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)

    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

                   For the fiscal year ended December 31, 1999

                                       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: 0-14786

                          HOMETOWN AUTO RETAILERS, INC.
             (Exact Name of Registrant as Specified in Its Charter)

           Delaware                                             06-1501703
(State or Other Jurisdiction of                               (IRS Employer
Incorporation or Organization)                               Identification No.)

                              774 Straits Turnpike
                               Watertown, CT 06795
                    (Address of Principal Executive Offices)

Registrant's telephone number, including area code: (860) 945-6900

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. |_|

      The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 24, 2000 was approximately $16,187,000.

      The number of shares outstanding of the registrant's Class A and Class B
Common Stock, $.001 par value, as of March 24, 2000 was 5,967,016 shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      NONE

<PAGE>

                          HOMETOWN AUTO RETAILERS, INC.

                             Form 10-K Annual Report
                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----
PART I
   Item 1.  Business.......................................................   1
   Item 2.  Properties.....................................................  22
   Item 3.  Legal Proceedings..............................................  24
   Item 4.  Submission of Matters to a Vote of Security Holders............  24

PART II
   Item 5.  Market for Registrant's Common Equity and Related Stockholder
             Matters.......................................................  25
   Item 6.  Selected Financial Data........................................  26
            Unaudited Financial Data.......................................  27
   Item 7.  Management's Discussion and Analysis of Financial Condition
             and Results of Operations.....................................  29
   Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....  45
   Item 8.  Financial Statements and Supplementary Data....................  45
   Item 9.  Changes in and Disagreements With Accountants on Accounting
             and Financial Disclosures.....................................  45

PART III
   Item 10. Directors and Executive Officers of the Registrant.............  46
   Item 11. Executive Compensation.........................................  49
   Item 12. Security Ownership of Certain Beneficial Owners and Management.  52
   Item 13. Certain Relationships and Related Transactions.................  53

PART IV
   Item 14. Exhibits, Financial Statement Schedules, and Reports on
             Form 8-K...................................................... F-1

                      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 the Company 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. The Company'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 the Company. Although the
Company 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 included herein particularly in view
of the Company's limited history of operating multiple dealerships in a combined
entity, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company 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."


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<PAGE>

                                     PART I

ITEM 1. BUSINESS

      Until the closing of its initial public offering on July 31, 1998.
Hometown Auto Retailers, Inc. conducted no operations under its own name and all
revenues were generated by its predecessor companies. On July 31, 1998, four
corporations (the "Core Operating Companies") operating six dealerships, a
collision repair center and a factory authorized free standing service center
were acquired in Exchange for 3,760,000 shares of Class B Common Stock (the
"Exchange") and three additional dealerships were acquired for cash. In 1999,
the Company also acquired free standing Lincoln Mercury and Toyota dealerships
and added both a Mazda and a Jeep dealership to existing locations. References
herein to the "Company" or "Hometown" mean Hometown Auto Retailers, Inc., its
predecessor companies and subsidiaries after giving effect to the foregoing
transactions. Unless otherwise indicated, all share, per share and financial
information set forth herein has been adjusted retroactively to give effect to
(i) a 12,000-for-1 stock split In [July] 1998 and, (ii) the issuance of
3,760,000 shares of Class B Common Stock in the Exchange.

General

      The Company 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 11 franchised dealerships located in New
Jersey, New York, Connecticut, Massachusetts and Vermont. The Company's
dealerships offer 13 American and Asian automotive brands, including Chevrolet,
Chrysler, Dodge, Ford, Isuzu, Jeep, Lincoln, Mercury, Oldsmobile, Plymouth,
Mazda, Daewoo, and Toyota. The Company also is active in two "niche" areas of
the automotive market, the sale of Lincoln town cars and limousines to livery
car and livery fleet operators and the maintenance and repair of cars and trucks
at a Ford and Lincoln Mercury factory authorized free-standing service center.
The Company believes that it is one of the five largest automotive dealers in
New England. The Company's growth strategy is to participate in the recent
consolidation trend in the automotive sales and service industry and, through
strategic acquisitions, become the largest dealer group in New England and parts
of the Mid-Atlantic region and to expand its two "niche" businesses.

      The Company believes that it has a significant market position as a seller
of Lincoln town cars and limousines to livery car and livery fleet operators.
The Company has achieved its market position in livery car sales through
innovative sales, financing and maintenance programs creating a high level of
repeat business under which livery car operators trade in their vehicles for new
models every 18 to 24 months. The Company believes that it will be able to
expand its livery sales business throughout the New England and Mid-Atlantic
regions by adding additional sales locations and maintenance and repair
facilities.

      The Company'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 services centers are designed to enhance customer convenience by operating
during extended hours, servicing vehicles without prior appointment and offering
quick turnaround. The Company intends to establish additional neighborhood
service centers in locations in which they develop a concentration of
dealerships.

      The Company's goals are to become, through selected acquisitions, the
leading consolidator and the largest dealer group in New England, to increase
the number of its dealerships in New Jersey and other portions of the
Mid-Atlantic region, to add additional sales locations and maintenance and
repair


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<PAGE>

facilities for its livery sales business and to establish additional factory
authorized free-standing neighborhood service centers in parts of both New
England and the Mid- Atlantic region with a concentration of Hometown
dealerships. Its acquisition strategy will focus on small to mid-sized
dealerships, having annual revenues of between $20 million and $60 million per
location (some of which may be part of larger groups), which are located in
urban fringe or suburban areas. By the nature of their customer base and
"neighborhood" location, the Company believes that these small to mid-sized
dealerships are more compatible with its core operating strategy than larger
regional dealerships, as they are able to provide customers with convenient
access for the higher margin products and services, such as used vehicle retail
sales, light repair and maintenance services and sale of replacement parts.

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 the Company'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 cyclicality of new car sales.

      The Company believes that the following factors, coupled with its
established organizational structure, will help it achieve its operating
strategy:

      o     Strong Regional Focus. The Company's eleven franchised dealerships
            are located in New Jersey, Connecticut, Massachusetts and Vermont.
            Its acquisition program is focused on acquiring additional
            dealerships in New England, New Jersey and contiguous portions of
            the mid-Atlantic region. The Company 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. The Company believes that its existing
            dealerships have good local reputations and have strong local name
            recognition. Through "owner-loyalty" and similar programs, the
            Company believes it has established a customer base that looks to
            its existing "hometown" dealership as its first choice in buying
            replacement vehicles.

      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
            of the Company have over 130 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.
            The Company 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 "Management?Directors and Officers" for additional information
            as to the numerous Manufacturer awards and citations earned by
            Hometown's senior management and dealerships in recent years.


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<PAGE>

      o     Presence In Higher Profit Margin Businesses

            o     Livery Sales and Service. The Company's Westwood subsidiary is
                  a major seller of Lincoln Town Cars and limousines to livery
                  car and livery fleet operators. The sale of livery vehicles
                  also tends 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. A major impediment to further expansion of
                  livery business has been a lack of suitable service facilities
                  in areas too distant from Westwood's existing service location
                  in Emerson, New Jersey to permit the return of livery cars to
                  that location for servicing. As a first step in expansion of
                  this livery business, the Company intends to put in place
                  special financing, sales and prepaid service programs for
                  livery vehicles, following the Westwood model, at the Shaker
                  Group's Lincoln Mercury dealership and Bay State Lincoln
                  Mercury and, in such connection, will modify the service
                  facilities of these dealerships where necessary to make them
                  more suitable for the servicing of limousines and livery cars.

            o     Maintenance and Repair. The Company's Shaker subsidiary's
                  "Lincoln Mercury Autocare" facility was the pilot for Ford's
                  authorized free-standing neighborhood service centers for the
                  maintenance and light repair of cars and trucks. Free-standing
                  service centers are an innovative attempt by the automotive
                  retail industry to recapture repair and maintenance business
                  which has been lost in recent decades to chain and independent
                  service businesses. The service center encourages customers to
                  deal directly with service personnel and permits customers to
                  watch the progress of work on their cars by entering the shop
                  on railed walkways. The service center also operates during
                  extended hours, provides comfortable customer waiting areas
                  and quickly services vehicles without prior appointment.

      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.

            o     Used Car Sales. The sale of used vehicles is emphasized at
                  each of the Company's dealerships. Typically, used vehicle
                  sales generate higher gross margins than new vehicle sales.
                  The Company 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. The Company 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. The Company
            believes that auction buying activities will be 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.

      o     Brand Diversity. Hometown's dealerships offer 13 American and Asian
            automotive brands including Chevrolet, Chrysler, Dodge, Ford, Isuzu,
            Jeep, Lincoln, Mercury, Oldsmobile, Plymouth, Mazda, Daewoo, and
            Toyota. The Company believes that brand diversity helps to


                                       5
<PAGE>

            insulate it from changes in consumer preferences, short supplies of
            particular automotive models and negative publicity concerning a
            particular Manufacturer or vehicle model.

      o     Centralized Financing and Administrative Functions. The Company
            believes that it has been able to generate cost savings by centrally
            financing its new and used car inventories through the $100 Million
            credit line obtained through General Electric Capital Corp. in
            January 1999. Additional cost savings are believed possible through
            centralizing accounting, personnel, employee benefits and other
            functions.

      o     Quality Personnel. The Company employs professional management
            practices in all aspects of its operations, including information
            technology, employee 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. The Company 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. The Company believes that the
            application of its professional management practices provides it
            with an ability to achieve levels of profitability superior to
            industry averages.

Growth Strategy

      The Company's goals are to become, through selected acquisitions, the
leading consolidator and the largest dealer group in New England, to increase
the number of its dealerships in New York, New Jersey and other portions of the
Mid-Atlantic region, to add additional sales locations and maintenance and
repair facilities for its livery sales business and to establish new factory
authorized free-standing neighborhood maintenance and repair centers in both New
England and the Mid-Atlantic regions.

      The Company believes that the Northeast is the most fragmented automotive
retail market in the United States. Though some large dealerships operate in the
area, there are a large number of small to mid-size dealers operating in an area
of heavy population densities. The Company intends to focus its acquisition
strategy on dealerships with annual revenues of $20 million to $60 million per
location (some of which may be part of larger groups), located in urban fringe
or suburban areas. The Company believes that these small to mid-size dealerships
are more likely to provide their customers with convenient access for
maintenance and repair than larger dealerships, as well as being more compatible
with the Company's operating model which requires a high shop absorption and a
high rate of service retention. Also, these dealerships can benefit the most
from the synergies created by being a member of a larger automotive group, such
as cross-utilization of same brand new car inventories, lower cost financing,
swapping of used car inventories, more effective auction positioning and
integration of computer systems. Where dealerships are acquired in close
proximity to other existing Hometown dealerships, the Company may consolidate
their operations to create further efficiencies. Proximity is expected to
facilitate management control of diverse dealerships and make it easier to
implement "best in class" practices.


                                       6
<PAGE>

      Though many manufacturers have imposed limitations on the acquisition of
dealerships by public corporations, the Company believes that, because of
fragmentation of the market in the Northeast, the principal Manufacturers from
whom it holds franchises, are seeking to reduce the number of dealerships
holding their franchises. Accordingly, the Company believes that these
Manufacturers will be inclined to support further growth by Hometown. High CSI
ratings have been identified by certain of its Manufacturers as factors in their
approval of additional acquisitions and each of the Company's dealers has had
historically high ratings.

      The Company also believes that its livery sales business can be expanded
throughout the New England and mid-Atlantic regions based on the innovative
sales and marketing practices utilized by its Westwood subsidiary and its
reputation among livery car operators. The major impediment to expansion of this
business had been Westwood's lack of service facilities, which require extended
body lifts, beyond its existing service location in Emerson, New Jersey. Shaker
Lincoln Mercury already has installed such extended car body lifts and the
Company plans to install additional lifts in certain of its other facilities so
that they can service livery vehicles sold. The Company also intends to adopt
Westwood's innovative sales and financing programs to implement sales of livery
vehicles at other locations.

Dealership Operations

      The Company'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 general managers and members of the
Company's operating committee, consisting of its six senior executive officers,
each of whom is, or has been, the chief operating officer of a franchised
dealership. Each of the Company's dealerships will use a management structure,
currently used by the Core Operating Companies, that promotes and rewards the
achievement of benchmarks set by senior management and the Operations Committee.
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 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 the Company's senior management also serve as general
managers of particular dealerships. A similar management structure will be
implemented for each Acquisition, as well as subsequent acquisitions.

      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 13 American and Asian
brands of lower, mid and higher priced sport and family cars and light trucks,
including sport utility vehicles. The Company 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. The following table sets forth for 1998 and 1999, certain information
relating to the brands of new vehicles sold at retail by the Company:


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<PAGE>

                         For the Year Ended December 31,
                                 1998 and 1999

                                1998                     1999
                                ----                     ----
BRANDS                         Number    Percentage     Number    Percentage

LINCOLN/MERCURY...........      2,369        44.5%       2,812        40.8%
TOYOTA....................      1,040        19.5%       2,188        31.8%
FORD......................        728        13.7%         767        11.1%
DODGE.....................        389         7.3%         325         4.7%
JEEP......................        283         5.3%         283         4.1%
CHEVROLET.................        222         4.2%         213         3.1%
OLDSMOBILE................         66         1.2%          65         1.0%
PLYMOUTH..................         63         1.2%          36         0.5%
CHRYSLER..................         88         1.6%          92         1.3%
ISUZU.....................         56         1.1%          57         0.8%
OTHER.....................         21         0.4%          54         0.8%

Total                           5,325       100.0%       6,892       100.0%
                                -----       ------       -----       ------

      The Company's new vehicle unit sales include lease transactions. New
vehicle leases generally have short terms which tend to bring the consumer back
to the market sooner than if the purchase were debt financed. In addition,
leases provide a steady source of late-model, off-lease vehicles for used
vehicle inventory. Leased vehicles generally remain under factory warranty for
the term of the lease which allows the dealerships to provide repair service to
the lessee throughout the lease term.

      The Company 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. For example, the Company intends to implement
the strategy of the Core Operating Companies by: (i) engaging in extensive
follow-up after a sale in order to develop long-term relationships with its
customers; (ii) training its sales staffs 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. The Company believes that its ability to share "best practices" among
its dealerships gives it an advantage over smaller dealerships.

      The Company acquires substantially all of its new vehicle inventory from
the Manufacturers. Manufacturers allocate a limited inventory among their
franchised dealers based primarily on sales volume and input from dealers. The
Company finances its inventory purchases through revolving credit arrangements
known in the industry as "floorplan" financing

      Used Vehicle Sales. The Company sells used vehicles at each of its
franchised dealerships. Sales of used vehicles have become an increasingly
significant source of profit for dealerships. Consumer demand for used vehicles
has increased as prices of new vehicles have risen and as more high quality used
vehicles have become available. Furthermore, used vehicles typically generate
higher gross margins than new vehicles because of their limited comparability
and the somewhat subjective nature of their


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<PAGE>

valuation. The Company intends to emphasize used vehicle sales by maintaining a
high quality inventory, providing competitive prices and extended service
contracts for its used vehicles and continuing to promote used vehicle sales.
The Company will also certify that its used cars meet specified testing and
quality standards.

      The following table shows the growth of used vehicle sales by the Company
from 1995 through 1999 and the pro forma combined used vehicle sales by the
Company in those years:

<TABLE>
<CAPTION>
                                                 Number of User and New Vehicles Sold
                                                 ------------------------------------
                                           1995        1996       1997       1998      1999
                                           ----        ----       ----       ----      ----
<S>                                       <C>         <C>        <C>        <C>       <C>
Total Hometown
Used Vehicles Retail..................     4,542       5,107      4,725      3,995     4,790
Used Vehicles Wholesale...............     3,573       3,867      4,154      3,794     3,319
New Vehicles..........................     4,843       5,450      5,431      5,150     6,892

      Total Sales.....................    12,958      14,424     14,310     12,939    15,001
</TABLE>

      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, the
Company acquires used vehicles from trade-ins and a variety of sources
nationwide, including direct purchases and manufacturers' and independent
auctions.

      The Company 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 10 weeks are sold
to another dealer or sold at auction. Pursuant to this strategy the Company
generally maintains only a 30 to 45 day supply of used vehicles. 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. The Company believes that the Acquisitions and acquisitions of
additional dealerships will expand its market for transfers of used vehicles
among its dealerships and, therefore, increase the ability of each dealership to
maintain a balanced inventory of used vehicles. The Company intends to develop
integrated computer inventory systems that will allow it to coordinate vehicle
transfers between its dealerships.

      The Company 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. The Company 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


                                       9
<PAGE>

unwilling to purchase a new vehicle, and (iv) increase ancillary product sales,
particularly F&I, to improve overall profitability.

      Parts and Service. The Company 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 11 locations, one factory authorized
neighborhood service center and one collision repair center, using approximately
110 service bays. Hometown provides both warranty and non-warranty service
work.

      The Company intends to implement an "owner loyalty program" similar to
programs used by the Core Operating Companies 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, 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 recent
trend for increasing percentages 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 the Company'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 the Company's dealerships. The
Company will use systems, already in place at the Core Operating Companies, that
track its customers' maintenance records and notify owners of vehicles purchased
at the dealerships when their vehicles are due for periodic services. The
Company 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 have begun to 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 1999, Hometown arranged financing for
approximately 33% of new cars and 44% of used cars 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. However, under existing agreements no charge-backs are permitted after
90, or in some cases 120, days except for certain sales to livery car
operations. In addition, Hometown has guaranteed certain automobile financing
loans made by financial institutions to its livery customers for the purchase
new and used limousines. At December 31, 1999 contingent liability on these
guarantees to Ford Motor Credit Co. and two other financial institutions
aggregated $8,242,515. The collectability of such loans to customers in the
livery business can be adversely affected by a decline in


                                       10
<PAGE>

economic conditions. The Company has established reserves for potential
liability arising from such guarantees, which it believes are adequate but not
excessive.

      At the time of a new vehicle sale, the Company offers extended service
contracts to supplement the Manufacturer's warranty. Additionally, the Company
sells primary service contracts for used vehicles, as well as service contracts
of third party vendors.

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. 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.

      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. In
connection with approving the Exchange, the Manufacturers will require Hometown
to execute new franchise agreements which may contain different provisions from
the current agreements. For a description of these and other restrictions and
other material terms imposed by the Manufacturers in the franchise agreements,
see "Certain Factors that may Affect Growth and Profits ?Manufacturers' Control
Over Dealerships" and "Certain Factors that may Affect Growth and Profits -
Dependence on Acquisitions for Growth; Manufacturers' Restrictions on
Acquisitions."

      Most franchise agreements expire within one to five years. The Company
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 circumstance 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.

      The automobile franchise relationship is also governed by various federal
and state laws established to protect dealerships from the generally unequal
bargaining power between the parties. 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


                                       11
<PAGE>

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.

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. The Company 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. In addition, Ford Motor has announced that it is exploring the
possibility of going into business with some of its dealers to create automotive
superstores in selected markets. The Company 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. The Company 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. The Company 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.

      The Company 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. The Company competes with other automobile dealers,
service stores and automotive parts retailers in its parts operations. The
Company 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, the Company competes
with publicly and privately owned dealership groups for the acquisition of other
dealerships. The Company believes that it is currently the only dealer group
with public ownership located in the Northeast. 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 the Company's current and targeted market areas
including Republic Industries, Inc. and United Auto Group, Inc. which have,
respectively, purchased a dealer group in southern New Jersey, eastern
Massachusetts, and a limited


                                       12
<PAGE>

number of dealerships in New Jersey and the Danbury, Connecticut and Nyack, New
York areas. The Company expects increased future competition for dealerships in
its markets.

Governmental Regulations

      A number of regulations affect Hometown's business of marketing, selling,
financing and servicing automobiles. The Company is also subject to laws and
regulations relating to business corporations generally.

      Under New Jersey, Connecticut, Massachusetts and Vermont law, the Company
must obtain a license in order to establish, operate or relocate a dealership or
provide certain automotive repair services. These laws also regulate the
Company's conduct of business, including its advertising and sales practices.
Other states may have similar requirements.

      The Company's financing activities are subject to federal
truth-in-lending, 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. 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. The
Company 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 the Company's capital expenditures, earnings, or
competitive position.

Environmental Matters

      The Company 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, the Company'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 the Company
must comply.

      Hometown's business also involves the use of aboveground and underground
storage tanks. Under applicable laws and regulations, the Company 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, the Company 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 the Company to remediate any soils or groundwater
resulting from such releases.

      The Company 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


                                       13
<PAGE>

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.

      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. The Company 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, the Company, 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 the
Company does not anticipate that any material environmental liabilities will be
incurred in the future. Although the Company is in the process of establishing
an environmental management program that is intended to reduce the risk of
noncompliance with environmental laws and regulations, environmental laws and
regulations and their interpretation and enforcement are changed frequently and
the Company 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 the Company or that such expenditures would not be material. See
"Certain Factors that may Affect Growth and Profits" ? Governmental Regulations
and Environmental Matters."

Employees

      As of December 31, 1999, the Company employed 415 people, of whom
approximately 98 were employed in managerial positions, 83 were employed in
non-managerial sales positions, 169 were employed in non-managerial parts and
service positions and 65 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, the Company 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 the Company and
should be considered by any prospective purchaser of the Company's securities:


                                       14
<PAGE>

Absence of Combined Operating History

      Until July 31, 1998 the Company conducted no combined or coordinated
operations other than in connection with the Exchange, the Acquisitions and its
initial public offering. The Core Operating Companies have been operated and
managed as separate independent entities and the Company's future operating
results will depend, in part, on its ability to integrate operations and manage
the combined enterprise. The management group that will lead the Company has
been formed only recently and there can be no assurance that it will be able to
effectively and profitably integrate the Core Operating Companies, the
Acquisitions and any future acquisitions, or to effectively manage the combined
entity. The inability of the Company to do so could have a material adverse
effect on its business, financial condition and results of operations.

Dependence on Automobile Manufacturers

      The Company is significantly dependent upon its relationships with, and
the success of, certain Manufacturers. For the year ended December 31, 1999,
Ford Motor, Toyota Motor and Chrysler accounted for 51.9 %, 31.7%, and 10.7% of
the new vehicle sales of the Company, respectively. The Company may become
dependent on additional manufacturers in the future as a result of its
acquisition strategy and changes in the Company's sales mix.

      The Company also is dependent upon its Manufacturers to provide it with an
inventory of new vehicles. The most popular vehicles tend to provide the Company
with the highest profit margins and are frequently the most difficult to obtain
from the Manufacturers. In order to obtain sufficient numbers of these vehicles,
the Company may be required to purchase a larger number of less marketable makes
and models than it would otherwise purchase. Sales of less desirable makes and
models may result in lower profit margins than sales of the more popular
vehicles. If the Company were to be unable to obtain sufficient quantities of
the most popular makes and models, its profitability could be adversely
affected.

      The success of each of the Company's 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. Events such as labor strikes or negative publicity concerning a
particular Manufacturer, including safety recalls of a particular vehicle model,
could adversely affect the Company. The Company has attempted to lessen its
dependence on any one Manufacturer by obtaining agreements with a number of
different domestic and foreign automobile manufacturers.

Lack of Exclusive Market Area

      The Company's franchise and dealership agreements with its Manufacturers
do not give the Company the exclusive right to sell any Manufacturer's product
within any given geographical area. Accordingly, a Manufacturer could grant a
franchise to another dealer to start a new dealership in proximity to one or
more of the Company's locations or an existing dealer could move its dealership
to a location which would be directly competitive with the Company. Although
under Connecticut and New Jersey law a manufacturer is prohibited from
establishing a new dealership, or authorizing the relocation of an existing
dealership, to a location within 14 miles (8 miles in New Jersey under certain
circumstances) of a pre-existing dealership holding a franchise to sell the same
brand, depending upon the dealership involved, such an event could have a
material adverse effect on the Company and its operations.


                                       15
<PAGE>

Failure to Meet Loan Agreement Covenants at Year End.

      Net income for 1999 was $0.8 million or $0.13 per diluted share versus
$2.3 million or $0.39 per diluted share (Pro Forma) for 1998. Further, due to
rail transportation delays, in-transit inventory levels increased and inventory
reached $51.0 million by year-end. As a result of Hometown's earnings decline
from plan and its excess inventory, Hometown failed to comply with four
covenants in its loan agreement with General Electric Capital Corporation ("GE")
as of December 31, 1999. The Company's consolidated EBIDTA at year end was
$4,887,000 compared to the covenant of $8,810,000. The interest coverage and the
debt service coverage of the borrowers, as defined in the loan agreement, was
1.61 to 1 and 1.41 to 1 compared to the covenants of 2.5 to 1 and 2.0 to 1,
respectively. Additionally the current ratio of the specified borrowers, as
defined in the loan agreement, was 1.05 to 1 compared to the covenant of 1.1 to
1. GE waived these events of default as of December 31, 1999. However, there can
be no assurance that the Company will not be in violation of these or any other
covenants in the loan agreement at March 31, 2000 or at any time thereafter.
Further, there can be no assurance that GE will grant any waiver if an event of
a default occurs in the future. Upon the occurrence of an event of default under
its loan agreement with GE, not cured by the Company, it may be forced to pay
the outstanding balance under its loan agreement, seek alternative sources of
financing to the extent available, and/or substantially curtail operations.

Manufacturers' Control over Dealerships

      The dealerships operated by the Company sell cars and light trucks
pursuant to franchise or dealership agreements with Ford Motor, GM, Toyota
Motor, Chrysler, [Mazda] and American Isuzu. Through the terms and conditions of
these agreements, such Manufacturers exert considerable influence over the
operations of the Company'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.

      To its knowledge, the Company has, to date, complied with its dealership
agreements. There can be no assurance, however, that the Company will not from
time to time fail to comply with particular provisions of some or all of these
agreements. Although such agreements generally afford the Company a reasonable
opportunity to cure violations, if a Manufacturer were to terminate or decline
to renew one or more of the Company's significant agreements, such action could
have a material adverse effect on the Company and its business.

Dependence on Acquisitions for Growth

      The Company's future growth and financial success will be dependent upon a
number of factors including, among others, the Company's ability to identify
acceptable acquisition candidates, consummate the acquisition of such
dealerships on terms that are favorable to the Company, obtain the consent of
applicable automobile manufacturers, acquire and retain or hire and train
professional management and sales personnel at each such acquired dealership and
promptly and profitably integrate the acquired operations into the Company. The
Company may acquire dealerships with net profit margins which are materially
lower than the Company's historical average net profit margin. No assurance can
be given that the Company will be able to improve the profitability of any such
acquired dealerships. To manage its expansion, the Company intends to evaluate
on an ongoing basis the adequacy of its existing systems and procedures,
including, among others, its financial and reporting control systems, data
processing systems and management structure. However, no assurance can be given
that the Company will adequately anticipate all of the demands its growth will
impose on such systems, procedures and structure. Any failure to adequately
anticipate and respond to such demands could have a material adverse effect on
the Company.


                                       16
<PAGE>

      Acquisitions of additional dealerships will require substantial capital
investment and could have a significant impact on the Company's financial
position and operating results. Any such acquisitions may involve the use of
cash or the issuance of additional debt or equity securities which could have a
dilutive effect on the then outstanding capital stock of the Company.
Acquisitions may also result in the accumulation of substantial goodwill and
intangible assets which would result in amortization charges to the Company and
adversely affect future earnings.

Manufacturers' Restrictions on Existing and Future Acquisitions

      As a condition to granting their consent to the Exchange and the
Acquisitions, the Manufacturers have imposed certain restrictions on the
Company. Further, the consents from Ford Motor and Chrysler are subject to
conditions subsequent with respect to the submission by the Company of
supporting documents of the type generally contained in new dealer appointment
packages and such Manufacturer's approval thereof. Although various principals
of the Company have previously been approved by these Manufacturers in
connection with the franchises held by the Core Operating Companies and the
Company believes that such conditions subsequent will be satisfied, there is no
assurance that acceptable final consents will be obtained. The Manufacturers'
consents include restriction on: (i) the acquisition of more than a specified
percentage of the Common Stock (20% in the case of GM and Toyota Motor and 50%
in the case of Ford Motor) by any one person who in the opinion of the
Manufacturer is unqualified to own a dealership of such Manufacturer or has
interests incompatible with the Manufacturer, (ii) certain material changes in
the Company or extraordinary corporate transactions such as an acquisition,
merger or sale of a material amount of assets; (iii) a change in the general
manager of a dealership without the consent of the applicable Manufacturer; (iv)
the use of dealership facilities to sell or service new vehicles of other
Manufacturers; (v) in the case of GM, the advertising or marketing of non-GM
operations with GM operations; (vi) in the case of GM, any change in control of
the Company's Board of Directors; and (vii) in the case of Ford Motor, any
change in greater than 50% of the Company's Board of Directors or management.
The Company believes it has approached two percent of Lincoln/Mercury retail
sales in Connecticut and New Jersey and two percent of Ford retail sales in
Connecticut. Because retail sales numbers are constantly changing this number is
also subject to change. All of the Company's Lincoln/Mercury and Ford
dealerships operate in markets having three or less Ford or Lincoln/Mercury
authorized dealerships and the Company does not operate in any markets having
four or more authorized Ford or Lincoln dealerships. Notwithstanding the
numerical limitations on the acquisition of additional Lincoln/Mercury and Ford
dealerships in certain of the Company's existing market areas, the Company
believes that Ford Motor will be cooperative in the Company's attempts to
acquire additional dealerships in both these and other market areas, but there
can be no assurance that this will be the case. If the Company is unable to
comply with the foregoing restrictions or satisfy the conditions subsequent, the
Manufacturer may require the Company to sell the assets of the dealerships to
the Manufacturer or to a third party acceptable to the Manufacturer, or to
terminate the dealership agreements with the Manufacturer.

      It may be anticipated that obtaining Manufacturer's consent will also be a
prerequisite to any future acquisitions which the Company will seek to
consummate. Various Manufacturers have set limits on the number of dealerships
carrying their brand which may be owned by one dealer group (or company)
nationally or in specified market areas or which may be acquired within
specified time periods.

      In the case of Ford Motor Company, the Company may not acquire more than
two Ford and two Lincoln Mercury Dealerships during the first 12-month period
after execution of the Dealer Sales and Service Agreement and thereafter may not
acquire an additional dealership unless and until the Company's Ford and Lincoln
Mercury dealerships, as the case may be, are meeting Ford's performance
criteria. Additionally, the Company may not: (a) acquire an additional Ford or
Lincoln Mercury dealership, as the case may be, if the Company would then own or
control authorized Ford or Lincoln Mercury dealerships with total retail sales
of new vehicles for the preceding calendar year of more than


                                       17
<PAGE>

2% of the total Ford or Lincoln Mercury, as the case may be, retail sales volume
in the United States or more than 2% of the total Ford or Lincoln Mercury retail
sales volume in any state; or (b) acquire an additional Ford or Lincoln Mercury
dealership, as the case may be, if the Company would own or control more than
one authorized dealership in those market areas (defined by Ford) having three
or less Ford or Lincoln Mercury authorized dealerships in them or acquire more
than 25% of the Ford or Lincoln Mercury authorized dealerships in a market area
having four or more authorized Ford or Lincoln Mercury dealerships in them.

      In the case of Toyota Motor Sales, U.S.A., Inc., the Company may not: (a)
acquire greater than a specified number of dealerships per region (e.g. four in
the Boston region and five in the New York region); (b) acquire the greater of
one or 20% of the Toyota dealerships in any metro market (as defined by Toyota);
(c) own or control dealerships in contiguous market areas; or (d) acquire Toyota
dealerships more frequently than every nine months.

      In the case of General Motors, provided that the Company meets certain
managerial requirements, the Company may acquire up to five General Motor
dealerships during the period ending 24 months after the effective date of the
dealer sales and service agreement.

      Certain state laws, however, limit the ability of automobile manufacturers
to reject proposed transfers of dealerships, notwithstanding the terms of any
dealership agreement. See "Business ?Dealership Agreements." The loss of one or
more of the Company's dealership agreements could have a material adverse effect
on the Company's business, financial condition and results of operations.

Risks Related to Acquisition Financing; Future Capital Requirements

      The Company currently intends to finance future acquisitions by issuing
shares of Class A Common Stock as full or partial consideration for acquired
dealerships. The issuance of additional shares of Class A Common Stock may be
dilutive to the Company's future earnings per share. In addition, the extent to
which the Company will be able or willing to issue Class A Common Stock for
acquisitions will depend on the then current market value of the Class A Common
Stock and the willingness of potential acquisition candidates to accept shares
of that stock as part of the consideration for the sale of their businesses. To
the extent that the Company is unable or unwilling to do so, the Company may be
required to use available cash or proceeds from debt or equity financings.
However, no assurance can be given that existing resources will be sufficient to
fund the Company's acquisition program and other cash needs or that the Company
will be able to obtain adequate additional capital from other sources for either
such purposes.

Risks Relating to Failure to Meet Manufacturer CSI Scores

      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. The dealerships operated by the Core
Operating Companies have historically exceeded their Manufacturers' CSI
standards. However, there can be no assurance that either the Company
dealerships operated by members of the Core Operating Companies or other
subsequently acquired dealerships will continue to meet such standards.
Moreover, 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
make it more difficult for key Company dealerships to meet such standards.


                                       18
<PAGE>

Reliance on Key Personnel

The Company depends to a large extent upon the abilities and continued efforts
of its senior executive officers including Salvatore A. Vergopia, Corey Shaker,
William C. Muller, Jr., Edward A. Vergopia and James Christ. Further, the
Company may be dependent on the senior management of the dealerships it
acquires. If any of these persons becomes unavailable to continue in such
capacity, or if the Company were unable to attract and retain other qualified
employees, its business or prospects could be adversely affected.

Substantial Competition

      The automotive retailing industry is highly competitive with respect to
price, service, location and assortment. The Company competes with automobile
dealerships (including public franchised dealership consolidators), private
market buyers and sellers of used vehicles, used vehicle dealerships, service
center chains, independent service and repair shops and financing and insurance
("F&I") operations. In the sale of new vehicles, the Company competes with other
franchised dealers. The Company does not have any cost advantage in purchasing
new vehicles from the Manufacturers, and typically will rely on advertising,
merchandising, sales expertise, service reputation and location of its
dealerships to sell new vehicles. In recent years, the Company has also faced
competition from non-traditional sources such as companies that sell automobiles
on the Internet, automobile rental agencies, independent leasing companies,
used-car "superstores" and price clubs associated with established consumer
agencies such as the American Automobile Association, some of which use
non-traditional sales techniques such as one-price shopping. In addition, Ford
Motor has announced that it is exploring the possibility of going into business
with some of its dealers to create automotive superstores in selected markets.
In furtherance of this plan, Ford Motor announced in mid-1998, a proposed joint
venture with Republic Industries under which Ford Motor would acquire a 51%
interest and Republic Industries a 49% interest in a joint venture entity that
will acquire one Lincoln Mercury and eight Ford dealerships in the Rochester,
New York area to create a retail network. The dealerships would be operated by
Republic Industries. Some of these recent market entrants may have greater
financial, marketing and personnel resources and/or lower overhead or sales
costs than the Company. In the parts and service area, the Company also competes
with a number of regional or national chains which offer selected parts and
services at prices that may be lower than the Company's prices. In addition,
there can be no assurance that the Company's strategy will be more effective
than the strategies of its competitors.

Goodwill

      The Company's balance sheet at December 31, 1999 includes an amount
designated as "goodwill" that represents 25.2% of assets and 79.2% of
stockholders' equity.

      Goodwill arises when an acquirer pays more for a business than the fair
value of the tangible and separately measurable intangible net assets. Generally
Accepted Accounting Principles requires that this and all other intangible
assets be amortized over the period benefited. Management has determined that
period to be no less than 40 years.

      If management were not to separately recognize a material intangible asset
having a benefit period less than 40 years, or were not to give effect to
shorter benefit periods of factors giving rise to a material portion of the
goodwill, earnings reported in periods immediately following an acquisition
would be overstated. In later years, the Company would be burdened by a
continuing charge against earnings without the associated benefit to income
valued by management in arriving at the consideration paid for the business.
Earnings in later years could be significantly affected if management determined
then that the remaining balance of goodwill was impaired.


                                       19
<PAGE>

      Management has reviewed all of the factors and related future cash flows
which it considered in arriving at the amount incurred to acquire each of the
founding companies. Management concluded that the anticipated future cash flows
associated with intangible assets recognized in the acquisitions will continue
indefinitely, and there is no persuasive evidence that any material portion will
dissipate over a period shorter than 40 years.

Mature Industry

      The United States automobile dealership industry generally is considered a
mature industry in which minimal growth is expected in unit sales of new
vehicles. As a consequence, growth in the Company's revenues and earnings are
likely to be significantly affected by the Company's success in acquiring and
integrating dealerships and the pace and size of such acquisitions. See
"Business?Growth Strategy."

Cyclical Nature of Automobile Sales

      Sales of motor vehicles, particularly new vehicles, historically have been
subject to substantial cyclical variation characterized by oversupply and weak
demand. The Company believes 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 effect on the Company. The Company
believes that new vehicle sales in North America will be at levels slightly
under 1997 during 1998 and 1999 and at levels increasingly higher than 1997 in
the years 2000 through 2002. The Company does not believe that future expected
sales levels through 2002 will have a negative impact on its business. During
the past five years the Company's sales of new and used vehicles have not been
materially affected by overall industry levels of vehicle sales but have been
more significantly affected by the timing of introduction of new models by
particular Manufacturers and changes in consumer preferences for particular
brands or models.

Seasonality; Variability of Quarterly Operating Results

      The automobile industry is subject to seasonal variations in revenues.
Demand for cars and light trucks is generally lower during the winter months
than in other seasons, particularly in regions of the United States where the
Company is located which are associated with harsh winters. Accordingly, the
Company expects its revenues and operating results to be generally lower in its
first and fourth quarters than in its second and third quarters. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Imported Products

      A significant portion of the Company's new vehicle business will involve
the sale of vehicles, parts or vehicles composed of parts that are manufactured
outside the United States. As a result, the Company's 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 the Company's 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 the Company's operations and its ability to purchase imported
vehicles and/or parts.


                                       20
<PAGE>

Government Regulations and Environmental Matters

      The Company is subject to a wide range of federal, state and local laws
and regulations which are administered by various federal, state and local
regulatory agencies, such as local licensing requirements, consumer protection
laws and environmental requirements governing, among other things, discharges to
the air and water, the storage of petroleum substances and chemicals, the
handling and disposal of wastes, and the remediation of contamination arising
from spills and releases. The violation of these laws and regulations could
result in civil and criminal penalties being levied against the Company or in a
cease and desist order against operations that are not in compliance. Future
acquisitions by the Company may also be subject to governmental regulation,
including antitrust reviews. The Company believes that the Core Operating
Companies substantially comply with all applicable laws and regulations relating
to its business, but future laws and regulations may be more stringent and
require the Company to incur significant additional costs. The failure to
satisfy current or future regulatory requirements could have a material adverse
effect on the operations and financial condition of the Company. See "Business
?Governmental Regulations" and "Business?Environmental Matters."

Concentration of Voting Power; Anti-Takeover Provisions

      The former stockholders of the Core Operating Companies and their donees
own all of the Class B Common Stock, which entitles them to ten votes for each
share held, while holders of Class A Common Stock, are entitled to one vote per
share held. Consequently, such holders of the Class B Common Stock, who own
64.8% of the Company's outstanding Common Stock of all classes, will control
94.9% 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 the policies and operations of the Company. In addition,
the holders of the Class B Common Stock have entered into a stockholders'
agreement obligating them, for a five-year period, to vote for Salvatore A.
Vergopia, Joseph Shaker, William C. Muller Jr., Corey Shaker, Edward A. Vergopia
and James Christ as members of the Company's Board of Directors. The executive
officers and directors of the Company control 54.8% 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 the
policies and operations of the Company. 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.

      The Delaware General Corporation Law requires super-majority voting
thresholds to approve certain "business combinations" between interested
stockholders and the Company which may render more difficult or tend to
discourage attempts to acquire the Company. In addition, the Company's Board of
Directors has the authority to issue shares of preferred stock ("Preferred
Stock"), of which 2,000,000 are currently authorized, in one or more series and
to fix the rights and preferences of the shares of any such series without
stockholder approval. Any series of Preferred Stock is likely to be senior to
all classes of Common Stock of the Company with respect to dividends,
liquidation rights and, possibly, voting rights. The ability to issue Preferred
Stock could also have the effect of discouraging unsolicited acquisition
proposals, thus affecting the market price of the Common Stock and preventing
stockholders from obtaining any premium which might otherwise be offered by a
potential buyer. In addition, certain of the Company's dealer agreements will
prohibit the acquisition of more than a specified percentage of the Common Stock
without the consent of the relevant Manufacturers. See "Management?Executive
Officers and Directors," "Principal Stockholders" and "Description of Capital
Stock."


                                       21
<PAGE>

Possible Volatility of Price

      The market price of the Class A Common Stock could be subject to wide
fluctuations in response to a number of factors, including quarterly variations
of operating results, investor perceptions of the Company and automotive
retailing industry and general economic and other conditions.

ITEM 2. PROPERTIES

      Set forth in the table below is certain information relating to the
properties that the Company uses in its business.

<TABLE>
<CAPTION>
Occupant/Trade         Location                 Use                     Lease/Own
--------------         --------                 ---                     ---------
Name
----

<S>             <C>                    <C>                       <C>
Shaker's        831 Straits Turnpike   New and used car sales;   Lease expires in 2013;
  Lincoln       Watertown, CT          service; F & I            $240,000 per year with CPI
  Mercury       06795                                            increases in 2004 and 2009

Lincoln         1189 New Haven Rd.     Service                   Owned by dealership
  Mercury       Naugatuck, CT
  Autocare      06770

Family Ford     1200 Wolcott Street    New and used car sales;   Lease expires in 2013;
                Waterbury, CT 06705    service; F & I            $240,000 per year with CPI
                                                                 increases in  2004 and 2009

Shaker's Jeep   1311 South Main St.    New and used car sales;   Lease expires in 2013;
  Eagle         Waterbury, CT          service; F & I            $72,000 per year with CPI
                06706                                            increases in 2004 and 2009

Westwood        55 Kinderkamack Rd.    New and used car sales;   Lease expires in 2013;
  Lincoln       Emerson, NJ            service; F & I; livery    $360,000 per year with CPI
  Mercury       07630                  sales                     increases in 2004 and 2009

Muller Toyota   Route 31 and Van       New and used car sales;   Lease expires in 2013;
                Sickles Rd.            service; F & I            $360,000 per year with CPI
                Clinton, NJ 08809                                increases in 2004 and 2009

Muller Toyota   Route 31 and Spruce    Used car sales            Lease expires in 2000; $60,000
                St. Glen Gardner,                                per year with increases up to
                NJ 08826                                         $72,000 per year

Muller          Route 173 and          New and used car sales;   Lease expires in 2013;
  Chevrolet,    Voorhees Rd.           service; F & I            $396,000 per year with CPI
  Oldsmobile,   Stewartsville, NJ                                increases in 2004 and 2009
  Isuzu         08865

Wellesley       965 Worcester Road   New and User car sales;     Lease expires 12/22/08 at
  Lincoln       Wellesley, MA        service; F&I                $216,000 per year, one five
  Mercury       02181                                            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       571 Worcester Road   New and used car sales;     Owned facility
  Lincoln       Framingham, MA       service; F & I Mercury
                01701
</TABLE>


                                       22
<PAGE>

<TABLE>
<S>             <C>                    <C>                       <C>
Brattleboro     Route 5, Putney Rd.  New and used car sales;     Lease expires in 2003 at
  Chrysler      N. Brattleboro, VT   service; F & I              $240,000 per year; one five
  Plymouth      05304                                            year renewal option at the
  Dodge Sales;                                                   same rent and option to
                                                                 purchase at fair market value
                                                                 of not less than $1.5 million.

Morristown      115 Spring St.       New and used car sales;     New lease expires in 2005 at
Auto Sales,     Morristown,          service; F&I                $180,000 per year; two five year
Inc.            NJ 07960                                         renewal options, one at $192,000
                                                                 per year, the next at $204,000 per
                                                                 year and a right of first refusal as
                                                                 to purchase.

Autos of        2934 Rte 9 W         New and used car sales;     Owned facility
Newburgh, Inc.  New Windsor,         service; F&I
d/b/a Toyota    NY 12553
of Newburgh
</TABLE>

Leases

      The Company 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 for the five-year periods commencing January 1, 2004 and 2009.

Shaker Group. The Company leases, for an initial annual base rental of $240,000,
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 and Janet
Shaker. Corey Shaker is President and a principal stockholder of the Company.
Steven Shaker is [new regional title] and Vice President-Parts and Service and a
principal stockholder of the Company. Joseph Shaker is a consultant to and a
principal stockholder of the Company. Janet Shaker is a principal stockholder of
the Company.

Muller Group. The Company leases, for an initial annual base rental of $360,000
and $396,000 respectively the premises occupied by its Toyota dealership in
Clinton, New Jersey and its Chevrolet/Oldsmobile/Isuzu 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
[new regional title] and Vice President-New Jersey operations and, prior to the
Offering, was a 9.42% stockholder of Hometown.

Westwood. The Company leases, for an initial annual base rental of $360,000 the
premises occupied by its Lincoln Mercury dealership in Emerson, New Jersey from
Salvatore A. Vergopia and his wife. Mr. Vergopia is Chairman of the Board and
Chief Executive Officer of Hometown and, prior to the Offering, including shares
owned by his wife, was a 17.63% stockholder of Hometown.

Floor Plan Line of Credit

      As at March 31, 2000, the Company had aggregate liability of $42,890,000
under its floor plan line of credit with General Electric Capital Corp.


                                       23
<PAGE>

Item 3. LEGAL PROCEEDINGS

      The Company is not party to any material legal proceedings.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      None


                                       24
<PAGE>

                                     PART II

Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      (a) Market Information

      The Company's Class A Common Stock had been traded on The Nasdaq National
Market under the symbols "HCAR" since July 31, 1998

      The following table sets forth the high and low closing prices as quoted
by The Nasdaq National Market since the commencement of trading. Such quotations
reflect inter-dealer prices, without retail mark-up, markdown or commission and
may not necessarily represent actual transactions.

                                               High                       Low
1998

Third Quarter (from July 31)                  $8.75                    $5.375

Fourth Quarter                               $5.875                    $3.625

1999

First Quarter                                 $5.25                     $4.00

Second Quarter                                $4.50                     $3.75

Third Quarter                                $3.875                     $3.50

Fourth Quarter                               $3.938                    $2.938

      (b) Holders

      As of March 24, 2000, the number of record holders of the Class A Common
Stock of the Company was 81. The Company believes that there are more than 500
beneficial holders of the Common Stock.

      (c) Dividends

      The holders of Common Stock are entitled to receive such dividends as may
be declared by the Company's Board of Directors. The Company has not paid and
does not expect to declare or pay any dividends in the foreseeable future.


                                       25
<PAGE>

Item 6. SELECTED FINANCIAL DATA

      The Company acquired the Core Operating Companies and the Acquisitions
simultaneously with the closing of the Offering on July 31, 1998, which
transactions have been accounted for using the purchase method of accounting.
E.R.R. Enterprises, Inc. ("Shaker"), the parent of one of the Core Operating
Companies, has been identified as the acquiror for financial statement
presentation purposes. The following selected financial data as of December 31,
1999 and 1998 have been derived from the audited consolidated financial
statements of the Company. The following selected historical financial data
as of December 31, 1997, 1996, and 1995 have been derived from the audited
financial statements of Shaker.

<TABLE>
<CAPTION>
                                                                  For the Years Ended December 31,
                                               -----------------------------------------------------------------------
                                                  1999           1998           1997           1996           1995
                                               -----------    -----------    -----------    -----------    -----------
Statement of Operations Data:                               (in thousands, except share and per share data)

<S>                                            <C>            <C>            <C>            <C>            <C>
Revenues                                       $   285,493    $   121,516    $    59,496    $    62,222    $    52,020
Cost of sales                                      248,615        104,898         51,226         53,076         44,189
                                               -----------    -----------    -----------    -----------    -----------
      Gross profit                                  36,878         16,618          8,270          9,146          7,831
Amortization of goodwill                               600            212             --             --             --
Loss from operations of e-Commerce
     subsidiary                                        515             --             --             --             --
Selling, general and administrative expenses        32,045         17,510          7,715          8,049          6,961
                                               -----------    -----------    -----------    -----------    -----------
      Income (loss) from operations                  3,718         (1,104)           555          1,097            870
Other income (expense)
   Interest (expense), net                          (1,988)          (443)          (189)          (384)          (555)
   Other income (expense), net                         (95)            46            116              1             16
                                               -----------    -----------    -----------    -----------    -----------
      Income (loss) before taxes                     1,635         (1,501)           482            714            331
Provision (benefit) for income taxes                   850           (502)           166            321            118
                                               -----------    -----------    -----------    -----------    -----------
      Net income (loss)                        $       785    $      (999)   $       316    $       393    $       213
                                               ===========    ===========    ===========    ===========    ===========
Earnings (loss) per share, basic               $       .13    $      (.28)   $       .17    $       .21    $       .11
Earnings (loss) per share, diluted             $       .13    $      (.28)   $       .17    $       .21    $       .11
Weighted average shares, basic                   5,875,342      3,513,333      1,880,000      1,880,000      1,880,000
Weighted average shares, diluted                 6,003,851      3,513,333      1,880,000      1,880,000      1,880,000
</TABLE>

<TABLE>
<CAPTION>
                                                                         As of December 31,
                                               -----------------------------------------------------------------------
                                                  1999           1998           1997           1996           1995
                                               -----------    -----------    -----------    -----------    -----------
Balance Sheet Data:                                                        (in thousands)

<S>                                            <C>            <C>            <C>            <C>            <C>
Working capital                                $     5,128    $     5,760    $     4,347    $     4,138    $     3,138
Inventories                                         51,455         30,554          7,609          8,504          9,769
Total assets                                        97,307         66,411         13,878         14,798         14,719
Total debt                                          60,945         32,145          7,231          8,201          9,167
Stockholders' equity                                31,015         29,230          5,098          4,782          4,390
</TABLE>


                                       26
<PAGE>

                            UNAUDITED FINANCIAL DATA

      The Company acquired the Core Operating Companies and the Acquisitions
simultaneously with the closing of the Offering on July 31, 1998, however, for
pro forma financial presentation purposes, these transactions will be given
effect on the first day of each year. These transactions have been accounted for
using the purchase method of accounting. E.R.R. Enterprises, Inc. ("Shaker"),
the parent of one of the Core Operating Companies, has been identified as the
acquiror for financial statement presentation purposes. The following summary
financial data presents, for the year ended December 31, 1999, 1998 and 1997,
certain historical and pro forma data for the Core Operating Companies, the
Acquisitions and pro forma adjustments. (See Note below.)

<TABLE>
<CAPTION>
                                                             For the Years
                                                           Ended December 31,
                                                           ------------------
                                                  1999           1998           1997
                                               -----------    -----------    -----------
                                                      (in thousands, except share and
Statement of Operations Data:                                 per share data)

<S>                                            <C>            <C>            <C>
Revenues                                                      (pro forma)     (pro forma)
   New vehicle sales                           $   173,481    $   140,203    $   141,211
   Used vehicle sales                               82,272         73,404         84,395
   Parts and service sales                          22,823         21,147         23,211
   Other dealership revenues, net                    6,917          5,849          5,379
                                               -----------    -----------    -----------
      Total revenues                               285,493        240,603        254,196
Cost of sales                                      248,615        209,246        221,395
                                               -----------    -----------    -----------
      Gross profit                                  36,878         31,357         32,801
Amortization of goodwill                               600            473            417
Loss from operations of e-Commerce
subsidiary                                             515             --             --

Selling, general and administrative
   Expenses                                         32,045         26,047         25,946
                                               -----------    -----------    -----------
      Income from operations                         3,718          4,837          6,438

Other (expense)                                     (2,083)          (892)          (610)
                                               -----------    -----------    -----------
      Income before taxes                            1,635          3,945          5,828

Provision for income taxes                             850          1,692          2,331
                                               -----------    -----------    -----------
      Net income                               $       785    $     2,253    $     3,497
                                               ===========    ===========    ===========
Earnings per share, basic                      $       .13    $       .39    $       .60
Earnings per share, diluted                    $       .13    $       .39    $       .60

Weighted average shares, basic                   5,875,342      5,800,000      5,800,000
Weighted average shares, diluted                 6,003,851      5,800,000      5,800,000

Other Data:
Retail new vehicles sold                             6,892          5,325          5,644
Retail used vehicles sold                            4,790          4,105          5,021
</TABLE>


                                       27
<PAGE>

Note to Pro Forma Combination

      The 1999, 1998 and 1997 pro forma combined data presented on the previous
page represents a summation of certain data on an historical basis on the
assumption that the combination of the Core Operating Companies, the
Acquisitions, and the Offering had occurred on the first day of each year
presented, and includes the effects of the specific pro forma adjustments
detailed below. This data may not be comparable to and may not be indicative of
Hometown's post-combination results of operations because the acquired
dealerships were not under common control of management. The pro forma
adjustments primarily relate to: (a) amortization of goodwill using an estimated
useful life of 40 years; (b) adjusting compensation expense and management fees
to the level that certain management employees and owners of the Core Operating
Companies and the Acquisitions will contractually receive subsequent to the
closing of the combination and the Acquisitions; (c) adjusting rent expense to
reflect newly negotiated fair market value leases; (d) adjustments to interest
income on Cash and Cash Equivalents not realized as part of the combination and
the Acquisitions offset by the reduction of interest expense on certain
long-term debt that will be liquidated out of proceeds of the Offering and the
reduction of interest expense on debt and leases not assumed as part of the
transactions with the acquired dealerships; (e) adjustments to interest expense
resulting from the repayment of floor plan obligations with proceeds from the
Offering and the interest savings for refinancing the balance of the floor plan
obligations with a commercial lender; (f) adjustments for incremental provision
for federal and state income taxes relating to the pro forma adjustments
described above and the loss of S-corporation status of Muller Toyota, Muller
Chevrolet, Bay State and Brattleboro; (g) the accounting adjustments required to
reflect the purchase of the Core Operating Companies and the Acquisitions, the
recording of the associated transaction costs and the settlement of certain
related party payables and a distribution to the owners of Shaker; (h) the
adjustments needed to record the receipt of the net Offering; (i) adjustments to
reflect the settlement of the cash portion of the acquisitions; and (j)
adjustments to reflects the pay-down of certain long-term debt; and (k)
adjustment to reflect the pay-down of floor plan obligations with proceeds from
the Offering.


                                       28
<PAGE>

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATION

                       The Company - Pro Forma Information

Overview

      In July 1998, Hometown Auto Retailers, Inc. ("Hometown" or the "Company")
completed simultaneously its acquisition of three automobile dealership groups
(the "Core Operating Companies"), the acquisition of certain assets and
liabilities of another three dealerships (the "Acquisitions") and an initial
public offering (the "Offering"). The Core Operating Companies were acquired in
exchange for common stock of Hometown Auto Retailers, Inc. The Acquisitions were
acquired for cash.

      In the attached pro forma consolidated financial statements for 1998, the
Exchange and the Acquisitions are accounted for using the purchase method of
accounting. E.R.R. Enterprises, Inc. (Shaker), one of the Core Operating
Companies, was identified as the accounting acquirer for pro forma financial
statement presentation purposes in accordance with SAB No. 97 because its
stockholders received the largest number of shares of Class B Common Stock in
the Exchange, which shares represent the single largest voting interest in the
Company.

      The 1998 pro forma combined data represents a summation of certain data on
an historical basis on the assumption that the combination of the Core Operating
Companies, the Acquisitions, and the Offering had occurred on the first day of
1998, and includes the effects of the specific pro forma adjustments detailed
below. This data may not be comparable to and may not be indicative of
Hometown's post-combination results of operations because the acquired
dealerships were not under common control of management. The pro forma
adjustments primarily relate to: (a) amortization of the "excess purchase price
over net tangible assets acquired" using an estimated useful life of 40 years;
(b) adjusting compensation expense and management fees to the level that certain
management employees and owners of the Core Operating Companies and the
Acquisitions will contractually receive subsequent to the closing of the
combination and the Acquisitions; (c) adjusting rent expense to reflect newly
negotiated fair market value leases; (d) adjustments to interest income on Cash
and Cash Equivalents not realized as part of the combination and the
Acquisitions offset by the reduction of interest expense on certain long-term
debt that will be liquidated out of proceeds of the Offering and the reduction
of interest expense on debt and leases not assumed as part of the transactions
with the acquired dealerships; (e) adjustments to interest expense resulting
from the repayment of floor plan obligations with proceeds from the Offering and
the interest savings for refinancing the balance of the floor plan obligations
with a commercial lender; (f) adjustments for incremental provision for federal
and state income taxes relating to the pro forma adjustments described above and
the loss of S-corporation status of Muller Toyota, Muller Chevrolet, Bay State
and Brattleboro; (g) the accounting adjustments required to reflect the purchase
of the Core Operating Companies and the Acquisitions, the recording of the
associated transaction costs and the settlement of certain related party
payables and a distribution to the owners of Shaker; (h) the adjustments needed
to record the receipt of the net Offering; (i) adjustments to reflect the
settlement of the cash portion of the acquisitions; and (j) adjustments to
reflects the pay-down of certain long-term debt; and (k) adjustment to reflect
the pay-down of floor plan obligations with proceeds from the Offering.

Operating Strategy

      Since July 31, 1998, the Company has begun to integrate certain functions
and to implement practices that have been successful at other franchises,
including those of the Core Operating Companies, and in other retail segments
("best practices"). This integration and implementation of best practices may
present opportunities to increase revenues and reduce costs but may also
necessitate additional costs and expenditures for corporate administration,
including expenses necessary to implement the Company's acquisition strategy.
These various costs and possible cost-savings and revenue enhancements may make
historical operating results not comparable to, or indicative of, future
performance.


                                       29
<PAGE>

      The following table of financial data presents actual financial data for
the year ended December 31, 1999, and certain combined pro forma financial data
for the year ended December 31, 1998, as if the combinations of the Core
Operating Companies, the Acquisitions and the Offering had occurred on the first
day of 1998.

                                                           For the Years
                                                         Ended December 31,
                                                    ---------------------------
                                                       1999            1998
                                                    -----------     -----------
                                                     (in thousands, except per
Statement of Operations Data:                                share data)
Revenues
   New vehicle sales                                $   173,481     $   140,203
   Used vehicle sales                                    82,272          73,404
   Parts and service sales                               22,823          21,147
   Other dealership revenues, net                         6,917           5,849
                                                    -----------     -----------
      Total revenues                                    285,493         240,603
Cost of sales                                           248,615         209,246
                                                    -----------     -----------
      Gross profit                                       36,878          31,357
Amortization of goodwill                                    600             473

Loss from operations of
   e-Commerce subsidiary                                    515              --
Selling, general and administrative
   expenses                                              32,045          26,047
                                                    -----------     -----------
      Income from operations                              3,718           4,837

Other (expense)                                          (2,083)           (892)
                                                    -----------     -----------
      Income before taxes                                 1,635           3,945

Provision for income taxes                                  850           1,692
                                                    -----------     -----------
      Net income                                    $       785     $     2,253
                                                    ===========     ===========
Earnings per share, basic                           $       .13     $       .39
Weighted average shares, basic                        5,875,342       5,800,000

Earnings per share, diluted                         $       .13     $       .39
Weighted average shares, diluted                      6,003,851       5,800,000

Other Data:
Retail new vehicles sold                                  6,892           5,325
Retail used vehicles sold                                 4,790           4,105


                                       30
<PAGE>

Actual and Pro Forma Combined Revenues, Units, Gross Profit and Gross Profit
Percentage to Revenues

      On an actual basis for 1999 and on a pro forma combined basis for 1998,
the total revenue by category for Hometown for the years ended December 31, 1999
and 1998, are as follows:

                                                           For the Years
                                                         Ended December 31,
                                                    ---------------------------
                                                       1999            1998
                                                    -----------     -----------
                                                           (in thousands)
New vehicle                                         $   173,481     $   140,203
Used vehicle - retail                                    67,050          55,344
Used vehicle - wholesale                                 15,222          18,060
Parts and service                                        22,823          21,147
F&I and other                                             6,917           5,849
                                                    -----------     -----------
Total Revenue                                       $   285,493     $   240,603
                                                    ===========     ===========

      On an actual basis for 1999 and on a pro forma combined basis for 1998,
the units sold by category for Hometown for the years ended December 31, 1999
and 1998, are as follows:

                                                           For the Years
                                                         Ended December 31,
                                                    ---------------------------
                                                       1999            1998
                                                    -----------     -----------
New vehicle                                               6,892           5,325
Used vehicle - retail                                     4,790           4,105
Used vehicle - wholesale                                  3,319           3,871
                                                    -----------     -----------
Total units sold                                         15,001          13,301
                                                    ===========     ===========


                                       31
<PAGE>

      On an actual basis for 1999 and on a pro forma combined basis for 1998,
the new vehicle revenue by manufacturer for Hometown for the years ended
December 31, 1999 and 1998, are as follows:

                                                           For the Years
                                                         Ended December 31,
                                                    ---------------------------
                                                       1999            1998
                                                    -----------     -----------
                                                           (in thousands)
Ford Motor                                          $    98,038     $    89,237
Chrysler                                                 18,358          18,857
Toyota Motor                                             48,520          24,115
GM                                                        6,452           6,523
All Other                                                 2,113           1,471
                                                    -----------     -----------
Total Revenue                                       $   173,481     $   140,203
                                                    ===========     ===========

      On an actual basis for 1999 and on a pro forma combined basis for 1998,
the new vehicle units sold by manufacturer for Hometown for the years ended
December 31, 1999 and 1998, are as follows:

                                                           For the Years
                                                         Ended December 31,
                                                    ---------------------------
                                                       1999            1998
                                                    -----------     -----------
Ford Motor                                                3,579           3,097
Chrysler                                                    736             823
Toyota Motor                                              2,188           1,040
GM                                                          278             288
All Other                                                   111              77
                                                    -----------     -----------
Total units sold                                          6,892           5,325
                                                    ===========     ===========


                                       32
<PAGE>

      On an actual basis for 1999 and on a pro forma combined basis for 1998,
the gross profit by category for Hometown for the years ended December 31, 1999
and 1998, are as follows:

                                                           For the Years
                                                         Ended December 31,
                                                    ---------------------------
                                                       1999            1998
                                                    -----------     -----------
                                                           (in thousands)
New vehicle                                         $    10,065     $     8,525
Used vehicle - retail                                     7,070           6,561
Used vehicle - wholesale                                   (183)            (24)
Parts and service                                        13,009          10,446
F&I and other                                             6,917           5,849
                                                    -----------     -----------
Total Gross Profit                                  $    36,878     $    31,357
                                                    ===========     ===========

      On an actual basis for 1999 and on a pro forma combined basis for 1998,
the gross profit percent of revenue by category for Hometown for the years ended
December 31, 1999 and 1998, are as follows:

                                                           For the Years
                                                         Ended December 31,
                                                    ---------------------------
                                                       1999            1998
                                                    -----------     -----------
                                                             (percent)
New vehicle                                                 5.8             6.1
Used vehicle - retail                                      10.5            11.8
Used vehicle - wholesale                                   (1.2)           (0.1)
Parts and service                                          57.0            49.4
F&I and other                                             100.0           100.0
                                                    -----------     -----------
Total Gross Profit percent                                 12.9            13.0
                                                    ===========     ===========


                                       33
<PAGE>

Actual year ended December 31, 1999 compared with pro forma year ended December
31, 1998.

      Revenue

      Total Revenue increased $ 44.9 million, or 18.7%, from $ 241 million for
the year ended December 31, 1998 to $ 285 million for year ended December 31,
1999. On a same store basis, total revenue decreased $7.5 million, or 3.1% from
$ 241 million for the year ended December 31, 1998 to $ 233 million for the year
ended December 31, 1999.

      The increase in total revenue reflects the first quarter 1999 acquisition
of Toyota of Newburgh and Morristown Lincoln Mercury. The decline in same store
sales is due primarily to a 37.3% decline in used vehicle sales at wholesale.
The Company's inventory policy is to transfer a used vehicle one time within the
Company to improve the possibility of realizing a gross profit rather than send
it immediately to an auction where the vehicle will typically be sold at cost or
less. Same store parts and service sales also declined 10.6%. The decline
occurred at two of the Company's Lincoln Mercury stores and reflects the
downturn in sales of Lincoln Mercury.

      Revenue from the sale of new vehicles increased $33.3 million, or 23.7%
from $140 million for the year ended December 31, 1998 to $173 million for year
ended December 31, 1999. Unit sales increased from 5,325 units for the year
ended December 31, 1998, to 6,892 for the year ended December 31, 1999, an
increase of 29.4%. The increase reflects the first quarter acquisitions of
Toyota of Newburgh and Morristown Lincoln Mercury. On a same store basis,
revenue from the sale of new vehicles increased $1.9 million, or 1.4%, from $140
million for the year ended December 31, 1998, to $142 million for the year ended
December 31, 1999. The increase reflects increased sales of Toyota vehicles
offset by a decline in sales of Lincoln vehicles. New vehicle sales at the
Company's Westwood Lincoln Mercury store declined by $5.5 million or 11.1%. That
decline reflects a nationwide decline in sales of Lincoln Mercury vehicles.
Generally, because of its heavy concentration in Lincoln (35.5% of the new
vehicle unit sales of the Company are in Lincoln Mercury), the Company's
operating results are dependant on sales of Lincoln Mercury vehicles.
Additionally, rail construction near Albany, New York (a transfer point for rail
shipments) created shipping delays for Lincoln Mercury retailers in the New
Jersey area. These delays began in the third quarter and lasted until January
2000.

      Revenue from the sale of used vehicles at retail increased $11.7 million,
or 21.2%, from $55.3 million for the year ended December 31, 1998, to $67.1
million for the year ended December 31, 1999. Unit sales increased from 4,105
units for the year ended December 31, 1998, to 4,790 for the year ended December
31, 1999, an increase of 16.7%. The increase reflects the first quarter
acquisitions of Toyota of Newburgh and Morristown Lincoln Mercury. On a same
store basis, revenue from the sale of used vehicles at retail decreased $0.4
million, or 0.9%, from $55.3 million for the year ended December 31, 1998, to
$54.9 million for the year ended December 31, 1999. Sales of used vehicles have
been essentially flat due largely to aggressive new car pricing by the
manufacturers cutting into the sales of late model, low mileage used vehicles.
Also on a same store basis, revenue from the sale of used vehicles at wholesale
decreased $6.8 million, or 37.3%, from $18.1 million for the year ended December
31, 1998, to $11.3 million for the year ended December 31, 1999. The decrease
reflects managements inventory policy of sending fewer vehicles to the auction
as mentioned above to improve the possibility of realizing a gross profit. The
above mentioned delivery delays at Westwood Lincoln Mercury also adversely
impacted its sales of used livery vehicles. Westwood depends upon trade-in
vehicles for its supply of used vehicles. As a result of the drop in sales of
new vehicles, sales of used vehicles fell by $2.1 million or 25.1% from the
prior year. Also, used vehicle sales at retail declined by $0.5 million or 8.2%
at the Company's Brattleboro Chrysler Plymouth Dodge Jeep store in Brattleboro,
Vermont. The decrease was primarily due to a change in customer mix toward
customers with lower credit ratings resulting in a increase of financing
rejections. The Company is taking steps to find better sources of financing for
customers with lower credit scores, i.e. "sub-prime" financing. These declines
in sales of used vehicles at retail were offset by increases in sales at other
dealerships, principally GoodDay Chevrolet and Family Ford.

      Parts and service sales revenue increased $1.7 million, or 7.9%, from
$21.1 million for the year ended December 31, 1998, to $22.8 million for the
year ended December 31, 1999. The increase reflects the first


                                       34
<PAGE>

quarter acquisitions of Toyota of Newburgh and Morristown Lincoln Mercury. On a
same store basis, parts and service sales revenue decreased $2.2 million, or
10.6% from $21.1 million for year ended December 31, 1998, to $18.9 million for
year ended December 31, 1999. The decrease occurred at the Company's Lincoln
Mercury stores and is primarily a reflection of the sales decline.

      Finance, Insurance, Extended Service, and Other Dealership revenue
increased $1.1 million, or 18.3% from $5.8 million for the year ended December
31, 1998 to $6.9 million for the year ended December 31, 1999. The increase
reflects the first quarter acquisitions of Toyota of Newburgh and Morristown
Lincoln Mercury. On a same store basis, Finance, Insurance, Extended Service,
and Other Dealership revenue was flat year to year reflecting primarily the flat
sales of used vehicles.

      Gross Profit

      Total gross profit increased $5.5 million, or 17.6%, from $31.4 million
for the year ended December 31, 1998, to $36.9 million for the year ended
December 31, 1999. The increase reflects the first quarter acquisitions of
Toyota of Newburgh and Morristown Lincoln Mercury.

      Gross profit on the sale of new vehicles increased $1.6 million, or 18.1%,
from $8.5 million for the year ended December 31, 1998, to $10.1 million for the
year ended December 31, 1999. The increase reflects the first quarter
acquisitions of Toyota of Newburgh and Morristown Lincoln Mercury. On a same
store basis, gross profit on the sale of new vehicles decreased $0.3 million, or
4.2%, from $8.5 million for the year ended December 31, 1998, to $8.2 million
for the year ended December 31, 1999. That decrease was primarily due to gross
profit decline at Westwood Lincoln Mercury resulting from the above mentioned
decline in sales of Lincoln Mercury vehicles.

      Gross profit on the sale of used vehicles at retail increased $0.5
million, or 8.0%, from $6.6 million for the year ended December 31, 1998, to
$7.1 million for the year ended December 31, 1999. The increase reflects the
first quarter acquisitions of Toyota of Newburgh and Morristown Lincoln Mercury.
On a same store basis, gross profit on the sale of used vehicles at retail
decreased $0.9 million, or 12.7%, from $6.6 million for the year ended December
31, 1998, to $5.7 million for the year ended December 31, 1999. The decrease was
due primarily to the decline in the sale of used livery vehicles at Westwood
Lincoln Mercury caused by the above mentioned delivery delays and to a decrease
in used vehicles sales at the Company's Brattleboro Chrysler Plymouth Dodge Jeep
store.

      Parts and service gross profit increased $2.6 million, or 24.5%, from
$10.4 million for the year ended December 31, 1998, to $13.0 million for the
year ended December 31, 1999. The increase reflects the first quarter
acquisitions of Toyota of Newburgh and Morristown Lincoln Mercury. On a same
store basis, parts and service gross profit increased $0.5 million or 3.9%, from
$10.4 million for the year ended December 31, 1998, to $10.9 million for the
year ended December 31, 1999. The increase in parts and service gross profit was
generally across all dealerships and reflects management's focus on improving
the most profitable component of an auto dealership.

      Selling, General and Administrative Expenses

      The pro forma combination of Hometown's selling, general and
administration expenses for the year ended December 31, 1998, includes various
adjustments made to the Company's historical financial statements for changes in
compensation of the owners and differences in the negotiated cost of the fair
market valued leases.

      Selling, general and administrative expenses increased $6.0 million, or
23.0%, from $26.0 million for the year ended December 31, 1998, to $32.0 million
for the year ended December 31, 1999. The increase reflects the first quarter
acquisitions of Toyota of Newburgh and Morristown Lincoln Mercury. On a same
store basis, selling, general and administrative expenses increased $0.7
million, or 2.4%, from $26.0 million for the year ended December 31, 1998, to
$26.7 million for the year ended December 31, 1999. The increase was due
primarily to


                                       35
<PAGE>

increases in corporate overhead costs reflecting a full year as a public company
compared to five months in 1998, offset by decreases in the cost of insurance,
oil, other commodities and compensation savings resulting from the integration
of individual private businesses into one company, and a reclassification of
approximately $0.3 million in rent on the Bay State Lincoln Mercury facility to
interest expense due to the Bay State Lincoln Mercury facility being purchased
in the second quarter of 1999.

      Expenses relating to CarDay.com, Hometown's e-Commerce subsidiary, totaled
$0.5 million in 1999 compared to nil in 1998. Subsequent to year end, CarDay.com
obtained $25 million in venture capital funds, reducing Hometown's ownership
interest in CarDay.com from 82% to 15%.

      Other Income (Expense)

      Net other expense increased by $1.2 million, from $0.9 million for the
year ended December 31, 1998, to $2.1 million for the year ended December 31,
1999. Net interest expense, increased by $1.1 million, or 10.7%, from $2.4
million for the year ended December 31, 1998, to $2.6 million for the year ended
December 31, 1999. The increase in net other expense reflects the first quarter
acquisitions of Toyota of Newburgh and Morristown Lincoln Mercury. On a same
store basis, net other expense increased by $0.7 million, from $0.9 million for
the year ended December 31, 1998, to $1.6 million for the year ended December
31, 1999.

      Floor plan interest increased by $0.4 million or 15.9%, from $2.2 million
for the year ended December 31, 1998, to $2.6 million for the year ended
December 31, 1999. Manufacturers floor plan assistance credits increased $0.12
million or 11.5%, from $1.3 million for the year ended December 31, 1998, to
$1.5 million for the year ended December 31, 1999. The resulting decrease in net
floor plan interest expense is due to lower interest rates for a full year in
1999, offset by increased interest expense in the third and fourth quarters of
1999 caused by inventory increases at Westwood related to the above mentioned
transportation delays and caused by purchasing by other dealerships against
anticipated sales that did not materialize. Inventories of new and used vehicles
rose during the third and fourth quarters to $51.0 million by year end. Industry
guide is two months supply which would equate to $41.0 million. Most of the
increase was at Westwood related to the above mentioned transportation delays.
Management took corrective action in the first quarter of 2000 by instituting
centralized inventory monitoring and new inventory measurement and control
tools. As of March 31, 2000, new and used vehicle inventory was down to
approximately $45 million. Management expects inventory to be back within
industry guide during the second quarter of 2000.

      Other interest expense increased by $0.8 million from $0.1 million for the
year ended December 31, 1998, to $0.9 million for the year ended December 31,
1999. The increase represents mortgage interest on the purchase of the Toyota of
Newburgh facility in the first quarter of 1999, and the purchase of the Bay
State Lincoln Mercury facility in the second quarter of 1999. Interest income
decreased by $0.3 million from $0.3 million for the year ended December 31,
1998, to nil for the year ended December 31, 1999. Under the financing agreement
dated January 6, 1999, with General Electric Capital Corporation, all cash is
swept to GE to pay down the floor plan line of credit as opposed to being
deposited in an interest bearing account as was the case in 1998.

      Net Income

      Net income decreased $1.5 million, or 65.2%, from $2.3 million for the
year ended December 31, 1998, to $0.8 million for the year ended December 31,
1999. The decrease was primarily due to increases in selling, general and
administrative expenses and other income (expense) offset by increased gross
profit. Of the $1.5 million decrease in net income, over $515,000 relates to
CarDay development expenses.


                                       36
<PAGE>

Earnings Per Share, Basic and Diluted

      On a pro forma combined basis, the earnings per share for the year ended
December 31, 1998 was $.39. As of December 31, 1998, the Company did not have
any potentially dilutive securities. On an actual basis, the earnings per share
for the year ended December 31, 1999 was $0.13 basic and $0.13 diluted. Without
CarDay expenses, earnings per share on a basic and diluted basis for the year
ended December 31, 1999 would have been $0.19.

Weighted Average Shares

      On a pro forma combined basis, the weighted average shares for the year
ended December 31, 1998 are 5,800,000 shares, both basic and diluted. The
weighted average shares represent the sum of the outstanding Class A shares
(2,040,000) and Class B shares (3,760,000). On an actual basis, the weighted
average shares for the year ended December 31, 1999 are 5,875,342 basic and
6,003,851 diluted.

Acquisitions

      The Company acquired two dealerships, Toyota of Newburgh located in New
York and Morristown Lincoln Mercury located in New Jersey for an aggregate price
of $3.2 million in cash and $1.0 million in shares of Hometown stock plus the
assumption of floor plan liabilities of $3.2 million. These two acquisitions
added $52.4 million to the Company's 1999 revenues and $0.7 million to the
Company's income before income taxes for the year ended December 31, 1999.

      On November 3, 1999, Hometown purchased a Mazda franchise, special parts,
signage and new car inventory for $.7 million. This franchise was tucked into
the Company's Framingham, Massachusetts dealership and will co-exist with the
Lincoln/Mercury's until showroom space can be added for the Mazda new cars.


                                       37
<PAGE>

                      The Company - Historical Information

      The following discussion and analysis are based on the historical
consolidated financial statements of Hometown Auto Retailers, Inc. ("Hometown"),
since July 1998, and E.R.R. Enterprises, Inc. ("Shaker") collectively referred
to as Hometown. Shaker was one of the three Core Operating Companies of Hometown
and was deemed to be the accounting acquirer.

Overview.

      Shaker was a holding company that operated one of the largest dealer
groups in Connecticut, consisting of Shaker's Lincoln Mercury in Watertown
Connecticut; Family Ford and Family Rental in Waterbury, Connecticut; and
Shaker's Jeep/Eagle in Waterbury, Connecticut. It also operated Lincoln Mercury
Autocare, a factory authorized free-standing neighborhood automobile maintenance
and repair center in Naugatuck, Connecticut. Shaker is a franchised dealer for
Lincoln, Mercury, Ford, Jeep, and Eagle cars and trucks.

      Shaker was originally founded as Shaker Auto Service, an automobile repair
shop, in Waterbury, Connecticut in 1930. After World War II, Shaker became an
automobile dealer, ultimately being awarded the Jeep, Lincoln Mercury and Ford
franchises. Shaker is operated by a third generation of the Shaker family.

      Shaker has diverse sources of automotive revenues, including: new car
sales, new light truck sales, used car sales, used light truck sales, used cars
purchased from the manufacturers, parts sales, service sales, including from
Lincoln Mercury Autocare, finance fees, insurance commissions, extended service
contract sales, documentary fees and after-market product sales. Sales revenues
include sales to retail customers, other dealers and wholesalers. Other
dealership revenue includes revenue from the sale of financing, insurance and
extended service contracts, all net of a provision for anticipated chargebacks,
and related documentary fees charged to customers.

      Shaker's gross profit varies as its automotive merchandise mix (the mix
between new vehicle sales, used vehicle sales, parts and service sales, and
other dealership revenues) changes. The gross margin realized by Shaker on the
sale of its products and services generally varies between approximately 13.9%
and 14.6% annually, with new vehicle sales generally resulting in the lowest
gross margin and parts and service sales generally resulting in the highest
gross margin. Revenues from related financing, insurance and service contracts
contribute a disproportionate share of gross, operating and pre-tax margins.
When Shaker's new vehicle sales increase or decrease at a rate greater than its
other revenue sources, its gross profit margin responds inversely. Factors such
as seasonality, weather, cyclicality and manufacturers' advertising and
incentives may impact Shaker's merchandise mix and therefore affect its gross
profit margin.

      Selling, general and administrative expenses consist primarily of
compensation for sales, administrative, finance and general management
personnel, rent, marketing, insurance and utilities. Interest expense consists
of interest charges on debt, including floor plan inventory financing, net of
interest credits received from certain manufacturers and interest income earned.

Combinations & Acquisitions

      Simultaneously with the closing of the Offering, Shaker acquired in
exchange for Hometown's Class B Common Stock two dealership groups, collectively
with Shaker known as the Core Operating Companies. Subsequently, the Company
purchased six other dealerships and one tuck-in franchise for cash and the
assumption of the respective floor plan liabilities. The Company has accounted
for each of its acquisitions using the purchase method of accounting, and the
results of operations of these dealerships have not been included in the
Company's results of operations prior to the date they were acquired by the
Company. For the discussion that follows, these exchanges and acquisitions are
collectively known as the "Combinations".


                                       38
<PAGE>

Formation of e-Commerce Subsidiary

      In June 1999, Hometown formed Hometown Operating Corporation
("CarDay.com") to operate an internet-based online auction site for the sale of
mechanically certified, used vehicles carrying limited warranties. The
accumulated operating losses of CarDay are consolidated with the results of
Hometown's other wholly owned subsidiaries and all necessary intercompany
eliminations have been performed. The financial statements of the Company for
the year ended December 31, 1999, include start up and development expenses
totaling $515,000 relating to the e-commerce subsidiary. The balance sheet of
the Company includes $653,000 in cash, $658,000 in property and equipment, and
$1.25 million in other assets relating to CarDay.com. Liabilities attributable
to the subsidiary on the Company's financial statements include short-term
bridge loans in the amount of $2.2 million with two financial institutions.

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

      Revenues

      Revenues increased by $164 million, or 135%, from $122 million for the
year ended December 31, 1998, to $285 million for the year ended December 31,
1999. Revenue increases in Shaker accounted for $10.4 million while the
Combinations accounted for the remaining $154 million.

      New vehicle sales increased by $103 million, or 148%, from $70.1 million
for the year ended December 31, 1998, to $173 million for the year ended
December 31, 1999. Of that increase, $4.8 million resulted from an increase of
206 new vehicle units sold and $1.0 million resulted from an increase of $647 in
the average revenue received per unit sold at the Shaker dealerships. The
remaining $97 million increase was accounted for by the Combinations.

      Used vehicle sales increased by $45.2 million, or 122%, from $37.1 million
for the year ended December 31, 1998, to $82.3 million for the year ended
December 31, 1999. That increase consisted of a $40.8 million increase due to
the Combinations combined with an increase of $4.4 million at the Shaker
dealerships. The Shaker dealerships sold 170 more used vehicles and the average
revenue received per vehicle increased by $1,100.

      Parts and service revenue increased by $11.7 million, or 105%, from $11.1
million for the year ended December 31, 1998, to $22.8 million for the year
ended December 31, 1999. Virtually all of the increase in parts and service
revenue is attributable to the Combinations.

      Other dealership revenues increased by $3.7 million, or 112%, from $3.3
million for the year ended December 31, 1998, to $6.9 million for the year ended
December 31, 1999. Other dealership revenues at the Shaker dealerships increased
$0.3 million, the balance of the increase is attributable to the Combinations.

      Gross Profit

      Gross profit for the year ended December 31, 1999 was $36.9 million, an
increase of $20.3 million or 122%, compared with $16.6 million for the year
ended December 31, 1998. Gross profit at the Shaker dealerships increased by
10.3% or $0.9 million, with the balance of $19.4 million attributable to the
Combinations.

      Gross profit on sales of new vehicles increased $5.8 million, or 135%,
from $4.3 million for the year ended December 31, 1998 to $10.1 million for the
year ended December 31, 1999. Of that increase, only $0.3 million occurred at
the Shaker dealerships with the remaining $5.5 million due to the Combinations.


                                       39
<PAGE>

      Gross profit on sales of used vehicles was $6.9 million for the year ended
December 31, 1999, up $3.6 million or 108%, from $3.3 million in the prior year.
The increase in gross profit on used vehicles was almost completely attributable
to the Combinations.

      Parts and service sales yielded gross profit of $13.0 million in the year
ended December 31, 1999, an increase of $7.2 million or 125%, from $5.8 million
for the prior year. The vast majority of this increase was due to the
Combinations, as the Shaker dealerships experienced an increase of $0.4 million
from the prior year.

      Selling, General and Administrative Expense

Selling, general and administrative expenses increased by $14.5 million, or
83.0%, from $17.5 million for the year ended December 31, 1998, to $32.0
million, for the year ended December 31, 1999. The increases consist of $14.6
million attributable to the Combinations, increases in corporation expenses of
$1.7 million, and increases in ongoing expenses at the Shaker dealerships of
$0.5 million. That increase was partially offset by a one time bonus paid to the
owner employees of Shaker in 1998 of $2.5 million.

      Expenses relating to CarDay.com, Hometown's e-Commerce subsidiary, totaled
$0.5 million in 1999 compared to nil in 1998. Subsequent to year end, CarDay.com
obtained $25 million in venture capital funds, reducing Hometown's ownership
interest in CarDay.com from 82% to 15%.

      Interest Expenses, net

      Net interest expense was $2.0 million for the year ended December 31,
1999, an increase of $1.6 million, or 349%, from $0.4 million, for the year
ended December 31, 1998. The increase was due primarily to increased floor plan
interest resulting from the assumption of additional floor plan debt associated
with the Combinations.

      Net Income (loss)

      Net Income increased from a loss of $1.0 million for the year ended
December 31, 1998, to a profit of $0.8 million for the year ended December 31,
1999, an increase of $1.8 million. Of the $1.8 million increase, Shaker's net
income increased by $0.1 million after giving effect to the one time bonuses.
Shaker's core operation added $0.8 million to net income for 1999, with $1.2
million net income from the Combinations offset by a net loss of $1.2 million
from corporate expenses, goodwill amortization and CarDay.com organization and
development expenses.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

      Revenues

      Revenues increased by $62 million, or 104.2%, from $59.5 million for the
year ended December 31, 1997, to $121.5 million for the year ended December 31,
1998. Revenue increases in Shaker accounted for $1 million while the
Combinations accounted for the remaining $61 million.

      New vehicle sales increased by $40.7 million, or 138.9%, from $29.3
million for the year ended December 31, 1997, to $70 million for the year ended
December 31, 1998. Of that increase $1.2 million was the result of an increase
of $831 in the average revenue received per unit sold plus an increase of 7
units sold at the Shaker dealerships. The remaining $39.5 million increase was
attributable to the Combinations.

      Used vehicle sales increased by $15.3 million, or 70.1%, from $21.8
million for the year ended December 31, 1997, to $37.1 million for the year
ended December 31, 1998. That increase consisted of a $15.6 million increase due
to the accounting for the Combinations offset by a decrease of $.3 million at
the Shaker dealerships. The Shaker dealerships sold 20 fewer used vehicles at a
decreased average revenue received of $49. Most of the decline in used vehicle
sales at the Shaker dealerships resulted from an increase in the


                                       40
<PAGE>

auction price of used cars in the third quarter. Shaker chose not to buy at the
inflated auction prices thereby lowering inventory and sales. Prices have since
returned to normal levels and Shaker is once again purchasing used vehicles at
auction.

      Parts and service revenue increased by $4.4 million, or 65.7%, from $6.7
million for the year ended December 31, 1997, to $11.1 million for the year
ended December 31, 1998. Parts and service revenue at the Shaker dealerships was
down by $.2 million offset by the Combinations.

      Other dealership revenues increased by $1.7 million, or 101%, from $1.6
million for the year ended December 31, 1997, to $3.3 million for the year ended
December 31, 1998. Other dealership revenues at the Shaker dealerships increased
$.2 million, the balance of the increase was attributable to the Combinations.

      Gross Profit

      Gross profit increased $8.3 million or 100%, from $8.3 million for the
year ended December 31, 1997, to $16.6 million for the year ended December 31,
1998. Gross profit at the Shaker dealerships increased by 6.1% or $.5 million,
the balance of the increase was attributable to the Combinations.

      Selling, General and Administrative Expense

      Selling, general and administrative expenses increased by $9.8 million, or
127.1%, from $7.7 million for the year ended December 31, 1997, to $17.5
million, for the year ended December 31, 1998. The increases consist of $6.6
million for accounting for the Combinations, a one time bonus distributed to the
owner employees of Shaker of $2.5 million and increases in corporation expenses
of $1.1 million, offset by $.3 million reduction in poor performing advertising
programs and savings on renegotiated liability insurance programs.

      Interest Expenses, net

      Net interest expense increased by $0.25 million, or 134.4%, from $0.19
million, for the year ended December 31, 1997, to $0.44 million for the year
ended December 31, 1998. The increase was due primarily to increased floor plan
interest resulting from the assumption of additional floor plan debt associated
with the Combinations.

      Net Income (loss)

      Net Income decreased from $.3 million for the year ended December 31,
1997, to a loss of $1.0 million for the year ended December 31, 1998, a decrease
of $1.3 million or 416%. Of the $1.3 million decrease, Shaker's net income
decreased by $1.4 million from the after tax effect of the one time bonuses.
Shaker's core operation, before bonuses, added $1.1 million to net income, which
is coupled with another $.5 million net income from the accounting for the
Combinations offset by a net loss of $.8 million from the corporation expense
and goodwill amortization.

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 the Hometown's operations of


                                       41
<PAGE>

future negative trends in such factors will be somewhat mitigated by its (i)
strong parts and service business, (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 1998
and 1999, inflation did not have a significant effect on the results of Shaker
or Hometown during those periods.

Earnings (Loss) Per Share, Basic and Diluted

      On a consolidated basis, the earnings (loss) per share for the year ended
December 31, 1999 and 1998, are $.13 and ($.28), respectively, basic and fully
diluted.

Weighted Average Shares

      On a consolidated basis, the weighted average shares for the years ended
December 31, 1999 and 1998 are 5,875,342 million shares and 3,513,333 million
shares, respectively. The weighted average shares for 1998 represent the
weighted average of the sum of the outstanding equivalent Class A shares of
Shaker (1,880,000) for seven months and the outstanding Class A shares
(2,040,000) and Class B shares (3,760,000) for the remaining five months. On a
diluted basis, the weighted average shares for the year ended December 31, 1999,
are 6,003,851.

Liquidity and Capital Resources

      The principal sources of liquidity are cash from operations and floor plan
financing from the Company's revolving line of credit with GE Capital
Corporation.

      Cash and Cash Equivalents

      Total cash and cash equivalents at December 31, 1999 and 1998, were $1.6
million and $5.5 million, respectively. This decrease of $3.9 million was due
primarily to the change in floor plan financing to GE Capital. Upon completion
of the floor plan facility, $2.5 million of Hometown's cash was transferred to
GE to pay down the existing debt. The Company's liquidity under the GE lending
arrangement stems from its unused borrowing capacity (the excess of eligible
vehicle inventory over outstanding advances). Also, as of December 31, 1999,
Hometown had advanced $0.6 million to CarDay, its internet subsidiary. Those
funds were repaid in January 2000.


                                       42
<PAGE>

      Cash Flow from Operations

      For the year ended December 31, 1999, the Company generated $1.1 million
in cash from operating activities.

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

<TABLE>
<CAPTION>
                                                                  For the years ended December 31,
                                                               ------------------------------------
                                                                 1999          1998          1997
                                                               --------      --------      --------
                                                                Amount        Amount        Amount
                                                               --------      --------      --------
                                                                          (in thousands)
<S>                                                            <C>           <C>           <C>
      Net Cash Provided by (Used) in Operating Activities      $  1,125      $ (2,458)     $    335
      Net Cash Used in Investing Activities                     (11,226)       (6,919)         (102)
      Net Cash Provided by Financing Activities                   6,222        11,352           225
                                                               --------      --------      --------
      Net Increase (Decrease) in Cash and Cash Equivalents     $ (3,879)     $  1,975      $    458
                                                               ========      ========      ========
</TABLE>

      Floor Plan Financing

      On January 6, 1999, the Company completed the refinancing of its floor
plan lines of credit into one floor plan line of credit with GE Capital
Corporation. As of December 31, 1999, the Company had $49.0 million of floor
plan financing outstanding, bearing interest at LIBOR plus 160 basis points.
Interest expense on floor plan notes payable, before manufacturer's interest
assistance, totaled approximately $0.8 million, $1.4 million, and $2.6 million
for the years ended December 31, 1997, 1998, and 1999, respectively.
Manufacturer interest assistance, which is recorded as a reduction of interest
expense, totaled approximately $0.4 million, $0.8 million, and $1.5 million for
the years ended December 31, 1997, 1998, and 1999, respectively.

      Hometown failed to comply with four covenants in its loan agreement with
GE as of December 31, 1999. GE waived these events of default as of December 31,
1999, although, there can be no assurance that the Company will not be in
violation of these or any other covenants in the loan agreement at March 31,
2000 or at any time thereafter. There can be no assurance that GE will grant any
waiver if an event of default occurs in the future. Upon the occurance of an
event of default under its loan agreement with GE, not cured by the Company, it
may be forced to pay the outstanding balance under its loan agreement, seek
alternative sources of financing to the extent available, and/or substantially
curtail operations.

Acquisitions

      Shortly after the close of the public offering in July 1998, the Company
had acquired four dealerships located in Connecticut, Massachusetts and Vermont
for an aggregate price of $7.2 million in cash plus the assumption of floor plan
liabilities of $5.2 million. These four acquisitions added $57.8 million and
$2.1 million, respectively, to the Company's annualized revenues and income
before income taxes for the year ended December 31, 1998.

      During 1999, two additional dealerships were acquired, Toyota of Newburgh
located in New York and Morristown Lincoln Mercury located in New Jersey, for an
aggregate price of $3.2 million and $1.0 million in shares of Hometown stock
plus the assumption of floor plan liabilities of $3.2 million. These two
acquisitions added $52.4 million to the Company's 1999 revenues and $0.7 million
to the Company's income before income taxes for the year ended December 31,
1999.


                                       43
<PAGE>

      In addition, on November 3, 1999, Hometown purchased a Mazda franchise,
special parts, signage and new car inventory for $.7 million. This franchise was
tucked into the Company's Framingham, Massachusetts dealership and will co-exist
with the Lincoln/Mercury's until showroom space can be added for the Mazda new
cars.

Public Offering of Common Stock

      The Company completed an initial public offering of 1.8 million shares of
its Class A Common Stock on July 31, 1998 at a price of $9 per share. Net
proceeds of the public offering of $12.7 million were used to finance the
acquisitions above, to fund the working capital requirements, and to fund
corporation expenses.

New Accounting Pronouncements

      In June 1999, the Financial Accounting Standards Board issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133." This statement defers for one
year the effective date of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" issued in June 1998. Statement No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability and be measured at
its fair value. Additionally, any changes in the derivative's fair value is to
be recognized currently in earnings, unless specific hedge accounting criteria
are met. This statement is effective for fiscal years beginning after June 15,
2000. The Company does not believe that adoption of this statement will have a
material impact on its 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 the Company's future plans of operations, business strategy, results
of operations and financial condition. The Company 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 the Company 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 the Company's reports and registration statements filed with the
Securities and Exchange Commission (the "Commission"). The Company disclaims any
intent or obligation to update such forward-looking statements.


                                       44
<PAGE>

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Not applicable

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The financial statements of the Company 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

      Not applicable


                                       45
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and Executive Officers

      The executive officers and directors of the Company and their respective
ages as of January 31, 2000 are as follows:

Name                                 Age              Position
----                                 ---              --------

Salvatore A. Vergopia............    59    Chairman of the Board and Chief
                                           Executive Officer
Joseph Shaker(1).................    31    President, Chief Operating Officer
                                           and Director
William C. Muller Jr. ...........    47    Regional Vice President, Southern
                                           Region and Director
Corey Shaker(1)..................    41    Vice President Connecticut Operations
                                           and Director
Edward A. Vergopia...............    29    Vice President Fleet Operations and
                                           Director
James Christ.....................    42    General Manager Muller Toyota and
                                           Director
John Rudy(2).....................    57    Chief Financial Officer and Secretary
Steven Shaker....................    29    Regional Vice President, Northern
                                           Region
Michael J. Shonborn(2)...........    42    Corporate Controller
Domenic Colasacco(3).............    50    Director
Louis I. Margolis(3).............    54    Director

--------------
(1)   Joseph Shaker resigned as President and Chief Operating Officer on
      February 7, 2000, remaining as a Director, and on that date Corey Shaker
      was elected and assumed those offices.

(2)   John Rudy resigned as Chief Financial Officer and Secretary effective
      April 15, 2000. Michael J. Shonborn has been elected to assume those
      offices on that date.

(3)   Member of Audit and Compensation 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 the Company:

      Salvatore A. Vergopia has been Chairman of the Board and Chief Executive
Officer since October 1, 1997. In addition, from 1992 to date, he has been
President and for over 20 years prior thereto, Vice President of Westwood
Lincoln Mercury Sales Inc. Under his management, Westwood has been a winner of
numerous awards, including: (a) Lincoln-Mercury 100 Champions Leadership
Conference award in each of the past 25 years; (b) North American Customer
Excellence Award; and (c) Ford Motor Credit Company's Partners in Quality Award.
In addition to his responsibilities as a dealer, he has served on the Customer
Dispute Settlement Board for New Jersey and Connecticut and is a member and past
Chairman of the Ford Lincoln-Mercury NADA 20 Group. He holds a B.S. degree from
Northern Arizona University.


                                       46
<PAGE>

      Joseph Shaker has been the President and Chief Operating Officer since
October 1, 1997 and is in charge of the Company's dealer acquisition program,
including the implementation of such programs as may be necessary to assimilate
new dealers into Hometown's operational model. In addition, from 1991 to date,
he has been the Chief Operating Officer of Shaker's Lincoln Mercury, Shaker's
Jeep Eagle and Lincoln Mercury Autocare in Connecticut. In 1992, at the request
of Ford Motor Company, he developed the pilot free-standing neighborhood
Autocare Center which has become the model for free-standing neighborhood auto
maintenance centers established by Ford Motor with certain of its other dealers.
He also started Shaker's Lincoln Mercury limousine department in 1992 and has
been responsible for its growth and implementation. He is a Member of the
Executive Committee of the NADA 20 Group. He holds a B.S. (Management) degree
from Bentley College.

      William C. Muller Jr. has been a Regional Vice President since March 2000.
Mr. Muller has been Vice President?New Jersey Operations since October 1, 1997.
In addition, from 1980 to date, he has been the President of Muller Toyota, Inc.
and of Muller Chevrolet, Oldsmobile, Isuzu, Inc. Under his management, Muller
Toyota has been: (a) a 9-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 have high market penetration and facilities
that meet or exceed Toyota standards; (b) a 13-time recipient of Toyota Parts
Excellence Award; (c) a 9-time winner of Toyota Service Excellence Award; and
(d) a 3-time winner of Toyota's Sales Excellence Award. He holds a B.A. degree
from Fairleigh Dickinson University.

      Corey Shaker has been Vice President-Connecticut Operations since October
1, 1997 and is in charge of Hometown's Company-wide sales training efforts. In
addition, from 1989 to date, he has been Chief Operating Officer and General
Manager of Family Ford Inc. where he was responsible for all aspects of its
operations. He is a 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 holds a B.S. in Business
Administration from Providence College.

      Edward A. Vergopia has been Vice President?Fleet Operations since October
1, 1997. In addition, from 1988 to date, he has been Executive Vice President of
Westwood where, among other responsibilities, he managed the Lincoln Mercury
Division of Spoilers Plus (custom cars) and Westwood Lincoln Mercury Limousine
Department. During those periods, he also worked in the Leasing, Financing and
Parts and Service Departments of Westwood Lincoln Mercury. He holds a B.B.A.
from the University of Miami.

      James Christ has been General Manager of the Muller Toyota division of the
Company since October 1, 1997. In addition, from 1995 to date, he has been
General Manager of Muller Toyota in Clinton, New Jersey. From March 1986 to
November 1994, he was Vice President and General Manager of Liberty Toyota, Inc.
in Burlington, New Jersey and from August 1989 to November 1994, he was Vice
President of Richardson Imports, Inc. a Lexus dealership, in Cherry Hill, New
Jersey. Prior thereto he had more than 5 years experience in managerial
capacities at Toyota. He holds a B.S. in Business Administration from West
Chester University.

      John C. Rudy has been Chief Financial Officer since October 1, 1997. His
responsibities include financial reporting, accounting and computer systems. In
addition, from 1992 to date, he has been President of Beacon Business Services,
Inc., a business consulting firm providing business strategy, financial, and
accounting services to small and mid-size businesses. From 1990 to 1992, he
directed the Metropolitan New York area troubled business practice for Coopers &
Lybrand, and from 1987 through 1989, served as Chief Financial Officer for
Plymouth Lamston Stores Corporation, a chain of retail stores in New York City.
He holds a Bachelor of Science Degree in Economics from Albright College in
Reading, Pennsylvannia, an MBA from Emory University in Atlanta, Georgia, and is
a Certified Public Accountant in New York State.

      Steven Shaker has been a Regional Vice President since March 2000. Mr.
Shaker has been a Vice President in charge of Parts and Service since October 1,
1997. In addition, from 1992 to date, he has been 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 holds a B.A. degree from Salve Regina
College.


                                       47
<PAGE>

      Michael Shonborn has been Corporate Controller since September 1999. Prior
to joining Hometown, he served as First Vice President and Chief Financial
Officer of Riverside National Bank, a publicly held commercial bank. Mr.
Shonborn is licensed as a C.P.A. in the State of California. He earned his
Bachelor's Degree in Accounting from Whittier College and an M.B.A. in Business
Strategy and Finance from Yale University.

      Domenic Colasacco is Chairman of the Board and President of United States
Trust Company (USTC), a Boston based firm specializing in trust and investment
management services for institutional and personal clients. Mr. Colasacco has
been serving as the Chief Investment Officer of USTC since 1980. From 1990 to
March 1998, he was also a director of UST Corp., the holding company for USTC
and USTrust, a commercial and retail bank in Greater Boston. He holds both a
bachelors degree and an M.B.A. from Babson College and is a Chartered Financial
Analyst.

      Louis I. Margolis has been a General Partner of Pine Street Associates,
L.P., a private investment partnership that invests in other private limited
partnerships since January 1994. In January 1997, Mr. Margolis formed and is the
President and sole shareholder of Chapel Hill Capital Corp., a financial
services company. From 1991 through 1993, he was a Member of the Management
Committee of Nomura Securities International. From 1993 through 1995, he was
Chairman of Classic Capital Inc., a registered investment advisor. Mr. Margolis
has been a director of Milestone Scientific, Inc., a manufacturer of dental
devices, since 1997. Mr. Margolis has been a member of the Financial Products
Advisory Committee of the Commodity Futures Trading Commission since its
formation in 1986, a Trustee of the Futures Industry Institute since 1991 and a
Trustee of Saint Barnabas Hospital in Livingston, New Jersey since 1994.

Committees of the Board of Directors

      The Company's Board of Directors has established compensation and audit
committees, whose members are Messrs. Colasacco and Margolis. The Compensation
Committee reviews and recommends to the Board of Directors the compensation and
benefits of all officers of the Company, reviews general policy matters relating
to compensation and benefits of employees of the Company and administers the
issuance of stock options and discretionary cash bonuses to the Company's
officers, employees, directors and consultants. The Audit Committee meets with
management and the Company's independent public accountants to determine the
adequacy of internal controls and other financial reporting matters. It is the
intention of the Company to appoint only independent directors to the Audit and
Compensation Committees.


                                       48
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation.

      The following table presents certain information concerning compensation
paid or accrued for services rendered to the Company in all capacities during
the year ended December 31, 1999, for the Chief Executive Officer and the other
six executive officers of the Company whose aggregate annual base salary
exceeded $100,000 (collectively, the "Named Executive Officers").

<TABLE>
<CAPTION>
                                                                                   Other
                                                                                   Annual
      Name and Principal Position                          Salary       Bonus   Compensation
      ---------------------------                          ------       -----   ------------
<S>                                                       <C>          <C>         <C>
      Salvatore A. Vergopia, Chairman & Chief
        Executive Officer ...........................     250,000                  74,578

      Joseph Shaker, President and Chief
        Operating Officer                                 200,000

      Corey Shaker, Vice President Connecticut
        Operations                                        200,000

      William C. Muller Jr., Regional Vice President,
        Vice President New Jersey Operations              200,000                   3,411

      John Rudy, Chief Financial Officer and
        Secretary                                         208,560

      Edward A. Vergopia, Vice President Fleet
        Operations ..................................     150,000                   5,596

      James Christ, General Manager Muller
        Toyota ......................................     150,000      54,033
</TABLE>

Option Grants.

      The following table sets forth certain information regarding options
granted by the Company to the Named Executive Officers during 1999.

                        Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
                                                                                                    Potential Realizable Value at
                               Number of                                                            Assumed Annual Rates of Stock
                                Shares        Percent of Total                                      Price Appreciation for Option
                              Underlying     Options Granted to                                               Term(2)
                               Options       Employees in Fiscal  Exercise Price                    -----------------------------
        Name                Granted(#)(1)           Year             ($/Share)     Expiration Date    0%         5%        10%
        ----                -------------           ----             ---------     ---------------    --         --        ---
<S>                            <C>                  <C>                <C>                   <C>    <C>        <C>        <C>
Corey Shaker..........         30,000               75%                $3.00        December 2004   16,875     46,403     82,123
</TABLE>
      (1) The options vest with respect to one-third of the shares of Common
      Stock covered by the options on December 8, 2000 (the "Initial Vesting
      Date") and one-third will vest on each of the first and second anniversary
      of the Initial Vesting Date.

      (2) Potential realizable values are net of exercise price but before
      taxes, and are based on the assumption that the Common Stock of the
      Company appreciates at the annual rate shown (compounded annually) from
      the date of grant until the expiration date of the respective options.
      These numbers are calculated based on Securities and Exchange Commission
      requirements and do not reflect the Company's projection or estimate of
      future stock price growth. Actual gains, if any, on stock option exercises
      are dependent on the future financial performance of the Company, overall
      market conditions and the option holder's continued employment through the
      vesting period. This table does not take into account any appreciation in
      the price of the Common Stock from the date of grant to the date of this
      Form 10-K.

                                       49
<PAGE>

      Option Exercises and Year-End Option Values.

      No options were exercised during 1999.

Employment Contracts

      In April 1998, Hometown entered into five-year employment agreement,
effective as of the closing of the Offering, for the following key positions:
Chairman and Chief Executive Officer; President and Chief Operating Officer;
Vice President?New Jersey Operations; Vice President?Connecticut Operations;
Vice President?Fleet Operations; General Manager?Muller Toyota, Vice
President?Parts and Services and Vice President Mergers and Acquisitions. Each
agreement provides for an annual base salary of $200,000, except that the
agreement for the General Manager provides for an annual base salary of $150,000
plus an annual bonus equal to five percent of the pre-tax profits of Muller
Toyota, the agreement for Vice President?Parts and Service provides for an
annual base salary of $100,000. In October 1999, Hometown entered into a
four-year agreement with the Corporate Controller at an annual base salary of
$90,000. In February 2000, the Vice President Connecticut Operations resigned
his position and became President and Chief Operating Officer, with the former
President and Chief Operating Officer resigning. The new President and Chief
Operating Officer is compensated at an annual base salary rate of $200,000 per
year. In addition, as of February 15, 2000, the Vice President Mergers and
Acquisitions resigned with the related employment agreement terminating. Each
agreement also provides for participation by the employee in all executive
benefit plans and, if employment is terminated without cause (as defined in the
agreement), payment of an amount equal to the salary which would have been
payable over the unexpired term of his employment agreement.

Compensation Committee Interlocks and Insider Participation in Compensation
Decisions

      None of the Directors serving on the Compensation Committee is an employee
of the Company. No Director or executive officer of the Company is a director or
executive officer of any other corporation that has a director or executive
officer who is also a Director of the Company.

1998 Stock Option Plan

      In February 1998, in order to attract and retain persons necessary for the
success of the Company, Hometown adopted its 1998 Stock Option Plan (the "Stock
Option Plan") covering up to 480,000 shares of Class A Common Stock. Pursuant to
the Stock Option Plan officers, directors and key employees of the Company and
consultants to the Company are eligible to receive incentive and/or non-
incentive stock options. The Stock Option Plan, which expires in January 2008,
will be 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 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. As of the date hereof, options for an aggregate of 276,200,
exercisable at the Offering price during a five- year period, were granted to
eight officers and ten other employees of the Company and were outstanding under
the Stock Option Plan. These options will be exercisable for one-third of the
shares covered thereby on the first anniversary of the date of the grant and for
an additional one-third of the shares covered thereby each year thereafter. In
addition, options for 5,000 shares were granted to each of the Company's outside
directors


                                       50
<PAGE>

upon their taking office. These options, exercisable at the fair market value
per share on the date of grant, are 50% vested immediately upon grant and fully
vested on year thereafter.

Compensation of Directors

      Each non-employee Director receives a fee of $1,000, for each meeting
attended in person and $250 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 $125 for each committee meeting
attended telephonically. Additionally, pursuant to the Plan, each non-employee
Director, will receive options to purchase 5,000 shares of Common Stock
exercisable at the fair market value on the date of grant. These options will
vest one-third on the date of grant and one-third at the end of each subsequent
year of service on the Board. In addition, each non-employee Director receives
options to purchase an additional 2,500 shares of Common Stock on the date of
the Company'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. The Company's Certificate of Incorporation limits the liability of
Directors of the Company to the Company or its shareholders to the fullest
extent permitted by Delaware law.

      The Company's Certificate of Incorporation provides mandatory
indemnification rights to any officer or Director of the Company who, by reason
of the fact that he or she is an officer or Director of the Company, 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
the Company, the Company 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.

      There is no pending litigation or proceeding involving a Director,
officer, employee or agent of the Company in which indemnification by the
Company will be required or permitted. The Company is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.


                                       51
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following table sets forth certain information known to the Company
regarding the beneficial ownership of Common Stock as of March 24, 2000 by (i)
each person known to the Company to be the beneficial owner of more than 5% of
its outstanding shares of Common Stock, (ii) each Director of the Company, (iii)
each Named Executive Officer and (iv) all Directors, and Executive Officers of
the Company 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.

                             PRINCIPAL STOCKHOLDERS

<TABLE>
<CAPTION>
                                                        Number of           Percentage of         Percentage of
                                                         Shares                 Shares               Aggregate
                                                      Beneficially           Beneficially        Voting Rights of
Name of Beneficial Owner(1)                             Owned (2)              Owned(3)             All Classes
<S>                                                      <C>                    <C>                   <C>
Salvatore A. Vergopia(4).....................            706,000                11.82                 17.90
Corey Shaker(5) .............................            290,246                 4.86                  6.79
William C. Muller Jr.(6).....................            463,450                 7.76                 11.53
Edward A. Vergopia...........................            235,000                 3.94                  5.96
James Christ (7).............................             96,914                 1.62                  2.31
Steven Shaker (8)............................            212,258                 3.56                  5.25
William C. Muller Sr. (9)....................            315,786                 5.29                  8.02
Joseph Shaker(10) ...........................            278,942                 4.67                  6.71
All Officers and Directors as a group
(7 persons)(5)...............................          2,597,096                37.45                 64.47
</TABLE>

-----------
(1)   The respective addresses of the beneficial owners are: Salvatore A.
      Vergopia and Edward A. Vergopia, c/o Westwood Lincoln Mercury, 55
      Kinderkamack Road, Emerson, New Jersey 07630; Corey Shaker, 774 Straits
      Turnpike, Watertown Connecticut 06795; William C. Muller Jr., James Christ
      and William C. Muller Sr. c/o Muller Toyota, Inc., Route 31, PO Box J,
      Clinton, New Jersey, 08809; Steven Shaker, c/o Family Ford, Inc., 1200
      Wolcott Street, Waterbury, Connecticut 06705 and Joseph Shaker, c/o CarDay
      Inc., 88 Pine Street, New York, New York.

(2)   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 report upon
      the exercise of options and warrants or conversion of convertible
      securities. Each beneficial owner's percentage ownership is determined by
      assuming that options, warrants and convertible securities that are held
      by such person (but not held by any other person) and that are exercisable
      or convertible within 60 days from the filing of this report have been
      exercise or converted. Except as otherwise indicated, and subject to
      applicable community property and similar laws, each of the persons named
      has sole voting and investment power with respect to the shares shown as
      beneficially owned. All percentages of beneficial ownership are calculated
      based the number of shares outstanding as of April 4, 2000, which includes
      2,325,016 shares of Class A Common Stock and 3,706,068 shares of Class B
      common stock. Unless otherwise specified herein, shares of common stock
      shall be shares of Class B common stock of the Company.

(3)   Percentages based on number of shares of all classes.

(4)   Includes 225,600 shares owned by his wife Janet and an option to purchase
      1,000 shares of Class A common stock, exercisable within the next 60 days
      at $9.00 per share.


                                       52
<PAGE>

(5)   Includes (i) 15,980 shares held by the Edward Shaker Family Trust of which
      he is the Trustee and a beneficiary, (ii) 13,000 shares of Class A common
      stock, and (iii) and an option to purchase 12,166 shares of Class A common
      stock, exercisable within the next 60 days at $9.00 per share.

(6)   Includes 3,750 shares of Class A common stock and an option to purchase
      6,666 shares of Class A common stock, exercisable within the next 60 days
      at $9.00 per share.

(7)   Includes an option to purchase 6,666 shares of Class A common stock,
      exercisable within the next 60 days at $9.00 per share.

(8)   Includes 2,500 shares of Class A common stock and an option to purchase
      3,334 shares of Class A common stock, exercisable within the next 60 days
      at $9.00 per share.

(9)   All shares are owned by The William C. Muller Revocable Living Trust of
      which the William C. Muller Sr. is Trustee. William C. Muller Sr. is
      neither an officer or director.

(10)  Includes (i) 15,980 shares held by the Richard Shaker Family Trust of
      which Mr. Shaker is the Trustee and a beneficiary, (ii) 40,000 share held
      by the Sadie Shaker Irrevocable Trust of which Mr. Shaker is Trustee,
      (iii) 4,184 shares of Class A common stock, and (iv) an option to purchase
      12,166 shares of Class A common stock, exercisable within the next 60 days
      at $9.00 per share.

      The Company's officers and directors and holders of more than five percent
of any class of its voting securities have agreed with the representative of the
underwriter in the initial public offering that they will not sell or otherwise
dispose of any Common Stock, or any securities convertible into shares of the
Company's Common Stock without the prior written consent of such representative
until July 27, 1999.

Section 16(a) Beneficial Ownership Reporting Compliance

      Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC"). Officers, directors and greater than ten-percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file. Based solely on review of the copies of such forms
furnished to the Company, or written representations that no Forms 5 were
required, the Company believes that all Section 16(a) filing requirements
applicable to its officers and directors were complied with

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Leases

      The Company 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 for the five-year periods commencing January 1, 2004 and 2009.

Shaker Group. The Company leases, for an initial annual base rental of $240,000,
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 and Janet


                                       53
<PAGE>

Shaker. Corey Shaker is President, Chief Operating Officer and Vice President
Connecticut Operations of Hometown and a principal stockholder of the Company.
Corey Shaker is Vice President-Connecticut Operations and a principal
stockholder of the Company. Steven Shaker is Vice President-Parts and Service
and a principal stockholder of the Company. Joseph Shaker is a Consultant to the
Company and the President and Chief Executive Officer of CarDay Inc., a
subsidiary. Janet Shaker is a principal stockholder of the Company.

Muller Group. The Company leases, for an initial annual base rental of $360,000
and $396,000 respectively the premises occupied by its Toyota dealership in
Clinton, New Jersey and its Chevrolet/Oldsmobile/Isuzu 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 a
Regional Vice President and Vice President-New Jersey operations and, prior to
the Offering, was a 9.42% stockholder of Hometown.

Westwood. The Company leases, for an initial annual base rental of $360,000 the
premises occupied by its Lincoln Mercury dealership in Emerson, New Jersey from
Salvatore A. Vergopia and his wife. Mr. Vergopia is Chairman of the Board and
Chief Executive Officer of Hometown and, prior to the Offering, including shares
owned by his wife, was a 17.63% stockholder of Hometown.

Exchange

      The executive officers, directors and holders of more than five percent of
any class of the Company's voting securities who are listed in the table under
"Principal Stockholders" received their stock in the Exchange.

Guarantees

      A Core Operating Company is the guarantor of a $2,000,000 credit facility
from SEC Funding Corp. ("SFC") pursuant to which loans are made to third party
purchasers of limousines. As at December 31, 1999 loans outstanding under this
credit line were $37,000. SFC is owned by Salvatore and Edward Vergopia.


                                       54
<PAGE>

                                   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 April 14,
2000 on its behalf by the undersigned, thereunto duly authorized.

                                        Homwtown Auto Retailers, Inc.


                                        By: /s/ Corey Shaker
                                           -------------------------------------
                                           Corey Shaker, President and Chief
                                             Operating 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/ Salvatore A. Vergopia
------------------------------------    Chairman of the Board and
Salvatore A. Vergopia                   Chief Executive Officer

/s/ Corey Shaker
-----------------------------------     President,
Corey Shaker                            Chief Operating Officer and Director

/s/ John Rudy
-----------------------------------     Chief Financial Officer and Secretary
John Rudy

/s/ William C. Muller
-----------------------------------     Regional Vice President--Southern Region
William C. Muller                       and Director


-----------------------------------     Vice President--Fleet Operations
Edward A. Vergopia                      and Director

/s/ James Christ
-----------------------------------     General Manager--Muller Toyota
James Christ                            and Director

/s/ Joseph Shaker
-----------------------------------     Director
Joseph Shaker

/s/ Domenic Colasacco
-----------------------------------     Director
Domenic Colasacco

/s/ Louis I. Margolis
-----------------------------------     Director
Louis I. Margolis


                                       55
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Hometown Auto Retailers, Inc.:

      We have audited the accompanying consolidated balance sheets of Hometown
Auto Retailers, Inc. (a Delaware Corporation) as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years then ended. We have also audited the accompanying
consolidated statements of operations, stockholders' equity and cash flows of
E.R.R. Enterprises, Inc., and subsidiaries for the year ended December 31, 1997.
(see Note 1). These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

      We conducted our audits in accordance with auditing standards generally
accepted in the 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 examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes 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, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended and the results of
operations and cash flows of E.R.R. Enterprises, Inc. and subsidiaries for the
year ended December 31, 1997, in conformity with accounting principles generally
accepted in the United States.

New York, New York                                           ARTHUR ANDERSEN LLP
April 12, 2000


                                      F-1
<PAGE>

                          HOMETOWN AUTO RETAILERS, INC,

                           CONSOLIDATED BALANCE SHEETS
                 (in thousands, except share and per share data)

                                                                December 31,
                                                             ------------------
                                                               1999       1998
                     ASSETS                                  (Note 1)   (Note 1)
Current Assets:                                              ------------------
   Cash and cash equivalents                                 $ 1,635    $ 5,514
   Accounts receivable                                         6,101      4,665
   Inventories                                                51,455     30,554
   Prepaid expenses and other current assets                   2,095      1,183
   Deferred income taxes and taxes receivable                    523        412
                                                             -------    -------
      Total current assets                                    61,809     42,328
Property and equipment, net                                    8,415      2,293
Goodwill,  net                                                24,578     20,879
Other assets                                                   2,505        911
                                                             -------    -------
      Total assets                                           $97,307    $66,411
                                                             =======    =======
      LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
   Floor plan notes payable                                  $48,986    $29,624
   Accounts payable and accrued expenses                       4,787      4,798
   Current maturities of long-term debt                          708        946
   Other current bank borrowings                               2,200      1,200
                                                             -------    -------
      Total current liabilities                               56,681     36,568
Long-term debt                                                 9,051        375
Long-term deferred income taxes                                  200         --
Due to related parties                                            --        238
Other long-term liabilities                                      360         --
                                                             -------    -------
       Total liabilities                                      66,292     37,181
Commitments and contingencies (Note 14)

Stockholders' Equity:
   Preferred stock, $.001 par value, 2,000,000
   shares authorized, no shares issued                            --         --
   Common stock, Class A, $.001 par value,
   24,000,000 shares authorized,
   2,147,000 and 2,040,000 issued and
   outstanding, respectively                                       2          2
   Common stock, Class B, $.001 par value,
   3,760,000 shares authorized,
   3,753,000 and 3,760,000 issued and
   outstanding, respectively                                       4          4
   Additional paid-in capital                                 26,194     25,194
   Retained earnings                                           4,815      4,030
                                                             -------    -------
      Total stockholders' equity                              31,015     29,230
                                                             -------    -------
      Total liabilities and stockholders' equity             $97,307    $66,411
                                                             =======    =======

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


                                      F-2
<PAGE>

                          HOMETOWN AUTO RETAILERS, INC,

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                           For the Years Ended December 31,
                                       -----------------------------------------
                                           1999         1998          1997
                                         (Note 1)     (Note 1)      (Note 1)
 Revenues                              -----------------------------------------
<S>                                    <C>            <C>            <C>
   New vehicle sales                   $   173,481    $    70,068    $    29,345
   Used vehicle sales                       82,272         37,053         21,800
   Parts and service sales                  22,823         11,130          6,727
   Other, net                                6,917          3,265          1,624
                                       -----------    -----------    -----------
      Total revenues                       285,493        121,516         59,496
Cost of sales
   New vehicle sales                       163,416         65,790         27,505
   Used vehicle sales                       75,385         33,749         20,048
   Parts and service sales                   9,814          5,359          3,673
                                       -----------    -----------    -----------
Cost of sales                              248,615        104,898         51,226
                                       -----------    -----------    -----------
      Gross profit                          36,878         16,618          8,270
Amortization of goodwill                       600            212             --
Loss from operations of e-Commerce
subsidiary                                     515             --             --
Selling, general and administrative
expenses                                    32,045         17,510          7,715
                                       -----------    -----------    -----------
      Income (loss) from operations          3,718         (1,104)           555
Other income (expense)
   Interest expense, net                    (1,988)          (443)          (189)
   Other income (expense), net                 (95)            46            116
                                       -----------    -----------    -----------
      Income (loss) before taxes             1,635         (1,501)           482
Provision (benefit) for income taxes           850           (502)           166
                                       -----------    -----------    -----------
      Net income (loss)                $       785    $      (999)   $       316
                                       ===========    ===========    ===========
Earnings (loss) per share, basic       $       .13    $      (.28)   $       .17
                                       ===========    ===========    ===========
Earnings (loss) per share, diluted     $       .13    $      (.28)   $       .17
                                       ===========    ===========    ===========
Weighted average shares outstanding,
basic                                    5,875,342      3,513,333      1,880,000
Weighted average shares outstanding,
diluted                                  6,003,851      3,513,333      1,880,000
</TABLE>

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


                                      F-3
<PAGE>

                          HOMETOWN AUTO RETAILERS, INC,
          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the years
                     ended December 31, 1999, 1998 and 1997
                                 (in thousands)

<TABLE>
<CAPTION>
                                Class A               Class B         Additional               Total
                              Common Stock          Common Stock        Paid-in   Retained  Stockholders'
                            Shares    Amount      Shares     Amount     Capital   Earnings     Equity
                           --------  --------     ------     ------    --------   --------    --------
<S>                          <C>     <C>                    <C>        <C>           <C>      <C>
Balance at
December 31, 1996               --   $     --         --    $     --   $     69      4,713    $  4,782
Net Income                      --         --         --          --         --        316         316
                             -----   --------      -----    --------   --------   --------    --------
Balance at
December 31, 1997               --         --         --          --         69      5,029       5,098
Issuance of Class B
Common Stock in
exchange                        --         --      3,760           4         --         --           4
Stock split at offering        240         --         --          --         --         --          --
Public offering of
Common Stock, net of
offering expenses            1,800          2         --          --     25,125         --      25,127
Net loss                        --         --         --          --         --       (999)       (999)
                             -----   --------      -----    --------   --------   --------    --------
Balance at
December 31, 1998            2,040          2      3,760           4     25,194      4,030      29,230
Conversion of Class B
Common to Class A
Common                           7         --         (7)         --         --         --          --
Issuance of Class A
Common to acquire
Toyota of Newburgh             100         --         --          --      1,000         --       1,000
Net income                      --         --         --          --         --        785         785
                             -----   --------      -----    --------   --------   --------    --------
Balance at
December 31, 1999            2,147   $      2      3,753    $      4   $ 26,194   $  4,815    $ 31,015
                             =====   ========      =====    ========   ========   ========    ========
</TABLE>

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


                                      F-4
<PAGE>

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

<TABLE>
<CAPTION>
                                                     For the Years Ended December 31,
                                                    ---------------------------------
                                                       1999        1998        1997
                                                     (Note 1)    (Note 1)    (Note 1)
<S>                                                  <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                    $    785    $   (999)   $    316
Adjustments to reconcile net income (loss)
   to net cash provided by (used in)
   operating activities -
   Depreciation and amortization                        1,130         451         184
   Gain on sale of assets                                  12         (43)         --
   Deferred income taxes                                  178        (755)         14
   Changes in assets and liabilities:
      Accounts receivable                                 133      (1,390)        177
      Inventories                                     (13,629)     (4,404)        895
      Prepaid expenses and other current assets          (913)       (139)       (166)
      Other assets                                       (752)        199         (38)
      Floor plan notes payable                         15,320       4,687        (888)
      Accounts payable, accrued expenses and
      accrued compensation                             (1,139)        (65)       (159)
                                                     --------    --------    --------
   Net cash provided by (used) in operating
   activities                                           1,125      (2,458)        335
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property and equipment                  (6,187)       (398)       (102)
   Proceeds from sales of property and
   equipment                                               44         278          --
   Investment in website for development               (1,251)         --          --
   Acquisitions, net of cash acquired                  (3,832)     (6,799)         --
                                                     --------    --------    --------
   Net cash used in investing activities              (11,226)     (6,919)       (102)
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from long-term borrowings                   9,406         105          60
   Principal payments of long-term debt                (1,495)       (111)       (126)
   Excess cash used to pay down floor plan notes       (2,538)         --          --
   Other current bank borrowings, net of
   repayments                                             500         (85)        (16)
   Due from/to related parties                            349      (1,269)        307
   Issuance of common stock                                --      12,712          --
                                                     --------    --------    --------
   Net cash provided by financing activities            6,222      11,352         225
Net increase (decrease) in cash and cash
equivalents                                            (3,879)      1,975         458
CASH AND CASH EQUIVALENTS, beginning of period          5,514       3,539       3,081
                                                     --------    --------    --------
CASH AND CASH EQUIVALENTS,  end of period            $  1,635    $  5,514    $  3,539
                                                     ========    ========    ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 Cash paid for - Interest                            $  3,513    $    886    $    458
                                                     ========    ========    ========
 Cash paid for - Taxes                               $  1,048    $    227    $    245
                                                     ========    ========    ========
</TABLE>

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


                                      F-5
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999

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, 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.

      Formation of e-Commerce Subsidiary

      In June 1999, Hometown formed Hometown Operating Corporation
("CarDay.com") to operate an internet-based online auction site for the sale of
mechanically certified, used vehicles carrying limited warranties. Hometown's
investment of $41,000 represented 82% of the total investment and the remaining
18%, $9,000, was made by private investors, two of which were officers of
Hometown. CarDay.com is included in the accompanying consolidated financial
statements. The $9,000 investment by the private investors was offset against a
portion of CarDay's operating loss, therefore, no minority interest exists in
the consolidated Hometown results.

      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.

      The accompanying consolidated statements of operations, stockholders'
equity and cash flows for the year ended December 31, 1997, presents the
operations of E.R.R. Enterprises, Inc. and Subsidiaries ("Shaker"), one of the
Core Operating Companies which was identified as the accounting acquirer for
financial presentation purposes in accordance with SAB No. 97 because its
stockholders held the single largest voting interest subsequent to the Offering.

      The accompanying consolidated balance sheets as of December 31, 1999 and
1998, and the consolidated statements of operations, stockholders' equity and
cash flows for the year ended December 31, 1999 and 1998, present the
consolidated operations of: (i) Shaker for all periods; and (ii) the remaining
Core Operating Companies, the Acquisitions, effective with the respective
acquisition dates.

      The Company'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 the
Company 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

      The Company purchases substantially all of its new vehicles at the
prevailing prices charged by the applicable Manufacturers to all franchised
dealers. The Company's sales volume could be adversely impacted by the


                                      F-6
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999

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.

      Revenue Recognition

      Revenue for vehicle and parts sales is recognized upon delivery, passage
of title to and acceptance by the customer. Revenue for vehicle service is
recognized when the service has been completed.

      Finance, Insurance and Service Contract Income Recognition

      The Company 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, the Company receives commissions from the sale of
credit life and disability insurance and extended service contracts to
customers.

      The Company may be charged back ("chargebacks") for unearned financing
fees, insurance or service contract commissions in the event of early
termination of the contracts by the customers. The revenues from financing fees
and commissions are recorded at the time of the sale of the vehicles. The
reserves for future chargebacks are based on historical operating results and
the termination provisions of the applicable contracts. Finance, insurance and
service contract income, net of estimated chargebacks, 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, cash
invested in applicable Manufacturers' cash management accounts, 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.

      Inventories

      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.

      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.

      Company Guarantees

      The Company guarantees or partially guarantees loans advanced by financial
institutions to certain customers. It is the Company's policy to provide
reserves for potential future default costs based on available historical
information.


                                      F-7
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1999

      Goodwill

      Goodwill represents the excess of purchase price over the estimated fair
value of the net assets acquired and is being amortized over a 40 year period.

      Long-lived Assets

      The Company reviews long-lived assets and certain related intangibles for
impairment whenever changes in circumstances indicate that the carrying
amount of the assets may not be fully recoverable.

      Internal Use Software

      In accordance with the provisions Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", the Company capitalizes costs associated with software developed
or obtained for internal use when both the preliminary project stage is
completed and the Company's management has authorized further funding for the
project which it deems is probable of being completed and used to perform the
function intended. Through December 31, 1999, costs capitalized by the Company
relate primarily to external direct costs related to the development of
internal-use software and are included in other assets on the accompanying
balance sheet.

      Income Taxes

      The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("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.

      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 net of
floor plan interest assistance.

      Fair Value of Financial Instruments

      The Company's financial instruments consist primarily of cash and cash
equivalents, floor plan notes payable, current bank borrowings and long-term
debt. The carrying amounts approximate fair value due mainly to the short
maturity of those instruments.

      Long Term Debt

      The fair value of long-term debt is estimated based on the quoted market
prices for the same or similar issues or on the current rates offered for debt
of the same remaining maturities.

      Advertising and Promotion

      The Company expenses advertising and promotion as incurred.


                                      F-8
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1999

      Concentration of Credit Risk

      Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of cash, cash equivalents,
contracts in transit and accounts receivable. The Company maintains cash
balances at financial institutions that may, at times, be in excess of federally
insured levels. Also, the Company 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. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. The Company 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 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. As of
December 31, 1999 the Company had potentially dilutive securities related to a
stock guarantee issued in connection with an acquisition (Note 10). As of
December 31, 1998 and 1997, the Company did not have any potentially dilutive
securities.

      "Earnings (loss) per share" and "Weighted average shares", for the year
ended December 31, 1998, represents the weighted average of the outstanding
equivalent Hometown shares of Shaker for seven months and outstanding shares of
Hometown since the offering. The "Earnings (loss) per share" and "Weighted
average shares", for the year ended December 31, 1997, are the weighted average
of the outstanding equivalent Hometown shares of Shaker only.

      Stock-based Compensation

      The Company accounts for stock-based compensation issued to employees in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company, as permitted, elected not to adopt
the financial reporting requirements of SFAS No. 123, "Accounting for Stock
Based Compensation," for stock based compensation granted to employees.
Accordingly, the Company has disclosed in the notes to the consolidated
financial statements, the proforma net loss for the periods presented as if the
fair value based method was used in accordance with SFAS No. 123.

      Use of Estimates

      The preparation of consolidated financial statements in conformity with
generally accepted accounting principles 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.

      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 1998 and 1997 amounts have been reclassified to conform to the
1999 presentation.

      Segments

      The Company considers its business to be in a single segment, Automotive
Retailing.


                                      F-9
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999

      New Accounting Pronouncements

      In June 1999, the Financial Accounting Standards Board issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the effective date of SFAS No. 133." This statement defers for one
year the effective date of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" issued in June 1998. The statement establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability and be measured at
its fair value. Additionally, any changes in the derivative's fair value are to
be recognized currently in earnings, unless specific hedge accounting criteria
are met. This statement is effective for fiscal years beginning after June 15,
2000. The Company does not believe that adoption of this statement will have a
material impact on its consolidated financial statements.

3. INVESTMENT IN e-COMMERCE SUBSIDIARY:

      The Company has invested in an e-commerce subsidiary, CarDay.com, which
will operate within the retail automotive sales industry. One current officer,
one previous officer and one outside director of the Company have personal
investments in this venture and additional shares and options have been issued
to officers of the subsidiary. As of December 31, 1999, the Company has an 82%
ownership interest in the subsidiary. CarDay.com expects to provide both buyers
and sellers of used cars with a more effective and efficient way to buy and sell
used cars on the Internet, including a mechanism through which to complete a
transaction, as well as offering car owners an array of financing, insurance,
warranty, and other related products and services.

      CarDay.com has obtained bridge loan financing of $2.2 million from several
major financial institutions. These loans were obtained without recourse against
Hometown Auto Retailers, Inc.

      The financial statements of the Company for the year ended December 31,
1999, include start up and development expenses totaling $515 thousand relating
to the e-commerce subsidiary. The balance sheet of the Company includes $653
thousand in cash, $658 thousand in property and equipment, and $1.25 million in
other assets relating to CarDay.com. Liabilities attributable to the subsidiary
in the Company's consolidated financial statements primarily include $2.2
million in short-term loans payable to two financial institutions. These loans
were paid in full subsequent to year end (Note 19).

4. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS

      Accounts receivable consist of the following:

                                                        12/31/99        12/31/98
                                                        --------        --------
                                                             (in thousands)
Due from manufacturers                                    $1,852          $1,602
Due from finance companies                                 3,175           1,451
Parts and service receivables                                588           1,066
Other                                                        486             546
                                                          ------          ------
   Total                                                  $6,101          $4,665
                                                          ======          ======


                                      F-10
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999

      Inventories consist of the following:

                                                        12/31/99        12/31/98
                                                        --------        --------
                                                             (in thousands)

New Vehicles                                             $39,760         $21,759
Used Vehicles                                             10,566           7,209
Parts, accessories and other                               1,129           1,586
                                                         -------         -------
   Total                                                 $51,455         $30,554
                                                         =======         =======

      Receivable from Finance Companies

      The Company uses, at certain dealerships, specialty financing companies
that provide credit to customers with poor credit history. The Company is
advanced approximately 70% of the financed amount and is paid the balance from
the finance company when the loans are satisfied. The Company's receivable
balance as of December 31, 1999 of $331,000, net of reserves for uncollectible
amounts, is included in other assets in the consolidated balance sheet as of
December 31, 1999. These receivables are classified as long-term due to the fact
that the remaining balances are paid to the dealerships when the loans are
satisfied. The average loan is approximately 3.5 years.

      Assets held for sale

      In connection with the combination of one of the Core Operating Companies,
the Company acquired a parcel of property that is currently unimproved and not
being used. The Company has committed to a plan to sell this property as soon as
practical.

      The land is recorded at its carrying value of $500,000 which management
believes is lower than the fair value less cost to sell, and is included in
other current assets in the consolidated balance sheet as of December 31, 1999.

      Other Assets

      In connection with formation of CarDay.com, the Company has capitalized
$1.25 million of costs related to the development of the internal-use software
to be used by this subsidiary's internet website. These costs are included in
other assets in the Company's consolidated balance sheet at December 31, 1999.


                                      F-11
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999

Accounts payable and accrued expenses consist of the following:

                                                       12/31/99        12/31/98
                                                       --------        --------
                                                            (in thousands)
Accounts payable, trade                                 $1,673         $2,237
Accrued compensation costs                                 382            268
Customer deposits                                          194            193
Reserve for finance, insurance and
   service contract chargebacks                            885          1,106
Other accrued expenses                                   1,653            994
                                                        ------         ------
   Total                                                $4,787         $4,798
                                                        ======         ======

Other long-term liabilities

      On September 30, 1999, the Company entered into a non-compete agreement
with the previous owner of one of the Acquisitions. The payments under this
agreement are due in equal installments over 46 months. The liability for the
remaining obligation under the agreement, included in other long-term
liabilities at December 31, 1999, was $360,000 representing the present value of
the future payments to be made. The related asset is included in other assets on
the accompanying consolidated financial statements and is being amortized over
10 years, representing the life of the non-compete agreement.

5. PROPERTY AND EQUIPMENT, NET

      Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                            Estimated Useful
                                             Lives in Years   12/31/99       12/31/98
                                             --------------   --------       --------
                                                        (in thousands)
<S>                                            <C>            <C>            <C>
Land and land improvements                      15 to 20      $  3,809       $    247
Buildings and leasehold improvements           7 to 31.5         3,013          1,123
Machinery, equipment, furniture and fixtures     3 to 7          3,051          1,798
Vehicles                                           5               174            289
                                                              --------       --------
   Sub-total                                                    10,047          3,457
Less - accumulated depreciation                                 (1,632)        (1,164)
                                                              --------       --------
   Total                                                      $  8,415       $  2,293
                                                              ========       ========
</TABLE>

      Depreciation expense for the years ended December 31, 1999, 1998 and 1997
was $530,000, $239,000 and $184,000, respectively.


                                      F-12
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999

6. FLOOR PLAN NOTES PAYABLE AND INTEREST EXPENSE

      Floor plan notes payable reflects amounts payable for the purchase of
vehicle inventory.

                                                       12/31/99        12/31/98
                                                       --------        --------
                                                             (in thousands)
FLOOR PLAN INTEREST:
Interest expense                                        $ 2,605        $  1,439
Interest assistance and subsidies                        (1,486)           (816)
                                                        -------        --------
   Net interest expense                                 $ 1,119        $    623
                                                        =======        ========

      On January 6, 1999, the Company refinanced the entire floor plan liability
with General Electric Capital Corporation ("GE"). This credit facility is a
revolving line of credit not specifically lent to purchase individual vehicles.
Therefore, the loan balance cannot be allocated to vehicle categories. The floor
plan arrangements permit the Company to finance its vehicle purchases and
operating expenses. Such credit is secured by and, therefore, dependent upon new
and used vehicle inventory levels. Maximum availability under the various lines
was $50,422,000 and $30,875,000 as of December 31, 1999 and 1998, respectively.
Floor plan notes payable totaled $48,986,000 and $29,624,000 as of December 31,
1999 and 1998, respectively. Current availability at December 31, 1999 and 1998
was $1,436,000 and $1,251,000, respectively.

      Interest rates on the various floor plan liabilities ranged from 6.5% to
8.1% during 1999 and 8.8% to 9.5% during 1998. The GE financing arrangement
includes a swing line that handles daily loan activity. The balance of the swing
line is swept into the floor plan line once monthly. The interest rates on the
swing line ranged from 7.8% to 8.35% during 1999. The floor plan arrangements
that existed prior to the agreement with GE permitted the Companies to finance
their vehicle purchases dependent upon new and used vehicle sales and inventory
levels. The resultant liability was secured by the related inventory and
normally by personal guarantees from the owners. Payments were due when the
related vehicles were sold. Automobile manufacturers periodically provide floor
plan interest assistance, or subsidies, which reduce the Company's cost of
financing. The accompanying consolidated financial statements reflect interest
expense net of floor plan assistance.

      Hometown failed to comply with four covenants in its loan agreement with
GE as of December 31, 1999. GE waived these events of default as of December 31,
1999, however, there can be no assurance that the Company will not be in
violation of these or any other covenants in the loan agreement at March 31,
2000 or at any time thereafter. There can be no assurance that GE will grant any
waiver if an event of default occurs in the future. Upon the occurance of an
event of default under its loan agreement with GE, not cured by the Company, it
may be forced to pay the oustanding balance under its loan agreement, seek
alternative sources of financing to the extent available, and/or substantially
curtail operations.


                                      F-13
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999

7. OTHER CURRENT BANK BORROWINGS

      One of the acquired dealerships had a $1,000,000 revolving line of credit.
This line of credit bore interest at the prime rate (7.75% as of December 31,
1998) and expired in April 1998. By mutual agreement, the loan expiration was
extended until the closing of the G.E. credit agreement on January 6, 1999. As
of December 31, 1998, borrowings under this line of credit amounted to
$1,000,000. This line of credit was repaid in full and closed in February 1999.

      One of the acquired dealerships had a $200,000 revolving line of credit.
This line of credit bore interest at the prime rate (7.75% as of December 31,
1998) and expired in April 1998. By mutual agreement, the loan expiration was
extended until the closing of the G.E. credit agreement on January 6, 1999. As
of December 31, 1998, borrowings under this line of credit amounted to $200,000.
This line of credit was repaid in full and closed in February 1999.

      Between August 26, 1999 and December 23, 1999, CarDay.com obtained several
bridge loans (the "Bridge Loans") from two major financial institutions. The
aggregate amount of these loans at December 31, 1999 was $2.2 million. All the
loans are due in full on their respective nine month anniversary and all have a
fixed interest rate of 5.5% per annum due on the date of maturity. These loans
were obtained without recourse against Hometown Auto Retailers, Inc. Subsequent
to year-end, concurrent with CarDay.com's equity financing arrangement (Note 19)
the Bridge Loans were paid in full.


                                      F-14
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999

8. LONG TERM DEBT

<TABLE>
<CAPTION>
                                                                             12/31/99  12/31/98
                                                                             --------  --------
                                                                              (in thousands)

<S>                                                                            <C>      <C>
Real estate mortgage note payable, due in monthly installments
including interest at 10% and 10.13%, maturing on May 1, 2014                  $9,183   $   --

Mortgage note payable, due in monthly installments including interest at
10.5%, maturing in October 2006, relating to assets held for sale                 358      458

Notes payable for computer equipment, due in monthly installments including
interest at rates ranging from 7.2% to 12.3%, maturing on various dates
through July 2003                                                                 179      318

Other                                                                              39      545
                                                                               ------   ------
                                                                                9,759    1,321
Less: Current portion                                                             708      946
                                                                               ------   ------

                                                                               $9,051   $  375

                                                                               ======   ======
</TABLE>

Maturities of long-term debt for each of the next five years and thereafter are
as follows:

                        Year ending                   Aggregate
                        December 31,                 Obligation
                      ----------------              ------------
                                                    (in thousands)
                            2000                       $   708
                            2001                           382
                            2002                           412
                            2003                           414
                            2004                           429
                         Thereafter                      7,414
                                                       -------
                                                       $ 9,759
                                                       =======


                                      F-15
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999

9. RELATED PARTY TRANSACTIONS

      Operating Leases with Stockholder

      Certain officers of the Company lease premises to the dealerships under
various operating leases (See Note 13).

      Due from related parties, included in other assets on the consolidated
balance sheets, are as follows:

<TABLE>
<CAPTION>
                                                                               12/31/99  12/31/98
                                                                               --------  --------
                                                                                  (in thousands)
<S>                                                                              <C>      <C>
Note receivable from a company owned by an officer of the Company,
non-interest bearing with payment due monthly at $2,000                          $ 193    $ 220

Advances to a Company officer and notes receivable from a company owned by an
officer of the Company.  Non-interest bearing with payment due on demand
This amount was repaid in full in March 1999                                        --      351

Other, (net)                                                                       (11)      11
                                                                                 -----    -----
    Total                                                                        $ 182    $ 582
                                                                                 =====    =====

     Due to related parties are as follows:

Amounts due to an officer and a stockholder. Non-interest bearing with payment
due on demand                                                                    $  --    $ 238
                                                                                 -----    -----
   Total                                                                         $  --    $ 238
                                                                                 =====    =====
</TABLE>

      Other:

      One of the dealerships purchases certain used vehicles from a company in
which an officer of the Company is a shareholder. Vehicles purchased from such
company for the years ended December 31, 1998 and 1997 aggregated approximately
$356,000 and $312,000, respectively. There were no such purchases in 1999.


                                      F-16
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999

10. CAPITAL STRUCTURE, PUBLIC OFFERING AND PER SHARE DATA

      General

      The authorized capital stock of the Company consists of 29,760,000 shares
of which 24,000,000 are shares of Class A Common Stock, par value $.001 per
share, 3,760,000 are shares of Class B Common Stock, par value $.001 per share,
collectively (the "Common Stock") and 2,000,000 are shares of Preferred Stock,
par value $.001 per share, issuable in series. As of December 31, 1999, none of
the Preferred Stock were outstanding, 3,753,000 shares of Class B Common were
outstanding and 2,147,000 shares of Class A Common Stock were outstanding.

      Preferred Stock

      The Company'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 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, 1999, the Company 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 the
Company, including the election of directors. The 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 the Company or of a subsidiary of the
Company. All of the outstanding shares of Class B Common Stock, representing
approximately 94% of the aggregate voting power of the Company, are beneficially
owned by the principals of the Core Operating Companies, including a majority of
the Board of Directors 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 the Company, 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.

      Public Offering of Common Stock

      The Company completed an initial public offering (the "Offering") of 1.8
million shares of its Class A Common Stock on July 31, 1998 at a price of $9 per
share. Net proceeds of the Offering of $12.9 million were used to finance the
Acquisitions, to fund the working capital requirements, to fund corporation
expenses and to fund additional acquisitions.


                                      F-17
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999

      Warrants

      In connection with this Offering, the Company granted to the Paulson
Securities (the "Representative"), Representative's Warrants, entitling the
holders thereof to purchase up to 180,000 shares of Class A Common Stock at a
purchase price of $10.80 per share over a four year period commencing one year
from the effective date of the Offering.

      Per Share Data

      The calculation of diluted earnings per share considers the potential
dilutive effect of outstanding stock options to purchase 224,200, 10,000 and
40,000 shares of common stock at $9.00, $5.94, and $3.00 per share,
respectively, and stock warrants to purchase 180,000 shares of Class A Common
Stock at a purchase price of $10.80. As of December 31, 1999, no additional
shares have been included in shares outstanding for the exercise of outstanding
stock options and warrants as their effect would be anti-dilutive. The Company
has guaranteed that the stock issued in connection with the acquisition of
Toyota of Newburgh will have a market value of at least $1,000,000 by March 31,
2001. As of December 31, 1999, additional shares totaling 180,702 would need to
be issued to comply with that guarantee.

The following represents a reconciliation from basic earnings per share to
diluted earnings per share.

                                               Year Ended December 31,
                                          1999           1998            1997
                                        ----------------------------------------
Determination of shares:

Weighted average shares oustanding,
basic                                   5,875,342      3,513,333      1,880,000

Potentially dilutive common shares        128,509             --             --
                                        =========      =========      =========

Weighted average shares outstanding,
diluted                                 6,003,851      3,513,333      1,880,000
                                        =========      =========      =========

Earnings (loss) per share, basic        $     .13      $    (.28)     $     .17
                                        =========      =========      =========

Earnings (loss) per share, diluted      $     .13      $    (.28)     $     .17
                                        =========      =========      =========


11. INCOME TAXES

      Federal and state income taxes (benefits) are as follows:

<TABLE>
<CAPTION>
                                      12/31/99         12/31/98         12/31/97
                                      --------         --------         --------
                                                     (in thousands)
<S>                                    <C>               <C>              <C>
Federal:
    Current                            $   431           $(611)           $ 103
    Deferred                               176              50                7
State:
    Current                                241              46               49
    Deferred                                 2              13                7
                                       -------           -----            -----
   Total                               $   850           $(502)           $ 166
                                       =======           =====            =====
</TABLE>


                                      F-18
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999

      Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34% to income (losses)
before income taxes as follows:

                                                 12/31/99   12/31/98   12/31/97
                                                 --------   --------   --------
Provision at the statutory rate                     34.0%   (34.0 %)     34.0 %
Increase (decrease) resulting from:
    State income tax, net of benefit for
       federal deduction                             9.0%    (4.0 %)      6.0 %
       Non-deductible goodwill                       7.0%     3.3 %        --
    Other                                            2.0%     1.3 %      (5.6 %)
                                                 --------  --------    --------
Effective tax rate                                 52.0 %  (33.4 %)      34.4 %
                                                 ========  ========    ========

      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:

                                                             12/31/99   12/31/98
                                                             --------   --------
                                                               (in thousands)
Deferred tax assets:
    Reserves and accruals not deductible
    until paid                                               $   311    $ 1,055
    Net operating loss carryforwards                              --        611
                                                             -------    -------
    Total assets                                                 311      1,666
Deferred tax liabilities:
    LIFO recapture                                           (   234)    (1,040)
    Amortization of goodwill                                 (   141)       (44)
    Depreciation                                             (     2)      (170)
    Other                                                    (   134)        --
                                                             -------    -------
    Total liabilities                                        (   511)    (1,254)
                                                             -------    -------
    Net deferred tax asset (liability)                       $  (200)   $   412
                                                             =======    =======

      Certain of the dealerships acquired changed their method of accounting for
inventories of new vehicles from LIFO to FIFO, which resulted in an additional
income tax liability. The liability is payable over a four year period beginning
in 1999.

12. ADVERTISING AND PROMOTION

      The Company expenses advertising and promotion as incurred. Advertising
and promotion expenses, net of manufacturers' rebates and assistance, were
approximately $2,864,000, $1,202,000 and $793,000 for the years ended December
31, 1999, 1998 and 1997, respectively.


                                      F-19
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999

13. OPERATING LEASES

      The Company has executed leases for the premises occupied by its
dealerships. Certain of the leases are with related parties. The minimum rental
commitments required under these operating leases after December 31, 1999 are as
follows:

<TABLE>
<CAPTION>
    Year ending                    Total             Related
   December 31,                  Obligation          Parties              Other
 ----------------               ------------       ------------          -------
                                               (in thousands)
<S>                                <C>              <C>                   <C>
       2000                        $2,363           $  1,668              $  695
       2001                         2,174              1,668                 506
       2002                         2,174              1,668                 506
       2003                         2,074              1,668                 406
       2004                         1,930              1,668                 262
    Thereafter                     15,182             14,318                 864
                                  -------           --------             -------
       Total                      $25,897           $ 22,658             $ 3,239
                                  =======           ========             ======
</TABLE>

      Total expense for operating leases and rental agreements was $2,815,000,
$1,239,000 and $480,000 for the years ending December 31, 1999, 1998 and 1997,
respectively.

      Total expense for operating leases and rental agreements with related
parties was $1,848,000, $1,060,000 and $480,000 for the years ending December
31, 1999, 1998 and 1997, respectively.

14. COMMITMENTS AND CONTINGENCIES

      Litigation

      The Company is a defendant in several lawsuits arising from normal
business activities. Management has reviewed 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 the Company's consolidated
financial position or results of operations.

      Insurance

      The Company carries a standard range of insurance coverage, including
general and business auto liability, commercial property, workers' compensation
and excess liability coverage.

      Guaranties

      One of the Company's dealerships enters into various arrangements whereby
the Company guarantees or partially guarantees loans advanced by financial
institutions to certain customers as follows:

      (i) Portfolio of customer's limousine vehicle loans granted by Ford Motor
Credit Co. As of December 31, 1999, the Company fully guaranteed limousine
vehicle loans aggregating approximately $6,900,000.

      (ii) Portfolio of vehicle loans, granted by a financial institution, to
various customers of the dealership with below average credit. As of December
31, 1999, the Company fully guaranteed vehicle loans associated with these
customers aggregating approximately $1,300,000.


                                      F-20
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999

      The Company has provided a reserve for potential future default costs
associated with the guarantees based on available historical information.

15. EMPLOYEE BENEFIT PLANS

      In October, 1999, the Company amended and restated the E.R.R. Enterprises,
Inc. Profit Sharing/401(k) Plan, (the "Amended Plan") into the Hometown Auto
Retailers, Inc. 401(k) Plan (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
limitation. The Company may make annual matching contributions to the Plan at
its discretion. Contributions to be made by the Company to the Plan are $48,000
for the year ended December 31, 1999 and is included in accounts payable and
accrued expenses on the acompanying balance sheet as of December 31, 1999.
Contributions under the Amended Plan were $40,000, $33,000 and $24,000 in 1999,
1998 and 1997, respectively.

16. STOCK OPTION PLAN

      In February 1998, in order to attract and retain persons necessary for the
success of the Company, Hometown adopted its 1998 Stock Option Plan (the "Stock
Option Plan") covering up to 480,000 shares of Class A Common Stock. Pursuant to
the Stock Option Plan, officers, directors, key employees of the Company and
consultants to the Company 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.

      As of the effective date of the offering, options for an aggregate of
295,555 shares, exercisable at the Offering price during a five year period,
were granted to eight officers and ten other employees of the Company and were
outstanding under the Stock Option Plan. In addition, options for 5,000 shares
were granted to two of the Company's outside directors upon their taking office.
These options, which will be exercisable at the fair market value per share on
the date of grant, will be exercisable for 50% of the shares covered immediately
upon grant and for the remainder of the shares following one year's service. On
December 8, 1999, options for 40,000 shares were granted to one officer and one
other employee of the Company, with an exercise price equal to the fair market
value of the Company's Common Stock on the date of issuance. These options will
be exercisable for one-third of the shares covered thereby each year thereafter.


                                      F-21
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999

         The following tables summarize information about stock option activity
and amounts:

<TABLE>
<CAPTION>
                                                                  Weighted Average     Weighted Average
                                           Number of Shares        Price per Share         Fair Value
                                           ----------------       ----------------     ----------------
<S>                                             <C>                     <C>                   <C>
Balance at December 31, 1997                         --                 $   --
Options Granted                                 305,555                   8.90                $ 3.51
Canceled                                         (8,000)                  9.00
                                               --------                 ------
Balance at December 31, 1998                    297,555                   8.90

Options Granted                                  51,200                   4.31                $ 1.03
Canceled                                        (74,555)                  9.00
                                               --------                 ------
Balance at December 31, 1999                    274,200                 $ 8.01
                                               ========                 ======
Exerciseable at December 31, 1999                84,733                 $ 8.64
                                               ========                 ======
</TABLE>


<TABLE>
<CAPTION>
                   Number of Options                            Weighted Average         Options
   Range of          Outstanding at       Weighted Average       Exercise Price        Exercisable     Weighted Avg.
Exercise Prices         12/31/99           Remaining Life           Per Share          at 12/31/98     Exercise Price
---------------    -----------------      ----------------      ----------------       -----------     --------------
<S>                     <C>                     <C>                   <C>                <C>               <C>
   $3 to $9             274,200                 8.83                  $8.01              84,733            $8.64
</TABLE>

      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 1999, the dividend yield was assumed to be 0%, the risk-free interest
rate was 6.48%, the expected option life was 3 years and the expected volatility
was 40.0%. In 1998, the dividend yield was assumed to be 0%, the risk-free
interest rate was 5.52%, the expected option life was 3 years and the expected
volatility was 49.25%.

      As permitted by FAS 123, the Company has chosen to continue accounting for
stock options at their intrinsic value under Accounting Principles Board ("APB")
Opinion No, 25. Accordingly, no compensation expense has been recognized for its
stock option plans. Had the fair value method of accounting been applied to the
Company's stock option plans, the tax-effected impact would be as follows:

     (in thousands, except per share amounts)                  1999        1998
                                                              ------      ------

     Net Income as reported                                   $ 785     $  (999)
     Estimated fair value of option grants, net of tax          (19)         (6)
                                                              -----     -------

     Net income (loss) (adjusted)                             $ 766     $(1,005)
                                                              =====     =======

     Adjusted earnings per share, basic                       $ .13     $  (.29)
                                                              =====     =======

     Adjusted earnings per share, diluted                     $ .13     $  (.29)
                                                              =====     =======


                                      F-22
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999

17. SEGMENTS

      The Company's management considers its business to be in a single segment-
Automotive Retailing. The Company's sales and services are through similar
distribution channels, and the Company's customers are similar for all sources
of revenues. Management evaluates its operating results by dealership, which are
all located in the Northeastern United States.

18. ACQUISITIONS

      In July 1998, Hometown completed simultaneously its combination of the
Core Operating Companies, the Acquisitions and the Offering. The Core Operating
Companies were acquired in exchange for Common Stock of Hometown Auto Retailers,
Inc. and the Acquisitions were acquired for cash.

      On December 23, 1998, Hometown closed its acquisition of Wellesley Lincoln
Mercury for $0.65 million and the assumption of their floor plan liability. This
acquisition was accounted for using the purchase method of accounting.

      On January 1, 1999, Hometown acquired Morristown Lincoln Mercury from a
related party for $.5 million in cash. This acquisition has been accounted for
using the purchase method of accounting, resulting in goodwill of approximately
$0.4 million.

      On February 12, 1999, Hometown exercised its option to purchase the real
estate used by its Bay State Lincoln Mercury dealership pursuant to the
Supplemental Agreement dated August 14, 1998 between Hometown and LM-1 LLC. The
purchase price was $4.0 million. The purchase price and the planned improvement
and ongoing expansion of the facility was financed by a $5.8 million capital
loan from Falcon Financial, LLP.

      On April 1, 1999, Hometown acquired Newburgh Toyota. The purchase price
was $2.9 million in cash, 100,000 shares of Hometown Class A Common Stock and
the assumption of floor plan and various other debt for the fully capitalized
operation. Concurrent with the closing of the dealership, Hometown purchased the
real estate for $0.8 million. The cash portion of the purchase price has been
financed by a $3.5 million capital loan from Falcon Financial, LLP and $0.2
million of working capital. This acquisition has been accounted for using the
purchase method of accounting, resulting in goodwill of approximately $2.7
million.

      On November 3, 1999, Hometown purchased a Mazda franchise, special parts,
signage and new car inventory for $0.8 million. This franchise was tucked into
the Company's Framingham, Massachusetts dealership and will co-exist with the
Lincoln/Mercury's until showroom space can be added for the Mazda new cars. This
acquisition has been accounted for using the purchase method of accounting,
resulting in goodwill of approxmiately $0.7 million.

      Goodwill created in the acquisitions represents the excess of purchase
price over management's estimate of the fair value of the net assets acquired.
Goodwill consists of the following:

<TABLE>
<CAPTION>
                 Common                             Net Deficit Assumed          Total
                Stock (1)          Cash (2)          Upon Acquisition        Consideration
                ---------          --------         -------------------      -------------
                                             (in thousands)
<S>              <C>               <C>                     <C>                 <C>
 Total           $ 13,220          $ 11,652                $ 518               $ 25,390
                 ========          ========               ======                ======
</TABLE>


                                      F-23
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999

(1)   The Company's executive officers, directors and 5% stockholders have
      agreed with the Representative that they would not sell or otherwise
      dispose of any Common Stock or any securities convertible into Common
      Stock of the Company without the prior written consent of the
      Representative until July 27, 1999. The fair value of these shares, which
      has been supported through independent appraisals, has been adjusted to
      reflect, among other things, these restrictions. After the lock-up period,
      such shares of Common Stock were eligible for sale in the public market
      pursuant to Rule 144 if the conditions of that Rule have been met. The
      Company is unable to estimate the amount of restricted securities that
      will be sold under Rule 144 because this will depend, among other factors,
      on the market price for the shares of Common Stock and the personal
      circumstances of the sellers.

(2)   The cash portion of the purchase price includes amounts paid to the former
      shareholders and $200,000 of transaction fees.

      The goodwill is being amortized over a 40 year period. The cumulative
amount of goodwill amortization through December 31, 1999 is $812,000.

      The following pro forma combined data represents a summation of certain
data on an historical basis on the assumption that the combination of the
Core Operating Companies, the Acquisitions, and the Offering had occurred on
January 1, 1997, and includes the effects of the specific pro forma adjustments.
This data may not be comparable to and may not be indicative of Hometown's
post-combination results of operations because the acquired dealerships were not
under control of management.

                                                  For the Years
                                                Ended December 31,
                                                   (unaudited)
                                      -------------------------------------
(in thousands, except per share data)   1999           1998          1997
                                      --------      ---------      --------

Total revenues                        $297,274      $ 297,308      $307,631

Net income                            $  1,085      $   2,187      $  3,671

Earnings per share, basic             $   0.18      $    0.37      $   0.62

Earnings per share, diluted           $   0.18      $    0.36      $   0.62


19. SUBSEQUENT EVENTS

      CarDay.com

      During 1999, the Company invested in an e-Commerce subisidiary,
CarDay.com. CarDay is an internet auction site that offers a buying experience
with many of the features generally not available outside the traditional
dealership environment. In January 2000, CarDay.com obtained $25 million equity
financing from a group of venture capital firms. As a result, Hometowns
ownership interest in CarDay was reduced from approximately 82% to approximately
15%. At December 31, 1999, the organizational and website development costs of
CarDay are included in operating expenses in the consolidated financial
statements of Hometown. Such expenses totaled $515,000 in 1999. Subsequent to
January 20, 2000, the operating results of CarDay will not be reflected in
Hometown's financial statements as Hometown's ownership interest has fallen
below 20%.

      Brattleboro Jeep

      On January 12, 2000, Hometown completed the acquisition of a Jeep
franchise in Brattleboro, Vermont for $550,000. As part of this acquisition, the
Company also purchased the new vehicle inventory totaling $269,000. The
operations of this franchise have been included as part of Hometowns existing
Brattleboro Chrysler/Plymouth/Dodge dealership.


                                      F-24
<PAGE>

              REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE

To Hometown Auto Retailers, Inc:

We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Hometown Auto Retailers,
Inc., and E.R.R. Enterprises, Inc. and Subsidiaries included in this annual
report on Form 10K and have issued our report thereon dated April 12, 2000. Our
audits were made for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. This schedule is presented for purposes
of complying with the Securities and Exchange Commissions rules and is not part
of the basic consolidated financial statements. This schedule has been subjected
to the auditing procedures applied in the audit of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.

                                        ARTHUR ANDERSEN LLP

New York, New York
April 12, 2000


                                      S-1
<PAGE>

                                   SCHEDULE II

             Additions charged Other Costs and Expenses Adjustments
                      VALUATION AND QUALIFYING ACCOUNT (1)
              For the years ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                          Balance at     charged to     Deductions,       Other        Balance at
                                          Beginning      Costs and       net of         Adjustments      End
Account Description                         of Year       Expenses      Write-offs         (1)          of Year
                                          ----------     ----------     ----------      ----------     --------
<S>                                       <C>            <C>            <C>             <C>            <C>
Reserve for finance, insurance and
    service contract charge-backs
    Year ended December 31, 1999          $  707,000     $  (86,000)    $ (206,000)     $ (150,000)    $265,000
                                          ==========     ==========     ==========      ==========     ========
    Year ended December 31, 1998          $   40,000     $  102,000     $ (233,000)     $  798,000     $707,000
                                          ==========     ==========     ==========      ==========     ========
    Year ended December 31, 1997          $   51,000     $       --     $  (11,000)     $       --     $ 40,000
                                          ==========     ==========     ==========      ==========     ========

Reserve for uncollectible long-term
    finance contracts
    Year ended December 31, 1999          $   60,000     $  383,000     $       --      $       --     $443,000
                                          ==========     ==========     ==========      ==========     ========
    Year ended December 31, 1998          $       --     $   60,000     $       --      $       --     $ 60,000
                                          ==========     ==========     ==========      ==========     ========

Reserve for guarantees on finance
    Contracts
    Year ended December 31, 1999          $  217,000     $   13,000     $       --      $  150,000     $380,000
                                          ==========     ==========     ==========      ==========     ========
    Year ended December 31, 1998          $       --     $   35,000     $       --      $  182,000     $217,000
                                          ==========     ==========     ==========      ==========     ========

Reserve for policy work expenses
    Year ended December 31, 1999          $  185,000     $   (5,000)    $       --      $       --     $180,000
                                          ==========     ==========     ==========      ==========     ========
    Year ended December 31, 1998          $       --     $       --     $       --      $  185,000     $185,000
                                          ==========     ==========     ==========      ==========     ========

Reserve for wholesale vehicle losses
    Year ended December 31, 1999          $  100,000     $  113,000     $       --      $       --     $213,000
                                          ==========     ==========     ==========      ==========     ========
    Year ended December 31, 1998          $       --     $       --     $       --      $  100,000     $100,000
                                          ==========     ==========     ==========      ==========     ========
</TABLE>

(1) Primarily purchase accounting adjustments


                                      S-2