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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 March 31, 2004
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 3,655,853
Common Stock, Class B, par value $.001 per share 3,519,252
INDEX
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Balance Sheets at March 31, 2004 (Unaudited)
and December 31, 2003 (Audited) 3
Unaudited Consolidated Statements of Operations for the
three months ended March 31, 2004 and 2003 4
Unaudited Consolidated Statements of Stockholders' Equity
for the three months ended March 31, 2004 and 2003 5
Unaudited Consolidated Statements of Cash Flows for the
three months ended March 31, 2004 and 2003 6
Notes to Unaudited Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 20
ITEM 4. Controls and Procedures 20
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 21
ITEM 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
CERTIFICATIONS 23
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)
March 31, December 31,
ASSETS 2004 2003
(Unaudited)
-------- --------
Current Assets:
Cash and cash equivalents $ 5,819 $ 5,639
Accounts receivable, net 6,725 6,058
Inventories, net 44,531 37,774
Prepaid expenses and other current assets 634 625
Deferred and prepaid income taxes 1,401 1,349
-------- --------
Total current assets 59,110 51,445
Property and equipment, net 12,543 12,678
Other assets 1,108 1,141
-------- --------
Total assets $ 72,761 $ 65,264
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Floor plan notes payable $ 45,201 $ 38,003
Accounts payable and accrued expenses 6,291 5,798
Current maturities of long-term debt and
capital lease obligations 1,004 996
Deferred revenue 467 609
-------- --------
Total current liabilities 52,963 45,406
Long-term debt and capital lease obligations 11,835 12,076
Long-term deferred income taxes 125 125
Other long-term liabilities and deferred revenue 808 729
-------- --------
Total liabilities 65,731 58,336
Commitments and Contingencies
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, 3,655,853 shares
issued and outstanding 4 4
Common stock, Class B, $.001 par value,
3,760,000 shares authorized, 3,519,252 shares
issued and outstanding 3 3
Additional paid-in capital 29,760 29,760
Accumulated deficit (22,737) (22,839)
-------- --------
Total stockholders' equity 7,030 6,928
-------- --------
Total liabilities and stockholders' equity $ 72,761 $ 65,264
======== ========
The accompanying notes are an integral part of these
unaudited 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
Ended March 31,
----------------------------
2004 2003
------------ ------------
Revenues
New vehicle sales $ 41,115 $ 35,930
Used vehicle sales 16,910 16,394
Parts and service sales 5,959 6,216
Other, net 1,894 1,780
----------- -----------
Total revenues 65,878 60,320
Cost of sales
New vehicle 38,355 33,560
Used vehicle 15,244 14,818
Parts and service 2,759 2,922
----------- -----------
Total cost of sales 56,358 51,300
----------- -----------
Gross profit 9,520 9,020
Selling, general and administrative expenses 8,621 8,446
----------- -----------
Income from operations 899 574
Interest income 44 7
Interest (expense) (801) (778)
Other income 2 13
Other (expense) (4) (3)
----------- -----------
Pre-tax income (loss) 140 (187)
Provision (benefit) for income taxes 38 (66)
----------- -----------
Net income (loss) $ 102 $ (121)
=========== ===========
Earnings (loss) per share, basic $ 0.01 $ (0.02)
=========== ===========
Earnings (loss) per share, diluted $ 0.01 $ (0.02)
=========== ===========
Weighted average shares outstanding, basic 7,175,105 7,175,105
Weighted average shares outstanding, diluted 7,471,259 7,175,105
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
4
HOMETOWN AUTO RETAILERS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Class A Class B Retained
Common Stock Common Stock Additional Earnings Total
------------------- -------------------- Paid-in (Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit) Equity
-------- -------- -------- -------- -------- -------- --------
Balance at
December 31, 2002 3,564 $ 3 3,611 $ 4 $ 29,760 $(25,217) $ 4,550
Conversion of Class B
Common to Class A
Common 1 -- (1) -- -- -- --
Net loss -- -- -- -- -- (121) (121)
-------- -------- -------- -------- -------- -------- --------
Balance at
March 31, 2003 3,565 $ 3 3,610 $ 4 $ 29,760 $(25,338) $ 4,429
======== ======== ======== ======== ======== ======== ========
Balance at
December 31, 2003 3,656 $ 4 3,519 $ 3 $ 29,760 $(22,839) $ 6,928
Net income -- -- -- -- -- 102 102
-------- -------- -------- -------- -------- -------- --------
Balance at
March 31, 2004 3,656 $ 4 3,519 $ 3 $ 29,760 $(22,737) $ 7,030
======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
5
HOMETOWN AUTO RETAILERS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the Three Months ended
March 31,
--------------------
2004 2003
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 102 $ (121)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities -
Depreciation and amortization 311 349
(Gain) loss on sale of fixed assets 4 (3)
Deferred income taxes -- (43)
Changes in assets and liabilities:
Accounts receivable, net (667) (812)
Inventories, net (6,494) 708
Prepaid expenses and other current assets (9) (75)
Prepaid taxes (52) (38)
Other assets 11 16
Floor plan notes payable 7,198 2,245
Accounts payable and accrued expenses 493 670
Deferred revenue (142) (4)
Other long-term liabilities and deferred revenue 79 (15)
------- -------
Net cash provided by operating activities 834 2,877
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (94) (236)
Proceeds from sale of property and equipment -- 6
------- -------
Net cash (used in) investing activities (94) (230)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt and
capital lease obligations (560) (717)
Proceeds from long-term borrowings -- 39
------- -------
Net cash (used in) financing activities (560) (678)
Net increase in cash and cash equivalents 180 1,969
CASH AND CASH EQUIVALENTS, beginning of period 5,639 3,624
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 5,819 $ 5,593
======= =======
Cash paid for - Interest $ 770 $ 777
Cash paid for - Taxes $ 89 $ 21
Purchases financed by capital lease obligations $ 327 $ 345
The accompanying notes are an integral part of these
unaudited 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, 1 stand-alone
used car facility and 1 stand-alone service facility, located in New Jersey, New
York, Connecticut, Massachusetts and Vermont. Hometown's dealerships offer 9
American and Asian automotive brands including Chevrolet, Chrysler, Dodge, Ford,
Jeep, Lincoln, Mazda, Mercury and Toyota.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated balance sheet as of March 31, 2004, the
consolidated statements of operations for the three months ended March 31, 2004
and 2003, the consolidated statements of stockholders' equity and the
consolidated statements of cash flows for the three months ended March 31, 2004
and 2003, 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, 2003, 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 March 31, 2004, 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 March 31,
2004 2003
------- -------
(in thousands, except per share data)
Net income (loss), as reported $ 102 $ (121)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (1) (7) (6)
------- -------
Pro forma net income (loss) $ 95 $ (127)
======= =======
Earnings (loss) per share:
Basic, as reported $ 0.01 $(0.02)
Basic, pro forma $ 0.01 $(0.02)
Diluted, as reported $ 0.01 $(0.02)
Diluted, pro forma $ 0.01 $(0.02)
(1) All awards refer 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. In December 2003,
the FASB completed deliberations of proposed modifications to FIN 46 ("Revised
Interpretations") resulting in multiple effective dates based on the nature as
well as the creation date of the VIE. VIE's created after January 31, 2003, but
prior to January 1, 2004, may be accounted for either based on the original
interpretation or the Revised Interpretations. However, the Revised
Interpretations must be applied no later than Hometown's first quarter of fiscal
2004. VIE's created after January 1, 2004 must be accounted for under the
Revised Interpretations. Special Purpose Entities ("SPE's") created prior to
February 1, 2003 may be accounted for under the original or revised
interpretation's provisions no later than Hometown's first quarter of fiscal
2004. Non-SPE's created prior to February 1, 2003, should be accounted for under
the revised interpretation's provisions no later than Hometown's first quarter
of fiscal 2004. Hometown has not entered into any material arrangements with
VIE's created after January 31, 2003. The adoption of this interpretation did
not have any effect on Hometown's 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
1,063,000 and 1,428,000 shares of common stock were outstanding during 2004 and
2003, respectively. Basic and diluted weighted average shares for the three
months ended March 31, 2004 and 2003 are as follows:
Three Months Ended March 31,
2004 2003
--------- ---------
Basic, Weighted Average
Shares 7,175,105 7,175,105
========= =========
Common Stock Equivalents 296,154 -
--------- ---------
Diluted, Weighted
Average Shares 7,471,259 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. In 2004,
options and warrants to purchase 163,000 shares of Hometown common stock were
excluded from the calculation of diluted income per share due to the options and
warrant prices being greater than the average market price of the common shares
during the period. In 2003, options and warrants to purchase 1,428,000 shares of
Hometown common stock were excluded from the calculation of diluted (loss) per
share due to the effect being anti-dilutive.
The basic and diluted income (loss) per share for the three months ended
March 31, 2004 and 2003 is $0.01 and $(0.02), respectively.
4. 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:
3/31/04 12/31/03
-------- --------
(in thousands)
New Vehicles $34,967 $28,420
Used Vehicles 7,555 7,255
Parts, accessories and other 2,009 2,099
-------- --------
Total Inventories $44,531 $37,774
======== ========
The lower of cost or market reserves were $0.7 million at March 31, 2004
and December 31, 2003, respectively.
9
5. INTANGIBLE ASSETS
As of March 31, 2004 and December 31, 2003, Hometown's intangible assets
consisted of the following:
3/31/04 12/31/03
-------- --------
(in thousands)
Deferred finance charges $ 267 $ 267
Accumulated amortization (105) (98)
Non-compete agreement 381 381
Accumulated amortization (286) (270)
Franchise Fee 10 10
Accumulated amortization (1) (1)
-------- --------
Net intangible assets $ 266 $ 289
======== ========
These assets are included in Other Assets in the consolidated financial
statements.
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.
Hometown is 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. The FMCC agreement has no set maturity date and it is the
intention of Hometown to continue with this financing on an ongoing basis.
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, 2005 for a total of $240,000, thereby significantly reducing
Morristown's exposure to a damages judgment for lost rent. The landlord has also
amended its complaint to state a claim directly against the assignee. 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.
10
On or about February 7, 2001, Salvatore A. Vergopia and Edward A.
Vergopia, former directors and 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
scheduled to close on May 30, 2004.
Hometown and its chief executive officer have also been served with a
third lawsuit brought by Edward and Salvatore Vergopia claiming defamation and
tortious interference with contract arising out of a letter allegedly sent to
one of Hometown's automobile manufacturers. Litigation counsel has been retained
by our insurers to represent us in this action as well. The suit is in its
earliest stages and Hometown's counsel has removed the third action from New
Jersey state court to Federal court. Hometown presently believes that this third
action by the Vergopias involves damage claims that are similar to those already
made in the two pending actions in the Superior Court of New Jersey in Bergen
County.
We believe that the Vergopias commenced these actions 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 these actions. 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 from such
actions will not have a material adverse effect on Hometown's consolidated
financial position or results of operations.
11
Guarantees
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 of March 31, 2004,
one of these loans remains unpaid. This is a vehicle loan, granted by a
financial institution, to a customer of the dealership with below average credit
that has been fully guaranteed by Hometown. The outstanding balance of this loan
at March 31, 2004, is approximately $2,000. No reserve is recorded for this
loan, as it is not currently delinquent. Should the loan become delinquent,
Hometown would expect to realize proceeds from the sale of the vehicle upon
repossession of such vehicle. The amount of proceeds, if any, is undetermined
due to not knowing its condition.
There is also one loan whose lien was not properly perfected totaling less
than $1,000 as of March 31, 2004. Hometown will be required to pay the remaining
loan balance should the customer default on their payments. Hometown is working
to perfect this lien and has taken steps to prevent this from occurring in the
future. No reserve is recorded for this loan, as it is not currently delinquent.
Should the loan become delinquent, Hometown would expect to realize proceeds
from the sale of the vehicle upon repossession of such vehicle. The amount of
proceeds, if any, is undetermined due to not knowing its condition.
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 March 31, 2004 the mortgage debt
balance is $4.6 million. Hometown makes annual lease payments of approximately
$864,000 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 $4.1 million at
March 31, 2004.
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. Also, certain Hometown dealerships
provide a three or five year 100,000-mile limited warranty on new and/or used
vehicles. The cost of this warranty is charged to the cost of sale of the
vehicle. The warranty covers certain parts and service for three or five years
or until the vehicle reaches an odometer reading of 100,000 miles, whichever
comes sooner. The warranty is insured, making the cost of the warranty fixed for
Hometown. The insurance company pays costs associated with the warranty work to
Hometown. An insurance company that is wholly owned by Ford Motor Company
reinsures the insurance policy. If the insurance company were to fail, Hometown
would be responsible for the costs of the service. Hometown has not recorded any
additional reserve for this warranty program.
Hometown records a reserve referred to as "policy" for used vehicle
warranties and the labor portion of service warranties based on available
historical information. At March 31, 2004 and December 31, 2003, Hometown has a
reserve of $198,000 and $175,000, respectively. The reserve is based on the last
three months of used vehicle units sold and the average cost of repairs over the
last twelve months. While Hometown believes its estimated liability for product
12
warranties is adequate and that the judgment applied is appropriate, the
estimated liability for product warranties could differ materially from future
actual warranty costs.
Balance At Additions To Balance At
Beginning Costs and End of
Reserve for Policy Work of Year Expenses Deductions Quarter
- ----------------------------------- -------- ---------- ---------- --------
Three Months Ended March 31, 2004 $175,000 $205,000 $(182,000) $198,000
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
March 31, 2004 and December 31, 2003, Hometown had $1,242,000 and $1,225,000 of
related deferred revenue, respectively. During the three months ended March 31,
2004, these dealerships generated approximately $132,000 of related warranty
service and insurance revenue, which was deferred. During the same period,
approximately $115,000 of deferred revenue was amortized to Other Revenues, net.
At March 31, 2004 and December 31, 2003, Hometown also had other deferred
revenue of $31,000 and $112,000, respectively.
Franchise Agreements
On March 8, 2004, Toyota Motor Sales, U.S.A., Inc. notified Hometown that
the current Toyota Dealer Agreement was extended through June 18, 2004. Hometown
is currently reviewing the proposed new Toyota Dealer Agreement and anticipates
executing that agreement prior to the expiration of the current agreement.
Previously on March 13, 2003, Hometown was notified by Toyota Motor Sales,
U.S.A., that Hometown must correct certain operational deficiencies or make
substantial progress toward rectifying such deficiencies. Toyota had previously
expressed concerns that the financial resources of the Toyota dealerships were
being used to finance the cash flow deficits of other Hometown dealerships and
that because of this the financial health of the Toyota dealerships were
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 in the second quarter of 2003 and advances on warranty income
from Hometown's Extended Service Plan vendor. 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 for the fiscal year
ended December 31, 2003 had combined revenues of $105.1 million and pre-tax
income before allocation of corporate costs of $2.3 million. Hometown believes
that it has corrected the alleged net working capital deficiency for the Toyota
dealerships, that it has alleviated the concerns expressed by Toyota and that
Hometown will enter into a new dealer agreement with Toyota Motor Sales, U.S.A
prior to the expiration of the current dealer agreement.
13
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, 2003.
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, 1 stand-alone
used car facility and 1 stand-alone service facility located in New Jersey, New
York, Connecticut, Massachusetts and Vermont. Hometown's dealerships offer 9
American and Asian automotive brands including Chevrolet, Chrysler, Dodge, Ford,
Jeep, Lincoln, Mazda, Mercury and Toyota.
THREE MONTHS ENDED MARCH 31, 2004 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2003.
UNITS
The units sold by category for Hometown for the quarters ended March 31,
2004 and 2003, are as follows:
For the three months
ended March 31,
2004 2003
-------- ---------
New vehicle 1,496 1,368
Used vehicle - retail 915 936
Used vehicle - wholesale 903 612
-------- ---------
Total units sold 3,314 2,916
======== ========
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 months ended March 31, 2004 and
2003, are as follows:
For the three months
ended March 31,
2004 2003
-------- ---------
New vehicle 1,496 1,305
Used vehicle - retail 915 936
Used vehicle - wholesale 903 612
-------- ---------
Total units sold 3,314 2,853
======== ========
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REVENUE
Total revenue increased $5.6 million, or 9.3% to $65.9 million for three
months ended March 31, 2004 from $60.3 million for three months ended March 31,
2003. 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 $7.5 million or 12.8% to $65.9 million for the three months
ended March 31, 2004 from $58.4 million for the three months ended March 31,
2003. This increase was primarily due to increased new vehicle sales ($6.9
million); increased sales of used vehicles ($0.5 million) and increased other
revenues ($0.1 million). New vehicle sales were helped by the continuation of
consumer financing deals, such as zero percent financing, combined with heavy
rebating by manufacturers.
Revenue from the sale of new vehicles increased $5.2 million, or 14.5% to
$41.1 million for the three months ended March 31, 2004 from $35.9 million for
three months ended March 31, 2003. On a same store basis, revenues increased
$6.9 million, or 20.2% to $41.1 million for the three months ended March 31,
2004 from $34.2 million for the three months ended March 31, 2003. The increase
is attributable to an additional 191 units sold in 2004 compared to 2003 ($5.0
million) plus a 4.6% increase in average selling price ($1.9 million). The
increase in average selling price is primarily due to an increase in truck and
livery sales in 2004 compared to 2003. All except for one Hometown dealership
experienced increases in new vehicle revenues in 2004 compared to 2003. Sales of
all brands increased over the prior year, Lincoln Mercury ($3.4 million),
Chevrolet ($1.6 million), Ford ($0.9 million), Chrysler/Jeep ($0.5 million),
Toyota ($0.4 million) and Mazda ($0.1 million). The increase at the Lincoln
Mercury dealerships was primarily due to an increase of 91 units sold in 2004
compared to 2003 ($3.2 million) combined with a 1.3% increase in the average
selling price ($0.2 million). The Lincoln Mercury increase includes an increase
in sales of 41 livery units ($1.6 million). The increase at the Chevrolet
dealership was primarily due to an increase of 57 units sold in 2004 compared to
2003 ($1.5 million), combined with a 2.3% increase in the average selling price
($0.1 million). The increase at the Ford dealership was primarily due to an
increase of 36 units sold in 2004 compared to 2003 ($1.0 million), partially
offset by 2.0% decrease in the average selling price ($0.1 million). The
Chrysler/Jeep increase was primarily due to an additional 16 units sold ($0.4
million) in 2004 compared to 2003, combined with an 8.5% increase in the average
selling price ($0.1 million). The increase at the Toyota dealerships was
primarily due to a 4.7% increase in the average selling price ($0.7 million),
partially offset by a decrease of 12 units sold in 2004 compared to 2003 ($0.3
million). Included in this was a decrease in fleet sales of $0.5 million due to
a decrease of 32 units sold. Excluding fleet sales, other Toyota new vehicle
sales increased $0.9 million due to the sale of 20 additional units ($0.5
million), combined with a 3.0% increase in average selling price ($0.4 million).
The increase at the Mazda dealership was primarily due to an additional 3 units
sold in 2004 compared to 2003 ($0.1 million).
Revenue from the sale of used vehicles increased $0.5 million, or 3.0% to
$16.9 million for the three months ended March 31, 2004 from $16.4 million for
three months ended March 31, 2003. This was due to increased used vehicle
revenues at retail ($0.3 million), primarily due to a 4.9% increase in average
selling price ($0.6 million), partially offset by a decrease of 21 units ($0.3
million); plus increased used vehicle sales at wholesale ($0.2 million), due to
an increased of 291 units ($1.5 million) partially offset by a 28.5% decrease in
average selling price ($1.3 million). The decrease in wholesale average selling
price is a function of the vehicles that were taken as trade-ins at the time of
new vehicle purchases. Although the average selling price on wholesale decreased
in 2004 from 2003, gross profit increased slightly. See Gross Profit below. The
increased revenues at retail were primarily due to increases at the Chevrolet
($0.7 million) and Lincoln Mercury dealerships ($0.4 million). The increase at
Chevrolet was primarily due to the sale of an additional 53 units ($0.7 million)
combined with a 2.5% increase in average selling price (less than $0.1 million).
The increase at the Lincoln Mercury dealerships was due to a 9.5% increase in
average selling price ($0.4 million). Ford accounted for a decrease of $0.4
million due to a decrease of 20 units ($0.3 million) combined with a 5.0%
decrease in average selling price ($0.1 million). The Toyota dealerships
accounted for a $0.2 million decrease in used vehicle sales at retail primarily
due to a decrease of 47 units ($0.6 million) partially offset by a 13.9%
increase in average selling price ($0.4 million). Chrysler/Jeep accounted for a
decrease of $0.1 million due to a decrease of 5 units and a 4.7% decrease in
average selling price. Also, Hometown's used car outlet, the site of the sold
Chrysler/Jeep franchise, accounted for a decrease of $0.1 million due to a 37.1%
decrease in average selling price ($0.2 million) partially offset by an increase
15
of 6 units ($0.1 million). The 37.1 % decrease in average selling price in 2004
from 2003 at this location was due to the mix of inventory available for sale.
Although there was a decrease in average selling price, gross profit on these
vehicles actually increased in 2004 from 2003. See Gross Profit below. Toyota
($0.3 million), Ford ($0.1 million) and Chevrolet (less than $0.1 million)
experienced increases in wholesale, while there were decreases at Lincoln
Mercury ($0.1 million) and Hometown's used car outlet ($0.1 million). Used
vehicle inventory available for sale at retail increased during the year due to
the increased new vehicle sales bringing in more vehicles as trade-ins at time
of new vehicle purchase. This combined with the decrease in used vehicle sales
at retail caused more vehicles to be sold at wholesale to manage used vehicle
inventory levels.
Parts and service revenue decreased $0.2 million, or 3.2%, to $6.0 million
for the three months ended March 31, 2004, from $6.2 million for the three
months ended March 31, 2003. As a result of the sale of a Chrysler/Jeep new car
franchise, that dealership's parts and service business was closed. Excluding
this business for all periods, parts and service revenue remained consistent at
$6.0 million for 2004 and 2003. Increases at the Toyota dealership ($0.3
million) were offset by decreases at Lincoln Mercury ($0.2 million) and the
remaining Chrysler/Jeep dealership ($0.1 million).
Other dealership revenues increased $0.1 million, or 5.6% to $1.9 million
for the three months ended March 31, 2004 from $1.8 million for the three months
ended March 31, 2003. On a same store basis, the increase in other dealership
revenues remained at $0.1 million. This increase is primarily attributable to
increases in other dealership revenues of new vehicles; primarily finance
income.
GROSS PROFIT
Total gross profit increased $0.5 million, or 5.6%, to $9.5 million for
the three months ended March 31, 2004, from $9.0 million for the three months
ended March 31, 2003. 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 8.0% to $9.5 million for
the three months ended March 31, 2004 from $8.8 million for the three months
ended March 31, 2003. This increase was primarily attributable to increased
gross profit on: (i) new vehicle sales ($0.5 million), (ii) used vehicle sales
(0.1 million) and (iii) other dealership revenues ($0.1 million). Gross profit
percentage for Hometown was 14.5% in 2004 and 15.0% in 2003. Adjusting both
periods for Toyota fleet sales, gross profit percentage was 14.5% in 2004 and
15.1% in 2003.
Gross profit on the sale of new vehicles increased $0.4 million, or 16.7%,
to $2.8 million for the three months ended March 31, 2004, from $2.4 million for
the three months ended March 31, 2003. On a same store basis gross profit on the
sale of new vehicles increased $0.5 million, or 21.7%, to $2.8 million for the
three months ended March 31, 2004, from $2.3 million for the three months ended
March 31, 2003. The increase in gross profit is primarily attributable to an
increase of 191 units ($0.3 million) combined with a 6.4% increase in average
gross profit per vehicle ($0.2 million). The unit increase is net of a 32 unit
decrease attributable to Toyota fleet sales, which had a minimal effect on the
increase in gross profit. All brands experienced an increase in gross profit on
the sale of new vehicles in the 2004 period compared to 2003 as follows: Toyota
- - $0.1 million, Chrysler/Jeep - $0.1 million, Lincoln Mercury - $0.1 million,
Chevrolet - $0.1 million, Mazda and Ford - $0.1 million together. Gross profit
percentage for 2004 was 6.7% compared to 6.6% for 2003. Adjusting both periods
for Toyota fleet sales, which generate low margins, gross profit percentage for
new vehicles was 6.7% in 2004 and 2003.
Gross profit on the sale of used vehicles increased $0.1 million, or 6.2%,
to $1.7 million for the three months ended March 31, 2004, from $1.6 million for
the three months ended March 31, 2003. This increase is primarily due to a 7.4%
increase in average gross profit per vehicle ($0.1 million) partially offset by
a decrease of 21 units (less than $0.1 million). Increases totaling $0.2 million
at Chevrolet, Lincoln Mercury and Hometown's used car outlet, the site of the
sold Chrysler/Jeep franchise, were partially offset by decreases at the Ford,
Toyota and Mazda dealerships ($0.1 million). Gross profit on the sale of used
vehicles at wholesale is minimal and was up slightly for the three months ended
March 31, 2004 compared to the 2003 period. Gross profit percentage on the sale
of used vehicles was 9.9% in 2004 compared to 9.6% in 2003.
16
Parts and service gross profit decreased $0.1 million, or 3.0%, to $3.2
million for the three months ended March 31, 2004, from $3.3 million for the
three months ended March 31, 2003. As a result of the sale of a Chrysler/Jeep
new car franchise, that dealership's parts and service business was closed.
Excluding this business for all periods, parts and service gross profit remained
consistent at $3.2 million for the three months ended March 31, 2004 and 2003.
Gross profit percentage was 53.7% in 2004 compared to 52.9% in 2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $0.2 million, or
2.4%, to $8.6 million for the three months ended March 31, 2004 from $8.4
million for the three months ended March 31, 2003. The increase is primarily
attributable to an increase in advertising.
INTEREST EXPENSE
Interest expense stayed consistent at $0.8 million for the three months
ended March 31, 2004 and 2003.
PROVISION (BENEFIT) FOR INCOME TAX
The effective income tax rate was 27.1% in the quarter ended March 31,
2004 and 35.3% in the same period of 2003. The rates were based on current
forecasts of income before taxes, and current forecasts of permanent differences
between tax and book income. The 2004 rate reflects the expected full year
effective tax rate adjusted for a reduction in the valuation allowance
associated with the 2004 amortization of goodwill for tax purposes. Deferred
taxes, including valuation allowances, will be reviewed throughout fiscal 2004.
NET INCOME (LOSS)
Net income increased $0.2 million to $0.1 million for the three months
ended March 31, 2004 from a loss of $(0.1) million for the three months ended
March 31, 2003. See above for explanation of the improvement.
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
1,063,000 and 1,428,000 shares of common stock were outstanding as of March 31,
2004 and 2003, respectively. The basic weighted average shares are 7,175,105
shares for both the 2004 and 2003 periods. The diluted weighted average shares
are 7,471,259 and 7,175,105 for the 2004 and 2003 periods, 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. Periods that do not include common stock equivalents exclude them
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. See Note 3 to the consolidated financial statements.
The basic and diluted income (loss) per share for the three months ended
March 31, 2004 and 2003 is $0.01 and $(0.02), respectively.
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
17
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, and (iii) consumer buying patterns.
EFFECTS OF INFLATION
Due to the relatively low levels of inflation experienced in the 2004 and
2003 periods, inflation did not have a significant effect on the results of
Hometown during those periods.
LIQUIDITY AND CAPITAL RESOURCES
The principal sources of liquidity are cash on hand, cash from operations
and floor plan financing.
Cash and Cash Equivalents
Total cash and cash equivalents was $5.8 million and $5.6 million at March
31, 2004 and December 31, 2003, respectively.
Cash Flow from Operations
The following table sets forth the consolidated selected information from
the unaudited statements of cash flows:
Three months ended
March 31,
2004 2003
------- -------
(in thousands)
Net cash provided by operating $ 834 $2,877
activities
Net cash (used in) investing activities (94) (230)
Net cash (used in) financing activities (560) (678)
------- -------
Net increase in cash and cash equivalents $ 180 $1,969
======= =======
For the three months ended March 31, 2004, net cash provided from
operations of $0.8 million primarily consists of: (i) net income plus non-cash
items of $0.4 million; (ii) the increase in floor plan liability in excess of
the increase in inventory of $0.7 million; (iii) an increase in accounts payable
and accrued expenses of $0.5 million; partially offset by the increase in
accounts receivable of $0.7 million. Net cash used in investing activities of
$0.1 million is due to capital expenditures. Net cash used in financing
activities of $0.6 million is due to principal payments of long-term debt and
capital lease obligations.
For the three months ended March 31, 2003, net cash provided from
operations of $2.9 million primarily consists of: (i) net loss plus non-cash
items of $0.2 million; (ii) the increase in floor plan liability of $2.2
million; (iii) the decrease in inventory of $0.7 million; and (iv) an increase
in accounts payable and accrued expenses of $0.7 million; partially offset by
increased accounts receivable of $0.8 million. Net cash used in investing
activities of $0.2 million is primarily due to capital expenditures. Net cash
18
used in financing activities of $0.7 million is due to principal payments of
long-term debt and capital lease obligations.
Capital Expenditures
Capital expenditures for fiscal 2004 are expected to be $2.2 million,
consisting primarily of the purchase of a building, equipment and leasehold
improvements. The building is a Hometown dealership, currently leased, that has
a purchase option. The purchase is subject to obtaining financing and board of
director's approval. The monthly financing payments are expected to be less than
the lease payments.
Receivables
Hometown had $6.7 million in accounts receivable at March 31, 2004
compared to $6.1 million at December 31, 2003. The increase in receivables is
due to the increase in sales that takes place in March compared to December. The
majority of those receivables, $3.3 million and $3.1 million as of March 31,
2004 and December 31, 2003, respectively, are due from finance companies that
provide or secure financing for customer purchases, and primarily represent
contracts-in-transit. These amounts are typically received within seven days of
the transaction. The allowance for doubtful accounts is $0.3 million at March
31, 2004 and December 31, 2003.
Inventories
Hometown had $44.5 million in inventories, net at March 31, 2004 compared
to $37.8 million at December 31, 2003. The majority of inventory, $35.0 million
and $28.4 million as of March 31, 2004 and December 31, 2003, 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 at
March 31, 2004 and December 31, 2003.
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.
Hometown is 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. The FMCC agreement has no set maturity date and it is the
intention of Hometown to continue with this financing on an ongoing basis.
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
19
statements should, therefore, be considered in light of various important
factors, including those set forth herein and others set forth from time to time
in Hometown's reports and registration statements filed with the Securities and
Exchange Commission (the "Commission"). Hometown disclaims any intent or
obligation to update such forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates on our
amounts outstanding under our floor plan financing arrangement, which bears
interest at variable rates based on the prime or LIBOR borrowing rates. Based on
floor plan amounts outstanding at March 31, 2004 of $45.2 million, a 1% change
in the prime rate would result in a $0.5 million change to annual floor plan
interest expense.
At March 31, 2004, Hometown invested $2.9 million of excess cash, of which
$0.5 million was invested in money market accounts paying a weighted average
interest rate of 0.83% at March 31, 2004, and $2.3 million was invested in a
Ford Motor Credit Company cash management account paying interest of 5.00% at
March 31, 2004. The cash management account interest rate is tied to the 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 March 31, 2004, 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.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 7 - Commitments and Contingencies - Litigation, to the notes to the
unaudited consolidated financial statements.
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 March 25, 2004, Hometown filed a report on Form 8-K with respect to
Items 7 and 12 on such report, related to the Company's announcing its
2003 annual results.
21
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.
May 13, 2004 By: /s/ Corey E. Shaker
- ------------------------ --------------------------------
Date Corey E. Shaker
President and Chief Executive Officer
May 13, 2004 By: /s/ Charles F. Schwartz
- ------------------------ --------------------------------
Date Charles F. Schwartz
Chief Financial Officer
22