709
Deferred revenue 579 476
-------- --------
Total current liabilities 46,371 39,898
Long-term debt and capital lease obligations 12,433 12,797
Long-term deferred income taxes 830 721
Other long-term liabilities and deferred revenue 909 974
-------- --------
Total liabilities 60,543 54,390
Stockholders' Equity
Preferred stock, $.001 par value, 2,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, Class A, $.001 par value, 12,000,000 shares
authorized, 3,563,605 and 3,561,605 shares issued and
outstanding 3 3
Common stock, Class B, $.001 par value, 3,760,000 shares
authorized, 3,611,500 and 3,613,500 shares issued and
outstanding 4 4
Additional paid-in capital 29,760 29,730
Accumulated deficit (1,741) (2,285)
-------- --------
Total stockholders' equity 28,026 27,452
-------- --------
Total liabilities and stockholders' equity $ 88,569 $ 81,842
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
HOMETOWN AUTO RETAILERS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------------------------------------------
2002 2001 2002 2001
(Restated) (Restated)
----------- ----------- ----------- -----------
Revenues
New vehicle sales $ 44,920 $ 41,351 $ 81,575 $ 76,010
Used vehicle sales 19,923 24,306 40,037 42,591
Parts and service sales 5,928 6,642 12,030 12,590
Other, net 2,231 2,155 4,453 3,910
----------- ----------- ----------- -----------
Total revenues 73,002 74,454 138,095 135,101
Cost of sales
New vehicle 42,122 38,681 76,555 70,915
Used vehicle 18,170 21,955 36,431 38,326
Parts and service 2,609 2,762 5,401 5,614
----------- ----------- ----------- -----------
Total cost of sales 62,901 63,398 118,387 114,855
----------- ----------- ----------- -----------
Gross profit 10,101 11,056 19,708 20,246
Amortization of goodwill -- 175 -- 353
Selling, general and administrative expenses 8,779 8,913 17,151 16,444
----------- ----------- ----------- -----------
Income from operations 1,322 1,968 2,557 3,449
Interest income 4 29 21 30
Interest (expense) (834) (1,096) (1,685) (2,367)
Other income 18 -- 24 254
Other (expense) (1) (1) (3) (2)
----------- ----------- ----------- -----------
Income before taxes 509 900 914 1,364
Provision for income taxes 200 291 370 558
----------- ----------- ----------- -----------
Net income $ 309 $ 609 $ 544 $ 806
=========== =========== =========== ===========
Earnings per share, basic $ 0.04 $ 0.10 $ 0.08 $ 0.13
=========== =========== =========== ===========
Earnings per share, diluted $ 0.04 $ 0.10 $ 0.08 $ 0.11
=========== =========== =========== ===========
Weighted average shares outstanding, basic 7,175,105 6,000,109 7,175,105 6,000,109
Weighted average shares outstanding, diluted 7,175,105 6,200,109 7,175,105 7,111,146
The accompanying notes are an integral part of these consolidated financial
statements.
4
HOMETOWN AUTO RETAILERS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Class A Class B Retained
Common Stock Common Stock Additional Earnings Total
---------------- ----------------- Paid-in (Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit) Equity
----- ------ ------ ------ ------- -------- -------
Balance at
December 31, 2000
(Restated) 2,301 $ 2 3,699 $4 $28,786 $ (149) $28,643
Conversion of Class B
Common to Class A Common 14 -- (14) -- -- -- --
Net income -- -- -- -- -- 806 806
----- ------ ----- ----- ------- -------- -------
Balance at
June 30, 2001
(Restated) 2,315 $ 2 3,685 $4 $28,786 $ 657 $29,449
===== ====== ===== ===== ======= ======= =======
Balance at
December 31, 2001 3,562 $ 3 3,613 $4 $29,730 $(2,285) $27,452
Conversion of Class B
Common to Class A Common 2 -- (2) -- -- -- --
Paid subscription
receivable 30 30
Net income -- -- -- -- -- 544 544
----- ------ ----- ----- ------- -------- -------
Balance at
June 30, 2002 3,564 $ 3 3,611 $ 4 $29,760 $(1,741) $28,026
===== ====== ===== ===== ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
HOMETOWN AUTO RETAILERS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Six Months ended
June 30,
-------------------
2002 2001
(Restated)
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 544 $ 806
Adjustments to reconcile net income
to net cash provided by (used in) operating activities -
Depreciation and amortization 473 812
Gain on disposal of business unit -- (254)
Deferred income taxes 138 639
Changes in assets and liabilities:
Accounts receivable, net (639) (2,165)
Inventories, net (5,859) 3,158
Prepaid expenses and other current assets (37) (508)
Other assets 210 67
Floor plan notes payable 6,657 (3,183)
Accounts payable and accrued expenses (336) 750
Deferred revenue - current 103 (19)
Other long term liabilities and deferred revenue (65) (21)
------- -------
Net cash provided by operating activities 1,189 82
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,214) (193)
Disposal of business unit -- 688
------- -------
Net cash provided by (used in) investing activities (1,214) 495
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt and capital lease obligations (315) (233)
Collection of subscription receivable 30 --
------- -------
Net cash (used in) financing activities (285) (233)
Net increase (decrease) in cash and cash equivalents (310) 344
CASH AND CASH EQUIVALENTS, beginning of period 4,446 586
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 4,136 $ 930
======= =======
Cash paid for - Interest $ 1,810 $ 2,113
Cash paid for - Taxes $ 256 $ 68
The accompanying notes are an integral part of these consolidated financial
statements.
6
HOMETOWN AUTO RETAILERS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Business of Hometown Auto Retailers, Inc. ("Hometown" or the "Company")
Hometown sells new and used cars and light trucks, provides maintenance
and repair services, sells replacement parts and provides related financing,
insurance and service contracts through 10 franchised dealerships located in New
Jersey, New York, Connecticut, Massachusetts and Vermont. Hometown's dealerships
offer 12 American and Asian automotive brands including Chevrolet, Chrysler,
Daewoo, Dodge, Ford, Isuzu, Jeep, Lincoln, Mazda, Mercury, Oldsmobile and
Toyota.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated balance sheet as of June 30, 2002, the
consolidated statements of operations for the three and six months ended June
30, 2002 and 2001 (Restated), the consolidated statements of stockholders'
equity and the consolidated statements of cash flows for the six months ended
June 30, 2002 and 2001 (Restated), are unaudited. The consolidated financial
statements include all significant majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
In the opinion of management, all adjustments necessary to present fairly
the financial position, results of operations and cash flows for the interim
periods were made. Certain items in the June 30, 2001 financial statements were
reclassified to conform to the classification of the June 30, 2002 financial
statements. Due to seasonality and other factors, the results of operations for
interim periods are not necessarily indicative of the results that will be
realized for the entire year.
Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, were omitted. Accordingly, these consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto for the year ended December 31, 2001, which are included in the
Hometown's filing of its annual report on Form 10-K.
The financial statements have been prepared in conformity with generally
accepted accounting principles and, accordingly, include amounts based on
estimates and judgments of management. Actual results could differ from those
estimates.
New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (FASB) issued
SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which
supercedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets to be
Disposed Of" and the accounting and reporting provisions of Accounting
Principles Board Opinion (APB) 30, "Reporting the Results of Operations -
Reporting the Effects of the Disposal of a Segment Business and Extraordinary,
Unusual, and Infrequently Occurring Events and Transactions". SFAS 144 addresses
financial accounting and reporting for the impairment and disposal of long-lived
assets. Discontinued operations accounting will be used for a component of an
entity and future operating losses of discontinued operations will no longer be
accrued. Additionally, assets acquired and held for disposal are recorded based
on fair value less cost to sell at the acquisition date. SFAS 144 is effective
for fiscal years beginning after December 15, 2001.
In June 2001, the FASB approved SFAS Nos. 141 and 142 "Business
Combinations" and "Goodwill and Other Intangible Assets", respectively. SFAS
141, among other things, eliminates the "Pooling of Interests" method
7
of accounting for business acquisitions entered into after June 30, 2001. SFAS
142, among other things, eliminates the need to amortize goodwill and requires
companies to use a fair-value approach to determine whether there is an
impairment of existing and future goodwill.
Additionally, an acquired intangible asset should be separately recognized
if the benefit of the intangible asset is obtained through contractual or other
legal rights, or if the intangible asset can be sold, transferred, licensed,
rented or exchanged, regardless of the acquirer's intent to do so. Intangible
assets with definitive lives will need to be amortized over their useful lives.
These statements are effective for Hometown beginning January 1, 2002.
Hometown adopted this statement effective January 1, 2002, and at such
time ceased recording goodwill amortization. By calendar year end, Hometown is
required to determine the correct implied fair value of the goodwill and record
any impairment charges that result from this application as a cumulative effect
of a change in accounting principle. Future impairment losses would be recorded
as an operating expense. To test for impairment, Hometown has obtained
appraisals of its reporting units, established its fair value benchmarks and
performed an evaluation that indicates a severe impairment exists and expects to
record a one-time, non-cash charge to reduce the carrying value of it goodwill
in the third quarter. See Note 5.
3. RESTATEMENT OF PRIOR YEARS FINANCIAL STATEMENTS
Subsequent to fiscal year end December 31, 2001, Hometown determined: (i)
two dealership operating leases should have more appropriately been classified
as capital leases, (ii) certain manufacturer incentives should have been more
appropriately reflected as a reduction of inventory costs, and (iii) certain
insurance product sales generated in Connecticut should be recognized over the
life of the contract due to operating under a dealer obligor status according to
state law. Accordingly, Hometown has restated prior year financial statements to
reflect these changes. These restatements are as follows:
(i) Reflecting the two leases as capital leases resulted in recording an
increase in buildings and capital lease obligations of $5.2 million as of July
1998, the lease inception date. Hometown has recorded (a) depreciation expense
on the building, (b) interest expense and principal payments on the related
capital lease obligation and (c) eliminated the lease expense that had
previously been recorded. The effect on income before taxes from these
adjustments was to reduce pre-tax income by $38,000 and $76,000 for the three
and six months ended June 30, 2001, respectively. The after tax effect of these
adjustments was to reduce net income $26,000 and $45,000 for the three and six
months ended June 30, 2001, respectively. These adjustments caused a reduction
in basic and diluted earnings per share of less than $0.01 and $0.01 for the
three months and six months ended June 30, 2001, respectively.
(ii) Manufacturers provide certain assistance to dealerships that had been
recorded as a reduction of interest expense when received. This is more
appropriately reflected as a reduction of inventory costs and cost of sales at
the time of sale of the vehicle. The effect on income before taxes from these
adjustments was to increase pre-tax income by $16,000 and $183,000 for the three
and six months ended June 30, 2001, respectively. The after tax effect of these
adjustments was to increase net income by $11,000 and $108,000 for the three and
six months ended June 30, 2001, respectively. These adjustments caused an
increase of less than $0.01 and $0.02 in basic and diluted earnings per share
for the three and six months ended June 30, 2001, respectively.
(iii) Connecticut dealerships operate under state laws, which make the
dealers responsible for providing warranty service and insurance in the event of
default by the insurance carriers. Accordingly, commissions on insurance and
service contract sales are required to be recognized over the life of the
related insurance product. Previously, the income had been recognized at the
time of sale of the vehicle. The revenue is taken into income over a five-year
period, which is the life of the contract. The effect on income before taxes
from these adjustments was to increase pre-tax income by $36,000 and $72,000 for
the three and six months ended June 30, 2001, respectively. The after tax effect
of these adjustments was to increase net income by $24,000 and $43,000 for the
three and six months ended June 30, 2001, respectively. These adjustments caused
an increase in basic and diluted earnings per share of less than $0.01 and $0.01
for the three months and six months ended June 30, 2001, respectively.
8
At June 30, 2002 and December 31, 2001 Hometown had $1,232,000 and
$1,264,000 of deferred revenue, respectively, relating to insurance and service
contract income.
The total effect of the aforementioned adjustments was to increase income
before taxes $14,000 and $179,000 for the three and six months ended June 30,
2001, respectively. The total effect of these changes was to increase net income
$36,000 and $106,000 for the three and six months ended June 30, 2001,
respectively. The three-month period includes a $27,000 increase in net income
resulting from a decrease in the effective tax rate for the period. There was no
effect on basic earnings per share for three months ended June 30, 2001. Diluted
earnings per share increased $0.01 for three months ended June 30, 2001. Basic
and diluted earnings per share increased $0.01 for the six months ended June 30,
2001. Restated basic and diluted earnings per share are $0.13 and $0.11,
respectively for the six months ended June 30, 2001.
4. EARNINGS PER SHARE
"Basic earnings per share" is computed by dividing net income by the
weighted average common shares outstanding. "Diluted earnings per share" is
computed by dividing net income by the weighted average common shares
outstanding adjusted for the incremental dilution of potentially dilutive
securities. For the three and six months ended June 30, 2001 the computation of
diluted earnings per share included approximately 200,000 and 1,111,000 common
shares, respectively in relation to a stock guaranty issueable in relation to an
acquisition (Note 10). Options and warrants to purchase approximately 1,373,000
and 770,000 shares of common stock were outstanding as of June 30, 2002 and
2001, respectively. The options and warrants were not included in the
computation of diluted earnings per share because the option and warrant prices
were greater than the average market price of the common shares.
See Note 5 for the effect of discontinuing the recording of goodwill
amortization effective January 1, 2002 per SFAS 142.
5. GOODWILL
As discussed in Note 2, effective January 1, 2002, Hometown adopted SFAS
142. At that time the Company ceased recording goodwill amortization. SFAS 142
requires that goodwill be reviewed for impairment upon adoption and annually
thereafter.
By calendar year end, Hometown is required to determine the correct
implied fair value of the goodwill and record any impairment charges that result
from this application as a cumulative effect of a change in accounting
principle. Future impairment losses would be recorded as an operating expense.
To test for impairment, Hometown has obtained appraisals of its reporting units,
established its fair value benchmarks and performed an evaluation that indicates
a severe impairment exists and expects to record a one-time, non-cash charge to
reduce the carrying value of it goodwill in the third quarter.
9
Goodwill amortization expense is as follows:
For the Three Months Ended For the Six Months Ended
06/30/02 06/30/01 06/30/02 06/30/01
(Restated) (Restated)
(in thousands) (in thousands)
------ ------ ------ ----
Goodwill amortization (a) $ -- $ 144 $ -- $293
====== ====== ====== ====
Reported net income $ 309 $ 609 $ 544 $806
====== ====== ====== ====
(a) Goodwill amortization reflects the effect of income tax. The majority
of goodwill amortization is non-deductible for tax purposes.
The 2001 (restated) results do not reflect the provisions of SFAS 142. Had
Hometown adopted SFAS 142 on January 1, 2001, historical net income and basic
and diluted net income per common share would have been changed to the adjusted
amounts indicated below.
For the Three Months Ended For the Six Months Ended
06/30/02 06/30/01 06/30/02 06/30/01
(Restated) (Restated)
(in thousands) (in thousands)
--------- --------- --------- ---------
Reported net income $ 309 $ 609 $ 544 $ 806
Add: Goodwill amortization (a) -- 144 -- 293
--------- --------- --------- ---------
Adjusted net income $ 309 $ 753 $ 544 $ 1,099
========= ========= ========= =========
Earnings per share, Basic
Reported net income $ 0.04 $ 0.10 $ 0.08 $ 0.13
Goodwill amortization (a) -- 0.03 -- 0.05
--------- --------- --------- ---------
Adjusted net income $ 0.04 $ 0.13 $ 0.08 $ 0.18
========= ========= ========= =========
Earnings per share, Diluted
Reported net income $ 0.04 $ 0.10 $ 0.08 $ 0.11
Goodwill amortization (a) -- 0.02 -- 0.04
--------- --------- --------- ---------
Adjusted net income $ 0.04 $ 0.12 $ 0.08 $ 0.15
========= ========= ========= =========
(a) Goodwill amortization reflects the effect of income tax. The majority
of goodwill amortization is non-deductible for tax purposes.
10
The 2001, 2000 (restated) and 1999 (restated) full year results do not
reflect the provisions of SFAS 142. Had Hometown adopted SFAS 142 on January 1,
1999, historical net income and basic and diluted net income per common share
would have been changed to the adjusted amounts indicated below.
For the Years Ended December 31,
2001 2000 1999
(Restated) (Restated)
(in thousands)
--------- --------- ---------
Reported net income (loss) $ (2,136) $ (3,800) $ 641
Add: Goodwill amortization (a) 585 545 508
--------- --------- ---------
Adjusted net income (loss) $ (1,551) $ (3,255) $ 1,149
========= ========= =========
Earnings (loss) per share, Basic
Reported net income (loss) $ (0.32) $ (0.63) $ 0.11
Goodwill amortization (a) 0.08 0.09 0.09
--------- --------- ---------
Adjusted net income (loss) $ (0.24) $ (0.54) $ 0.20
========= ========= =========
Earnings (loss) per share, Diluted
Reported net income (loss) $ (0.32) $ (0.63) $ 0.11
Goodwill amortization (a) 0.08 0.09 0.08
--------- --------- ---------
Adjusted net income (loss) $ (0.24) $ (0.54) $ 0.19
========= ========= =========
(a) Goodwill amortization reflects the effect of income tax. The majority
of goodwill amortization is non-deductible for tax purposes.
6. INVENTORIES
New, used and demonstrator vehicles are stated at the lower of cost or
market, determined on a specific unit basis. Parts and accessories are stated at
the lower of cost (determined on a first-in, first-out basis) or market.
Inventories, net consist of the following:
6/30/02 12/31/01
------- -------
(in thousands)
New Vehicles $27,316 $21,722
Used Vehicles 8,985 8,559
Parts, accessories and other 1,445 1,606
------- -------
Total Inventories $37,746 $31,887
======= =======
11
7. INVESTMENT IN CARDAY INC.
On October 18, 2001, CarDay Inc. ceased operations. Hometown owns
7,380,000 shares of CarDay Inc. As a result of CarDay Inc. ceasing operations,
Hometown now considers the investment to be permanently and totally impaired,
and it is not anticipated that any shareholders will receive any distributions
from the dissolution of CarDay Inc. The entire investment in CarDay Inc. was
charged against income in the quarter ended September 30, 2001.
Summarized financial data for CarDay Inc. for the periods it was not part
of the companies consolidated financial results is as follows:
Statement of Operations Data
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
(000's) (000's)
------- -------
Revenues $ 188 $ 337
Gross profit $ 156 $ 284
Loss from operations $(2,221) $(4,685)
Net loss $(2,201) $(4,645)
8. FLOOR PLAN NOTES PAYABLE
Hometown has a floor plan line of credit at each dealership with Ford
Motor Credit Corporation ("FMCC"). The FMCC floor plan agreement provides
financing for vehicle purchases and is secured by and dependent upon new and
used vehicle inventory levels. Maximum availability under the FMCC agreement is
a function of new and used car sales and is not a pre-determined amount.
In June 2002, Hometown renewed its floor plan agreement with FMCC and is
now subject to the FMCC standard financing agreement which provides for floor
plan loans for new and used vehicles that have variable interest rates that
increase or decrease based on movements in the prime or LIBOR borrowing rates.
9. OTHER INCOME / OTHER EXPENSE
The significant components of Other Income and Other Expense are:
For the Three Months For the Six Months
Ended Ended
06/30/02 06/30/01 06/30/02 06/30/01
(in thousands) (in thousands)
----- ----- ---- -----
Other Income:
Gain on sale of Morristown franchise $-- $-- $ -- $ 254
Miscellaneous 18 -- 24 --
---- ----- ---- -----
Total Other Income $ 18 $-- $ 24 $ 254
==== ===== ==== =====
Other Expense:
Miscellaneous $ (1) $ (1) $ (3) $ (2)
---- ----- ---- -----
Total Other Expense $ (1) $ (1) $ (3) $ (2)
==== ===== ==== =====
12
In January 2001, Hometown sold the franchise for its Morristown, NJ store
back to Lincoln Mercury for $0.7 million in cash. During the first six months of
2001, Hometown received the purchase price plus $23,000 for parts returned, and
paid out a broker's commission of $35,000. Included in accounts receivable is
$23,000 due for returned parts. The transaction resulted in Hometown recording a
$254,000 gain on the sale, which is included in other income.
10. STOCK GUARANTEE
On April 1, 1999, Hometown acquired Newburgh Toyota. The purchase price
was $2.9 million in cash, 100,000 shares of Hometown Class A Common Stock and
the assumption of floor plan and various other debt for the fully capitalized
operation. The acquisition resulted in goodwill of approximately $2.7 million.
The Company guaranteed that stock issued in connection with this
acquisition will have a market value of at least $1,000,000 by March 31, 2001.
Such amount was included in the original purchase accounting. On June 28, 2001,
an agreement was signed with the former owners settling the guarantee whereby
the Company issued 200,000 shares of Hometown stock and will pay $240,000,
payable in monthly installments through December 31, 2002 and a monthly profit
sharing payment equal to 20% of Newburgh Toyota's monthly pre-tax income over
$57,142 for the period from April 1, 2001 to December 31, 2002. In accordance
with APB No. 16, the issuance of the 200,000 shares and the cash settlement did
not result in a change in purchase accounting as the original purchase
accounting contemplated the guaranteed stock price and because the settlement is
outside the allocation period. The cash settlement is being accounted for as a
period expense.
11. CONTINGENCIES
In May, 2001, Hometown's wholly-owned subsidiary Morristown Auto Sales,
Inc. ("Morristown") assigned to Crestmont MM, L.P. (the "Assignee") the lease
for the premises, where it was operating its Lincoln Mercury dealership in
Morristown, New Jersey. On or about July 12, 2002, Hometown and Morristown
received notice from the landlord that the Assignee had not paid the required
monthly rent, maintained the premises in accordance with the lease, nor provided
the required insurance for the premises. To date, litigation has not commenced
with respect to this matter, however, in the event that Morristown and/or
Hometown is sued as a result of the Assignee's breach, Hometown will seek
damages from the Assignee as provided under the lease assignment. Total
anticipated costs for the remainder of the lease term, through June 2005, is
$540,000 for rent plus certain other costs.
In July 2002, Hometown received notice of a complaint filed by the Trust
Company of New Jersey ("Trust Company") for payment under certain guaranty
agreements made by Hometown in favor of Trust Company in connection with a sale
of vehicles in 1998. Trust Company is seeking approximately $390,000 plus other
costs. Hometown does not believe it has any obligations under the guaranty
agreements due to certain actions taken by Trust Company in relation to the
underlying debt, the debtor and other guarantors. Hometown believes it has
meritorious defenses and intends to vigorously defend this action. Hometown does
not believe that the eventual outcome of the case will have a material adverse
effect on Hometown's consolidated financial position or results of operations.
On or about February 7, 2001, Salvatore A. Vergopia and Edward A.
Vergopia, directors and formerly executive officers of Hometown, 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 Hometown, 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 are seeking back pay, front pay, compensatory, consequential and
punitive damages, in an unspecified amount as well as, reinstatement, injunctive
and other legal and equitable relief.
13
We have retained litigation counsel to represent us in this action. A
motion has been granted such that only a single shareholder remains as an
individual shareholder defendant. Also, Hometown has filed counterclaims to
recover damages associated with the Vergopia's breaches of certain agreements,
as well as breaches of their fiduciary duties. Discovery is proceeding in this
action.
We believe that the Vergopias commenced this action in response to our
dismissal of both Salvatore A. Vergopia and Edward A. Vergopia from their
officerships and employment positions with us. We believe we have meritorious
defenses and are vigorously defending this action. Hometown does not believe
that the eventual outcome of the case will have a material adverse effect on
Hometown's consolidated financial position or results of operations.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations is based on the historical financial statements of Hometown Auto
Retailers, Inc. and contains forward-looking statements that involve risks and
uncertainties. Hometown's actual results may differ materially from those
discussed in the forward-looking statements as a result of various factors, as
described under "Risk Factors" as detailed on Hometown's annual report on Form
10-K for the year ended December 31, 2001.
Overview
Hometown sells new and used cars and light trucks, provides maintenance
and repair services, sells replacement parts and provides related financing,
insurance and service contracts through 10 franchised dealerships located in New
Jersey, New York, Connecticut, Massachusetts and Vermont. Hometown's dealerships
offer 12 American and Asian automotive brands including Chevrolet, Chrysler,
Daewoo, Dodge, Ford, Isuzu, Jeep, Lincoln, Mazda, Mercury, Oldsmobile and
Toyota.
Restatement Of Prior Years Financial Statements
Subsequent to fiscal year end December 31, 2001, Hometown determined: (i)
two dealership operating leases should have more appropriately been classified
as capital leases, (ii) certain manufacturer incentives should have been more
appropriately reflected as a reduction of inventory costs, and (iii) certain
insurance product sales generated in Connecticut should be recognized over the
life of the contract due to operating under a dealer obligor status according to
state law. Accordingly, Hometown has restated prior year financial statements to
reflect these changes. These restatements are as follows:
(i) Reflecting the two leases as capital leases resulted in recording an
increase in buildings and capital lease obligations of $5.2 million as of July
1998, the lease inception date. Hometown has recorded (a) depreciation expense
on the building, (b) interest expense and principal payments on the related
capital lease obligation and (c) eliminated the lease expense that had
previously been recorded. The effect on income before taxes from these
adjustments was to reduce pre-tax income by $38,000 and $76,000 for the three
and six months ended June 30, 2001, respectively. The after tax effect of these
adjustments was to reduce net income $26,000 and $45,000 for the three and six
months ended June 30, 2001, respectively. These adjustments caused a reduction
in basic and diluted earnings per share of less than $0.01 and $0.01 for the
three months and six months ended June 30, 2001, respectively.
(ii) Manufacturers provide certain assistance to dealerships that had been
recorded as a reduction of interest expense when received. This is more
appropriately reflected as a reduction of inventory costs and cost of sales at
the time of sale of the vehicle. The effect on income before taxes from these
adjustments was to increase pre-tax income by $16,000 and $183,000 for the three
and six months ended June 30, 2001, respectively. The after tax effect of these
adjustments was to increase net income by $11,000 and $108,000 for the three and
six months ended June 30, 2001, respectively. These adjustments caused an
increase of less than $0.01 and $0.02 in basic and diluted earnings per share
for the three and six months ended June 30, 2001, respectively.
(iii) Connecticut dealerships operate under state laws, which make the
dealers responsible for providing warranty service and insurance in the event of
default by the insurance carriers. Accordingly, commissions on insurance and
service contract sales are required to be recognized over the life of the
related insurance product. Previously, the income had been recognized at the
time of sale of the vehicle. The revenue is taken into income over a five-year
period, which is the life of the contract. The effect on income before taxes
from these adjustments was to increase pre-tax income by $36,000 and $72,000 for
the three and six months ended June 30, 2001, respectively. The after tax effect
of these adjustments was to increase net income by $24,000 and $43,000 for the
three and six months ended June 30, 2001, respectively. These adjustments caused
an increase in basic and diluted earnings per share of less than $0.01 and $0.01
for the three months and six months ended June 30, 2001, respectively.
15
At June 30, 2002 and December 31, 2001 Hometown had $1,232,000 and
$1,264,000 of deferred revenue, respectively, relating to insurance and service
contract income. Though Connecticut State Law continues to hold the dealership
responsible for warranty service and insurance, it allows them to assign
responsiblity to others if the dealer's customers accept acknowledged forms of
contracts specifying this assignment. Commencing in June 2002, Hometown's
Connecticut dealerships began using a form of contract, which included the
acknowledged "contract assignment" provision for a portion of their extended
warranty contracts. Some of the contracts used by these dealerships prior to
June 2002, also contained the assignment language. Though Hometown will remain
contingently liable even if these contracts are assigned, based on the financial
strength of the assignee Hometown may be able to advance recognition of some of
its previously deferred revenue. Hometown is investigating the magnitude of
previously deferred revenues under extended warranty service agreements
containing assignment language and is exploring with its auditors the
possibility of advancing recognition of a portion of the deferred revenues
generated under these agreements.
The total effect of the aforementioned adjustments was to increase income
before taxes $14,000 and $179,000 for the three and six months ended June 30,
2001, respectively. The total effect of these changes was to increase net income
$36,000 and $106,000 for the three and six months ended June 30, 2001,
respectively. The three-month period includes a $27,000 increase in net income
resulting from a decrease in the effective tax rate for the period. There was no
effect on basic earnings per share for three months ended June 30, 2001. Diluted
earnings per share increased $0.01 for three months ended June 30, 2001. Basic
and diluted earnings per share increased $0.01 for the six months ended June 30,
2001. Restated basic and diluted earnings per share are $0.13 and $0.11,
respectively for the six months ended June 30, 2001.
Combined Revenues, Units, Gross Profit and Gross Profit Percentage to Revenues
(Unaudited)
The total revenue by category for Hometown for the three and six months
ended June 30, 2002 and 2001 are as follows:
For the three months ended For the six months ended
June 30, June 30,
2002 2001 2002 2001
(Restated) (Restated)
------- ------- -------- --------
(in thousands) (in thousands)
New vehicle $44,920 $41,351 $ 81,575 $ 76,010
Used vehicle - retail 15,374 20,267 31,112 35,975
Used vehicle - wholesale 4,549 4,039 8,925 6,616
Parts and service 5,928 6,642 12,030 12,590
F&I and other 2,231 2,155 4,453 3,910
------- ------- -------- --------
Total Revenue $73,002 $74,454 $138,095 $135,101
======= ======= ======== ========
The units sold by category for Hometown for the three and six months ended
June 30, 2002 and 2001 are as follows:
For the three months ended For the six months ended
June 30, June 30,
2002 2001 2002 2001
----- ----- ----- -----
New vehicle 1,828 1,540 3,256 2,891
Used vehicle - retail 1,099 1,146 2,199 2,248
Used vehicle - wholesale 727 814 1,424 1,548
----- ----- ----- -----
Total units sold 3,654 3,500 6,879 6,687
===== ===== ===== =====
16
The gross profit by category for Hometown for the three and six months
ended June 30, 2002 and 2001 are as follows:
For the three months ended For the six months ended
June 30, June 30,
2002 2001 2002 2001
(Restated) (Restated)
--------- --------- --------- ---------
(in thousands) (in thousands)
New vehicle $ 2,798 $ 2,670 $ 5,020 $ 5,095
Used vehicle - retail 1,789 2,325 3,611 4,171
Used vehicle - wholesale (36) 26 (5) 94
Parts and service 3,319 3,880 6,629 6,976
F&I and other 2,231 2,155 4,453 3,910
--------- --------- --------- ---------
Total Gross Profit $ 10,101 $ 11,056 $ 19,708 $ 20,246
========= ========= ========= =========
The gross profit percent of revenue by category for Hometown for the three
and six months ended June 30, 2002 and 2001 are as follows:
For the three months ended For the six months ended
June 30, June 30,
2002 2001 2002 2001
(Restated) (Restated)
--------- --------- --------- ---------
New vehicle 6.2% 6.5% 6.2% 6.7%
Used vehicle - retail 11.6% 11.5% 11.6% 11.6%
Used vehicle - wholesale (0.8)% 0.6% (0.1)% 1.4%
Parts and service 56.0% 58.4% 55.1% 55.4%
F&I and other 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- ---------
Total Gross Profit percent 13.8% 14.8% 14.3% 15.0%
========= ========= ========= =========
17
Three months ended June 30, 2002 compared with three months ended June 30, 2001.
Revenue
Total revenue decreased $1.5 million, or 2.0% to $73.0 million for the
three months ended June 30, 2002 from $74.5 million for three months ended June
30, 2001. All revenue comparisons for the three month periods are on a same
store basis. This decrease was primarily due to: (i) decreased sales of used
vehicles sold at retail of 238 units ($4.9 million) and (ii) decreased parts and
service sales ($0.7 million); partially offset by (iii) increased new vehicle
sales of 177 units ($3.5 million) primarily due to fleet and livery sales and
(iv) increased sales of used vehicles sold at wholesale ($0.5 million).
Revenue from the sale of new vehicles increased $3.5 million, or 8.5% to
$44.9 million for the three months ended June 30, 2002, from $41.4 million for
the three months ended June 30, 2001. The increase is primarily due to increases
at Hometown's Toyota ($2.6 million) and Chevy ($1.8 million) dealerships
partially offset by decreases at Hometown's Lincoln Mercury dealerships ($0.6
million). The Toyota increase was primarily due to an additional 147 units sold
in 2002 compared to 2001 of which 172 units ($2.6 million) were attributable to
fleet sales. The decrease in other Toyota units was entirely offset by an
increase in average selling price. The increase in the Chevy dealership was
primarily due to the sale of 77 additional units sold in 2002 ($1.8 million)
compared to 2001, average selling price was essentially the same in both
periods. The decreases at the Lincoln Mercury dealerships were primarily due to
a decrease of 29 units sold in 2002 compared to 2001. This was net of an
increase of 50 livery units ($2.0 million). Excluding livery units, the Lincoln
Mercury dealerships had decreased revenue of $2.6 million, primarily due to a
decrease of 79 units ($2.4 million). This represents an 18.7% decrease in units
from the 2001 period.
Revenue from the sale of used vehicles at retail decreased $4.9 million,
or 24.1% to $15.4 million for the three months ended June 30, 2002, from $20.3
million for the three months ended June 30, 2001. This decrease was primarily
attributable to a decrease of 238 units. Most Hometown dealerships experienced
decreases in this area, although one dealership accounted for $2.0 million of
this decrease. This was primarily due to the dealership reducing emphasis on its
high-end used car line during the second quarter of 2002, as Hometown
experienced a drop off in demand for its high-end used car line and increased
weakness on financing for these vehicles as the economy has weakened. Although
Hometown still sells high-end used cars, it is not expected to be a significant
portion of revenues from sales of used cars at retail. Revenue from the sale of
used vehicles at wholesale increased $0.5 million, or 12.5%, to $4.5 million for
three months ended June 30, 2002, from $4.0 million for the three months ended
June 30, 2001. This increase is primarily due to sales from Hometown's high-end
used car business. As Hometown determined to reduce its emphasis on its high-end
used car line during the second quarter of 2002, its related inventory was
reduced by selling certain of the vehicles it had in inventory at wholesale.
Parts and service sales revenue decreased $0.7 million, or 10.6% to $5.9
million for the three months ended June 30, 2002, from $6.6 million for the
three months ended June 30, 2001. Hometown's Toyota dealerships showed an
increase of $0.2 million, while all other dealerships decreased $0.9 million
from the prior year. One of these dealerships is undergoing construction of a
new showroom, which Hometown believes is negatively impacting the amount of
traffic in the service department. This dealership accounts for $0.3 million of
the decrease. It is expected that the construction will be complete by the end
of the third quarter.
Other dealership revenues remained essentially flat at $2.2 million for
the three months ended June 30, 2002 and June 30, 2001. Increased finance and
extended service contract income for new vehicles was offset by decreased
finance income for used vehicles.
18
Gross Profit
Total gross profit decreased $1.0 million, or 9.0%, to $10.1 million for
the three months ended June 30, 2002, from $11.1 million for the three months
ended June 30, 2001. All gross profit comparisons for the three-month periods
are on a same store basis. This decrease was primarily attributable to: (i)
parts and service decrease of $0.6 million and (ii) a decrease in gross profit
of used vehicles sold at retail of $0.5 million; partially offset by (iii) an
increase in new vehicle gross profit of $0.1 million. Gross profit percentage
for Hometown was 13.8% in 2002 compared to 14.8% in the 2001 period. Adjusting
both periods for Toyota fleet sales, discussed in new vehicles below, gross
profit percentage was 14.7% and 15.2% in the 2002 and 2001 periods,
respectively.
Gross profit on the sale of new vehicles increased $0.1 million, or 3.7%,
to $2.8 million for the three months ended June 30, 2002, from $2.7 million for
the three months ended June 30, 2001. Gross profit percentage for 2002 was 6.2%
compared to 6.5% for 2001. The decrease in gross profit percentage was primarily
due to a decrease at the Toyota dealerships, which was caused by the increased
sale of fleet vehicles discussed above, which generates minimal gross profit for
the dealership. Adjusting fleet sales in both periods, gross profit percentage
was 6.8% in 2002 compared to 6.7% in 2001. Although there was a decrease of 25
units in other Toyota sales, they generated a higher average gross profit per
unit ($0.1 million) compared to the 2001 period. Increased volume (77 units) at
the Chevy dealership generated an additional $0.1 million gross profit in 2002
compared to 2001. Partially offsetting these increases was a decrease at the
Lincoln Mercury dealerships ($0.1 million) due to a decrease of 29 units
partially offset by an increase in average gross profit per unit. This was net
of an increase in gross profit from livery sales ($0.1 million) discussed above.
Excluding gross profit from livery sales, the Lincoln Mercury dealerships had
decreased gross profit of $0.2 million, primarily due to a decrease of 79 units.
Gross profit on the sale of used vehicles at retail decreased $0.5
million, or 21.7%, to $1.8 million for the three months ended June 30, 2002,
from $2.3 million for the three months ended June 30, 2001. This decrease was
primarily attributable to a decrease of 238 units. Gross profit percentage was
11.6% and 11.5% for the three months ended June 30, 2002 and 2001, respectively.
As discussed in revenues above, most Hometown dealerships experienced decreases
in this area, although one dealership accounted for $0.2 million of this
decrease. This was primarily due to the dealership reducing emphasis on its
high-end used car line during the second quarter of 2002, as Hometown
experienced a drop off in demand for its high-end used car line and increased
weakness on financing for these vehicles as the economy has weakened. Although,
Hometown still sells high-end used cars, it is not expected to be a significant
portion of gross profit from sales of used cars at retail. Gross profit on the
sale of used vehicles at wholesale is minimal and decreased $62,000 for the
three months ended June 30, 2002 compared to the 2001 period. This decrease is
primarily due to sales from Hometown's high-end used car business. As the
Company determined to reduce its emphasis on its high-end used car line during
the second quarter of 2002, its related inventory was reduced by selling certain
of the vehicles it had in inventory at wholesale. Due to the weakened market for
these vehicles, Hometown was not able to generate the expected gross profit from
these vehicles that would have been able to obtain previously.
Parts and service gross profit decreased $0.6 million, or 15.4%, to $3.3
million for the three months ended June 30, 2002, from $3.9 million for the
three months ended June 30, 2001. The decrease was attributable to decreased
revenues discussed above combined with a decrease in related gross profit margin
to 56.0% for the three months ended June 30, 2002, from 58.4% for the three
months ended June 30, 2001.
Amortization of Goodwill
According to SFAS 142, the Company ceased recording goodwill amortization
on January 1, 2002. Goodwill amortization was $0.2 million for the three months
ended June 30, 2001. See Note 5.
19
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $0.1 million, or
1.1%, to $8.8 million for the three months ended June 30, 2002, from $8.9
million for the three months ended June 30, 2001. The decrease is primarily due
to a $0.2 million increase of reserves reflected in the 2001 quarter, and a net
$0.1 million decrease in various other costs, partially offset by increases in
salaries and employee benefits of $0.2 million.
Interest Income
Interest income decreased to $4,000 for the three months ended June 30,
2002 from $29,000 for the three months ended June 30, 2001. The decrease is
primarily the result of higher interest rates and invested cash in 2001 compared
to 2002.
Interest Expense
Interest expense decreased $0.3 million to $0.8 million for the three
months ended June 30, 2002 from $1.1 million for the three months ended June 30,
2001. The decrease is primarily attributable to a decrease in floor plan
interest expense, which decreased due to a reduction in interest rates from the
three months ended June 30, 2001.
Provision for income tax
The effective income tax rate was 39% in the quarter ended June 30, 2002
and 32% in the same period of 2001. The rates were based on current forecasts of
income before taxes, and current forecasts of permanent differences between tax
and book income. The calculation of the effective income tax rate for the six
months ended June 30, 2001 was lower than the rate as of March 31, 2001,
resulting in a reduction in the rate for the second quarter ended June 30, 2001.
This reduction in the effective tax rate for the second quarter 2001 is
partially offset by non-deductible goodwill amortization in the 2001 period.
According to SFAS 142, Hometown ceased recording goodwill amortization on
January 1, 2002.
Net Income
Net income decreased $300,000 to $309,000 for the three months ended June
30, 2002 from $609,000 for the quarter ended June 30, 2001. The decrease is due
to the changes described above.
Earnings Per Share, Basic and Diluted and Weighted Average Shares
The basic and diluted earnings per share for the three months ended June
30, 2002 is $0.04. The restated basic and diluted earnings per share for the
three months ended June 30, 2001 is $0.10. For the three months ended June 30,
2001 the computation of diluted earnings per share included approximately
200,000 common shares, respectively in relation to a stock guaranty issueable in
relation to an acquisition (Note 10). Options and warrants to purchase
approximately 1,373,000 and 770,000 shares of common stock were outstanding as
of June 30, 2002 and 2001, respectively. The options and warrants were not
included in the computation of diluted earnings per share because the option and
warrant prices were greater than the average market price of the common shares.
See Note 5 for the effect of discontinuing the recording of goodwill
amortization effective January 1, 2002 per SFAS 142.
20
Six months ended June 30, 2002 compared with six months ended June 30, 2001.
Revenue
Total revenue increased $3.0 million, or 2.2% to $138.1 million for six
months ended June 30, 2002 from $135.1 million for six months ended June 30,
2001. Adjusting for the sale of the Morristown Lincoln Mercury dealership ($0.2
million) in January 2001 to Lincoln Mercury, the increase is $3.2 million. This
increase was primarily due to: (i) increased new vehicle sales of 254 units
($5.6 million), (ii) increased sales of used vehicles sold at wholesale ($2.3
million) primarily caused by an increase of high-end vehicle sales, and (iii)
increased other revenues ($0.6 million) primarily due to increased finance and
extended service contract income for new vehicles; partially offset by (iv)
decreased sales of used vehicles sold at retail of 240 units ($4.9 million) and
(v) decreased parts and service ($0.6 million).
Revenue from the sale of new vehicles increased $5.6 million, or 7.4% to
$81.6 million for the six months ended June 30, 2002, from $76.0 million for the
six months ended June 30, 2001. Adjusting for the sale of the Morristown Lincoln
Mercury dealership ($0.1 million) in January 2001 to Lincoln Mercury, the
increase is $5.7 million. The increase is primarily due to increases at
Hometown's Toyota ($5.4 million) and Chevy ($3.6 million) dealerships partially
offset by decreases at Hometown's Lincoln Mercury dealerships ($3.6 million).
The Toyota increase was primarily due to an additional 262 units sold in 2002
compared to 2001 of which 226 units ($3.5 million) were attributable to fleet
sales. The remaining increase of $1.9 million was attributable to both the
increase of 36 units ($0.8 million) and a 3.7% increase in the average selling
price ($1.1 million). The increase in the Chevy dealership was due to the sale
of 145 additional units sold in 2002 ($3.4 million) compared to 2001, combined
with a 2.3% increase in average selling price in 2002 ($0.2 million) compared to
2001. The decreases at the Lincoln Mercury dealerships were primarily due to a
decrease of 142 units sold in 2002 compared to 2001. This was net of an increase
of 46 livery units ($1.7 million). Excluding livery units, the Lincoln Mercury
dealerships had decreased revenue of $5.3 million, primarily due to a decrease
of 188 units ($5.5 million). This represents a 23.6% decrease in units from the
2001 period.
Revenue from the sale of used vehicles at retail decreased $4.9 million,
or 13.6% to $31.1 million for the six months ended June 30, 2002, from $36.0
million for the six months ended June 30, 2001. This decrease was primarily
attributable to a decrease of 240 units, 238 of which occurred in the second
quarter. Most Hometown dealerships experienced decreases in this area, although
one dealership accounted for $2.8 million of this decrease. This was primarily
due to the dealership reducing emphasis on its high-end used car line during the
second quarter of 2002, as Hometown experienced a significant drop off in demand
for its high-end used car line and increased weakness on financing for these
vehicles as the economy has weakened. Although Hometown still sells high-end
used cars, it is not expected to be a significant portion of revenues from sales
of used cars at retail. Revenue from the sale of used vehicles at wholesale
increased $2.3 million, or 34.8%, to $8.9 million for six months ended June 30,
2002, from $6.6 million for the six months ended June 30, 2001. This increase is
primarily due to sales from Hometown's high-end used car business. As the
Company determined to reduce its emphasis on its high-end used car line during
the second quarter of 2002, its related inventory was reduced by selling certain
of the vehicles it had in inventory at wholesale. The effect on both sales of
used vehicles at retail and wholesale from the sale of the Morristown Lincoln
Mercury dealership in January 2001 to Lincoln Mercury was minimal.
Parts and service sales revenue decreased $0.6 million, or 4.8% to $12.0
million for the six months ended June 30, 2002, from $12.6 million for the six
months ended June 30, 2001. The decrease in revenues occurred during the second
quarter of 2002. Hometown's Toyota dealerships showed an increase of $0.4
million, while all other dealerships decreased $1.0 million from the prior year.
One of these dealerships is undergoing construction of a new showroom, which
Hometown believes is negatively impacting the amount of traffic in the service
department. This dealership accounts for $0.4 million of the decrease. It is
expected that the construction will be complete by the end of the third quarter.
The effect from the sale of the Morristown Lincoln Mercury dealership in January
2001 to Lincoln Mercury was minimal.
21
Other dealership revenues increased $0.6 million, or 15.4% to $4.5 million
for the six months ended June 30, 2002, from $3.9 million for the six months
ended June 30, 2001. This increase was primarily attributable to increased
finance and extended service contract income for new vehicles. The effect from
the sale of the Morristown Lincoln Mercury dealership in January 2001 to Lincoln
Mercury was minimal.
Gross Profit
Total gross profit decreased $0.5 million, or 2.5%, to $19.7 million for
the six months ended June 30, 2002, from $20.2 million for the six months ended
June 30, 2001. This decrease was primarily attributable to: (i) a decrease in
gross profit on used vehicles sold at retail of $0.6 million, (ii) decreased
parts and service gross profit of $0.4 million and (iii) a decrease in new
vehicle gross profit of $0.1 million, including $0.2 million increase in the
2001 period due to the financial statement restatement adjustments discussed
above; partially offset by (iv) other dealership gross profit of $0.6 million
discussed above. The effect on all components of gross profit from the sale of
the Morristown Lincoln Mercury dealership in January 2001 to Lincoln Mercury was
minimal. Gross profit percentage for Hometown was 14.3% in 2002 compared to
15.0% in the 2001 period. Adjusting both periods for Toyota fleet sales,
discussed in new vehicles below, and the sale of Morristown Lincoln Mercury,
gross profit percentage was 14.9% and 15.2% in the 2002 and 2001 periods,
respectively.
Gross profit on the sale of new vehicles decreased $0.1 million, or 2.0%,
to $5.0 million for the six months ended June 30, 2002, from $5.1 million for
the six months ended June 30, 2001. The decrease was primarily due to the
financial statement restatement adjustments discussed above ($0.2 million).
Gross profit percentage for 2002 was 6.2% compared to 6.7% for 2001. The
decrease in gross profit percentage was primarily due to a decrease at the
Toyota dealerships, which was primarily caused by the increased sale of fleet
vehicles discussed above, which generates minimal gross profit for the
dealership. Adjusting fleet sales in both periods, gross profit percentage was
6.6% and 6.9% in the 2002 and 2001 periods, respectively. Other Toyota sales
generated an additional $0.1 million in gross profit in 2002 compared to 2001,
due to an increase of 36 units and a 3.0% increase in the average gross profit
per unit. Increased volume (145 units) at the Chevy dealership generated an
additional $0.2 million gross profit in 2002 compared to 2001. Partially
offsetting these increases was a decrease at the Lincoln Mercury dealerships
($0.3 million) due to a decrease of 142 units. This was net of an increase in
gross profit from livery sales ($0.1 million) discussed above. Excluding gross
profit from livery sales, the Lincoln Mercury dealerships had decreased gross
profit of $0.4 million, primarily due to a decrease of 188 units.
Gross profit on the sale of used vehicles at retail decreased $0.6
million, or 14.3%, to $3.6 million for the six months ended June 30, 2002, from
$4.2 million for the six months ended June 30, 2001. This decrease was primarily
attributable to a decrease of 240 units, 238 of which occurred in the second
quarter. Gross profit percentage was 11.6% for both periods. As discussed in
revenues above, most Hometown dealerships experienced decreases in this area,
although one dealership accounted for $0.4 million of this decrease. This was
primarily due to the dealership reducing emphasis on its high-end used car line
during the second quarter of 2002, as Hometown experienced a significant drop
off in demand for its high-end used car line and increased weakness on financing
for these vehicles as the economy has weakened. Although, Hometown still sells
high-end used cars, it is not expected to be a significant portion of gross
profit from sales of used cars at retail. Gross profit on the sale of used
vehicles at wholesale was a loss of $5,000 for the six months ended June 30,
2002 compared to a profit $94,000 for the six months ended June 30, 2001. This
decrease is primarily due to sales from Hometown's high-end used car business.
As the Company determined to reduce its emphasis on its high-end used car line
during the second quarter of 2002, its related inventory was reduced by selling
certain of the vehicles it had in inventory at wholesale. Due to the weakened
market for these vehicles, Hometown was not able to generate the expected gross
profit from these vehicles that would have been able to obtain previously.
Parts and service gross profit decreased $0.4 million, or 5.7%, to $6.6
million for the six months ended June 30, 2002, from $7.0 million for the six
months ended June 30, 2001. The decrease was primarily
22
attributable to decreased revenues discussed above, which occurred during the
second quarter of 2002. Gross profit percentage was 55.1% and 55.4% for the six
months ended June 30, 2002 and 2001, respectively.
Amortization of Goodwill
According to SFAS 142, the Company ceased recording goodwill amortization
on January 1, 2002. Goodwill amortization was $0.4 million for the six months
ended June 30, 2001. See Note 5.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $0.8 million, or
4.9%, to $17.2 million for the six months ended June 30, 2002, from $16.4
million for the six months ended June 30, 2001. The increase is primarily due to
increases in salaries and employee benefits of $0.5 million in the 2002 period
and a $0.1 million reduction of reserves reflected in the 2001 period.
Interest Income
Interest income decreased to $21,000 for the six months ended June 30,
2002 from $30,000 for the six months ended June 30, 2001. The decrease is
primarily the result of higher interest rates in 2001 compared to 2002.
Partially offsetting this was the investing of excess cash in interest bearing
accounts effective with the implementation of the floor plan agreement with FMCC
in March 2001. Hometown's previous credit agreement provided that Hometown apply
excess cash against the outstanding floor plan liability.
Interest Expense
Interest expense decreased $0.7 million to $1.7 million for the six months
ended June 30, 2002 from $2.4 million for the six months ended June 30, 2001.
The decrease is primarily attributable to a decrease in floor plan interest
expense, which decreased due to a reduction in interest rates and a decrease in
the average floor plan liability from the six months ended June 30, 2001.
Other Income
Included in other income for the six months ended June 30, 2001 is a
$254,000 gain on sale of the Morristown Lincoln Mercury dealership to Lincoln
Mercury in January 2001.
Provision for income tax
The effective income tax rate was 40% in the six months ended June 30,
2002 and 41% in the same period of 2001. The rates were based on current
forecasts of income before taxes, and current forecasts of permanent differences
between tax and book income. The difference in the effective tax rates for the
two periods is primarily non-deductible goodwill amortization in the 2001
period. According to SFAS 142, Hometown ceased recording goodwill amortization
on January 1, 2002.
Net Income
Net income decreased $262,000 to $544,000 for the six months ended June
30, 2002 from $806,000 for the six months ended June 30, 2001. The decrease is
due to the changes described above.
Earnings Per Share, Basic and Diluted and Weighted Average Shares
The basic and diluted earnings per share for the six months ended June 30,
2002 is $0.08. The restated basic and diluted earnings per share for the six
months ended June 30, 2001 is $0.13 and $0.11, respectively. For the six months
ended June 30, 2001 the computation of diluted earnings per share included
approximately 1,111,000 common shares, respectively in relation to a stock
guaranty issueable in relation to an acquisition (Note 10). Options
23
and warrants to purchase approximately 1,373,000 and 770,000 shares of common
stock were outstanding as of June 30, 2002 and 2001, respectively. The options
and warrants were not included in the computation of diluted earnings per share
because the option and warrant prices were greater than the average market price
of the common shares.
See Note 5 for the effect of discontinuing the recording of goodwill
amortization effective January 1, 2002 per SFAS 142.
Cyclicality
Hometown's operations, like the automotive retailing industry in general,
are affected by a number of factors relating to general economic conditions,
including consumer business cycles, consumer confidence, economic conditions,
availability of consumer credit and interest rates. Although the above factors,
among others, may affect Hometown's business, Hometown believes that the impact
its operations of future negative trends in such factors will be somewhat
mitigated by its (i) strong parts, service and collision repair services, (ii)
variable cost salary structure, (iii) geographic regional focus, and (iv)
product diversity.
Seasonality
Hometown's operations are subject to seasonal variations, with the second
and third quarters generally contributing more revenues and operating profit
than the first and fourth quarters. This seasonality is driven primarily by: (i)
Manufacturer related factors, primarily the historical timing of major
Manufacturer incentive programs and model changeovers, (ii) weather-related
factors, which primarily affect parts and service and (iii) consumer buying
patterns.
Effects of Inflation
Due to the relatively low levels of inflation experienced in the 2001 and
2002 periods, inflation did not have a significant effect on the results of
Hometown during those periods.
Liquidity and Capital Resources
The principal sources of liquidity are cash on hand, cash from operations
and floor plan financing.
Cash and Cash Equivalents
Total cash and cash equivalents was $4.1 million and $4.4 million at June
30, 2002 and December 31, 2001, respectively.
Cash Flow from Operations
The following table sets forth the consolidated selected information from
the unaudited statements of cash flow:
Six months ended
June 30,
2002 2001
(Restated)
------- -----
(in thousands)
Net cash provided by operating activities $ 1,189 $ 82
Net cash provided by (used in) investing activities (1,214) 495
Net cash (used in) financing activities (285) (233)
------- -----
Net increase (decrease) in cash and cash equivalents $ (310) $ 344
======= =====
For the six months ended June 30, 2002, net cash provided from operations
of $1.2 million primarily consists of: (i) net income plus non-cash items of
$1.2 million; and (ii) the increase in floor plan liability in excess of the
increase in inventory of $0.8 million; partially offset by (iii) increased
accounts receivable of $0.6 million. Net cash used in investing activities of
$1.2 million is primarily due to capital expenditures associated with the
construction of a new showroom at our Framingham, Massachusetts dealership. Net
cash used in financing activities of $0.3 million is due to principal payments
of long-term debt and capital lease obligations.
For the six months ended June 30, 2001, net cash provided from operations
of $0.1 million primarily consists of: (i) net income plus non-cash items of
$2.0 million; and (ii) an increase in accounts payable and accrued expenses of
$0.8 million; partially offset by (iii) increased accounts receivable of $2.2
million; and (iv) increases in prepaid expenses and other current assets of $0.5
million. Net cash provided by investing activities of $0.5 million is primarily
due to the sale of Hometown's Morristown Lincoln Mercury dealership to Lincoln
Mercury of $0.7 million, partially offset by capital expenditures of $0.2
million. Net cash used in financing activities of $0.2 million is due to
principal payments of long-term debt and capital lease obligations.
Capital Expenditures
Capital expenditures for fiscal 2002 are expected to be $1.6 million
consisting primarily of the estimated construction and associated expenses for
building a new showroom at our Framingham, Massachusetts dealership.
25
Receivables
The Company had $6.3 million in accounts receivable at June 30, 2002
compared to $5.7 million at December 31, 2001. The majority of those receivables
are from companies that provide or secure financing for customer purchases.
Floor Plan Financing
Hometown has a floor plan line of credit at each dealership with Ford
Motor Credit Corporation ("FMCC"). The FMCC floor plan agreement provides
financing for vehicle purchases and is secured by and dependent upon new and
used vehicle inventory levels. Maximum availability under the FMCC agreement is
a function of new and used car sales and is not a pre-determined amount.
In June 2002, Hometown renewed its floor plan agreement with FMCC and is
now subject to the FMCC standard financing agreement which provides for floor
plan loans for new and used vehicles that have variable interest rates that
increase or decrease based on movements in the prime or LIBOR borrowing rates.
Disposals
In January 2001, Hometown sold the franchise for its Morristown, NJ store
back to Lincoln Mercury for $0.7 million in cash. During the first six months of
2001, Hometown received the purchase price plus $23,000 for parts returned, and
paid out a broker's commission of $35,000. Included in accounts receivable is
$23,000 due for returned parts. The transaction resulted in Hometown recording a
$254,000 gain on the sale, which is included in other income.
Contingencies
In May, 2001, Hometown's wholly-owned subsidiary Morristown Auto Sales,
Inc. ("Morristown") assigned to Crestmont MM, L.P. (the "Assignee") the lease
for the premises, where it was operating its Lincoln Mercury dealership in
Morristown, New Jersey. On or about July 12, 2002, Hometown and Morristown
received notice from the landlord that the Assignee had not paid the required
monthly rent, maintained the premises in accordance with the lease, nor provided
the required insurance for the premises. To date, litigation has not commenced
with respect to this matter, however, in the event that Morristown and/or
Hometown is sued as a result of the Assignee's breach, Hometown will seek
damages from the Assignee as provided under the lease assignment. Total
anticipated costs for the remainder of the lease term, through June 2005, is
$540,000 for rent plus certain other costs.
In July 2002, Hometown received notice of a complaint filed by the Trust
Company of New Jersey ("Trust Company") for payment under certain guaranty
agreements made by Hometown in favor of Trust Company in connection with a sale
of vehicles in 1998. Trust Company is seeking approximately $390,000 plus other
costs. Hometown does not believe it has any obligations under the guaranty
agreements due to certain actions taken by Trust Company in relation to the
underlying debt, the debtor and other guarantors. Hometown believes it has
meritorious defenses and intends to vigorously defend this action. Hometown does
not believe that the eventual outcome of the case will have a material adverse
effect on Hometown's consolidated financial position or results of operations.
Litigation
On or about February 7, 2001, Salvatore A. Vergopia and Edward A.
Vergopia, directors and formerly executive officers of Hometown, 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 Hometown, 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
26
stockholders' agreement and certain other wrongful conduct, including age
discrimination and breach of fiduciary duty. The Vergopias are seeking back pay,
front pay, compensatory, consequential and punitive damages, in an unspecified
amount as well as, reinstatement, injunctive and other legal and equitable
relief.
We have retained litigation counsel to represent us in this action. A
motion has been granted such that only a single shareholder remains as an
individual shareholder defendant. Also, Hometown has filed counterclaims to
recover damages associated with the Vergopia's breaches of certain agreements,
as well as breaches of their fiduciary duties. Discovery is proceeding in this
action.
We believe that the Vergopias commenced this action in response to our
dismissal of both Salvatore A. Vergopia and Edward A. Vergopia from their
officerships and employment positions with us. We believe we have meritorious
defenses and are vigorously defending this action. Hometown does not believe
that the eventual outcome of the case will have a material adverse effect on
Hometown's consolidated financial position or results of operations.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in interest rates on our
amounts outstanding under our floor plan financing arrangement, which bears
interest at variable rates based on prime. Based on floor plan amounts
outstanding at June 30, 2002 of $39.2 million, a 1% change in the prime rate
would result in a $0.4 million change to annual floor plan interest expense.
Hometown invests excess cash, $2.0 million at June 30, 2002, in a money
market account that was paying interest of 1.45% at June 30, 2002.
New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (FASB) issued
SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which
supercedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets to be
Disposed Of" and the accounting and reporting provisions of Accounting
Principles Board Opinion (APB) 30, "Reporting the Results of Operations -
Reporting the Effects of the Disposal of a Segment Business and Extraordinary,
Unusual, and Infrequently Occurring Events and Transactions". SFAS 144 addresses
financial accounting and reporting for the impairment and disposal of long-lived
assets. Discontinued operations accounting will be used for a component of an
entity and future operating losses of discontinued operations will no longer be
accrued. Additionally, assets acquired and held for disposal are recorded based
on fair value less cost to sell at the acquisition date. SFAS 144 is effective
for fiscal years beginning after December 15, 2001.
In June 2001, the FASB approved SFAS Nos. 141 and 142 "Business
Combinations" and "Goodwill and Other Intangible Assets", respectively. SFAS
141, among other things, eliminates the "Pooling of Interests" method of
accounting for business acquisitions entered into after June 30, 2001. SFAS 142,
among other things, eliminates the need to amortize goodwill and requires
companies to use a fair-value approach to determine whether there is an
impairment of existing and future goodwill.
Additionally, an acquired intangible asset should be separately recognized
if the benefit of the intangible asset is obtained through contractual or other
legal rights, or if the intangible asset can be sold, transferred, licensed,
rented or exchanged, regardless of the acquirer's intent to do so. Intangible
assets with definitive lives will need to be amortized over their useful lives.
These statements are effective for Hometown beginning January 1, 2002.
Hometown adopted this statement effective January 1, 2002, and at such
time ceased recording goodwill amortization. By calendar year end, Hometown is
required to determine the correct implied fair value of the goodwill and record
any impairment charges that result from this application as a cumulative effect
of a change in accounting principle. Future impairment losses would be recorded
as an operating expense. To test for impairment, Hometown has obtained
appraisals of its reporting units, established its fair value benchmarks and
performed an
27
evaluation that indicates a severe impairment exists and expects to record a
one-time, non-cash charge to reduce the carrying value of it goodwill in the
third quarter. See Note 5.
Forward Looking Statement
When used in the Quarterly Report on Form 10Q, the words "may", "will",
"should", "expect", "believe", "anticipate", "continue", "estimate", "project",
"intend" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act regarding events, conditions and financial trends that
may affect Hometown's future plans of operations, business strategy, results of
operations and financial condition. Hometown wishes to ensure that such
statements are accompanied by meaningful cautionary statements pursuant to the
safe harbor established in the Private Securities Litigation Reform Act of 1995.
Prospective investors are cautioned that any forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties and
that actual results may differ materially from those included within the
forward-looking statements as a result of various factors including the ability
of Hometown to consummate, and the terms of, acquisitions. Such forward-looking
statements should, therefore, be considered in light of various important
factors, including those set forth herein and others set forth from time to time
in Hometown's reports and registration statements filed with the Securities and
Exchange Commission (the "Commission"). Hometown disclaims any intent or
obligation to update such forward-looking statements.
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PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits:
99.1 Chief Executive Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Chief Financial Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K
NONE
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Hometown Auto Retailers, Inc.
August 12, 2002 By: /s/ Corey E. Shaker
- ------------------------ --------------------------------------
Date Corey E. Shaker, President and Chief
Executive Officer
August 12, 2002 By: /s/ Charles F. Schwartz
- ------------------------ --------------------------------------
Date Charles F. Schwartz
Chief Financial Officer
30