Hometown Auto Retailers, Inc.

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Hometown Auto Retailers, Inc.

774 Straits Turnpike
Watertown, Connecticut 06795
U.S.A.
Telephone (860) 945-6900
Fax: (860) 945-4909
Web site: http://www.hometownautoretailers.com

Public Company
Incorporated: 1997
Employees: 386
Sales: $279.8 million
Stock Exchanges: NASDAQ
Ticker Symbol: HCAR
NAIC: 441110 New Car Dealers

Hometown Auto Retailers, Inc. is a publicly traded company that operates ten franchised car dealerships in New Jersey, New York, Connecticut, Massachusetts, and Vermont. It offers a variety of domestic and foreign cars and light truck brands, including Chevrolet, Chrysler, Daewoo, Dodge, Ford, Isuzu, Jeep, Lincoln, Mazda, Mercury, Plymouth, and Toyota. In addition, Hometown is one of the leading suppliers of Lincoln Town Cars and limousines to livery operators through its New Jersey dealership, Westwood Lincoln Mercury. Hometown also sells used cars and replacement parts, offers maintenance and repair services, and provides customer financing. The company owns a minority stake in CarDay, an Internet car auction site it created in 1999. The core of Hometown is comprised of the auto dealerships formerly owned by the Muller, Shaker, and Vergopia families, who retain a controlling interest in the company’s voting stock.

From Automotive Repairs to Retail

The Shaker family auto businesses, operating under a holding company called E.R.R. Enterprises, was the acquiring party when Hometown was formed in 1997. The original Shaker business was a Waterbury, Connecticut, automobile repair shop called Shaker Auto Service, established in 1930 by Joseph Shaker. The family did not turn to selling cars until the years after World War II, when it gained franchises for Jeep, Lincoln-Mercury, and Ford. The Shaker holding company would eventually become one of Connecticut’s largest dealer groups. Traditionally, auto dealerships have been family-owned, local businesses, but in recent years many have been consolidated into larger, regional concerns that benefit from economies of scale. Despite this trend, large dealerships in the mid-1990s still represented only a small fraction of all franchised dealerships in the United States, as well as total sales revenues of the industry. The densely populated Northeast was more highly fragmented than other regions of the country, a fact instrumental in the Shaker, Muller, and Vergopia families deciding to join forces to create Hometown. Both the Muller Group and Vergopia’s Westwood Lincoln Mercury Sales Inc. were located in New Jersey.

Hometown was originally incorporated in New York as Dealerco in March 1997. After the family dealer groups agreed to combine their businesses, the company was reincorporated in Delaware in June 1997 and adopted the Hometown name. Each of the parties, along with the corporation’s law firm, received shares of Hometown stock. A temporary corporate headquarters was established in Watertown, Connecticut, with an accounting operation located in Matawan, New Jersey. Salvatore A. Vergopia was named as chief executive officer and chairman of the board; Joseph Shaker as president, chief operating officer, and director; and William C. Muller, Jr., as vice-president and director of New Jersey operations. Immediately the new company agreed to purchase a Vermont dealership, Brattleboro Chrysler Plymouth Dodge, Inc. for $2.7 million and the assumption of debt. A month later Hometown agreed to purchase Leominster Lincoln Mercury, located in Framingham, Massachusetts, for $3 million and the assumption of debt. Both transactions were scheduled to be finalized after Hometown completed an initial public offering of its stock in the following year.

Hometown’s strategy was to use its stock in order to acquire small and medium-size dealerships located in the Northeast that generated annual revenues ranging from $20 million to $60 million per location. The goal was to become New England’s largest dealer group, in addition to increasing its business in New York and New Jersey and establishing a presence in nearby Mid-Atlantic communities. Management targeted existing dealerships that had already gained the trust of local consumers. This belief in the value of “hometown” relationships was the reason the company chose the Hometown name. It also hoped to take advantage of the proximity of dealerships to lower operational costs while increasing sales through coordinated marketing efforts. In addition to new vehicle sales, Hometown dealerships emphasized used vehicle sales, keenly aware that used vehicles generally produce higher gross margins than new vehicles. Moreover, the company looked to provide maintenance and repair services, as well as financing, in order to meet the full range of its customers’ needs.

Hometown Goes Public in 1998

Hometown and its predecessors generated combined revenues of $254.2 million in 1997. Most dealership groups that had previously gone public totaled revenues in the $1 billion range, yet Hometown went forward with its initial public stock offering in July 1998, meeting with a less than enthusiastic response. Buying and selling cars, in general, was viewed skeptically by investors, who considered it an unreliable and cyclical business. Hometown planned to offer 2 million shares priced between $9 and $10, eventually opting for the low end of the range and cutting back the number of shares to 1.8 million. Trading on the Nasdaq, Hometown stock quickly sagged below its IPO price. Financial analysts warned that a low stock price would hurt Hometown’s ability to use its stock to make acquisitions, predicting that many dealers would be wary of accepting the stock of a small firm with no track record. Hometown, therefore, faced something of a Catch 22 situation: to acquire more dealerships it had to raise its stock price, but in order to raise its stock price it had to acquire more dealerships. Nevertheless, the company was able to use the $16.2 million raised in the IPO to close the two deals it had commenced the previous July. In addition, it purchased Pride Auto Center, Inc. for $925,000, then in December 1998 closed on the acquisition of Boston-area Wellesley Lincoln Mercury, paying $650,000 and assuming certain liabilities. The company also negotiated a $100 million “floor plan” credit facility from GE Capital with which to maintain its new and used car inventories. For the year, Hometown posted revenues of $240.6 million, down by almost $14 million from the previous year. Nevertheless, management touted 1998 as a year of accomplishment, one in which Hometown bolstered its presence in the area west of Boston and in northern New Jersey, and as a result established a base for future growth and a significant increase in revenues. The goal was to reach $500 million in revenues within the next year.

The company’s optimism, however, was not borne out by reality in 1999, although the acquisition of new dealerships did increase revenues somewhat. In January, Hometown acquired Morristown Lincoln Mercury for $500,000. It then added Newburgh Toyota, New York State’s leader in Toyota truck sales, paying $2.9 million in cash, plus 100,000 shares of stock and the assumption of liabilities. The acquisition was expected to add $50 million to Hometown’s annual sales. In October 1999 Hometown announced an agreement to purchase Welles-ley Mazda for $800,000, thereby adding Mazda to the brands the company represented. The dealership would then be “tucked in” with Hometown’s nearby Framington business, Bay State Lincoln Mercury, in order to save money by consolidating administrative personnel, sales forces, and service and parts departments. Hometown also announced that it was awarded a Daewoo franchise, which would allow its Westwood Lincoln Mercury dealership in Emerson, New Jersey, to offer the company’s 13th different brand of American and Asian automobiles.

Furthermore, Hometown looked to the Internet to increase sales. It launched Cyberlot in January 1999. The Web site was portrayed by the company as an interactive used car salesroom, offering more than 1,000 vehicles from its dealerships. Each listing included a digital photograph of the actual vehicle, rather than a manufacturer’s stock picture, as well as pertinent information about the vehicle. Purchased cars could then be delivered to a nearby Hometown dealership or direct to the customer’s home. By November 2000, however, Hometown refined its Internet concept by creating a subsidiary called CarDay.com, which it planned to launch in January 2000. CarDay continued to offer vehicles from Hometown’s dealerships, which allowed customers a chance for inspection, but differed from Cyberlot by auctioning the vehicles online. CarDay also offered financing and warranties, using Hometown’s service facilities to inspect and certify the vehicles. The combination of bricks and clicks proved to be an attractive idea to institutional investors, including Goldman Sachs, Odeon Capital Partners, Sierra Ventures, and Citigroup Investments. CarDay received $25 million in total investments by January 2000. Hometown’s stake in the business, as a result, was reduced to 15 percent, which meant any start-up losses would not be included in the company’s operating results.

Despite a number of successes in 1999, Hometown fell far short of its lofty financial goals. Instead of reaching $500 million in sales for the year, the company generated just $285 million, albeit an 18.7 percent increase over the previous year. Its net income of $800,000 was significantly less than the $2.3 million posted in 1998. A major part of the shortfall was beyond the control of management; livery operators were dissatisfied with the 1999 Lincoln Town Car, which featured a smaller trunk, and they opted in large numbers not to upgrade their fleets. This situation, however, illustrated Hometown’s over-dependence on Lincoln sales. More troubling was a computer tracking error that caused Hometown to carry $15 million worth of unnecessary inventory of Town Cars. Management hoped that Newburgh Toyota and Daewoo franchises would help rectify the sales imbalance, and it also began efforts to improve its computer systems. Despite these steps, however, investors were not forgiving and the price of Hometown stock began a steady long-term decline.

Company Perspectives:

Hometown’s growth strategy is to participate in the recent consolidation trend in the automotive sales and service industry and, through strategic acquisitions, become the largest dealer group in New England and parts of the Mid-Atlantic region and to expand its two “niche“ businesses.

In January 2000, as Hometown stock traded in the $4.50 range, the company initiated changes to reassure investors. It centralized its operations, moving into new offices in Water-town, Connecticut. It also added another tuck-in dealership, acquiring the Jeep franchise in Brattleboro, Vermont, for $550,000, plus $269,000 in inventory, which was then added to its Brattleboro Chrysler Plymouth Dodge Dealership. In addition, the Shaker Lincoln Mercury Dealership in Watertown was awarded a Daewoo franchise. In February 2000 Joseph Shaker stepped down as president and chief operating officer in order to focus his attention on the launch of CarDay. He was replaced by his brother, Corey Shaker.

Hometown Stock Begins Steep Plunge in 2000

While the stock price of most publicly traded dealer groups suffered during the first quarter of 2000, Hometown actually increased by some 110 percent, but that bump was fueled by rumors of a possible takeover. When it did not materialize and Hometown reported poorer than expected second quarter results, investor response was harsh. By the end of August, Hometown shares were trading below $1.50. Management could point to its new computerized inventory tracking system that it hoped would help return the company to profitability, as well as announce that managers of under-performing dealerships would be replaced, but clearly what investors wanted from Hometown were major acquisitions. Again, the company’s stock price hindered its ability to make a sizeable purchase, despite the fact that Hometown carried no debt. The company then decided to eliminate 12 million of the 24 million shares of stock that Hometown was authorized to sell. While it saved the company $50,000 a year in taxes, it also weakened its ability to use stock in making acquisitions.

After posting disappointing third quarter results, management announced in November 2000 that it would forego plans to expand, which had been the hallmark of Hometown’s strategy. Instead, the company would devote its energies to bolstering its existing dealerships. It also looked to take advantage of rising consumer interest in high-end, certified used cars. It purchased a Boston-area dealer of used Mercedes, Porsche, Audi, and Jaguar cars that it incorporated with its Wellesley Lincoln Mercury dealership. Hometown also announced that it planned to cut $2 million in overhead expenses for 2001 and, if necessary, would unload under-performing dealerships. Hometown would also have to line up a new floor plan credit line. Because of its recent losses, Hometown fell short of certain covenants with GE Capital Corp., mostly involving a separate line of credit the company hadn’t even touched. Nevertheless, the company’s credit line was cut in half and its interest rate increased by 75 percent. When the year was completed, Hometown reported revenues of $279.8 million, almost $6 million less than the year before, with a net loss of $3.6 million.

Hometown stock fell below $1, dipping as low as 31 cents in December 2000, and after trading below the $1 threshold for an extended period was eventually de-listed by Nasdaq and moved to the over-the-counter bulletin board. Even more trouble for the company’s image came in February 2001 when Hometown’s board of directors voted to remove chairman Salvatore Vergopia and his son, vice-president for fleet operations Edward Vergopia. Corey Shaker took over as the chief executive officer. The two men were accused of fiscal malfeasance involving the sale and transfer of limousine titles to a defaulting customer that cost the company approximately $850,000. They, along with Janet Vergopia, sued Hometown, claiming breach of contract along with age discrimination. They asked for their jobs back, as well as unspecified damages. Several months later, in June 2001, the parties would settle part of the suit. Salvatore and Edward Vergopia dropped their demand to return to their old jobs, and in turn Hometown agreed to allow the men to stand for re-election to the board. Shareholders subsequently retained them as directors. The breach of contract and age discrimination claims, however, remained unresolved.

In 2001, Hometown sold off Morristown Lincoln Mercury, made significant cuts in overhead, and secured a new floor plan credit line with Ford Motor Credit Co. After three consecutive quarters of posting losses, Hometown reported record profits for the first quarter of 2001. Net income stood at $127,000, compared to $38,000 for the same period a year earlier. Revenues were down, in large part due to the sale of Morristown Lincoln Mercury. Nevertheless, management insisted that the company had turned the corner. Investors, on the other hand, would require further proof. In the summer of 2001 the price of Hometown stock edged above $1, but remained well below the level it would need to achieve in order for the company to return to its plan for aggressive growth.