<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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: 1-14267
REPUBLIC SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 65-0716904
(State of Incorporation) (IRS Employer Identification No.)
110 S.E. 6TH STREET, 28TH FLOOR
FT. LAUDERDALE, FLORIDA 33301
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (954) 769-2400
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 [ ]
On August 9, 1999 the registrant had outstanding 175,412,646 shares of
Common Stock, par value $.01 per share.
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<PAGE> 2
REPUBLIC SERVICES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999
(Unaudited) and December 31, 1998 ............................. 3
Unaudited Condensed Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 1999 and 1998 ..... 4
Unaudited Condensed Consolidated Statement of Stockholders'
Equity for the Six Months Ended June 30, 1999 ................. 5
Unaudited Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1999 and 1998 .............. 6
Notes to Unaudited Condensed Consolidated Financial
Statements .................................................... 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 14
ITEM 3. Quantitative and Qualitative Disclosures about Market
Risk .......................................................... 20
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K ................................ 20
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPUBLIC SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 44.9 $ 556.6
Restricted cash ........................................ 7.1 7.1
Accounts receivable, less allowance for doubtful
accounts of $15.3 and $22.1, respectively .......... 234.3 182.7
Prepaid expenses and other current assets .............. 39.5 37.6
-------- --------
Total Current Assets ........................... 325.8 784.0
PROPERTY AND EQUIPMENT, NET .............................. 1,526.1 1,096.1
INTANGIBLE AND OTHER ASSETS, NET ......................... 1,250.2 932.0
-------- --------
$3,102.1 $2,812.1
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ....................................... $ 67.1 $ 64.7
Accrued liabilities .................................... 164.5 146.2
Deferred revenue ....................................... 54.4 46.6
Notes payable and current maturities of long-term debt . 27.0 499.9
Other current liabilities .............................. 35.4 26.4
-------- --------
Total Current Liabilities ...................... 348.4 783.8
LONG-TERM DEBT, NET OF CURRENT MATURITIES ................ 1,118.5 557.2
ACCRUED ENVIRONMENTAL AND LANDFILL COSTS ................. 140.8 77.3
DEFERRED INCOME TAXES .................................... 73.0 71.4
OTHER LIABILITIES ........................................ 22.4 23.3
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share; 50,000,000
shares authorized; none issued ...................... -- --
Common stock, par value $.01 per share; 750,000,000
shares authorized; 175,412,500 issued and
outstanding ......................................... 1.8 1.8
Additional paid-in capital ............................. 1,205.5 1,203.5
Retained earnings ...................................... 191.7 93.8
-------- --------
Total Stockholders' Equity ..................... 1,399.0 1,299.1
-------- --------
$3,102.1 $2,812.1
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
REPUBLIC SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUE ....................................... $ 455.6 $ 335.9 $ 859.1 $ 636.7
EXPENSES:
Cost of operations .......................... 270.1 205.7 514.8 391.6
Depreciation, amortization and depletion .... 39.6 26.0 73.0 49.8
Selling, general and administrative ......... 43.3 33.5 89.3 65.6
------- ------- ------- -------
OPERATING INCOME .............................. 102.6 70.7 182.0 129.7
INTEREST EXPENSE .............................. (14.4) (31.9) (25.7) (37.3)
INTEREST INCOME ............................... .4 .2 3.0 .7
OTHER INCOME (EXPENSE), NET ................... -- .2 (.1) .5
------- ------- ------- -------
INCOME BEFORE INCOME TAXES .................... 88.6 39.2 159.2 93.6
PROVISION FOR INCOME TAXES .................... 34.1 14.1 61.3 33.7
------- ------- ------- -------
NET INCOME .................................... $ 54.5 $ 25.1 $ 97.9 $ 59.9
======= ======= ======= =======
BASIC AND DILUTED EARNINGS PER
SHARE ....................................... $ .31 $ .26 $ .56 $ .63
======= ======= ======= =======
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING ............... 176.5 95.7 176.0 95.7
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
REPUBLIC SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in millions)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID - IN RETAINED
STOCK CAPITAL EARNINGS
-------- ----------- --------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 .............................. $ 1.8 $1,203.5 $ 93.8
Net income .............................................. -- -- 97.9
Issuance of compensatory stock options .................. -- 2.0 --
-------- -------- --------
BALANCE AT JUNE 30, 1999 .................................. $ 1.8 $1,205.5 $ 191.7
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE> 6
REPUBLIC SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-------------------
1999 1998
------ ------
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income .................................................... $ 97.9 $ 59.9
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, amortization and depletion of property
and equipment ............................................ 58.3 42.1
Amortization of intangible assets .......................... 14.7 7.7
Deferred tax provision ..................................... 16.0 9.3
Non-cash charge ............................................ 2.0 --
Changes in assets and liabilities, net of
effects from business acquisitions:
Accounts receivable ................................... (41.8) (19.3)
Prepaid expenses and other assets ..................... (2.6) (1.0)
Accounts payable and accrued liabilities .............. (21.0) (16.4)
Other liabilities ..................................... 11.4 58.3
------ ------
134.9 140.6
------ ------
CASH USED IN INVESTING ACTIVITIES:
Purchases of property and equipment ........................... (135.9) (71.1)
Cash used in business acquisitions, net of cash acquired ...... (596.0) --
Other ......................................................... (1.3) 9.8
------ ------
(733.2) (61.3)
------ ------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from notes payable and long-term debt ................ 21.5 .6
Payments of notes payable and long-term debt .................. (17.3) (27.9)
Net payments on revolving credit facility ..................... (516.0) --
Proceeds from issuance of unsecured notes, net of discount .... 598.4 --
Decrease in notes payable to AutoNation ....................... -- (34.9)
------ ------
86.6 (62.2)
------ ------
DECREASE IN CASH AND CASH EQUIVALENTS ........................... (511.7) 17.1
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................ 556.6 --
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 44.9 $ 17.1
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tables in millions, except per share data)
1. BASIS OF PRESENTATION
Republic Services, Inc. and its subsidiaries (the "Company") is a leading
provider of non-hazardous solid waste collection and disposal services in the
United States.
The accompanying Unaudited Condensed Consolidated Financial Statements
include the accounts of the Company and have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
All significant intercompany accounts and transactions have been eliminated.
Certain information related to the Company's organization, significant
accounting policies and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. In the opinion of management, these Unaudited
Condensed Consolidated Financial Statements reflect all material adjustments
(which include only normal recurring adjustments) necessary to fairly state the
financial position and the results of operations for the periods presented, and
the disclosures herein are adequate to make the information presented not
misleading. Operating results for interim periods are not necessarily indicative
of the results that can be expected for a full year. These interim financial
statements should be read in conjunction with the Company's audited Consolidated
Financial Statements and notes thereto appearing in the Company's Form 10-K as
of and for the year ended December 31, 1998.
The historical Unaudited Condensed Consolidated Financial Statements through
the date of the secondary offering in May 1999 reflect the accounts of the
Company as a subsidiary of AutoNation, Inc., formerly known as Republic
Industries, Inc. (together with its subsidiaries, "AutoNation"), subject to
corporate general and administrative expense allocations or charges under the
Services Agreement as described in Note 11, Related Party Transactions. Such
information does not necessarily reflect the financial position or results of
operations of the Company as a separate, stand-alone entity.
All historical share and per share data of the Company's common stock, par
value $.01 per share ("Common Stock," which was formerly designated as either
"Class A Common Stock" or "Class B Common Stock"), for the six months ended June
30, 1998 in the Unaudited Condensed Consolidated Financial Statements and the
notes thereto have been retroactively adjusted for the recapitalization of
AutoNation's 100 shares of Common Stock previously outstanding into 95,688,083
shares of Class B Common Stock in July 1998.
In July 1998, the Company completed an initial public offering of its Class
A Common Stock ("Initial Public Offering") resulting in net proceeds of
approximately $1.4 billion. In addition, in July 1998 the Company repaid in full
all amounts due to AutoNation as of June 30, 1998 through the issuance of 16.5
million shares of Class A Common Stock and through all of the proceeds from the
Initial Public Offering. Following the Initial Public Offering and the repayment
of amounts due to AutoNation, approximately 63.9% of the outstanding shares of
Common Stock were owned by AutoNation.
In March 1999, AutoNation converted all 95.7 million shares of its Class B
Common Stock into Class A Common Stock on a one-for-one basis. In April 1999,
AutoNation transferred all of its Class A Common Stock to its indirect,
wholly-owned subsidiary, AutoNation Insurance Company, and the Company
registered all 112.2 million shares of its Common Stock owned by AutoNation. In
May 1999, the Company completed a secondary offering, in which AutoNation sold
substantially all of the Class A Common Stock it owned in the Company. In June
1999, the Company amended its certificate of incorporation to eliminate the
classifications of common stock.
During the three months ended March 31, 1999, the Company recorded other
charges of approximately $4.0 million, which are included in selling, general
and administrative expenses in the Unaudited Condensed Consolidated Financial
Statements. These costs relate to the Company's separation from AutoNation and
consist of $2.0 million of compensation expenses related to the granting of
certain replacement employee stock options at exercise prices below the quoted
market price of the Company's Common Stock at the date of grant (see Note 8,
Stock Options) and $2.0 million of additional charges directly related to the
separation. The Company expects to incur an additional $1.5 to $2.0 million in
additional separation costs during the third quarter of 1999.
7
<PAGE> 8
REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The following unaudited pro forma consolidated statement of operations data
for the six months ended June 30, 1999 excludes the $4.0 million pre-tax charge
resulting from the Company's separation from AutoNation:
Revenue ....................................... $ 859.1
Expenses:
Cost of operations .......................... 514.8
Depreciation, amortization and depletion .... 73.0
Selling, general and administrative ......... 85.3
-------
Operating income .............................. 186.0
Interest expense .............................. (25.7)
Interest income ............................... 3.0
Other income (expense), net ................... (.1)
-------
Income before income taxes .................... 163.2
Provision for income taxes .................... 62.8
-------
Net income .................................... $ 100.4
=======
Basic and diluted earnings per share .......... $ .57
=======
Weighted average common and common
equivalent shares outstanding ............... 176.0
=======
The unaudited pro forma consolidated statement of operations data are
provided for informational purposes only and do not project the Company's
results of operations for any future date or period.
The Company has no components of other comprehensive income. Accordingly,
net income equals comprehensive income for all periods presented.
2. BUSINESS COMBINATIONS
Prior to the Initial Public Offering, AutoNation acquired various businesses
operating in the solid waste services industry using cash and/or shares of its
common stock. The aggregate purchase price paid by AutoNation in transactions
accounted for under the purchase method of accounting during the six months
ended June 30, 1998 was $128.3 million consisting of cash and 3.4 million shares
of AutoNation common stock. These businesses were contributed by AutoNation to
the Company subsequent to their acquisition.
The Company uses the purchase method of accounting to account for business
acquisitions. Businesses acquired are included in the Unaudited Condensed
Consolidated Financial Statements from the date of acquisition.
In September 1998, the Company entered into an agreement with Waste
Management, Inc. ("Waste Management") to acquire certain assets consisting of 16
landfills, 11 transfer stations and 136 commercial collection routes across the
United States, as well as disposal agreements at various Waste Management
facilities. By June 1999, the Company had completed the purchases of the assets
for approximately $479.6 million in cash plus properties, $292.7 million of
which were acquired during the six months ended June 30, 1999.
In addition to the acquisitions from Waste Management, the Company also
acquired various other solid waste businesses during the six months ended June
30, 1999. The aggregate purchase price paid by the Company in these transactions
was $306.0 million in cash.
8
<PAGE> 9
REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The following summarizes the preliminary purchase price allocations for
business combinations accounted for under the purchase method of accounting
consummated during the periods presented:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-------------------
1999 1998
------ ------
<S> <C> <C>
Property and equipment .............................. $370.7 $ 23.9
Cost in excess of net assets acquired ............... 302.8 142.5
Other assets ........................................ 2.2 10.0
Working capital deficit ............................. (55.4) (22.7)
Debt assumed ........................................ (1.8) (25.4)
Other liabilities ................................... (22.5) --
Investment by AutoNation ............................ -- (128.3)
------ ------
Cash used in acquisitions, net of cash acquired ..... $596.0 $ --
====== ======
</TABLE>
The Company's unaudited pro forma consolidated results of operations
assuming all significant acquisitions during the six months ended June 30, 1999
accounted for under the purchase method of accounting had occurred as of the
beginning of each six month period presented are as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Revenue ................................................. $ 893.2 $ 718.3
Net income .............................................. $ 95.2 $ 52.3
Basic and diluted earnings per share .................... $ .54 $ .55
Weighted average common and common equivalent shares
Outstanding ........................................... 176.0 95.7
</TABLE>
The unaudited pro forma consolidated results of operations are presented for
informational purposes only and may not necessarily reflect the future results
of operations of the Company or what the results of operations would have been
had the Company owned and operated these businesses as of the beginning of each
period presented.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
Land, landfills and improvements ............. $ 987.8 $ 611.7
Furniture, fixtures, trucks and equipment .... 896.5 806.8
Buildings and improvements ................... 162.3 150.6
-------- --------
2,046.6 1,569.1
Less: Accumulated depreciation,
amortization and depletion ................. (520.5) (473.0)
-------- --------
$1,526.1 $1,096.1
======== ========
</TABLE>
4. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist primarily of the cost of acquired
businesses in excess of the fair value of net assets acquired and other
intangible assets. The cost in excess of the fair value of net assets acquired
is amortized over 40 years on a straight-line basis. Other intangible assets
include values assigned to customer lists, long-term contracts and covenants not
to compete and are amortized generally over periods ranging from 5 to 25 years.
Accumulated amortization of intangible assets at June 30, 1999 and
December 31, 1998 was $85.1 million and $73.0 million, respectively.
9
<PAGE> 10
REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
5. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
$225 million unsecured notes, net of unamortized
discount of $1.0 million; interest payable
semi-annually in May and November at 6 5/8%;
principal due at maturity in 2004 ........................... $ 224.0 $ --
$375 million unsecured notes, net of unamortized
discount of $.6 million; interest payable
semi-annually in May and November at 7 1/8%;
principal due at maturity in 2009 ........................... 374.4 --
$1.0 billion unsecured revolving credit facility;
interest payable using LIBOR-based rates; $500.0 million
matures July 2000 and $500.0 million matures 2003 ........... 464.0 980.0
Bonds payable under loan agreements with California
Pollution Control Financing Authority; interest at
prevailing market rates ..................................... 42.0 42.0
Other notes; secured by real property, equipment and other
assets ...................................................... 41.1 35.1
-------- --------
1,145.5 1,057.1
Less: current portion ......................................... (27.0) (499.9)
-------- --------
$1,118.5 $ 557.2
======== ========
</TABLE>
Interest expense paid was $21.9 million (net of $3.0 million of capitalized
interest) and $37.6 million for the six months ended June 30, 1999 and 1998,
respectively.
6. ACCRUED ENVIRONMENTAL AND LANDFILL COSTS
The Company accrues for environmental and landfill costs which include
landfill site closure and post-closure costs. Landfill site closure and
post-closure costs include estimated costs to be incurred for final closure of
the landfills and estimated costs for providing required post-closure monitoring
and maintenance of landfills. These costs are accrued based on consumed
airspace. Available airspace is generally based on estimates of remaining
permitted and likely to be permitted airspace developed by independent engineers
together with the Company's engineers and accounting personnel utilizing
information provided by aerial surveys of landfills which are generally
performed annually. These aerial surveys form the basis for the volume available
for disposal. The Company estimates its future cost requirements for closure and
post-closure monitoring and maintenance for its solid waste facilities based on
its interpretation of the technical standards of the United States Environmental
Protection Agency's Subtitle D regulations. These estimates do not take into
account discounts for the present value of such total estimated costs. The
Company periodically reassesses such costs based on various methods and
assumptions regarding landfill airspace and the technical requirements of the
Environmental Protection Agency's Subtitle D regulations and adjusts such
accruals accordingly. Estimated aggregate closure and post-closure costs will be
fully accrued for these landfills at the time that such facilities cease to
accept waste and the closure process begins.
In the normal course of business, the Company is subject to ongoing
environmental investigations by certain regulatory agencies, as well as other
claims and disputes that could result in litigation. Environmental costs are
accrued by the Company through a charge to income in the period such liabilities
become probable and can be reasonably estimated. No material amounts were
charged to expense during the six months ended June 30, 1999 and 1998.
10
<PAGE> 11
REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
7. INCOME TAXES
Income taxes have been provided for based upon the Company's anticipated
annual effective income tax rate. Income taxes paid were $44.6 million for the
six months ended June 30, 1999. Through June 30, 1998, the Company was included
in the consolidated federal income tax return of AutoNation.
8. STOCK OPTIONS
In July 1998, the Company adopted the 1998 Stock Incentive Plan ("Stock
Incentive Plan") to provide for grants of options to purchase shares of Common
Stock to employees, non-employee directors and independent contractors of the
Company who are eligible to participate in the Stock Incentive Plan. The Company
has reserved 20.0 million shares of Common Stock for issuance pursuant to
options granted under the Stock Incentive Plan.
Prior to the Initial Public Offering, employees of the Company were granted
stock options under AutoNation stock option plans. As of March 2, 1999, options
to purchase approximately 7.8 million shares of AutoNation common stock held by
the Company's employees were canceled by AutoNation, and the Company's
Compensation Committee granted replacement options on a one-for-one basis. The
replacement options to purchase shares of Common Stock retained the vesting and
exercise rights of the original options, subject to certain exercise limitations
for individuals who signed stock option repricing agreements with AutoNation.
The exercise prices for individual replacement options were established to
maintain the unrealized gain or loss on each option for AutoNation stock that
was cancelled. Compensation expense related to the granting of certain
replacement options at exercise prices below the fair market value of the Common
Stock at the date of grant is approximately $2.0 million, and has been included
in selling, general and administrative expenses in the Company's Unaudited
Condensed Consolidated Statement of Operations for the six months ended June 30,
1999.
A summary of stock option transactions for the six months ended June 30,
1999 is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
------ ----------------
<S> <C> <C>
Options outstanding at beginning of year... .6 $18.12
Granted to replace AutoNation options ..... 7.8 17.77
Granted, other ............................ 3.8 18.35
Exercised ................................. -- --
Cancelled ................................. -- --
------ ------
Options outstanding at June 30, 1999 ...... 12.2 $17.97
====== ======
Options exercisable at June 30, 1999 ...... 4.3 $17.85
====== ======
</TABLE>
9. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is based on the combined weighted average number of common shares and
common share equivalents outstanding which include, where appropriate, the
assumed exercise of employee stock options. In computing diluted earnings per
share, the Company utilizes the treasury stock method.
Earnings per share for the six months ended June 30, 1998 includes the
retroactive effect of the recapitalization of the 100 shares of Common Stock
held by AutoNation into 95,688,083 shares of Class B Common Stock.
11
<PAGE> 12
REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Earnings per share for the three and six months ended June 30 is calculated
as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income .............................................. $ 54,500 $25,100 $ 97,900 $59,900
-------- ------- -------- -------
Denominator:
Denominator for basic earnings per share ................ 175,412 95,688 175,412 95,688
Effect of dilutive securities -- Options to purchase
common stock ......................................... 1,068 -- 547 --
-------- ------- -------- -------
Denominator for diluted earnings per share .............. 176,480 95,688 175,959 95,688
-------- ------- -------- -------
Basic and diluted earnings per share ...................... $ .31 $ .26 $ .56 $ .63
======== ======= ======== =======
Antidilutive securities not included in the diluted
earnings per share calculation:
Options to purchase common stock ........................ 664 -- 6,332 --
Weighted average exercise price ......................... $ 24.37 -- $ 18.97 --
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company is a party to various general legal proceedings which have
arisen in the ordinary course of business. While the results of these matters
cannot be predicted with certainty, the Company believes that losses, if any,
resulting from the ultimate resolution of these matters will not have a material
adverse effect on the Company's consolidated results of operations, cash flows
or financial position. However, unfavorable resolution could affect the
consolidated results of operations or cash flows for the quarterly periods in
which they are resolved.
LIABILITY INSURANCE
The Company carries general liability, vehicle liability, employment
practices liability, pollution liability, workers compensation and employer's
liability coverage, as well as umbrella liability policies to provide excess
coverage over the underlying limits contained in these primary policies. The
Company also carries property insurance.
The Company's liabilities for unpaid and incurred but not reported claims at
June 30, 1999 was $37.7 million and are included in other current and other
liabilities in the accompanying Unaudited Condensed Consolidated Balance Sheets.
While the ultimate amount of claims incurred is dependent on future
developments, in management's opinion, recorded reserves are adequate to cover
the future payment of claims. However, it is reasonably possible that recorded
reserves may not be adequate to cover the future payment of claims. Adjustments,
if any, to estimates recorded resulting from ultimate claim payments will be
reflected in operations in the periods in which such adjustments are known.
OTHER MATTERS
In the normal course of business, the Company is required to post
performance bonds, letters of credit and/or cash deposits as a financial
guarantee of the Company's performance. To date, the Company has satisfied
financial responsibility requirements for regulatory agencies by making cash
deposits, obtaining bank letters of credit or by obtaining surety bonds. At June
30, 1999, surety bonds and letters of credit totaling $520.3 million were
outstanding and will expire on various dates through 2007.
12
<PAGE> 13
REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The Company's business activities are conducted in the context of a
developing and changing statutory and regulatory framework. Governmental
regulation of the waste management industry requires the Company to obtain and
retain numerous governmental permits to conduct various aspects of its
operations. These permits are subject to revocation, modification or denial. The
costs and other capital expenditures which may be required to obtain or retain
the applicable permits or comply with applicable regulations could be
significant.
11. RELATED PARTY TRANSACTIONS
Prior to the Initial Public Offering, AutoNation's corporate general and
administrative costs not specifically attributable to its operating subsidiaries
were allocated to the Company based upon the ratio of the Company's invested
capital to AutoNation's consolidated invested capital. Such allocations are
included in the Company's selling, general and administrative expenses and were
approximately $7.5 million for the six months ended June 30, 1998. These amounts
approximate management's estimate of AutoNation's corporate general and
administrative costs required to support the Company's operations. Management
believes that the amounts allocated to the Company are reasonable and are no
less favorable to the Company than the expenses the Company would have incurred
to obtain such services on its own or from unaffiliated third parties.
In June 1998, the Company and AutoNation entered into a services agreement
(the "Services Agreement") pursuant to which AutoNation agreed to provide to the
Company certain accounting, auditing, cash management, corporate communications,
corporate development, financial and treasury, human resources and benefit plan
administration, insurance and risk management, legal, purchasing and tax
services. The Services Agreement expired June 30, 1999. In exchange for the
provision of such services, fees were payable by the Company to AutoNation in
the amount of $1.25 million per month, subject to review and adjustment from
time to time as the Company reduced the amount of services it obtained from
AutoNation. Effective January 1, 1999, such fees payable by the Company to
AutoNation were reduced to approximately $.9 million per month. The Company
believes that the fees for services provided under the Services Agreement are no
less favorable to the Company than could be obtained by the Company internally
or from unaffiliated third parties. Charges under the Services Agreement during
the six months ended June 30, 1999 were approximately $5.3 million and are
included in selling, general and administrative expenses.
Prior to the Initial Public Offering, the Company participated in
AutoNation's combined risk management programs for property, casualty and
general liability insurance. The Company was charged for annual premiums of $9.7
million for the six months ended June 30, 1998.
Interest expense on notes payable to AutoNation was $35.9 million for the
six months ended June 30, 1998. All amounts due AutoNation were repaid in full
in July 1998 through the issuance of shares of Class A Common Stock and proceeds
from the Initial Public Offering.
12. SUBSEQUENT EVENT
In July 1999, the Company entered into a definitive agreement with Allied
Waste Industries, Inc. ("Allied") to acquire certain solid waste assets for
approximately $230.0 million in cash. The assets to be acquired include four
landfill operations, eleven transfer stations and a subset of small container
hauling assets from five collection operations. In addition, the Company and
Allied also entered into a definitive agreement for the simultaneous purchase
and sale of certain other solid waste assets. Both transactions will be
accounted for under the purchase method of accounting. The closing of both
transactions is subject to approval by various state and federal agencies as
well as satisfaction of customary closing conditions.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Unaudited
Condensed Consolidated Financial Statements and notes thereto included under
Item 1. In addition, reference should be made to the Company's audited
Consolidated Financial Statements and notes thereto and related Management's
Discussion and Analysis of Financial Condition and Results of Operations
appearing in the Company's Form 10-K as of and for the year ended December 31,
1998. All references to historical share and per share data of the Company's
Common Stock, par value $.01 per share ("Common Stock," which was formerly
designated as either "Class A Common Stock" or "Class B Common Stock"), have
been retroactively adjusted for the recapitalization of AutoNation's 100 shares
of Common Stock previously outstanding into 95,688,083 shares of Class B Common
Stock in July 1998.
The accompanying historical Unaudited Condensed Consolidated Financial
Statements through the date of the secondary offering in May 1999 reflect the
accounts of the Company as a subsidiary of AutoNation, Inc. (together with its
subsidiaries, "AutoNation") subject to corporate general and administrative
expense allocations or charges under the Services Agreement as described in Note
11, Related Party Transactions, of the Notes to Unaudited Condensed Consolidated
Financial Statements. The historical consolidated financial information
contained in this Form 10-Q does not necessarily reflect the financial position
or results of operations of the Company as a separate, stand-alone entity.
BUSINESS COMBINATIONS
The Company makes decisions to acquire or invest in businesses based on
financial and strategic considerations.
Prior to the Initial Public Offering, AutoNation acquired various businesses
operating in the solid waste services industry using cash and/or shares of its
common stock. The aggregate purchase price paid by AutoNation in transactions
accounted for under the purchase method of accounting during the six months
ended June 30, 1998 was $128.3 million consisting of cash and 3.4 million shares
of AutoNation common stock. These businesses were contributed by AutoNation to
the Company subsequent to their acquisition.
The Company uses the purchase method of accounting to account for business
acquisitions. Businesses acquired are included in the Unaudited Condensed
Consolidated Financial Statements from the date of acquisition.
In September 1998, the Company entered into an agreement with Waste
Management, Inc. ("Waste Management") to acquire certain assets consisting of 16
landfills, 11 transfer stations and 136 commercial collection routes across the
United States as well as disposal agreements at various Waste Management
facilities. By June 1999, the Company had completed the purchases of the assets
for approximately $479.6 million in cash plus properties, $292.7 million of
which were acquired during the six months ended June 30, 1999.
In addition to the acquisitions from Waste Management, the Company also
acquired various other solid waste businesses during the six months ended June
30, 1999. The aggregate purchase price paid by the Company in these transactions
was $306.0 million in cash.
In July 1999, the Company entered into a definitive agreement with Allied
Waste Industries, Inc. ("Allied") to acquire certain solid waste assets for
approximately $230.0 million in cash. The assets to be acquired include four
landfill operations, eleven transfer stations and a subset of small container
hauling assets from five collection operations. In addition, the Company and
Allied also entered into a definitive agreement for the simultaneous purchase
and sale of certain other solid waste assets. Both transactions will be
accounted for under the purchase method of accounting. The closing of both
transactions is subject to approvals by various state and federal agencies as
well as satisfaction of customary closing conditions.
PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS
Pro forma net income was $100.4 million, or $.57 per share, for the six
months ended June 30, 1999. Pro forma operating results exclude the $4.0 million
pre-tax charge that was recorded during the three months ended March 31, 1999
resulting from the Company's separation from AutoNation. See Note 1, Basis of
Presentation, of the Notes to Unaudited Condensed Consolidated Financial
Statements, for further discussion of pro forma operating results.
14
<PAGE> 15
CONSOLIDATED RESULTS OF OPERATIONS
Net income was $54.5 million for the three months ended June 30, 1999, or
$.31 per share, as compared to $25.1 million, or $.26 per share, for the three
months ended June 30, 1998. Net income was $97.9 million for the six months
ended June 30, 1999, or $.56 per share, as compared to $59.9 million, or $.63
per share, for the six months ended June 30, 1999.
The following table sets forth revenue and cost of operations, depreciation,
amortization and depletion of property and equipment, amortization of intangible
assets, selling, general and administrative expenses, other charges and
operating income with percentages of revenue for the three and six months ended
June 30 (in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------- -----------------------------------
1999 1998 1999 1998
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue ........................................ $455.6 100.0% $335.9 100.0% $859.1 100.0% $636.7 100.0%
Expenses:
Cost of operations ........................... 270.1 59.3% 205.7 61.2% 514.8 59.9% 391.6 61.5%
Depreciation, amortization and depletion of
property and equipment ...................... 32.0 7.0% 21.8 6.5% 58.3 6.8% 42.1 6.6%
Amortization of intangible assets ............ 7.6 1.7% 4.2 1.3% 14.7 1.7% 7.7 1.2%
Selling, general and administrative expenses . 43.3 9.5% 33.5 10.0% 85.3 9.9% 65.6 10.3%
Other charges ................................ -- -- -- -- 4.0 .5% -- --
------ ------ ------ ------ ------ ------ ------ ------
Operating Income ............................. $102.6 22.5% $ 70.7 21.0% $182.0 21.2% $129.7 20.4%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Revenue was $455.6 million and $335.9 million for the three months ended
June 30, 1999 and 1998, respectively, an increase of 35.6%. Internal growth,
consisting of price and primarily volume, accounted for 8.0% of the increase,
and "tuck-in" acquisitions contributed 11.0%. Other acquisitions accounted for
the remaining 16.6% of the increase.
Revenue was $859.1 million and $636.7 million for the six months ended June
30, 1999 and 1998, respectively, an increase of 34.9%. Internal growth,
consisting of price and primarily volume, accounted for 8.0% of the increase,
and "tuck-in" acquisitions contributed 10.9%. Other acquisitions accounted for
the remaining 16.0% of the increase.
The increase in revenue for the three months ended June 30, 1999 versus the
comparable 1998 period is due to an increase in collection, transfer and
disposal operations offset by a decrease in other revenue. All of the Company's
revenue sources showed increases in aggregate dollar amounts for the six months
ended June 30, 1999 versus the comparable 1998 period. The following table
reflects total revenue of the Company by revenue source excluding intercompany
disposal revenue (in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- ----------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Collection .............. $346.3 76.0% $262.4 78.1% $657.2 76.5% $502.3 78.9%
Transfer and disposal ... 69.6 15.3% 31.9 9.5% 126.7 14.7% 62.3 9.8%
Other ................... 39.7 8.7% 41.6 12.4% 75.2 8.8% 72.1 11.3%
------ ------ ------ ------ ------ ------ ------ ------
Total Revenue ......... $455.6 100.0% $335.9 100.0% $859.1 100.0% $636.7 100.0%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Cost of operations was $270.1 million and $514.8 million for the three and
six months ended June 30, 1999, versus $205.7 million and $391.6 million for the
comparable 1998 periods. The increase in aggregate dollars is primarily due to
acquisitions. Cost of operations as a percentage of revenue was 59.3% and 59.9%
for the three and six months ended June 30, 1999, respectively, versus 61.2% and
61.5% for the comparable 1998 periods. The decrease in such costs as a
percentage of revenue is primarily a result of improved operating efficiencies
and an increase in higher margin landfill operations primarily due to
acquisitions.
Expenses for depreciation, amortization and depletion of property and
equipment were $32.0 million and $58.3 million for the three and six months
ended June 30, 1999, respectively, versus $21.8 million and $42.1 million for
the comparable 1998 periods. Expenses for depreciation, amortization and
depletion of property and equipment as a percentage of revenue were 7.0% and
6.8% for the three and six months ended June 30, 1999, respectively, versus 6.5%
and 6.6% for the comparable 1998 periods. The increase in such expenses in
aggregate dollars and as a percentage of revenue is primarily due to
acquisitions and capital expenditures.
15
<PAGE> 16
Expenses for amortization of intangible assets were $7.6 million and $14.7
million for the three and six months ended June 30, 1999, respectively, versus
$4.2 million and $7.7 million for the comparable 1998 periods. Amortization of
intangible assets as a percentage of revenue were 1.7% for the three and six
months ended June 30, 1999 versus 1.3% and 1.2% for the comparable 1998 periods.
The increase in aggregate dollars is primarily due to acquisitions.
Selling, general and administrative expenses were $43.3 million and $85.3
million for the three and six months ended June 30, 1999, respectively, versus
$33.5 million and $65.6 million for the comparable 1998 periods. The increase in
aggregate dollars is primarily due to acquisitions. Selling, general and
administrative expenses as a percentage of revenue were 9.5% and 9.9% for the
three and six months ended June 30, 1999, respectively, versus 10.0% and 10.3%
for the comparable 1998 period. The decrease in such expenses as a percentage of
revenue is primarily due to leveraging the existing overhead structure over an
expanding revenue base.
Included in selling, general and administrative expenses are fees paid to
AutoNation under the Services Agreement of $2.6 million and $5.3 million for the
three and six months ended June 30, 1999, respectively, and allocations of
AutoNation's corporate general and administrative costs of $3.7 million and $7.5
million for the three and six months ended June 30, 1998, respectively. See Note
11, Related Party Transactions, of the Notes to Unaudited Condensed Consolidated
Financial Statements for further information.
Other charges were $4.0 million for the six months ended June 30, 1999.
These costs relate to the Company's separation from AutoNation and consist of
$2.0 million of compensation expense related to the granting of certain
replacement employee stock options at exercise prices below the quoted market
price of the Company's Common Stock at the date of grant (see Note 8, Stock
Options, of the Notes to Unaudited Condensed Consolidated Financial Statements)
and $2.0 million of additional charges directly related to the separation. The
Company expects to incur an additional $1.5 to $2.0 million in additional
separation costs during the third quarter of 1999.
INTEREST EXPENSE
Interest expense was $14.4 million and $25.7 million for three and six
months ended June 30, 1999, respectively, versus $31.9 million and $37.3 million
for the comparable 1998 periods. Interest expense for the six months ended June
30, 1999 is primarily due to borrowings under the Company's unsecured notes and
revolving credit facility. Proceeds from the sale of the unsecured notes were
used to repay the revolving credit facility. Borrowings under the revolving
credit facility were used primarily to fund acquisitions. Interest expense for
the three and six months ended June 30, 1998 was primarily due to interest
expense on borrowings from AutoNation. All amounts due to AutoNation were repaid
in full in July 1998 through the issuance of shares of Class A Common Stock and
proceeds from the Initial Public Offering.
INTEREST INCOME
Interest income was $.4 million and $3.0 million for the three and six
months ended June 30, 1999, respectively, versus $.2 million and $.7 million for
the comparable 1998 periods. The increase in interest income for the three and
six months ended June 30, 1999 versus the comparable periods in 1998 is
primarily due to higher average cash balances on hand during 1999.
INCOME TAXES
The provision for income taxes was $34.1 million and $61.3 million for the
three and six months ended June 30, 1999, respectively, versus $14.1 million and
$33.7 million for the comparable 1998 periods. The effective income tax rate was
38.5% and 36.0% for the three and six months ended June 30, 1999 and 1998,
respectively. Income taxes have been provided based upon the Company's
anticipated annual effective tax rate.
ENVIRONMENTAL AND LANDFILL MATTERS
The Company accrues for environmental and landfill costs which include
landfill site closure and post-closure costs. Landfill site closure and
post-closure costs include estimated costs to be incurred for final closure of
the landfills and estimated costs for providing required post-closure monitoring
and maintenance of landfills. These costs are accrued based on consumed
airspace. The Company estimates its future cost requirements for closure and
post-closure monitoring and maintenance for its solid waste facilities based on
its interpretation of the technical standards of the Environmental Protection
Agency's Subtitle D regulations. These estimates do not take into account
discounts for the present value of such total estimated costs. Engineering
reviews of the future cost requirements for
16
<PAGE> 17
closure and post-closure monitoring and maintenance for the Company's operating
landfills are generally performed on an annual basis. Such reviews provide the
basis upon which the Company estimates future costs and revises the related
accruals. Changes in these estimates primarily relate to modifications in
available airspace, inflation and changes in regulations, all of which are taken
into consideration annually.
The current and long-term portion of accrued closure and post-closure costs
associated with landfills are included in other current liabilities and accrued
environmental and landfill costs, respectively, in the Company's Unaudited
Condensed Consolidated Balance Sheets. The increase in such accruals results
primarily from landfill acquisitions.
Costs related to environmental remediation activities are accrued by the
Company through a charge to income in the period such liabilities become
probable and can be reasonably estimated. No material amounts were charged to
expense during the six months ended June 30, 1999 and 1998, respectively.
FINANCIAL CONDITION
At June 30, 1999, the Company had $44.9 million of unrestricted cash. The
cash on hand as of December 31, 1998 was used primarily to fund acquisitions in
the first quarter of 1999.
Prior to the Initial Public Offering, the Company's needs for working
capital and capital for general corporate purposes, including acquisitions, were
satisfied pursuant to AutoNation corporate-wide cash management policies.
Following the Initial Public Offering, the Company has been financed
autonomously and AutoNation has not provided funds to finance the Company's
operations or acquisitions. The Company's operating cash flow is used by the
Company to finance its working capital, acquisitions and other requirements. In
July 1998, the Company entered into a $1.0 billion unsecured revolving credit
facility with a group of banks. $500.0 million of the facility had an original
term of 364 days and the remaining $500.0 million expires July 2003. During July
1999, the Company extended the short-term portion of the credit facility for an
additional one year term expiring in July 2000. Borrowings under the facility
bear interest at LIBOR-based rates. At June 30, 1999, the Company had
approximately $522.6 million of availability under this facility. Proceeds from
the facility are used to satisfy working capital requirements, capital
expenditures and acquisitions.
In May 1999, the Company sold $600.0 million of unsecured notes in the
public market. $225.0 million of these notes bear interest at 6 5/8% and mature
in 2004. The remaining $375.0 million bear interest at 7 1/8% and mature in
2009. Interest on both notes is payable semi-annually in May and November. The
$225.0 million and $375.0 million notes were offered at a discount of $1.0
million and $.6 million, respectively. Proceeds from the notes were used to
repay the Company's revolving credit facility.
CASH FLOWS
Cash and cash equivalents decreased by $511.7 million during the six months
ended June 30, 1999 and increased by $17.1 million during the six months ended
June 30, 1998. The major components of these changes are discussed below.
Management believes that it has sufficient financial resources available to
meet anticipated capital requirements and obligations as they come due.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash provided by operating activities was $134.9 million and $140.6 million
during the six months ended June 30, 1999 and 1998, respectively. The decrease
is due to increased working capital requirements as a result of business
acquisitions.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash flows from investing activities consist primarily of cash used for
capital additions and business acquisitions. Capital additions were $135.9
million and $71.1 million during the six months ended June 30, 1999 and 1998,
respectively. Cash used in business acquisitions, net of cash acquired was
$596.0 million during the six months ended June 30, 1999. Business acquisitions
for the six months ended June 30, 1998 were funded by AutoNation.
17
<PAGE> 18
The Company believes capital expenditures and cash used in business
acquisitions will increase during the remainder of 1999 and in the foreseeable
future due to expansion of the Company's business. The Company intends to
finance capital expenditures and acquisitions through cash on hand, cash flow
from operations, the Company's $1.0 billion revolving credit facility, the
Company's $600.0 million of unsecured notes and other financings.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from financing activities during the six months ended June 30,
1999 and 1998 included unsecured notes, commercial bank and affiliate
borrowings, and repayments of debt. Proceeds from bank and affiliate borrowings
were used to fund acquisitions and capital additions, and to repay debt. During
the six months ended June 30, 1999, the Company sold unsecured notes with a face
value of $600.0 million at a discounted price of $598.4 million. Proceeds from
the notes were used to repay the Company's revolving credit facility.
SEASONALITY
The Company's operations can be adversely affected by periods of inclement
weather which could delay the collection and disposal of waste, reduce the
volume of waste generated or delay the construction or expansion of the
Company's landfill sites and other facilities.
YEAR 2000
The Company utilizes software and related technologies throughout its
business that will be affected by the date change in the year 2000 ("Y2K"). The
Company is currently addressing the impact of Y2K on its computer programs,
embedded chips and third party suppliers. The Company has developed a dedicated
Y2K project office to coordinate the compliance efforts and monitor and report
project status throughout the organization.
The Company has identified four core phases in preparing for Y2K:
Assessment. In the assessment phase, an inventory of software, hardware,
telecommunications equipment, embedded chip technology and significant third
party suppliers is performed and critical systems and vendors are identified and
prioritized.
Analysis. In the analysis phase, each system or item assessed as critical is
reviewed to determine its Y2K compliance. Key vendors are also evaluated at this
time to determine their compliance status.
Remediation. In the remediation phase, modifications or replacements are
made to critical systems and equipment to make them Y2K compliant or the systems
and/or vendors are replaced with compliant systems or vendors. Decisions are
also made as to whether changes are necessary or feasible for key third party
suppliers.
Testing and Validation. In this phase, the Company prepares, executes and
verifies the testing of critical systems.
Six critical systems or processes have been the focus of the Company's Y2K
compliance efforts. These are hauling and disposal fleet operations, electrical
systems, telecommunications, payroll processing, billing systems and payments to
critical third parties. The Company primarily uses industry standard automated
applications in most of its locations, which are provided by third parties. The
majority of these applications are believed to be Y2K compliant, but the Company
is currently testing compliance in coordination with its vendors. The Company
expects to complete the testing and validation of these applications prior to
yearend. Three of the Company's locations use proprietary software. The
remediation of the software at these locations has been completed and the
Company expects to complete testing and validation of this software prior to
yearend.
The Company has completed its inventory and assessment of embedded chips and
third party suppliers. The Company is currently testing and validating the
compliance of products and is developing strategies for repair or replacement of
non-compliant systems. The Company expects to complete the testing and
validation phases prior to yearend.
To date, the Company estimates that it has spent approximately $2.2 million
on Y2K efforts across all areas of the Company and expects to have spent a total
of approximately $3.0 to $4.0 million when complete. The Company expects to fund
Y2K costs through
18
<PAGE> 19
operating cash flows. All system modification costs associated with Y2K will be
expensed as incurred. Y2K expenditures vary significantly in project phases and
vary depending on remedial methods used. Past expenditures in relation to total
estimated costs should not be considered or relied on as a basis for estimating
progress to completion for any element of the Company's Y2K project.
The Company presently believes that, upon remediation of its business
software applications, as well as other equipment with embedded technology, the
Y2K issue will not present a materially adverse risk to the Company's future
consolidated results of operations, liquidity or capital resources. However, if
such remediation is not completed in a timely manner or the level of timely
compliance by key suppliers or vendors is not sufficient, the Company believes
that the most likely reasonable worst-case scenario would involve the failure of
one of the Company's critical systems, delaying or disrupting the delivery of
services, resulting in loss of revenue, increased operating costs, loss of
customers or suppliers, or other significant disruptions to the Company's
business. In response to this scenario, comprehensive contingency and business
continuation plans, which address the six critical processes described above are
currently being tested. The Company expects its contingency and business
continuation plans to be implemented prior to yearend. These plans include the
manual performance of processes that are currently automated, such as billing,
accounts payable and payroll.
Determining the Y2K readiness of third party products (information
technology and other computerized equipment) and business dependencies
(including suppliers, distributors or ancillary industry groups) requires
pursuit, collection and appraisal of voluntary statements made or provided by
those parties, if available, together with independent factual research. The
Company has identified a number of material third party relationships, the most
significant of which includes billing services provided by municipalities,
delivery of fuel for collection vehicles and delivery of parts and supplies for
collection vehicles. Surveys have been distributed to each of the material third
parties identified and results are being analyzed as surveys are received.
Employees of the Company are independently verifying and validating these
responses as they are received. This validation and notification phase is
expected to be complete prior to yearend. In addition, during the third and
fourth quarters of 1999, management at each of the Company's locations will meet
with their material third party vendors to further assess the Y2K readiness of
third party products and dependencies. Although the Company has taken, and will
continue to take, reasonable efforts to gather information to determine and
verify the readiness of products and dependencies, there can be no assurance
that reliable information will be offered or otherwise available. Furthermore,
verification methods (including testing methods) may not be reliable or fully
implemented. Accordingly, notwithstanding the foregoing efforts, there are no
assurances that the Company is correct in its determination or belief that a
product or a business dependency is Y2K ready.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 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 measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. SFAS 133 cannot
be applied retroactively. The Company will adopt SFAS 133 beginning January 1,
2001. Adoption of this statement is not expected to have a material impact on
the Company's consolidated financial position or results of operations.
FORWARD-LOOKING STATEMENTS
Certain statements and information included herein constitute
"forward-looking statements" within the meaning of the Federal Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the 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. Such factors include, among other
things, competition in the solid waste industry; dependence on acquisitions for
growth; the Company's ability to manage growth; compliance with environmental
regulations; the ability to obtain financing on acceptable terms to finance the
Company's operations and growth strategy and for the Company to operate within
the limitations imposed by financing arrangements; the Company's dependence on
key personnel; general economic conditions; dependence on large, long-term
collection contracts; risks associated with undisclosed liabilities of acquired
businesses; the risks and costs associated with the date change in the year
2000; and other factors contained in the Company's filings with the Securities
and Exchange Commission.
19
<PAGE> 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market sensitive financial instruments consist primarily of
variable rate debt. Therefore, the Company's market risk exposure is with
changing interest rates in the United States and fluctuations in LIBOR. The
Company manages interest rate risk through a combination of fixed and floating
rate debt.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule for the Three and Six Months Ended
June 30, 1999 (for SEC use only)
20
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, Republic Services, Inc., has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REPUBLIC SERVICES, INC.
By: /s/ Tod C. Holmes
---------------------------------
Tod C. Holmes
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Charles F. Serianni
---------------------------------
Charles F. Serianni
Chief Accounting Officer
(Principal Accounting Officer)
Date: August 16, 1999
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 44,900 44,900
<SECURITIES> 0 0
<RECEIVABLES> 249,600 249,600
<ALLOWANCES> 15,300 15,300
<INVENTORY> 0 0
<CURRENT-ASSETS> 325,800 325,800
<PP&E> 2,046,600 2,046,600
<DEPRECIATION> 520,500 520,500
<TOTAL-ASSETS> 3,102,100 3,102,100
<CURRENT-LIABILITIES> 348,400 348,400
<BONDS> 1,118,500 1,118,500
0 0
0 0
<COMMON> 1,800 1,800
<OTHER-SE> 1,397,200 1,397,200
<TOTAL-LIABILITY-AND-EQUITY> 3,102,100 3,102,100
<SALES> 0 0
<TOTAL-REVENUES> 455,600 859,100
<CGS> 0 0
<TOTAL-COSTS> 270,100 514,800
<OTHER-EXPENSES> 82,900 162,300
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 14,400 25,700
<INCOME-PRETAX> 88,600 159,200
<INCOME-TAX> 34,100 61,300
<INCOME-CONTINUING> 54,500 97,900
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 54,500 97,900
<EPS-BASIC> .31 .56
<EPS-DILUTED> .31 .56
</TABLE>
