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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORT
PURSUANT TO SECTIONS 13 OR 15 (D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
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.)
1309 SOUTH MAIN STREET
WATERBURY, CT 06706
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (203) 756-1300
Securities registered pursuant To Section 12(B) of the Act: None
Securities registered pursuant to Section 12(G) of the Act:
CLASS A COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES |_| NO |X|
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 30, 2004 was approximately $3,108,000. Non-affiliates
are defined as holders of Class A Common Stock that do not also hold Class B
Common Stock. Hometown used closing selling price in the calculation.
The number of shares outstanding of the registrant's Class A and Class B
Common Stock, $.001 par value, as of March 22, 2005 was 6,449,389 shares.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
HOMETOWN AUTO RETAILERS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business............................................ 3
Item 2. Properties.......................................... 17
Item 3. Legal Proceedings................................... 19
Item 4. Submission of Matters to a Vote of Security Holders. 20
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................... 21
Item 6. Selected Financial Data............................. 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 23
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk....................................... 37
Item 8. Financial Statements and Supplementary Data......... 37
Item 9. Change in and Disagreements With Accountants on
Accounting and Financial Disclosure............... 37
Item 9A. Controls and Procedures ............................ 37
Item 9B. Other Information .................................. 37
PART III
Item 10. Directors and Executive Officers of the Registrant.. 38
Item 11. Executive Compensation.............................. 41
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................... 45
Item 13. Certain Relationships and Related Transactions...... 49
Item 14. Principal Accountant Fees and Services.............. 50
PART IV
Item 15. Exhibits and Financial Statement Schedules.......... 51
FORWARD LOOKING STATEMENT INFORMATION
Certain statements made in this Annual Report on Form 10-K 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 headings "Business,"
"Certain Factors That May Affect Future Growth" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
2
PART I
ITEM 1. BUSINESS
Hometown was founded by merger, on June 27, 1997, between Dealer-Co.,
Inc., a New York Corporation, organized on March 10, 1997 and Hometown Auto
Retailers, Inc., a Delaware corporation, organized on June 6, 1997. Until the
closing of its initial public offering on July 31, 1998, Hometown conducted no
operations under its own name and all revenues were generated by its predecessor
companies. On July 31, 1998, Hometown acquired three dealerships, and the
predecessor companies, which operate six dealerships, a collision repair center
and a factory authorized freestanding service center. In 1999, Hometown also
acquired freestanding Lincoln Mercury and Toyota dealerships and added both a
Mazda and a Jeep dealership to existing locations. In 2000, Hometown acquired a
high-end used car operation, which was added to its Massachusetts location. In
2001, Hometown sold its Morristown, NJ dealership, Lincoln Mercury franchise
back to Lincoln Mercury. In 2002, the high-end used car operation was
significantly scaled down. In 2003, Hometown sold the Chrysler/Jeep Sales and
Service Franchise for its Waterbury CT store. In 2005, as described in Item 3 -
Legal Proceedings, Hometown settled certain litigation matters, which includes
among other things the transfer of certain Westwood Lincoln Mercury Sales, Inc.
assets, the transfer to the Vergopia's of the Westwood Lincoln Mercury franchise
subject to manufacturer approval, the termination of Hometown's Westwood, New
Jersey lease, and the receipt by Hometown of all of Hometown's shares owned by
the Vergopia's.
GENERAL
Hometown sells new and used cars and light trucks, provides maintenance
and repair services, sells replacement parts and provides related financing,
insurance and service contracts through 9 franchised dealerships located in New
Jersey, New York, Connecticut, Massachusetts and Vermont. Hometown's dealerships
offer 9 American and Asian automotive brands, including Chevrolet, Chrysler,
Dodge, Ford, Jeep, Lincoln, Mazda, Mercury, and Toyota. Hometown also is active
in a "niche" area of the automotive market, the sale of Lincoln town cars and
limousines to livery car and livery fleet operators.
Hometown's "Lincoln Mercury Autocare" center located in Connecticut was
the pilot facility for Ford's authorized free-standing neighborhood service
center concept for the maintenance and light repair of cars and trucks.
Free-standing neighborhood service centers are an innovative attempt by the
automobile retail industry to recapture repair and maintenance business which
has been lost in recent decades to chain and independent service businesses.
These service centers are designed to enhance customer convenience by operating
during extended hours, servicing vehicles without prior appointment and offering
quick turnaround.
OPERATING STRATEGY
Hometown will seek to consolidate operations and increase the
profitability of its existing dealerships by using a strategy that combines its
"best in class" operating practices with the advantages of its established
customer base, local presence and name recognition. Each of Hometown's
dealerships will use a core operating strategy specifically designed to produce
a high "shop absorption rate," a high rate of service retention and a high ratio
of retail used to new car sales, all in order to maximize profitability and
provide insulation from the cyclical nature of new car sales. "Shop absorption
rate" is the percentage of a dealership's fixed expenses that are covered or
absorbed by the gross profit of the parts and service departments."
Hometown believes that the following factors, coupled with its established
organizational structure, will help it achieve its operating strategy:
3
o Strong Regional Focus. Hometown's nine franchised dealerships are
located in New Jersey, New York, Connecticut, Massachusetts and
Vermont. Hometown believes that proximity of its dealerships to one
another will contribute to ease of management, more effective
control of dealership operations, increased sales from coordinated
marketing of new cars, used cars and livery vehicles and cost
savings from coordinated auction purchasing, car transport and other
activities.
o Established Customer Base. Hometown believes that its existing
dealerships have good local reputations and have strong local name
recognition. Through "owner-loyalty" and similar programs, Hometown
believes it has established a customer base that looks to its
existing "hometown" dealership as its first choice in buying
replacement vehicles. See "Dealership Operations - Parts and
Service" for a description of "owner-loyalty program".
o Experienced Management. Hometown's management is comprised of second
and third generation members of dealer families who have been
leaders in the automotive retailing industry. The executive officers
and key managers of Hometown have over 200 years of combined
experience in the automotive retailing industry and are members of
families who have owned dealerships since 1947. They are recognized
leaders in the automotive retailing industry and have served at
various times in leadership positions in state and national industry
organizations. Hometown has also received numerous awards based on
high customer satisfaction index ("CSI") ratings and other
performance measures regularly compiled and monitored by the
automobile Manufacturers. See "Item 10. Directors and Executive
Officers of the Registrant" for additional information as to the
numerous Manufacturer awards and citations earned by Hometown's
senior management and dealerships in recent years.
o Focus on Higher Margin Operations
o Parts and Service. Hometown's dealerships emphasize sales of
parts and service, which typically have a higher profit margin
than vehicle sales. As part of their emphasis Hometown
operates "Lincoln Mercury Autocare" a freestanding
neighborhood service center for the maintenance and light
repair of cars and trucks, which operates during extended
hours, provides comfortable customer waiting areas and quickly
services vehicles without prior appointment. It is also,
through its Westwood subsidiary, a major seller of Lincoln
Town Cars and limousines to livery car and livery fleet
operators. These sales tend to generate significant
maintenance and repair business since the primary concern of
livery operators is keeping their cars in use and on the road
for a maximum number of hours per day.
o Used Car Sales. The sale of used vehicles is emphasized at
each of Hometown's dealerships. Typically, used vehicle sales
generate higher gross margins than new vehicle sales. Hometown
seeks to attract customers and enhance buyer satisfaction by
offering multiple financing options and extended warranties on
used vehicles.
o Ability To Source High Quality Used Vehicles. An important component
in selling used vehicles and maintaining high margins on such sales
is the ability to obtain high quality used vehicles at reasonable
prices. Hometown obtains its used vehicles through trade-ins and
off-lease programs as well as regular auction buying. Key executives
at each dealership have developed the skills necessary for making
effective purchases at regularly scheduled auctions. Hometown
believes that auction buying activities is enhanced by its ability
to use common buyers to fill the needs of several dealerships,
handle its own transportation of vehicles from the auction to the
dealership and obtain discounted prices.
4
o Brand Diversity. Hometown's dealerships offer 9 American and Asian
automotive brands including Chevrolet, Chrysler, Dodge, Ford, Jeep,
Lincoln, Mazda, Mercury, and Toyota. Hometown believes that brand
diversity helps to insulate it from changes in consumer preferences,
short supplies of particular automotive models and negative
publicity concerning a particular Manufacturer or vehicle model.
o Quality Personnel. Hometown employs professional management
practices in all aspects of its operations, including information
technology, advanced employee sales training, profit-based
compensation and cash management. Each dealership is managed as a
profit center by a trained and experienced general manager who has
primary responsibility for decisions relating to inventory, pricing
and personnel. Hometown compensates its general managers and
department managers pursuant to various formulas based upon
dealership or department profitability, rather than on sales volume.
Senior management uses computer-based management information systems
to monitor each dealership's sales, profitability and inventory on a
daily basis and to identify areas requiring improvement and provide
additional training where necessary.
DEALERSHIP OPERATIONS
Hometown's established operating practices and procedures, including the
management and pricing of inventories of new and used vehicles, are regularly
reviewed and updated by the Chief Executive Officer and members of Hometown's
operating management. Each of Hometown's dealerships use a management structure
that promotes and rewards the achievement of benchmarks set by senior
management. Each local general manager of a Hometown dealership is ultimately
responsible for the operation, personnel and financial performance of that
dealership. Each general manager is complemented with a management team
generally consisting of a new vehicle sales manager, a used vehicle sales
manager, service and parts managers and finance and insurance ("F&I") managers.
The general manager and the other members of each dealership management team, as
long-time members of their local communities, are typically best able to judge
how to conduct day-to-day operations based on the team's experience in and
familiarity with its local market. Certain members of Hometown's senior
management also serve as general managers of particular dealerships. Each
dealership engages in a number of inter-related businesses: new vehicle sales;
used vehicle sales; service and parts operations; and F&I.
New Vehicle Sales. Hometown's dealerships represent 9 American and Asian
brands of lower, mid and higher priced sport and family cars and light trucks,
including sport utility vehicles. Hometown believes that offering numerous new
vehicle brands appeals to a variety of customers, minimizes dependence on any
one Manufacturer and reduces its exposure to supply problems and product cycles.
5
The following table sets forth for 2004 and 2003, certain information
relating to the brands of new vehicles sold at retail by Hometown:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2004 2003
----- ----
BRANDS NUMBER PERCENTAGE NUMBER PERCENTAGE
- ------ ------ ---------- ------ ----------
TOYOTA ........ 2,851 45.9% 3,227 46.7%
LINCOLN/MERCURY 1,373 22.1% 1,398 20.2%
CHEVROLET ..... 759 12.2% 772 11.2%
FORD .......... 601 9.7% 703 10.2%
MAZDA ......... 351 5.6% 393 5.7%
DODGE ......... 105 1.7% 108 1.6%
JEEP .......... 97 1.6% 167 2.4%
CHRYSLER ...... 71 1.1% 89 1.3%
OLDSMOBILE .... 7 0.1% 50 0.7%
OTHER ......... 0 0.0% 3 0.0%
----- ----- ----- -----
Total ......... 6,215 100.0% 6,910 100.0%
===== ===== ===== =====
Hometown seeks to provide customer-oriented service designed to meet the
needs of its customers and establish lasting relationships that will result in
repeat and referral business. This is accomplished by: (i) engaging in extensive
follow-up after a sale in order to develop long-term relationships with its
customers; (ii) training its sales staff to be able to meet customer needs;
(iii) employing more efficient, non-confrontational selling systems; and (iv)
using computer technology that decreases the time necessary to purchase a
vehicle. Hometown believes that its ability to share "best practices" among its
dealerships gives it an advantage over smaller dealerships.
Hometown acquires substantially all of its new vehicle inventory from
Manufacturers of the vehicle brands it sells. The Manufacturers allocate a
limited inventory among their franchised dealers based primarily on sales volume
and input from dealers. Hometown finances its inventory purchases through
revolving credit arrangements known in the industry as "floor plan" financing.
Used Vehicle Sales. Hometown sells used vehicles at each of its franchised
dealerships. Used vehicles typically generate higher gross margins than new
vehicles because of their limited comparability and the somewhat subjective
nature of their valuation.
The following table shows actual vehicle sales by Hometown from 2000
through 2004.
NUMBER OF USED AND NEW VEHICLES SOLD
------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
Used Vehicles - Retail .. 3,329 3,683 4,128 4,874 4,549
Used Vehicles - Wholesale 3,576 3,144 2,857 3,105 3,208
New Vehicles ............ 6,215 6,910 6,432 6,230 6,731
------ ------ ------ ------ ------
Total Sales ..... 13,120 13,737 13,417 14,209 14,488
Sales of used vehicles are dependent on the ability of the dealerships to
obtain a supply of high quality used vehicles and effectively manage that
inventory. New vehicle operations provide a supply of such vehicles through
trade-ins and off-lease vehicles. Hometown supplements its used vehicle
inventory with used vehicles purchased at auctions where Manufacturers re-market
lease return, rental buy back and Manufacturer demonstration cars. To maintain a
broad selection of high quality used vehicles and to meet local preferences,
Hometown acquires used vehicles from trade-ins and a variety of sources
throughout the Northeast, including direct purchases and Manufacturers' and
independent auctions.
6
Hometown follows an inventory management strategy pursuant to which used
vehicles are offered at progressively lower gross profit margins the longer they
stay in inventory and if not sold at retail by the end of approximately 12 weeks
are sold to another dealer or sold at auction. Unsold, excess or unsuitable
vehicles received as trade-ins are sold at auctions or sold directly to other
dealers and wholesalers. Trade-ins may be transferred among Hometown dealerships
to provide balanced inventories of used vehicles at each location.
Hometown has taken steps to build customer confidence in its used vehicle
inventory, including participation in the Manufacturers' certification processes
to make used vehicles eligible for new vehicle benefits such as new vehicle
finance rates and extended Manufacturer warranties.
Hometown believes that franchised dealership strengths in offering used
vehicles include: (i) access on new vehicle purchase to trade-ins which are
typically lower mileage and higher quality relative to trade-ins on used car
purchases, (ii) access to late-model, low mileage off-lease vehicles, rental
returns and Manufacturer demos, and (iii) the availability of Manufacturer
certification and extended Manufacturer warranties for higher quality used
vehicles. Hometown believes that a well-managed used vehicle operation at each
location affords it an opportunity to: (i) generate additional customer traffic
from a wide variety of prospective buyers, (ii) increase new and used vehicle
sales by aggressively pursuing customer trade-ins, (iii) generate incremental
revenues from customers financially unable or unwilling to purchase a new
vehicle, and (iv) increase ancillary product sales, particularly F&I, to improve
overall profitability. Hometown also maintains a "virtual" used car lot through
its website "htauto.com". Customers can see digital images of most of Hometown's
pre-owned inventory, updated weekly, at all their locations. In addition, sales
people and managers can search other Hometown locations to fulfill customer
needs for used cars or trucks not at the specific location that a customer may
be in. This potentially eliminates many customers from leaving one Hometown
location without seeing what they need.
Parts and Service. Hometown regards service and repair activities as an
integral part of its overall approach to customer service, providing an
opportunity to foster ongoing relationships with its customers and deepen
customer loyalty. Hometown provides parts and service at each of its franchised
dealerships for the vehicle brands sold by these dealerships. Maintenance and
repair services are provided at 9 dealership locations, one factory authorized
neighborhood service center and one collision repair center (included in one of
the 9 dealerships).
Hometown implemented an "owner loyalty program" to encourage customers to
return to the dealership for all maintenance and light repair work. The program
provides customers with information as to recommended intervals of service and
details all charges for a wide range of maintenance activities and expected
replacements at such intervals. Customers who maintain their vehicles in
accordance with the owner loyalty program recommendations receive various items
of maintenance, such as oil changes, loaner vehicles, certain scheduled
maintenance, wiper blades, spark plugs and towing without charge and also
receive specified rebates against new or used vehicle purchases for money spent
in Hometown's service departments. The owner loyalty program is designed to
combat the quantity of repair and maintenance work to be performed at service
stations and other independent repair shops, chains of specialized repair,
maintenance and part replacement shops, such as muffler shops, brake shops, and
tire shops. Manufacturers' policies that require warranty work to be performed
at franchised dealerships support Hometown's strategy of retaining maintenance
and light repair work.
The parts and service business is less cyclical than new vehicle sales and
provides an important recurring revenue stream to Hometown's dealerships.
Hometown uses systems that track its customers' maintenance records and notify
owners of vehicles purchased at the dealerships when their vehicles are due for
7
periodic services. Hometown believes that this practice encourages preventive
maintenance rather than post-breakdown repairs.
Each dealership sells factory-approved parts for vehicle brands and models
sold by that dealership. These parts are either used in repairs made by the
dealership or sold at retail to its customers or at wholesale to independent
repair shops. Each dealership employs its own parts manager and independently
controls its parts inventory and sales. Hometown dealerships which sell the same
new vehicle brands will have access to each other's computerized inventories.
Further, certain Manufacturers offer discounts on volume purchases of certain
parts and components.
Finance, Insurance and Other Revenue. Hometown dealerships arrange
financing for their customers' vehicle purchases, sell vehicle service contracts
and arrange selected types of credit insurance in connection with the financing
of vehicle sales. The dealerships place heavy emphasis on F&I and offer advanced
F&I training to their F&I managers. During 2004, Hometown arranged financing for
approximately 62% of new and used vehicles sold at retail to its customers.
Typically, the dealerships forward proposed financing contracts to finance
companies owned and operated by the Manufacturers or to selected commercial
banks or other financing parties. The dealerships receive a finance fee from the
lender for arranging the financing and may be assessed a charge-back against a
portion of the finance fee if the contract is terminated prior to its scheduled
maturity for any reason, including early repayment or default. The time period
whereby Hometown is subject to charge-backs is generally from 90 days to 180
days. For certain other contracts Hometown is subject to charge-backs for the
life of the loan. Hometown pays for this in the form of a reduction of the
finance fee.
At the time of a new vehicle sale, Hometown offers extended service
contracts to supplement the Manufacturer's warranty. Additionally, Hometown
sells primary service contracts for used vehicles, as well as service contracts
of third party vendors.
Hometown also offers three types of insurance to customers: (i) credit
life insurance pays off the remaining balance of the vehicle loan upon the death
of the insured, (ii) disability insurance makes the monthly loan payments on
behalf of the insured during a period of disability and (iii) gap insurance
ensures that the loan is paid in full if the vehicle becomes totally inoperable
due to an accident. Hometown's dealerships typically receive one-half of the
premiums as a commission for selling these products. Insurance revenues for the
year ended December 31, 2004 were less than 2% of total Finance, Insurance and
Other Revenues.
COMPANY GUARANTEES
Hometown may guaranty or partially guaranty loans advanced by financial
institutions to certain customers. It is Hometown's policy to provide reserves
for potential future default losses based on available historical information.
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. Hometown recorded the lease as a
capital lease. As of December 31, 2004 the mortgage debt balance is $4.3
million, which equals the capital lease obligation. Hometown makes annual lease
payments of $864,000 to the landlord. The annual mortgage payments made by the
landlord total approximately $774,000. The mortgage matures March 2013. See
Notes 7 and 8 to the consolidated financial statements.
8
COMPANY 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, four 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, four 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 December 31, 2004 and 2003, Hometown has a reserve of
$208,000 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
warranties is adequate and that the judgment applied is appropriate, the
estimated liability for product warranties could differ materially from future
actual warranty costs.
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 discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Finance, Insurance and Service Contract Income Recognition".
SEASONALITY
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
FRANCHISE AGREEMENTS
Each Hometown dealership operates pursuant to a franchise agreement
between the applicable Manufacturer and the dealership. The typical automotive
franchise agreement specifies the locations at which the dealer has the right
and the obligation to sell motor vehicles and related parts and products and to
perform certain approved services in order to serve a specified market area. The
designation of such areas and the allocation of new vehicles among dealerships
are subject to the discretion of the manufacturer which generally does not
guarantee exclusivity within a specified territory. However, most states have
laws protecting dealership territories. In addition, a franchise agreement may
impose requirements on the dealer concerning such matters as showrooms,
facilities and equipment for servicing vehicles, maintenance of inventories of
vehicles and parts, maintenance of minimum net working capital and training of
personnel. Compliance with each of these requirements is closely monitored by
the Manufacturer. In addition, Manufacturers require each dealership to submit a
financial statement of operations on a monthly and annual basis. The franchise
agreement also grants the dealer the non-exclusive right to use and display the
Manufacturer's trademarks, service marks and design in the form and manner
approved by the Manufacturer.
9
Each franchise agreement sets forth the name of the person approved by the
Manufacturer to exercise full managerial authority over the dealership's
operations and the names and ownership percentages of the approved owners of the
dealership and contains provisions requiring the Manufacturer's prior approval
of changes in management or transfers of ownership of the dealership. A number
of Manufacturers prohibit the acquisition of a substantial ownership interest in
the franchised dealer or transactions that may affect management control of the
franchised dealer, in each case without the approval of the Manufacturer.
Certain franchise agreements are perpetual, while others expire within one
to five years. Hometown expects to renew any expiring agreements in the ordinary
course of business. The typical franchise agreement provides for early
termination or non-renewal by the Manufacturer under certain circumstances such
as change of management or ownership without Manufacturer approval, insolvency
or bankruptcy of the dealership, death or incapacity of the dealer manager,
conviction of a dealer manager or owner of certain crimes, misrepresentation of
certain information by the dealership or dealer manager or owner to the
Manufacturer, failure to adequately operate the dealership, failure to maintain
any license, permit or authorization required for the conduct of business or
material breach of other provisions of the franchise agreement. The dealership
is typically entitled to terminate the franchise agreement for any cause.
Various federal and state laws established to protect dealerships from the
generally unequal bargaining power between the parties also govern the
automobile franchise relationship. The state statutes generally provide that it
is a violation for a manufacturer to terminate, or to fail to renew, a franchise
without good cause. Most statutes also provide that the manufacturer is
prohibited from unreasonably withholding approval for a proposed change in
ownership of the dealership. Generally, in order to withhold approval, the
manufacturer must have material reasons relating to the character, financial
ability or business experience of the proposed transferee. Moreover, certain
states including Connecticut, New Jersey, Massachusetts and Vermont have laws
which grant to pre-existing dealers a right to contest, in court or before an
administrative agency, if a manufacturer establishes a new dealership, or
authorizes the relocation of an existing dealership, to a location within a
defined market area of a pre-existing dealership holding a franchise to sell the
same brand. Accordingly, the relationship between the Manufacturer and the
dealer, particularly as it relates to a manufacturer's rights to terminate, or
to fail to renew, the franchise, is the subject of a substantial body of case
law based upon specific facts in each instance. The above discussion of state
court and administrative holdings and various state laws is based on
management's beliefs and may not be an accurate description of the state court
and administrative holdings and various state laws.
Toyota Motor Sales, U.S.A., Inc. has extended Hometown's current Toyota
Dealer Agreement through April 18, 2005. 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, which has now been settled, including the Vergopia's as
discussed in Item 3. - Legal Proceedings and in Note 14 to the consolidated
financial statements. 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, 2004 had combined revenues of $98.1 million and pre-tax
income before allocation of corporate costs of $2.2 million. Hometown believes
10
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.;
however, Toyota has reserved the right to terminate the Toyota Dealership
Agreements if sufficient progress is not made to correct the alleged
deficiencies. Should Hometown be notified by Toyota that they intend to
terminate the Toyota Dealership Agreements, Hometown believes it would have a
reasonable amount of time to cure the defaults.
COMPETITION
The automotive retailing industry is extremely competitive and consumers
generally have a number of choices in deciding where to purchase or service a
new or used vehicle. Hometown competes for new vehicle sales with other
franchised dealers in each of its marketing areas. Hometown does not have any
cost advantage in purchasing new vehicles from the Manufacturers and typically
relies on sales expertise, reputation and customer goodwill, the quality of its
service and location of its dealerships to sell new vehicles. In recent years,
automobile dealers have also faced increased competition in the sale or lease of
new vehicles from independent leasing companies, on-line purchasing services and
warehouse clubs. Hometown believes that the principal competitive factors in new
vehicle sales are the marketing campaigns conducted by Manufacturers, the
ability of dealerships to offer a wide selection of the most popular vehicles,
the location of dealerships and the quality of customer service. Other
competitive factors include customer preference for particular brands of
automobiles, pricing (including Manufacturer rebates and other special offers)
and warranties. Hometown believes that its dealerships are competitive in all of
these areas.
In used vehicles, Hometown competes with other franchised dealers,
independent used car dealers, automobile rental agencies and private parties for
supply and resale of used vehicles. Hometown believes that the principal
competitive factors in used vehicle sales are the quality and condition of its
used cars, price and the quality of customer service.
Hometown competes against other franchised dealers to perform warranty
repairs and against other automobile dealers, franchised and independent service
center chains and independent garages for non-warranty repair and routine
maintenance business. Hometown competes with other automobile dealers, service
stores and automotive parts retailers in its parts operations. Hometown believes
that the principal competitive factors in parts and service sales are price, the
use of factory approved replacement parts, a dealership's expertise with a
Manufacturer's brands and models, the quality of customer service and
convenience for the customer.
In addition to competition for the sale of vehicles, Hometown competes
with publicly and privately owned dealership groups for the acquisition of other
dealerships. It currently faces only limited competition in this region from
other purchasers of dealerships. Publicly owned dealerships with significantly
greater capital resources have acquired a limited number of dealerships in
Hometown's current and targeted market areas.
GOVERNMENTAL REGULATIONS
A number of regulations affect Hometown's business of marketing, selling,
financing and servicing automobiles. Hometown is also subject to laws and
regulations relating to business corporations generally.
Under New Jersey, New York, Connecticut, Massachusetts and Vermont law,
Hometown must obtain a license in order to establish, operate or relocate a
dealership or provide certain automotive repair services. These laws also
regulate Hometown's conduct of business, including its advertising and sales
practices.
11
Hometown's financing activities are subject to federal and state laws and
regulations regarding truth-in-lending, deceptive and unfair trade practices,
consumer leasing and equal credit opportunity regulations, as well as state and
local motor vehicle finance laws, installment finance laws, insurance laws,
usury laws and other installment sales laws. We are also subject to certain
so-called Lemon Laws, which may require repair or replacement of vehicles in
certain situations. Laws have recently been enacted to strengthen the privacy of
consumers not only with respect to the sharing of information, but more
recently, with regard to restrictions on access to that information by employees
of the dealership. Hometown is complying with these laws, which include the
development of secure documentation areas and the restriction on access to
sensitive computer information. Some states regulate finance fees that may be
paid as a result of vehicle sales. Penalties for violation of any of these laws
or regulations may include revocation of certain licenses, assessment of
criminal and civil fines and penalties and, in certain instances, may create a
private cause of action for individuals. Automobile dealerships, and parts and
service operations in particular, involve the use, handling and recycling and
disposal of hazardous substances or wastes, including motor oil, oil filters,
transmission fluid, antifreeze, freon, batteries, lubricants, degreasing agents
and gasoline and diesel fuels. As a result, we are subject to federal, state and
local environmental laws concerning health, environmental quality, and
remediation of contamination to facilities under our control or to which we send
hazardous wastes. Hometown believes that its dealerships substantially comply
with all laws and regulations affecting their businesses and do not have any
material liabilities under such laws and regulations, and that compliance with
all such laws and regulations does not and will not, individually or in the
aggregate, have a material adverse effect on Hometown's capital expenditures,
earnings, or competitive position.
ENVIRONMENTAL MATTERS
Hometown is subject to a wide range of federal, state and local
environmental laws and regulations, including those governing discharges to the
air and water, storage of petroleum substances and chemicals, handling and
disposal of wastes, and remediation of contamination arising from spills and
releases. As with automobile dealerships generally, and service and parts and
collision repair center operations in particular, Hometown's business involves
the generation, use, handling and disposal of hazardous or toxic substances or
wastes. Operations involving the management of hazardous and non- hazardous
wastes are subject to requirements of the Federal Resource Conservation and
Recovery Act and comparable state statutes. Pursuant to these laws, federal and
state environmental agencies have established approved methods for storage,
treatment, and disposal of regulated wastes with which Hometown must comply.
Hometown's business also involves the use of aboveground and underground
storage tanks. Under applicable laws and regulations, Hometown is responsible
for the proper use, maintenance and abandonment of regulated storage tanks owned
or operated by it and for remediation of subsurface soils and groundwater
impacted by releases from such existing or abandoned aboveground or underground
storage tanks. In addition to these regulated tanks, Hometown owns and operates
other underground and aboveground devices or containers (e.g. automotive lifts
and service pits) that may not be classified as regulated tanks, but which are
capable of releasing stored materials into the environment, thereby potentially
obligating Hometown to remeditate any contamination of soils or groundwater
resulting from such releases.
Hometown is also subject to laws and regulations governing remediation of
contamination at facilities it operates or to which it sends hazardous or toxic
substances or wastes for treatment, recycling or disposal. The Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), also known as
the "Superfund" law, imposes liability, without regard to fault or the legality
of the original conduct, on certain classes of persons that are considered to
have contributed to the release of a "hazardous substance" into the environment.
These persons include the owner or operator of the disposal site or sites where
the release occurred and companies that disposed or arranged for the disposal of
the hazardous substances released at such sites. Under CERCLA, these
"responsible parties" may be subject to joint and several liability for the
costs of cleaning up the hazardous substances that have been released into the
environment, for damages to natural resources and for the costs of certain
health studies, and it is not uncommon for neighboring landowners and other
third parties to file claims for personal injury and property damage allegedly
caused by the release of hazardous substances.
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Further, the Federal Water Pollution Control Act, also known as the Clean
Water Act, and comparable state statutes prohibit discharges of pollutants into
regulated waters without authorized National Pollution Discharge Elimination
System (NPDES) and similar state permits, require containment of potential
discharges of oil or hazardous substances, and require preparation of spill
contingency plans. Hometown expects to implement programs that address
wastewater discharge requirements as well as containment of potential discharges
and spill contingency planning.
Environmental laws and regulations have become very complex, making it
very difficult for businesses that routinely handle hazardous and non-hazardous
wastes to achieve and maintain full compliance with all applicable environmental
laws. Like virtually any network of automobile dealerships and vehicle service
facilities, Hometown, from time to time, can be expected to experience incidents
and encounter conditions that will not be in compliance with environmental laws
and regulations. However, none of Hometown's dealerships have been subject to
any material environmental liabilities in the past and Hometown does not
anticipate that any material environmental liabilities will be incurred in the
future. Hometown believes that the trend towards broader and stricter
environmental legislation and regulations is likely to continue. Hence, there
can be no assurance that compliance with environmental laws or regulations or
the future discovery of unknown environmental conditions will not require
additional expenditures by Hometown or that such expenditures would not be
material.
EMPLOYEES
As of December 31, 2004, Hometown employed 371 people, of whom
approximately 56 were employed in managerial positions, 80 were employed in
non-managerial sales positions, 183 were employed in non-managerial parts and
service positions and 52 were employed in administrative support positions.
Hometown believes that its relationships with its employees are favorable.
None of the employees is represented by a labor union. Because of its dependence
on the Manufacturers, Hometown may, however, be affected by labor strikes, work
slowdowns and walkouts at the manufacturing facilities of their Manufacturers or
of suppliers to, or shippers for, their Manufacturers.
CERTAIN FACTORS THAT MAY AFFECT GROWTH AND PROFITS
The following factors may affect the growth or profits of Hometown and
should be considered by any prospective purchaser of Hometown's securities:
A DECREASE IN CONSUMER DEMAND FOR OUR NEW VEHICLE LINES OR THE FAILURE OF ITS
MANUFACTURER COULD ADVERSELY AFFECT THE RESULTS OF OUR OPERATIONS.
Our business is significantly dependent upon the sale of new vehicles from
Toyota Motors, Ford Motors and Chevrolet. For the year ended December 31, 2004,
Toyota Motor, Ford Motor and Chevrolet accounted for 45.9%, 31.8% and 12.2% of
our new vehicle sales, respectively. New vehicle sales generate the majority of
our gross revenue and lead to sales of higher-margin products and services such
as used vehicle sales, finance and insurance products and repair and maintenance
services. In addition, the success of each of our franchises is also dependent
to a great extent on the success of the respective manufacturer, including its
financial condition, marketing, vehicle demand, production capabilities and
management. If one or more of these manufacturers were to suffer from labor
strikes, negative publicity, including safety recalls of a particular vehicle
model, or a decrease in consumer demand for its products, our results of
operations could be materially and adversely affected.
13
THE FAILURE TO MEET MANUFACTURERS' CUSTOMER SATISFACTION REQUIREMENTS COULD
LIMIT OUR ABILITY TO ACQUIRE ADDITIONAL DEALERSHIPS AND PARTICIPATE IN
MANUFACTURERS' INCENTIVE PROGRAMS.
Many manufacturers attempt to measure customers' satisfaction with
automobile dealerships through a CSI, or customer satisfaction index, rating
system. These manufacturers may use a dealership's CSI scores as a factor in
evaluating applications for additional dealership acquisitions and participation
by a dealership in incentive programs. Additionally, from time to time, the
components of the various manufacturer CSI scores have been modified and there
is no assurance that such components will not be further modified or replaced by
different systems in the future, which will make it more difficult for our key
dealerships to meet such standards. If our dealerships fail to meet or exceed
their manufacturers' CSI standards, those manufacturers may prohibit us from
acquiring additional dealerships and/or participating in incentive programs,
which could have a material adverse effect on our business.
MANUFACTURERS' CONTROL OVER DEALERSHIPS
The dealerships operated by Hometown sell cars and light trucks pursuant
to franchise or dealership agreements with Ford Motor, GM, Toyota Motor,
Chrysler and Mazda. Through the terms and conditions of these agreements, such
Manufacturers exert considerable influence over the operations of Hometown's
dealerships. Each of these agreements includes provisions for the termination or
non-renewal of the manufacturer-dealer relationship for a variety of causes
including any unapproved change of ownership or management and other material
breaches of the franchise agreement.
Toyota Motor Sales, U.S.A., Inc. has extended Hometown's current Toyota
Dealer Agreement through April 18, 2005. 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, which has now been settled, including the Vergopia's as
discussed in Item 3. - Legal Proceedings and in Note 14 to the consolidated
financial statements. 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, 2004 had combined revenues of $98.1 million and pre-tax
income before allocation of corporate costs of $2.2 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.;
however, Toyota has reserved the right to terminate the Toyota Dealership
Agreements if sufficient progress is not made to correct the alleged
deficiencies. Should Hometown be notified by Toyota that they intend to
terminate the Toyota Dealership Agreements, Hometown believes it would have a
reasonable amount of time to cure the defaults.
To its knowledge, Hometown has, to date, complied with its other
dealership agreements. There can be no assurance, however, that Hometown will
not from time to time fail to comply with particular provisions of some or all
of these agreements. Although such agreements generally afford Hometown a
reasonable opportunity to cure violations, if a Manufacturer were to terminate
or decline to renew one or more of Hometown's significant agreements, such
action could have a material adverse effect on Hometown and its business.
14
IF AUTOMOBILE MANUFACTURERS DISCONTINUE INCENTIVE PROGRAMS, OUR SALES VOLUME OR
PROFIT MARGIN COULD BE MATERIALLY AND ADVERSELY AFFECTED.
We depend on manufacturers for certain sales incentives, warranties and
other programs that are intended to promote and support new vehicle sales.
Manufacturers often make many changes to their incentive programs during each
year. Some key incentive programs include:
o customer rebates on new vehicles;
o dealer incentives on new vehicles;
o special financing or leasing terms;
o warranties on new and used vehicles; and
o sponsorship of used vehicle sales by authorized new vehicle dealers.
A reduction or discontinuation of our key manufacturers' incentive
programs may materially and adversely affect our revenues or profitability.
WE MAY NOT BE ABLE TO RETAIN KEY EXISTING EMPLOYEES OR ATTRACT AND RETAIN
QUALIFIED EMPLOYEES.
Our success depends to a large extent upon the abilities and continued
efforts of its senior executive officers and key managers including Corey
Shaker, William C. Muller Jr., Joseph Shaker, Steven Shaker and Charles F.
Schwartz and on our ability to attract and retain qualified employees to operate
our dealerships. If any of these persons becomes unavailable to continue in such
capacity, or if Hometown were unable to attract and retain other qualified
employees, its business or prospects could be adversely affected.
FUTURE LOSSES MAY THREATEN THE VIABILITY OF OUR BUSINESS.
Hometown had net income of $3.7 million for the year ended December 31,
2004 compared to net income of $2.4 million and a net loss of $22.9 million for
the years ended December 31, 2003 and 2002, respectively. The 2004 period
includes a $2.8 million tax benefit primarily associated with a reduction of a
tax valuation allowance. See Note 11 to the consolidated financial statements.
The 2003 period included $0.9 million associated with the gain on sale of a
Chrysler/Jeep Sales and Service Franchise and $0.6 million associated with a tax
benefit recorded primarily due to the reduction of a tax valuation allowance.
The 2002 net loss was due to recording the write-off of the carrying value of
goodwill of $23.7 million in accordance with the provisions of SFAS 142. See
Note 5 to the consolidated financial statements. Although Hometown is currently
profitable, if Hometown sustains significant losses in the future, our business
could be materially and adversely affected and the value of our common stock
might decline.
OUR LIMITED CASH AND WORKING CAPITAL COULD HAVE AN ADVERSE AFFECT ON OUR
BUSINESS.
At December 31, 2004, our total cash and cash equivalents was
approximately $6.1 million and our working capital was approximately $2.9
million. If we were to incur net losses in 2005 or subsequent years, then we may
have insufficient working capital to maintain our current level of operations or
provide for unexpected contingencies. In such event, we will need to seek
additional capital from public or private equity or debt funding sources and we
may not be able to raise needed cash on terms acceptable to us or at all.
Financings may be on terms that are dilutive or potentially dilutive to our
stockholders. If sources of financing are required, but are insufficient or
unavailable, we will be required to modify our growth and operating plans to the
extent of available funding, which could have an adverse affect on our business.
15
THE CYCLICAL NATURE OF AUTOMOBILE SALES MAY ADVERSELY AFFECT OUR PROFITABILITY.
Sales of motor vehicles, particularly new vehicles, historically have been
subject to substantial cyclical variation characterized by oversupply and weak
demand. We believe that the industry is affected by many factors, including
general economic conditions, consumer confidence, the level of personal
discretionary spending, interest rates and credit availability. There can be no
assurance that the industry will not experience sustained periods of decline in
vehicle sales, particularly new vehicle sales, in the future. Any such decline
could have a material adverse affect on our business.
GOVERNMENTAL RESTRICTIONS ON IMPORTED PRODUCTS COULD IMPAIR OUR ABILITY TO SELL
FOREIGN VEHICLES PROFITABLY.
A portion of our new vehicle business involves the sale of vehicles, parts
or vehicles composed of parts that are manufactured outside the United States.
As a result, our operations will be subject to customary risks of importing
merchandise, including fluctuations in the value of currencies, import duties,
exchange controls, trade restrictions, work stoppages and general political and
economic conditions in foreign countries. The United States or the countries
from which our products are imported may, from time to time, impose new quotas,
duties, tariffs or other restrictions, or adjust presently prevailing quotas,
duties or tariffs, which could affect our operations and our ability to purchase
imported vehicles and/or parts.
THE CONCENTRATION OF VOTING POWER COULD PREVENT OUR CLASS A COMMON STOCKHOLDERS
FROM HAVING ANY VOICE IN OUR CORPORATE AFFAIRS.
The holders of our Class B common stock are entitled to ten votes for each
share held, while holders of our Class A common stock, are entitled to one vote
per share held. Consequently, as of March 22, 2005, the holders of the Class B
common stock, who also own approximately 58% of our outstanding common stock of
all classes, will control approximately 91% of the aggregate number of votes
eligible to be cast by stockholders for the election of directors and certain
other stockholder actions, and will be in a position to control our policies and
operations. Also as of March 22, 2005, our executive officers and directors
control approximately 55% of the aggregate number of votes eligible to be cast
by stockholders for the election of directors and certain other stockholder
actions, and will be in a position to control our policies and operations.
Accordingly, absent a significant increase in the number of shares of Class A
common stock outstanding or conversion of Class B common stock into Class A
common stock, the holders of shares of Class B common stock will be entitled,
for the foreseeable future, to elect all members of the Board of Directors and
control all matters subject to stockholder approval.
REGULATIONS AFFECTING LOW PRICE SECURITIES COULD IMPAIR THE LIQUIDITY OF OUR
CLASS A COMMON STOCK.
The Securities and Exchange Commission has adopted regulations which
generally define "penny stock" to be an equity security that has a market price,
as defined, of less than $5.00 per share or an exercise price of less than $5.00
per share, subject to certain exceptions, including an exception of an equity
security that is quoted on the Nasdaq Stock Market. Equity securities trading on
the NASD "OTC Bulletin Board" are subject to rules that impose additional sales
practice requirements on broker-dealers who sell our securities. For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchaser of such securities and have received
the purchaser's written consent to the transactions prior to the purchase.
Additionally, unless exempt, the rules require the delivery, prior to the
transaction, of a disclosure schedule prepared by the Securities and Exchange
Commission relating to the penny stock market. The broker-dealer also must
disclose the commissions payable to both the broker-dealer and the registered
underwriter, current quotations for the securities and, if the broker-dealer is
the sole market-maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally among other
requirements, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Since February 2001 our Class A common stock has
16
been trading on the NASD OTC Bulletin Board, as a penny stock, and therefore is
subject to these additional rules. As such, these penny stock rules may restrict
the ability of stockholders to sell our Class A common stock. Consequently, the
liquidity of our Class A common stock could be impaired, not only in the number
of securities which could be bought and sold, but also through delays in the
timing of transactions, reduction in security analysts and new media coverage of
Hometown, and lower prices for our securities than might otherwise be obtained.
ITEM 2. PROPERTIES
Set forth in the table below is certain information relating to the
properties that Hometown uses in its business. Hometown accounts for operating
leases on a straight line basis.
OCCUPANT/
TRADE NAME LOCATION USE LEASE/OWN
- ---------- -------- --- ---------
Shaker's Lincoln 831 Straits Turnpike New and used car sales; Lease expires in 2013; $274,000 per
Mercury Watertown, CT 06795 service; F & I year with CPI increase in 2009.
Lincoln Mercury 1189 New Haven Rd. Service Owned by dealership.
Autocare Naugatuck, CT 06770
Family Ford 1200 Wolcott Street New and used car sales; Lease expires in 2013; $274,000 per
Waterbury, CT 06705 service; F & I year with CPI increase in 2009.
Hometown Auto 1309 South Main St. Administrative and Lease expires in 2013; $82,000 per year
Retailers, Inc. Waterbury, CT 06706 Corporate offices with CPI increase in 2009.
Hometown Auto 774 Straits Turnpike Administrative and Month to month lease expired 1/31/05.
Retailers, Inc. Watertown, CT. 06795 Corporate offices Moved to 1309 South Main St. Waterbury,
CT 06706, described above.
Westwood Lincoln 55 Kinderkamack Rd. New and used car sales; Lease expires in 2013; $411,000 per
Mercury Emerson, NJ 07630 service; F & I; livery year with CPI increase in 2009. See
sales Item 3. Legal Proceedings.
Muller Toyota Route 31 and Van New and used car sales; Lease expires in 2013; $411,000 per
Syckles Rd. Clinton, NJ service; F & I year with CPI increase in 2009.
08809 Hometown guarantees mortgage debt
associated with this lease. The lease
is treated as a capital lease.
Muller Chevrolet Route 173 and Voorhees New and used car sales; Lease expires in 2013; $452,000 per
Rd. Stewartsville, NJ service; F & I year with CPI increase in 2009.
08886 Hometown guarantees mortgage debt
associated with this lease. The lease
is treated as a capital lease.
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Wellesley Mazda 965 Worcester Road New and Used car sales; Lease expires 12/22/08 at $216,000 per
Wellesley, MA 02181 service; F&I year, one five year renewal option at
the same rent; and option to purchase
at the end of term or end of extension
term at the then fair market value.
Bay State Lincoln 571 Worcester Road New and used car sales; Owned facility. Mortgage balance of
Mercury Framingham, MA 01701 service; F & I $4,613,000 at 12/31/04. Matures May
2014. Annual payments of $748,000. See
Note 7.
Brattleboro Route 5, Putney Rd. N. New and used car sales; Owned facility. Mortgage balance of
Chrysler Brattleboro, VT 05304 service; F & I $1,025,000 at 12/31/04. Matures May
Dodge Sales 2019. Annual payments of $113,000.
Second mortgage balance of $241,000 at
12/31/04. Matures April 2007. Annual
payments of $117,000.
Autos of 2934 Rte 9 W New and used car sales; Owned facility. Mortgage balance of
Newburgh, Inc. New Windsor, NY 12553 service; F & I $2,834,000 at 12/31/04. Matures
d/b/a Toyota of 5/1/2014. Annual payments of $462,000.
Newburgh
Autos of 334 Route 9W New and used car sales; Lease expires 10/14/06 at $78,000 per
Newburgh, Inc. New Windsor, NY F & I year, increasing by a CPI adjustment in
d/b/a Toyota of 12553 the final two years; one five-year
Newburgh renewal option at the previous year
rent plus CPI adjustment for each year
of the extension.
LEASES
Hometown has leased from various affiliates the premises occupied by
certain of its dealerships. Each of the governing leases became effective as of
the closing of the initial public offering, has a term expiring in 2013, is on a
triple net basis and provides for a consumer price index ("CPI") increase to the
base rent on January 1, 2009. Hometown believes that each lease was at their
fair market value at inception.
Shaker Group. Hometown leases, for an annual base rental of approximately
$274,000, the premises occupied by its Lincoln Mercury dealership in Watertown,
Connecticut, from Shaker Enterprises, a Connecticut general partnership whose
seven partners include Joseph Shaker, Corey Shaker, Steven Shaker, Janet Shaker,
Edward D. Shaker, Edward Shaker and Richard Shaker. Hometown leases, for an
annual base rental of approximately $274,000 and $82,000 respectively, the
premises occupied by the Family Ford and Shaker Auto Outlet dealerships in
Waterbury, CT from Joseph Shaker Realty, a Connecticut general partnership whose
three partners are Richard Shaker, Edward Shaker and Rose Shaker. Richard Shaker
is the father of Steven Shaker, Edward D. Shaker and Joseph Shaker. Edward
Shaker is the father of Corey Shaker and Janet Shaker and Rose Shaker is the
aunt of Steven Shaker, Joseph Shaker, Edward D. Shaker, Corey Shaker and Janet
Shaker. Corey Shaker is the CEO, Director and a principal stockholder of
Hometown. Steven Shaker is the Regional Vice President - North Division and a
18
principal stockholder of Hometown. Joseph Shaker is the Regional Vice President
- - East Division, Director and a principal stockholder of Hometown. Edward D.
Shaker and Janet Shaker are principal stockholders of Hometown.
Muller Group. Hometown leases, for an annual base rental of approximately
$411,000 and $452,000 respectively the premises occupied by its Toyota
("Toyota") dealership in Clinton, New Jersey and its Chevrolet ("Chevy")
dealership in Stewartsville, New Jersey from Rellum Realty Company, a New Jersey
general partnership, one of whose two partners is William C. Muller Jr. Mr.
Muller is Regional Vice President - South Division, director and a principal
stockholder of Hometown. The Toyota and Chevy leases are treated as capital
leases. 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. Hometown
recorded the lease as a capital lease. As of December 31, 2004 the mortgage debt
balance is $4.3 million, which agrees with the capital lease obligation.
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.
Westwood. Hometown leases, for an annual base rental of approximately
$411,000 the premises occupied by its Lincoln Mercury dealership in Emerson, New
Jersey from Salvatore A. Vergopia and his wife. Mr. Vergopia and his wife will
cease to be principal stockholders and this lease will be terminated as part of
the settlement of the litigation between Hometown and the Vergopia's. See Item
3. Legal Proceedings.
ITEM 3. LEGAL PROCEEDINGS
During the fourth quarter of 2004, Hometown announced that it had resolved
in principle to settle the litigation matters described in Footnote 9 in the
Notes to Unaudited Consolidated Financial Statements as contained in Hometown's
most recent Form 10-Q as filed with the Securities and Exchange Commission on
November 12, 2004. On March 3, 2005 the execution and delivery of a settlement
agreement and applicable releases of claims from all parties to the litigation
was completed. The settlement agreement settles all claims made by Salvatore A.
Vergopia and Edward A. Vergopia, former directors and executive officers of the
Corporation, and Janet Vergopia, the wife of Salvatore A. Vergopia (the
"Vergopias"). The settlement also finally resolved the related insurance
coverage litigation with Universal Underwriters Group and The Chubb Group of
Insurance Companies. The gross payment to the Vergopias by all parties is $4
million of which $600,000 is payable by Hometown. The settlement will be
completed when all the material terms have been satisfied including Hometown's
payment of its share of the gross settlement proceeds. The settlement with the
Vergopias and the insurers included an exchange of mutual releases of claims
among the parties and a withdrawal of all claims with prejudice and without
costs or attorneys fees to any party. The settlement also provides for the
transfer to the Vergopias of certain Westwood Lincoln Mercury Sales, Inc.
assets, including its Lincoln Mercury franchise, subject to manufacturer
approval which is pending, the termination of Hometown's Westwood, New Jersey
lease, and the receipt by Hometown of all of the 940,000 shares of Class B
Common Stock owned by the Vergopias. The Settlement Agreement does not
constitute an admission of liability or wrongdoing by any party. The $600,000 is
included in Accounts Payable and Accrued Expenses in Hometown's Consolidated
Balance Sheet as of December 31, 2004.
The receipt of the Hometown stock will be recorded at fair market value on
March 3, 2005, the date of the executed settlement agreement, and will be shown
as a reduction of Stockholders' Equity. The assets and liabilities being
transferred to the Vergopias will be recorded as a reduction of those accounts
at book value. If the fair market value of Hometown stock exceeds the net book
value of the assets being transferred, a gain will result from the transaction.
Hometown wrote off the goodwill associated with this franchise in 2002. See Note
5.
19
Also, during the fourth quarter of 2004, Hometown fully resolved the
litigation concerning the lease for property in Morristown, New Jersey formerly
used by Hometown's subsidiary Morristown Auto Sales, Inc., including all claims
among the landlord, Morristown and Crestmont M.M., L.P., the assignee of the
lease agreement. The cost to Hometown is $150,000 with $75,000 payable
immediately, that has already been paid as of December 31, 2004, and the balance
in six equal monthly installments commencing January 1, 2005. This liability is
included in Accounts Payable and Accrued Expenses in Hometown's Consolidated
Balance Sheet as of December 31, 2004.
Hometown Auto Retailers, Inc. d/b/a Muller Toyota, Inc. has been named as
one of 1,667 defendants in a complaint filed by Maryann Cerbo, et. al. in the
Superior Court of New Jersey in Bergen County and allegedly served upon Hometown
on December 30, 2004. The action has been brought on behalf of about 111 named
plaintiffs and, purportedly on behalf of a class of individuals and companies
who have purchased or leased a motor vehicle from the defendants. Plaintiffs
contend that the defendants (a) overcharged for registration and/or title fees;
(b) failed to properly itemized documentary costs and governmental costs; (c)
charged grossly excessive documentary fees not reasonably related to costs; and
(d) failed to disclose that the defendants are not required to perform certain
documentary services. It appears from the complaint that plaintiffs have
attempted to name as defendants all franchised automobile dealers in the State
of New Jersey, as well as a large assortment of other persons and entities.
There are no allegations that Hometown ever performed any services for any of
the plaintiffs. The complaint makes certain class action allegations and alleges
violations of the New Jersey Consumer Fraud Act as well as common law fraud.
Hometown does not believe that the eventual outcome of this case will have a
material adverse effect upon 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
20
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(A) MARKET INFORMATION
Hometown's Class A Common Stock trades over the counter as a Bulletin
Board stock under the symbol "HCAR.OB"
The following table sets forth the high and low bid prices as quoted by
the NASD OTC Bulletin Board. Such quotations reflect inter-dealer prices,
without retail mark-up, markdown or commission and may not necessarily represent
actual transactions.
PRICE RANGE OF COMMON STOCK BID PRICES
- --------------------------- ---------------------
HIGH LOW
---- ---
YEAR ENDED 2003
First Quarter . $ 0.55 $ 0.31
Second Quarter $ 0.55 $ 0.28
Third Quarter . $ 0.88 $ 0.41
Fourth Quarter $ 1.60 $ 0.67
YEAR ENDED 2004
First Quarter . $ 2.00 $ 1.05
Second Quarter $ 1.40 $ 0.95
Third Quarter . $ 1.25 $ 0.71
Fourth Quarter $ 0.87 $ 0.68
(B) HOLDERS
As of March 22, 2005, the number of record holders of the Class A Common
Stock of Hometown was 50. Hometown believes it has more than 700 beneficial
holders.
(C) DIVIDENDS
The holders of Common Stock are entitled to receive such dividends as may
be declared by Hometown's Board of Directors. Hometown has not paid and does not
expect to declare or pay any dividends in the foreseeable future.
(D) EQUITY COMPENSATION PLAN INFORMATION
There are no new compensation plans in 2004.
21
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 2004, 2003, 2002,
2001 and 2000 have been derived from the audited consolidated financial
statements of Hometown.
For the Years Ended December 31,
(in thousands, except share and per share data)
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Revenues $ 265,281 $ 279,777 $ 269,739 $ 275,760 $ 279,382
Gross profit 37,974 39,747 38,667 39,815 37,881
Amortization of goodwill -- -- -- 704 661
Selling, general and administrative expenses 33,371 34,840 34,152 35,114 37,946
Income (loss) from operations 4,711 4,907 4,515 3,997 (726)
Interest expense (3,281) (3,037) (3,205) (4,225) (5,069)
Net income (loss) before cumulative effect of
accounting change 3,748 2,378 776 (2,136) (3,800)
Cumulative effect of accounting change -- -- (23,708) -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 3,748 $ 2,378 $ (22,932) $ (2,136) $ (3,800)
=========== =========== =========== =========== ===========
Earnings (loss) per share, basic
Before cumulative effect of accounting change 0.51 $ 0.33 $ 0.10 $ (.32) $ (.63)
Cumulative effect of accounting change -- -- (3.30) -- --
----------- ----------- ----------- ----------- -----------
Earnings (loss) per share, basic $ 0.51 $ 0.33 $ (3.20) $ (.32) $ (.63)
=========== =========== =========== =========== ===========
Earnings (loss) per share, diluted
Before cumulative effect of accounting change $ 0.50 $ 0.33 $ 0.10 $ (.32) $ (.63)
Cumulative effect of accounting change -- -- (3.30) -- --
----------- ----------- ----------- ----------- -----------
Earnings (loss) per share, diluted $ 0.50 $ 0.33 $ (3.20) $ (.32) $ (.63)
=========== =========== =========== =========== ===========
Weighted average shares,
Basic 7,286,931 7,175,105 7,175,105 6,592,436 5,995,996
Diluted 7,439,024 7,215,492 7,175,105 6,592,436 5,995,996
-----------
- -----------------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA:
Working capital $ 2,900 $ 6,039 $ 4,085 $ 4,029 $ 1,663
Inventories 43,440 37,774 39,169 31,887 40,170
Total assets 74,223 65,264 63,816 81,842 91,572
Total debt 56,600 51,075 52,745 46,234 54,133
Stockholders' equity $ 10,933 $ 6,928 $ 4,550 $ 27,452 $ 28,643
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
REVENUE
Total revenue decreased $14.5 million, or 5.2% to $265.3 million for the
year ended December 31, 2004 from $279.8 million for the year ended December 31,
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 $10.4 million or 3.8% to $264.2 million for the year ended December
31, 2004 from $274.6 million for the year ended December 31, 2003. This decrease
was primarily due to decreased sales of new vehicles ($10.2 million).
Revenue from the sale of new vehicles decreased $12.7 million, or 7.0%, to
$167.9 million for the year ended December 31, 2004, from $180.6 million for the
year ended December 31, 2003. On a same store basis, revenues decreased $10.2
million, or 5.7% to $167.9 million for the year ended December 31, 2004, from
$178.1 million for the year ended December 31, 2003. The decrease is
attributable to a reduction of 601 units sold in 2004 compared to 2003 ($15.7
million), partially offset by a 3.4% increase in average selling price ($5.5
million). The decrease is primarily from Hometown's Toyota ($6.0 million), Ford
($2.4 million), Lincoln Mercury ($1.0 million), Mazda ($0.9 million) and
Chevrolet ($0.3 million) dealerships, partially offset by increases at
Chrysler/Jeep ($0.4 million). The decrease at the Toyota dealerships was
primarily due a decrease in fleet sales of $3.9 million, due to a decrease of
268 units sold in 2004 compared to 2003. Excluding the decrease in fleet sales,
other Toyota sales decreased $2.1 million, due to a decrease of 108 units sold
in 2004 compared to 2003 ($2.6 million), partially offset by a 0.7% increase in
the average selling price ($0.4 million). The decrease at the Ford dealership
was primarily due to a decrease of 102 units sold in 2004 compared to 2003 ($2.7
million), partially offset by a 2.1% increase in average selling price ($0.3
million). The decrease at the Lincoln Mercury dealerships was primarily due to a
decrease of 176 non-livery units sold in 2004 compared to 2003 ($6.2 million),
combined with a 2.3% decrease in their average selling price ($0.8 million),
partially offset by an increase in livery sales in 2004 compared to 2003 ($6.0
million), primarily due to an additional 151 units sold in 2004 compared to 2003
($5.6 million). The decrease at the Mazda dealership was primarily due to a
decrease of 42 units sold in 2004 compared to 2003. 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 increased $0.5 million, due
to a 4.7% increase in the average selling price ($0.9 million), partially offset
by a decrease of 17 units sold in 2004 compared to 2003 ($0.4 million). The
Chrysler/Jeep increase was primarily due to a 5.1% increase in the average
selling price in 2004 compared to 2003.
Revenue from the sale of used vehicles decreased $1.2 million, or 1.8%, to
$65.3 million for year ended December 31, 2004, from $66.5 million for the year
ended December 31, 2003. On a same store basis, revenues decreased $0.1 million
or 0.2% to $64.3 million for year ended December 31, 2004, from $64.4 million
for the year ended December 31, 2003. This was due to: (i) decreased used
vehicle revenues at retail ($1.5 million), due to a decrease of 307 units ($4.5
million), partially offset by a 6.4% increase in average selling price ($3.0
million), (ii) partially offset by increased used vehicle sales at wholesale
($1.4 million), due to an increase of 416 units sold in 2004 compared to 2003
($1.7 million), partially offset by a 2.5% decrease in average selling price
($0.3 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,
average gross profit per unit increased slightly. 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 ($2.3 million), Ford ($0.9 million), Lincoln Mercury
($0.5 million), and Mazda ($0.3 million) dealerships, partially offset by
increases at the Chevrolet ($2.1 million) and Chrysler/Jeep ($0.4 million)
23
dealerships. The decrease at Toyota was primarily due to a decrease of 221 units
($3.1 million), partially offset by a 6.7% increase in average selling price
($0.8 million). The decrease at Ford was primarily due to a decrease of 57
units. The decrease at the Lincoln Mercury dealerships was primarily due to a
decrease of 129 units ($2.1 million), partially offset by a 10.4% increase in
average selling price ($1.6 million). The decrease at Mazda was primarily due to
a decrease of 27 units ($0.4 million), partially offset by a 6.5% increase in
average selling price ($0.1 million). The increase at Chevrolet was primarily
due to the sale of an additional 114 units ($1.5 million), combined with a 6.8%
increase in average selling price ($0.6 million). The increase at Chrysler/Jeep
was primarily due to the sale of an additional 13 units ($0.2 million), combined
with a 4.8% increase in average selling price ($0.2 million). Increases in used
vehicle revenues at wholesale were primarily due to the Toyota ($0.7 million),
Lincoln Mercury ($0.3 million), Ford ($0.2 million) and Chevrolet ($0.1 million)
dealerships.
Parts and service revenue decreased $0.4 million, or 1.6% to $24.2 million
for the year ended December 31, 2004, from $24.6 million for the year ended
December 31, 2003. On a same store basis, parts and service revenue remained
constant at $24.2 million for the years ended December 31, 2004 and 2003.
Decreases at the Lincoln Mercury ($0.6 million) and Chrysler/Jeep ($0.1 million)
dealerships were partially offset by increases at the Toyota ($0.5 million),
Chevrolet ($0.1 million) and Ford ($0.1 million) dealerships.
Other dealership revenues decreased $0.2 million, or 2.5% to $7.8 million
for the year ended December 31, 2004, from $8.0 million for the year ended
December 31, 2003. On a same store basis, other dealership revenues decreased
$0.1 million, or 1.3% to $7.8 million for the year ended December 31, 2004, from
$7.9 million for the year ended December 31, 2003. Decreases in other dealership
revenues of used vehicles ($0.3 million), was partially offset by increases in
other dealership revenues of new vehicles ($0.2 million). Other dealership
revenues are comprised of extended service plan income, finance income,
insurance income and other income.
GROSS PROFIT
Total gross profit decreased $1.7 million, or 4.3%, to $38.0 million for
the year ended December 31, 2004 from $39.7 million for the year ended December
31, 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 $1.2 million, or 3.1% to $37.8 million for the year ended
December 31, 2004 from $39.0 million for the year ended December 31, 2003. This
decrease was primarily attributable to decreased gross profit on new vehicle
sales ($1.2 million). Gross profit percentage for Hometown was 14.3% for the
year ended December 31, 2004 compared to 14.2% for the year ended December 31,
2003. Fleet sales generate low margins. Excluding Toyota and Chevrolet fleet
sales from both periods, gross profit percentage was 14.4% for the year ended
December 31, 2004 compared to 14.5% for the year ended December 31, 2003.
Gross profit on the sale of new vehicles decreased $1.3 million, or 10.8%,
to $10.7 million for the year ended December 31, 2004 from $12.0 million for the
year ended December 31, 2003. On a same store basis gross profit on the sale of
new vehicles decreased $1.2 million, or 10.5%, to $10.7 million for the year
ended December 31, 2004 from $11.9 million for the year ended December 31, 2003.
The decrease in gross profit is primarily attributable to a decrease of 601
units ($1.1 million), combined with a 0.9% decrease in average gross profit per
vehicle ($0.1 million). The unit decrease includes a 310-unit decrease
attributable to Toyota (268 units) and Chevrolet (42 units) fleet sales, which
had a minimal effect on gross profit ($39,000). Excluding fleet sales, the
following brands experienced decreases in gross profit on the sale of new
vehicles in 2004 compared to 2003: Lincoln Mercury ($0.9 million), Ford ($0.2
million), Chevrolet ($0.2 million) and Toyota ($0.1 million). The Lincoln
Mercury decrease is net of an increase of $0.1 million attributable to a
151-unit increase in livery sales. Non-livery sales decreased $1.0 million due
to a decrease of 176 units ($0.5 million) combined with a 15.5% decrease in
gross profit per unit ($0.5 million). The decrease at Ford was primarily due to
24
a 102-unit decrease. The decrease at Chevrolet was primarily due to an 11.3%
decrease in gross profit per unit. The decrease at Toyota was primarily due to a
108-unit decrease. Partially offsetting this were increases at: Mazda ($0.2
million) and Chrysler/Jeep ($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 6.7% for the 2003 period. Excluding Toyota and Chevrolet fleet sales
from both periods, 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 $0.1 million, or 1.6%,
to $6.3 million for the year ended December 31, 2004 from $6.4 million for the
year ended December 31, 2003. On a same store basis, gross profit decreased $0.1
million, or 1.6%, to $6.1 million for the year ended December 31, 2004 from $6.2
million for the year ended December 31, 2003. This decrease is primarily due to
a 307-unit decrease at retail ($0.5 million), partially offset by a 7.2%
increase in average gross profit per retail unit ($0.4 million). Decreases at
retail for the Toyota ($0.2 million), Lincoln Mercury ($0.2 million), and Ford
($0.1 million) dealerships were partially offset by increases at the Chevrolet
($0.3 million) and Chrysler/Jeep ($0.1 million) dealerships. The decrease at
Toyota was primarily due to a decrease of 221 units ($0.4 million), partially
offset by an 11.4% increase in average gross profit per unit ($0.2 million). The
decrease at Lincoln Mercury and Ford was primarily due to a decrease of 129
units and 57 units, respectively. The increase at Chevrolet was primarily due to
an increase of 114 units ($0.2 million), combined with a 4.5% increase in
average gross profit per unit ($0.1 million). The increase at Chrysler/Jeep was
primarily due to an increase of 13 units, combined with an 11.2% increase in
average gross profit per unit. Gross profit on wholesale increased slightly
(less than $0.1 million) due to an additional 416 units sold in 2004 compared to
2003. 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 0.8%, to $13.2
million for the year ended December 31, 2004 from $13.3 million for the year
ended December 31, 2003. On a same store basis, gross profit increased $0.1
million, or 0.8%, to $13.2 million for the year ended December 31, 2004 from
$13.1 million for the year ended December 31, 2003. The increase was primarily
attributable to the increase in gross profit percentage. Gross profit percentage
was 54.4% in 2004 compared to 54.1% in 2003. Increases at the Toyota ($0.3
million) and Mazda, Ford and Chevrolet (together totaling $0.2 million)
dealerships, were partially offset by decreases at the Lincoln Mercury ($0.3
million) and Chrysler/Jeep ($0.1 million) dealerships.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $1.4 million, or
4.0%, to $33.4 million for the year ended December 31, 2004, from $34.8 million
for the year ended December 31, 2003. Decreases in salaries and employee
benefits ($1.4 million), legal and other professional fees ($0.5 million) and
reserves for charge-backs ($0.3 million), were partially offset by an increase
in advertising costs ($0.6 million) and other costs ($0.2 million). The sale of
a Chrysler/Jeep new car franchise and subsequent closing of the used car lot
accounted for $0.3 million of the reduction in salaries and employee benefits.
INTEREST INCOME
Interest income increased $0.1 million, or 100%, to $0.2 million for the
year ended December 31, 2004 from $0.1 million for the year ended December 31,
2003. The increase is primarily the result of investing excess cash in a Ford
Motor Credit Company cash management account paying interest of 6.25% at
December 31, 2004. The cash management account interest rate is tied to the rate
charged on Hometown's floor plan financing arrangement.
25
INTEREST EXPENSE
Interest expense increased $0.4 million, or 13.3%, to $3.4 million for the
year ended December 31, 2004 from $3.0 million for the year ended December 31,
2003. The increase is primarily attributable to an increase in floor plan
interest expense resulting form higher average borrowings.
OTHER INCOME
Other income for 2004 primarily includes $0.1 million received from
General Motors Corp. related to the termination of the Oldsmobile product line.
Other income for 2003 primarily includes a gain of approximately $0.9 million
resulting from the sale of a Chrysler/Jeep Sales and Service Franchise in
Waterbury, CT in June 2003.
PROVISION (BENEFIT) FOR INCOME TAX
The effective income tax rate was (127)% for the year ended December 31,
2004 and 18% for the year ended December 31, 2003. The rates were based on
current forecasts of income before taxes, and current forecasts of permanent
differences between tax and book income. The difference in rates for both years
from the expected effective tax rate of approximately 40% is primarily due to a
reduction in the valuation allowance for both periods. The 2004 difference is
primarily due to the reduction of the valuation allowance on the deferred tax
asset due to the ability to project sufficient income to recover the deferred
tax asset. The 2003 difference is primarily due to the reduction of a valuation
allowance related to goodwill that was deducted related with the sale of the
Chrysler/Jeep Sales and Service Franchise as well as amortization of goodwill
for tax purposes. At December 31, 2004, Hometown has a deferred tax asset of
$0.6 million, net of a valuation allowance, related to its net operating losses.
The state net operating losses begin to expire in 2005. The federal net
operating losses begin to expire in 2021. Hometown believes this net deferred
tax asset will be realized within the next three years based on current
projections. See Note 11 to the consolidated financial statements.
NET INCOME
Net income improved $1.3 million, to income of $3.7 million for the year
ended December 31, 2004, from $2.4 million for the year ended December 31, 2003.
See changes described above.
EARNINGS PER SHARE, BASIC AND DILUTED AND WEIGHTED AVERAGE SHARES
"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. See Note 10 to the consolidated financial statements.
The basic and diluted income per share for the year ended December 31,
2004 is $0.51 and $0.50, respectively, including $0.38 and $0.37 respectively,
resulting from a tax benefit recorded primarily due to the reduction of a
valuation allowance on the deferred tax asset related to tax deductible
unamortized goodwill and net operating losses. The basic and diluted income per
share for the year ended December 31, 2003 is $0.33 including $0.09 resulting
from a tax benefit recorded primarily due to the reduction of a valuation
allowance on the deferred tax asset related to tax deductible unamortized
goodwill and $0.08 resulting from a gain on the sale of a Chrysler/Jeep Sales
and Service Franchise in June 2003.
26
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
REVENUE
Total revenue increased $10.1 million, or 3.7% to $279.8 million for the
year ended December 31, 2003 from $269.7 million for the year ended December 31,
2002. Hometown sold a Chrysler/Jeep new car franchise on June 3, 2003. On a same
store basis (excluding the Chrysler/Jeep new car franchise for all periods),
revenues increased $16.2 million or 6.2% to $276.8 million for the year ended
December 31, 2003 from $260.6 million for the year ended December 31, 2002. This
increase was primarily due to increased new vehicle sales ($21.5 million) and an
increase in parts and service revenue ($0.8 million) partially offset by
decreased sales of used vehicles ($6.0 million). New vehicle sales were helped
by the continuation of consumer financing deals, such as zero percent financing,
combined with heavy rebating by manufacturers, which in turn contributed to the
decrease in used vehicle sales.
Revenue from the sale of new vehicles increased $15.9 million, or 9.7%, to
$180.6 million for the year ended December 31, 2003, from $164.7 million for the
year ended December 31, 2002. On a same store basis, revenues increased $21.5
million, or 13.7% to $178.1 million for the year ended December 31, 2003, from
$156.6 million for the year ended December 31, 2002. The increase is
attributable to an additional 694 units sold in 2003 compared to 2002 ($17.8
million) plus a 2.1% increase in average selling price ($3.7 million). All
except for one Hometown dealership experienced increases in new vehicle revenues
in 2003 compared to 2002. Increases at Hometown's Lincoln Mercury ($6.7
million), Chevrolet ($5.9 million), Toyota ($5.1 million), Mazda ($2.5 million),
and Ford ($1.5 million) dealerships were partially offset by a decrease at
Hometown's remaining Chrysler/Jeep dealership ($0.2 million). The increase at
the Lincoln Mercury dealerships was primarily due to a 7.8% increase in the
average selling price ($3.6 million), plus an increase of 93 units sold in 2003
compared to 2002 ($3.1 million). The Lincoln Mercury increase is net of a
decrease in sales of 25 livery units ($1.2 million). The increase at the
Chevrolet dealership was primarily due to an increase of 239 units sold in 2003
compared to 2002 ($5.8 million), combined with a slight increase in the average
selling price ($0.1 million). Included in this was an increase in fleet sales of
42 units ($0.8 million). Excluding fleet sales, other Chevrolet new vehicle
sales increased $5.1 million due to the sale of 197 additional units ($4.8
million), combined with a 1.6% increase in average selling price ($0.3 million).
The increase at the Toyota dealerships was primarily due to an increase of 242
units sold in 2003 compared to 2002 ($5.5 million), partially offset by a small
decrease in the average selling price ($0.4 million). Included in this was a
decrease in fleet sales of $0.5 million due to a decrease of 18 units ($0.3
million) combined with a 3.4% decrease in average selling price ($0.2 million).
Excluding fleet sales, other Toyota new vehicle sales increased $5.6 million due
to the sale of 260 additional units ($6.3 million) partially offset by a 1.0%
decrease in average selling price ($0.7 million). The increase at the Mazda
dealership was primarily due to an additional 116 units sold in 2003 compared to
2002 ($2.5 million). The increase at the Ford dealership was primarily due to an
increase of 31 units sold in 2003 compared to 2002 ($0.8 million), combined with
a 4.0% increase in the average selling price ($0.7 million). The Chrysler/Jeep
decrease was primarily due to a decrease of 27 units sold ($0.7 million) in the
2003 period compared to the 2002 period, partially offset by a 6.9% increase in
the average selling price ($0.5 million).
Revenue from the sale of used vehicles decreased $6.0 million, or 8.3%, to
$66.5 million for year ended December 31, 2003, from $72.5 million for the year
ended December 31, 2002. This was due to decreased used vehicle revenues at
retail ($4.7 million) due to a decrease of 445 units ($6.3 million), partially
offset by a 3.0% increase in average selling price ($1.6 million); plus reduced
used vehicle sales at wholesale ($1.3 million) due to lower average selling
price ($2.7 million) partially offset by an increase of 287 units ($1.4
million). A Lincoln Mercury/Mazda dealership accounted for $2.6 million of the
decrease in used vehicle sales at retail primarily due to a decrease of 181
units ($2.9 million) partially offset by a 4.3% increase in average selling
price ($0.3 million). The declines at the Lincoln Mercury/Mazda dealership was
primarily due to the dealership reducing its emphasis on the sale of high-end
used cars during the 2002 period, causing a decrease in retail and wholesale
sales of such vehicles subsequent to that time. The Toyota dealerships accounted
for a $1.9 million decrease in used vehicle sales at retail primarily due to a
27
decrease of 145 units ($2.0 million). Ford accounted for a decrease of $0.9
million due to a decrease of 88 units ($1.2 million) partially offset by a 5.9%
increase in average selling price ($0.3 million). Other Lincoln Mercury
dealerships had an increase of $0.8 million due to an increase of 8 units ($0.1
million) and a 5.8% increase in average selling price ($0.7 million). As
discussed above, new vehicle sales were helped by the continuation of consumer
financing deals, such as zero percent financing and heavy rebating by the
manufacturers, which in turn contributed to the decrease in used vehicle sales
at retail. The same Lincoln Mercury/Mazda dealership discussed above had a $2.9
million decrease in used vehicle sales at wholesale for the reasons discussed
above. Most other dealerships experienced increases in wholesale (Toyota - $0.7
million; Ford - $0.3 million; Chevrolet - $0.4 million; other Lincoln Mercury -
$0.7 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 increased $0.3 million, or 1.2%, to $24.6
million for the year ended December 31, 2003, from $24.3 million for the year
ended December 31, 2002. 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 increased $0.8 million
or 3.4%, to $24.2 million for the year ended December 31, 2003, compared to
$23.4 million for the year ended December 31, 2002. The increase was primarily
generated from the Toyota dealerships ($0.8 million). Increases at the
Chevrolet, Mazda and remaining Jeep dealership ($0.3 million) were offset by
decreases at the Ford and Lincoln Mercury dealerships ($0.3 million).
Other dealership revenues decreased $0.3 million, or 3.6% to $8.0 million
for the year ended December 31, 2003, from $8.3 million for the year ended
December 31, 2002. On a same store basis, other dealership revenues decreased
$0.2 million, or 2.4% to $8.0 million for the year ended December 31, 2003, from
$8.2 million for the year ended December 31, 2002. This decrease is primarily
attributable to decreases in other dealership revenues (extended service plan
income, finance income and other income) of used vehicles.
GROSS PROFIT
Total gross profit increased $1.0 million, or 2.6%, to $39.7 million for
the year ended December 31, 2003 from $38.7 million for the year ended December
31, 2002. Hometown sold a Chrysler/Jeep new car franchise on June 3, 2003. On a
same store basis (excluding the Chrysler/Jeep new car franchise for all
periods), gross profit increased $1.8 million, or 4.8% to $39.3 million for the
year ended December 31, 2003 from $37.5 million for the year ended December 31,
2002. This increase was primarily attributable to an increase in new vehicle
gross profit of $2.0 million and an increase in gross profit on parts and
service sales of $0.3 million, partially offset by a $0.3 million decrease in
used vehicle gross profit and a $0.2 million decrease in gross profit on other
dealership revenues. Gross profit percentage for Hometown was 14.2% in 2003 and
14.4% in 2002. Adjusting both periods for Toyota and Chevrolet fleet sales,
gross profit percentage was 14.5% in 2003 and 14.8% in 2002.
Gross profit on the sale of new vehicles increased $1.6 million, or 15.4%,
to $12.0 million for the year ended December 31, 2003, from $10.4 million for
the year ended December 31, 2002. On a same store basis gross profit on the sale
of new vehicles increased $2.0 million, or 20.2%, to $11.9 million for the year
ended December 31, 2003, from $9.9 million for the year ended December 31, 2002.
The increase in gross profit is primarily attributable to an increase of 694
units ($1.1 million) combined with a 7.5% increase in average gross profit per
vehicle ($0.9 million). Included in the unit increase are 24 units attributable
to an increase in Toyota and Chevrolet fleet sales, which had a minimal effect
on the increase in gross profit. All dealerships experienced an increase in
gross profit on the sale of new vehicles in the 2003 period compared to 2002 as
follows: Lincoln Mercury - $0.9 million, Toyota - $0.4 million, Chevrolet - $0.4
million, Mazda - $0.2 million and Ford - $0.1 million. Gross profit percentage
for 2003 was 6.7% compared to 6.3% for 2002. Adjusting both periods for Toyota
and Chevrolet fleet sales, which generate low margins, gross profit percentage
28
for new vehicles was 6.9% in 2003 and 6.6% in 2002. Included in the these
results is an increase in gross profit of $0.3 million (Lincoln Mercury - $0.2
million and Ford - $0.1 million) attributable to the implementation of EITF
Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor" ("EITF Issue No. 02-16"). This issue
addressed the income statement classification of cash consideration received
from a vendor and the recognition criteria for performance-driven vendor rebates
or refunds. This consensus, which was effective for all arrangements entered
into after December 31, 2002, resulted in certain co-op advertising recoveries,
which would previously have been recorded as a reduction of SG&A, being recorded
as a reduction of Cost of Sales, buying and occupancy. We adopted EITF Issue No.
02-16 on January 1, 2003.
Gross profit on the sale of used vehicles decreased $0.3 million, or 4.5%,
to $6.4 million for the year ended December 31, 2003, from $6.7 million for the
year ended December 31, 2002. Due to most dealerships experiencing a decrease in
used vehicle sales at retail in 2003 compared to 2002, they had to wholesale
more vehicles that would have been received as trade-ins that would have been
sold at retail in prior years; however, gross profit is minimal on wholesale
sales. The decrease in gross profit on used vehicle sales was due to a net
decrease of 158 units ($0.2 million) combined with a 1.9% decrease in average
gross profit per vehicle ($0.1 million). The decrease of 158 units is net of a
445 decrease in retail units, partially offset by a 287-unit increase in
wholesale units. The Toyota dealerships accounted for a $0.2 million decrease
primarily due a decrease of 145 units sold at retail. A Lincoln Mercury/Mazda
dealership, discussed in revenues above, accounted for a $0.1 million decrease.
Ford accounted for a $0.1 million decrease primarily due to a decrease of 88
units sold at retail. Other Lincoln Mercury dealerships partially offset this
with a $0.1 million increase due to an increase of 45 units (8 at retail) and an
increase in average selling price. Gross profit percentage on the sale of used
vehicles was 9.6% in 2003 compared to 9.2% in 2002.
Parts and service gross profit remained constant at $13.3 million for the
years ended December 31, 2003 and 2002. 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 increased $0.3 million, or 2.3%, to $13.1 million for the year ended
December 31, 2003, from $12.8 million for the year ended December 31, 2002. The
increase was primarily attributable to the increase in revenues ($0.4 million)
partially offset by a decrease in gross profit percentage ($0.1 million). Gross
profit percentage was 54.1% in 2003 compared to 54.6% in 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $0.6 million, or
1.8%, to $34.8 million for the year ended December 31, 2003, from $34.2 million
for the year ended December 31, 2002. Increases in advertising ($0.6 million),
reserves for charge-backs ($0.3 million), legal and other professional fees
($0.3 million) and various other costs ($0.1 million), were partially offset by
a reduction in salaries and employee benefits ($0.5 million) and the ceasing of
certain contractual payments at the end of 2002 ($0.2 million). Included in the
increase in advertising costs is $0.3 million attributable to the implementation
of EITF Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor" ("EITF Issue No. 02-16"). This
issue addressed the income statement classification of cash consideration
received from a vendor and the recognition criteria for performance-driven
vendor rebates or refunds. This consensus, which was effective for all
arrangements entered into after December 31, 2002, resulted in certain co-op
advertising recoveries, which would previously have been recorded as a reduction
of SG&A, being recorded as a reduction of Cost of Sales. We adopted EITF Issue
No. 02-16 on January 1, 2003. The sale of a Chrysler/Jeep new car franchise
accounted for $0.4 million of the reduction in salaries and employee benefits.
29
INTEREST INCOME
Interest income increased to $82,000 for the year ended December 31, 2003
from $43,000 for the year ended December 31, 2002. The increase is primarily the
result of investing excess cash in a Ford Motor Credit Company cash management
account paying interest of 5.00% at December 31, 2003. The cash management
account interest rate is tied to the rate charged on Hometown's floor plan
financing arrangement.
INTEREST EXPENSE
Interest expense decreased $0.2 million, or 6.3%, to $3.0 million for the
year ended December 31, 2003 from $3.2 million for the year ended December 31,
2002. The decrease is primarily attributable to a decrease in floor plan
interest expense ($0.1 million), which decreased due to a reduction in interest
rates from the year ended December 31, 2002.
OTHER INCOME
Other income for 2003 primarily includes a gain of approximately $0.9
million resulting from the sale of a Chrysler/Jeep Sales and Service Franchise
in Waterbury, CT in June 2003.
OTHER EXPENSE
Included in other expense for the year ended December 31, 2002 is an asset
impairment charge of $150,000 related to a property held for sale. The
impairment charge was recorded to write-down the asset to fair value. See Notes
2 and 3 to the consolidated financial statements.
PROVISION (BENEFIT) FOR INCOME TAX
The effective income tax rate was 18% for the year ended December 31, 2003
and 38% for the year ended December 31, 2002. The rates were based on current
forecasts of income before taxes, and current forecasts of permanent differences
between tax and book income. The difference in rates between 2003 and 2002 is
primarily due to the change in valuation allowance from 2002 to 2003. This is
primarily due to goodwill that was deducted related with the sale of the
Chrysler/Jeep Sales and Service Franchise as well as amortization of goodwill
for tax purposes. At December 31, 2003, Hometown has a deferred tax asset of
$0.2 million, net of a valuation allowance, related to its net operating losses.
The state net operating losses begin to expire in 2005. The federal net
operating losses begin to expire in 2021. Hometown believes this net deferred
tax asset will be realized within the next three years based on current
projections.
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Income before cumulative effect of accounting change increased $1.6
million to $2.4 million for the year ended December 31, 2003 from $0.8 million
for the year ended December 31, 2002. The increase is primarily due to the gain
on sale of the Chrysler/Jeep Sales and Service Franchise recorded in Other
Income. See other changes described above.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
In accordance with SFAS 142, Hometown completed its goodwill impairment
testing during 2002, which resulted in Hometown recording a one-time, non-cash
charge of approximately $23.7 million to write-off the carrying value of
goodwill. This charge is non-operational in nature and is reflected as a
cumulative effect of an accounting change in the accompanying statement of
operations for the year ended December 31, 2002. Approximately $9.6 million of
this charge is tax deductible, resulting in a deferred tax benefit of
approximately $3.8 million against which a full valuation allowance was
recorded. Hometown is reducing its valuation allowance as goodwill is being
amortized for tax purposes. See Note 5 to the consolidated financial statements.
30
NET INCOME (LOSS)
Net income (loss) improved $25.3 million, to income of $2.4 million for
the year ended December 31, 2003, from a loss of $(22.9) million for the year
ended December 31, 2002. The 2002 loss was primarily due to the write-off of the
carrying value of goodwill in the 2002 period. See other changes described
above.
EARNINGS (LOSS) 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. See Note 10 to the consolidated financial
statements.
The basic and diluted income per share for the year ended December 31,
2003 is $0.33 including $0.09 resulting from a tax benefit recorded primarily
due to the reduction of a valuation allowance on the deferred tax asset related
to tax deductible unamortized goodwill and $0.08 resulting from a gain on the
sale of a Chrysler/Jeep Sales and Service Franchise in June 2003. The basic and
diluted (loss) per share for the year ended December 31, 2002 is $(3.20), which
includes basic and diluted income per share before cumulative effect of
accounting change of $0.10 and basic and diluted (loss) per share for a
cumulative effect of accounting change of $(3.30), resulting from the goodwill
impairment charge associated with the implementation of SFAS 142. See Note 5 to
the consolidated financial statements for the recognition of an impairment of
the carrying value of its goodwill in 2002, in accordance with SFAS 142.
CYCLICALITY
Hometown's operations, like the automotive retailing industry in general,
are affected by a number of factors relating to general economic conditions,
including consumer business cycles, consumer confidence, economic conditions,
availability of consumer credit and interest rates. Although the above factors,
among others, may affect Hometown's business, Hometown believes that the impact
on Hometown's operations of future negative trends in such factors will be
somewhat mitigated by its (i) strong parts, service and collision repair
services, (ii) variable cost salary structure, (iii) geographic regional focus,
and (iv) product diversity.
SEASONALITY
Hometown's operations will be subject to seasonal variations, with the
second and third quarters generally contributing more revenues and operating
profit than the first and fourth quarters. This seasonality is driven primarily
by: (i) Manufacturer related factors, primarily the historical timing of major
Manufacturer incentive programs and model changeovers, (ii) weather-related
factors, which primarily affect parts and service and (iii) consumer buying
patterns.
EFFECTS OF INFLATION
Due to the relatively low levels of inflation experienced in fiscal 2004
and 2003, inflation did not have a significant effect on the results of Hometown
during those periods.
31
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents
Total cash and cash equivalents at December 31, 2004 and 2003, was $6.1
million and $5.6 million, respectively.
Cash Flow from Operations
The following table sets forth the consolidated selected information from
the statements of cash flow:
For the years ended December 31,
--------------------------------------------
2004 2003 2002
---------- ---------- ----------
(in thousands)
Net cash provided by operating activities $ 3,129 $ 4,273 $ 3,386
Net cash provided by (used in) investing activities (2,121) 132 (2,439)
Net cash (used in) financing activities (546) (2,390) (1,769)
------- ------- -------
Net increase (decrease) in cash and cash equivalents $ 462 $ 2,015 $ (822)
======= ======= =======
For the year ended December 31, 2004, net cash provided from operations of
$3.1 million is primarily due to: (i) net income plus non-cash items of $2.7
million, and (ii) a decreases in accounts receivable of $1.0 million. Partially
offsetting this were increases in accounts payable and accrued expenses of $0.7
million. An increase in inventory of $4.5 million was offset by a similar
increase in floor plan notes payable of $4.5 million. New vehicle inventory was
purchased with the expectation of higher sales in 2004, which did not
materialize. Sales of new vehicles actually decreased $12.7 million in 2004 from
the 2003 period, resulting in an increase in new vehicle inventory at December
31, 2004 due to the higher purchasing level. Net cash used in investing
activities of $2.1 million is due to capital expenditures of $2.1 million and is
primarily due to the Brattleboro, VT building purchased in June 2004 for $1.5
million. Net cash used in financing activities of $0.5 million is due to
principal payments of long-term debt and capital lease obligations of $2.2
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 year ended December 31, 2003, net cash provided from operations of
$4.3 million is primarily due to: (i) net income plus non-cash items of $2.9
million, (ii) the decrease in inventory in excess of the decrease in floor plan
liability of $1.8 million and (iii) increases in accounts payable and accrued
expenses of $0.7 million. Partially offsetting this were increases in accounts
receivable of $1.1 million. Net cash provided by investing activities of $0.1
million is primarily due the proceeds from the sale of a Chrysler/Jeep Sales and
Service Franchise of $0.9 million, partially offset by capital expenditures of
$0.8 million. Net cash used in financing activities of $2.4 million is primarily
due to principal payments of long-term debt and capital lease obligations.
Capital Expenditures
Capital expenditures for 2005 are expected to be $0.3 million, consisting
of equipment purchases and building and leasehold improvements.
32
Use of Estimates and Critical Accounting Policies
Preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the financial
statements and reported amounts of revenues and expenses during the periods
presented. Actual amounts could differ from those estimates. A summary of our
significant accounting policies is presented in the Notes to Consolidated
Financial Statements.
Revenue Recognition
Revenues for vehicle and parts sales are recognized upon delivery to or
acceptance by the customer. Revenues for vehicle service are recognized when the
service has been completed. Sales discounts and service coupons are accounted
for as a reduction to the sales price at the point of sale. Manufacturer
incentives and rebates are not recognized until earned in accordance with
respective manufacturers incentive programs. See Note 12 to the consolidated
financial statements for effect of EITF 02-16 "Accounting by a Customer
(Including a Reseller) for Certain Consideration Received from a Vendor".
Finance, Insurance and Service Contract Income Recognition
Hometown arranges financing for customers through various institutions and
receives financing fees equal to the difference between the loan rates charged
to customers and the predetermined financing rates set by the financing
institution. Hometown receives payment of finance fees from the financing
institution approximately 30 days after the financing institution receives the
contract. In addition, Hometown receives commissions from the sale of credit
life and disability insurance based on the premiums charged to the customer by
the insurance company; and commissions from the sale of extended service
contracts to customers based on the difference between the price paid by the
customer for the service contract and the premium paid to the primary obligor.
These commissions are received upfront at the time the vehicle was sold. The
revenues from financing fees and commissions are generally recorded at the time
of the sale of the vehicles. Hometown is not the principal in these
transactions. Hometown acts as the agent for the financing institution or vendor
that is providing the service. These revenues are recorded on a net basis.
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
December 31, 2004 and 2003, Hometown had $1,140,000 and $1,225,000 of related
deferred revenue, respectively. During 2003, these dealerships generated
approximately $403,000 of related warranty service and insurance revenue, which
was deferred. During the same period, approximately $488,000 of deferred revenue
was amortized to Other Revenues, net. At December 31, 2004, Hometown also had
other deferred revenue of $319,000, which 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.
Hometown may be charged back ("charge-backs") for unearned financing fees,
insurance or service contract commissions in the event of early termination of
the contracts by the customers. For finance fees, if a customer were to
terminate their contract prior to the scheduled maturity, generally three to
five years, Hometown may be charged back for a portion of the finance fee
received. The time period whereby Hometown is subject to charge-backs is
generally from 90 days to 180 days. For certain other contracts Hometown is
subject to charge-backs for the life of the loan. Generally, if a customer makes
their first three to six payments and subsequently pays off the loan, Hometown
will not be charged back by the financing institution. Hometown pays for this in
33
the form of a reduction of the finance fee. In the case of insurance or service
contracts, Hometown is subject to charge-backs for the life of the related
insurance policy or service contract. In the case of early termination, the
vendor will bill us back a pro-rated portion of our commission. The reserves for
future charge backs are based on historical operating results and the
termination provisions of the applicable contracts. At the time of sale,
Hometown records finance, insurance and service contract income, net of
estimated charge-backs. This is included in other dealership revenue in the
accompanying consolidated financial statements.
Receivables
Hometown had $5.1 million in accounts receivable, net at December 31, 2004
compared to $6.1 million at December 31, 2003. The majority of those
receivables, $2.4 million and $3.1 million as of December 31, 2004 and 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. Of the
remaining amount, $1.6 million and $1.7 million as of December 31, 2004 and
2003, respectively, represents amounts due from manufactures for such items as
warranty claims and incentive reimbursements. Additional amounts are parts,
service and other trade receivables. In assessing our allowance for doubtful
accounts, we consider historical losses as well as current performance with
respect to past due accounts. The allowance for doubtful accounts is $0.3
million at December 31, 2004 and 2003.
Inventories
Hometown had $43.4 million in inventories, net at December 31, 2004
compared to $37.8 million at December 31, 2003. The majority of inventory, $33.6
million and $28.4 million as of December 31, 2004 and 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 adjustment was $0.7 million at
December 31, 2004 and 2003.
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.
FLOOR PLAN FINANCING
See Note 6 to the consolidated financial statements.
OTHER INDEBTEDNESS
In addition to floor plan financing, Hometown has long-term debt and
capital lease obligations of $13.7 million, which is primarily attributable to
real estate mortgage notes payable of $7.4 million due in monthly installments
including interest at 10.0% that matures in May 2014, real estate capital lease
obligations of $4.3 million due in monthly installments including interest at
10.0% that matures in December 2013, real estate mortgage note payable of $1.0
million including interest at 7.0% through May 2009 at which time the terms of
the loan will be renegotiated, and capital lease obligations on rental vehicles
of $0.9 million due in monthly installments including interest ranging from 3.8%
to 5.5% that matures through April 2012. See Notes 7, 8 and 13 to the
consolidated financial statements.
34
Hometown is subject to certain financial covenants related to its real
estate mortgages. At December 31, 2004, Hometown was in default of its loan
agreement for Baystate Lincoln Mercury for failure to comply with a financial
covenant. Accordingly, Hometown has reclassified $4,319,000 of related long-term
debt to current at December 31, 2004. Total debt for this mortgage at December
31, 2004 is $4,613,000. On March 16, 2005, the lender notified Hometown that it
is not declaring an event of default in connection with the loan, however,
reserving all rights to declare an event of default in the future should the
financial covenant default not be cured. If an event of default was declared and
only at the lenders option, Hometown could be required to pay all outstanding
debt plus a defeasance penalty and transaction costs totaling approximately
$1,400,000. Although Hometown does not believe the lender will call the loan, in
the event it is called, Hometown believes it would be able to secure alternate
financing. Hometown believes the market value of the property is approximately
$6,200,000. Hometown believes it would be able to borrow up 100% of the market
value of the property. Assuming borrowing $6,000,000 at a current variable
interest rate of approximately 7.46% for a 15-year mortgage, monthly payments
would be approximately $6,800 lower than the current monthly payments being made
on the property.
As of December 31, 2004, Hometown has the following contractual
obligations:
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
------- ------- ------- ------- -------
(In thousands)
Floor Plan $42,474 $42,474 -- -- --
Long term debt and
capital lease obligations $14,126 $ 5,505 $ 1,810 $ 1,634 $ 5,177
Operating leases:
Third parties $ 1,172 $ 452 $ 504 $ 216 $ --
Related parties $ 5,851 $ 831 $ 1,250 $ 1,250 $ 2,520
Interest $10,827 $ 5,663 $ 1,781 $ 1,489 $ 1,894
------- ------- ------- ------- -------
Total $74,450 $54,925 $ 5,345 $ 4,589 $ 9,591
======= ======= ======= ======= =======
COMPANY GUARANTEES
See Note 14 to the consolidated financial statements.
COMPANY WARRANTIES
See Note 14 to the consolidated financial statements.
FRANCHISE AGREEMENTS
See Note 14 to the consolidated financial statements.
ACQUISITIONS AND DISPOSITIONS
See Note 17 to the consolidated financial statements.
35
RELATED PARTY TRANSACTIONS
Hometown has leased from various affiliates the premises occupied by
certain of its dealerships and guaranteed the related mortgage debt of certain
dealerships. Each of the governing leases became effective as of the closing of
the initial public offering, has a term expiring in 2013, is on a triple net
basis and provides for a consumer price index ("CPI") increase to the base rent
on January 1, 2009. Total expense for operating leases and rental agreements
with related parties was $1.0 million for the year ended December 31, 2004 and
future minimum payments under these lease agreements as of December 31, 2004 is
$5.9 million. Two of the leases are treated as capital leases. Total payments
for these leases were $0.9 million for the year ended December 31, 2003. This
practice is fairly common in the automotive retail industry. See Item 13 -
"Certain Relationships and Related Transactions".
LITIGATION
See Item 3. - Legal Proceedings and Note 14 to the consolidated financial
statements.
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 December 31, 2004 of $42.5 million, a 1%
change in the borrowing rate would result in a $0.4 million change to annual
floor plan interest expense.
At December 31, 2004, Hometown invested $4.8 million of excess cash, of
which $0.8 million was invested in money market accounts paying a weighted
average interest rate of 1.70% at December 31, 2004, and $4.0 million was
invested in a Ford Motor Credit Company cash management account paying interest
of 6.25% at December 31, 2004. The cash management account interest rate is tied
to the rate charged on Hometown's floor plan financing arrangement.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 2 to the consolidated financial statements.
FORWARD LOOKING STATEMENT
When used in the Annual Report on Form 10K, 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.
36
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See Management Discussion and Analysis - Quantitative and Qualitative
Disclosure about Market Risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Hometown required by this item
are set forth beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
ITEM 9A. 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 December 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.
ITEM 9B. OTHER INFORMATION
None
37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
Information regarding directors and nominees for directors of Hometown is
included under the caption entitled "Election of Directors" in the 2005 Proxy
Statement and is incorporated herein by reference.
The executive officers and directors of Hometown and their respective ages
as of March 22, 2005 are as follows:
NAME AGE POSITION DIRECTOR SINCE
- ---- --- -------- --------------
Corey Shaker 47 President, Chief Operating Officer, Chief 1997
Executive Officer and Director
William C. Muller Jr. 53 Regional Vice President - South Division and 1997
Director
Steven Shaker 36 Regional Vice President - North Division Not a director
Joseph Shaker 37 Regional Vice President - East Division and 1997
Director
Charles F. Schwartz 49 Chief Financial Officer Not a director
Bernard J. Dzinski, Jr. * 41 Director 2003
Steven A. Fournier * 50 Director 2002
H. Dennis Lauzon 56 Director 2002
Timothy C. Moynahan * 65 Director 2002
- --------------
* Member of Audit, Compensation and Nominating/Governance Committees
All directors hold office until the next annual meeting of shareholders
and until their successors are duly elected and qualified. Officers are elected
to serve subject to the discretion of the Board of Directors.
Set forth below is a brief description of the background and business
experience of the executive officers and directors of Hometown:
Corey E. Shaker was named President and Chief Operating Officer on
February 7, 2000, and added the title of Chief Executive Officer on August 29,
2000. In addition, he was Vice President-Connecticut Operations since October 1,
1997 and was in charge of Hometown's Company-wide sales training efforts. Prior
to that, from 1989 he was Chief Operating Officer and General Manager of Family
Ford Inc. where he was responsible for all aspects of its operations. He is a
past member of NADA Ford F01 20 group. He was awarded the Lincoln Mercury
Salesperson of the Nation award in 1980 and is a three-time winner of the
Lincoln Mercury Inner Circle award. He is also a first cousin to Steven Shaker,
the Regional VP - North Division, and Joseph Shaker, the Regional VP - East
Division and director of Hometown. He holds a B.S. in Business Administration
from Providence College.
William C. Muller Jr. has been Regional Vice President - South Division
since March 2000. Mr. Muller has been Vice President-New Jersey Operations since
October 1, 1997. In addition, from 1980 he was the President of Muller Toyota,
Inc. and of Muller Chevrolet, Oldsmobile, Isuzu, Inc (both of which are
currently known as Muller Automotive Group, Inc. and Muller Chevrolet Inc.,
respectively.) Under his management, Muller Toyota has been: (a) a 14-time
recipient of Toyota's Prestigious President's Award, given to those dealers with
superior levels of customer satisfaction who also exceed capital standards and
38
have high market penetration and facilities that meet or exceed Toyota
standards; (b) a 14-time recipient of Toyota Parts Excellence Award; (c) a
10-time winner of the Toyota Service Excellence Award; and (d) a 4-time winner
of Toyota's Sales Excellence Award. He holds a B.A. degree from Fairleigh
Dickinson University.
Steven Shaker has been Regional Vice President - North Division since
March 2000. Mr. Shaker had been a Vice President in charge of Parts and Service
since October 1, 1997. In addition, from 1992 he was Director of Parts and
Service of all of the Shaker Group's operations and was instrumental in the
implementation of the pilot program to develop the Ford Motor Company's first
Autocare automobile service center. He is the brother of Joseph Shaker and a
first cousin of Corey Shaker, each respectively an officer and director of
Hometown. He holds a B.A. degree from Salve Regina College.
Joseph Shaker has been Regional Vice President - East Division since 2002.
Mr. Shaker served as President and Chief Executive Officer of CarDay, Inc.; an
internet based used vehicle exchange company between 2000 and 2002. He was
President and Chief Operating Officer of Hometown from 1997 to 2000. In
addition, between 1991 and 1997 he served as the Chief Operating Officer of
Shaker's Lincoln Mercury, Shaker's Jeep Eagle and Lincoln Mercury Autocare in
Connecticut. Since 2002 he has served as a member of the Mazda Dealer Advisory
Counsel, was Chairman of the Counsel for 2004, and was elected Immediate Past
Chairman for 2005. Mr. Shaker is also a member of the newly formed Ford Motor
Credit Dealer/Retailer Advisory Board. Mr. Shaker is also a board member of
VPRO, a privately held software company specializing in digital photography in
the auto and insurance industries. He is the brother of Steven Shaker, the
Regional VP - North Division, and a first cousin of Corey Shaker, the Chief
Executive Officer and a director of Hometown. He holds a B.S. (Management)
degree from Bentley College.
Charles F. Schwartz has been Chief Financial Officer since January 2002.
From November 2001 through January 2002 he was the Assistant to the CEO. Prior
to joining Hometown, he was the Vice President and Chief Financial Officer for
Staples Communications, a nationwide integrator of communications solutions from
2000 - 2001. From 1993 - 2000 he was the Senior Vice President, Chief Financial
Officer and Chief of Staff for People's Choice TV Corporation, a wireless
communications company. From 1989 through 1993, Mr. Schwartz had been Chief
Financial Officer of Jimbo's Jumbos, Incorporated, an affiliate of Chock Full O'
Nuts. Mr. Schwartz is a Certified Public Accountant. He holds a B.B.A. degree in
accounting from Bernard M. Baruch College in New York City.
Bernard J. Dzinski, Jr. has been employed by Lenkowski Lonergan & Co., LLP
since 2004. Prior to 2004, he was a partner with Charles Heaven & Co., CPA's. He
currently serves on the Board of Directors of the Waterbury Rotary Club. He also
serves as Director, Treasuer and Executive Committee member of Holy Cross High
School, located in Waterbury, Connecticut. Mr. Dzinski received a Bachelor of
Science in Accounting from Providence College in 1985 and is a Certified Public
Accountant. He is a member of the American Institute of Certified Public
Accountants and the Connecticut Society of Certified Public Accountants.
Steven A. Fournier has been the President and Chief Executive Officer of
Gar-Kenyon Technologies, a manufacturer of hydraulic aerospace components, since
December 2001. He previously was President and Chief Operating Officer of
Matthews Ventures, a diversified holding company, from 1992. Mr. Fournier has
recently served as Director, Treasurer, and member of the executive committee of
the Greater New Haven Chamber of Commerce. Mr. Fournier received a Bachelor of
Science Degree in Accounting from Bentley College in 1975 and is a Certified
Public Accountant.
H. Dennis Lauzon has been the President and owner of Parkway Toyota since
1978. Mr. Lauzon is on the Toyota Dealers Advertising Board as well as the
Dealer Council. He is also on the board of Trustees for Hackensack University
Medical Center. Mr. Lauzon attended Fairleigh Dickinson University.
39
Timothy C. Moynahan has been a founding partner in the law firm Moynahan,
Minnella, Broderick and Tindall since 1974. Mr. Moynahan is a director of The
Institute of Human Virology, at the University of Maryland School of Medicine.
He is also the President of the Connecticut Chapter of the Ireland Chamber of
Commerce, a non-profit organization which promotes economic relationships
between the United States and Ireland and is Vice-President of the Paula A.
Moynahan Skin Care Company, a manufacturer of skin care products. Mr. Moynahan
holds a BS degree in History from Providence College and a JD degree from
Catholic University School of Law.
COMMITTEES OF THE BOARD OF DIRECTORS
Hometown's Board of Directors has established a Compensation Committee,
whose members are Messrs. Dzinski, Fournier and Moynahan. The Compensation
Committee reviews and recommends to the Board of Directors the compensation and
benefits of all officers of Hometown, reviews general policy matters relating to
compensation and benefits of employees of Hometown and administers the issuance
of stock options and discretionary cash bonuses to Hometown's officers,
employees, directors and consultants.
The Company has a separately designated standing Audit Committee whose
members are Bernard J. Dzinski, Jr., Steven A. Fournier and Timothy C. Moynahan.
The Audit Committee meets with management and Hometown's independent public
accountants to determine the adequacy of internal controls and other financial
reporting matters. The Board of Directors has determined that Bernard J.
Dzinski, Jr. and Steven A. Fournier, each qualify as an audit committee
financial expert, as such term is defined in recently adopted rules of the
Securities and Exchange Commission implementing requirements of the
Sarbanes-Oxley Act of 2002. In addition, Bernard J. Dzinski, Jr., Steven A.
Fournier and Timothy C. Moynahan are independent within the meaning of Item
7(d)(3) of Schedule 14A of the Exchange Act.
The Company also has a separately designated standing Nominating/Corporate
Governance Committee whose members are Bernard J. Dzinski, Jr., Steven A.
Fournier and Timothy C. Moynahan. The Committee assists the Board with respect
to corporate governance matters, including the composition and function of the
Board. The Committee has the responsibilities set forth in its Charter with
respect to identifying individuals qualified to become members of the Board,
recommending qualified members to the Board when vacancies occur, recommending
changes in the size and composition of the Board or any Committees, periodically
developing and recommending to the Board updates to the Governance Guidelines,
and overseeing the annual evaluation of the Board and Committees. The criteria
that the Committee applies to Director nominees is set forth in the Charter of
the Committee. The Committee considers suggestions from many sources, including
shareholders, regarding possible candidates for director. The Committee reviews
the qualifications and backgrounds of all the candidates and recommends the
slate of candidates to be nominated for election at the annual meeting of
shareholders. Shareholder recommendations for nominees to the Board will be
given appropriate consideration by the Committee for recommendation to the Board
based upon the nominee's qualifications in the same manner as all other
candidates. Shareholder nominee recommendations should be submitted in writing
to the Chairman of the Nominating/Governance in care of the Corporate Secretary.
Hometown has adopted a Code of Business Conduct and Ethics that applies to
all of Hometown's employees and directors, including its principal executive
officer, principal financial officer and principal accounting officer. Hometown
has also adopted a Code of Ethics for the Chief Executive Officer, Chief
Financial Officer and Chief Accounting Officer. Hometown's Code of Business
Conduct and Ethics covers all areas of professional conduct including, but not
limited to, conflicts of interest, disclosure obligations, protections for
persons reporting questionable behavior, confidential information, protection of
company assets, as well as compliance with all laws, rules and regulations
applicable to Hometown's business. Hometown's Code of Ethics for the Chief
Executive Officer, Chief Financial Officer and Chief Accounting Officer
reinforces the Code of Business Conduct and Ethics and covers standards of
ethical conduct, timely and truthful disclosures, legal compliance and reporting
of known or suspected violations.
40
A copy of Hometown's Code of Business Conduct and Ethics and the Code of
Ethics for the Chief Executive Officer, Chief Financial Officer and Chief
Accounting Officer are posted on its website at www.htauto.com. In the event
that an amendment to, or a waiver from, a provision of Hometown's Code of
Business Conduct and Ethics or the Code of Ethics that applies to any of
Hometown's officers or directors is necessary, Hometown intends to post such
information on its website.
Hometown undertakes to provide without charge to any person, upon written
or verbal request of such person, a copy of Hometown's Code of Business Conduct
and Ethics and Code of Ethics. Requests should be directed in writing to Chief
Financial Officer, Hometown Auto Retailers, Inc., 1309 South Main Street,
Waterbury, CT 06706, or by telephone to (203) 756-1300.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION.
The following table presents certain information concerning compensation
paid or accrued for services rendered to Hometown in all capacities during the
three years ended December 31, 2004, for the Chief Executive Officer and the
other executive officers of Hometown whose aggregate annual base salary exceeded
$100,000 (collectively, the "Named Executive Officers").
COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION
---------------------------------------------------------------------------------
FISCAL ANNUAL OTHER OPTION
NAME AND PRINCIPAL POSITION YEAR COMPENSATION $ SALARY BONUS (1) (2) GRANTS
- --------------------------- ---------------- -------- --------- ------- -------
Corey E. Shaker, 2004 257,500 35,168 18,202 --
President and Chief 2003 250,000 66,923 16,073 --
Executive Officer 2002 250,000 -- 6,840 50,000
William C. Muller, Jr 2004 215,000 134,346 20,046 --
Regional Vice 2003 215,000 155,319 17,384 --
President-South Division 2002 200,000 101,844 9,673 --
Steven Shaker, 2004 150,000(3) -- 5,745 --
Regional Vice 2003 125,000 -- 3,542 --
President-North Division 2002 125,000 1,325 2,600 --
Joseph Shaker, 2004 200,000 -- 10,600 --
Regional Vice 2003 200,000 53,461 10,400 --
President-East Division 2002 196,350 -- 8,000 --
Charles F. Schwartz, 2004 195,000 33,034 5,970 --
Chief Financial Officer 2003 180,000 39,385 5,402 50,000
and Secretary 2002 160,000 20,000 1,749 --
- -------------------------
(1) The amounts shown are cash bonuses earned in the specified year. A portion
of these bonuses may be paid in the first quarter of the following year.
(2) Primarily use of vehicles.
(3) A portion of this salary was received in 2005.
41
OPTION GRANTS IN LAST FISCAL YEAR
NONE
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table summarizes options exercised during fiscal 2004 and
presents the value of unexercised options held by the Named Executive Officers
at fiscal year end:
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR-END FISCAL YEAR-END
ACQUIRED ON VALUE EXERCISABLE (E) EXERCISABLE (E)
NAME EXERCISE REALIZED UNEXERCISABLE (U) UNEXERCISABLE (U)
- ---------------------------- -------------- ------------- ------------------------------ --------------------------
Corey E. Shaker -- -- 83,333 E $11,000 E
President and Chief 16,667 U $ 5,500 U
Executive Officer
William C. Muller, Jr -- -- 30,000 E $ 0 E
Regional Vice President - -- U $ 0 U
South
Steven Shaker -- -- 30,000 E $ 0 E
Regional Vice President - -- U $ 0 U
North
Charles F. Schwartz, -- -- 66,666 E $14,333 E
Chief Financial Officer 33,334 U $15,667 U
and Secretary
In general, the option agreements shall be exercisable only so long as the
Optionee shall continue to be an employee of Hometown and within the thirty-day
period after the date of termination of his employment to the extent it was
exercisable on the day prior to the date of termination. In the event the
Optionee is unable to continue his employment with Hometown as a result of his
total and permanent disability, he may, but only within three (3) months from
the date of disability, exercise the option to the extent he was entitled to
exercise it at the date of such disability. In the event of death of the
Optionee, the option may be exercised, at any time within twelve (12) months
following the date of death, by the Optionee's estate or by a person who
acquired the right to exercise this option by bequest or inheritance, but only
to the extent of the right that would have accrued had the Optionee continued
living one (1) month after the date of death, provided that at the time of his
death the Optionee is an employee of Hometown and shall have been in Continuous
Status (as defined in Hometown's Stock Option Plan) as an employee from the date
hereof; or within thirty (30) days after the termination of Continuous Status as
an employee, the option may be exercised, at any time within three (3) months
following the date of death, by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only to
the extent of the right to exercise that had accrued at the date of termination.
EMPLOYMENT CONTRACTS
None of the officers of Hometown have employment agreements.
42
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
None of the directors serving on the Compensation Committee are employees
or officers of Hometown. No director or executive officer of Hometown is a
director or executive officer of any other corporation that has a director or
executive officer who is also a director of Hometown.
1998 STOCK OPTION PLAN
In February 1998, as further amended in August 2002, in order to attract
and retain persons necessary for the success of Hometown, Hometown adopted its
1998 Stock Option Plan (the "Stock Option Plan") covering up to 830,000 shares
of Class A Common Stock. Pursuant to the Stock Option Plan, officers, directors
and key employees of Hometown and consultants to Hometown are eligible to
receive incentive and/or non-incentive stock options. The Board of Directors
will administer the Stock Option Plan, which expires in January 2008, or a
committee designated by the Board of Directors. The selection of participants,
allotment of shares, determination of price and other conditions relating to the
purchase of options will be determined by the Board of Directors, or a committee
thereof, in its sole discretion. Stock options granted under the Stock Option
Plan are exercisable for a period of up to 10 years from the date of grant at an
exercise price which is not less than the fair market value of the Common Stock
on the date of the grant, except that the term of an incentive stock option
granted under the Stock Option Plan to a stockholder owning more than 10% of the
outstanding Common Stock may not exceed five years and its exercise price may
not be less than 110% of the fair market value of the Common Stock on the date
of the grant. For grants to the Named Executive Officers see the chart above
titled "AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION VALUES."
EMPLOYEE BENEFIT PLAN
Hometown maintains the Hometown Auto Retailers, Inc. 401(k) Plan, as
amended, (the "Plan") effective October 1, 1999, for the benefit of eligible
employees, as defined. Participants may make voluntary contributions of up to
15% of their compensation, subject to certain IRS limitations. Hometown may make
annual matching contributions to the Plan at its discretion. Hometown made
contributions of $18,000, $24,000 and $0 to the Plan for the years ended
December 31, 2004, 2003, and 2002, respectively.
COMPENSATION OF DIRECTORS
Each non-employee Director receives a fee of $1,000, for each meeting
attended in person and $800 for each meeting attended telephonically and
reimbursement for travel costs and other out-of-pocket expenses incurred in
attending each Directors' meeting. In addition, committee members receive $500
for each committee meeting attended in person, other than meeting directly
following or preceding Board meetings and $400 for each committee meeting
attended telephonically. In addition, each non-employee Director receives
options to purchase an additional 2,500 shares of Common Stock on the date of
Hometown's annual stockholders' meeting. Such options will have an exercise
price equal to the fair market value of the Common Stock on the date of grant
and will vest one-third upon grant and one-third on each of the first and second
anniversary of the date of grant.
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION
The Delaware General Corporation Law (the "DGCL") authorizes corporations
to limit or eliminate the personal liability of directors to corporations and
their shareholders for monetary damages for breach of directors' fiduciary duty
of care. Hometown's Certificate of Incorporation limits the liability of
Directors of Hometown to Hometown or its shareholders to the fullest extent
permitted by Delaware law.
43
Hometown's Certificate of Incorporation provides mandatory indemnification
rights to any officer or Director of Hometown who, by reason of the fact that he
or she is an officer or Director of Hometown, is involved in a legal proceeding
of any nature. Such indemnification rights include reimbursement for expenses
incurred by such officer or Director in advance of the final disposition of such
proceeding in accordance with the applicable provisions of the DGCL. Insofar as
indemnification for liabilities under the Securities Act may be provided to
officers and Directors or persons controlling Hometown, Hometown has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
Except for the litigation described in Item 3 above, there is no pending
litigation or proceeding involving a Director, officer, employee or agent of
Hometown in which indemnification by Hometown will be required or permitted.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The primary purposes of the Compensation Committee are to establish and
maintain competitive, fair and equitable compensation practices designed to
attract and retain key management employees throughout the Corporation and to
establish appropriate incentives to motivate and reward key management employees
for achieving or exceeding established performance goals; and to oversee the
competency and qualifications of senior management personnel and the provisions
of senior management succession planning. The Compensation Committee is
responsible for a broad range of activities which include (i) recommending to
the full Board of Directors the salary(ies) of the Chairman of the Board, Chief
Executive Officer, Chief Operating Officer and Chief Financial Officer after an
evaluation of market data, internal salary relationships as provided by the
Corporation's executive compensation professionals, and such other factors as
the Committee deems appropriate; (ii) recommending to the full Board of
Directors the salaries for other elected Corporate Officers and selected key
management employees after reviewing the recommendations made by the Chief
Executive Officer and the Chief Operating Officer; (iii) recommending to the
full Board of Directors the type of incentive plans, if any, which will be
offered to management employees; and (iv) administering the Corporation's 1998
Incentive Stock Option Plan, to include, after reviewing the recommendations of
the Chief Executive Officer and the Chief Operating Officer, determining the
employees to be eligible for plan participation.
COMPENSATION COMMITTEE
Steven Fournier
Chairman
44
[GRAPHIC OMITTED]
The above graph shows a comparison of cumulative total returns for Hometown, the
NASDAQ Market Index, and a Peer Group from Hometown's SIC Code Index from the
date of the initial public offering.
(1) The Peer Group Index includes the following companies: Asbury Automotive
Group, Auto Nation Inc., CarMax Inc., Group 1 Automotive, Inc., Lithia Motors
Inc., Major Automotive Companies, Inc., Rush Enterprises, Inc., Sonic Automotive
Inc. and United Auto Group, Inc.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to Hometown
regarding the beneficial ownership of Common Stock as of March 22, 2005 by (i)
each person known to Hometown to be the beneficial owner of more than 5% of its
outstanding shares of Common Stock, (ii) each Director of Hometown, (iii) each
Named Executive Officer and (iv) all Directors, and Executive Officers of
Hometown as a group. Except as otherwise indicated, the persons or entities
listed below have sole voting and investment power with respect to all shares of
Common Stock owned by them.
A person is deemed to be a beneficial owner of securities that can be
acquired by such person within 60 days from the filing of this Form 10-K upon
the exercise of options and warrants or conversion of convertible securities.
Each beneficial owner's percentage ownership is determined by dividing the
number of shares beneficially owned by that person by the total number of shares
beneficially owned, increased to reflect the shares underlying the options,
warrants and convertible securities that are held by such person, but not held
by any other person.
o As of March 22, 2005, the total number of shares outstanding is
6,449,389, of which 3,870,137 shares are Class A common stock and
2,579,252 shares are Class B common stock.
The total number of votes is based on the combined total of Class A and
Class B common stock beneficially owned by the beneficial owner. The voting
power percentage of each beneficial owner is determined by dividing the number
of votes held by that person by the total number of votes outstanding, increased
to reflect the number of votes of the shares underlying the options, warrants
and convertible securities that are held by such person, but not held by any
other person.
o As of March 22, 2005, the total number of votes outstanding is
29,662,657, of which 3,870,137 votes are from Class A common stock
outstanding and 25,792,520 votes are from Class B common stock
outstanding;
45
o Class A common stock have one (1) vote per share; and
o Class B common stock have ten (10) votes per share.
Common Stock % of Outstanding % of
Beneficially Owned Equity Owned Aggregate
----------------------- ------------------------------- voting Power
Class Class Class Class of all
Name of Beneficial Owner A B A B Total Classes
- ------------------------ ------- ------- ---- ----- ---- ----
OFFICERS AND DIRECTORS
Corey E. Shaker 220,214 265,080 5.55 10.28 7.41 9.65
William C. Muller, Jr 392,000 761,752 10.05 29.53 17.81 26.97
Steven Shaker 145,142 206,424 3.72 8.00 5.43 7.44
Joseph Shaker 147,826 321,812 3.82 12.48 7.28 11.35
Charles F. Schwartz 83,333 -- 2.11 -- 1.28 **
Bernard J. Dzinski Jr 20,834 -- ** -- ** **
Steven A. Fournier 35,001 -- ** -- ** **
H. Dennis Lauzon 15,834 -- ** -- ** **
Timothy C. Moynahan 35,001 -- ** -- ** **
All Directors, and Executive
Officers as a group (9 persons) 1,095,185 1,555,068 25.95 60.29 38.98 55.46
5% BENEFICIAL OWNERS
Janet Shaker 71,428 227,668 1.85 8.83 4.64 7.92
Paul Shaker -- 218,268 -- 8.46 3.38 7.36
Edward D. Shaker 124,642 206,612 3.21 8.01 5.12 7.38
Edward Shaker 125,842 175,404 3.25 6.80 4.67 6.34
Richard Shaker 131,642 175,404 3.39 6.80 4.75 6.35
Steven N. Bronson 361,817 -- 9.35 -- 5.61 1.22
Louis Meade 200,000 -- 5.17 -- 3.10 **
** OWNERSHIP IS LESS THAN 1%
Corey Shaker has an address at c/o Hometown Auto Retailers, Inc., 1309
South Main Street, Waterbury, Connecticut 06706. His beneficial ownership of our
common stock includes:
o 265,080 shares of Class B common stock, of which 15,980 shares are
held by the Edward Shaker Family Trust of which he is the Trustee
and a beneficiary;
o 120,214 shares of Class A common stock, including 72 shares (24
shares each for his children, Lindsay, Kristen and Edward) of which
he is custodian;
o Options exercisable within the next 60 days to purchase shares of
Class A common stock as follows:
o 25,000 shares at $2.25 per share;
o 25,000 shares at $1.25 per share;
o 50,000 shares at $0.48 per share;
William Muller, Jr. has an address at c/o Muller Toyota Inc., Route 31, PO
Box J, Clinton, New Jersey 08809. His beneficial ownership of our common stock
includes:
o 761,752 shares of Class B common stock;
o 360,750 shares of Class A common stock;
o 1,250 shares of Class A common stock owned by his wife, Michele;
o Options exercisable within the next 60 days to purchase shares of
Class A common stock as follows:
o 15,000 shares at $2.25 per share;
o 15,000 shares at $1.25 per share;
46
Steven Shaker has an address at c/o Family Ford, Inc., 1200 Wolcott
Street, Waterbury, Connecticut 06705. His beneficial ownership of our common
stock includes:
o 206,424 shares of Class B common stock;
o 115,142 shares of Class A common stock;
o Options exercisable within the next 60 days to purchase shares of
Class A common stock as follows:
o 15,000 shares at $2.25 per share;
o 15,000 shares at $1.25 per share;
Joseph Shaker has an address at c/o Baystate Lincoln Mercury, 571
Worcester Road, Framingham, Massachusetts 01701. His beneficial ownership of our
common stock includes:
o 321,812 shares of Class B common stock of which 15,980 shares are
held by the Richard Shaker Family Trust which Mr. Shaker is the
Trustee and a beneficiary; and 40,000 shares are held by the Shaker
Irrevocable Trust of which Mr. Shaker is Trustee;
o 147,826 shares of Class A common stock;
Charles F. Schwartz has an address at c/o Hometown Auto Retailers, Inc.,
1309 South Main Street, Waterbury, Connecticut 06706. His beneficial ownership
of our common stock consists of options exercisable within the next 60 days to
purchase shares of Class A common stock as follows:
o 50,000 shares at $0.68 per share;
o 33,333 shares at $0.34 per share.
Bernard J. Dzinski Jr. has an address at 141 East Main Street, Waterbury,
CT 06721. His beneficial ownership of our common stock consist of options
exercisable within the next 60 days to purchase shares of Class A common stock
as follows:
o 834 shares at $1.05 per share;
o 20,000 shares at $0.42 per share.
Steven A. Fournier has an address at 238 Water Street, Naugatuck,
Connecticut 06770. His beneficial ownership of our common stock consist of
options exercisable within the next 60 days to purchase shares of Class A common
stock as follows:
o 834 shares at $1.05 per share;
o 30,000 shares at $0.58 per share;
o 4,167 shares at $0.42 per share.
H. Dennis Lauzon has an address at 854 Sunset Avenue, Haworth, New Jersey
07641. His beneficial ownership of our common stock consists of options
exercisable within the next 60 days to purchase shares of Class A common stock
as follows:
o 834 shares at $1.05 per share;
o 5,000 shares at $0.65 per share;
o 10,000 shares at $0.42 per share.
Timothy C. Moynahan has an address at 141 East Main Street, Waterbury,
Connecticut 06722. His beneficial ownership of our common stock consist of
options exercisable within the next 60 days to purchase shares of Class A common
stock as follows:
o 834 shares at $1.05 per share;
o 30,000 shares at $0.48 per share;
o 4,167 shares at $0.42 per share;
Janet Shaker has an address at c/o Family Ford, Inc., 1200 Wolcott Street,
Waterbury, Connecticut 06705.
Paul Shaker has an address at 210 Munson Road, Middlebury, Connecticut
06762.
47
Edward D. Shaker has an address at c/o Shakers Lincoln Mercury, Inc. 831
Straits Turnpike, Watertown, Connecticut 06795. His beneficial ownership of our
common stock includes:
o 206,612 shares of Class B common stock;
o 107,142 shares of Class A common stock; and
o Options exercisable within the next 60 days to purchase shares of
Class A common stock as follows:
o 8,750 shares at $2.25 per share;
o 8,750 shares at $1.25 per share;
Edward Shaker has an address at c/o Hometown Auto Retailers, Inc., 1309
South Main Street, Waterbury, Connecticut 06706. His beneficial ownership of our
common stock includes 13,700 shares of Class A common stock owned by his wife,
Lillian.
Richard Shaker has an address at c/o Shakers Lincoln Mercury, Inc. 831
Straits Turnpike, Watertown, Connecticut 06795. His beneficial ownership of our
common stock includes:
o 175,404 shares of Class B common stock;
o 114,142 shares of Class A common stock; and
o Options exercisable within the next 60 days to purchase shares of
Class A common stock as follows:
o 8,750 shares at $2.25 per share;
o 8,750 shares at $1.25 per share;
Steven N. Bronson has an address at 100 Mill Plain Road, Danbury,
Connecticut 06811.
Louis Meade has an address at 44 Red Road, Chatham, New Jersey 07928.
EQUITY COMPENSATION PLAN INFORMATION
Plan category Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under equity
warrants and rights warrants and rights compensation plans (excluding
(a) securities reflected in
column (a))
Equity compensation plans
approved by security
holders 517,500 $1.04 312,500
Equity compensation plans
not approved by security
holders None None None
--------------- --------------- ---------------
Total 517,500 $1.04 312,500
In February 1998, as further amended in August 2002, in order to attract
and retain persons necessary for the success of Hometown, Hometown adopted its
1998 Stock Option Plan covering up to 830,000 shares of Class A Common Stock.
See Note 16 to the consolidated financial statements.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Hometown's
officers and directors, and persons who own more than ten-percent of a
registered class of Hometown's equity securities, to file reports of ownership
and changes in ownership with the Securities and Exchange Commission ("SEC").
48
Officers, directors and greater than ten-percent stockholders are required by
SEC regulation to furnish Hometown with copies of all Section 16(a) forms they
file.
To the best of Hometown's knowledge, based solely on review of the copies
of such forms furnished to Hometown, or written representations that no other
forms were required, Hometown believes that all Section 16(a) filing
requirements applicable with respect to all its current officers, directors and
ten percent shareholders have been complied with as of the filing date of this
Annual Report. With respect to any former directors, officers, and ten-percent
shareholders of Hometown, Hometown does not have any knowledge of any known
failures to comply with the filing requirements of Section 16(a).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LEASES
Hometown has leased from various affiliates the premises occupied by
certain of its dealerships. Each of the governing leases became effective as of
the closing of the initial public offering, has a term expiring in 2013, is on a
triple net basis and provides for a consumer price index ("CPI") increase to the
base rent on January 1, 2009. Hometown believes that each lease was at their
fair market value at inception.
SHAKER GROUP. Hometown leases, for an annual base rental of approximately
$274,000, the premises occupied by its Lincoln Mercury dealership in Watertown,
Connecticut, from Shaker Enterprises, a Connecticut general partnership whose
seven partners include Joseph Shaker, Corey Shaker, Steven Shaker, Janet Shaker,
Edward D. Shaker, Edward Shaker and Richard Shaker. Hometown leases, for an
annual base rental of approximately $274,000 and $82,000 respectively, the
premises occupied by the Family Ford and Shaker Auto Outlet dealerships in
Waterbury, CT from Joseph Shaker Realty, a Connecticut general partnership whose
three partners are Richard Shaker, Edward Shaker and Rose Shaker. Richard Shaker
is the father of Steven Shaker, Edward D. Shaker and Joseph Shaker. Edward
Shaker is the father of Corey Shaker and Janet Shaker and Rose Shaker is the
aunt of Steven Shaker, Joseph Shaker, Edward D. Shaker, Corey Shaker and Janet
Shaker. Corey Shaker is the CEO, Director and a principal stockholder of
Hometown. Steven Shaker is the Regional Vice President - North Division and a
principal stockholder of Hometown. Joseph Shaker is the Regional Vice President
- - East Division, Director and a principal stockholder of Hometown. Edward D.
Shaker and Janet Shaker are principal stockholders of Hometown.
MULLER GROUP. Hometown leases, for an annual base rental of approximately
$411,000 and $452,000 respectively the premises occupied by its Toyota
("Toyota") dealership in Clinton, New Jersey and its Chevrolet ("Chevy")
dealership in Stewartsville, New Jersey from Rellum Realty Company, a New Jersey
general partnership, one of whose two partners is William C. Muller Jr. Mr.
Muller is Regional Vice President - South Division, director and a principal
stockholder of Hometown. The Toyota and Chevy leases are treated as capital
leases. 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. Hometown
recorded the lease as a capital lease. As of December 31, 2004 the mortgage debt
balance is $4.3 million, which agrees with the capital lease obligation.
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.
WESTWOOD. Hometown leases, for an annual base rental of approximately
$411,000 the premises occupied by its Lincoln Mercury dealership in Emerson, New
Jersey from Salvatore A. Vergopia and his wife. Mr. Vergopia and his wife will
cease to be principal stockholders and this lease will be terminated as part of
the settlement of the litigation between Hometown and the Vergopia's. See Item
3. Legal Proceedings.
49
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The aggregate fees and expenses billed for the professional services
rendered by BDO Seidman, LLP for the audit of Hometown's annual financial
statements included in Hometown's Form 10-K filing for fiscal year 2004 and 2003
and the reviews of Hometown's quarterly financial statements included in
Hometown's First, Second and Third Quarter Form 10-Q filings for fiscal year
2004 and 2003 totaled approximately $144,000 and $137,000, respectively.
AUDIT RELATED FEES
Hometown did not incur any audit related fees, other than those included
under the paragraph "Audit Fees", for professional services rendered by BDO
Seidman, LLP during the 2004 and 2003 fiscal year.
TAX FEES
Hometown incurred tax fees of approximately $16,000 and $0 for
professional services rendered by BDO Seidman, LLP for tax compliance, tax
advice and tax planning during the 2004 and 2003 fiscal years, respectively. The
2004 services were comprised of research discussions regarding tax treatment of
a litigation settlement.
ALL OTHER FEES
Hometown did not incur any other fees for professional services rendered
by BDO Seidman, LLP other than the services covered in the paragraphs above
titled "Audit Fees" and "Audit Related Fees" during the 2004 and 2003 fiscal
years.
AUDIT COMMITTEE PRE-APPROVAL POLICY
Hometown's Audit Committee has authorized the Chief Financial Officer to
incur up to $5,000 per fiscal year on accounting research projects outside the
scope of normal audit services rendered by BDO Seidman, LLP for the audit of
Hometown's annual financial statements included in Hometown's Form 10-K filing
and the reviews of Hometown's quarterly financial statements included in
Hometown's Form 10-Q filings. Such amount is less than 5% of the annual fees
paid to BDO Seidman, LLP for its Form 10-K and Form 10-Q filings. No fees were
incurred in fiscal 2004 that were not approved by the Audit Committee pursuant
to this policy.
AUDIT COMMITTEE CONSIDERATION
Hometown's Audit Committee has considered whether BDO Seidman, LLP's
provision of the services which generated the Audit and Other Fees reported
above was compatible with maintaining BDO Seidman, LLP's independence as
Hometown's principal independent accounting firm.
WORK PERFORMED BY PRINCIPAL ACCOUNTANT'S FULL TIME PERMANENT EMPLOYEES
BDO Seidman, LLP's services rendered in performing Hometown's audits for
fiscal year 2004 and 2003 were performed by full time, permanent employees and
partners of BDO Seidman, LLP.
50
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBITS:
No: DESCRIPTION
- ------- ----------------------------------------------------------------------
3.1 Certificate of Incorporation of Dealer-Co., Inc. (NY-3/10/97)
3.2 Certificate of Incorporation of Hometown Auto Retailers, Inc.
(Del-6/5/97)
3.3 Certificate of Ownership and Merger of Dealer-Co., Inc. into Hometown
Auto Retailers, Inc. (Del-6/27/97)
3.4 Certificate of Merger of Dealer-Co., Inc. and Hometown Auto Retailers,
Inc. into Hometown Auto Retailers, Inc. (the "Company") (NY-9/11/97)
3.5 Certificate of Amendment of the Certificate of Incorporation filed
February 19, 1998
3.6 Certificate of Amendment of the Certificate of Incorporation filed
June 8, 1998
(1) 3.7 Certificate of Amendment of the Certificate of Incorporation filed
December 7, 2000
3.8 By-Laws of Hometown
4.1 Form of Class A Common Stock Certificate
4.2 Form of Class B Common Stock Certificate
4.3 Form of Warrant Agreement between Hometown and Paulson Investment
Company and related Warrant
4.4 Stock Option Plan of Hometown
(2) 4.5 Form of 3-year warrant issued in the Private Placement of units on
July 25, 2001
(2) 4.6 Copy of the $240,000 Non-negotiable Promissory Note made by Hometown
to Autos of Newburgh, Inc.
(2) 4.7 Copy of the Settlement Agreement, dated June 28, 2001, between
Hometown and Autos of Newburgh, Inc.
10.1 Exchange Agreement, dated as of the 1st day of July, 1997, among the
Registrant and the members of the Shaker Group, the Muller Group and
the Westwood Group
10.2 Agreement, dated July 2, 1997, between the Registrant and Brattleboro
Chrysler Plymouth Dodge, Inc. and Amendments dated November 11, 1997,
April 14, 1998 and July 8, 1998
10.3 Agreement, dated August 14, 1997, between the Registrant and
Leominster Lincoln Mercury, Inc., dba Bay State Lincoln Mercury and
Amendments dated October 31, 1997 and April 14, 1998, respectively
10.4 Stockholders Agreement, dated as of the 16th day of February 1998,
among the Shaker Stockholders, the Muller Stockholders and the
Westwood Stockholders
10.5 Employment Agreement, dated as of the 20th day of April, 1998, between
the Registrant and Salvatore A. Vergopia
10.6 Employment Agreement, dated as of the 20th day of April, 1998, between
the Registrant and William C. Muller Jr.
10.7 Employment Agreement, dated as of the 20th day of April, 1998, between
the Registrant and Corey Shaker
10.8 Employment Agreement, dated as of the 20th day of April, 1998, between
the Registrant and Edward A. Vergopia
51
10.9 Employment Agreement, dated as of the 20th day of April, 1998, between
the Registrant and James Christ
10.10 Employment Agreement, dated as of the 20th day of April, 1998, between
the Registrant and Steven Shaker
10.11 Lease, dated as of April 20, 1998, between Shaker Enterprises, as
landlord, and Hometown (Lincoln/Mercury dealership in Watertown, CT.)
10.12 Lease, dated as of April 20, 1998, between Joseph Shaker Realty
Company, as landlord, and Hometown (Ford dealership in Waterbury, CT.)
10.13 Lease, dated as of April 20, 1998, between Joseph Shaker Realty
Company, as landlord, and Hometown (Jeep/Eagle dealership Waterbury,
CT.)
10.14 Lease, dated as of April 20, 1998, between Rellum Realty Company, as
landlord, and Hometown (Toyota dealership in Clinton, NJ)
10.15 Lease, dated as of April 20, 1998, between Rellum Realty Company, as
landlord, and Hometown (Chevrolet/Oldsmobile/Isuzu dealership In
Stewartville, NJ)
10.16 Lease, dated as of April 20, 1998, between Salvatore A. Vergopia and
Janet Vergopia, as landlord, and Hometown (Lincoln Mercury dealership
in Emerson, NJ)
10.17 Inventory Loan and Security Agreement between Toyota Motor Credit
Corporation and Muller Toyota, Inc.; Commercial Promissory Notes;
Dealer Floor Plan Agreement
10.18 Ford Motor Company Automotive Wholesale Installment Sale and Security
Agreement with Shakers, Inc.; Power of Attorney for Wholesale
Installment Sale Contract; and Automotive Installment Sale Contract
10.19 Ford Motor Company Automotive Wholesale Installment Sale and Security
Agreement with Family Ford, Inc. and Power of Attorney for Wholesale
10.20 Chrysler Financial Security Agreement and Master Credit Agreement with
Shaker's Inc.
10.21 Lease, dated as of April 20, 1998, between Thomas E. Cosenzi optionees
as landlord, and Hometown (Chrysler Plymouth dealerships in N.
Brattleboro, VT.)
10.22 Form of Stock Option Agreement with schedule of optionees
10.23 Agreement dated May 28, 1998, between the Registrant and Pride Auto
Center, Inc. (an Acquisition)
10.24 Supplemental Agreement to Dealer Sales and Service Agreement (Publicly
Traded Company) dated April 27, 1998 among Muller Chevrolet,
Oldsmobile, Isuzu, Inc., Hometown Auto Retailers, Inc. and American
Isuzu Motors, Inc.
10.25 Letter consent for ownership change and initial public offering from
Toyota Motor Sales, USA, Inc. dated July 24, 1998
10.26 Supplemental Agreement to General Motors Corporation Dealer Sales and
Service Agreement between Hometown Auto Retailers, Inc. and General
Motors, dated July 20, 1998.
10.27 Letter consent from Ford Motor Company to Hometown Auto Retailers,
Inc. relating to the Ford Division and Lincoln Mercury Division dated
July 24, 1998.
10.28 Credit Agreement dated January 6, 1999 among the registrant, specified
subsidiaries, General Electric Capital Corporation, and other
specified lenders. All Annexes A through I.
(1) 10.29 Credit Agreement dated March 14, 2001 among the registrant,
subsidiaries of the registrant, and Ford Motor Credit Company.
(2) 10.30 Guarantee Agreement dated January 5, 1999 among the registrant and
Falcon Financial, LLC.
52
(2)10.31 Modification Agreement dated January 6, 1999 among the registrant,
subsidiaries of the registrant and Falcon Financial, LLC.
(3) 14.1 Code of Ethics for Chief Executive Officer, Chief Financial Officer
and Chief Accounting Officer
(3) 14.2 Code of Business Conduct and Ethics
21.1 Subsidiaries of the Registrant
(4) 31.1 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
(4) 31.2 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
(4) 32.1 Chief Executive Officer Certification
(4) 32.2 Chief Financial Officer Certification
- ----------------------------------------------------
* Unless otherwise indicated all exhibits were previously filed as an
exhibit to Hometown's Registration Statement on Form S-1 (File No
333-52763), and incorporated herein by reference.
(1) Filed as an exhibit to Hometown's Form 10-K for the period ending December
31, 2000, and incorporated herein by reference.
(2) Filed as an exhibit to Hometown's Form 10-K for the period ending December
31, 2001, and incorporated herein by reference.
(3) Filed as an exhibit to Hometown's Form 10-K for the period ending December
31, 2003, and incorporated herein by reference.
(4) Filed herewith.
FINANCIAL STATEMENT SCHEDULES:
See below, beginning on page F-1.
SUPPLEMENTAL SCHEDULES:
Report of Independent Registered Public Accounting Firm on Schedule is set forth
on page S-1.
Schedule II - Valuation and Qualifying Accounts for the years ended December 31,
2004, 2003, and 2002 is set forth hereafter on page S-2.
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d), the Securities Exchange Act
of 1934, the registrant has duly caused this Report to be signed on March 22,
2005 on its behalf by the undersigned, thereunto duly authorized.
Hometown Auto Retailers, Inc.
By: /s/ Corey Shaker
----------------------------------------------
Corey Shaker, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated.
/s/ Corey Shaker
- -----------------------------------------
Corey Shaker President, Chief Executive Officer
and Director
/s/ Charles F. Schwartz
- -----------------------------------------
Charles F. Schwartz Chief Financial Officer
/s/ Bernard J. Dzinski, Jr.
- -----------------------------------------
Bernard J. Dzinski, Jr. Director
/s/ Steven A. Fournier
- -----------------------------------------
Steven A. Fournier Director
/s/ H. Dennis Lauzon
- -----------------------------------------
H. Dennis Lauzon Director
/s/ Timothy C. Moynahan
- -----------------------------------------
Timothy C. Moynahan Director
/s/ William C. Muller, Jr.
- -----------------------------------------
William C. Muller, Jr. Director
/s/ Joseph Shaker
- -----------------------------------------
Joseph Shaker Director
54
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Reports of Independent Registered Public Accounting Firm F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 2004 and 2003 F-3
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2004 F-4
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended December 31, 2004 F-5
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2004 F-6
Notes to Consolidated Financial Statements F-7
Reports of Independent Registered Public Accounting Firm on Schedule S-1
Schedule II - Valuation and Qualifying Accounts S-2
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Directors of Hometown Auto Retailers, Inc.
We have audited the accompanying consolidated balance sheets of Hometown
Auto Retailers, Inc. as of December 31, 2004 and 2003 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period then ended. These financial statements are
the responsibility of Hometown Auto Retailers, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hometown
Auto Retailers, Inc. as of December 31, 2004 and 2003, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the Unites States.
As discussed in Note 5 to the consolidated financial statements, effective
January 1, 2002, the Company adopted FASB Statement No. 142, Goodwill and Other
Intangible Assets.
New York, New York /s/ BDO Seidman, LLP
March 9, 2005 BDO Seidman, LLP
F-2
HOMETOWN AUTO RETAILERS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
December 31,
--------------------
ASSETS 2004 2003
-------- --------
Current Assets:
Cash and cash equivalents $ 6,101 $ 5,639
Accounts receivable, net 5,081 6,058
Inventories, net 43,440 37,774
Prepaid expenses and other current assets 634 625
Deferred and prepaid income taxes 1,464 1,349
-------- --------
Total current assets 56,720 51,445
Property and equipment, net 13,854 12,678
Other assets 3,649 1,141
-------- --------
Total assets $ 74,223 $ 65,264
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Floor plan notes payable $ 42,474 $ 38,003
Accounts payable and accrued expenses 5,106 5,798
Current maturities of long-term debt and capital lease obligations 5,505 996
Deferred revenue 735 609
-------- --------
Total current liabilities 53,820 45,406
Long-term debt and capital lease obligations 8,621 12,076
Long-term deferred income taxes 123 125
Other long-term liabilities and deferred revenue 726 729
-------- --------
Total liabilities 63,290 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, respectively 3 3
Additional paid-in capital 30,017 29,760
Accumulated deficit (19,091) (22,839)
-------- --------
Total stockholders' equity 10,933 6,928
-------- --------
Total liabilities and stockholders' equity $ 74,223 $ 65,264
======== ========
The accompanying notes are an integral part of these consolidated financial
statements
F-3
HOMETOWN AUTO RETAILERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
For the Years Ended December 31,
-----------------------------------------
2004 2003 2002
----------- ----------- -----------
Revenues
New vehicle sales $ 167,932 $ 180,615 $ 164,659
Used vehicle sales 65,326 66,543 72,482
Parts and service sales 24,219 24,621 24,330
Other, net 7,804 7,998 8,268
----------- ----------- -----------
Total revenues 265,281 279,777 269,739
----------- ----------- -----------
Cost of sales
New vehicle 157,211 168,579 154,225
Used vehicle 59,053 60,152 65,821
Parts and service 11,043 11,299 11,026
----------- ----------- -----------
Total Cost of sales 227,307 240,030 231,072
----------- ----------- -----------
Gross profit 37,974 39,747 38,667
Selling, general and administrative expenses 33,371 34,840 34,152
----------- ----------- -----------
Income from operations 4,603 4,907 4,515
----------- ----------- -----------
Interest income 204 82 43
Interest (expense) (3,281) (3,037) (3,205)
Other income 135 956 52
Other (expense) (9) (3) (158)
----------- ----------- -----------
Income before taxes and cumulative effect
of accounting change 1,652 2,905 1,247
Provision (benefit) for income taxes (2,096) 527 471
----------- ----------- -----------
Income before cumulative effect of
accounting change 3,748 2,378 776
Cumulative effect of accounting change -- -- (23,708)
----------- ----------- -----------
Net income (loss) $ 3,748 $ 2,378 $ (22,932)
=========== =========== ===========
Earnings (loss) per share, basic
Before cumulative effect of accounting change $ 0.51 $ 0.33 $ 0.10
Cumulative effect of accounting change -- -- (3.30)
----------- ----------- -----------
Earnings (loss) per share, basic $ 0.51 $ 0.33 $ (3.20)
=========== =========== ===========
Earnings (loss) per share, diluted
Before cumulative effect of accounting change $ 0.50 $ 0.33 $ 0.10
Cumulative effect of accounting change -- -- (3.30)
----------- ----------- -----------
Earnings (loss) per share, diluted $ 0.50 $ 0.33 $ (3.20)
=========== =========== ===========
Weighted average shares outstanding, basic 7,286,931 7,175,105 7,175,105
Weighted average shares outstanding, diluted 7,439,024 7,215,492 7,175,105
The accompanying notes are an integral part of these consolidated financial
statements
F-4
HOMETOWN AUTO RETAILERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Class A Class B
Common Stock Common Stock Additional Total
------------------- -------------------- Paid-in (Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit) Equity
-------- -------- -------- -------- -------- -------- --------
Balance at
December 31, 2001 3,562 $ 3 3,613 $ 4 $ 29,730 $ (2,285) $ 27,452
Conversion of Class B
Common to Class A Common 2 -- (2) -- -- -- --
Paid subscription receivable -- -- -- -- 30 -- 30
Net loss -- -- -- -- -- (22,932) (22,932)
-------- -------- -------- -------- -------- -------- --------
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 92 1 (92) (1) -- -- --
Net income -- -- -- -- -- 2,378 2,378
-------- -------- -------- -------- -------- -------- --------
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 -- -- -- -- -- 3,748 3,748
-------- -------- -------- -------- -------- -------- --------
Balance at
December 31, 2004 3,870 $ 4 3,519 $ 3 $ 30,017 $(19,091) $ 10,933
======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements
F-5
HOMETOWN AUTO RETAILERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the Years Ended December 31,
2004 2003 2002
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,748 $ 2,378 $(22,932)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities -
Cumulative effect of accounting change -- -- 23,708
Depreciation and amortization 1,269 1,328 1,330
Impairment of assets -- -- 150
(Gain) loss on sale/disposal of sales and service and
property and equipment 8 (939) --
Deferred income taxes (2,288) 120 315
Changes in assets and liabilities:
Accounts receivable, net 977 (1,127) 768
Inventories, net (4,481) 2,335 (5,330)
Prepaid expenses and other current assets (9) (133) 134
Prepaid taxes (41) 47 (6)
Other assets 44 43 172
Floor plan notes payable 4,471 (519) 6,059
Accounts payable and accrued expenses (692) 733 (1,038)
Deferred revenue - current 126 21 112
Other long term liabilities and deferred revenue (3) (14) (56)
-------- -------- --------
Net cash provided by operating activities 3,129 4,273 3,386
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (2,121) (810) (2,439)
Proceeds from sale of sales and service franchise and
property and equipment -- 942 --
-------- -------- --------
Net cash provided by (used in) investing activities (2,121) 132 (2,439)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 1,418 74 61
Principal payments of long-term debt and capital lease
obligations (2,221) (2,464) (1,860)
Exercise of warrants 257 -- --
Issuance of common stock and warrants -- -- 30
-------- -------- --------
Net cash (used in) financing activities (546) (2,390) (1,769)
Net increase (decrease) in cash and cash equivalents 462 2,015 (822)
CASH AND CASH EQUIVALENTS, beginning of period 5,639 3,624 4,446
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period $ 6,101 $ 5,639 $ 3,624
======== ======== ========
Cash paid for - Interest $ 3,233 $ 3,087 $ 3,331
======== ======== ========
Cash paid for - Taxes $ 259 $ 366 $ 264
======== ======== ========
Purchases financed by capital lease obligations $ 1,430 $ 1,239 $ 1,386
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements
F-6
HOMETOWN AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Business of Hometown Auto Retailers Inc.
Hometown was founded on March 10, 1997 as Dealerco, Inc., a New York
Corporation, and was later merged into Hometown Auto Retailers, Inc., a Delaware
Corporation ("Hometown" or the "Company"). Hometown's purpose was to consolidate
and operate automobile dealerships in the Northeast, primarily in New Jersey and
New England. Hometown was formed to combine three dealership groups (the "Core
Operating Companies") located in New Jersey and Connecticut, one of which was
considered the accounting acquirer ("Shaker"), acquire two other dealerships
(the "Acquisitions") located in Vermont and Massachusetts, complete an initial
public offering (the "Offering") of its Common Stock and, subsequent to the
Offering, continue to acquire, through merger or purchase, additional
dealerships to expand its regional operations.
Basis of Presentation
In July 1998, Hometown simultaneously completed the combination of the
Core Operating Companies, the Acquisitions and the Offering. The Core Operating
Companies were acquired in exchange for common stock of Hometown. The
Acquisitions were acquired for cash.
Principals of Consolidation
The consolidated financial statements include all significant
majority-owned subsidiaries. All intercompany accounts and transactions among
the consolidated subsidiaries have been eliminated.
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)
factors related to the automobile and truck manufacturers from which Hometown
holds franchises ("Manufacturer"), primarily the historical timing of major
Manufacturer incentive programs and model changeovers, (ii) weather-related
factors, which primarily affect parts and service and (iii) consumer buying
patterns.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Major Suppliers and Franchise Agreements
Hometown purchases substantially all of its new vehicles at the prevailing
prices charged by the applicable Manufacturers to all franchised dealers.
Hometown's sales volume could be adversely impacted by the manufacturers'
inability to supply it with an adequate supply of popular models or as a result
of an unfavorable allocation of vehicles by the manufacturer.
Each Manufacturers franchise agreement contains provisions which may
limit, without the consent of the applicable manufacturer, changes in dealership
management and ownership, place certain restrictions on the dealership (such as
minimum working capital requirements) and provide for termination of the
franchise agreement by the manufacturer in certain instances. See Note 14.
F-7
Revenue Recognition
Revenues for vehicle and parts sales are recognized upon delivery to or
acceptance by the customer. Revenues for vehicle service are recognized when the
service has been completed. Sales discounts and service coupons are accounted
for as a reduction to the sales price at the point of sale. Manufacturer
incentives and rebates are not recognized until earned in accordance with
respective manufacturers incentive programs. See Note 12 for effect of EITF
02-16 "Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor".
Finance, Insurance and Service Contract Income Recognition
Hometown arranges financing for customers through various institutions and
receives financing fees equal to the difference between the loan rates charged
to customers and the predetermined financing rates set by the financing
institution. In addition, Hometown receives commissions from the sale of credit
life and disability insurance and extended service contracts to customers. The
revenues from financing fees and commissions are generally recorded at the time
of the sale of the vehicles. These revenues are recorded on a net basis.
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. At December 31, 2004 and 2003 Hometown had $1,140,000 and
$1,225,000 of related deferred revenue, respectively. At December 31, 2004 and
2003, Hometown also had other deferred revenue of $319,000 and $112,000,
respectively. The December 31, 2004 amount 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.
Hometown may be charged back ("charge-backs") for unearned financing fees,
insurance or service contract commissions in the event of early termination of
the contracts by the customers. The reserves for future charge backs are based
on historical operating results and the termination provisions of the applicable
contracts. Finance, insurance and service contract income, net of estimated
charge-backs, are included in other dealership revenue in the accompanying
consolidated financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash on deposit,
marketable securities and liquid investments, such as money market accounts,
that have an original maturity of three months or less at the date of purchase.
Contracts-in-Transit
Contracts-in-transit, included in Accounts Receivable net, represent
receivables from finance companies for the portion of the vehicle purchase price
financed by customers through sources arranged by Hometown.
Inventories
New, used and demonstrator vehicle values are stated at the lower of cost
or market,
F-8
determined on a specific unit basis. Parts, accessories and other 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 December 31, 2004 and
2003.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated useful life of the asset.
Capital Lease Obligations
Hometown classifies two dealership leases and certain vehicle leases as
capital leases. Hometown depreciates these assets over the lesser of the asset's
useful life or the terms of the lease agreements.
Company Guarantees
Hometown may guaranty or partially guaranty loans advanced by financial
institutions to certain customers. It is Hometown's policy to provide reserves
for potential future default losses based on available historical information.
Hometown guarantees certain mortgage debt obligations of the lessor, related to
two dealership leases. See Notes 7, 8 and 14.
Company Warranties
Hometown's new vehicle sales and certain used vehicle sales have
manufacturer warranties. Hometown also provides limited warranties on certain
used vehicles sold at retail. Hometown also sells parts and service.
Manufacturer parts and service are covered by limited warranties. It is
Hometown's policy to provide reserves for warranty costs based on available
historical information. Certain Hometown dealerships also provide a three or
five year 100,000 mile-limited warranty on certain vehicles. The cost of this
warranty is included in the cost of sale of the vehicle.
Impairment of Long-lived Assets
Hometown periodically reviews long-lived assets for impairment whenever
changes in the circumstances indicate that the carrying amount of the assets may
not be fully recoverable. Hometown considers relevant cash flow, management's
strategic plans, significant decreases in the market value of the asset and
other available information in assessing whether the carrying value of the
assets can be recovered. When such events occur, Hometown compares the carrying
amount of the assets to undiscounted expected future cash flows from the use and
eventual disposition of the asset. If this comparison indicates an impairment,
the carrying amount would then be compared to the fair value of the long-lived
asset. An impairment loss would be measured as the amount by which the carrying
value of the long-lived asset exceeds its fair value. The difference would be
recorded as an impairment of assets. Hometown recorded an asset impairment
charge for assets that were held for sale of $150,000 for the year ended
December 31, 2002. See Notes 3 and 4. Hometown does not believe any other
impairment exists based on this methodology.
F-9
Income Taxes
Hometown accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under this method, deferred income taxes are
recorded based upon differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the underlying assets are realized or liabilities
are settled. A valuation allowance reduces deferred tax assets when it is more
likely than not that some or all of the deferred tax assets will not be
realized. See Note 11.
Interest Expense
Automobile manufacturers periodically provide floor plan interest
assistance, or subsidies, which reduce the dealer's cost of financing. The
accompanying consolidated financial statements reflect interest expense gross.
Floor plan interest assistance is recorded as a reduction of cost of sales when
the vehicle is sold. See Note 6.
Fair Value of Financial Instruments
Hometown's financial instruments consist primarily of cash and cash
equivalents, floor plan notes payable and long-term debt. The carrying amounts
of cash equivalents approximate fair value due to the short maturity of those
instruments. The carrying amounts of floor plan notes payable approximate fair
value due to their variable interest rates. The fair market value of long-term
debt approximated the carrying value at December 31, 2004. The fair value of
long-term debt is estimated based on the current rates offered for similar debt
instruments with the same remaining maturities.
Advertising and Promotion
Hometown expenses advertising and promotion as incurred. Automobile
Manufacturers periodically provide advertising assistance, or subsidies. In
accordance with EITF Issue No. 02-16, this is recorded as a reduction of the
dealer's advertising expense if directly related to the performance of
advertising in accordance with manufacturer guidelines or as a reduction of cost
of sales upon sale of the vehicle. See Note 12.
Concentration of Credit Risk
Financial instruments that potentially subject Hometown to a concentration
of credit risk consist principally of cash, cash equivalents,
contracts-in-transit and accounts receivable. Hometown maintains cash balances
at financial institutions that may, at times, be in excess of federally insured
levels. Also, Hometown grants credit to individual customers and local companies
in the automobile repair business such as automotive parts stores, automotive
mechanics, and automotive body repair shops. Hometown performs ongoing credit
evaluations of its customers and generally does not require collateral. Hometown
maintains an allowance for doubtful accounts at a level which management
believes is sufficient to provide for potential credit losses.
Earnings (loss) per Share
"Basic earnings (loss) per share" represents net income (loss) divided by
the weighted
F-10
average shares outstanding. "Diluted earnings (loss) per share" represents net
income (loss) divided by weighted average shares outstanding adjusted for the
incremental dilution of potentially dilutive securities. See Note 10.
Stock-based Compensation
At December 31, 2004, Hometown has one stock-based employee compensation
plan, the 1998 Stock Option Plan (the "Stock Option Plan") that is described
more fully in Note 16. 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.
Year Ended December 31,
2004 2003 2002
(in thousands)
---------- ---------- ----------
Net income (loss), as reported $ 3,748 $ 2,378 $ (22,932)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (1) (23) (35) (28)
---------- ---------- ----------
Pro forma net income (loss) $ 3,725 $ 2,343 $ (22,960)
========== ========== ==========
Earnings (loss) per share:
Basic, as reported $ 0.51 $ 0.33 $ (3.20)
Basic, pro forma $ 0.51 $ 0.33 $ (3.20)
Diluted, as reported $ 0.50 $ 0.33 $ (3.20)
Diluted, pro forma $ 0.50 $ 0.32 $ (3.20)
(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.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principals generally accepted in the United States requires
management to make estimates and assumptions in determining the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
F-11
Consolidated Statements of Cash Flows
The net change in floor plan financing of inventory, which is a customary
financing technique in the industry, is reflected as an operating activity in
the accompanying consolidated statements of cash flows.
Reclassification
Certain prior year amounts have been reclassified to conform to the 2004
presentation.
Segments
Hometown's management considers its business to be a single
segment-Automotive Retailing. Hometown's sales and services are through similar
distribution channels, and Hometown's customers are similar for all sources of
revenues. Management evaluates its operating results by dealerships, which are
all located in the Northeastern United States.
New Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51. The objective of this interpretation is to provide
guidance on how to identify a variable interest entity ("VIE") and requires the
VIE to be consolidated by its primary beneficiary. The primary beneficiary is
the party that absorbs a majority of the VIE's expected losses and/or receives a
majority of the entity's expected residual returns, if they occur. In December
2003, the FASB issued FIN 46(R) ("Revised Interpretations") delaying the
effective date for certain entities created before February 1, 2003 and making
other amendments to clarify the application of the guidance. In adopting FIN
46(R) Hometown has evaluated its variable interests to determine whether they
are in fact VIE's and whether Hometown was the primary beneficiary of the VIE.
This evaluation resulted in determining that Hometown has a VIE with a related
party, whereby Hometown guarantees the mortgage debt of the company. See Notes 9
and 14. The adoption of this interpretation did not have a material effect on
Hometown's financial statements.
SFAS No. 123 (Revised 2004), "Share-Based Payment," issued in December
2004, is a revision of FASB Statement 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and its related implementation guidance. The Statement focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. SFAS No. 123 (Revised 2004)
requires a public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award (with limited exceptions). That cost will be recognized over the
period during which an employee is required to provide service in exchange for
the award. This statement is effective as of the beginning of the first interim
or annual reporting period that begins after June 15, 2005 and the Company will
adopt the standard in the third quarter of fiscal 2005. The Company has not
determined the impact, if any, that this statement will have on its consolidated
financial position or results of operations.
F-12
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Accounts receivable, net consist of the following:
12/31/04 12/31/03
(in thousands)
------ ------
Due from manufacturers $1,584 $1,741
Due from finance companies 2,378 3,090
Parts and service receivables 637 738
Other 482 489
------ ------
Total receivables, net $5,081 $6,058
====== ======
The allowance for doubtful accounts was $0.3 million as of December 31,
2004 and 2003. In assessing the allowance for doubtful accounts, Hometown
considers historical losses as well as current performance with respect to past
due accounts.
Inventories, net consist of the following:
12/31/04 12/31/03
(in thousands)
------- -------
New Vehicles $33,616 $28,420
Used Vehicles 7,761 7,255
Parts, accessories and other 2,063 2,099
------- -------
Total Inventories $43,440 $37,774
======= =======
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 adjustment was $0.7 million at December 31, 2004 and
2003.
Prepaid Expenses and Other Current Assets - Assets Held For Sale
Included in Prepaid Expenses and Other Current Assets as of December 31,
2004 and 2003 is land held for sale of $300,000. This is net of an impairment
charge of $150,000 that was recorded at December 31, 2002 to write-down the
asset to fair value. The impairment charge is included in Other Expense in
Hometown's Consolidated Statements of Operations for the year ended December 31,
2002. See Note 17. The land held for sale is not being used in Hometown's
business. Prior to December 31, 2003, Hometown decided to sell the property and
has been marketing the property, but has been hampered by certain state
environmental regulations which were passed in 2004. Hometown is evaluating the
impact of the new regulations on the potential development of the property and
the sale agreement.
F-13
Accounts payable and accrued expenses consist of the following:
12/31/04 12/31/03
(in thousands)
------ ------
Accounts payable, trade $2,320 $2,030
Accrued compensation costs 684 717
Sales and use tax 464 768
Reserve for finance, insurance and service contract charge-backs 415 510
Accrued legal and professional fees 315 434
Accrued interest 286 238
Reserve for policy work expenses 208 175
Customer payoffs 135 259
Other accrued expenses 279 667
------ ------
Total $5,106 $5,798
====== ======
Other long-term liabilities and deferred revenue
Hometown receives commissions from the sale of insurance products and
extended service contracts to customers. These revenues are recorded on a net
basis. 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 over a five-year period. At December 31, 2004
Hometown had $1,459,000 of deferred revenue of which $735,000 was current and
$724,000 was long-term. Included in this amount is other deferred revenue of
$319,000, which 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. At December 31, 2003 Hometown had
$1,337,000 of deferred revenue of which $609,000 was current and $728,000 was
long-term. Included in this amount is other deferred revenue of $112,000.
F-14
4. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
12/31/04 12/31/03
Lives in Years (in thousands)
------------------ -------- --------
Land -- $ 4,246 $ 4,246
Land improvements 15 to 21 84 84
Buildings and leasehold improvements (1) 7 to 31.5 12,101 10,262
Machinery, equipment, furniture and fixtures 3 to 10 3,321 3,272
Vehicles 2 to 3 171 184
Construction in progress 224 128
-------- --------
Sub-total 20,147 18,176
Less - accumulated depreciation and amortization (6,293) (5,498)
-------- --------
Total $ 13,854 $ 12,678
======== ========
(1) Shorter of estimated useful life or lease term.
Included in buildings and leasehold improvements are capital leases for
two dealerships totaling $5,180,000 for the years ended December 31, 2004 and
2003 which are leased from related parties. See Notes 8, 9 and 13. Hometown
begins depreciating assets once the asset is placed in service. Depreciation and
amortization expense for property and equipment for the years ended December 31,
2004, 2003 and 2002 was $932,000, $944,000 and $943,000 respectively.
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 bank loan and a note held by the seller.
See Note 7.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, Hometown adopted SFAS 142 "Goodwill and Other
Intangible Assets". Upon adoption, Hometown ceased recording goodwill
amortization. SFAS 142 requires the completion of a transitional impairment test
in the year of adoption, with any impairment identified upon initial
implementation treated as a cumulative effect of a change in accounting
principle.
Under SFAS 142, goodwill impairment is deemed to exist if the net book
value of a reporting unit exceeds its estimated fair value. According to the
criteria under SFAS 142, it has been determined that Hometown is a single
reporting unit.
During 2002, Hometown completed its goodwill impairment testing which
resulted in Hometown recording a one-time, non-cash charge of approximately
$23.7 million to write-off the carrying value of goodwill. This charge is
non-operational in nature and is reflected as a
F-15
cumulative effect of an accounting change in the accompanying statement of
operations for the year ended December 31, 2002. Approximately $9.6 million of
this charge is tax deductible, resulting in a deferred tax benefit of
approximately $3.8 million against which a full valuation allowance was
recorded. Hometown has subsequently reduced its valuation allowance. See Note
11.
In calculating the impairment charge, the fair value of the reporting unit
was estimated using both the discounted cash flow method and the guideline
company method. The discounted cash flow method used Hometown's estimates of
future cash flows discounted to present value using an appropriate discount
rate. The guideline company method selects certain value measures of guideline
companies and calculates appropriate market multiples based on the fundamental
value measures of the guideline companies and compares same to Hometown. The
guideline companies chosen were other publicly traded companies within
Hometown's Standard Industrial Classification (SIC) code. These methodologies
differ from Hometown's previous policy, as permitted under SFAS 121, using
undiscounted cash flows to determine if goodwill is recoverable.
The goodwill impairment is associated with goodwill that resulted from
acquisitions since the formation of Hometown. The amount of the impairment
reflects the effect of the change in methodology in determining impairment
charges as discussed above.
As of December 31, 2004 and 2003, the Company's intangible assets
consisted of the following:
12/31/04 12/31/03
(in thousands)
----- -----
Deferred finance charges $ 272 $ 267
Accumulated amortization (121) (98)
Non-compete agreement 381 381
Accumulated amortization (333) (270)
Franchise fee 10 10
Accumulated amortization (3) (1)
----- -----
Net intangible assets (a) $ 206 $ 289
===== =====
(a) These assets are included in Other Assets in the consolidated
financial statements
Aggregate Amortization Expense of Intangible Assets for the years ended
December 2004, 2003 and 2002 is $87,000, $85,000 and $85,000, respectively.
Estimated Amortization Expense of Intangible Assets, in thousands:
For the year ended 12/31/05 $71
For the year ended 12/31/06 $23
For the year ended 12/31/07 $18
For the year ended 12/31/08 $15
For the year ended 12/31/09 $14
F-16
6. FLOOR PLAN NOTES PAYABLE AND INTEREST EXPENSE
12/31/04 12/31/03 12/31/02
(in thousands)
------- ------- -------
Floor plan notes payable $42,474 $38,003 $38,522
======= ======= =======
Floor plan interest expense $ 1,877 $ 1,632 $ 1,713
======= ======= =======
Since March 15, 2001, 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. As of December 31, 2004 Hometown's floor plan liability
with FMCC is $42.5 million. The FMCC agreement has no set maturity date and it
is the intention of Hometown to continue with this financing on an ongoing
basis.
For the first year of the agreement, through May 2002, the FMCC floor plan
loans carried an interest rate of prime less 0.75% for new vehicles and prime
less 0.50% for used vehicles. From January 1, 2002 through May 31, 2002,
interest was approximately 4.0% for new vehicles and 4.25% for used vehicles.
In June 2002, Hometown renewed its floor plan agreement with FMCC and is
now subject to the FMCC standard financing agreement which provides for floor
plan loans for new and used vehicles that have variable interest rates that
increase or decrease based on movements in the prime or LIBOR borrowing rates
and FMCC financing volume. At December 31, 2004, interest rates were
approximately 4.94% for new vehicles and 7.00% for used vehicles. At December
31, 2003, interest rates were approximately 3.75% for new vehicles and 5.75% for
used vehicles. The average interest rate was approximately 4.42%, 4.25% and
5.20% for 2004, 2003 and 2002, respectively.
Automobile manufacturers periodically provide floor plan interest
assistance, or subsidies, which reduce the dealer's cost of financing. The
accompanying consolidated financial statements reflect interest expense gross.
Floor plan interest assistance was $1.5 million, $1.6 million and $1.7 million
for the years ended December 31, 2004, 2003 and 2002, respectively, and is
recorded as a reduction of cost of sales when the vehicle is sold. Of these
amounts, $0.3 million was recorded as a reduction of inventory for each of the
years ending December 31, 2004, 2003 and 2002.
F-17
7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
12/31/04 12/31/03
(in thousands)
------- -------
Real estate mortgage notes payable, due in monthly installments including
interest at 10.0%, maturing May 2014 $ 7,447 $ 7,872
Real estate capital lease obligations, due in monthly installments including
interest at 10.0%, maturing December 2013. See Note 8 4,335 4,163
Real estate mortgage note payable.(b) 1,025 --
Capital lease obligations on rental vehicles, due in monthly installments
including interest ranging from 3.8% to 5.5%, maturing on various dates
through April 2012. See Note 8 892 811
Real estate mortgage note payable, due in monthly installments including
interest at 10.5%, maturing April 2007. Note partially finances the
Brattleboro building purchase. See Note 4 241 --
Notes payable on rental vehicles, due in monthly installments including
interest of 6.5%, maturing December 2005 48 96
Various due in monthly installments including interest ranging from 5.3% to
15.6%, maturing on various dates through October 2009 138 130
------- -------
14,126 13,072
Less: Current portion 5,505 996
------- -------
Total Long Term Debt and Capital Lease Obligations (a) $ 8,621 $12,076
======= =======
(a) Hometown is subject to certain financial covenants related to its real
estate mortgages. At December 31, 2004, Hometown was in default of its loan
agreement for Baystate Lincoln Mercury for failure to comply with a financial
covenant. Accordingly, Hometown has reclassified $4,319,000 of related long-term
debt to current at December 31, 2004. Total debt for this mortgage at December
31, 2004 is $4,613,000. On March 16, 2005, the lender notified Hometown that it
is not declaring an event of default in connection with the loan, however,
reserving all rights to declare an event of default in the future should the
financial covenant default not be cured. If an event of default was declared and
only at the lenders option, Hometown could be required to pay all outstanding
debt plus a defeasance penalty and transaction costs totaling approximately
$1,400,000. Although Hometown does not believe the lender will call the loan, in
the event it is called, Hometown believes it would be able to secure alternate
financing. Hometown believes the market value of the property is approximately
$6,200,000. Hometown believes it would be able to borrow up 100% of the market
value of the property. Assuming borrowing $6,000,000 at a current variable
interest rate of approximately 7.46% for a 15-year mortgage, monthly payments
would be approximately $6,800 lower than the current monthly payments being made
on the property.
(b) Mortgage partially financing the Brattleboro building purchase (See Note 4)
has an interest rate of 7.0% through May 2009 and is variable thereafter. The
monthly payments are sufficient to amortize the loan over a 15-year period.
After 10 years, May 2014, the terms of the bank loan will be renegotiated.
F-18
Maturities of long-term debt and capital lease obligations for each of the
next five years and thereafter are as follows:
Aggregate
Year ending Obligation
December 31, (in thousands)
---------------- -------------
2005 $ 5,505
2006 905
2007 905
2008 851
2009 783
Thereafter 5,177
------
$14,126
=======
8. CAPITAL LEASES
The following is an analysis of the leased property under capital leases
by major classes:
Asset Balances at December 31,
2004 2003
(in thousands)
------- -------
Rental and loaner vehicles $ 981 $ 928
Less: Accumulated amortization (89) (117)
------- -------
Net rental and loaner vehicles (included in Inventories) $ 892 $ 811
======= =======
Buildings $ 5,180 $ 5,180
Less: Accumulated amortization (2,156) (1,820)
------- -------
Net Buildings (included in Property & Equipment) $ 3,024 $ 3,360
======= =======
F-19
The following is a schedule by years of future minimum lease payments
under capital leases together with the present value of the net minimum lease
payments as of December 31, 2004:
Minimum Lease
Year ending Payments
December 31, (in thousands)
---------------- --------------
2005 $ 1,155
2006 1,155
2007 1,155
2008 1,085
2009 910
Thereafter 3,990
-------------
Total minimum lease payments 9,450
Less: Amount representing estimated executory costs,
included in total minimum lease payments (226)
-------------
Net minimum lease payments 9,224
Less: Amount representing interest (3,997)
-------------
Present value of net minimum lease payments * $ 5,227
========
* Reflected in the balance sheet as current and non-current
obligations under capital leases of $491 and $4,736, respectively.
9. RELATED PARTY TRANSACTIONS
Leases
Certain officers of Hometown lease to the dealerships the premises under
various leases, two of which are classified as capital leases. See Notes 4, 8
and 13. 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. Hometown
recorded the lease as a capital lease. As of December 31, 2004 the mortgage debt
balance is $4.3 million, which equals the capital lease obligation. Hometown
makes annual lease payments of $864,000 to the landlord. The annual mortgage
payments made by the landlord total approximately $774,000. The mortgage matures
March 2013.
10. CAPITAL STRUCTURE AND PER SHARE DATA
Preferred Stock
Hometown's Certificate of Incorporation provides that its Board of
Directors has the authority, without further action by the holders of the
outstanding Common Stock, to issue up to two million shares of Preferred Stock
from time to time in one or more classes or series, to fix the number of shares
constituting any class or series and the stated value thereof, if different from
the
F-20
par value, and to fix the terms of any such series or class, including dividend
rights, dividend rates, conversion or exchange rights, voting rights, rights and
terms of redemption (including sinking fund provisions), the redemption price
and the liquidation preference of such class or series. As of December 31, 2004
and 2003, Hometown does not have any Preferred Stock outstanding. The
designations, rights and preferences of any Preferred Stock would be set forth
in a Certificate of Designation which would be filed with the Secretary of the
State of Delaware.
Common Stock - Class A and Class B
The Class A Common Stock and the Class B Common Stock each have a par
value of $.001 per share and are identical in all respects, except voting rights
and the convertibility of the Class B Common Stock. Subject to any special
voting rights of any series of Preferred Stock that may be issued in the future,
the holders of Class A Common Stock are entitled to one vote per share and the
holders of Class B Common Stock are entitled to ten votes per share. Except as
otherwise required by law, both Class A Common Stock and Class B Common Stock
vote together as one class on all matters to be voted on by stockholders of
Hometown, including the election of directors. Class A Common Stock is not
convertible. The Class B Common Stock is convertible into Class A Common Stock
on a share for share basis, at any time at the election of the holder and is
automatically converted into Class A Common Stock upon any transfer to a person
who is not then an officer or director of Hometown or of a subsidiary of
Hometown. All of the outstanding shares of Class B Common Stock represent
approximately 87% of the aggregate voting power of Hometown. Executive officers
and directors control approximately 55% of the aggregate voting power of
Hometown. Neither class of Common Stock has redemption, preemptive or sinking
fund rights. Holders of both classes of Common Stock are entitled to dividends
as and when declared by the Board of Directors from funds legally available
therefore and, upon liquidation, dissolution or winding up of Hometown, to
participate ratably in all assets remaining after payment of all liabilities.
All shares of Common Stock issued and outstanding are fully-paid and
non-assessable.
Warrants
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.
Per Share Data
"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 to purchase approximately 518,000
shares of common stock were outstanding during 2004. Options and warrants to
purchase approximately 1,112,000 and 1,378,000 shares of common stock were
outstanding during 2003 and 2002, respectively. Basic and diluted weighted
average shares for the years ended December 31, 2004, 2003 and 2002 are as
follows:
F-21
Year Ended December 31,
2004 2003 2002
--------- --------- ---------
Basic, Weighted Average Shares 7,286,931 7,175,105 7,175,105
========= ========= =========
Common Stock Equivalents 152,093 40,387 --
--------- --------- ---------
Diluted, Weighted Average Shares 7,439,024 7,215,492 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 and
2003, options and warrants to purchase 248,000 and 842,000 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. In 2002, options and
warrants to purchase 1,378,000 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 per share for the year ended December 31,
2004 is $0.51 and $0.50, respectively, including $0.38 and $0.37 respectively,
resulting from a tax benefit recorded primarily due to the reduction of a
valuation allowance on the deferred tax asset related to tax deductible
unamortized goodwill and net operating losses. See Note 11. The basic and
diluted income per share for the year ended December 31, 2003 is $0.33 including
$0.09 resulting from a tax benefit recorded primarily due to the reduction of a
valuation allowance on the deferred tax asset related to tax deductible
unamortized goodwill and $0.08 resulting from a gain on the sale of a
Chrysler/Jeep Sales and Service Franchise in June 2003. The basic and diluted
(loss) per share for the year ended December 31, 2002 is $(3.20), which includes
basic and diluted income per share before cumulative effect of accounting change
of $0.10 and basic and diluted (loss) per share for a cumulative effect of
accounting change of $(3.30), resulting from the goodwill impairment charge
associated with the implementation of SFAS 142. See Note 5 to the consolidated
financial statements for the effect of recognition of an impairment of the
carrying value of its goodwill in 2002, in accordance with SFAS 142.
11. INCOME TAXES
12/31/04 12/31/03 12/31/02
(in thousands)
-------- -------- --------
Federal:
Current $ (31) $ 60 $ --
Deferred (1,977) 205 428
State:
Current 223 347 19
Deferred (311) (85) 24
------- ------- -------
Provision (Benefit) for Income Taxes $(2,096) $ 527 $ 471
======= ======= =======
F-22
Actual income tax expense (benefit) differs from income tax expense
computed by applying a U.S. federal statutory corporate tax rate of 34% to
income before income taxes as follows:
12/31/04 12/31/03 12/31/02
-------- -------- --------
Provision at the statutory rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State income tax, net of benefit for
Federal deduction (3.5%) 6.0% 2.3%
Change in valuation allowance (a) (150.7%) (15.5%) --
Adjustment for prior year over accruals (6.8%) (6.3%) --
Other 0.1% (0.1%) 1.5%
----- ----- -----
Effective tax rate (126.9%) 18.1% 37.8%
===== ===== =====
Deferred income taxes are provided for temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
12/31/04 12/31/03
-------- --------
(in thousands)
DEFERRED INCOME TAXES AND TAXES RECEIVABLE -
SHORT-TERM:
Tax assets related to goodwill $ 181 $ --
Current net operating loss carryforward(c) 354 162
Reserves and accruals not deductible until paid 538 887
Tax on current portion of deferred revenue 294 244
Tax prepayments and prior year overpayments 97 56
------- -------
Total $ 1,464 $ 1,349
======= =======
DEFERRED TAX ASSETS - LONG-TERM:(b)
Tax assets related to goodwill $ 2,199 $ 2,643
Net operating loss carryforward(c) 1,159 999
Tax on long term portion of deferred revenue 290 291
Deferred tax on capital leases treated as operating
leases for tax purposes 353 321
Other 74 98
Valuation allowance(a) (1,153) (3,642)
------- -------
Total $ 2,922 $ 710
======= =======
F-23
12/31/04 12/31/03
(in thousands)
------- -------
DEFERRED TAX LIABILITIES - LONG-TERM:
Depreciation $ (123) $ (125)
------- -------
Total $ (123) $ (125)
======= =======
Net deferred tax assets - short term $ 1,367 $ 1,293
Net deferred tax assets - long term 3,952 4,227
Valuation allowance on long-term assets (1,153) (3,642)
------- -------
Net deferred tax asset $ 4,166 $ 1,878
======= =======
(a) In 2004, the deferred tax asset valuation allowance decreased by
$2,489,000. This decrease is primarily the result of Hometown's analysis of the
likelihood of realizing the future tax benefit of tax loss carryforwards and
additional temporary differences. Realization of the net deferred tax asset (net
of recorded valuation allowance) is dependent upon profitable operations and
future reversals of existing taxable temporary differences. Although realization
is not assured, Hometown believes it is more likely than not that the net
recorded benefits will be realized through the reduction of future taxable
income. The amount of the net deferred tax assets considered realizable,
however, could be reduced in the near term if actual future taxable income is
lower than estimated, or if there are differences in the timing or amount of
future reversals of existing taxable temporary differences.
(b) Long-term deferred tax assets are recorded in other assets in the
consolidated balance sheets.
(c) Federal NOL's of $1,570,000 begin to expire in 2021. State NOL's of
$10,547,000 begin to expire in 2005. See (a) above.
12. ADVERTISING AND PROMOTION
Hometown expenses advertising and promotion as incurred. Advertising and
promotion expenses included in Selling, General and Administrative Expenses, net
certain of manufacturers' rebates and assistance, were approximately $4.0
million, $3.5 million and $2.9 million for the years ended December 31, 2004,
2003 and 2002, respectively. Manufacturers advertising rebates and assistance
recorded as a reduction of advertising expense was approximately $0.4 million,
$0.7 million and $0.6 million for the years ended December 31, 2004, 2003 and
2002, respectively.
Certain manufacturers will charge Hometown for national and regional
advertising in the invoice price of the vehicle. These charges are included in
the cost of vehicles sold by Hometown. The expense is recognized in cost of
sales upon the sale of the vehicle.
F-24
Certain manufacturers will reimburse the dealerships for a portion of
these advertising costs upon providing the manufacturer documentation of
advertising performed by the dealership according to the manufacturers
advertising and marketing program guidelines. These rebates were $0.4 million
and $0.7 million in 2004 and 2003, respectively, and were recorded as a
reduction of advertising expense. Other manufacturers reimburse dealerships a
flat amount of the advertising charged without any advertising required by the
dealerships. In 2004 and 2003, in accordance with EITF Issue No. 02-16, these
amounts are reflected as a reduction of the inventory amount and as a reduction
of cost of sales upon sale of the vehicle. Approximately $0.3 million has been
reflected as a reduction of cost of sales in both 2004 and 2003. In prior years
these amounts were reflected as a reduction of advertising expense. In November
2002, the EITF reached a final consensus on EITF Issue No. 02-16, resulting in
certain co-op advertising recoveries, which would previously have been recorded
as a reduction of SG&A, being recorded as a reduction of cost of sales, buying
and occupancy.
13. OPERATING LEASES
Hometown has executed leases for the premises occupied by its dealerships.
Certain of the leases are with related parties. Hometown also has operating
leases relating to its data processing equipment. The minimum rental commitments
required under these operating leases after December 31, 2004 are as follows:
Related Parties
Year ending December 31, Total Obligation (in thousands) Other
------------------------- ------------------ ---------------- ------------
2005 $1,391 $ 939 $ 452
2006 1,021 733 288
2007 949 733 216
2008 949 733 216
2009 733 733 -
Thereafter 2,952 2,952 -
------- ------- ------
Total (1) $7,995 $6,823 $1,172
======= ======= ======
(1) Minimum rental commitments have not been reduced by minimum
sub-lease rentals of $20,000 per year, expiring November 2005.
Total expense for operating leases and rental agreements was $1, 859,000,
$1,851,000 and $1,938,000 for the years ended December 31, 2004, 2003 and 2002,
respectively. Rental expense for the years ended December 31, 2004, 2003 and
2002, does not include sub-lease income received of $20,000, $3,000 and $93,000,
respectively.
Total expense for operating leases and rental agreements with related
parties was $1,149,000, $912,000 and $912,000 for the years ending December 31,
2004, 2003 and 2002, respectively.
F-25
14. COMMITMENTS AND CONTINGENCIES
Litigation
During the fourth quarter of 2004, Hometown announced that it had resolved
in principle to settle the litigation matters described in Footnote 9 in the
Notes to Unaudited Consolidated Financial Statements as contained in Hometown's
most recent Form 10-Q as filed with the Securities and Exchange Commission on
November 12, 2004. On March 3, 2005 the execution and delivery of a settlement
agreement and applicable releases of claims from all parties to the litigation
was completed. The settlement agreement settles all claims made by Salvatore A.
Vergopia and Edward A. Vergopia, former directors and executive officers of the
Corporation, and Janet Vergopia, the wife of Salvatore A. Vergopia (the
"Vergopias"). The settlement also finally resolved the related insurance
coverage litigation with Universal Underwriters Group and The Chubb Group of
Insurance Companies. The gross payment to the Vergopias by all parties is $4
million of which $600,000 is payable by Hometown. The settlement will be
completed when all the material terms have been satisfied including Hometown's
payment of its share of the gross settlement proceeds. The settlement with the
Vergopias and the insurers included an exchange of mutual releases of claims
among the parties and a withdrawal of all claims with prejudice and without
costs or attorneys fees to any party. The settlement also provides for the
transfer to the Vergopias of certain Westwood Lincoln Mercury Sales, Inc.
assets, including its Lincoln Mercury franchise, subject to manufacturer
approval which is pending, the termination of Hometown's Westwood, New Jersey
lease, and the receipt by Hometown of all of the 940,000 shares of Class B
Common Stock owned by the Vergopias. The Settlement Agreement does not
constitute an admission of liability or wrongdoing by any party. The $600,000 is
included in Accounts Payable and Accrued Expenses in Hometown's Consolidated
Balance Sheet as of December 31, 2004.
The receipt of the Hometown stock will be recorded at fair market value on
March 3, 2005, the date of the executed settlement agreement, and will be shown
as a reduction of Stockholders' Equity. The assets and liabilities being
transferred to the Vergopias will be recorded as a reduction of those accounts
at book value. If the fair market value of Hometown stock exceeds the net book
value of the assets being transferred, a gain will result from the transaction.
Hometown wrote off the goodwill associated with this franchise in 2002. See Note
5.
Also, during the fourth quarter of 2004, Hometown fully resolved the
litigation concerning the lease for property in Morristown, New Jersey formerly
used by Hometown's subsidiary Morristown Auto Sales, Inc., including all claims
among the landlord, Morristown and Crestmont M.M., L.P., the assignee of the
lease agreement. The cost to Hometown is $150,000 with $75,000 payable
immediately, that has already been paid as of December 31, 2004, and the balance
in six equal monthly installments commencing January 1, 2005. This liability is
included in Accounts Payable and Accrued Expenses in Hometown's Consolidated
Balance Sheet as of December 31, 2004.
Hometown Auto Retailers, Inc. d/b/a Muller Toyota, Inc. has been named as
one of 1,667 defendants in a complaint filed by Maryann Cerbo, et. al. in the
Superior Court of New Jersey in Bergen County and allegedly served upon Hometown
on December 30, 2004. The action has been brought on behalf of about 111 named
plaintiffs and, purportedly on behalf of a class of individuals and companies
who have purchased or leased a motor vehicle from the defendants.
F-26
Plaintiffs contend that the defendants (a) overcharged for registration and/or
title fees; (b) failed to properly itemized documentary costs and governmental
costs; (c) charged grossly excessive documentary fees not reasonably related to
costs; and (d) failed to disclose that the defendants are not required to
perform certain documentary services. It appears from the complaint that
plaintiffs have attempted to name as defendants all franchised automobile
dealers in the State of New Jersey, as well as a large assortment of other
persons and entities. There are no allegations that Hometown ever performed any
services for any of the plaintiffs. The complaint makes certain class action
allegations and alleges violations of the New Jersey Consumer Fraud Act as well
as common law fraud. Hometown does not believe that the eventual outcome of this
case will have a material adverse effect upon Hometown's consolidated financial
position or results of operations.
Hometown from time to time may be a defendant in lawsuits arising from
normal business activities. Management reviews pending litigation with legal
counsel and believes that the ultimate liability, if any, resulting from such
actions will not have a material adverse effect on Hometown's consolidated
financial position or results of operations.
Guarantees
Hometown may guaranty or partially guaranty loans advanced by financial
institutions to certain customers. It is Hometown's policy to provide reserves
for potential future default losses based on available historical information.
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. Hometown recorded the lease as a
capital lease. As of December 31, 2004 the mortgage debt balance is $4.3
million, which agrees to the capital lease obligation. Hometown makes annual
lease payments of $864,000 to the landlord. The annual mortgage payments made by
the landlord total approximately $774,000. The mortgage matures March 2013. See
Notes 7 and 8 to the consolidated financial statements.
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
F-27
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 December 31, 2004 and 2003, Hometown has a reserve of
$208,000 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
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 Costs Balance At
Reserve for Policy Work Beginning of Year and Expenses Deductions End of Year
------------------------------ ------------------ ---------------- ------------- --------------
Year Ended 12/31/04 $175,000 $955,000 $(922,000) $208,000
Year Ended 12/31/03 $172,000 $785,000 $(782,000) $175,000
Year Ended 12/31/02 $226,000 $800,000 $(854,000) $172,000
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 discussed in Note 2 -
Finance, Insurance and Service Contract Income Recognition .
Franchise Agreements
Toyota Motor Sales, U.S.A., Inc. has extended Hometown's current Toyota
Dealer Agreement through April 18, 2005. 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, which has now been settled, including the Vergopia's as
discussed above. 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, 2004 had combined revenues of $98.1 million and pre-tax
income before allocation of corporate costs of
F-28
$2.2 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.; however, Toyota has reserved the
right to terminate the Toyota Dealership Agreements if sufficient progress is
not made to correct the alleged deficiencies. Should Hometown be notified by
Toyota that they intend to terminate the Toyota Dealership Agreements, Hometown
believes it would have a reasonable amount of time to cure the defaults.
15. EMPLOYEE BENEFIT PLANS
Hometown maintains the Hometown Auto Retailers, Inc. 401(k) Plan (the
"Plan") for the benefit of eligible employees, as defined. Participants may make
voluntary contributions of up to 15% of their compensation, subject to certain
IRS limitation. Hometown may make annual matching contributions to the Plan at
its discretion. Hometown made contributions of $18,000, $24,000 and $0 for the
years ended December 31, 2004, 2003 and 2002, respectively.
16. STOCK OPTION PLAN
In February 1998, as further amended in August 2002, in order to attract
and retain persons necessary for the success of Hometown, Hometown adopted its
1998 Stock Option Plan (the "Stock Option Plan") covering up to 830,000 shares
of Class A Common Stock. Pursuant to the Stock Option Plan, officers, directors,
key employees of Hometown and consultants to Hometown are eligible to receive
incentive and/or non-incentive stock options. The Stock Option Plan, which
expires in January 2008, is administered by the Board of Directors or a
committee designated by the Board of Directors. The selection of participants,
allotment of shares, determination of price and other conditions relating to the
purchase of options will be determined by the Board of Directors, or a committee
thereof, in its sole discretion. Stock options granted under the Stock Option
Plan are exercisable for a period of up to ten years from the date of grant at
an exercise price which is not less than the fair market value of the Common
Stock on the date of the grant, except that the term of an incentive stock
option granted under the Stock Option Plan to a stockholder owning more than 10%
of the outstanding Common Stock may not exceed five years and its exercise price
may not be less than 110% of the fair market value of the Common Stock on the
date of the grant.
F-29
The following tables summarizes information about stock option activity
and amounts:
Weighted
Number of Weighted Average Average Fair
Shares Price per Share Value
--------------- --------------------- ---------------
Balance at December 31, 2001 615,750 $ 4.17
Options Granted 120,000 .51 $ 0.33
Canceled (25,000) 2.97
------- ------
Balance at December 31, 2002 710,750 $ 3.60
Options Granted 100,000 0.38 $ 0.27
Canceled (186,250) 7.47
------- ------
Balance at December 31, 2003 624,500 $ 1.93
Options Granted 10,000 1.05 $ 0.67
Canceled (117,000) 5.79
------- ------
Balance at December 31, 2004 517,500 $ 1.04
======= ======
Exercisable at December 31, 2002 414,914 $ 5.26
======= ======
Exercisable at December 31, 2003 413,000 $ 2.45
======= ======
Exercisable at December 31, 2004 444,169 $ 1.13
======= ======
Number of
Range of Options Weighted Weighted Average Options
Exercise Outstanding at Average Exercise Price Exercisable Weighted Avg.
Prices 12/31/04 Remaining Life Per Share at 12/31/04 Exercise Price
----------- ---------------- ------------ --------------------- --------------- ----------------
$0.34 to
$0.65 220,000 3.96 $ 0.45 153,333 $ 0.47
$0.68 to
$1.50 198,750 2.80 $ 1.08 192,086 $ 1.09
$2.25 98,750 1.38 $ 2.25 98,750 $ 2.25
------- ---- ------ ------- ------
517,500 3.02 $ 1.04 444,169 $ 1.13
======= ==== ====== ======= ======
In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation", the fair value of option grants is estimated on the date of grant
using the Black-Scholes option-pricing model for pro forma footnote purposes.
In 2004, the dividend yield was assumed to be 0%, the risk-free interest
rate was 3.93%, the expected option life was 5 years and the expected volatility
was 75%. In 2003, the dividend yield was assumed to be 0%, the risk-free
interest rate ranged from 3.0% to 3.2%, the expected option life was 5 to 10
years and the expected volatility was 75%. In 2002, the dividend yield was
assumed to be 0%, the risk-free interest rate ranged from 3.4% to 4.4%, the
expected option life was 5 years and the expected volatility was 75%.
F-30
See Note 2 for impact of accounting for stock options using the fair value
method of accounting according to SFAS 123.
17. OTHER INCOME / OTHER EXPENSE - SALE OF CHRYSLER/JEEP SALES AND SERVICE
FRANCHISE
The significant components of Other Income and Other Expense are:
12/31/04 12/31/03 12/31/02
(in thousands)
-------- -------- --------
OTHER INCOME:
Oldsmobile termination payment $ 127 $ -- $ --
Gain on sale of Sales and Service Franchise -- 936 --
Insurance claim proceeds -- 8 40
Other 8 12 12
----- ----- -----
Total Other Income $ 135 $ 956 $ 52
===== ===== =====
OTHER EXPENSE:
Impairment of Assets $ -- $ -- $(150)
Miscellaneous (9) (3) (8)
----- ----- -----
Total Other Expense $ (9) $ (3) $(158)
===== ===== =====
Hometown received $127,000 from General Motors Corp. related to the
termination of the Oldsmobile product line, which was recorded in Other Income
in Hometown's Consolidated Statement of Operations for the year ended December
31, 2004.
On June 3, 2003 Hometown sold the Chrysler/Jeep Sales and Service
Franchise for its Waterbury, CT store for $950,000 in cash. The transaction
resulted in Hometown recording a $936,000 gain on the sale and is included in
Other Income in Hometown's Consolidated Statement of Operations for the year
ended December 31, 2003. Hometown relocated its corporate offices to this
location in January 2005. The lease for the property expires in 2013. Hometown
wrote off the goodwill associated with this franchise in 2002. See Note 5.
As of December 31, 2002, Hometown recorded a $150,000 asset impairment
charge to write-down the asset to fair value for assets that are held for sale.
See Notes 2 and 3. The impairment charge is included in Other Expense in
Hometown's Consolidated Statements of Operations for the year ended December 31,
2002.
F-31
18. UNAUDITED QUARTERLY FINANCIAL DATA
FOR THE YEAR ENDED DECEMBER 31, 2004
(in thousands, except per share data)
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.(*) TOTAL YEAR
----------- ----------- ----------- ----------- -----------
Net Sales $ 65,878 $ 68,722 $ 69,282 $ 61,399 $ 265,281
Gross profit 9,520 9,631 9,752 9,071 37,974
Income before taxes 140 319 781 412 1,652
----------- ----------- ----------- ----------- -----------
Net income $ 102 $ 233 $ 570 $ 2,843 $ 3,748
----------- ----------- ----------- ----------- -----------
Per share information:
Earnings per share, basic $ 0.01 $ 0.03 $ 0.08 $ 0.38 $ 0.51
Earnings per share, diluted $ 0.01 $ 0.03 $ 0.08 $ 0.38 $ 0.50
Weighted average shares, basic 7,175.1 7,191.6 7,389.4 7,389.4 7,286.9
Weighted average shares, diluted 7,471.3 7,324.5 7,493.2 7,466.2 7,439.0
(*) The fourth quarter of 2004 contains a tax valuation adjustment of $2.5
million. See Note 11.
FOR THE YEAR ENDED DECEMBER 31, 2003
(in thousands, except per share data)
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. TOTAL YEAR
----------- ----------- ----------- ----------- -----------
Net Sales $ 60,320 $ 78,103 $ 78,180 $ 63,174 $ 279,777
Gross profit 9,020 10,779 10,915 9,033 39,747
Income (loss) before taxes (187) 1,816 1,053 223 2,905
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (121) $ 1,083 $ 832 $ 584 $ 2,378
----------- ----------- ----------- ----------- -----------
Per share information:
Earnings (loss) per share, basic $ (0.02) $ 0.15 $ 0.12 $ 0.08 $ 0.33
Earnings (loss) per share, diluted $ (0.02) $ 0.15 $ 0.12 $ 0.08 $ 0.33
Weighted average shares, basic 7,175.1 7,175.1 7,175.1 7,175.1 7,175.1
Weighted average shares, diluted 7,175.1 7,175.1 7,212.1 7,299.7 7,215.5
F-32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULE
To the Shareholders and Directors of Hometown Auto Retailers, Inc.
The audits referred to in our report dated March 9, 2005 relating to the
consolidated financial statements of Hometown Auto Retailers, Inc., which is
contained in Item 8 of this Form 10-K included the audits of the financial
statement schedules for the years ended December 31, 2004, 2003 and 2002 listed
in the accompanying index. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statement schedules based upon our audits.
In our opinion such financial statement schedules present fairly, in all
material respects, the information set forth therein.
New York, New York /s/ BDO Seidman, LLP
March 9, 2005 BDO Seidman, LLP
S-1
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2004, 2003 and 2002
Additions
Balance at charged to Deductions, Balance at
Beginning Costs and net of Other End
Account Description of Year Expenses Write-offs Adjustments of Year
----------- ------------ ------------ ------------ -----------
Reserves for:
Finance contract charge-backs
Year ended December 31, 2004 $ 190,000 $ 317,000 $(327,000) $-- $ 180,000
========= ========= ========= === =========
Year ended December 31, 2003 $ 162,000 $ 277,000 $(249,000) $-- $ 190,000
========= ========= ========= === =========
Year ended December 31, 2002 $ 113,000 $ 367,000 $(318,000) $-- $ 162,000
========= ========= ========= === =========
Insurance contract charge-backs
Year ended December 31, 2004 $ 35,000 $ 34,000 $ (24,000) $-- $ 45,000
========= ========= ========= === =========
Year ended December 31, 2003 $ 35,000 $ 14,000 $ (14,000) $-- $ 35,000
========= ========= ========= === =========
Year ended December 31, 2002 $ 23,000 $ 37,000 $ (25,000) $-- $ 35,000
========= ========= ========= === =========
Service contract charge-backs
Year ended December 31, 2004 $ 285,000 $ 12,000 $(107,000) $-- $ 190,000
========= ========= ========= === =========
Year ended December 31, 2003 $ 96,000 $ 369,000 $(180,000) $-- $ 285,000
========= ========= ========= === =========
Year ended December 31, 2002 $ 134,000 $ 47,000 $ (85,000) $-- $ 96,000
========= ========= ========= === =========
Guarantees on finance contracts
Year ended December 31, 2004 $ 24,000 $ (21,000) $ (3,000) $-- $ --
========= ========= ========= === =========
Year ended December 31, 2003 $ 78,000 $ (21,000) $ (33,000) $-- $ 24,000
========= ========= ========= === =========
Year ended December 31, 2002 $ 377,000 $ (99,000) $(200,000) $-- $ 78,000
========= ========= ========= === =========
Policy work expenses
Year ended December 31, 2004 $ 175,000 $ 955,000 $(922,000) $-- $ 208,000
========= ========= ========= === =========
Year ended December 31, 2003 $ 172,000 $ 785,000 $(782,000) $-- $ 175,000
========= ========= ========= === =========
Year ended December 31, 2002 $ 226,000 $ 800,000 $(854,000) $-- $ 172,000
========= ========= ========= === =========
Allowance for doubtful accounts
Year ended December 31, 2004 $ 300,000 $ 98,000 $(128,000) $-- $ 270,000
========= ========= ========= === =========
Year ended December 31, 2003 $ 207,000 $ 122,000 $ (29,000) $-- $ 300,000
========= ========= ========= === =========
Year ended December 31, 2002 $ 250,000 $ 76,000 $(119,000) $-- $ 207,000
========= ========= ========= === =========
S-2