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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 September 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 3,654,853
Common Stock, Class B, par value $.001 per share 3,520,252
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. Consolidated Balance Sheets at September 30, 2003 (Unaudited)
and December 31, 2002 (Audited) 3
Unaudited Consolidated Statements of Operations for three and nine
months ended September 30, 2003 and 2002 4
Unaudited Consolidated Statements of Stockholders' Equity for the
nine months ended September 30, 2003 and 2002 5
Unaudited Consolidated Statements of Cash Flows for nine months
ended September 30, 2003 and 2002 6
Notes to Unaudited Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 30
ITEM 4. Controls and Procedures 30
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 31
ITEM 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
CERTIFICATIONS 33
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)
September 30, December 31,
ASSETS 2003 2002
(Unaudited)
-------- --------
Current Assets:
Cash and cash equivalents $ 5,741 $ 3,624
Accounts receivable, net 7,026 4,883
Inventories, net 34,181 39,169
Prepaid expenses and other current assets 557 510
Deferred income taxes and taxes receivable 1,061 1,245
-------- --------
Total current assets 48,566 49,431
Property and equipment, net 12,689 12,882
Other assets 1,075 1,503
-------- --------
Total assets $ 62,330 $ 63,816
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Floor plan notes payable $ 34,265 $ 38,522
Accounts payable and accrued expenses 6,812 5,072
Current maturities of long-term debt and capital lease obligations 998 1,164
Deferred revenue 697 588
-------- --------
Total current liabilities 42,772 45,346
Long-term debt and capital lease obligations 12,370 13,059
Long-term deferred income taxes 90 118
Long-term deferred revenue 754 743
-------- --------
Total liabilities 55,986 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, 3,597,105 and 3,563,605 shares issued and
outstanding 4 3
Common stock, Class B, $.001 par value, 3,760,000 shares
authorized, 3,578,000 and 3,611,500 shares issued and
outstanding 3 4
Additional paid-in capital 29,760 29,760
Accumulated deficit (23,423) (25,217)
-------- --------
Total stockholders' equity 6,344 4,550
-------- --------
Total liabilities and stockholders' equity $ 62,330 $ 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 Nine Months
Ended September 30, Ended September 30,
---------------------------- ----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues
New vehicle sales $ 52,786 $ 47,597 $ 139,668 $ 129,172
Used vehicle sales 16,888 18,039 52,021 58,076
Parts and service sales 6,220 6,354 18,655 18,384
Other, net 2,286 2,358 6,259 6,811
----------- ----------- ----------- -----------
Total revenues 78,180 74,348 216,603 212,443
Cost of sales
New vehicle 49,272 44,740 130,640 121,295
Used vehicle 15,243 16,285 47,006 52,716
Parts and service 2,830 2,861 8,463 8,262
----------- ----------- ----------- -----------
Total cost of sales 67,345 63,886 186,109 182,273
----------- ----------- ----------- -----------
Gross profit 10,835 10,462 30,494 30,170
Selling, general and administrative expenses 9,094 8,794 26,509 26,030
----------- ----------- ----------- -----------
Income from operations 1,741 1,668 3,985 4,140
Interest income 22 12 36 33
Interest (expense) (715) (812) (2,292) (2,412)
Other income 5 11 956 35
Other (expense) -- -- (3) (3)
----------- ----------- ----------- -----------
Income before taxes and cumulative effect of
accounting change 1,053 879 2,682 1,793
Provision for income taxes 221 321 888 691
----------- ----------- ----------- -----------
Income before cumulative effect of accounting change 832 558 1,794 1,102
Cumulative effect of accounting change -- -- -- (23,708)
----------- ----------- ----------- -----------
Net income (loss) $ 832 $ 558 $ 1,794 $ (22,606)
=========== =========== =========== ===========
Earnings (loss) per share, basic
Before cumulative effect of accounting change $ 0.12 $ 0.07 $ 0.25 $ 0.15
Cumulative effect of accounting change -- -- -- (3.30)
----------- ----------- ----------- -----------
Earnings (loss) per share, basic $ 0.12 $ 0.07 $ 0.25 $ (3.15)
=========== =========== =========== ===========
Earnings (loss) per share, diluted
Before cumulative effect of accounting change $ 0.12 $ 0.07 $ 0.25 $ 0.15
Cumulative effect of accounting change -- -- -- (3.30)
----------- ----------- ----------- -----------
Earnings (loss) per share, diluted $ 0.12 $ 0.07 $ 0.25 $ (3.15)
=========== =========== =========== ===========
Weighted average shares outstanding, basic 7,175,105 7,175,105 7,175,105 7,175,105
Weighted average shares outstanding, diluted 7,212,067 7,175,105 7,187,426 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 December 31, 2001 3,562 $ 3 3,613 $ 4 $ 29,730 $ (2,285) $ 27,452
Conversion of Class B Common to
Class A Common 2 -- (2) -- -- -- --
Paid subscription receivable -- -- -- -- 30 -- 30
Net loss -- -- -- -- -- (22,606) (22,606)
-------- -------- -------- -------- -------- -------- --------
Balance at September 30, 2002 3,564 $ 3 3,611 $ 4 $ 29,760 $(24,891) $ 4,876
======== ======== ======== ======== ======== ======== ========
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 33 1 (33) (1) -- -- --
Net income -- -- -- -- -- 1,794 1,794
-------- -------- -------- -------- -------- -------- --------
Balance at September 30, 2003 3,597 $ 4 3,578 $ 3 $ 29,760 $(23,423) $ 6,344
======== ======== ======== ======== ======== ======== ========
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 Nine Months
ended September 30,
-------------------------
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,794 $(22,606)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities -
Cumulative effect of accounting change -- 23,708
Depreciation and amortization 1,010 995
(Gain) on sale of sales and service franchise (936) --
(Gain) on sale of fixed assets (3) --
Deferred income taxes 513 627
Changes in assets and liabilities:
Accounts receivable, net (2,095) 63
Inventories, net 5,716 (2,363)
Prepaid expenses and other current assets (65) (88)
Other assets 37 (23)
Floor plan notes payable (4,257) 3,852
Accounts payable and accrued expenses 1,747 (112)
Deferred revenue - current 109 117
Other long term liabilities and deferred revenue 11 (16)
-------- --------
Net cash provided by operating activities 3,581 4,154
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (593) (1,794)
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 349 (1,794)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt and capital lease obligations (1,868) (1,268)
Proceeds from long-term borrowings 55 33
Collection of subscription receivable -- 30
-------- --------
Net cash (used in) financing activities (1,813) (1,205)
Net increase in cash and cash equivalents 2,117 1,155
CASH AND CASH EQUIVALENTS, beginning of period 3,624 4,446
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 5,741 $ 5,601
======== ========
Cash paid for - Interest $ 2,325 $ 2,396
Cash paid for - Taxes $ 316 $ 261
Purchases financed by capital lease obligations $ 958 $ 891
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 September 30, 2003,
the consolidated statements of operations for the three and nine months ended
September 30, 2003 and 2002, the consolidated statements of stockholders' equity
and the consolidated statements of cash flows for the nine months ended
September 30, 2003 and 2002, 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 September 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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
(in thousands)
Net income (loss), as reported $ 832 $ 558 $ 1,794 $ (22,606)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (1)
(10) (7) (22) (21)
---------- ---------- ---------- ----------
Pro forma net income (loss) $ 822 $ 551 $ 1,772 $ (22,627)
========== ========== ========== ==========
Earnings (loss) per share:
Basic, as reported $ 0.12 $ 0.07 $ 0.25 $ (3.15)
Basic, pro forma $ 0.11 $ 0.07 $ 0.25 $ (3.15)
Diluted, as reported $ 0.12 $ 0.07 $ 0.25 $ (3.15)
Diluted, pro forma $ 0.11 $ 0.07 $ 0.25 $ (3.15)
(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.
New Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities. The objective of this interpretation is to
provide guidance on how to identify a variable interest entity ("VIE") and
determine when the assets, liabilities, non-controlling interests, and results
of operations of a VIE need to be included in a company's consolidated financial
statements. A company that holds variable interests in an entity will need to
consolidate the entity if the company's interest in the VIE is such that the
company will absorb a majority of the VIE's expected losses and/or receive a
majority of the entity's expected residual returns, if they occur.
Interpretation No. 46 also requires additional disclosures by primary
beneficiaries and other significant variable interest holders. The provisions of
this interpretation became effective upon issuance. The adoption of this
interpretation did not have any effect on Hometown's consolidated financial
statements.
8
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
1,132,000 and 1,378,000 shares of common stock were outstanding as of September
30, 2003 and 2002, respectively. Basic and diluted weighted average shares for
the three and nine months ended September 30, 2003 and 2002 are as follows:
Three Months Ended Nine Months Ended
September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002
------------------ ------------------ ------------------ ------------------
Basic, Weighted Average Shares 7,175,105 7,175,105 7,175,105 7,175,105
========= ========= ========= =========
Common Stock Equivalents 36,962 -- 12,321 --
--------- --------- --------- ---------
Diluted, Weighted Average Shares 7,212,067 7,175,105 7,187,426 7,175,105
========= ========= ========= =========
The common stock equivalents are options whose exercise price is less
than the average market price of the common shares during the period. Periods
that do not include common stock equivalents is due to the options and warrant
prices being greater than the average market price of the common shares during
the period or due to the effect being anti-dilutive.
The basic and diluted earnings per share is $0.12 and $0.07 for the
three months ended September 30, 2003 and September 30, 2002, respectively. The
basic and diluted earnings per share for the nine months ended September 30,
2003 is $0.25. The nine months ended September 30, 2003 includes $0.08 per share
from the gain on sale of a Chrysler /Jeep Sales and Service Franchise (Note 8).
The basic and diluted (loss) per share for the nine months ended September 30,
2002 is $(3.15), which includes basic and diluted income per share before
cumulative effect of accounting change of $0.15 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 AND OTHER INTANGIBLE ASSETS
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 nine
months ended September 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. Hometown is
reducing its valuation allowance as goodwill is being amortized for tax
purposes.
9
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.
A summary of changes in Hometown's goodwill during the year ended
December 31, 2002, is as follows (in thousands):
Reporting Unit Balance at Balance at
December 31, 2001 Impairments December 31, 2002
----------------- ----------- -----------------
Total Company $ 23,708 $ 23,708 $ -
=============== ========= ============
As of September 30, 2003 and December 31, 2002, Hometown's intangible
assets consisted of the following:
9/30/03 12/31/02
------- --------
(in thousands)
Deferred finance charges $ 267 $ 267
Accumulated amortization (94) (78)
Non-compete agreement 381 381
Accumulated amortization (254) (206)
Franchise fee 10 --
Accumulated amortization (1) --
----- -----
Net intangible assets (a) $ 309 $ 364
===== =====
(a) These assets are included in Other Assets in the consolidated
financial statements
10
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:
9/30/03 12/31/02
------- --------
(in thousands)
New Vehicles $24,497 $29,236
Used Vehicles 7,496 7,264
Parts, accessories and other 2,188 2,669
------- -------
Total Inventories $34,181 $39,169
======= =======
The lower of cost or market reserves were $0.7 million and $0.6
million at September 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.
7. COMMITMENTS AND CONTINGENCIES
Litigation
In May 2001, Hometown's wholly-owned subsidiary Morristown Auto
Sales, Inc. ("Morristown") assigned the lease for the premises, where it was
operating its Lincoln Mercury dealership in Morristown, New Jersey to Crestmont
MM, L.P. (the "Assignee"). 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 addition, the
landlord has leased the premises to another tenant for the period from January
29, 2003 through January 29, 2004 for a total of $120,000, 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.
11
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 totaling approximately $70,000. 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.
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. Hometown's former counsel and assistant secretary has
been added to the case as a defendant in the action and has made cross-claims
against Hometown demanding indemnification for claims made by the Vergopias
against him in the underlying action. 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
12
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 8 customer's limousine vehicle loans granted by Ford
Motor Credit Co. As of September 30, 2003, Hometown fully and
partially guaranteed limousine vehicle loans aggregating
approximately $35,000.
(ii) Portfolio of 7 vehicle loans, granted by a financial institution, to
various customers of the dealership with below average credit. As of
September 30, 2003, Hometown fully guaranteed vehicle loans
associated with these customers aggregating approximately $11,000.
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 September 30, 2003, Hometown has reserved $13,000 against a
total maximum payout of $46,000 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.
There are also 8 loans whose liens were not properly perfected
totaling approximately $30,000 as of September 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 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 September
30, 2003 the mortgage debt balance is $4.7 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 $4.2
million at September 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.
13
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 September 30, 2003 and December 31, 2002
Hometown has a reserve of $210,000 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.
Additions To Balance At End
Balance At Costs and of
Reserve for Policy Work Beginning of Year Expenses Deductions Quarter
--------------------------------- ------------------ --------------- ------------ --------------
Nine Months Ended September 30, 2003 $172,000 599,000 (561,000) $210,000
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
September 30, 2003 and December 31, 2002, Hometown had $1,257,000 and $1,237,000
of related deferred revenue, respectively. During the nine months ended
September 30, 2003, these dealerships generated approximately $405,000 of
related warranty service and insurance revenue, which was deferred. During the
same period, approximately $385,000 of deferred revenue was amortized to Other
Revenues, net. At September 30, 2003 and December 31, 2002, Hometown also had
other deferred revenue of $194,000 and $94,000, respectively.
Franchise Agreements
On September 18, 2003, Hometown was notified by Toyota Motor Sales,
U.S.A., Inc. that the period during which Hometown must correct certain
operational deficiencies or make substantial progress toward rectifying such
deficiencies was extended for an additional ninety (90) days through December
18, 2003. Toyota had previously expressed concerns that the financial resources
of the Toyota dealerships were being used to finance the cash flow deficits of
affiliated companies and that because of this the financial health of the Toyota
dealerships was detrimentally affected by a net working capital deficiency.
Toyota requested and Hometown provided a written action plan and consolidated
financial forecast. Toyota 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 developed and implemented 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. In addition, Hometown has been in regular contact
with Toyota to review the efforts of Hometown to resolve the deficiencies
alleged by Toyota. The two Toyota dealerships at September 30, 2003 had combined
revenues of $81.1 million and pre-tax income before allocation of corporate
costs of $1.9 million. As of September 30, 2003, Hometown believes that it has
corrected the alleged net working capital deficiency for the Toyota dealerships.
Hometown believes that it will be able to alleviate the concerns expressed by
Toyota; however, Toyota has not yet withdrawn its reservation of 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.
14
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 nine
months ending September 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.
15
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.
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 nine
months ended September 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. Hometown is
reducing its valuation allowance as goodwill is being amortized for tax
purposes.
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.
16
UNITS
The units sold by category for Hometown for the three and nine months
ended September 30, 2003 and 2002, are as follows:
For the three months For the nine months
ended September 30, ended September 30,
2003 2002 2003 2002
------ ------ ------ ------
New vehicle 1,990 1,841 5,456 5,097
Used vehicle - retail 947 1,038 2,883 3,237
Used vehicle - wholesale 936 781 2,316 2,205
------ ------ ------ ------
Total units sold 3,873 3,660 10,655 10,539
====== ====== ====== ======
Hometown sold a Chrysler/Jeep new car franchise on June 3, 2003. The
units sold by category for Hometown on a same store basis (excluding the
Chrysler/Jeep new car franchise for all periods) for the three and nine months
ended September 30, 2003 and 2002, are as follows:
For the three months For the nine months
ended September 30, ended September 30,
2003 2002 2003 2002
------ ------ ------ ------
New vehicle 1,990 1,753 5,363 4,857
Used vehicle - retail 947 1,038 2,883 3,237
Used vehicle - wholesale 936 781 2,316 2,205
------ ------ ------ ------
Total units sold 3,873 3,572 10,562 10,299
====== ====== ====== ======
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 2002.
REVENUE
Total revenue increased $3.9 million, or 5.2% to $78.2 million for
the three months ended September 30, 2003, from $74.3 million for three months
ended September 30, 2002. Hometown sold a Chrysler/Jeep new car franchise on
June 3, 2003. On a same store basis (excluding the Chrysler/Jeep new car
franchise for all periods), revenues increased $6.3 million, or 8.8% to $78.2
million for the three months ended September 30, 2003, from $71.9 million for
three months ended September 30, 2002. This increase was primarily due to
increased sales of new vehicles ($7.4 million), partially offset by decreased
sales of used vehicles ($1.1 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 $5.2 million, or
10.9% to $52.8 million for the three months ended September 30, 2003, from $47.6
million for the three months ended September 30, 2002. On a same store basis,
revenues increased $7.4 million, or 16.3% to $52.8 million for the three months
ended September 30, 2003, from $45.4 million for the three months ended
September 30, 2002. This is comprised of an increase of 237 units sold in 2003
compared to 2002 ($6.2 million) and a 2.4% increase in average selling price
($1.2 million). The increase is primarily due to increases at Hometown's Lincoln
Mercury ($2.8 million), Chevrolet ($2.5 million), Toyota ($1.8 million), Mazda
($0.8 million) and the remaining Chrysler/Jeep ($0.4 million) dealerships
partially offset by a decrease at Hometown's Ford dealership ($0.9
17
million). The increase at the Lincoln Mercury dealerships was primarily due to
an additional 56 units sold in 2003 compared to 2002 ($1.8 million), combined
with a 6.5% increase in the average selling price ($1.0 million). Lincoln
Mercury includes an increase in sales of 9 livery units ($0.2 million). The
increase at the Chevrolet dealership was primarily due to an increase of 104
units sold in 2003 compared to 2002 ($2.5 million). The increase at the Toyota
dealerships was primarily due to an increase of 79 units sold in 2003 compared
to 2002 ($1.9 million), partially offset by a slight decrease in the average
selling price ($0.1 million). This is net of a decrease in fleet sales ($0.1
million). The increase at the Mazda dealership was primarily due to an
additional 36 units sold in 2003 compared to 2002 ($0.8 million). The
Chrysler/Jeep increase was primarily due to an increase of 9 units sold ($0.2
million) in the 2003 period compared to the 2002 period combined with a 9.4%
increase in the average selling price ($0.2 million). The decrease at the Ford
dealership was primarily due to a decrease of 47 units sold in 2003 compared to
2002 ($1.2 million), partially offset by a 4.8% increase in the average selling
price ($0.3 million).
Revenue from the sale of used vehicles decreased $1.1 million, or
6.1%, to $16.9 million for three months ended September 30, 2003, from $18.0
million for the three months ended September 30, 2002. This was primarily due to
reduced used vehicle sales at retail ($1.1 million), due to a decrease in 91
units ($1.3 million) partially offset by an increase in average selling price
($0.2 million). Essentially all dealerships experienced decreased revenue from
the sale of used vehicles at retail. An increase of 155 units sold at wholesale
($0.6 million) was offset by a decrease in their average selling price. As
discussed above, 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.
Parts and service revenue decreased $0.2 million, or 3.1% to $6.2
million for the three months ended September 30, 2003, from $6.4 million for the
three months ended September 30, 2002. As a result of the sale of a
Chrysler/Jeep new car franchise, that dealerships parts and service business was
closed. Excluding this business for all periods, parts and service revenue
increased $0.1 million or 1.6% for the three months ended September 30, 2003,
compared to the three months ended September 30, 2002.
Other dealership revenues decreased less than $0.1 million to $2.3
million for the three months ended September 30, 2002, from $2.4 million for the
three months ended September 30, 2003. This decrease is primarily attributable
to decreases in other dealership revenues (extended service plan income, finance
income and other income) of used vehicles ($0.1 million), from decreased unit
sales and lower average other revenue per vehicle sold, partially offset by an
increase in similar revenues attributable to sales of new vehicles (less than
$0.1 million).
GROSS PROFIT
Total gross profit increased $0.3 million, or 2.9% to $10.8 million
for the three months ended September 30, 2003, from $10.5 million for the three
months ended September 30, 2002. Hometown sold a Chrysler/Jeep new car franchise
on June 3, 2003. On a same store basis (excluding the Chrysler/Jeep new car
franchise for all periods), gross profit increased $0.7 million, or 6.9% to
$10.8 million for the three months ended September 30, 2003, from $10.1 million
for the three months ended September 30, 2002. This increase was primarily
attributable to an increase in new vehicle gross profit of $0.8 million and
gross profit on other dealership revenues ($0.1 million), partially offset by a
decrease in gross profit on sale of used vehicles ($0.2 million). Gross profit
percentage for Hometown was 14.0% in 2003 and 14.3% in 2002. Adjusting both
periods for Toyota and Chevrolet fleet sales, gross profit percentage was 15.0%
in 2003 and 15.2% in 2002.
Gross profit on the sale of new vehicles increased $0.6 million, or
20.7%, to $3.5 million for the three months ended September 30, 2003, from $2.9
million for the three months ended September 30, 2002. On a same store basis
gross profit on the sale of new vehicles increased $0.8 million, or 29.6%, to
$3.5 million for the three months ended September 30, 2003, from $2.7 million
for the three months ended September 30, 2002. The increase in gross profit is
primarily attributable to an increase of 237 units ($0.4 million), combined with
a 14.7% increase in average gross profit per vehicle ($0.4 million). Most
dealerships experienced an increase in gross profit in the 2003 period compared
to 2002. Gross profit percentage for 2003 was 7.0% compared to
18
6.3% for 2002. Adjusting both periods for Toyota and Chevrolet fleet sales,
which generate low margins, gross profit percentage for new vehicles was 7.8% in
2003 and 7.0% in 2002.
Gross profit on the sale of used vehicles decreased $0.2 million, or
11.1%, to $1.6 million for the three months ended September 30, 2003 from $1.8
million for the three months ended September 30, 2002. This decrease is
primarily due to a 9.5% decrease in average gross profit per vehicle ($0.2
million), partially offset by an increase of 64 units. Gross profit percentage
on the sale of used vehicles was 8.8% in 2003 and 2002.
Parts and service gross profit decreased $0.1 million, or 2.9%, to
$3.4 million for the three months ended September 30, 2003, from $3.5 million
for the three months ended September 30, 2002. As a result of the sale of a
Chrysler/Jeep new car franchise, that dealerships parts and service business was
closed. Excluding this business for all periods, parts and service gross profit
increased approximately $30,000 or less than 1.0% for the three months ended
September 30, 2003, compared to the three months ended September 30, 2002. The
increase was primarily attributable to the increase in revenues. Gross profit
percentage was 56.7% in 2003 compared to 59.6% in 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $0.3 million,
or 3.4%, to $9.1 million for the three months ended September 30, 2003, from
$8.8 million for the three months ended September 30, 2002. Increases in
advertising ($0.2 million) and various reserves for chargebacks ($0.2 million),
were partially offset by other cost reductions ($0.1 million).
INTEREST EXPENSE
Interest expense decreased $0.1 million, or 12.5% to $0.7 million for
the three months ended September 30, 2003, from $0.8 million for the three
months ended September 30, 2002.
PROVISION FOR INCOME TAX
The effective income tax rate was 21.0% for the quarter ended
September 30, 2003 and 36.5% 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. The 2003 rate reflects a $196,000
reduction in the valuation allowance associated with the amortization of
goodwill for tax purposes.
NET INCOME
Net income increased $274,000 to $832,000 for the three months ended
September 30, 2003, from $558,000 for the three months ended September 30, 2002.
See above for explanation of 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
1,132,000 and 1,378,000 shares of common stock were outstanding as of September
30, 2003 and 2002, respectively. The basic weighted average shares are 7,175,105
shares for both the three months ended September 30, 2003 and 2002. The diluted
weighted average shares are 7,212,067 shares and 7,175,105 shares for the three
months ended September 30, 2003 and 2002, respectively. Options whose exercise
price is less than the average market price of the common shares during the
period are included in weighted average shares as common stock equivalents. See
Note 3. The basic and diluted earnings per share is $0.12 and $0.07 for the
three months ended September 30, 2003 and September 30, 2002, respectively.
19
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 2002.
REVENUE
Total revenue increased $4.2 million, or 2.0% to $216.6 million for
the nine months ended September 30, 2003, from $212.4 million for the nine
months ended September 30, 2002. Hometown sold a Chrysler/Jeep new car franchise
on June 3, 2003. On a same store basis (excluding the Chrysler/Jeep new car
franchise for all periods), revenues increased $8.2 million or 4.0% to $213.7
million for the nine months ended September 30, 2003, from $205.5 million for
the nine months ended September 30, 2002. This increase was primarily due to
increased new vehicle sales ($14.2 million) partially offset by decreased sales
of used vehicles ($6.1 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 $10.5 million, or
8.1%, to $139.7 million for the nine months ended September 30, 2003, from
$129.2 million for the nine months ended September 30, 2002. On a same store
basis, revenues increased $14.2 million, or 11.5% to $137.2 million for the nine
months ended September 30, 2003, from $123.0 million for the nine months ended
September 30, 2002. The increase is attributable to an additional 506 units sold
in 2003 compared to 2002 ($12.8 million) plus a 1.0% increase in average selling
price ($1.4 million). The increase is primarily due to increases at Hometown's
Chevrolet ($5.0 million), Lincoln Mercury ($4.4 million), Mazda ($2.2 million),
Toyota ($2.1 million) and Ford ($0.7 million) dealerships partially offset by a
decrease at Hometown's remaining Chrysler/Jeep dealership ($0.2 million). The
increase at the Chevrolet dealership was primarily due to an increase of 199
units sold in 2003 compared to 2002 ($4.8 million), combined with an 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 Chevrolet
new vehicle sales increased $4.2 million due to the sale of 157 additional units
($3.8 million), combined with a 2.6% increase in average selling price ($0.4
million). The increase at the Lincoln Mercury dealerships was primarily due to
an 8.4% increase in the average selling price ($3.0 million), plus an increase
of 44 units sold in 2003 compared to 2002 ($1.4 million). The Lincoln Mercury
increase is net of a decrease in sales of 9 livery units ($0.5 million). The
increase at the Mazda dealership was primarily due to an additional 102 units
sold in 2003 compared to 2002 ($2.2 million). The increase at the Toyota
dealerships was primarily due to an increase of 178 units sold in 2003 compared
to 2002 ($4.0 million), partially offset by a 3.3% 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 7.4% decrease in average selling price, partially offset
by an increase of 6 units. Excluding fleet sales, other Toyota new vehicle sales
increased $2.4 million due to the sale of 172 additional units ($4.1 million)
partially offset by a 3.2% decrease in average selling price ($1.7 million). The
increase at the Ford dealership was primarily due to a 3.8% increase in the
average selling price ($0.5 million), combined with an increase of 7 units sold
in 2003 compared to 2002 ($0.2 million). The Chrysler/Jeep decrease was
primarily due to a decrease of 24 units sold ($0.6 million) in the 2003 period
compared to the 2002 period, partially offset by an 8.3% increase in the average
selling price ($0.4 million).
Revenue from the sale of used vehicles decreased $6.1 million, or
10.5%, to $52.0 million for nine months ended September 30, 2003, from $58.1
million for the nine months ended September 30, 2002. This was due to a decrease
of 354 units sold at retail ($5.0 million), partially offset by a 2.8% increase
in average selling price ($1.1 million) plus reduced used vehicle sales at
wholesale ($2.2 million) due to lower average selling price ($2.8 million)
partially offset by a increase of 111 units ($0.6 million). A Lincoln
Mercury/Mazda dealership accounted for $2.2 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. Essentially all dealerships
experienced decreased revenue from the sale of used vehicles at retail. As
discussed above, 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.
20
Parts and service revenue increased $0.3 million, or 1.6%, to $18.7
million for the nine months ended September 30, 2003, from $18.4 million for the
nine months ended September 30, 2002. As a result of the sale of a Chrysler/Jeep
new car franchise, that dealerships parts and service business was closed.
Excluding this business for all periods, parts and service revenue increased
$0.5 million or 2.8% for the nine months ended September 30, 2003, compared to
the nine months ended September 30, 2002.
Other dealership revenues decreased $0.5 million, or 7.4% to $6.3
million for the nine months ended September 30, 2003, from $6.8 million for the
nine months ended September 30, 2002. This decrease 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 increased $0.3 million, or 1.0% to $30.5 million
for the nine months ended September 30, 2003, from $30.2 million for the nine
months ended September 30, 2002. Hometown sold a Chrysler/Jeep new car franchise
on June 3, 2003. On a same store basis (excluding the Chrysler/Jeep new car
franchise for all periods), gross profit increased $0.8 million, or 2.7% to
$30.1 million for the nine months ended September 30, 2003, from $29.3 million
for the nine months ended September 30, 2002. This increase was primarily
attributable to an increase in new vehicle gross profit of $1.4 million and an
increase in gross profit on parts and service sales of $0.3 million, partially
offset by a $0.5 million decrease in gross profit on other dealership revenues
and a $0.4 million decrease in used vehicle gross profit. Gross profit
percentage for Hometown was 14.1% in 2003 and 14.3% in 2002. Adjusting both
periods for Toyota and Chevrolet fleet sales, gross profit percentage was 14.5%
in 2003 and 14.7% in 2002.
Gross profit on the sale of new vehicles increased $1.1 million, or
13.9%, to $9.0 million for the nine months ended September 30, 2003, from $7.9
million for the nine months ended September 30, 2002. On a same store basis
gross profit on the sale of new vehicles increased $1.4 million, or 18.7%, to
$8.9 million for the nine months ended September 30, 2003, from $7.5 million for
the nine months ended September 30, 2002. The increase in gross profit is
primarily attributable to an increase of 506 units ($0.8 million) combined with
a 7.3% increase in average gross profit per vehicle ($0.6 million). Included in
the unit increase are 48 units attributable to an increase in Toyota and
Chevrolet 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. Gross profit percentage for 2003 was 6.5% compared to
6.1% for 2002. Adjusting both periods for Toyota and Chevrolet fleet sales,
which generate low margins, gross profit percentage for new vehicles was 6.7% in
2003 and 6.4% in 2002.
Gross profit on the sale of used vehicles decreased $0.4 million, or
7.4%, to $5.0 million for the nine months ended September 30, 2003, from $5.4
million for the nine months ended September 30, 2002. The decrease was due to a
decrease of 243 units ($0.3 million) combined with a 2.0% decrease in average
gross profit per vehicle ($0.1 million). A Lincoln Mercury/Mazda dealership,
discussed in revenues above, accounted for a $0.2 million decrease. Gross profit
percentage on the sale of used vehicles was 9.6% in 2003 compared to 9.2% in
2002.
Parts and service gross profit increased $0.1 million, or 1.0%, to
$10.2 million for the nine months ended September 30, 2003, from $10.1 million
for the nine months ended September 30, 2002. As a result of the sale of a
Chrysler/Jeep new car franchise, that dealerships parts and service business was
closed. Excluding this business for all periods, parts and service gross profit
increased $0.3 million, or 3.1%, to $10.0 million for the nine months ended
September 30, 2003, from $9.7 million for the nine months ended September 30,
2002. The increase was primarily attributable to the increase in revenues. Gross
profit percentage was 54.9% in 2003 compared to 54.8% in 2002.
21
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $0.5 million,
or 1.9%, to $26.5 million for the nine months ended September 30, 2003, from
$26.0 million for the nine months ended September 30, 2002. Increases in
advertising ($0.4 million), reserves for chargebacks ($0.3 million) and various
other costs ($0.1 million), were partially offset by a reduction in salaries and
employee benefits ($0.3 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 decreased $0.1 million, or 4.2% to $2.3 million for
the nine months ended September 30, 2003, from $2.4 million for the nine months
ended September 30, 2002.
PROVISION FOR INCOME TAX
The effective income tax rate was 33.1% for the nine months ended
September 30, 2003 and 38.5% 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. The 2003 rate reflects a $196,000
reduction in the valuation allowance associated with the amortization of
goodwill for tax purposes.
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Income before cumulative effect of accounting change increased $0.7
million to $1.8 million for the nine months ended September 30, 2003, from $1.1
million for the nine months ended September 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 nine months ended September 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. See Note 4 to the consolidated financial statements. Hometown is
reducing its valuation allowance as goodwill is being amortized for tax
purposes.
NET INCOME (LOSS)
Net income (loss) improved $24.4 million, to income of $1.8 million
for the nine months ended September 30, 2003, from a loss of $(22.6) million for
the nine months ended September 30, 2002. 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.
22
Options and warrants to purchase approximately 1,132,000 and 1,378,000 shares of
common stock were outstanding as of September 30, 2003 and 2002, respectively.
The basic weighted average shares are 7,175,105 shares for both the nine months
ended September 30, 2003 and 2002. The diluted weighted average shares are
7,187,426 shares and 7,175,105 shares for the nine months ended September 30,
2003 and 2002, respectively. Options whose exercise price is less than the
average market price of the common shares during the period are included in
weighted average shares as common stock equivalents. See Note 3.
The basic and diluted earnings per share for the nine months ended
September 30, 2003 is $0.25 and includes $0.08 per share from the gain on sale
of a Chrysler Sales and Service Franchise (Note 8). The basic and diluted (loss)
per share for the nine months ended September 30, 2002 is $(3.15), which
includes basic and diluted income per share before cumulative effect of
accounting change of $0.15 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.
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.
23
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 $5.7 million and $3.6 million at
September 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:
Nine months ended September 30,
2003 2002
------- -------
(in thousands)
Net cash provided by operating activities $ 3,581 $ 4,154
Net cash provided by (used in) investing activities 349 (1,794)
Net cash (used in) financing activities (1,813) (1,205)
------- -------
Net increase in cash and cash equivalents $ 2,117 $ 1,155
======= =======
For the nine months ended September 30, 2003, net cash provided from
operations of $3.6 million primarily consists of: (i) net income plus non-cash
items of $2.4 million; (ii) the decrease in inventory in excess of the decrease
in floor plan liability of $1.5 million; and (iii) an increase in accounts
payable and accrued expenses of $1.7 million; partially offset by increased
accounts receivable of $2.1 million. Net cash provided by investing activities
of $0.3 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 $0.6 million. Net cash used in financing activities of $1.8
million is primarily due to principal payments of long-term debt and capital
lease obligations.
For the nine months ended September 30, 2002, net cash provided from
operations of $4.2 million primarily consists of: (i) net loss plus non-cash
items totaling $2.7 million; and (ii) the increase in floor plan liability in
excess of the increase in inventory of $1.5 million. Net cash used in investing
activities of $1.8 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 $1.2 million is primarily
due to principal payments of long-term debt and capital lease obligations.
Capital Expenditures
Capital expenditures for fiscal 2003 are expected to be $0.7 million,
consisting primarily of equipment purchases ($0.3 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 September 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 September compared to
December. The majority of those receivables, $3.6 million and $2.8 million as of
September 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
24
the transaction. The allowance for doubtful accounts is $0.3 million and $0.2
million at September 30, 2003 and December 31, 2002, respectively.
Inventories
Hometown had $34.2 million in inventories, net at September 30, 2003
compared to $39.2 million at December 31, 2002. The majority of inventory, $24.5
million and $29.2 million as of September 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 September 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.
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 8 customer's limousine vehicle loans granted by Ford
Motor Credit Co. As of September 30, 2003, Hometown fully and
partially guaranteed limousine vehicle loans aggregating
approximately $35,000.
(ii) Portfolio of 7 vehicle loans, granted by a financial institution, to
various customers of the dealership with below average credit. As of
September 30, 2003, Hometown fully guaranteed vehicle loans
associated with these customers aggregating approximately $11,000.
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 September 30, 2003, Hometown has reserved $13,000 against a
total maximum payout of $46,000 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.
There are also 8 loans whose liens were not properly perfected
totaling approximately $30,000 as of September 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 future. Hometown has reserved $3,000 for
these loans. The reserve amount represents loans that are currently
25
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 September
30, 2003 the mortgage debt balance is $4.7 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 $4.2
million at September 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 September 30, 2003 and December 31, 2002
Hometown has a reserve of $210,000 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.
Additions To Balance At End
Balance At Costs and of
Reserve for Policy Work Beginning of Year Expenses Deductions Quarter
----------------------- ----------------- -------- ---------- -------
Nine Months Ended September 30, 2003 $172,000 599,000 (561,000) $210,000
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
September 30, 2003 and December 31, 2002, Hometown had $1,257,000 and $1,237,000
of related deferred revenue, respectively. During the nine months ended
September 30, 2003, these dealerships generated approximately $405,000 of
related warranty service and insurance revenue, which was deferred. During the
same period, approximately $385,000 of deferred revenue was amortized to Other
Revenues, net. At September 30, 2003 and December 31, 2002, Hometown also had
other deferred revenue of $194,000 and $94,000, respectively.
26
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 nine
months ending September 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 September 18, 2003, Hometown was notified by Toyota Motor Sales,
U.S.A., Inc. that the period during which Hometown must correct certain
operational deficiencies or make substantial progress toward rectifying such
deficiencies was extended for an additional ninety (90) days through December
18, 2003. Toyota had previously expressed concerns that the financial resources
of the Toyota dealerships were being used to finance the cash flow deficits of
affiliated companies and that because of this the financial health of the Toyota
dealerships was detrimentally affected by a net working capital deficiency.
Toyota requested and Hometown provided a written action plan and consolidated
financial forecast. Toyota 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 developed and implemented 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. In addition, Hometown has been in regular contact
with Toyota to review the efforts of Hometown to resolve the deficiencies
alleged by Toyota. The two Toyota dealerships at September 30, 2003 had combined
revenues of $81.1 million and pre-tax income before allocation of corporate
costs of $1.9 million. As of September 30, 2003, Hometown believes that it has
corrected the alleged net working capital deficiency for the Toyota dealerships.
Hometown believes that it will be able to alleviate the concerns expressed by
Toyota; however, Toyota has not yet withdrawn its reservation of 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.
27
LITIGATION
In May 2001, Hometown's wholly-owned subsidiary Morristown Auto
Sales, Inc. ("Morristown") assigned the lease for the premises, where it was
operating its Lincoln Mercury dealership in Morristown, New Jersey to Crestmont
MM, L.P. (the "Assignee"). 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 addition, the
landlord has leased the premises to another tenant for the period from January
29, 2003 through January 29, 2004 for a total of $120,000, 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 totaling approximately $70,000. 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.
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. Hometown's former counsel and assistant secretary has
been added to the case as a defendant in the action and has made cross-claims
against Hometown demanding indemnification for claims made by the Vergopias
against him in the underlying action. 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
28
from such actions will not have a material adverse effect on Hometown's
consolidated financial position or results of operations.
New Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities. The objective of this interpretation is to
provide guidance on how to identify a variable interest entity ("VIE") and
determine when the assets, liabilities, non-controlling interests, and results
of operations of a VIE need to be included in a company's consolidated financial
statements. A company that holds variable interests in an entity will need to
consolidate the entity if the company's interest in the VIE is such that the
company will absorb a majority of the VIE's expected losses and/or receive a
majority of the entity's expected residual returns, if they occur.
Interpretation No. 46 also requires additional disclosures by primary
beneficiaries and other significant variable interest holders. The provisions of
this interpretation became effective upon issuance. The adoption of this
interpretation did not have any effect on Hometown's consolidated financial
statements.
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.
29
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 September 30, 2003 of $34.3 million, a 1% change in the prime
rate would result in a $0.3 million change to annual floor plan interest
expense.
At September 30, 2003, Hometown invested $3.5 million of excess cash,
of which $1.3 million was invested in money market accounts paying a weighted
average interest rate of 0.66% at September 30, 2003, and $2.2 million was
invested in a Ford Motor Credit Company cash management account paying interest
of 5.00% at September 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
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our reports under the
Securities Exchange Act of 1934, as amended, are recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to our management,
including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO),
as appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any disclosure controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily is required to use its
judgment in evaluating the cost to benefit relationship of possible controls and
procedures.
At September 30, 2003, management, with the participation of the CEO
and CFO, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures. Based upon that evaluation and subject to
the foregoing, our management, including the CEO and CFO, concluded that our
disclosure controls and procedures were effective to accomplish their
objectives.
There have been no significant changes in our internal controls over
financial reporting during the most recently completed fiscal quarter that
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
30
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Hometown held its Annual Stockholders Meeting on August 7, 2003. The following
matters were submitted to a vote of security holders.
1) The candidates nominated for election to its Board of Directors are as
follows:
Candidates Votes For Votes Withheld
---------- --------- --------------
Corey E. Shaker 26,827,018 7,165,350
William C. Muller Jr 26,829,893 7,162,475
Joseph Shaker 26,827,393 7,164,975
H. Dennis Lauzon 26,829,893 7,162,475
Timothy C. Moynahan 26,828,393 7,163,975
Steven A. Fournier 26,829,893 7,162,475
Bernard J. Dzinski Jr 26,829,893 7,162,475
All seven nominees were elected to the Board. Those individuals represent the
entire Board of Directors as no other directors had terms continuing after the
meeting.
2) To ratify the selection of BDO Seidman, LLP as independent auditors for the
year ending December 31, 2003. The selection of BDO Seidman, LLP was ratified.
There were 26,829,593 votes for, 18,075 votes against and 7,144,700 votes
abstaining.
No other matter was submitted to a vote of security holders.
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 August 14, 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 second quarter results.
31
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.
November 11, 2003 By: /s/ Corey E. Shaker
- ------------------------ ----------------------------------
Date Corey E. Shaker
President and Chief Executive
Officer
November 11, 2003 By: /s/ Charles F. Schwartz
- ------------------------ ----------------------------------
Date Charles F. Schwartz
Chief Financial Officer
32