Hometown Auto Retailers 10Q/A 2005 Q1 Quarterly report (amended)

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

AMENDMENT NO. 2

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005

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 of	(IRS Employer
incorporation or organization)	Identification No.)

1309 South Main Street

Waterbury, CT 06706

(Address of principal executive offices) (Zip code)

(203) 756-1300

(Registrant's telephone number including area code)

774 Straits Turnpike

Watertown, CT 06795

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes[ ] No [X]

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

Title		Outstanding
Common Stock, Class A, par value $.001 per share		3,870,137
Common Stock, Class B, par value $.001 per share		2,579,252

EXPLANATORY NOTE

Hometown Auto Retailers, Inc. (the “Company” or “Hometown”) is filing this Amendment No. 2 on Form 10-Q/A to amend our previously filed Quarterly Report on Form 10-Q/A for the quarterly period ended March 31, 2005 as filed with the Securities and Exchange Commission (the “SEC”) on September 21, 2005 (the “First Amendment”) which amended our previously filed Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005 as filed with the SEC on May 16, 2005 (the “Original Filing”).

A discussion of the restatement is set forth in Note 2 to the Unaudited Consolidated Financial Statements and in Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations included in this Amendment No. 2 on Form 10-Q/A. Changes have also been made to the following items in this Amendment No. 2 on Form 10-Q/A as a result of the restatement.

·	Item 1. Financial Statements and Supplementary Data, including the Notes to the Consolidated Financial Statements.
·	Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.

The changes do not affect total cash flows. The other portions of the Original Filing are unaffected by the restatement and have not been amended. All information in this amendment is as of the date of the Original Filing and does not reflect any subsequent information or events occurring after the date of the Original Filing, except to reflect the changes discussed in the restatement note. Accordingly, this amendment should be read in conjunction with the Original Filing.

INDEX

PART I.	FINANCIAL INFORMATION	Page

ITEM 1.	Consolidated Balance Sheets at March 31, 2005 (Unaudited - Restated) and December 31, 2004 (Audited - Restated)	4
	Unaudited Consolidated Statements of Operations for the three months ended March 31, 2005 (Restated) and 2004 (Restated)	5
	Unaudited Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2005 (Restated) and 2004 (Restated)	6
	Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2005 (Restated) and 2004 (Restated)	7
	Notes to Unaudited Consolidated Financial Statements	8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	24
ITEM 4.	Controls and Procedures	24

PART II.	OTHER INFORMATION

ITEM 1.	Legal Proceedings	25
ITEM 2.	Unregistered Sales Of Equity Securities and Use of Proceeds	25
ITEM 3.	Defaults Upon Senior Securities	25
ITEM 4.	Submission of Matters to a Vote of Security Holders	25
ITEM 5.	Other Information	25
ITEM 6.	Exhibits	25

SIGNATURES		26

CERTIFICATIONS		27

FORWARD LOOKING STATEMENTS

Certain statements made in this Quarterly Report on Form 10-Q/A 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. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of Hometown. Although Hometown believes that its assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements, the inclusion of such information should not be regarded as a representation by Hometown or any other person that the objectives and plans of Hometown will be achieved. Factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, the factors set forth herein under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

HOMETOWN AUTO RETAILERS, INC.
CONSOLIDATED BALANCE SHEETS (RESTATED)
(in thousands, except share and per share data)

	March 31,			December 31,
ASSETS	2005			2004
	(Unaudited)

Current Assets:
Cash and cash equivalents	$	5,336		$	6,101
Accounts receivable, net		6,320			5,081
Inventories, net		42,930			43,440
Prepaid expenses and other current assets		745			634
Deferred and prepaid income taxes		1,412			1,412

Total current assets		56,743			56,668

Property and equipment, net		13,663			13,854
Other assets		3,341			3,486

Total assets	$	73,747		$	74,008


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:
Floor plan notes payable - trade	$	15,703		$	17,382
Floor plan notes payable - non-trade		26,870			25,092
Accounts payable and accrued expenses		5,750			5,106
Current maturities of long-term debt and capital lease obligations		5,477			5,505
Deferred revenue		523			605

Total current liabilities		54,323			53,690

Long-term debt and capital lease obligations		8,521			8,621
Long-term deferred income taxes		123			123
Other long-term liabilities and deferred revenue		271			319

Total liabilities		63,238			62,753

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 shares issued and outstanding		4			4
Common stock, Class B, $.001 par value, 3,760,000 shares authorized, 3,519,252 shares issued		3			3
Additional paid-in capital		30,017			30,017
Accumulated deficit		(18,472	)		(18,769	)
Less: treasury stock, 940,000 Class B shares in 2005		(1,043	)		-

Total stockholders' equity		10,509			11,255

Total liabilities and stockholders' equity	$	73,747		$	74,008


The accompanying notes are an integral part of these unaudited consolidated financial statements.

HOMETOWN AUTO RETAILERS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (RESTATED)
(in thousands, except share and per share data)

	For the Three Months
	Ended March 31,
	2005			2004
Revenues
New vehicle sales	$	38,025		$	41,115
Used vehicle sales		15,560			16,910
Parts and service sales		6,156			5,959
Other, net		2,074			2,011

Total revenues		61,815			65,995

Cost of sales
New vehicle		35,592			38,355
Used vehicle		14,003			15,244
Parts and service		2,865			2,759

Total cost of sales		52,460			56,358

Gross profit		9,355			9,637

Selling, general and administrative expenses		8,009			8,648

Income from operations		1,346			989

Interest income		70			44
Interest (expense)		(920	)		(774	)
Other income		2			2
Other (expense)		-			(4	)

Pre-tax income		498			257
Provision for income taxes		201			70

Net income	$	297		$	187

Earnings per share, basic	$	0.04		$	0.03

Earnings per share, diluted	$	0.04		$	0.03

Weighted average shares outstanding, basic		7,086,500			7,175,105
Weighted average shares outstanding, diluted		7,210,990			7,471,259

The accompanying notes are an integral part of these unaudited consolidated financial statements.

HOMETOWN AUTO RETAILERS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (RESTATED)
(in thousands)

	Class A				Class B						Retained
	Common Stock				Common Stock				Additional		Earnings						Total
									Paid-in		(Accumulated			Treasury			Stockholders’
	Shares		Amount		Shares		Amount		Capital		Deficit)			Stock			Equity

Balance at December 31, 2003		3,656	$	4		3,519	$	3	$	29,760	$	(22,704	)	$	-		$	7,063
Net income		-		-		-		-		-		187			-			187

Balance at March 31, 2004		3,656	$	4		3,519	$	3	$	29,760	$	(22,517	)	$	-		$	7,250

Balance at December 31, 2004		3,870	$	4		3,519	$	3	$	30,017	$	(18,769	)	$	-		$	11,255
Net income		-		-		-		-		-		297			-			297
Litigation Settlement (Note 9)		-		-		-		-		-		-			(1,043	)		(1,043	)

Balance at March 31, 2005		3,870	$	4		3,519	$	3	$	30,017	$	(18,472	)	$	(1,043	)	$	10,509


The accompanying notes are an integral part of these unaudited consolidated financial statements.

HOMETOWN AUTO RETAILERS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)
(in thousands)

	For the Three Months ended March 31,
	2005			2004

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	297		$	187
Adjustments to reconcile net income to net cash provided by operating activities -
Depreciation and amortization		335			311
Loss on sale of fixed assets		-			4
Deferred income taxes		201			70
Changes in assets and liabilities:
Accounts receivable, net		(1,239	)		(667	)
Inventories, net		562			(6,494	)
Prepaid expenses and other current assets		(111	)		(9	)
Prepaid taxes		(32	)		(90	)
Other assets		(64	)		11
Floor plan notes payable - trade		(1,679	)		3,758
Accounts payable and accrued expenses		(399	)		493
Deferred revenue		(82	)		(109	)
Other long-term liabilities and deferred revenue		(48	)		(71	)

Net cash (used in) operating activities		(2,259	)		(2,606	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(57	)		(94	)

Net cash (used in) investing activities		(57	)		(94	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from floor plan notes payable - non-trade		39,637			42,159
Payment of floor plan notes payable - non-trade		(37,859	)		(38,719	)
Principal payments of long-term debt and capital lease obligations		(452	)		(560	)
Proceeds from long-term borrowings		225			-

Net cash provided by financing activities		1,551			2,880

Net increase (decrease) in cash and cash equivalents		(765	)		180
CASH AND CASH EQUIVALENTS, beginning of period		6,101			5,639

CASH AND CASH EQUIVALENTS, end of period	$	5,336		$	5,819

Cash paid for - Interest	$	897		$	770
Cash paid for - Taxes	$	32		$	90
Purchases financed by capital lease obligations	$	117		$	327

The accompanying notes are an integral part of these unaudited consolidated financial statements.

HOMETOWN AUTO RETAILERS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.	BUSINESS AND ORGANIZATION

Business of Hometown Auto Retailers, Inc. (“Hometown” or the “Company”)

Hometown sells new and used cars and light trucks, provides maintenance and repair services, sells replacement parts and provides related financing, insurance and service contracts through 8 franchised dealerships and 1 stand-alone service facility, located in New Jersey, New York, Connecticut, Massachusetts and Vermont. Hometown’s dealerships offer 9 American and Asian automotive brands including Chevrolet, Chrysler, Dodge, Ford, Jeep, Lincoln, Mazda, Mercury and Toyota.

2.	RESTATEMENT

Subsequent to fiscal year end December 31, 2005, Hometown concluded that the income from certain extended warranty and extended warranty reimbursement insurance policies generated in Connecticut was no longer required to be recognized over the period of the contract. Prior to July 1, 2003, Connecticut dealerships were considered to be “extended warranty providers” because they did not qualify for any of the exclusions applicable to the retail seller of the extended warranty. Effective on July 1, 2003, the Connecticut law applicable to extended warranties was amended to provide that an “extended warranty provider” means a person who issues, makes, provides or offers to provide an extended warranty but that person must also be “contractually obligated to provide service under such extended warranty”. The administrator of the extended warranties sold by Hometown has confirmed that Hometown is not contractually obligated to provide service under the extended warranties that they sell. Therefore Hometown is no longer liable as the “extended warranty provider” under the extended warranties that they sell. Hometown has determined that it is no longer necessary to recognize the commissions that it receives from the sale of such extended warranties over the period of the warranty contract. Accordingly, within this Amendment No. 2 to Form 10Q/A, Hometown has restated prior year financial statements to reflect this change.

The effect of this restatement was to increase pre-tax income $49,000 and $117,000 for the three months ended March 31, 2005 and 2004, respectively. The after tax effects was to increase net income by $29,000 and $85,000 for the three months ended March 31, 2005 and 2004, respectively. The effect of these adjustments was to increase basic and diluted earnings per share by $0.00 and $0.02 for the three months ended March 31, 2005 and 2004, respectively.

Deferred revenue recorded as of June 30, 2003, will continue to be taken into income over the remaining life of the contract. At March 31, 2005, Hometown had $532,000 of related deferred revenue remaining. This deferred revenue will be recognized over the next three years as follows: 2005 (remaining period) - $215,000, 2006 - $191,000, 2007 - $100,000 and 2008 - $26,000. These revenues are recorded in Revenues, Other in the Statement of Operations. The recognition of deferred revenues does not generate a cash tax effect as the recording of deferred revenues generates a deferred tax asset; therefore the recognition of this income causes a reduction of deferred tax assets.

The effect of the restatement on the financial statement items affected follows:

(in thousands)	March 31, 2005						December 31, 2004
	Previously			Restated			Previously			Restated
	Reported						Reported
Balance Sheets:

Deferred and prepaid income taxes	$	1,464		$	1,412		$	1,464		$	1,412
Total current assets	$	56,795		$	56,743		$	56,720		$	56,668

Other assets	$	3,524		$	3,341		$	3,649		$	3,486
Total Assets	$	73,982		$	73,747		$	74,223		$	74,008

Deferred revenue	$	664		$	523		$	735		$	605
Total current liabilities	$	54,464		$	54,323		$	53,820		$	53,690

Other long-term liabilities and deferred revenue	$	716		$	271		$	726		$	319
Total liabilities	$	63,824		$	63,238		$	63,290		$	62,753

Accumulated deficit	$	(18,823	)	$	(18,472	)	$	(19,091	)	$	(18,769	)
Total stockholders’ equity	$	10,158		$	10,509		$	10,933		$	11,255
Total liabilities and stockholders’ equity	$	73,982		$	73,747		$	74,223		$	74,008

	Three months ended						Three months ended
	March 31, 2005						March 31, 2004
		Previously			Restated			Previously			Restated
		Reported						Reported
Statements of Operations:

Other revenues, net	$	2,025		$	2,074		$	1,894		$	2,011
Total revenues	$	61,766		$	61,815		$	65,878		$	65,995

Gross profit	$	9,306		$	9,355		$	9,520		$	9,637

Income from operations	$	1,297		$	1,346		$	872		$	989

Pre-tax income	$	449		$	498		$	140		$	257
Provision for income taxes	$	181		$	201		$	38		$	70
Net income	$	268		$	297		$	102		$	187

Earnings per share, basic	$	0.04		$	0.04		$	0.01		$	0.03

Earnings per share, diluted	$	0.04		$	0.04		$	0.01		$	0.03

Statements of Cash Flows:

Net income	$	268		$	297		$	102		$	187
Deferred income taxes	$	181		$	201		$	38		$	70
Deferred revenue - current	$	(71	)	$	(82	)	$	(142	)	$	(109	)
Other long-term liabilities and deferred revenue	$	(10	)	$	(48	)	$	79		$	(71	)
Net cash provided by operating activities	$	(2,259	)	$	(2,259	)	$	(2,606	)	$	(2,606	)

In addition, Hometown has previously restated its Balance Sheets and Statements of Cash Flows to comply with guidance under SFAS 95, “Statement of Cash Flows”, which states that payments to suppliers should be classified as an operating activity. The balance sheets restatement is to breakdown the floor plan notes payable into trade and non-trade components, where it had previously been shown as a single line item, which has been consistent with industry practice. The Statements of Cash Flows reclassification is to show the non-trade component of floor plan notes payable as a financing activity, where it had been shown as an operating activity. The floor plan lender is FMCC, an affiliate of Ford, Lincoln and Mercury; therefore; floor plan notes payable amounts due from purchases of inventory from Ford, Lincoln and Mercury are classified as floor plan - trade and the related borrowings and payments are to be classified as operating activities in the Statements of Cash Flows. Amounts due for inventory purchases from all other manufacturers are classified as floor plan notes payable - non-trade and the related borrowings and payments are to be classified as financing activities in the Statements of Cash Flows. The changes do not affect working capital or total cash flows. See Note 7 to the consolidated financial statements.

3.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated balance sheet as of March 31, 2005, the consolidated statements of operations for the three months ended March 31, 2005 and 2004, the consolidated statements of stockholders’ equity and the consolidated statements of cash flows for the three months ended March 31, 2005 and 2004, are unaudited and restated. (See Note 2) The consolidated financial statements include all significant majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods were made. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. Due to seasonality and other factors, the results of operations for interim periods are not necessarily indicative of the results that will be realized for the entire year.

Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, were omitted. Accordingly, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the years ended December 31, 2004 (restated) and December 31, 2005, which are included in Hometown’s filings of its amended annual report on Form 10-K/A Amendment No. 1 and Form 10/K, respectively.

The financial statements have been prepared in conformity with generally accepted accounting principles and, accordingly, include amounts based on estimates and judgments of management. Actual results could differ from those estimates.

Stock-based Compensation

At March 31, 2005, Hometown has one stock-based employee compensation plan, the 1998 Stock Option Plan (the “Stock Option Plan”). As allowed by SFAS 148, Hometown has elected not to use one of the alternative methods of transition available for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Hometown accounts for this plan under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation.

	Three Months Ended
	March 31,
(in thousands, except per share data)	2005			2004

Net income, as reported	$	297		$	187
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (1)		(2	)		(7	)

Pro forma net income	$	295		$	180

Earnings per share:
Basic, as reported	$	0.04		$	0.03
Basic, pro forma	$	0.04		$	0.03

Diluted, as reported	$	0.04		$	0.03
Diluted, pro forma	$	0.04		$	0.02

(1)	All awards refer to awards granted, modified, or settled in fiscal periods since plan inception in 1998; that is, awards for which the fair value was required to be measured under Statement 123.

New Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46 (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. 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 next fiscal year that begins after June 15, 2005 and the Company will adopt the standard in the first quarter of fiscal 2006. The Company has not determined the impact, if any, that this statement will have on its consolidated financial position or results of operations.

4.	EARNINGS PER SHARE / STOCKHOLDERS EQUITY

“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 2005. Options and warrants to purchase approximately 1,063,000 shares of common stock were outstanding during 2004. Basic and diluted weighted average shares for the three months ended March 31, 2005 and 2004 are as follows:

	Three Months Ended
	March 31,
	2005		2004
Basic, Weighted Average Shares		7,086,500		7,175,105

Common Stock Equivalents		124,490		296,154

Diluted, Weighted Average Shares		7,210,990		7,471,259

Basic weighted average shares reflect a reduction of 940,000 Class B shares from the settlement of the Vergopia litigation on March 3, 2005. This is reflected as Treasury Stock. See Note 9.

The common stock equivalents are options whose exercise price is less than the average market price of the common shares during the period. In 2005, options to purchase 238,000 shares of Hometown common stock were excluded from the calculation of diluted income per share due to the option prices being greater than the average market price of the common shares during the period. In 2004, options and warrants to purchase 163,000 shares of Hometown common stock were excluded from the calculation of diluted income per share due to the option and warrant prices being greater than the average market price of the common shares during the period.

The basic and diluted income per share for the three months ended March 31, 2005 and 2004 is $0.04 and $0.03, respectively.

5.	INVENTORIES

New, used and demonstrator vehicles are stated at the lower of cost or market, determined on a specific unit basis. Parts and accessories are stated at the lower of cost (determined on a first-in, first-out basis) or market. Inventories, net consist of the following:

(in thousands)	3/31/05		12/31/04

New Vehicles	$	32,703	$	33,616
Used Vehicles		8,208		7,761
Parts, accessories and other		2,019		2,063

Total Inventories	$	42,930	$	43,440

The lower of cost or market adjustment was $0.7 million at March 31, 2005 and December 31, 2004, respectively.

6.	INTANGIBLE ASSETS

As of March 31, 2005 and December 31, 2004, Hometown’s intangible assets consisted of the following:

(in thousands)	3/31/05			12/31/04

Deferred finance charges	$	272		$	272
Accumulated amortization		(126	)		(121	)
Non-compete agreement		381			381
Accumulated amortization		(349	)		(333	)
Franchise Fee		10			10
Accumulated amortization		(3	)		(3	)

Net intangible assets	$	185		$	206

These assets are included in Other Assets in the consolidated financial statements.

7.	FLOOR PLAN NOTES PAYABLE

Hometown has a floor plan line of credit at each dealership with Ford Motor Credit Corporation (“FMCC”). The FMCC floor plan agreement provides financing for vehicle purchases and is secured by and dependent upon new and used vehicle inventory levels. Maximum availability under the FMCC agreement is a function of new and used car sales and is not a pre-determined amount.

Hometown is subject to the FMCC standard financing agreement which provides for floor plan loans for new and used vehicles that have variable interest rates that increase or decrease based on movements in the prime or LIBOR borrowing rates. The FMCC agreement has no set maturity date and it is the intention of Hometown to continue with this financing on an ongoing basis.

FMCC directly pays the manufacturers from which Hometown purchases new vehicle inventory. The process is done electronically where an Electronic Funds Transfer (EFT) is made whereby the vehicle is purchased with funds from the floor plan line. Hometown does not have the discretion to receive these funds prior to disbursement to the manufacturers. Hometown finances used vehicles acquired by trade-in at the time a customer is purchasing a new vehicle shortly after receipt of the used vehicle from the customer. Hometown will also acquire used vehicles at auction, where more likely than not, arrangements have been made with FMCC for payment to be made by FMCC on our behalf using funds available from the floor plan notes payable line of credit.

Hometown typically makes monthly interest payments on the amount financed, but is not generally required to repay the principal prior to sale of the vehicle.

Outstanding floor plan borrowings financing new vehicles of manufacturers that are affiliates of FMCC (Ford, Lincoln and Mercury) are classified as “floor plan notes payable - trade”. All other floor plan borrowings are classified as “floor plan notes payable - non-trade”.

The Statement of Cash Flows reflects changes in “floor plan notes payable - trade” as a cash operating activity and the changes in “floor plan notes payable -non- trade” as a cash financing activity.

8.	LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Hometown is subject to certain financial covenants calculated semi-annually at June 30^th and December 31st, 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 $4,239,000 of related long-term debt to current at March 31, 2005. Total debt for this mortgage at March 31, 2005 is $4,541,000. 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 to 100% of the market value of the property. Assuming borrowing $6,000,000 at a current variable interest rate of approximately 7.44% for a 15-year mortgage, monthly payments would be approximately $6,800 lower than the current monthly payments being made on the property.

9.	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 was $4 million of which $600,000 was paid by Hometown in March 2005. 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. On May 11, 2005, the parties completed the transfer to the Vergopias of certain Westwood Lincoln Mercury Sales, Inc. assets, including its Lincoln Mercury franchise and have completed the termination of Hometown’s Westwood, New Jersey lease. Hometown received all of the 940,000 shares of Class B Common Stock owned by the Vergopias in March 2005. The Settlement Agreement does not constitute an admission of liability or wrongdoing by any party.

The 940,000 shares of Hometown stock was recorded at fair market value on March 3, 2005, the date of the executed settlement agreement, and is shown as a reduction of Stockholders’ Equity as Treasury Stock of $1,043,000. The assets and liabilities being transferred to the Vergopias will be recorded as a reduction of those accounts at book value on May 11, 2005. At the time of the Original Filing of this Form 10-Q, the final accounting for the transaction has not yet been completed, but it is estimated that a gain of approximately $600,000 will result from the transaction. Hometown wrote off the goodwill associated with this franchise in 2002 and expensed the aforementioned $600,000 March payment in prior periods. At March 31, 2005, Hometown has recorded a liability of $1,043,000 included in Accounts Payable and Accrued Expenses, pending the assets and liabilities transfer to the Vergopias.

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 itemize 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 March 31, 2005 the mortgage debt balance is $4.2 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.

Warranties

Hometown’s new vehicle sales and certain used vehicle sales have manufacturer warranties that specify coverage and period. In these instances, Hometown is reimbursed by the manufacturer for the cost of parts and service on the vehicle covered by these warranties, as specified by the manufacturer. Hometown also provides a limited warranty on used vehicles sold at retail. The warranty period is as agreed upon by the customer and may be subject to a minimum period as mandated by the state. The typical warranty period ranges up to three months. Hometown also sells parts and service. Manufacturer parts are covered by limited warranties, as specified by the manufacturer. Service also has a limited warranty; whereby the part and certain labor costs are covered under the limited manufacturer warranty. Also, certain Hometown dealerships provide a three or five year 100,000-mile limited warranty on new and/or used vehicles. The cost of this warranty is charged to the cost of sale of the vehicle. The warranty covers certain parts and service for three or five years or until the vehicle reaches an odometer reading of 100,000 miles, whichever comes sooner. The warranty is insured, making the cost of the warranty fixed for Hometown. The insurance company pays costs associated with the warranty work to Hometown. An insurance company that is wholly owned by Ford Motor Company reinsures the insurance policy. If the insurance company were to fail, Hometown would be responsible for the costs of the service. Hometown has not recorded any additional reserve for this warranty program.

Hometown records a reserve referred to as “policy” for used vehicle warranties and the labor portion of service warranties based on available historical information. At March 31, 2005 and December 31, 2004, Hometown has a reserve of $212,000 and $208,000, 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.

Reserve for Policy Work		Balance At Beginning of Year			Additions To Costs and Expenses			Deductions			Balance At End of Quarter
Three Months Ended March 31, 2005		$	208,000		$	204,000		$	(200,000	)	$	212,000

Hometown also sells extended service contracts as an agent for a third party for which it receives a commission. The primary obligor is the institution underwriting the service contract. These revenues are recorded in Revenues, Other in the Statement of Operations. Revenues from sales of third party extended service contracts, including recognition of deferred revenues discussed below, was $0.8 million and $0.6 million for three months ended March 31, 2005 and 2004, respectively. Prior to July 1, 2003, Connecticut dealerships operated under state laws, which made 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 sold prior to July 1, 2003 are required to be recognized over the life of the related insurance product. For these dealerships, Hometown recorded the revenue as a liability and amortizes the amount into revenue over a five-year period. At March 31, 2005 and December 31, 2004 Hometown had $532,000 and $603,000 of related deferred revenue, respectively. (See Note 2.) At March 31, 2005 and December 31, 2004, Hometown also had other deferred revenue of $261,000 and $319,000, respectively.

Franchise Agreements

Toyota Motor Sales, U.S.A., Inc. has extended Hometown’s current Toyota Dealer Agreement through May 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 $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.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's discussion and analysis of financial condition and results of operations is based on the historical financial statements of Hometown Auto Retailers, Inc. and contains forward-looking statements that involve risks and uncertainties. Hometown's actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, as described under "Risk Factors" as detailed on Hometown’s amended annual report on Form 10-K/A amendment No. 1 for the year ended December 31, 2004 and Form 10-K for the year ended December 31, 2005.

Overview

Hometown sells new and used cars and light trucks, provides maintenance and repair services, sells replacement parts and provides related financing, insurance and service contracts through 8 franchised dealerships and 1 stand-alone service facility located in New Jersey, New York, Connecticut, Massachusetts and Vermont. Hometown’s dealerships offer 9 American and Asian automotive brands including Chevrolet, Chrysler, Dodge, Ford, Jeep, Lincoln, Mazda, Mercury and Toyota.

Restatement

The effect of the restatement on the financial statement items affected follows:

(in thousands)	March 31, 2005						December 31, 2004
	Previously			Restated			Previously			Restated
	Reported						Reported
Balance Sheets:

Deferred and prepaid income taxes	$	1,464		$	1,412		$	1,464		$	1,412
Total current assets	$	56,795		$	56,743		$	56,720		$	56,668

Other assets	$	3,524		$	3,341		$	3,649		$	3,486
Total Assets	$	73,982		$	73,747		$	74,223		$	74,008

Deferred revenue	$	664		$	523		$	735		$	605
Total current liabilities	$	54,464		$	54,323		$	53,820		$	53,690

Other long-term liabilities and deferred revenue	$	716		$	271		$	726		$	319
Total liabilities	$	63,824		$	63,238		$	63,290		$	62,753

Accumulated deficit	$	(18,823	)	$	(18,472	)	$	(19,091	)	$	(18,769	)
Total stockholders’ equity	$	10,158		$	10,509		$	10,933		$	11,255
Total liabilities and stockholders’ equity	$	73,982		$	73,747		$	74,223		$	74,008

	Three months ended						Three months ended
	March 31, 2005						March 31, 2004
		Previously			Restated			Previously			Restated
		Reported						Reported
Statements of Operations:

Other revenues, net	$	2,025		$	2,074		$	1,894		$	2,011
Total revenues	$	61,766		$	61,815		$	65,878		$	65,995

Gross profit	$	9,306		$	9,355		$	9,520		$	9,637

Income from operations	$	1,297		$	1,346		$	872		$	989

Pre-tax income	$	449		$	498		$	140		$	257
Provision for income taxes	$	181		$	201		$	38		$	70
Net income	$	268		$	297		$	102		$	187

Earnings per share, basic	$	0.04		$	0.04		$	0.01		$	0.03

Earnings per share, diluted	$	0.04		$	0.04		$	0.01		$	0.03

Statements of Cash Flows:

Net income	$	268		$	297		$	102		$	187
Deferred income taxes	$	181		$	201		$	38		$	70
Deferred revenue - current	$	(71	)	$	(82	)	$	(142	)	$	(109	)
Other long-term liabilities and deferred revenue	$	(10	)	$	(48	)	$	79		$	(71	)
Net cash provided by operating activities	$	(2,259	)	$	(2,259	)	$	(2,606	)	$	(2,606	)

Revenue

Total revenue decreased $4.2 million, or 6.4% to $61.8 million for three months ended March 31, 2005 from $66.0 million for three months ended March 31, 2004. This decrease was primarily due to decreased new vehicle sales ($3.1 million) and decreased sales of used vehicles ($1.3 million) partially offset by an increase in parts and service revenues ($0.2 million).

Revenue from the sale of new vehicles decreased $3.1 million, or 7.5% to $38.0 million for the three months ended March 31, 2005 from $41.1 million for three months ended March 31, 2004. The decrease is attributable to a reduction of 59 units sold in 2005 compared to 2004 ($1.6 million) combined with a 3.7% decrease in average selling price ($1.5 million). The decrease was primarily due to the Lincoln Mercury ($4.1 million), Chevrolet ($0.8 million) and Ford ($0.5 million) dealerships, partially offset by an increase at the Toyota ($1.6 million) and Chrysler/Jeep ($0.7 million) dealerships. The decrease at the Lincoln Mercury dealerships was primarily due to a decrease of 107 units sold in 2005 compared to 2004 ($3.8 million) combined with a 3.4% decrease in the average selling price ($0.3 million). The Lincoln Mercury increase includes a decrease in sales of 55 livery units ($1.9 million). The decrease at the Chevrolet dealership was primarily due to a decrease of 33 units sold in 2005 compared to 2004. The decrease at the Ford dealership was primarily due to a decrease of 27 units sold in 2005 compared to 2004 ($0.7 million), partially offset by a 4.4% increase in the average selling price ($0.2 million). The increase at the Toyota dealerships was primarily due to an increase of 80 units sold in 2005 compared to 2004 ($1.9 million), partially offset by a 1.9% decrease in the average selling price ($0.3 million). Included in this was an increase in fleet sales of $0.4 million due to an increase of 30 units sold. The Chrysler/Jeep increase was primarily due to an additional 28 units sold in 2005 compared to 2004.

Revenue from the sale of used vehicles decreased $1.3 million, or 7.7% to $15.6 million for the three months ended March 31, 2005 from $16.9 million for three months ended March 31, 2004. This was due to decreased used vehicle revenues at retail ($1.2 million), primarily due to a decrease of 178 units ($2.6 million), partially offset by a 12.8% increase in average selling price ($1.4 million); plus a decrease in used vehicle sales at wholesale ($0.1 million), due to a decrease of 210 units ($0.8 million) partially offset by a 25.8% increase in average selling price ($0.7 million). The increase in wholesale average selling price is a function of the decrease in retail sales. High quality vehicles that were taken as trade-ins at the time of new vehicle purchases, were not being sold at retail, necessitating being sold at wholesale. The decreased revenues at retail were primarily due to decreases at the Toyota ($0.8 million), Chevrolet ($0.4 million) and Lincoln Mercury dealerships ($0.4 million) along with the closing of a used car outlet ($0.4 million). The decrease at Toyota was primarily due to the reduction of 66 units ($1.0 million) partially offset by a 6.9% increase in average selling price ($0.2 million). The decrease at Chevrolet was primarily due to the reduction of 43 units ($0.6 million) partially offset by a 9.2% increase in average selling price ($0.2 million). The decrease at Lincoln Mercury was primarily due to the reduction of 41 units ($0.7 million) partially offset by a 7.8% increase in average selling price ($0.3 million). Ford ($0.4 million), Mazda ($0.2 million) and Chrysler/Jeep ($0.2 million) had increases in revenues at retail in 2005 compared to 2004. The increase at Ford was primarily due to a 30.5% increase in average selling price. The increase at Mazda was primarily due to an additional 16 units ($0.3 million) sold in 2005 compared to 2004 partially offset by a 12.2% decrease in average selling price ($0.1 million). Lincoln Mercury ($0.5 million), Ford (less than $0.1 million) and Mazda (less than $0.1 million) experienced decreases in wholesale, while there were increases at Toyota ($0.2 million), Chevrolet ($0.1 million) and Chrysler/Jeep ($0.1 million).

Parts and service revenue increased $0.2 million, or 3.3%, to $6.2 million for the three months ended March 31, 2005, from $6.0 million for the three months ended March 31, 2004. The Toyota dealerships accounted for $0.1 million with the remaining $0.1 million spread across the other dealerships.

Other dealership revenues increased less than $0.1 million, or 5.0% to $2.1 million for the three months ended March 31, 2005 from $2.0 million for the three months ended March 31, 2004. The increase is primarily attributable to increased extended service plan income.

Gross Profit

Total gross profit decreased $0.2 million, or 2.1%, to $9.4 million for the three months ended March 31, 2005, from $9.6 million for the three months ended March 31, 2004. This decrease was primarily attributable to decreased gross profit on new vehicle sales ($0.4 million) and used vehicle sales ($0.1 million) partially offset by increases gross profit on parts and service sales ($0.1 million) other dealership revenues ($0.1 million). Gross profit percentage for Hometown was 15.1% in 2005 and 14.6% in 2004. Adjusting both periods for fleet sales, which generate low gross profit margins, gross profit percentage was 15.4% in 2005 and 14.5% in 2004.

Gross profit on the sale of new vehicles decreased $0.4 million, or 14.3%, to $2.4 million for the three months ended March 31, 2005, from $2.8 million for the three months ended March 31, 2004. The decrease in gross profit is primarily attributable to an 8.2% decrease in average gross profit per vehicle ($0.3 million) combined with a reduction of 59 units ($0.1 million) sold in 2005 compared to 2004. The unit increase is net of a 39-unit increase attributable to fleet sales, which had a minimal effect on the increase in gross profit. All brands, except for Mazda, experienced a decrease in gross profit on the sale of new vehicles in the 2005 period compared to 2004. Lincoln Mercury accounted for $0.2 million while all of the other dealerships accounted for the remainder. Mazda had a minimal increase. Gross profit percentage for 2005 was 6.4% compared to 6.7% for 2004. Adjusting both periods for fleet sales, which generate low margins, gross profit percentage for new vehicles was 6.5% in 2005 compared to 6.7% in 2004.

Gross profit on the sale of used vehicles decreased $0.1 million, or 5.9%, to $1.6 million for the three months ended March 31, 2005, from $1.7 million for the three months ended March 31, 2004. This decrease is primarily due to a 178-unit decrease at retail ($0.3 million), partially offset by a 7.7% increase in average gross profit per retail unit ($0.1 million). Decreases at retail for Toyota and Lincoln Mercury (together totaling $0.1 million) and Chevrolet ($0.1 million) dealerships were partially offset by increases at the Ford, Mazda and Chrysler/Jeep (together totaling $0.1 million) dealerships. The closing of a used car outlet in 2004 accounted for an additional $0.1 million. The decrease at Toyota was primarily due to a decrease of 66 units ($0.1 million), partially offset by a 16.0% increase in average gross profit per unit (less than $0.1 million). The decrease at Lincoln Mercury and Chevrolet was primarily due to a decrease of 41 units and 45 units, respectively. The increase at Ford and Chrysler/Jeep was primarily due to an increase in average gross profit per vehicle of 34.9% and 1.4%, respectively. The increase at Mazda was primarily due to an increase of 16-units sold in 2005 compared to 2004. Gross profit on the sale of used vehicles at wholesale increased $0.1 million to $0.2 million for the three months ended March 31, 2005, from $0.1 million for the three months ended March 31, 2004. The increase in wholesale gross profit is a function of the decrease in retail sales. High quality vehicles that were taken as trade-ins at the time of new vehicle purchases, were not being sold at retail, necessitating being sold at wholesale. Gross profit percentage on the sale of used vehicles was 10.0% in 2005 compared to 9.9% in 2004.

Parts and service gross profit increased $0.1 million, or 3.1%, to $3.3 million for the three months ended March 31, 2005, from $3.2 million for the three months ended March 31, 2004. The increase is due to the increased revenue described above. Gross profit percentage was 53.5% in 2005 compared to 53.7% in 2004.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $0.6 million, or 7.0%, to $8.0 million for the three months ended March 31, 2005 from $8.6 million for the three months ended March 31, 2004. The decrease was primarily due to decreases in salaries and employee benefits ($0.3 million), legal and other professional fees ($0.1 million), rent ($0.1 million) and various other costs ($0.1 million). Included in these selling, general and administrative expense reductions was approximately $0.1 million associated with the closing of the used car lot.

Interest Expense

Interest expense increased $0.1 million, or 12.5% to $0.9 for the three months ended March 31, 2005 from $0.8 million for the three months ended March 31, 2004. The increase is primarily attributable to an increase in floor plan interest expense resulting from an increase in interest rates.

Provision for income tax

The effective income tax rate was 40.4% in the quarter ended March 31, 2005 and 27.2% in the same period of 2004. The rates were based on current forecasts of income before taxes, and current forecasts of permanent differences between tax and book income. The 2005 rate reflects the expected effective tax rate for the year. The 2004 rate reflects the expected full year effective tax rate of 40% adjusted for a reduction in the valuation allowance associated with the 2004 amortization of goodwill for tax purposes. At December 31, 2004 deferred taxes were adjusted primarily to reflect a reduction of the valuation allowance on the deferred tax asset due to the ability to project sufficient income to recover the deferred tax asset. Deferred taxes, including the valuation allowance, will be reviewed throughout fiscal 2005.

Net Income

Net income increased $0.1 million to $0.3 million for the three months ended March 31, 2005 from $0.2 million for the three months ended March 31, 2004. See above for explanation of the improvement.

Earnings Per Share, Basic and Diluted and Weighted Average Shares

The basic and diluted income per share for the three months ended March 31, 2005 and 2004 is $0.04 and $0.03, respectively.

Cyclicality

Hometown’s operations, like the automotive retailing industry in general, are affected by a number of factors relating to general economic conditions, including consumer business cycles, consumer confidence, economic conditions, availability of consumer credit and interest rates. Although the above factors, among others, may affect Hometown’s business, Hometown believes that the impact on Hometown’s operations of future negative trends in such factors will be somewhat mitigated by its (i) strong parts, service and collision repair services, (ii) variable cost salary structure, (iii) geographic regional focus, and (iv) product diversity.

Seasonality

Hometown’s operations are subject to seasonal variations, with the second and third quarters generally contributing more revenues and operating profit than the first and fourth quarters. This seasonality is driven primarily by: (i) Manufacturer related factors, primarily the historical timing of major Manufacturer incentive programs and model changeovers, (ii) weather-related factors and (iii) consumer buying patterns.

Effects of Inflation

Due to the relatively low levels of inflation experienced in the 2005 and 2004 periods, inflation did not have a significant effect on the results of Hometown during those periods.

Liquidity and Capital Resources

The principal sources of liquidity are cash on hand, cash from operations and floor plan financing.

Cash and Cash Equivalents

Total cash and cash equivalents was $5.3 million and $6.1 million at March 31, 2005 and December 31, 2004, respectively.

Cash Flow from Operations

The following table sets forth the consolidated selected information from the unaudited statements of cash flows:

	Three months ended March 31,
(in thousands)	2005			2004

Net cash (used in) operating activities	$	(2,259	)	$	(2,606	)
Net cash (used in) investing activities		(57	)		(94	)
Net cash provided by financing activities		1,551			2,880

Net increase (decrease) in cash and cash equivalents	$	(765	)	$	180

For the three months ended March 31, 2005, net cash used in operations of $2.3 million primarily consists of: (i) the decrease in floor plan notes payable - trade of $1.7 million less the decrease in inventory of $0.6 million, (ii) the increase in accounts receivable of $1.2 million, (iii) a decrease in accounts payable, accrued expenses and deferred revenues of $0.5 million (see Note 2 to the unaudited consolidated financial statements) and (iv) an increase in prepaid expenses and other assets of $0.2 million; partially offset by net income of $0.3 million plus non-cash items of $0.5 million. The decrease in inventory of $0.6 million would be expected to generate a similar decrease in floor plan notes payable (trade and non-trade); however, due to the timing of floor plan payoffs, floor plan notes payable (trade and non-trade) actually increased $0.1 million. Net cash used in investing activities of $0.1 million is due to capital expenditures. Net cash used in financing activities of $1.6 million is due to (i) the net change (increase) in non-trade floor plan notes payable of $1.8 million (see operating activities) and (ii) proceeds from long-term borrowings of $0.2 million; partially offset by principal payments of long-term debt and capital lease obligations of $0.4 million.

For the three months ended March 31, 2004, net cash used in operations of $2.6 million primarily consists of: (i) the increase in inventory of $6.5 million less the increase in floor plan notes payable - trade of $3.8 million, (ii) the increase in accounts receivable of $0.7 million and (iii) the decrease in deferred revenue of $0.2 million (see Note 2 to the unaudited consolidated financial statements); partially offset by (iii) net income plus non-cash items of $0.6 million and (iv) an increase in accounts payable and accrued expenses of $0.5 million. Inventory (an increase of $6.5 million) and related floor plan liability (trade and non-trade increase of $7.2 million) increased due to inventory that was purchased with the expectation of higher sales in 2004, which did not materialize. The increase in floor plan liability in excess of inventory is due to timing of payments. Net cash used in investing activities of $0.1 million is due to capital expenditures. Net cash provided by financing activities of $2.9 million is due to the net change (increase) in non-trade floor plan notes payable of $3.4 million (see operating activities) partially offset by principal payments of long-term debt and capital lease obligations.

Capital Expenditures

Capital expenditures for fiscal 2005 are expected to be $0.3 million, consisting primarily of equipment purchases and building and leasehold improvements.

Receivables

Hometown had $6.3 million in accounts receivable at March 31, 2005 compared to $5.1 million at December 31, 2004. The increase in receivables is due to the increase in sales that takes place in March compared to December. The majority of those receivables, $3.0 million and $2.4 million as of March 31, 2005 and December 31, 2004, respectively, are due from finance companies that provide or secure financing for customer purchases, and primarily represent contracts-in-transit. These amounts are typically received within seven days of the transaction. The allowance for doubtful accounts is $0.3 million at March 31, 2005 and December 31, 2004.

Inventories

Hometown had $42.9 million in inventories, net at March 31, 2005 compared to $43.4 million at December 31, 2004. The majority of inventory, $32.7 million and $33.6 million as of March 31, 2005 and December 31, 2004, 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 March 31, 2005 and December 31, 2004.

Floor Plan Financing

See Note 7 to the unaudited consolidated financial statements.

Long-Term Debt and Capital Lease Obligations

See Note 8 to the unaudited consolidated financial statements.

Commitments and Contingencies

See Note 9 to the unaudited consolidated financial statements.

Forward Looking Statement

When used in the amended Quarterly Report on Form 10Q/A Amendment No. 2, 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in interest rates on our amounts outstanding under our floor plan financing arrangement, which bears interest at variable rates based on the prime or LIBOR borrowing rates. Based on floor plan amounts (trade and non-trade) outstanding at March 31, 2005 of $42.6 million, a 1% change in the prime rate would result in a $0.4 million change to annual floor plan interest expense.

At March 31, 2005, Hometown invested $2.6 million of excess cash, of which $0.1 million was invested in money market accounts paying a weighted average interest rate of 1.23% at March 31, 2005, and $2.5 million was invested in a Ford Motor Credit Company cash management account paying interest of 6.50% at March 31, 2005. The cash management account interest rate is tied to the rate charged on Hometown’s floor plan financing arrangement.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, are recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to use its judgment in evaluating the cost to benefit relationship of possible controls and procedures.

At March 31, 2005, 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.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

See Note 9 - Commitments and Contingencies - Litigation, to the notes to the unaudited consolidated financial statements.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

NONE

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

NONE

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

NONE

ITEM 5.

OTHER INFORMATION

NONE

ITEM 6.

EXHIBITS

31.1	Chief Executive Officer Certification

31.2	Chief Financial Officer Certification

32.1	Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2	Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	Hometown Auto Retailers, Inc.

April 14, 2006	By:	/s/ Corey E. Shaker
Date		Corey E. Shaker
		President and Chief Executive Officer




April 14, 2006	By:	/s/ Charles F. Schwartz
Date		Charles F. Schwartz
		Chief Financial Officer

Hometown Auto Retailers Inactive 10-Q/A2005 Q1 Quarterly report (amended)