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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, 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 3,870,137
Common Stock, Class B, par value $.001 per share 3,519,252
INDEX
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Balance Sheets at September 30, 2004 (Unaudited)
and December 31, 2003 (Audited) 3
Unaudited Consolidated Statements of Operations for the three
and nine months ended September 30, 2004 and 2003 4
Unaudited Consolidated Statements of Stockholders' Equity for the
nine months ended September 30, 2004 and 2003 5
Unaudited Consolidated Statements of Cash Flows for the nine
months ended September 30, 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 23
ITEM 4. Controls and Procedures 23
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 24
ITEM 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
CERTIFICATIONS 26
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 2004 2003
(Unaudited)
------------ ------------
Current Assets:
Cash and cash equivalents $ 5,224 $ 5,639
Accounts receivable, net 7,248 6,058
Inventories, net 38,686 37,774
Prepaid expenses and other current assets 672 625
Deferred and prepaid income taxes 1,216 1,349
-------- --------
Total current assets 53,046 51,445
Property and equipment, net 13,793 12,678
Other assets 1,067 1,141
-------- --------
Total assets $ 67,906 $ 65,264
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Floor plan notes payable $ 38,664 $ 38,003
Accounts payable and accrued expenses 5,699 5,798
Current maturities of long-term debt and capital lease obligations 1,148 996
Deferred revenue 818 609
-------- --------
Total current liabilities 46,329 45,406
Long-term debt and capital lease obligations 12,598 12,076
Long-term deferred income taxes 125 125
Other long-term liabilities and deferred revenue 764 729
-------- --------
Total liabilities 59,816 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, 3,870,137 and 3,655,853 shares issued and outstanding,
respectively 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 30,017 29,760
Accumulated deficit (21,934) (22,839)
-------- --------
Total stockholders' equity 8,090 6,928
-------- --------
Total liabilities and stockholders' equity $ 67,906 $ 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 For the Nine Months
Ended September 30, Ended September 30,
----------------------------- -----------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues
New vehicle sales $ 44,291 $ 52,786 $ 130,182 $ 139,668
Used vehicle sales 16,943 16,888 49,633 52,021
Parts and service sales 5,984 6,220 18,098 18,655
Other, net 2,064 2,286 5,969 6,259
----------- ----------- ----------- -----------
Total revenues 69,282 78,180 203,882 216,603
----------- ----------- ----------- -----------
Cost of sales
New vehicle 41,474 49,192 121,789 130,420
Used vehicle 15,359 15,243 44,921 47,006
Parts and service 2,697 2,830 8,269 8,463
----------- ----------- ----------- -----------
Total cost of sales 59,530 67,265 174,979 185,889
----------- ----------- ----------- -----------
Gross profit 9,752 10,915 28,903 30,714
Selling, general and administrative expenses 8,280 9,174 25,367 26,729
----------- ----------- ----------- -----------
Income from operations 1,472 1,741 3,536 3,985
Interest income 53 22 134 36
Interest (expense) (802) (715) (2,487) (2,292)
Other income 63 5 66 956
Other (expense) (5) -- (9) (3)
----------- ----------- ----------- -----------
Pre-tax income 781 1,053 1,240 2,682
Provision for income taxes 211 221 335 888
----------- ----------- ----------- -----------
Net income $ 570 $ 832 $ 905 $ 1,794
=========== =========== =========== ===========
Earnings per share, basic $ 0.08 $ 0.12 $ 0.12 $ 0.25
=========== =========== =========== ===========
Earnings per share, diluted $ 0.08 $ 0.12 $ 0.12 $ 0.25
=========== =========== =========== ===========
Weighted average shares outstanding, basic 7,389,389 7,175,105 7,252,529 7,175,105
Weighted average shares outstanding, diluted 7,493,208 7,212,067 7,429,892 7,187,426
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 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
======== ======== ======== ======== ======== ======== ========
Balance at
December 31, 2003 3,656 $ 4 3,519 $ 3 $ 29,760 $(22,839) $ 6,928
Exercise of Warrants 214 -- -- -- 257 -- 257
Net income -- -- -- -- -- 905 905
-------- -------- -------- -------- -------- -------- --------
Balance at
September 30, 2004 3,870 $ 4 3,519 $ 3 $ 30,017 $(21,934) $ 8,090
======== ======== ======== ======== ======== ======== ========
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 Nine Months ended
September 30,
-------------------------
2004 2003
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 905 $ 1,794
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 950 1,010
(Gain) loss on sale/disposal of sales and service franchise and
property and equipment 8 (939)
Deferred income taxes 335 829
Changes in assets and liabilities:
Accounts receivable, net (1,190) (2,095)
Inventories, net (85) 5,716
Prepaid expenses and other current assets (47) (65)
Prepaid taxes (202) (316)
Other assets 8 37
Floor plan notes payable 661 (4,257)
Accounts payable and accrued expenses (99) 1,747
Deferred revenue - current 209 109
Other long-term liabilities and deferred revenue 35 11
------- -------
Net cash provided by operating activities 1,488 3,581
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,821) (593)
Proceeds from sale of sales and service franchise and property and
equipment -- 942
------- -------
Net cash provided by (used in) investing activities (1,821) 349
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt and capital lease obligations (1,707) (1,868)
Proceeds from long-term borrowings 1,368 55
Exercise of warrants 257 --
------- -------
Net cash (used in) financing activities (82) (1,813)
Net increase (decrease) in cash and cash equivalents (415) 2,117
CASH AND CASH EQUIVALENTS, beginning of period 5,639 3,624
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 5,224 $ 5,741
======= =======
Cash paid for - Interest $ 2,485 $ 2,325
Cash paid for - Taxes $ 202 $ 316
Purchases financed by capital lease obligations $ 1,013 $ 958
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 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 September 30, 2004, the
consolidated statements of operations for the three and nine months ended
September 30, 2004 and 2003, the consolidated statements of stockholders' equity
and the consolidated statements of cash flows for the nine months ended
September 30, 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 September 30, 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 Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
--------- --------- --------- ---------
(in thousands)
Net income, as reported $ 570 $ 832 $ 905 $ 1,794
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects (1) (7) (10) (21) (22)
--------- --------- --------- ---------
Pro forma net income $ 563 $ 822 $ 884 $ 1,772
========= ========= ========= =========
Earnings per share:
Basic, as reported $ 0.08 $ 0.12 $ 0.12 $ 0.25
Basic, pro forma $ 0.08 $ 0.11 $ 0.12 $ 0.25
Diluted, as reported $ 0.08 $ 0.12 $ 0.12 $ 0.25
Diluted, pro forma $ 0.08 $ 0.11 $ 0.12 $ 0.25
(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.
3. EARNINGS PER SHARE
"Basic earnings per share" is computed by dividing net income by the
weighted average common shares outstanding. "Diluted earnings per share" is
computed by dividing net income by the weighted average common shares
outstanding adjusted for the incremental dilution of potentially dilutive
securities. Options and warrants to purchase approximately 556,000 and 1,132,000
shares of common stock were outstanding as of September 30, 2004 and 2003,
respectively. Basic and diluted weighted average shares for the three and nine
months ended September 30, 2004 and 2003 are as follows:
8
Three Months Ended September 30, Nine Months Ended September 30,
2004 2003 2004 2003
--------- --------- --------- ---------
Basic, Weighted Average Shares 7,389,389 7,175,105 7,252,529 7,175,105
Common Stock Equivalents 103,819 36,962 177,363 12,321
--------- --------- --------- ---------
Diluted, Weighted Average Shares 7,493,208 7,212,067 7,429,892 7,187,426
========= ========= ========= =========
The common stock equivalents are options and warrants whose exercise price
is less than the average market price of the common shares during the period.
For the three and nine months ended September 30, 2004, options and warrants to
purchase approximately 286,000 and 133,000 shares, respectively 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. For the three and nine months ended
September 30, 2003, options and warrants to purchase 947,000 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.
The basic and diluted income per share for the three months ended
September 30, 2004 and 2003 is $0.08 and $0.12, respectively. The basic and
diluted income per share for the nine months ended September 30, 2004 and 2003
is $0.12 and $0.25, respectively. 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 in June 2003.
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:
9/30/04 12/31/03
------- --------
(in thousands)
New Vehicles $29,088 $28,420
Used Vehicles 7,714 7,255
Parts, accessories and other 1,884 2,099
------- -------
Total Inventories $38,686 $37,774
======= =======
The lower of cost or market reserves were $0.7 million at September 30,
2004 and December 31, 2003.
9
5. INTANGIBLE ASSETS
As of September 30, 2004 and December 31, 2003, Hometown's intangible
assets consisted of the following:
9/30/04 12/31/03
------- --------
(in thousands)
Deferred finance charges $ 272 $ 267
Accumulated amortization (115) (98)
Non-compete agreement 381 381
Accumulated amortization (317) (270)
Franchise Fee 10 10
Accumulated amortization (3) (1)
----- -----
Net intangible assets $ 228 $ 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. BUILDING PURCHASE / OTHER INDEBTEDNESS
In June 2004, Hometown exercised an option to buy the building leased by
its Brattleboro, VT. dealership. The purchase price was $1.5 million plus
closing costs. The purchase was financed by a $1.05 million bank loan, a $0.3
million term note held by the seller and $0.15 million in cash. The bank loan is
for 10 years, carries an interest rate of 7.0% for the first five years and is
variable thereafter with monthly payments sufficient to amortize the loan over a
15-year period. After 10 years, the terms of the bank loan will be renegotiated.
The note held by the seller is payable over three years and carries an interest
rate of 10.5%.
8. EXERCISE OF WARRANTS / COMMON STOCK
In connection with a Private Equity Financing in July 2001, Hometown
issued warrants that entitled the holders to purchase up to 487,498 shares of
Class A Common Stock at a purchase price of $1.20 per share, exercisable over a
three-year period. In June 2004, 214,284 warrants were exercised for
approximately $257,000 and 214,284 shares of Class A Common Stock were issued.
All remaining warrants expired in July 2004.
9. 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
10
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 is vigorously defending 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.
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. A trial date
has been set for November 29, 2004.
Hometown and its chief executive officer were 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. Since the original filing, the Vergopias
have sought to add Hometown's Regional Vice President - South as an additional
defendant. Litigation counsel has been retained by our insurers to represent us
in this action as well. The third action had been removed from New Jersey state
court to Federal court, but has been remanded to state court in New Jersey.
Discovery has been initiated. 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
which are scheduled for trial November 29, 2004.
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 cases 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 Federal Insurance Company an affiliate of The Chubb
Group of Insurance Companies ("Federal"), Hometown's former 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. It is scheduled to be tried immediately
following the
11
conclusion of the Vergopias suit. 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 Federal 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 Federal. 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 was previously 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. The claims
made by the Vergopias against Hometown's former counsel and assistant secretary
have been disposed of as the court granted summary judgment against the
Vergopias as to those claims. Hometown believes it has meritorious claims and is
vigorously defending this action and prosecuting its counterclaims and
cross-claims. Hometown does not believe that the eventual outcome of the case
will have a material adverse effect on Hometown's consolidated financial
position or results of operations.
Hometown from time to time may be a defendant in lawsuits arising from
normal business activities. Management reviews pending litigation with legal
counsel and believes that the ultimate liability, if any, resulting from such
actions will not have a material adverse effect on Hometown's consolidated
financial position or results of operations.
Guarantees
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, 2004 the mortgage
debt balance is $4.4 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 $4.0
million at September 30, 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 September 30, 2004 and December 31, 2003, Hometown
has a reserve of $194,000 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
12
estimated liability for product warranties is adequate and that the judgment
applied is appropriate, the estimated liability for product warranties could
differ materially from future actual warranty costs.
Balance At Additions To Balance At
Beginning of Costs and End of
Reserve for Policy Work Year Expenses Deductions Quarter
---------------------------------------- ---------------- --------------- ------------ -------------
Nine Months Ended September 30, 2004 $175,000 $551,000 $(532,000) $194,000
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, 2004 and December 31, 2003, Hometown had $1,181,000 and $1,225,000
of related deferred revenue, respectively. During the nine months ended
September 30, 2004, these dealerships generated approximately $315,000 of
related warranty service and insurance revenue, which was deferred. During the
same period, approximately $359,000 of deferred revenue was amortized to Other
Revenues, net. At September 30, 2004 and December 31, 2003, Hometown also had
other deferred revenue of $399,000 and $112,000, respectively. The 2004 other
deferred revenue of $399,000, represents the balance of a $500,000 advance on
warranty income from Hometown's Extended Service Plan vendor received June 2004.
It is estimated that this advance will be earned over the next 12 months. There
were no fees or other costs associated with the advance.
Franchise Agreements
In August 2004, Toyota Motor Sales, U.S.A., Inc. notified Hometown that
the current Toyota Dealer Agreement was extended through November 18, 2004.
Hometown is currently awaiting receipt of a revised 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 9, Commitments
and Contingencies - 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 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.
UNITS
The units sold by category for Hometown for the three and nine months
ended September 30, 2004 and 2003, are as follows:
For the three months For the nine months
ended September 30, ended September 30,
2004 2003 2004 2003
------ ------ ------ ------
New vehicle 1,663 1,990 4,814 5,456
Used vehicle - retail 864 947 2,560 2,883
Used vehicle - wholesale 932 936 2,767 2,316
------ ------ ------ ------
Total units sold 3,459 3,873 10,141 10,655
====== ====== ====== ======
Hometown sold a Chrysler/Jeep sales and service franchise on June 3, 2003.
The units sold by category for Hometown on a same store basis (excluding the
aforementioned Chrysler/Jeep dealership for all periods) for the three and nine
months ended September 30, 2004 and 2003, are as follows:
For the three months For the nine months
ended September 30, ended September 30,
2004 2003 2004 2003
------ ------ ------ ------
New vehicle 1,663 1,990 4,814 5,363
Used vehicle - retail 846 911 2,455 2,772
Used vehicle - wholesale 922 947 2,748 2,311
------ ------ ------ ------
Total units sold 3,431 3,848 10,017 10,446
====== ====== ====== ======
14
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 2003.
REVENUE
Total revenue decreased $8.9 million, or 11.4% to $69.3 million for the
three months ended September 30, 2004 from $78.2 million for the three months
ended September 30, 2003. Hometown sold a Chrysler/Jeep sales and service
franchise on June 3, 2003. At that time, sales of new vehicles along with parts
and service stopped at that location while sales of used vehicles continued
until August 2004. On a same store basis (excluding the Chrysler/Jeep revenues
for all periods), revenues decreased $8.8 million or 11.3% to $69.0 million for
the three months ended September 30, 2004 from $77.8 million for the three
months ended September 30, 2003. This decrease was primarily due to decreased
sales of new vehicles ($8.5 million).
Revenue from the sale of new vehicles decreased $8.5 million, or 16.1% to
$44.3 million for the three months ended September 30, 2004 from $52.8 million
for the three months ended September 30, 2003. The decrease is attributable to a
reduction of 327 units sold ($8.7 million) in 2004 compared to 2003, partially
offset by a 0.4% increase in average selling price ($0.2 million). All
dealerships contributed to the decrease as follows: Lincoln Mercury ($3.6
million), Toyota ($2.1 million), Chevrolet ($1.1 million), Chrysler/Jeep ($0.7
million), Ford ($0.5 million) and Mazda ($0.5 million). The decrease at the
Lincoln Mercury dealerships was primarily due to a decrease of 103 units sold in
2004 compared to 2003 ($3.6 million). This is net of a 5 unit increase in livery
sales ($0.2 million). The decrease at the Toyota dealerships was primarily due
to a decrease of 84 units sold in 2004 compared to 2003 ($2.0 million), combined
with a 1.0% decrease in the average selling price ($0.1 million). The decrease
at the Chevrolet dealership was primarily due to a decrease of 66 units sold in
2004 compared to 2003 ($1.6 million), partially offset by a 12.0% increase in
the average selling price ($0.5 million). The Chrysler/Jeep decrease was
primarily due to a decrease of 30 units sold ($0.8 million) in 2004 compared to
2003, partially offset by a 6.7% increase in the average selling price ($0.1
million). The decrease at the Ford dealership was primarily due to a decrease of
24 units sold in 2004 compared to 2003 ($0.6 million), partially offset by a
4.1% increase in the average selling price ($0.1 million). The decrease at the
Mazda dealership was primarily due to a decrease of 20 units sold in 2004
compared to 2003 ($0.4 million), combined with a 2.2% decrease in average
selling price ($0.1 million).
Revenue from the sale of used vehicles remained constant at $16.9 million
for the three months ended September 30, 2004 and September 30, 2003. On a same
store basis, revenues increased $0.1 million or 0.6% to $16.7 million for the
three months ended September 30, 2004 from $16.6 million for the three months
ended September 30, 2003. This was due to: (i) increased used vehicle sales at
wholesale ($0.4 million), due to a 14.7% increase in average selling price ($0.5
million), partially offset by a decrease of 25 units sold in 2004 compared to
2003 ($0.1 million); and (ii) decreased used vehicle revenues at retail ($0.2
million), due to a decrease of 65 units ($1.0 million), partially offset by a
5.7% increase in average selling price ($0.8 million). The increase in wholesale
average selling price is a function of the vehicles that were taken as trade-ins
at the time of new vehicle purchases. The Lincoln Mercury ($0.1 million),
Chrysler/Jeep ($0.1 million), Ford ($0.1 million), and Chevrolet ($0.1 million)
dealerships experienced increases in used vehicle sales at wholesale. The
decreased revenues at retail were primarily due to decreases at the Toyota ($0.9
million), Lincoln Mercury ($0.1 million) and Ford ($0.1 million) dealerships,
partially offset by increases at the Chevrolet ($0.7 million) and Chrysler/Jeep
($0.2 million) dealerships. The decrease at Toyota was primarily due to a
decrease of 69 units. The decrease at the Lincoln Mercury dealerships was
primarily due to a decrease of 42 units ($0.7 million), partially offset by a
13.0% increase in average selling price ($0.6 million). The decrease at Ford was
primarily due to a decrease of 4 units, combined with a 2.2% decrease in average
selling price ($0.1 million combined). The increase at Chevrolet was primarily
due to the sale of an additional 43 units ($0.6 million), combined with a 7.7%
increase in average selling price ($0.1 million).
Parts and service revenue decreased $0.2 million, or 3.2% to $6.0 million
for the three months ended September 30, 2004 from $6.2 million for the three
months ended September 30, 2003. On a same store basis, the decrease in other
dealership revenues remained at $0.2 million. The decrease was primarily due to
the Lincoln Mercury ($0.2 million) dealerships.
15
Other dealership revenues decreased $0.2 million, or 8.7% to $2.1 million
for the three months ended September 30, 2004 from $2.3 million for the three
months ended September 30, 2003. On a same store basis, the decrease in other
dealership revenues remained at $0.2 million. This decrease is attributable to
decreases in other dealership revenues of both new and used vehicles.
GROSS PROFIT
Total gross profit decreased $1.1 million, or 10.1%, to $9.8 million for
the three months ended September 30, 2004, from $10.9 million for the three
months ended September 30, 2003. Hometown sold a Chrysler/Jeep sales and service
franchise on September 3, 2003. At that time, sales of new vehicles along with
parts and service stopped at that location while sales of used vehicles
continued until August 2004. On a same store basis (excluding the Chrysler/Jeep
gross profit for all periods), gross profit decreased $1.0 million, or 9.3% to
$9.8 million for the three months ended September 30, 2004, from $10.8 million
for the three months ended September 30, 2003. This decrease was attributable to
decreased gross profit on: (i) new vehicle sales ($0.8 million), (ii) parts and
service sales ($0.1 million) and (iii) other dealership revenues ($0.1 million).
Gross profit percentage for Hometown was 14.1% for the three months ended
September 30, 2004 and 13.9% for the three months ended September 30, 2003.
Adjusting both periods for Toyota and Chevrolet fleet sales, gross profit
percentage was 14.2% for the three months ended September 30, 2004 and 14.0% for
the three months ended September 30, 2003.
Gross profit on the sale of new vehicles decreased $0.8 million, or 22.2%,
to $2.8 million for the three months ended September 30, 2004, from $3.6 million
for the three months ended September 30, 2003. The decrease in gross profit is
primarily attributable to a decrease of 327 units ($0.6 million), combined with
a 6.3% decrease in average gross profit per vehicle ($0.2 million). The
following brands experienced a decrease in gross profit on the sale of new
vehicles in the 2004 period compared to 2003: Lincoln Mercury ($0.5 million),
Toyota ($0.1 million), Chevrolet ($0.1 million) and Ford ($0.1 million). The
Lincoln Mercury decrease was primarily due to a decrease of 103 units ($0.3
million) combined with a 21.1% decrease in average gross profit per unit ($0.2
million), or a 15.0% decrease in average gross profit per unit when not
including livery sales ($0.1 million). The Toyota and Chevrolet decreases are
due to a decrease of 84 units and 66 units sold, respectively. The Ford decrease
was due to the decrease of 24 units combined with a 3.7% decrease in average
gross profit per unit. Gross profit percentage for 2004 was 6.4% compared to
6.8% for 2003. Adjusting both periods for Toyota and Chevrolet fleet sales,
which generate low margins, gross profit percentage for new vehicles was 6.4% in
2004 and 6.9% in 2003.
Gross profit on the sale of used vehicles remained constant at $1.6
million for the three months ended September 30, 2004 and September 30, 2003. On
a same store basis, revenues remained at $1.6 million for both periods.
Increases at the Chevrolet ($0.1 million) and Chrysler/Jeep ($0.1 million)
dealerships were offset by decreases at the Lincoln Mercury ($0.1 million) and
Toyota ($0.1 million) dealerships. The majority of the changes were at retail. A
decrease of 65 units ($0.1 million), was offset by a 7.3% increase in average
gross profit per unit ($0.1 million). Gross profit at wholesale remained
constant. Gross profit percentage on the sale of used vehicles was 9.5% in 2004
compared to 9.6% in 2003.
Parts and service gross profit decreased $0.1 million, or 2.9%, to $3.3
million for the three months ended September 30, 2004, from $3.4 million for the
three months ended September 30, 2003. The decrease was primarily due to the
Lincoln Mercury ($0.1 million) dealerships. Gross profit percentage was 54.9% in
2004 compared to 54.5% in 2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $0.9 million, or
9.8%, to $8.3 million for the three months ended September 30, 2004 from $9.2
million for the three months ended September 30, 2003. The decrease is primarily
attributable to reductions in payroll and related taxes and benefits ($0.7
million), professional fees ($0.3 million) and various reserves for chargebacks
(less than $0.1 million), partially offset by an increase in advertising of $0.1
million.
16
INTEREST EXPENSE
Interest expense increased $0.1 million, or 14.3%, to $0.8 million for the
three months ended September 30, 2004, from $0.7 million for the three months
ended September 30, 2003. The increase is primarily due to an increase of
floorplan interest expense resulting from higher average borrowings.
PROVISION FOR INCOME TAX
The effective income tax rate was 27.0% in the quarter ended September 30,
2004 and 21.0% 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.
NET INCOME AND EARNINGS PER SHARE
Net income decreased $0.2 million to $0.6 million for the three months
ended September 30, 2004, from $0.8 million for the three months ended September
30, 2003. See above for explanation of the decrease.
The basic and diluted income per share for the three months ended
September 30, 2004 and 2003 is $0.08 and $0.12, respectively. See Note 3 to the
consolidated financial statements.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2003.
REVENUE
Total revenue decreased $12.7 million, or 5.9% to $203.9 million for the
nine months ended September 30, 2004, from $216.6 million for the nine months
ended September 30, 2003. Hometown sold a Chrysler/Jeep sales and service
franchise on June 3, 2003. At that time, sales of new vehicles along with parts
and service stopped at that location while sales of used vehicles continued
until August 2004. On a same store basis (excluding the Chrysler/Jeep revenues
for all periods), revenues decreased $9.0 million or 4.2% to $202.8 million for
the nine months ended September 30, 2004, from $211.8 million for the nine
months ended September 30, 2003. This decrease was primarily due to decreased
sales of new vehicles ($7.0 million) and used vehicles ($1.6 million).
Revenue from the sale of new vehicles decreased $9.5 million, or 6.8% to
$130.2 million for the nine months ended September 30, 2004, from $139.7 million
for the nine months ended September 30, 2003. On a same store basis, revenues
decreased $7.0 million, or 5.1% to $130.2 million for the nine months ended
September 30, 2004, from $137.2 million for the nine months ended September 30,
2003. The decrease is attributable to a reduction of 549 units sold in 2004
compared to 2003 ($14.0 million), partially offset by a 5.7% increase in average
selling price ($7.0 million). The increase in average selling price is primarily
due to higher fleet sales in 2003 compared to 2004. The fleet sales had a lower
average selling price than other units sold. Excluding Toyota and Chevrolet
fleet sales, there was a 2.6% increase in average selling price. The decrease is
primarily from Hometown's Toyota ($5.3 million), Ford ($1.5 million), Chevrolet
($1.0 million), and Mazda ($0.6 million) dealerships, partially offset by
increases at Lincoln Mercury ($1.2 million) and Chrysler/Jeep ($0.2 million).
The decrease at the Toyota dealerships was primarily due a decrease in fleet
sales of $4.4 million, due to a decrease of 316 units sold in 2004 compared to
2003. Excluding the decrease in fleet sales, other Toyota sales decreased $0.9
million, due to a decrease of 91 units sold in 2004 compared to 2003 ($2.1
million), partially offset by a 2.4% increase in the average selling price ($1.2
million). The decrease at the Ford dealership was primarily due to a decrease of
64 units sold in 2004 compared to
17
2003 ($1.7 million), partially offset by a 1.7% increase in average selling
price ($0.2 million). The decrease at the Chevrolet dealership was primarily due
to a decrease in fleet sales of $0.8 million, due to a decrease of 42 units sold
in 2004 compared to 2003. Excluding the decrease in fleet sales, other Chevrolet
sales decreased $0.2 million, due to a decrease of 40 units sold in 2004
compared to 2003 ($1.0 million), partially offset by a 5.7% increase in the
average selling price ($0.8 million). The decrease at the Mazda dealership was
primarily due to a decrease of 28 units sold in 2004 compared to 2003. The
increase at the Lincoln Mercury dealerships was primarily due to an increase of
140 livery units sold in 2004 compared to 2003 ($5.4 million), partially offset
by a decrease of other sales of $4.2 million due to a decrease of 105 units sold
in 2004 compared to 2003 ($3.7 million), combined with a 2.1% decrease in the
average selling price ($0.5 million). The Chrysler/Jeep increase was primarily
due to a 5.2% increase in the average selling price ($0.3 million), partially
offset by a decrease of 3 units sold ($0.1 million) in 2004 compared to 2003.
Revenue from the sale of used vehicles decreased $2.4 million, or 4.6% to
$49.6 million for the nine months ended September 30, 2004 from $52.0 million
for the nine months ended September 30, 2003. On a same store basis, revenues
decreased $1.6 million or 3.2% to $48.6 million for the nine months ended
September 30, 2004 from $50.2 million for the nine months ended September 30,
2003. This was due to: (i) decreased used vehicle revenues at retail ($2.7
million), due to a decrease of 317 units ($4.6 million), partially offset by a
5.2% increase in average selling price ($1.9 million), (ii) partially offset by
increased used vehicle sales at wholesale ($1.1 million), due to an increase of
437 units sold in 2004 compared to 2003 ($1.8 million), partially offset by a
6.1% decrease in average selling price ($0.7 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, average gross profit per unit increased
slightly. Used vehicle inventory available for sale at retail increased during
the year due to the increased new vehicle sales (during the first quarter of
2004) 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. The
decreased revenues at retail were primarily due to decreases at the Toyota ($2.5
million), Ford ($1.2 million), Lincoln Mercury ($1.0 million), and Mazda ($0.2
million) dealerships, partially offset by increases at the Chevrolet ($2.0
million) and Chrysler/Jeep ($0.2 million) dealerships. The decrease at Toyota
was primarily due to a decrease of 212 units ($3.0 million), partially offset by
a 5.1% increase in average selling price ($0.5 million). The decrease at Ford
was primarily due to a decrease of 69 units ($1.0 million), combined with a 3.9%
decrease in average selling price ($0.2 million). The decrease at the Lincoln
Mercury dealerships was primarily due to a decrease of 135 units ($2.2 million),
partially offset by a 10.2% increase in average selling price ($1.2 million).
The decrease at Mazda was primarily due to a decrease of 24 units ($0.3
million), partially offset by a 10.7% increase in average selling price ($0.1
million). The increase at Chevrolet was primarily due to the sale of an
additional 120 units ($1.6 million), combined with a 6.0% increase in average
selling price ($0.4 million). The increase at Chrysler/Jeep was primarily due to
a 2.9% increase in average selling price. The Toyota ($0.7 million), Lincoln
Mercury ($0.2 million) and Ford ($0.2 million) dealerships experienced increases
in used vehicle revenues at wholesale.
Parts and service revenue decreased $0.6 million, or 3.2% to $18.1 million
for the nine months ended September 30, 2004, from $18.7 million for the nine
months ended September 30, 2003. On a same store basis, parts and service
revenue decreased $0.1 million, or 0.5% to $18.1 million for the nine months
ended September 30, 2004, from $18.1 million for the nine months ended September
30, 2003. Decreases at the Lincoln Mercury ($0.5 million) and Chrysler/Jeep
($0.1 million) dealerships were partially offset by increases at the Toyota
($0.3 million), Ford ($0.1 million) and Chevrolet ($0.1 million) dealerships.
Other dealership revenues decreased $0.3 million, or 4.8% to $6.0 million
for the nine months ended September 30, 2004, from $6.3 million for the nine
months ended September 30, 2003. On a same store basis, other dealership
revenues decreased $0.2 million, or 3.3% to $5.9 million for the nine months
ended September 30, 2004, from $6.1 million for the nine months ended September
30, 2003. Decreases in other dealership revenues of used vehicles ($0.3
million), was partially offset by increases in other dealership revenues of new
vehicles ($0.1 million).
18
GROSS PROFIT
Total gross profit decreased $1.8 million, or 5.9%, to $28.9 million for
the nine months ended September 30, 2004, from $30.7 million for the nine months
ended September 30, 2003. Hometown sold a Chrysler/Jeep sales and service
franchise on June 3, 2003. At that time, sales of new vehicles along with parts
and service stopped at that location while sales of used vehicles continued
until August 2004. On a same store basis (excluding the Chrysler/Jeep gross
profit for all periods), gross profit decreased $1.3 million, or 4.3% to $28.7
million for the nine months ended September 30, 2004, from $30.0 million for the
nine months ended September 30, 2003. This decrease was primarily attributable
to decreased gross profit on new vehicle sales ($0.7 million), used vehicle
sales ($0.3 million), other dealership revenues ($0.2 million),and parts and
service sales ($0.1 million). Gross profit percentage for Hometown was 14.2% for
the nine months ended September 30, 2004 and September 30, 2003. Adjusting both
periods for Toyota and Chevrolet fleet sales, gross profit percentage was 14.2%
for the nine months ended September 30, 2004 and 14.6% for the nine months ended
September 30, 2003.
Gross profit on the sale of new vehicles decreased $0.8 million, or 8.7%,
to $8.4 million for the nine months ended September 30, 2004, from $9.2 million
for the nine months ended September 30, 2003. On a same store basis gross profit
on the sale of new vehicles decreased $0.7 million, or 7.7%, to $8.4 million for
the nine months ended September 30, 2004, from $9.1 million for the nine months
ended September 30, 2003. The decrease in gross profit is primarily attributable
to a decrease of 549 units ($0.9 million), partially offset by a 3.0% increase
in average gross profit per vehicle ($0.2 million). The unit decrease includes a
358-unit decrease attributable to Toyota (316 units) and Chevrolet (42 units)
fleet sales, which had a minimal effect on gross profit ($40,000). Excluding
fleet sales, the following brands experienced decreases in gross profit on the
sale of new vehicles in 2004 compared to 2003: Lincoln Mercury ($0.6 million),
Ford ($0.2 million) and Chevrolet ($0.1 million). The Lincoln Mercury decrease
is net of an increase of $0.1 million attributable to a 140-unit increase in
livery sales. Partially offsetting this were increases at: Chrysler/Jeep ($0.1
million), and Mazda ($0.1 million). These increases were primarily due to
increased gross profit per unit. Gross profit percentage was 6.4% for the 2004
period and 6.6% for the 2003 period. Adjusting both periods for Toyota and
Chevrolet fleet sales, which generate low margins, gross profit percentage for
new vehicles was 6.5% in 2004 and 6.9% in 2003.
Gross profit on the sale of used vehicles decreased $0.3 million, or 6.0%,
to $4.7 million for the nine months ended September 30, 2004, from $5.0 million
for the nine months ended September 30, 2003. On a same store basis, gross
profit decreased $0.3 million, or 6.1%, to $4.6 million for the nine months
ended September 30, 2004, from $4.9 million for the nine months ended September
30, 2003. This decrease is primarily due to a 317-unit decrease at retail ($0.5
million), partially offset by a 5.4% increase in average gross profit per retail
unit ($0.2 million). Decreases at retail for the Toyota ($0.3 million), Lincoln
Mercury ($0.2 million), and Ford ($0.1 million) dealerships were partially
offset by increases at the Chevrolet ($0.2 million) and Chrysler/Jeep ($0.1
million) dealerships. Gross profit on wholesale increased slightly due to an
additional 437 units sold in 2004 compared to 2003. Gross profit percentage on
the sale of used vehicles was 9.4% in 2004 compared to 9.7% in 2003.
Parts and service gross profit decreased $0.4 million, or 3.9%, to $9.8
million for the nine months ended September 30, 2004, from $10.2 million for the
nine months ended September 30, 2003. On a same store basis, gross profit
decreased $0.2 million, or 2.0%, to $9.8 million for the nine months ended
September 30, 2004, from $10.0 million for the nine months ended September 30,
2003. Gross profit percentage was 54.3% in 2004 compared to 54.7% in 2003.
Decreases at the Lincoln Mercury ($0.3 million) and Chrysler/Jeep ($0.1 million)
dealerships were partially offset by increases at the Toyota ($0.1 million) and
Mazda, Ford and Chevrolet (together totaling $0.1 million) dealerships.
19
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $1.3 million, or
4.9%, to $25.4 million for the nine months ended September 30, 2004 from $26.7
million for the nine months ended September 30, 2003. The decrease is primarily
attributable to reductions in payroll and related taxes and benefits ($1.2
million), various reserves for chargebacks ($0.3 million) and professional fees
($0.3 million), partially offset by an increase in advertising of $0.4 million.
Approximately $0.2 million of the decrease in payroll and related taxes is due
to the sale of the Chrysler/Jeep sales and service franchise in June 2003.
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 increased $0.2 million, or 8.7%, to $2.5 million for the
nine months ended September 30, 2004, from $2.3 million for the nine months
ended September 30, 2003. The increase is primarily due to an increase of
floorplan interest expense resulting from higher average borrowings.
PROVISION FOR INCOME TAX
The effective income tax rate was 27.0% in the nine months ended September
30, 2004 and 33.1% 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.
NET INCOME AND EARNINGS PER SHARE
Net income decreased $0.9 million to $0.9 million for the nine months
ended September 30, 2004, from $1.8 million for the nine months ended September
30, 2003. The decrease is primarily due to the gain on sale of the Chrysler/Jeep
sales and service franchise recorded in Other Income in 2003. See above for
explanation of other changes.
The basic and diluted income per share for the nine months ended September
30, 2004 and 2003 is $0.12 and $0.25, respectively. 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 in June 2003. See Note 3 to the
consolidated financial statements.
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 operations, 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 and (iii) consumer buying patterns.
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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 $5.2 million and $5.6 million at
September 30, 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:
Nine months ended
September 30,
2004 2003
------- -------
(in thousands)
Net cash provided by operating activities $ 1,488 $ 3,581
Net cash provided by (used in) investing activities (1,821) 349
Net cash (used in) financing activities (82) (1,813)
------- -------
Net increase (decrease) in cash and cash equivalents $ (415) $ 2,117
======= =======
For the nine months ended September 30, 2004, net cash provided from
operations of $1.5 million primarily consists of: (i) net income plus non-cash
items of $2.2 million and (ii) the increase in floor plan liability in excess of
the increase in inventory of $0.6 million, (iii) partially offset by an increase
in accounts receivable of $1.2 million. Net cash used in investing activities of
$1.8 million is due to capital expenditures, primarily the Brattleboro, VT.
building purchased in June 2004 for $1.5 million. Net cash used in financing
activities of $0.1 million is due to principal payments of long-term debt and
capital lease obligations of $1.7 million; partially offset by proceeds from
long-term borrowings of $1.4 million and exercise of warrants of $0.26 million.
The long-term borrowings were used to acquire the Brattleboro, VT. building
discussed above.
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 $2.7 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 to 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.
Capital Expenditures
Capital expenditures for fiscal 2004 are expected to be approximately $2.2
million, consisting primarily of the purchase of a building, equipment and
leasehold improvements. The building was acquired in June 2004 for $1.5 million.
It is a Hometown dealership that had been previously leased, that had a purchase
option. See Other Indebtedness.
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Receivables
Hometown had $7.2 million in accounts receivable at September 30, 2004
compared to $6.1 million at December 31, 2003. The majority of those
receivables, $3.7 million and $3.1 million as of September 30, 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 September 30, 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"). See Note 6 to the consolidated financial
statements.
Other Indebtedness
In June 2004, Hometown exercised an option to buy the building leased by
its Brattleboro, VT. dealership. The purchase price was $1.5 million plus
closing costs. The purchase was financed by a $1.05 million bank loan, a $0.3
million term note held by the seller and $0.15 million in cash. The bank loan is
for 10 years, carries an interest rate of 7.0% for the first five years and is
variable thereafter with monthly payments sufficient to amortize the loan over a
15-year period. After 10 years, the terms of the bank loan will be renegotiated.
The note held by the seller is payable over three years and carries an interest
rate of 10.5%.
Exercise of Warrants / Common Stock
In connection with a Private Equity Financing in July 2001, Hometown
issued warrants that entitled the holders to purchase up to 487,498 shares of
Class A Common shares at a purchase price of $1.20 per share, exercisable over a
three-year period. In June 2004, 214,284 warrants were exercised for
approximately $257,000, and 214,284 shares of Class A Common shares were issued.
All remaining warrants expired in July 2004.
FORWARD LOOKING STATEMENT
When used in the Quarterly Report on Form 10Q, the words "may", "will",
"should", "expect", "believe", "anticipate", "continue", "estimate", "project",
"intend" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act regarding events, conditions and financial trends that
may affect Hometown's future plans of operations, business strategy, results of
operations and financial condition. Hometown wishes to ensure that such
statements are accompanied by meaningful cautionary statements pursuant to the
safe harbor established in the Private Securities Litigation Reform Act of 1995.
Prospective investors are cautioned that any forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties and
that actual results may differ materially from those included within the
forward-looking statements as a result of various factors including the ability
of Hometown to consummate, and the terms of, acquisitions. Such forward-looking
statements should, therefore, be considered in light of various important
factors, including those set forth herein and others set forth from time to time
in Hometown's reports and registration statements filed with the Securities and
Exchange Commission (the "Commission"). Hometown disclaims any intent or
obligation to update such forward-looking statements.
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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 September 30, 2004 of $38.7 million, a 1%
change in the prime rate would result in a $0.4 million change to annual floor
plan interest expense.
At September 30, 2004, Hometown invested $4.2 million of excess cash, of
which $1.0 million was invested in money market accounts paying a weighted
average interest rate of 1.06% at September 30, 2004, and $3.2 million was
invested in a Ford Motor Credit Company cash management account paying interest
of 5.50% at September 30, 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 September 30, 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 9 - 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 August 11, 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 second quarter 2004 results.
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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, 2004 By: /s/ Corey E. Shaker
- ------------------------ --------------------------------------
Date Corey E. Shaker
President and Chief Executive Officer
November 11, 2004 By: /s/ Charles F. Schwartz
- ------------------------ --------------------------------------
Date Charles F. Schwartz
Chief Financial Officer
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