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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, 2003
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 by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes[ ] No [X]
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 3,564,605
Common Stock, Class B, par value $.001 per share 3,610,500
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. Consolidated Balance Sheets at June 30, 2003 (Unaudited)
and December 31, 2002 (Audited) 3
Unaudited Consolidated Statements of Operations for three and six
months ended June 30, 2003 and 2002 (six months Restated) 4
Unaudited Consolidated Statements of Stockholders' Equity for the
six months ended June 30, 2003 and 2002 (Restated) 5
Unaudited Consolidated Statements of Cash Flows for six months
ended June 30, 2003 and 2002 (Restated) 6
Notes to Unaudited Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 27
ITEM 4. Controls and Procedures 28
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
CERTIFICATIONS 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, 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
HOMETOWN AUTO RETAILERS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
June 30, December 31,
ASSETS 2003 2002
(Unaudited)
-------- --------
Current Assets:
Cash and cash equivalents $ 4,928 $ 3,624
Accounts receivable, net 7,044 4,883
Inventories, net 37,978 39,169
Prepaid expenses and other current assets 555 510
Deferred income taxes and taxes receivable 1,229 1,245
-------- --------
Total current assets 51,734 49,431
Property and equipment, net 12,777 12,882
Other assets 1,092 1,503
-------- --------
Total assets $ 65,603 $ 63,816
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Floor plan notes payable $ 38,516 $ 38,522
Accounts payable and accrued expenses 6,376 5,072
Current maturities of long-term debt and capital lease obligations 1,031 1,164
Deferred revenue 799 588
-------- --------
Total current liabilities 46,722 45,346
Long-term debt and capital lease obligations 12,546 13,059
Long-term deferred income taxes 97 118
Long-term deferred revenue 726 743
-------- --------
Total liabilities 60,091 59,266
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, 3,564,605 and 3,563,605 shares issued and
outstanding 3 3
Common stock, Class B, $.001 par value, 3,760,000 shares
authorized, 3,610,500 and 3,611,500 shares issued and
outstanding 4 4
Additional paid-in capital 29,760 29,760
Accumulated deficit (24,255) (25,217)
-------- --------
Total stockholders' equity 5,512 4,550
-------- --------
Total liabilities and stockholders' equity $ 65,603 $ 63,816
======== ========
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,
-------------------------- --------------------------
2003 2002 2003 2002
(Restated)
----------- ----------- ----------- -----------
Revenues
New vehicle sales $ 50,952 $ 44,920 $ 86,882 $ 81,575
Used vehicle sales 18,739 19,923 35,133 40,037
Parts and service sales 6,219 5,928 12,435 12,030
Other, net 2,193 2,231 3,973 4,453
----------- ----------- ----------- -----------
Total revenues 78,103 73,002 138,423 138,095
Cost of sales
New vehicle 47,748 42,122 81,368 76,555
Used vehicle 16,945 18,170 31,763 36,431
Parts and service 2,711 2,609 5,633 5,401
----------- ----------- ----------- -----------
Total cost of sales 67,404 62,901 118,764 118,387
----------- ----------- ----------- -----------
Gross profit 10,699 10,101 19,659 19,708
Selling, general and administrative expenses 9,029 8,823 17,415 17,236
----------- ----------- ----------- -----------
Income from operations 1,670 1,278 2,244 2,472
Interest income 7 4 14 21
Interest (expense) (799) (790) (1,577) (1,600)
Other income 938 18 951 24
Other (expense) -- (1) (3) (3)
----------- ----------- ----------- -----------
Income before taxes and cumulative effect of
accounting change 1,816 509 1,629 914
Provision for income taxes 733 200 667 370
----------- ----------- ----------- -----------
Income before cumulative effect of accounting change 1,083 309 962 544
Cumulative effect of accounting change -- -- -- (23,708)
----------- ----------- ----------- -----------
Net income (loss) $ 1,083 $ 309 $ 962 $ (23,164)
=========== =========== =========== ===========
Earnings (loss) per share, basic
Before cumulative effect of accounting change $ 0.15 $ 0.04 $ 0.13 $ 0.07
Cumulative effect of accounting change -- -- -- (3.30)
----------- ----------- ----------- -----------
Earnings (loss) per share, basic $ 0.15 $ 0.04 $ 0.13 $ (3.23)
=========== =========== =========== ===========
Earnings (loss) per share, diluted
Before cumulative effect of accounting change $ 0.15 $ 0.04 $ 0.13 $ 0.07
Cumulative effect of accounting change -- -- -- (3.30)
----------- ----------- ----------- -----------
Earnings (loss) per share, diluted $ 0.15 $ 0.04 $ 0.13 $ (3.23)
=========== =========== =========== ===========
Weighted average shares outstanding, basic 7,175,105 7,175,105 7,175,105 7,175,105
Weighted average shares outstanding, diluted 7,175,105 7,175,105 7,175,105 7,175,105
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
Common Stock Common Stock Additional Total
------------------- ------------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
-------- -------- -------- -------- -------- -------- --------
Balance at 3,562 $ 3 3,613 $ 4 $ 29,730 ($ 2,285) $ 27,452
December 31, 2001
Conversion of Class B
Common to Class A
Common 2 -- (2) -- -- -- --
Paid subscription
receivable -- -- -- -- 30 -- 30
Net loss -- -- -- -- -- (23,164) (23,164)
-------- -------- -------- -------- -------- -------- --------
Balance at
June 30, 2002
(Restated) 3,564 $ 3 3,611 $ 4 $ 29,760 ($25,449) $ 4,318
======== ======== ======== ======== ======== ======== ========
Balance at
December 31, 2002 3,564 $ 3 3,611 $ 4 $ 29,760 ($25,217) $ 4,550
Conversion of Class B
Common to Class A
Common 1 -- (1) -- -- -- --
Net income -- -- -- -- -- 962 962
-------- -------- -------- -------- -------- -------- --------
Balance at
30-Jun-03 3,565 $ 3 3,610 $ 4 $ 29,760 ($24,255) $ 5,512
======== ======== ======== ======== ======== ======== ========
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,
---------------------------------
2003 2002
(Restated)
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 962 $(23,164)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities -
Cumulative effect of accounting change -- 23,708
Depreciation and amortization 691 553
(Gain) on sale of sales and service franchise (936) --
(Gain) on sale of fixed assets (3) --
Deferred income taxes 373 138
Changes in assets and liabilities:
Accounts receivable, net (2,113) (639)
Inventories, net 1,605 (5,596)
Prepaid expenses and other current assets (63) (37)
Other assets 21 168
Floor plan notes payable (6) 6,472
Accounts payable and accrued expenses 1,304 (336)
Deferred revenue - current 211 103
Other long term liabilities and deferred revenue (17) (13)
-------- --------
Net cash provided by operating activities 2,029 1,357
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (442) (1,214)
Proceeds from sale of property and equipment 6 --
Proceeds from sale of sales and service franchise 936 --
-------- --------
Net cash provided by (used in) investing activities 500 (1,214)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt and capital lease obligations (1,264) (483)
Proceeds from long-term borrowings 39 30
-------- --------
Net cash (used in) financing activities (1,225) (453)
Net increase (decrease) in cash and cash equivalents 1,304 (310)
CASH AND CASH EQUIVALENTS, beginning of period 3,624 4,446
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 4,928 $ 4,136
======== ========
Cash paid for - Interest $ 1,557 $ 1,563
Cash paid for - Taxes $ 260 $ 256
Purchases financed by capital lease obligations $ 579 $ 301
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 9 franchised dealerships located in New
Jersey, New York, Connecticut, Massachusetts and Vermont. Hometown's dealerships
offer 10 American and Asian automotive brands including Chevrolet, Chrysler,
Dodge, Ford, 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, 2003, the
consolidated statements of operations for the three and six months ended June
30, 2003 and 2002 (six months Restated), the consolidated statements of
stockholders' equity and the consolidated statements of cash flows for the six
months ended June 30, 2003 and 2002 (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 reclassifications have been made to the prior
year amounts to conform to the current year presentation. 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, 2002, which are included in
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.
Stock-based Compensation
At June 30, 2003, Hometown has one stock-based employee compensation
plan, the 1998 Stock Option Plan (the "Stock Option Plan"). As allowed by SFAS
148, Hometown has elected not to use one of the alternative methods of
transition available for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. Hometown accounts for this
plan under the recognition and measurement principles of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and
related Interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under those plans had an exercise price
equal to or greater than the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the company had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation",
to stock-based employee compensation.
7
Three Months Ended Six Months Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
(Restated)
-------------- -------------- -------------- --------------
(in thousands)
Net income (loss), as reported $ 1,083 $ 309 $ 962 $ (23,164)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects (1) (6) (7) (12) (14)
---------- ---------- ---------- ----------
Pro forma net income (loss) $ 1,077 $ 302 $ 950 $ (23,178)
========== ========== ========== ==========
Earnings (loss) per share:
Basic, as reported $ 0.15 $ 0.04 $ 0.13 $ (3.23)
Basic, pro forma $ 0.15 $ 0.04 $ 0.13 $ (3.23)
Diluted, as reported $ 0.15 $ 0.04 $ 0.13 $ (3.23)
Diluted, pro forma $ 0.15 $ 0.04 $ 0.13 $ (3.23)
(1) All awards refers to awards granted, modified, or settled in fiscal periods
since plan inception in 1998; that is, awards for which the fair value was
required to be measured under Statement 123.
3. EARNINGS PER SHARE
"Basic earnings (loss) per share" is computed by dividing net income
(loss) by the weighted average common shares outstanding. "Diluted earnings
(loss) per share" is computed by dividing net income (loss) by the weighted
average common shares outstanding adjusted for the incremental dilution of
potentially dilutive securities. Options and warrants to purchase approximately
1,401,000 and 1,373,000 shares of common stock were outstanding as of June 30,
2003 and 2002, respectively. The basic and diluted weighted average shares are
7.2 million shares for the three and six months ended June 30, 2003 and 2002.
The options and warrants were not included in the computation of diluted
earnings (loss) per share because the option and warrant prices were greater
than the average market price of the common shares or the effect would have been
anti-dilutive.
The basic and diluted earnings per share is $0.15 and $0.04 for the
three months ended June 30, 2003 and June 30, 2002, respectively. The basic and
diluted earnings per share for the six months ended June 30, 2003 is $0.13. The
three and six months ended June 30, 2003 includes $0.08 per share from the gain
on sale of a Chrysler /Jeep Sales and Service Franchise (Note 8). The restated
basic and diluted (loss) per share for the six months ended June 30, 2002 is
$(3.23), which includes basic and diluted income per share before cumulative
effect of accounting change of $0.07 and basic and diluted (loss) per share for
a cumulative effect of accounting change of $(3.30), resulting from the goodwill
impairment charge associated with the implementation of SFAS 142. See Note 4 to
the consolidated financial statements for the recognition of an impairment of
the carrying value of its goodwill in 2002, in accordance with SFAS 142.
4. GOODWILL - RESTATEMENT OF SIX MONTHS ENDED JUNE 30, 2002 FINANCIAL
STATEMENTS
Effective January 1, 2002, Hometown adopted SFAS 142. At that time,
Hometown ceased recording goodwill amortization. SFAS 142 requires the
completion of a transitional impairment test in the year of adoption, with any
impairment identified upon initial implementation treated as a cumulative effect
of a change in accounting principle.
8
Under SFAS 142, goodwill impairment is deemed to exist if the net book
value of a reporting unit exceeds its estimated fair value. According to the
criteria under SFAS 142, it has been determined that Hometown is a single
reporting unit.
During 2002, Hometown completed its goodwill impairment testing which
resulted in Hometown recording a one-time, non-cash charge of approximately
$23.7 million to write-off the carrying value of goodwill. This charge is
non-operational in nature and is reflected as a cumulative effect of an
accounting change in the accompanying statement of operations for the six months
ended June 30, 2002. Approximately $9.6 million of this charge is tax
deductible, resulting in a deferred tax benefit of approximately $3.8 million
against which a full valuation allowance was recorded.
In calculating the impairment charge, the fair value of the reporting
unit was estimated using both the discounted cash flow method and the guideline
company method. The discounted cash flow method used Hometown's estimates of
future cash flows discounted to present value using an appropriate discount
rate. The guideline company method selects certain value measures of guideline
companies and calculates appropriate market multiples based on the fundamental
value measures of the guideline companies and compares same to Hometown. The
guideline companies chosen were other publicly traded companies within
Hometown's Standard Industrial Classification (SIC) code. These methodologies
differ from Hometown's previous policy, as permitted under SFAS 121, using
undiscounted cash flows to determine if goodwill is recoverable.
The goodwill impairment is associated with goodwill that resulted from
acquisitions since the formation of Hometown. The amount of the impairment
reflects the effect of the change in methodology in determining impairment
charges as discussed above.
The effect of the charge on the six months ended June 30, 2002
financial statements, and the restated six months ended June 30, 2002 financial
statements is as follows:
Six Months Ended June 30, 2002
(in thousands)
As Reported Effect of Charge Restated
Reported net income $ 544 $ -- $ 544
Less: Cumulative effect of accounting change -- (23,708) (23,708)
---------- ---------- ----------
Adjusted net income (loss) $ 544 $ (23,708) $ (23,164)
========== ========== ==========
Earnings (loss) per share, Basic
Reported net income $ 0.07 $ -- $ 0.07
Cumulative effect of accounting change -- (3.30) (3.30)
---------- ---------- ----------
Adjusted net income (loss) $ 0.07 $ (3.30) $ (3.23)
========== ========== ==========
Earnings (loss) per share, Diluted
Reported net income $ 0.07 $ -- $ 0.07
Cumulative effect of accounting change -- (3.30) (3.30)
---------- ---------- ----------
Adjusted net income (loss) $ 0.07 $ (3.30) $ (3.23)
========== ========== ==========
9
A summary of changes in Hometown's goodwill during the year ended
December 31, 2002, is as follows (in thousands):
Reporting Unit Balance at Impairments Balance at
December 31, 2001 December 31, 2002
-------------- ----------------- ------------ -----------------
Total Company $ 23,708 $ 23,708 $ -
================= ============ =================
As of June 30, 2003 and December 31, 2002, Hometown's intangible assets
consisted of the following:
6/30/03 12/31/02
----------- -----------
(in thousands)
Deferred finance charges $ 267 $ 267
Accumulated amortization (89) (78)
Non-compete agreement 381 381
Accumulated amortization (238) (206)
------ ------
Net intangible assets (a) $ 321 $ 364
====== ======
(a) These assets are included in Other Assets in the consolidated
financial statements
5. 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:
6/30/03 12/31/02
---------- ----------
(in thousands)
New Vehicles $28,109 $ 29,236
Used Vehicles 7,518 7,264
Parts, accessories and other 2,351 2,669
---------- ----------
Total Inventories $37,978 $ 39,169
========== ==========
The lower of cost or market reserves were $0.7 million and $0.6 million
at June 30, 2003 and December 31, 2002, respectively.
6. 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.
10
7. COMMITMENTS AND CONTINGENCIES
Litigation
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, 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. In September 2002, Hometown received notice of a
complaint filed by the landlord against Hometown, Morristown and certain former
officers seeking payment of rent and other obligations through June 2005. In
October 2002, Morristown filed a complaint against the Assignee to recover any
potential damages from the Assignee as provided under the lease assignment. The
Assignee has made a claim against Hometown for breach of the assignment
agreement and misrepresentation of the use of the subject property. The Assignee
has also brought a claim against Morristown's president, Hometown's Chief
Executive Officer, for misrepresentation. Total anticipated costs for the
remainder of the lease term, through June 2005, is $540,000 for rent plus
certain other costs. Hometown believes it has meritorious defenses to the claim
and cross-claim and intends to vigorously defend this action. In fact the
landlord has leased the premises for the period January 29, 2003 through January
29, 2004 for a total of $120,000, to another tenant thereby significantly
reducing Morristown's exposure to a damages judgment for lost rent. 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.
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 allegedly made by Hometown's wholly-owned subsidiary Westwood Lincoln
Mercury Sales, Inc. ("Westwood") 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 that Westwood 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, for an unspecified amount as well as, reinstatement,
injunctive and other legal and equitable relief. Salvatore A. Vergopia and
Edward A. Vergopia have also commenced a second action for defamation against
Hometown and its Chief Executive Officer, which has been consolidated with the
action initially filed.
Litigation counsel has been retained by our insurers 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 Vergopias 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.
11
Universal Underwriters Group ("Universal"), Hometown's insurance provider,
commenced a lawsuit against The Chubb Group of Insurance Companies ("Chubb"),
Hometown's Director and Officer Liability Insurance provider, Hometown, certain
officers, directors and shareholders of Hometown and the Vergopias seeking a
declaration of its coverage obligations with respect to the suit brought by the
Vergopias discussed above. The suit has been consolidated with the suit brought
by the Vergopias for discovery and case management purposes. Universal
originally acknowledged its obligation to defend and indemnify Hometown against
the Vergopias claims and engaged separate counsel to represent Hometown and its
directors. Universal is now seeking to limit its obligations under the
comprehensive insurance policy as well as require Chubb to share in defense and
indemnity obligations. Hometown originally commenced an action seeking
affirmative declaration of its rights under its policy with Universal, but
allowed this action to be stayed pending a resolution of the action brought by
Universal. Hometown has brought counterclaims against Universal and a
cross-claim for declaratory judgment against Chubb. Hometown maintains that the
insurers are obligated to defend and indemnify on all claims brought by the
Vergopias. Discovery is ongoing on this matter. Hometown believes it has
meritorious claims and is vigorously defending this action and prosecuting its
counterclaims and cross-claims. 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.
Hometown from time to time may be a defendant in lawsuits arising from
normal business activities. Management reviews pending litigation with legal
counsel and believes that the ultimate liability, if any, resulting from such
actions will not have a material adverse effect on Hometown's consolidated
financial position or results of operations.
Guarantees
Hometown guarantees or partially guarantees loans advanced by financial
institutions to certain customers. It is Hometown's policy to provide reserves
for potential future default losses based on available historical information.
One of Hometown's dealerships, prior to fiscal 2000, had entered into
various arrangements whereby Hometown guaranteed or partially guaranteed loans
advanced by financial institutions to certain customers as follows:
(i) Portfolio of 9 customer's limousine vehicle loans granted by
Ford Motor Credit Co. As of June 30, 2003, Hometown fully and
partially guaranteed limousine vehicle loans aggregating
approximately $46,000.
(ii) Portfolio of 8 vehicle loans, granted by a financial
institution, to various customers of the dealership with below
average credit. As of June 30, 2003, Hometown fully guaranteed
vehicle loans associated with these customers aggregating
approximately $18,000.
The guarantees in (i) and (ii) above are related to loans whereby
Hometown is required to pay the remaining loan balance upon default by the
customer. As of June 30, 2003, Hometown has reserved $15,000 against a total
maximum payout of $64,000 for these loans. The reserve amount represents loans
that are currently delinquent. Hometown would expect to realize proceeds from
the sale of these vehicles upon repossession of such vehicle. The amount of
proceeds, if any, is undetermined due to not knowing the condition of the
vehicles.
The same dealership during fiscal 2000 and 2001 partially guaranteed
loans advanced by Ford Motor Credit Co. to a certain limousine customer. As of
June 30, 2003, 18 of these loans remain outstanding. Hometown has reserved $0
against a total maximum payout of $207,000 for these loans. Hometown has not
reserved for these loans due to the expected fair value of the vehicles
approximating or exceeding the unamortized portion of the loan balance.
There are also 16 loans whose liens were not properly perfected
totaling approximately $127,000 as of June 30, 2003. Hometown will be required
to pay the remaining loan balance should the customers default on their
payments. Hometown is working to perfect these liens and has taken steps to
prevent this from occurring in the
12
future. Hometown has reserved $3,000 for these loans. The reserve amount
represents loans that are currently delinquent. Hometown would expect to realize
proceeds from the sale of these vehicles upon repossession of such vehicle. The
amount, if any, is undetermined due to not knowing the condition of the
vehicles.
Hometown will continue to provide a reserve for potential future
default losses associated with the guarantees based on available historical
information. The reserve continues to decrease as the loans are paid off and due
to no new loan guarantees being provided by Hometown to customers with below
average credit.
In connection with the acquisition in 1999 of real estate used by
Baystate Lincoln Mercury, Hometown guaranteed the mortgage debt of Rellum Realty
Company. The 1999 guaranty was given in substitution for a February 1998
guaranty of that debt by the Muller Group, a subsidiary of Hometown. In the
event of default by Rellum Realty Company, Hometown is required to make the
mortgage payments, but does not take ownership of the property. As of June 30,
2003 the mortgage debt balance is $4.8 million. Hometown makes annual lease
payments of $756,000 to the landlord. The annual mortgage payments made by the
landlord total approximately $774,000. The mortgage matures March 2013. The
lease was recorded as a capital lease. The capital lease obligation is $4.3
million at June 30, 2003.
Warranties
Hometown's new vehicle sales and certain used vehicle sales have
manufacturer warranties that specify coverage and period. In these instances,
Hometown is reimbursed by the manufacturer for the cost of parts and service on
the vehicle covered by these warranties, as specified by the manufacturer.
Hometown also provides a limited warranty on used vehicles sold at retail. The
warranty period is as agreed upon by the customer and may be subject to a
minimum period as mandated by the state. The typical warranty period ranges up
to three months. Hometown also sells parts and service. Manufacturer parts are
covered by limited warranties, as specified by the manufacturer. Service also
has a limited warranty; whereby the part and certain labor costs are covered
under the limited manufacturer warranty.
Hometown records a reserve referred to as "policy" for new and used
vehicle warranties and the labor portion of service warranties based on
available historical information. At June 30, 2003 and December 31, 2002
Hometown has a reserve of $205,000 and $172,000, respectively. The reserve is
based on the last three months of new and used vehicle units sold and the
average cost of repairs over the last twelve months. While Hometown believes its
estimated liability for product warranties is adequate and that the judgment
applied is appropriate, the estimated liability for product warranties could
differ materially from future actual warranty costs.
Balance At Additions To Balance At End
Beginning of Costs and of
Reserve for Policy Work Year Expenses Deductions Quarter
---------------------------------------- ---------------- --------------- ------------ -------------
Six Months Ended June 30, 2003 $172,000 380,000 (347,000) $205,000
Other revenues generated by sales of extended service plans, finance,
insurance and other do not have any Hometown warranties attached to the sale,
except for certain sales in Connecticut dealerships.
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. For these dealerships, Hometown records the revenue
as a liability and amortizes the amount into revenue over a five-year period. At
June 30, 2003 and December 31, 2002, Hometown had $1,232,000 and $1,237,000 of
related deferred revenue, respectively. During the six months ended June 30,
2003, these dealerships generated approximately $252,000 of related warranty
service and insurance revenue, which was deferred. During the same period,
approximately $257,000 of deferred revenue was amortized to Other Revenues, net.
At June 30, 2003 and December 31, 2002, Hometown also had other deferred revenue
of $293,000 and $94,000, respectively.
13
Franchise Agreements
On March 13, 2003, Hometown was notified by Toyota Motor Sales, U.S.A.,
Inc. that Hometown must correct certain operational deficiencies or make
substantial progress toward rectifying such deficiencies during the next six
months. Toyota has expressed concerns that the financial resources of the Toyota
dealerships are being used to finance the cash flow deficits of affiliated
companies and that because of this the Toyota dealerships do not meet their net
working capital requirements by approximately $1.0 million. Toyota requested and
Hometown provided a written action plan and consolidated financial forecast.
Toyota has also expressed concerns about the impact of Ford Motor Credit's
financing terms upon the Toyota dealerships and the existing litigation,
including the Vergopia's as discussed above in Note 7, Commitments and
Contingencies - Litigation and in Managements Discussion and Analysis -
Litigation. Hometown has developed plans to correct the operational deficiencies
that would bring Hometown into compliance. Hometown has obtained written
confirmations from Ford Motor Credit in response to Toyota's requests for
information relating to financing arrangements. In addition, Hometown has
improved net working capital through the sale of a Chrysler/Jeep Sales and
Service Franchise (Note 8) and advances on warranty income from Hometown's
Extended Service Plan vendor. Other possible plans include the sale of real
property, obtaining an outside line of credit and private equity financing. In
addition, Hometown has been in monthly contact with Toyota to review the efforts
of Hometown to resolve the deficiencies alleged by Toyota. The two Toyota
dealerships at December 31, 2002 had combined revenues of $100.6 million and
pre-tax income before allocation of corporate costs of $2.5 million. Hometown
believes that it will be able to alleviate the concerns expressed by Toyota;
however, Toyota has reserved the right to terminate the Toyota Dealership
Agreements if sufficient progress is not made to correct the alleged
deficiencies. Should Hometown be notified by Toyota that they intend to
terminate the Toyota Dealership Agreements, Hometown believes it would have a
reasonable amount of time to cure the default.
8. SALE OF CHRYSLER/JEEP SALES AND SERVICE FRANCHISE
On June 3, 2003 Hometown sold the Chrysler/Jeep Sales and Service
Franchise for its Waterbury, CT store for $950,000 in cash. The transaction
resulted in Hometown recording a $936,000 gain on the sale and is included in
Other Income in Hometown's Consolidated Statement of Operations for the three
and six months ending June 30, 2003. Hometown will continue to use the property
for the sale of used cars. The lease for the property expires in 2013. Hometown
wrote off the goodwill associated with this franchise in 2002. See Note 4.
14
ITEM 2. 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, 2002.
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 9 franchised dealerships located in New
Jersey, New York, Connecticut, Massachusetts and Vermont. Hometown's dealerships
offer 10 American and Asian automotive brands including Chevrolet, Chrysler,
Dodge, Ford, Jeep, Lincoln, Mazda, Mercury, Oldsmobile and Toyota.
RESTATEMENT OF PRIOR YEARS FINANCIAL STATEMENTS - CUMULATIVE EFFECT OF
ACCOUNTING CHANGE
As discussed in Note 4, effective January 1, 2002, Hometown adopted
SFAS 142. At that time, Hometown ceased recording goodwill amortization. SFAS
142 requires the completion of a transitional impairment test in the year of
adoption, with any impairment identified upon initial implementation treated as
a cumulative effect of a change in accounting principle.
Under SFAS 142, goodwill impairment is deemed to exist if the net book
value of a reporting unit exceeds its estimated fair value. According to the
criteria under SFAS 142, it has been determined that Hometown is a single
reporting unit.
During 2002, Hometown completed its goodwill impairment testing which
resulted in Hometown recording a one-time, non-cash charge of approximately
$23.7 million to write-off the carrying value of goodwill. This charge is
non-operational in nature and is reflected as a cumulative effect of an
accounting change in the accompanying statement of operations for the six months
ended June 30, 2002. Approximately $9.6 million of this charge is tax
deductible, resulting in a deferred tax benefit of approximately $3.8 million
against which a full valuation allowance was recorded.
In calculating the impairment charge, the fair value of the reporting
unit was estimated using both the discounted cash flow method and the guideline
company method. The discounted cash flow method used Hometown's estimates of
future cash flows discounted to present value using an appropriate discount
rate. The guideline company method selects certain value measures of guideline
companies and calculates appropriate market multiples based on the fundamental
value measures of the guideline companies and compares same to Hometown. The
guideline companies chosen were other publicly traded company's within
Hometown's Standard Industrial Classification (SIC) code. These methodologies
differ from Hometown's previous policy, as permitted under SFAS 121, using
undiscounted cash flows to determine if goodwill is recoverable.
The goodwill impairment is associated with goodwill that resulted from
acquisitions since the formation of Hometown. The amount of the impairment
reflects the effect of the change in methodology in determining impairment
charges as discussed above.
15
The effect of the charge on the six months ended June 30, 2002
financial statements, and the restated six months ended June 30, 2002 financial
statements is as follows:
Six Months Ended June 30, 2002
(in thousands)
As Reported Effect of Charge Restated
------------ ------------------- ------------
Reported net income $ 544 $ -- $ 544
Less: Cumulative effect of accounting change -- (23,708) (23,708)
---------- ---------- ----------
Adjusted net income (loss) $ 544 $ (23,708) $ (23,164)
========== ========== ==========
Earnings (loss) per share, Basic
Reported net income $ 0.07 $ -- $ 0.07
Cumulative effect of accounting change -- (3.30) (3.30)
---------- ---------- ----------
Adjusted net income (loss) $ 0.07 $ (3.30) $ (3.23)
========== ========== ==========
Earnings (loss) per share, Diluted
Reported net income $ 0.07 $ -- $ 0.07
Cumulative effect of accounting change -- (3.30) (3.30)
---------- ---------- ----------
Adjusted net income (loss) $ 0.07 $ (3.30) $ (3.23)
========== ========== ==========
UNITS
The units sold by category for Hometown for the three and six months
ended June 30, 2003 and 2002, are as follows:
For the three months For the six months
ended June 30, ended June 30,
2003 2002 2003 2002
----- ----- ----- -----
New vehicle 2,098 1,828 3,466 3,256
Used vehicle - retail 1,000 1,099 1,936 2,199
Used vehicle - wholesale 768 727 1,380 1,424
----- ----- ----- -----
Total units sold 3,866 3,654 6,782 6,879
===== ===== ===== =====
THREE MONTHS ENDED JUNE 30, 2003 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2002.
REVENUE
Total revenue increased $5.1 million, or 7.0% to $78.1 million for the
three months ended June 30, 2003, from $73.0 million for three months ended June
30, 2002. This increase was primarily due to: (i) increased sales of new
vehicles ($6.1 million) and (ii) increased parts and service sales ($0.3
million), partially offset by (iii) decreased sales of used vehicles ($1.2
million). New vehicle sales were helped by the continuation of consumer
financing deals, such as zero percent financing, which in turn contributed to
the decrease in used vehicle sales.
Revenue from the sale of new vehicles increased $6.1 million, or 13.6%
to $51.0 million for the three months ended June 30, 2003, from $44.9 million
for the three months ended June 30, 2002. An increase of
16
270 units sold in 2003 compared to 2002 ($6.6 million) was partially offset by a
1.2% decrease in average selling price ($0.5 million). The increase is primarily
due to increases at Hometown's Chevy ($2.6 million), Ford ($1.8 million),
Lincoln Mercury ($1.5 million), Toyota ($0.8 million) and Mazda ($0.6 million)
dealerships partially offset by a decrease at Hometown's Chrysler/Jeep
dealerships ($1.2 million). The increase at the Chevy dealership was primarily
due to an increase of 104 units sold in 2003 compared to 2002 ($2.4 million),
combined with a 2.6% increase in the average selling price ($0.2 million).
Included in this was an increase in fleet sales of 42 units ($0.8 million).
Excluding fleet sales, other Chevy new vehicle sales increased $1.8 million due
to the sale of 62 additional units ($1.4 million), combined with a 6.4% increase
in average selling price ($0.4 million). The increase at the Ford dealership was
primarily due to an increase of 67 units sold in 2003 compared to 2002 ($1.7
million), combined with a 1.5% increase in the average selling price ($0.1
million). The increase at the Lincoln Mercury dealerships was primarily due to a
9.9% increase in the average selling price ($1.2 million), combined with an
additional 9 units sold in 2003 compared to 2002 ($0.3 million). The Lincoln
Mercury increase is net of a decrease in sales of 19 livery units ($0.9
million). The increase at the Toyota dealerships was primarily due to an
increase of 118 units sold in 2003 compared to 2002 ($2.5 million), partially
offset by a 7.9% decrease in the average selling price ($1.7 million). Included
in this was an increase in fleet sales of 41 units ($0.3 million). Excluding
fleet sales, other Toyota new vehicle sales increased $0.5 million due to the
sale of 77 additional units ($1.9 million) partially offset by a 7.8% decrease
in average selling price ($1.4 million). The increase at the Mazda dealership
was primarily due to an additional 26 units sold in 2003 compared to 2002 ($0.6
million). The Chrysler/Jeep decrease was primarily due to a decrease of 54 units
sold ($1.4 million) in the 2003 period compared to the 2002 period. A portion of
the decrease ($0.6 million) was attributable to the sale of one of Hometown's
Chrysler/Jeep new car franchises on June 3, 2003.
Revenue from the sale of used vehicles decreased $1.2 million, or 6.0%,
to $18.7 million for three months ended June 30, 2003, from $19.9 million for
the three months ended June 30, 2002. This was primarily due to reduced used
vehicle sales at wholesale ($0.9 million), due to a lower average selling price
($1.2 million) partially offset by an additional 41 units ($0.3 million), plus
reduced used vehicles sold at retail ($0.3 million) due to a reduction of 99
units sold ($1.4 million), partially offset by an 8.0% increase in average
selling price ($1.1 million). A Lincoln Mercury / Mazda dealership accounted for
$0.2 million of the decrease in used vehicles sales at retail and all of the
decrease in used vehicles sales at wholesale. This was primarily due to the
dealership reducing its emphasis on the sale of high-end used cars during the
2002 period, causing an increase in retail and wholesale sales of such vehicles
in 2002. Many of the other dealerships had increases in used vehicle sales at
wholesale, but were completely offset by the decrease described above.
Parts and service revenue increased $0.3 million, or 5.1% to $6.2
million for the three months ended June 30, 2003, from $5.9 million for the
three months ended June 30, 2002.
Other dealership revenues stayed the same at $2.2 million for the three
months ended June 30, 2002 and June 30, 2003. An increase in other dealership
revenues attributable to increased unit sales of new vehicles ($0.2 million) was
offset by decreases in other dealership revenues attributable to decreased unit
sales of used vehicles ($0.2 million).
GROSS PROFIT
Total gross profit increased $0.6 million, or 5.9% to $10.7 million for
the three months ended June 30, 2003, from $10.1 million for the three months
ended June 30, 2002. This increase was primarily attributable to: (i) an
increase in new vehicle gross profit of $0.3 million, (ii) a $0.1 million
increase in used vehicle gross profit and (iii) a $0.2 million increase in gross
profit on parts and service sales. Gross profit percentage for Hometown was
13.7% in 2003 and 13.8% in 2002. Adjusting both periods for Toyota and Chevy
fleet sales, gross profit percentage was 14.7% in 2003 and 2002.
Gross profit on the sale of new vehicles increased $0.3 million, or
10.3%, to $3.2 million for the three months ended June 30, 2003, from $2.9
million for the three months ended June 30, 2002. The increase in gross profit
is primarily attributable to an increase of 270 units ($0.4 million), partially
offset by a 3.4%
17
decrease in average gross profit per vehicle ($0.1 million). Included in the
unit increase are 83 units attributable to an increase in Toyota and Chevy fleet
sales, which had a minimal effect on the increase in gross profit. Most
dealerships experienced an increase in gross profit in the 2003 period compared
to 2002. Chrysler/Jeep had a decrease partly due to the sale of one of the new
car franchises on June 3, 2003. Gross profit percentage for 2003 was 6.3%
compared to 6.4% for 2002. Adjusting both periods for Toyota and Chevy fleet
sales, which generate low margins, gross profit percentage for new vehicles was
6.9% in 2003 and 7.0% in 2002.
Gross profit on the sale of used vehicles increased $0.1 million, or
5.9%, to $1.8 million for the three months ended June 30, 2003 from $1.7 million
for the three months ended June 30, 2002. This increase is primarily due to an
18.8% increase in average gross profit per vehicle ($0.1 million), partially
offset by a decrease of 58 units (less than $0.1 million). The improvement in
average gross profit per vehicle was attributable to used vehicles sold at both
retail and wholesale. Gross profit percentage on the sale of used vehicles was
9.6% in 2003 compared to 8.3% in 2002.
Parts and service gross profit increased $0.2 million, or 6.1%, to $3.5
million for the three months ended June 30, 2003, from $3.3 million for the
three months ended June 30, 2002. The increase was primarily attributable to the
increase in revenues. Gross profit percentage was 56.5% in 2003 compared to
55.9% in 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $0.2 million, or
2.3%, to $9.0 million for the three months ended June 30, 2003, from $8.8
million for the three months ended June 30, 2002. Increases in advertising ($0.1
million), insurance ($0.1 million) and various reserves for chargebacks ($0.1
million), were partially offset by a reduction in salaries and employee benefits
($0.1 million).
OTHER INCOME
In June 2003, Hometown sold a Chrysler/Jeep Sales and Service Franchise
in Waterbury, CT resulting in a gain of approximately $936,000 recorded in Other
Income.
INTEREST EXPENSE
Interest expense stayed consistent at $0.8 million for the three months
ended June 30, 2003 and 2002.
PROVISION FOR INCOME TAX
The effective income tax rate was 40.4% for the quarter ended June 30,
2003 and 39.3% for the same period of 2002. The rates were based on current
forecasts of income before taxes, and current forecasts of permanent differences
between tax and book income.
NET INCOME
Net income increased $0.8 million to $1.1 million for the three months
ended June 30, 2003, from $0.3 million for the three months ended June 30, 2002.
The improvement is primarily due to the gain on sale of the Chrysler/Jeep Sales
and Service Franchise recorded in Other Income. See above for explanation of
other changes.
EARNINGS PER SHARE, BASIC AND DILUTED AND WEIGHTED AVERAGE SHARES
"Basic earnings (loss) per share" is computed by dividing net income
(loss) by the weighted average common shares outstanding. "Diluted earnings
(loss) per share" is computed by dividing net income (loss) by the weighted
average common shares outstanding adjusted for the incremental dilution of
potentially dilutive securities.
18
Options and warrants to purchase approximately 1,401,000 and 1,373,000 shares of
common stock were outstanding as of June 30, 2003 and 2002, respectively. The
basic and diluted weighted average shares are 7.2 million shares for both the
three months ended June 30, 2003 and 2002. The options and warrants were not
included in the computation of diluted earnings (loss) per share because the
option and warrant prices were greater than the average market price of the
common shares. The basic and diluted earnings per share is $0.15 and $0.04 for
the three months ended June 30, 2003 and June 30, 2002, respectively. The three
months ended June 30, 2003 includes $0.08 per share from the gain on sale of a
Chrysler/Jeep Sales and Service Franchise (Note 8).
SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2002
(RESTATED).
REVENUE
Total revenue increased $0.3 million, or 0.2% to $138.4 million for the
six months ended June 30, 2003, from $138.1 million for the six months ended
June 30, 2002. This increase was primarily due to: (i) increased new vehicle
sales ($5.3 million) and (ii) increased parts and service sales ($0.4 million),
partially offset by (iii) decreased sales of used vehicles ($4.9 million); and
(iv) decreased other revenues ($0.5 million). New vehicle sales were helped by
the continuation of consumer financing deals, such as zero percent financing,
which in turn contributed to the decrease in used vehicle sales.
Revenue from the sale of new vehicles increased $5.3 million, or 6.5%,
to $86.9 million for the six months ended June 30, 2003, from $81.6 million for
the six months ended June 30, 2002. The increase is attributable to an
additional 210 units sold in 2003 compared to 2002 ($5.3 million), average
selling price remained consistent across both periods. The increase in unit
sales occurred in the second quarter of 2003 as discussed above. The increase is
primarily due to increases at Hometown's Chevy ($2.4 million), Ford ($1.7
million), Lincoln Mercury ($1.6 million), Mazda ($1.4 million) and Toyota ($0.3
million) dealerships partially offset by a decrease at Hometown's Chrysler/Jeep
dealerships ($2.1 million). The increase at the Chevy dealership was primarily
due to an increase of 95 units sold in 2003 compared to 2002 ($2.3 million),
combined with a 1.6% increase in the average selling price ($0.1 million).
Included in this was an increase in fleet sales of 42 units ($0.8 million).
Excluding fleet sales, other Chevy new vehicle sales increased $1.6 million due
to the sale of 53 additional units ($1.3 million), combined with a 4.1% increase
in average selling price ($0.3 million). The increase at the Ford dealership was
primarily due to an increase of 54 units sold in 2003 compared to 2002 ($1.4
million), combined with a 3.2% increase in the average selling price ($0.3
million). The increase at the Lincoln Mercury dealerships was primarily due to a
9.8% increase in the average selling price ($2.0 million), partially offset by a
decrease of 12 units sold in 2003 compared to 2002 ($0.4 million). The Lincoln
Mercury increase is net of a decrease in sales of 18 livery units ($0.7
million). The increase at the Mazda dealership was primarily due to an
additional 66 units sold in 2003 compared to 2002 ($1.4 million). The increase
at the Toyota dealerships was primarily due to an increase of 99 units sold in
2003 compared to 2002 ($2.2 million), partially offset by a 5.0% decrease in the
average selling price ($1.9 million). Included in this was a decrease in fleet
sales of $0.3 million due to a 6.7% decrease in average selling price, partially
offset by an increase of 7 units. Excluding fleet sales, other Toyota new
vehicle sales increased $0.6 million due to the sale of 92 additional units
($2.2 million) partially offset by a 5.1% decrease in average selling price
($1.6 million). The Chrysler/Jeep decrease was primarily due to a decrease of 92
units sold ($2.3 million) in the 2003 period compared to the 2002 period. A
portion of the decrease ($0.6 million) was attributable to the sale of one of
Hometown's Chrysler/Jeep new car franchises on June 3, 2003.
Revenue from the sale of used vehicles decreased $4.9 million, or
12.3%, to $35.1 million for six months ended June 30, 2003, from $40.0 million
for the six months ended June 30, 2002. This was due to a decrease of 263 units
sold at retail ($3.7 million), partially offset by a 3.4% increase in average
selling price ($0.9 million) plus reduced used vehicle sales at wholesale ($2.1
million) due to a reduction of 44 units ($0.3 million) and lower average selling
price ($1.8 million). A Lincoln Mercury/Mazda dealership accounted for $1.6
million of the decrease in used vehicle sales at retail and all of the decrease
in used vehicle sales at wholesale. This was primarily due to the dealership
reducing its emphasis on the sale of high-end used cars during the 2002 period,
causing an increase in retail and wholesale sales of such vehicles in 2002. Many
of the other dealerships had increases in used vehicle sales at wholesale, but
were completely offset by the decrease
19
described above. Used vehicles sold at retail at all other dealerships decreased
$1.2 million due to a decrease of 171 units sold ($2.1 million), partially
offset by an increase in average selling price ($0.9 million). Most dealerships
contributed to the decrease.
Parts and service revenue increased $0.4 million, or 3.3%, to $12.4
million for the six months ended June 30, 2003, from $12.0 million for the six
months ended June 30, 2002.
Other dealership revenues decreased $0.5 million, or 11.1% to $4.0
million for the six months ended June 30, 2003, from $4.5 million for the six
months ended June 30, 2002. This decrease is from the first quarter of 2003 and
is primarily attributable to decreases in other dealership revenues (extended
service plan income, finance income and other income) of used vehicles, from
decreased unit sales and lower average other revenue per vehicle sold.
GROSS PROFIT
Total gross profit remained constant at $19.7 million for both the six
months ended June 30, 2003 and June 30, 2002. An increase in new vehicle gross
profit of $0.3 million and an increase in gross profit on parts and service
sales of $0.2 million were offset by a $0.5 million decrease in gross profit on
other dealership revenues. Gross profit percentage for Hometown was 14.2% in
2003 and 14.3% in 2002. Adjusting both periods for Toyota and Chevy fleet sales,
gross profit percentage was 14.9% in 2003 and 14.8% in 2002.
Gross profit on the sale of new vehicles increased $0.3 million, or
5.8%, to $5.5 million for the six months ended June 30, 2003, from $5.2 million
for the six months ended June 30, 2002. The increase in gross profit is
primarily attributable to an increase of 210 units ($0.3 million). There was no
change in average gross profit per vehicle. Included in the unit increase are 49
units attributable to an increase in Toyota and Chevy fleet sales, which had a
minimal effect on the increase in gross profit. Most dealerships experienced an
increase in gross profit in the 2003 period compared to 2002. Chrysler/Jeep had
a decrease partly due to the sale of one of the new car franchises on June 3,
2003. Gross profit percentage for 2003 was 6.3% compared to 6.4% for 2002.
Adjusting both periods for Toyota and Chevy fleet sales, which generate low
margins, gross profit percentage for new vehicles was 6.7% in both 2003 and
2002.
Gross profit on the sale of used vehicles remained at $3.4 million for
both the six months ended June 30, 2003 and June 30, 2002. A 13.8% increase in
average gross profit per vehicle ($0.2 million) was offset by a decrease of 307
units ($0.2 million). A Lincoln Mercury/Mazda dealership, discussed in revenues
above, accounted for a $0.1 million decrease, which was offset by the net
increase at the remaining locations. Gross profit percentage on the sale of used
vehicles was 9.6% in 2003 compared to 8.6% in 2002.
Parts and service gross profit increased $0.2 million, or 3.0%, to $6.8
million for the six months ended June 30, 2003, from $6.6 million for the six
months ended June 30, 2002. The increase was primarily attributable to the
increase in revenues. Gross profit percentage was 54.8% in 2003 compared to
55.0% in 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $0.2 million, or
1.2%, to $17.4 million for the six months ended June 30, 2003, from $17.2
million for the six months ended June 30, 2002. Increases in advertising ($0.2
million), insurance ($0.2 million), reserves for chargebacks ($0.1 million) and
various other costs ($0.1 million), were partially offset by a reduction in
salaries and employee benefits ($0.4 million).
OTHER INCOME
In June 2003, Hometown sold a Chrysler/Jeep Sales and Service Franchise
in Waterbury, CT resulting in a gain of approximately $936,000 recorded in Other
Income.
20
INTEREST EXPENSE
Interest expense stayed consistent at $1.6 million for the six months
ended June 30, 2003 and 2002.
PROVISION FOR INCOME TAX
The effective income tax rate was 40.9% for the six months ended June
30, 2003 and 40.5% for the same period of 2002. The rates were based on current
forecasts of income before taxes, and current forecasts of permanent differences
between tax and book income.
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Income before cumulative effect of accounting change increased $418,000
to $962,000 for the six months ended June 30, 2003, from $544,000 for the six
months ended June 30, 2002. The improvement is primarily due to the gain on sale
of the Chrysler/Jeep Sales and Service Franchise recorded in Other Income. See
above for explanation of other changes.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
In accordance with SFAS 142, Hometown completed its goodwill impairment
testing during 2002, which resulted in Hometown recording a one-time, non-cash
charge of approximately $23.7 million to write-off the carrying value of
goodwill. This charge is non-operational in nature and is reflected as a
cumulative effect of an accounting change in the accompanying statement of
operations for the six months ended June 30, 2002 (restated). Approximately $9.6
million of this charge is tax deductible, resulting in a deferred tax benefit of
approximately $3.8 million against which a full valuation allowance was
recorded. See Note 4 to the consolidated financial statements.
NET INCOME (LOSS)
Net income (loss) improved $24.2 million, to income of $1.0 million for
the six months ended June 30, 2003, from a loss of $(23.2) million for the six
months ended June 30, 2002 (restated). The decreased loss is primarily due to
the write-off of the carrying value of goodwill in the 2002 period. See above
for explanation of other changes.
EARNINGS PER SHARE, BASIC AND DILUTED AND WEIGHTED AVERAGE SHARES
"Basic earnings (loss) per share" is computed by dividing net income
(loss) by the weighted average common shares outstanding. "Diluted earnings
(loss) per share" is computed by dividing net income (loss) by the weighted
average common shares outstanding adjusted for the incremental dilution of
potentially dilutive securities. Options and warrants to purchase approximately
1,401,000 and 1,373,000 shares of common stock were outstanding as of June 30,
2003 and 2002, respectively. The basic and diluted weighted average shares are
7.2 million shares for both the six months ended June 30, 2003 and 2002. The
options and warrants were not included in the computation of diluted earnings
(loss) per share because the option and warrant prices were greater than the
average market price of the common shares or the effect would have been
anti-dilutive.
The basic and diluted earnings per share for the six months ended June 30,
2003 is $0.13 and includes $0.08 per share from the gain on sale of a Chrysler
Sales and Service Franchise (Note 8). The restated basic and diluted (loss) per
share for the six months ended June 30, 2002 is $(3.23), which includes basic
and diluted income per share before cumulative effect of accounting change of
$0.07 and basic and diluted (loss) per share for a cumulative effect of
accounting change of $(3.30), resulting from the goodwill impairment charge
associated with the implementation of SFAS 142. See Note 4 to the consolidated
financial statements for the recognition of an impairment of the carrying value
of its goodwill in 2002, in accordance with SFAS 142.
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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 on Hometown's operations of future negative trends in such
factors will be somewhat mitigated by its (i) strong parts, service and
collision repair services, (ii) variable cost salary structure, (iii) geographic
regional focus, and (iv) product diversity.
SEASONALITY
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 2002
and 2003 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 $4.9 million and $3.6 million at
June 30, 2003 and December 31, 2002, respectively.
Cash Flow from Operations
The following table sets forth the consolidated selected information
from the unaudited statements of cash flows:
Six months ended
June 30,
2003 2002
(Restated)
---------- ----------
(in thousands)
Net cash provided by operating activities $ 2,029 $ 1,357
Net cash provided by (used in) investing activities 500 (1,214)
Net cash (used in) financing activities (1,225) (453)
------- -------
Net increase (decrease) in cash and cash equivalents $ 1,304 $ (310)
======= =======
For the six months ended June 30, 2003, net cash provided from
operations of $2.0 million primarily consists of: (i) net income plus non-cash
items of $1.1 million; (ii) the decrease in inventory in excess of the decrease
in floor plan liability of $1.6 million; and (iii) an increase in accounts
payable and accrued expenses of $1.3 million; partially offset by increased
accounts receivable of $2.1 million. Net cash provided by investing activities
of
22
$0.5 million is primarily due the proceeds from the sale of a Chrysler/Jeep
Sales and Service Franchise of $0.9 million, partially offset by capital
expenditures of $0.4 million. Net cash used in financing activities of $1.2
million is due to principal payments of long-term debt and capital lease
obligations.
For the six months ended June 30, 2002, net cash provided from
operations of $1.4 million primarily consists of: (i) net loss plus non-cash
items of $1.2 million; and (ii) the increase in floor plan liability in excess
of the increase in inventory of $0.9 million; partially offset by (iii)
increased accounts receivable of $0.6 million; and (iv) a decrease in accounts
payable and accrued expenses of $0.3 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 $0.5 million is due to
principal payments of long-term debt and capital lease obligations.
Capital Expenditures
Capital expenditures for fiscal 2003 are expected to be $0.6 million,
consisting primarily of equipment purchases ($0.2 million) and the remaining
costs associated with the construction of a new showroom at our Framingham,
Massachusetts dealership ($0.4 million).
Receivables
Hometown had $7.0 million in accounts receivable at June 30, 2003
compared to $4.9 million at December 31, 2002. The increase in receivables is
due to the increase in sales that takes place in June compared to December. The
majority of those receivables, $3.7 million and $2.8 million as of June 30, 2003
and December 31, 2002, respectively, are due from finance companies that provide
or secure financing for customer purchases, and primarily represent
contracts-in-transit. These amounts are typically received within seven days of
the transaction. The allowance for doubtful accounts is $0.3 million and $0.2
million at June 30, 2003 and December 31, 2002, respectively.
Inventories
Hometown had $38.0 million in inventories, net at June 30, 2003
compared to $39.2 million at December 31, 2002. The majority of inventory, $28.1
million and $29.2 million as of June 30, 2003 and December 31, 2002,
respectively, is new vehicle inventory. New, used and demonstrator vehicle
values are stated at the lower of cost or market, determined on a specific unit
basis. Parts and accessories are stated at the lower of cost (determined on a
first-in, first-out basis) or market. Hometown assesses the lower of cost or
market reserve requirement for vehicles, on an individual unit basis, taking
into consideration historical loss rates, the age and composition of the
inventory and current market conditions. The lower of cost or market reserves
were $0.7 million and $0.6 million at June 30, 2003 and December 31, 2002,
respectively.
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.
23
Guarantees
Hometown guarantees or partially guarantees loans advanced by financial
institutions to certain customers. It is Hometown's policy to provide reserves
for potential future default losses based on available historical information.
One of Hometown's dealerships, prior to fiscal 2000, had entered into
various arrangements whereby Hometown guaranteed or partially guaranteed loans
advanced by financial institutions to certain customers as follows:
(iii) Portfolio of 9 customer's limousine vehicle loans granted by
Ford Motor Credit Co. As of June 30, 2003, Hometown fully and
partially guaranteed limousine vehicle loans aggregating
approximately $46,000.
(iv) Portfolio of 8 vehicle loans, granted by a financial
institution, to various customers of the dealership with below
average credit. As of June 30, 2003, Hometown fully guaranteed
vehicle loans associated with these customers aggregating
approximately $18,000.
The guarantees in (i) and (ii) above are related to loans whereby
Hometown is required to pay the remaining loan balance upon default by the
customer. As of June 30, 2003, Hometown has reserved $15,000 against a total
maximum payout of $64,000 for these loans. The reserve amount represents loans
that are currently delinquent. Hometown would expect to realize proceeds from
the sale of these vehicles upon repossession of such vehicle. The amount of
proceeds, if any, is undetermined due to not knowing the condition of the
vehicles.
The same dealership during fiscal 2000 and 2001 partially guaranteed
loans advanced by Ford Motor Credit Co. to a certain limousine customer. As of
June 30, 2003, 18 of these loans remain outstanding. Hometown has reserved $0
against a total maximum payout of $207,000 for these loans. Hometown has not
reserved for these loans due to the expected fair value of the vehicles
approximating or exceeding the unamortized portion of the loan balance.
There are also 16 loans whose liens were not properly perfected
totaling approximately $127,000 as of June 30, 2003. Hometown will be required
to pay the remaining loan balance should the customer default on their payments.
Hometown is working to perfect these liens and has taken steps to prevent this
from occurring in the future. Hometown has reserved $3,000 for these loans. The
reserve amount represents loans that are currently delinquent. Hometown would
expect to realize proceeds from the sale of these vehicles upon repossession of
such vehicle. The amount, if any, is undetermined due to not knowing the
condition of the vehicles.
Hometown will continue to provide a reserve for potential future
default losses associated with the guarantees based on available historical
information. The reserve continues to decrease as the loans are paid off and due
to no new loan guarantees being provided by Hometown to customers with below
average credit.
In connection with the acquisition in 1999 of real estate used by
Baystate Lincoln Mercury, Hometown guaranteed the mortgage debt of Rellum Realty
Company. The 1999 guaranty was given in substitution for a February 1998
guaranty of that debt by the Muller Group, a subsidiary of Hometown. In the
event of default by Rellum Realty Company, Hometown is required to make the
mortgage payments, but does not take ownership of the property. As of June 30,
2003 the mortgage debt balance is $4.8 million. Hometown makes annual lease
payments of $756,000 to the landlord. The annual mortgage payments made by the
landlord total approximately $774,000. The mortgage matures March 2013. The
lease was recorded as a capital lease. The capital lease obligation is $4.3
million at June 30, 2003.
Warranties
Hometown's new vehicle sales and certain used vehicle sales have
manufacturer warranties that specify coverage and period. In these instances,
Hometown is reimbursed by the manufacturer for the cost of parts and
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service on the vehicle covered by these warranties, as specified by the
manufacturer. Hometown also provides a limited warranty on used vehicles sold at
retail. The warranty period is as agreed upon by the customer and may be subject
to a minimum period as mandated by the state. The typical warranty period ranges
up to three months. Hometown also sells parts and service. Manufacturer parts
are covered by limited warranties, as specified by the manufacturer. Service
also has a limited warranty; whereby the part and certain labor costs are
covered under the limited manufacturer warranty.
Hometown records a reserve referred to as "policy" for new and used
vehicle warranties and the labor portion of service warranties based on
available historical information. At June 30, 2003 and December 31, 2002
Hometown has a reserve of $205,000 and $172,000, respectively. The reserve is
based on the last three months of new and used vehicle units sold and the
average cost of repairs over the last twelve months. While Hometown believes its
estimated liability for product warranties is adequate and that the judgment
applied is appropriate, the estimated liability for product warranties could
differ materially from future actual warranty costs.
Balance At Additions To Balance At End
Beginning of Costs and of
Reserve for Policy Work Year Expenses Deductions Quarter
------------------------------- ------------ ------------ ---------- --------------
Six Months Ended June 30, 2003 $172,000 380,000 (347,000) $205,000
Other revenues generated by sales of extended service plans, finance,
insurance and other do not have any Hometown warranties attached to the sale,
except for certain sales in Connecticut dealerships.
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. For these dealerships, Hometown records the revenue
as a liability and amortizes the amount into revenue over a five-year period. At
June 30, 2003 and December 31, 2002, Hometown had $1,232,000 and $1,237,000 of
related deferred revenue, respectively. During the six months ended June 30,
2003, these dealerships generated approximately $252,000 of related warranty
service and insurance revenue, which was deferred. During the same period,
approximately $257,000 of deferred revenue was amortized to Other Revenues, net.
At June 30, 2003 and December 31, 2002, Hometown also had other deferred revenue
of $293,000 and $94,000, respectively.
SALE OF CHRYSLER/JEEP SALES AND SERVICE FRANCHISE
On June 3, 2003 Hometown sold the Chrysler/Jeep Sales and Service
Franchise for its Waterbury, CT store for $950,000 in cash. The transaction
resulted in Hometown recording a $936,000 gain on the sale and is included in
Other Income in Hometown's Consolidated Statement of Operations for the three
and six months ending June 30, 2003. Hometown will continue to use the property
for the sale of used cars. The lease for the property expires in 2013. Hometown
wrote off the goodwill associated with this franchise in 2002. See Note 4.
FRANCHISE AGREEMENTS
On March 13, 2003, Hometown was notified by Toyota Motor Sales, U.S.A.,
Inc. that Hometown must correct certain operational deficiencies or make
substantial progress toward rectifying such deficiencies during the next six
months. Toyota has expressed concerns that the financial resources of the Toyota
dealerships are being used to finance the cash flow deficits of affiliated
companies and that because of this the Toyota dealerships do not meet their net
working capital requirements by approximately $1.0 million. Toyota requested and
Hometown provided a written action plan and consolidated financial forecast.
Toyota has also expressed concerns about the impact of Ford Motor Credit's
financing terms upon the Toyota dealerships and the existing litigation,
including the Vergopia's as discussed above in Note 7, Commitments and
Contingencies - Litigation and in Managements Discussion and Analysis -
Litigation. Hometown has developed plans to correct the operational deficiencies
that would bring Hometown into compliance. Hometown has obtained written
confirmations from Ford Motor Credit in response to Toyota's requests for
information relating to financing arrangements. In addition, Hometown has
25
improved net working capital through the sale of a Chrysler/Jeep Sales and
Service Franchise and advances on warranty income from Hometown's Extended
Service Plan vendor. Other possible plans include the sale of real property,
obtaining an outside line of credit and private equity financing. In addition,
Hometown has been in monthly contact with Toyota to review the efforts of
Hometown to resolve the deficiencies alleged by Toyota. The two Toyota
dealerships at December 31, 2002 had combined revenues of $100.6 million and
pre-tax income before allocation of corporate costs of $2.5 million. Hometown
believes that it will be able to alleviate the concerns expressed by Toyota;
however, Toyota has reserved the right to terminate the Toyota Dealership
Agreements if sufficient progress is not made to correct the alleged
deficiencies. Should Hometown be notified by Toyota that they intend to
terminate the Toyota Dealership Agreements, Hometown believes it would have a
reasonable amount of time to cure the default.
LITIGATION
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, 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. In September 2002, Hometown received notice of a
complaint filed by the landlord against Hometown, Morristown and certain former
officers seeking payment of rent and other obligations through June 2005. In
October 2002, Morristown filed a complaint against the Assignee to recover any
potential damages from the Assignee as provided under the lease assignment. The
Assignee has made a claim against Hometown for breach of the assignment
agreement and misrepresentation of the use of the subject property. The Assignee
has also brought a claim against Morristown's president, Hometown's Chief
Executive Officer, for misrepresentation. Total anticipated costs for the
remainder of the lease term, through June 2005, is $540,000 for rent plus
certain other costs. Hometown believes it has meritorious defenses to the claim
and cross-claim and intends to vigorously defend this action. In fact the
landlord has leased the premises for the period January 29, 2003 through January
29, 2004 for a total of $120,000, to another tenant thereby significantly
reducing Morristown's exposure to a damages judgment for lost rent. 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.
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 allegedly made by Hometown's wholly-owned subsidiary Westwood Lincoln
Mercury Sales, Inc. ("Westwood") 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 that Westwood 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, for an unspecified amount as well as, reinstatement,
injunctive and other legal and equitable relief. Salvatore A. Vergopia and
Edward A. Vergopia have also commenced a second action for defamation against
Hometown and its Chief Executive Officer, which has been consolidated with the
action initially filed.
Litigation counsel has been retained by our insurers 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 Vergopias breaches of
certain agreements, as well as breaches of their fiduciary duties. Discovery is
proceeding in this action.
26
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.
Universal Underwriters Group ("Universal"), Hometown's insurance
provider, commenced a lawsuit against The Chubb Group of Insurance Companies
("Chubb"), Hometown's Director and Officer Liability Insurance provider,
Hometown, certain officers, directors and shareholders of Hometown and the
Vergopias seeking a declaration of its coverage obligations with respect to the
suit brought by the Vergopias discussed above. The suit has been consolidated
with the suit brought by the Vergopias for discovery and case management
purposes. Universal originally acknowledged its obligation to defend and
indemnify Hometown against the Vergopias claims and engaged separate counsel to
represent Hometown and its directors. Universal is now seeking to limit its
obligations under the comprehensive insurance policy as well as require Chubb to
share in defense and indemnity obligations. Hometown originally commenced an
action seeking affirmative declaration of its rights under its policy with
Universal, but allowed this action to be stayed pending a resolution of the
action brought by Universal. Hometown has brought counterclaims against
Universal and a cross-claim for declaratory judgment against Chubb. Hometown
maintains that the insurers are obligated to defend and indemnify on all claims
brought by the Vergopias. Discovery is ongoing on this matter. Hometown believes
it has meritorious claims and is vigorously defending this action and
prosecuting its counterclaims and cross-claims. 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.
Hometown from time to time may be a defendant in lawsuits arising from
normal business activities. Management reviews pending litigation with legal
counsel and believes that the ultimate liability, if any, resulting from such
actions will not have a material adverse effect on Hometown's consolidated
financial position or results of operations.
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.
ITEM 3. 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, 2003 of $38.5 million, a 1% change in the prime rate
would result in a $0.4 million change to annual floor plan interest expense.
At June 30, 2003, Hometown invested $2.3 million of excess cash, of
which $1.6 million was invested in money market accounts paying a weighted
average interest rate of 0.95% at June 30, 2003, and $0.7 million was
27
invested in a Ford Motor Credit Company cash management account paying interest
of 5.25% at June 30, 2003. The cash management account interest rate is tied to
rate charged on Hometown's floor plan financing arrangement.
ITEM 4. CONTROLS AND PROCEDURES
The Company's certifying officers have concluded based on their
evaluation of the Company's disclosure controls and procedures that the
disclosure controls and procedures as of the end of the quarter ended June 30,
2003 are effective in ensuring that material information relating to the
Company, including its consolidated subsidiaries, is made known to the
certifying officers by others within those entities, as appropriate to allow
timely decisions regarding required disclosure, particularly during the period
in which this Form 10-Q was being prepared and that information required to be
disclosed by the Company in its reports that it files under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported, within the
time periods specified in the Securities and Exchange Commission's rules and
forms. In addition, there was no change in internal control over financial
reporting during the quarter ended June 30, 2003 that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
31.1 Chief Executive Officer Certification
31.2 Chief Financial Officer Certification
32.1 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
32.2 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
On May 15, 2003, Hometown filed a report on Form 8-K with respect to
Items 7 and 9 on such report, related to the Company's announcing its
2003 first quarter results.
28
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, 2003 By: /s/ Corey E. Shaker
------------------------ --------------------------------------
Date Corey E. Shaker
President and Chief Executive Officer
August 12, 2003 By: /s/ Charles F. Schwartz
------------------------ --------------------------------------
Date Charles F. Schwartz
Chief Financial Officer
29