<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) September 30, 1996
------------------
REPUBLIC INDUSTRIES, INC.
-------------------------
(Exact name of registrant as specified in its charter)
Delaware
--------
(State or other jurisdiction of incorporation)
0-9787 73-1105145
------ ----------
(Commission (IRS Employer
File Number) Identification No.)
200 East Las Olas Boulevard
Ft. Lauderdale, FL 33301
--------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (954) 627-6000
--------------
N.A.
-------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 5. OTHER EVENTS
TERMINATION OF AGREEMENT TO ACQUIRE ADT LIMITED. On September 30, 1996,
Republic Industries, Inc. (the "Registrant") announced that the previously
announced Agreement and Plan of Amalgamation (the "ADT Agreement") by and among
the Registrant, R.I./Triangle, Ltd. and ADT Limited, a Bermuda corporation
("ADT"), dated as of July 1, 1996 and amended as of July 15, 1996, had been
terminated by mutual agreement of the parties. In connection with the execution
of the ADT Agreement, which had provided for the acquisition of ADT by
Republic, ADT granted to Republic a warrant to purchase 15,000,000 common
shares of ADT at a purchase price of $20 per share, subject to an antidilution
adjustment. Such warrant, which became exercisable upon the ADT Agreement's
termination, remains exercisable for six months following the termination.
The description contained herein relating to the termination of the ADT
Agreement is modified in its entirety by reference to the Press Release, dated
September 30, 1996, which is attached hereto as Exhibit 99.1 and incorporated
herein by reference.
REPORTING OF CERTAIN FINANCIAL INFORMATION FOR REGISTRATION AND OTHER PURPOSES.
In connection with the consummation of certain acquisitions of insignificant
businesses which, in the aggregate, are significant, as well as the proposed
acquisitions by the Registrant of AutoNation Incorporated ("AutoNation"),
Addington Resources, Inc. ("Addington") and Continental Waste Industries, Inc.
("Continental") and in accordance with Rule 3-05 of Regulation S-X, the
Registrant is filing herewith certain historical and pro forma financial
information relating to such consummated acquisitions, AutoNation, Addington
and Continental. In addition, the Registrant is filing herewith audited
supplemental consolidated financial statements which have been retroactively
adjusted to reflect the acquisition of CarChoice, Inc. and subsidiary, which
was accounted for under the pooling of interests method of accounting. Such
financial information, which is attached hereto as Exhibit 99.2 and
incorporated herein by reference, is hereby incorporated by reference into the
Registrant's Registration Statements on Form S-3, file numbers 33-61649,
33-62489, 33-63735, 33-65289, 333-01757, 333-04269 and 333-08479, and on
Form S-8, file numbers 33-93742 and 333-07623.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Not applicable.
(b) Not applicable.
(c) Exhibits.
The Exhibits to this Report are listed in the Exhibit Index set forth
elsewhere herein.
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
REPUBLIC INDUSTRIES, INC.
By: /s/ Michael R. Carpenter
-------------------------------
Michael R. Carpenter
Vice President
and Corporate Controller
Date: September 30, 1996
------------------
<PAGE> 4
REPUBLIC INDUSTRIES, INC.
EXHIBIT INDEX
Number and
Description of Exhibit
- ----------------------
1. None
2. None
4. None
15. None
16. None
17. None
21. None
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Munson, Cronick & Associates
24. None
27. None
99.1 Press Release, dated September 30, 1996
99.2 Financial Information
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our reports included in this Form 8-K, into the previously
filed Registration Statements of Republic Industries, Inc. on Forms S-3
(Registration Nos. 33-61649, 33-62489, 33-63735, 33-65289, 333-01757,
333-04269, and 333-08479) and S-8 (Registration Nos. 33-93742 and 333-07623).
ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida,
September 30, 1996.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our reports included in this Form 8-K, into the previously
filed Registration Statements of Republic Industries, Inc. on Forms S-3
(Registration Nos. 33-61649, 33-62489, 33-63735, 33-65289, 333-01757, 333-04269
and 333-08479) and S-8 (Registration Nos. 33-93742 and 333-07623).
MUNSON, CRONICK & ASSOCIATES
Fullerton, California,
September 30, 1996.
<PAGE> 1
EXHIBIT 99.1
REPUBLIC INDUSTRIES, INC.
200 East Las Olas Boulevard
Suite 1400
Fort Lauderdale, Florida 33301
954-627-6000
954-779-3884 FAX
CONTACT: REPUBLIC INDUSTRIES 954-627-6000
DAVID POTTS 954-627-6039
ADT LIMITED 407-997-8406
REPUBLIC INDUSTRIES AND ADT ANNOUNCE TERMINATION OF MERGER AGREEMENT
Fort Lauderdale, FL September 30, 1996 -- Republic Industries, Inc.
(NASDAQ: RWIN) and ADT Limited (NYSE:ADT) jointly announced today that they
have agreed to terminate their agreement providing for the combination of the
two companies. Both companies cited uncertainty mainly attributable to stock
market conditions over the past few months.
H. Wayne Huizenga, Chairman and Chief Executive Officer of Republic
Industries stated, "Despite both companies initial enthusiasm about this
transaction, we now have agreed that this combination is no longer in the best
interest of our respective companies. The delay in completing this transaction
has been inconsistent with our expansion plans. We will now be able to complete
several other pending acquisitions, including Addington Resources, Continental
Waste and AutoNation. We will also be able to pursue a number of other
opportunities which have been delayed due to the ADT transaction."
Michael A. Ashcroft, Chairman and Chief Executive Officer of ADT,
added, "The delay in completing the transaction forced both companies to put
business expansion plans on hold for too long. Both companies will now be free
to resume their individual business plans."
Republic Industries will continue to hold its warrant to acquire 15
million shares of ADT common stock at an exercise price of $20 per share. The
warrant, by its terms, became exercisable for a period of six months upon
termination of the combination agreement.
Republic is a diversified company operating in the solid waste,
automotive, electronic security and out-of-home media industries.
ADT is the largest single provider of electronic security services in
North America and the largest provider in the United Kingdom providing
continuous monitoring of commercial and residential security systems to over
1.6 million customers.
ADT is also the second largest provider of vehicle auction services in
the United States, operating a network of 28 vehicle auction centers providing
a comprehensive range of vehicle remarketing services to vehicle dealers and
owners of and operators of vehicle fleets.
<PAGE> 1
EXHIBIT 99.2
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
(a) Historical Financial Information
REPUBLIC INDUSTRIES, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants ............................................ 1
Supplemental Consolidated Balance Sheets as of
June 30, 1996 (unaudited) and December 31, 1995 and 1994..................................... 2
Supplemental Consolidated Statements of Operations for the
Six Months Ended June 30, 1996 and 1995 (unaudited)
and the Years Ended December 31, 1995, 1994 and 1993......................................... 3
Supplemental Consolidated Statements of Shareholders'
Equity for the Years Ended December 31, 1995, 1994 and 1993.................................. 4
Supplemental Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1996 and 1995 (unaudited)
and the Years Ended December 31, 1995, 1994 and 1993......................................... 5
Notes to Supplemental Consolidated Financial Statements........................................ 6
AUTONATION INCORPORATED AND SUBSIDIARIES
Report of Independent Certified Public Accountants............................................ 22
Consolidated Balance Sheets as of December 31, 1995 (audited) and
June 30, 1996 (unaudited)................................................................... 23
Consolidated Statements of Operations for the Period From Inception (September 12, 1995) to
December 31, 1995 (audited) and for the Three and Six Months Ended
June 30, 1996 (unaudited)................................................................... 24
Consolidated Statements of Shareholders' Equity for the Period From Inception
(September 12, 1995) to December 31, 1995 (audited) and for the Six Months Ended
June 30, 1996 (unaudited)................................................................... 25
Consolidated Statements of Cash Flows for the Period From Inception (September 12, 1995) to
December 31, 1995 (audited) and for the Six Months Ended June 30, 1996 (unaudited).......... 26
Notes to Consolidated Financial Statements.................................................... 27
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants............................................ 33
Consolidated Balance Sheets as of December 31, 1995 and 1994.................................. 34
Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993........ 35
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995,
1994 and 1993............................................................................... 36
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993.... 37
Notes to Consolidated Financial Statements.................................................... 38
Unaudited Condensed Consolidated Balance Sheets as of June 30, 1996 and
December 31, 1995........................................................................... 54
Unaudited Condensed Consolidated Statements of Income for the Three and Six Months Ended
June 30, 1996 and 1995....................................................................... 55
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1996 and 1995....................................................................... 57
Notes to Unaudited Condensed Consolidated Financial Statements................................ 58
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants............................................ 62
Consolidated Balance Sheets as of December 31, 1995 and 1994.................................. 63
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1994 and 1993............................................................. 64
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1995, 1994 and 1993....................................................... 65
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993............................................................. 66
Notes to Consolidated Financial Statements.................................................... 67
Unaudited Consolidated Balance Sheets as of June 30, 1996 and
December 31, 1995............................................................................ 84
Unaudited Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 1996 and 1995................................................................. 85
Unaudited Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1996 and 1995................................................................ 86
Notes to Unaudited Consolidated Financial Statements......................................... 87
CARCHOICE, INC. AND SUBSIDIARY
Report of Independent Certified Public Accountants........................................... 92
Consolidated Balance Sheets as of December 31, 1995.......................................... 93
Consolidated Statements of Operations for the period from Inception (January 26, 1995) to
December 31, 1995........................................................................... 94
Consolidated Statements of Shareholders' Equity for the period from Inception
(January 26, 1995) to December 31, 1995..................................................... 95
Consolidated Statements of Cash Flows for the period from Inception (January 26, 1995) to
December 31, 1995........................................................................... 96
Notes to Consolidated Financial Statements................................................... 97
Unaudited Consolidated Balance Sheets as of June 30, 1996 and
December 31, 1995........................................................................... 101
Unaudited Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 1996 and 1995................................................................ 102
Unaudited Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1996 and 1995................................................................ 103
Notes to Unaudited Consolidated Financial Statements......................................... 104
ACQUIRED SOLID WASTE COMPANIES
Report of Independent Auditor's Report........................................................ 109
Combined Balance Sheets as of December 31, 1995 (audited) and March 31, 1996 (unaudited)...... 110
Combined Statements of Operations for the Year Ended December 31, 1995 (audited) and for
the Three Months Ended March 31, 1996 and 1995 (unaudited).................................. 111
Combined Statements of Shareholders' Equity for the Year Ended December 31, 1995 (audited)
and for the Three Months Ended March 31, 1996 (unaudited)................................... 112
Combined Statements of Cash Flows for the Year Ended December 31, 1995 (audited) and for
the Three Months Ended March 31, 1996 and 1995 (unaudited).................................. 113
Notes to Combined Financial Statements........................................................ 114
(b) Pro Forma Financial Information.
Unaudited Condensed Consolidated Pro Forma Financial Statements............................... 117
Unaudited Condensed Consolidated Pro Forma Balance Sheet as of
June 30, 1996............................................................................... 119
Unaudited Condensed Consolidated Pro Forma Statement of Operations for the
Six Months Ended June 30, 1996.............................................................. 120
Unaudited Condensed Consolidated Pro Forma Statement of Operations for the
Year Ended December 31, 1995................................................................ 121
Unaudited Condensed Consolidated Pro Forma Statement of Operations for the
Year Ended December 31, 1994............................................................... 122
Unaudited Condensed Consolidated Pro Forma Statement of Operations for the
Year Ended December 31, 1993............................................................... 123
Notes to Unaudited Condensed Consolidated Pro Forma Financial Statements...................... 124
</TABLE>
<PAGE> 2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Republic Industries, Inc.:
We have audited the accompanying supplemental consolidated balance sheets
of Republic Industries, Inc. (a Delaware corporation, formerly Republic Waste
Industries, Inc.) and subsidiaries as of December 31, 1995 and 1994, and the
related supplemental consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1995. The supplemental consolidated statements give retroactive
effect to the acquisition of the assets of CarChoice, Inc. on August 1, 1996,
which has been accounted for as a pooling of interests as described in Note 1.
These supplemental financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these supplemental
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 supplemental consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Republic Industries, Inc. and its subsidiaries as of December 31,
1995 and 1994, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1995, after
giving retroactive effect to the acquisition of the assets of CarChoice, Inc.
as described in Note 1, all in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida,
September 30, 1996.
1
<PAGE> 3
REPUBLIC INDUSTRIES, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------
1996 1995 1994
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $263,540 $164,572 $ 11,485
Accounts receivable, less allowance for doubtful accounts of
$3,885, $2,559 and $1,581, respectively.................. 61,952 38,092 26,159
Prepaid expenses............................................ 6,883 3,757 2,735
Inventory................................................... 18,809 14,924 4,104
Other current assets........................................ 47,429 7,323 2,389
-------- -------- --------
TOTAL CURRENT ASSETS................................ 398,613 228,668 46,872
Property and equipment, net................................... 283,101 204,949 141,126
Investment in subscriber accounts, net of accumulated
amortization of $15,102, $11,446 and $6,977, respectively... 70,940 42,240 24,193
Intangible assets, net of accumulated amortization of $14,611,
$9,026 and $3,212, respectively............................. 180,565 101,363 15,605
Net assets of discontinued operations......................... -- -- 20,292
Other assets.................................................. 9,222 5,246 9,119
-------- -------- --------
TOTAL ASSETS........................................ $942,441 $582,466 $257,207
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................ $ 25,868 $ 18,732 $ 12,829
Accrued liabilities......................................... 37,422 21,506 11,635
Current portion of deferred revenue......................... 28,389 25,555 13,892
Current maturities of long-term debt and notes payable...... 13,801 11,996 11,210
Current portion of accrued environmental and landfill
costs.................................................... 1,843 2,925 1,404
Income taxes payable........................................ 11,269 3,625 1,281
-------- -------- --------
TOTAL CURRENT LIABILITIES........................... 118,592 84,339 52,251
Long-term debt and notes payable, net of current maturities... 3,267 3,791 40,703
Deferred revenue, net of current portion...................... 12,371 18,012 20,353
Accrued environmental and landfill costs, net of current
portion..................................................... 7,219 8,386 8,244
Deferred income taxes......................................... 21,420 14,414 11,597
Other liabilities............................................. 7,180 2,976 8,841
-------- -------- --------
TOTAL LIABILITIES................................... 170,049 131,918 141,989
-------- -------- --------
COMMITMENTS AND CONTINGENCIES.................................
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01 per share; 5,000,000 shares
authorized; none issued.................................. -- -- --
Common stock, par value $.01 per share; 500,000,000,
350,000,000 and 100,000,000 shares authorized,
respectively; 189,176,424, 161,820,630 and 96,456,334
shares issued, respectively.............................. 1,891 1,618 965
Additional paid-in capital.................................. 724,882 420,557 109,301
Retained earnings........................................... 45,619 28,373 5,625
Notes receivable arising from stock purchase agreements..... -- -- (673)
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY.......................... 772,392 450,548 115,218
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $942,441 $582,466 $257,207
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 4
REPUBLIC INDUSTRIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------- ------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue..................................... $267,625 $132,625 $295,238 $218,173 $182,495
Expenses:
Cost of operations........................ 184,050 86,231 192,311 143,375 121,640
Selling, general and administrative....... 52,605 31,648 67,048 49,245 46,477
Restructuring and unusual charges......... -- -- -- -- 10,040
-------- -------- -------- -------- --------
Operating income............................ 30,970 14,746 35,879 25,553 4,338
Interest and other income................... 5,981 1,052 5,715 1,081 760
Interest expense............................ (1,811) (2,999) (6,139) (4,487) (2,936)
-------- -------- -------- -------- --------
Income from continuing operations before
income taxes.............................. 35,140 12,799 35,455 22,147 2,162
Income tax provision........................ 13,178 5,719 15,534 5,298 2,493
-------- -------- -------- -------- --------
Income (loss) from continuing operations.... 21,962 7,080 19,921 16,849 (331)
Discontinued operations:
Income (loss) from discontinued
operations,
net.................................... -- 508 (293) 2,684 (14,579)
-------- -------- -------- -------- --------
Net income (loss)........................... $ 21,962 $ 7,588 $ 19,628 $ 19,533 $(14,910)
======== ======== ======== ======== ========
Primary earnings (loss) per common and
common equivalent share:
Continuing operations..................... $ .10 $ .07 $ .15 $ .17 $ --
Discontinued operations................... -- .01 -- .03 (.15)
-------- -------- -------- -------- --------
Net income (loss)................. $ .10 $ .08 $ .15 $ .20 $ (.15)
======== ======== ======== ======== ========
Fully diluted earnings (loss) per common and
common equivalent share:
Continuing operations..................... $ .10 $ .07 $ .14 $ .17 $ --
Discontinued operations................... -- -- -- .03 (.15)
-------- -------- -------- -------- --------
Net income (loss)................. $ .10 $ .07 $ .14 $ .20 $ (.15)
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 5
REPUBLIC INDUSTRIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
RETAINED ARISING
ADDITIONAL EARNINGS FROM STOCK
COMMON PAID-IN (ACCUMULATED PURCHASE
STOCK CAPITAL DEFICIT) AGREEMENTS
------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992........................ $ 968 $103,353 $ 17,423 $(673)
Contributions to capital from pooled entities..... -- 4,167 -- --
Distributions to former owners of pooled
companies...................................... -- -- (6,350) --
Other............................................. -- (679) (418) --
Net loss.......................................... -- -- (14,910) --
------ -------- -------- -----
BALANCE AT DECEMBER 31, 1993........................ 968 106,841 (4,255) (673)
Distributions to former owners of pooled
companies...................................... -- -- (9,671) --
Other............................................. (3) 2,460 18 --
Net income........................................ -- -- 19,533 --
------ -------- -------- -----
BALANCE AT DECEMBER 31, 1994........................ 965 109,301 5,625 (673)
Sales of common stock............................. 415 231,616 -- --
Stock issued in acquisitions...................... 172 82,811 -- --
Exercise of stock options and warrants, including
tax benefit of $4,068.......................... 28 13,346 -- --
Payments received on notes........................ -- -- -- 673
Reclassification of additional paid-in capital to
effect the spin-off............................ -- (36,305) 36,305 --
Spin-off of Republic Environmental Systems, Inc... -- -- (23,579) --
Distributions to former owners of pooled
companies...................................... -- -- (9,718) --
Other............................................. 38 19,788 112 --
Net income........................................ -- -- 19,628 --
------ -------- -------- -----
BALANCE AT DECEMBER 31, 1995........................ $1,618 $420,557 $ 28,373 $ --
====== ======== ======== =====
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 6
REPUBLIC INDUSTRIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------- ------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES OF CONTINUING
OPERATIONS:
Income (loss) from continuing operations............ $ 21,962 $ 7,080 $ 19,921 $ 16,849 $ (331)
Adjustments to reconcile income (loss) from
continuing operations to net cash provided by
continuing operations:
Restructuring and unusual charges................. -- -- -- -- 10,040
Depreciation, depletion and amortization.......... 17,096 10,283 22,673 19,525 15,591
Provision for accrued environmental and landfill
costs........................................... -- -- 400 377 215
Gain on the sale of equipment..................... (818) (214) (311) (286) (143)
Changes in assets and liabilities, net of effects
from business acquisitions:
Accounts receivable............................... (12,941) (2,981) (5,452) (2,754) (2,070)
Prepaid expenses and other assets................. (3,545) (2,383) (13,387) (708) (2,348)
Accounts payable and accrued liabilities.......... (9,037) 4,982 2,505 2,681 251
Income taxes payable.............................. 15,738 5,146 4,300 2,171 534
Deferred revenue and other liabilities............ (8,400) (3,822) (13,356) (10,985) (2,928)
-------- -------- -------- -------- --------
Net cash provided by continuing operations... 20,055 18,091 17,293 26,870 18,811
-------- -------- -------- -------- --------
CASH USED BY DISCONTINUED OPERATIONS.................. -- (263) (261) (736) (4,360)
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances and loans.................................. (40,600) -- -- -- --
Business acquisitions, net of cash acquired......... (6,942) (3,313) (7,304) (4,776) (5,664)
Purchases of property and equipment................. (50,912) (19,150) (62,930) (23,383) (13,317)
Investment in subscriber accounts................... (16,013) (7,300) (15,980) (17,512) (9,569)
Other............................................... 1,800 826 126 (901) (2,357)
-------- -------- -------- -------- --------
Net cash used in investing activities............. (112,667) (28,937) (86,088) (46,572) (30,907)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock............................... 197,583 -- 232,031 -- --
Exercise of stock options and warrants.............. 5,585 181 9,306 -- --
Capital contribution to Republic Environmental
Systems, Inc...................................... -- -- (2,520) -- --
Payments of long-term debt and notes payable........ (32,350) (5,637) (86,667) (17,950) (16,035)
Proceeds from long-term debt and notes payable...... 7,712 17,716 39,693 21,717 23,201
Proceeds from financing arrangements................ 17,813 3,110 24,747 27,070 15,473
Distributions to former owners of pooled
companies......................................... (4,763) (3,241) (7,434) (9,041) (6,044)
Other............................................... -- 2,878 12,987 (1,240) 615
-------- -------- -------- -------- --------
Net cash provided by financing activities......... 191,580 15,007 222,143 20,556 17,210
-------- -------- -------- -------- --------
INCREASE IN CASH AND CASH EQUIVALENTS................. 98,968 3,898 153,087 118 754
CASH AND CASH EQUIVALENTS:
Beginning of Period................................. 164,572 11,485 11,485 11,367 10,613
-------- -------- -------- -------- --------
End of Period....................................... $263,540 $ 15,383 $164,572 $ 11,485 $ 11,367
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 7
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(000'S OMITTED IN ALL TABLES EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying Supplemental Consolidated Financial Statements include the
accounts of Republic Industries, Inc. (formerly Republic Waste Industries, Inc.)
and its subsidiaries ("Republic" or the "Company"). All significant intercompany
accounts and transactions have been eliminated. In 1994, the Board of Directors
authorized management to pursue a plan to distribute its hazardous waste
services segment, Republic Environmental Systems, Inc. ("RESI"), now known as
International Alliance Services, Inc., to Republic shareholders. Accordingly, as
discussed in Note 9, this segment has been accounted for as a discontinued
operation and the accompanying Supplemental Consolidated Financial Statements
presented herein have been restated to report separately the net assets and
operating results of these discontinued operations.
In order to maintain consistency and comparability between periods
presented, certain amounts have been reclassified from the previously reported
financial statements in order to conform with the financial statement
presentation of the current period.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. The most significant estimates made in the preparation of the
accompanying Supplemental Consolidated Financial Statements are estimated future
cost requirements for closure and post-closure monitoring and maintenance for
the Company's solid waste facilities and estimated customer lives utilized in
amortizing the investment in subscriber accounts with respect to the Company's
electronic security service segment. Although the Company believes its estimates
are appropriate, changes in assumptions utilized in preparing such estimates
could cause these estimates to change in the near term.
In the opinion of management, the unaudited Supplemental Consolidated
Financial Statements contain all material adjustments, consisting of only normal
recurring adjustments, necessary to present fairly the supplemental consolidated
financial position of the Company at June 30, 1996, and the supplemental
consolidated results of its operations and cash flows for the six months ended
June 30, 1996 and 1995. Operating results for these interim periods are not
necessarily indicative of the results that can be expected for a full year.
The accompanying Supplemental Consolidated Financial Statements include the
financial position and results of operations of Kertz Security Systems II, Inc.
and Kertz Security Systems, Inc. (collectively, "Kertz"), with which the Company
merged in August 1995; United Waste Service, Inc. ("United") and Southland
Environmental Services, Inc. ("Southland"), with which the Company merged in
October 1995; J.C. Duncan Company, Inc. and affiliates ("Duncan"), Garbage
Disposal Service, Inc. ("GDS"), Fennell Container Co., Inc. and affiliates
("Fennell") and Scott Security Systems and affiliates ("Scott"), with which the
Company merged in November 1995; and The Denver Fire Reporter & Protective Co.
and affiliate ("Denver Alarm") and Incendere, Inc. and affiliates ("Schaubach"),
with which the Company merged in February 1996. These transactions were
accounted for under the pooling of interests method of accounting and,
accordingly, the Supplemental Consolidated Financial Statements have been
previously restated as if the Company and Kertz, United, Southland, Duncan, GDS,
Fennell, Scott, Denver Alarm and Schaubach had operated as one entity since
inception. See Note 2 for further discussion of these transactions.
All per share data and number of common shares for all periods included in
the financial statements and notes thereto have been retroactively adjusted to
reflect a two-for-one stock split in the form of a 100% stock dividend declared
in May 1996, as more fully described in Note 5.
6
<PAGE> 8
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Supplemental Consolidated Financial Statements. The accompanying
Supplemental Consolidated Financial Statements give retroactive effect to the
acquisition of the assets of CarChoice, Inc. ("CarChoice") which took place in
August 1996. The acquisition of CarChoice has been accounted for under the
pooling of interests method of accounting. See Note 2 for further discussion of
this transaction.
Inventory. Inventory consists primarily of vehicles valued using the
specific identification method. Cost includes acquisition expenses as well as
charges to bring inventory units to their existing location and condition,
including reconditioning cost. Parts and accessories are valued at the lower of
cost, using the first-in, first-out method, or market.
Other Current Assets. Included in other current assets at June 30, 1996
are approximately $40,600,000 in advances made to AutoNation Incorporated
("AutoNation") during the three months ended June 30, 1996. Such advances were
made pursuant to a loan agreement whereby the Company has agreed to provide
advances at an interest rate of LIBOR plus 2% to fund AutoNation's cash flow
requirements until consummation of the acquisition of AutoNation as described
in Note 2. Such advances mature on March 31, 1997 and are secured primarily by
the common stock of AutoNation's principal operating subsidiary, all trademarks
and other intellectual property of AutoNation and, until consummation of the
Company's merger with AutoNation, AutoNation's shareholder subscription
commitments.
Property and Equipment. Property and equipment are recorded at cost.
Expenditures for major additions and improvements are capitalized, while minor
replacements, maintenance and repairs are charged to expense as incurred. When
property is retired or otherwise disposed of, the cost and accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in current operations.
The Company revises the estimated useful lives of property and equipment
acquired through its business acquisitions to conform with its policies
regarding property and equipment. Depreciation is provided over the estimated
useful lives of the assets involved using the straight-line method. The
estimated useful lives are: twenty to forty years for buildings and
improvements, three to fifteen years for vehicles and equipment and five to ten
years for furniture and fixtures.
Landfills are stated at cost and are depleted based on consumed airspace.
Landfill improvements include direct costs incurred to obtain a landfill permit
and direct costs incurred to construct and develop the site. These costs are
depleted based on consumed airspace. No general and administrative costs are
capitalized as landfills and landfill improvements.
Depreciation, amortization and depletion expense related to property and
equipment was $15,988,000, $14,815,000 and $12,817,000 in 1995, 1994 and 1993,
respectively.
A summary of property and equipment is shown below:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------
1996 1995 1994
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Land, landfills and improvements...................... $ 114,494 $ 97,610 $ 84,864
Vehicles and equipment................................ 228,321 157,677 106,881
Buildings and improvements............................ 45,141 29,386 17,127
Furniture and fixtures................................ 12,148 9,061 8,128
--------- -------- --------
400,104 293,734 217,000
Less: accumulated depreciation, amortization and
depletion........................................... (117,003) (88,785) (75,874)
--------- -------- --------
$ 283,101 $204,949 $141,126
========= ======== ========
</TABLE>
7
<PAGE> 9
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investment in Subscriber Accounts. Investment in subscriber accounts
consists of certain capitalized costs associated with new monitoring systems
installed by the Company's electronic security service business and the cost of
acquired subscriber accounts.
The costs are amortized over periods ranging from eight to twelve years
(based on the historical customer attrition rates) on a straight-line basis.
Amortization expense related to investment in subscriber accounts was
$4,357,000, $3,377,000 and $1,801,000 in 1995, 1994 and 1993, respectively.
Intangible Assets. Intangible assets consist primarily of the cost of
acquired businesses in excess of the fair value of net tangible assets acquired.
The cost in excess of the fair value of net tangible assets is amortized over
forty years on a straight-line basis. Amortization expense related to intangible
assets was $2,328,000, $1,333,000 and $973,000 in 1995, 1994 and 1993,
respectively.
The Company continually evaluates whether events and circumstances have
occurred that may warrant revision of the estimated useful life of intangible
assets or whether the remaining balance of intangible assets should be evaluated
for possible impairment. The Company uses an estimate of the related
undiscounted net income over the remaining life of the intangible assets in
measuring their recoverability.
Deferred Revenue. Deferred revenue consists primarily of proceeds from the
factoring of electronic security monitoring contracts by one of the Company's
acquired security businesses. The use of factoring was discontinued by the
Company subsequent to the date of acquisition of such business. Revenue is
recognized over the period services are provided.
Accrued Environmental and Landfill Costs. Accrued environmental and
landfill costs 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. Estimated aggregate closure and post-closure costs
are to be fully accrued for these landfills at the time that such facilities
cease to accept waste and are closed. Excluding existing accruals at the end of
1995, approximately $7,871,000 of such costs are to be expensed over the
remaining lives of these facilities. 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.
Environmental costs are accrued by the Company through a charge to income
in the period such costs become probable and reasonably estimable.
The Company periodically reassesses its method and assumptions used to
estimate such accruals for environmental and landfill costs and adjusts such
accruals accordingly. Such factors considered are changing regulatory
requirements, the effects of inflation, changes in operating climates in the
regions in which the Company's facilities are located and the expectations
regarding costs of securing environmental services.
As discussed in Note 7, the Company is involved in litigation and is
subject to ongoing environmental investigations by certain regulatory agencies,
as well as other claims and disputes that could result in additional litigation
which are in the normal course of business.
Revenue Recognition. Revenue from the Company's solid waste services
segment includes primarily waste collection and landfill tipping fees. Revenue
from the Company's electronic security services business results from monitoring
contracts for security systems and fees charged for the sale and installation of
such systems. Revenue from the Company's vehicle retailing segment consists
primarily of sales of used vehicles. The Company recognizes revenue from its
solid waste, electronic security services and vehicle retailing segments in the
period services are provided or products are sold.
8
<PAGE> 10
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Statements of Cash Flows. The Company considers all highly liquid
investments with purchased maturities of three months or less to be cash
equivalents. The effect of non-cash transactions related to business
combinations, as discussed in Note 2, and other non-cash transactions are
excluded from the Statements of Cash Flows.
Fair Value of Financial Instruments. The carrying values of cash, trade
accounts receivable, trade accounts payable and financial instruments included
in other current assets and other assets approximate their fair values
principally because of the short-term maturities of these instruments. The fair
value of the Company's long-term debt is estimated based on the current rates
offered to the Company for debt of similar terms and maturities. Under this
method the Company's fair value of long-term debt was not significantly
different than the stated value at December 31, 1995 and 1994.
In the normal course of business, the Company has letters of credit,
performance bonds and other guarantees which are not reflected in the
accompanying Supplemental Consolidated Balance Sheets. The Company's management
believes that the likelihood of performance under these financial instruments is
minimal and expects no material losses to occur in connection with these
financial instruments.
Concentrations of Credit Risk. Concentrations of credit risk with respect
to trade receivables are limited due to the wide variety of customers and
markets in which the Company's services are provided, as well as their
dispersion across many different geographic areas. As a result, at December 31,
1995, the Company does not consider itself to have any significant
concentrations of credit risk.
New Accounting Pronouncements. In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", which was adopted by the Company in the first quarter
of 1996 without material effect. SFAS No. 121 establishes accounting standards
for the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used, and for long-lived assets
and certain identifiable intangibles to be disposed. In October 1995, the
Financial Accounting Standards Board issued SFAS No. 123, "Accounting for
Stock-Based Compensation", which requires adoption in 1996. SFAS No. 123
requires that the Company's financial statements include certain disclosures
about stock-based employee compensation arrangements and permits the adoption of
a change in accounting for such arrangements. Changes in accounting for
stock-based compensation are optional and the Company will adopt only the
disclosure requirements in its 1996 annual report on Form 10-K.
2. BUSINESS COMBINATIONS
Pending Acquisitions
In June 1996, the Company signed a definitive agreement to acquire
Continental Waste Industries, Inc. ("Continental") in a merger transaction.
Continental provides integrated solid waste management services to residential,
commercial and industrial customers primarily in the mid-south and eastern
United States. Under the terms of the agreement, each share of common stock of
Continental would be exchanged, on a tax-free basis, for .80 of a share of the
Company's Common Stock. As of June 30, 1996, Continental had approximately
14,244,000 shares of common stock issued and outstanding. The transaction, which
will be accounted for under the pooling of interests method of accounting, is
subject to approval of Continental's shareholders and other customary closing
conditions, including regulatory approvals. Continental's three largest
shareholders, representing approximately 25% of Continental's outstanding common
stock, have agreed to vote their shares in favor of the transaction.
In June 1996, the Company signed a definitive agreement to acquire
Addington Resources, Inc. ("Addington") in a merger transaction. Addington
provides integrated solid waste disposal services including landfill, collection
and recycling services for cities and counties in the southeastern United
States. Under the terms of the agreement, each share of common stock of
Addington would be exchanged, on a tax-free basis,
9
<PAGE> 11
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for .90 of a share of the Company's Common Stock. As of June 30, 1996, Addington
had approximately 15,189,000 shares of common stock issued and outstanding. The
transaction, which will be accounted for under the pooling of interests method
of accounting, is subject to approval by the shareholders of Addington and other
customary closing conditions, including regulatory approvals. Six of Addington's
shareholders, representing approximately 45% of Addington's outstanding common
stock, have agreed to vote their shares in favor of the transaction and have
granted the Company a proxy to vote all of their shares in favor of the
transaction.
In May 1996, after approval by a special committee of disinterested members
of the Company's Board of Directors, the Company signed a definitive agreement
to acquire AutoNation. AutoNation is a privately-owned company developing a
chain of megastores for the sale of new and used vehicles in a customer friendly
environment and is partially owned by the Company's Chairman and Chief Executive
Officer, and certain other officers and directors of the Company. The
transaction, which will be accounted for under the purchase method of
accounting, is subject to final approval by the shareholders of the Company and
other customary closing conditions, including regulatory approvals. It is
contemplated that the Company will issue approximately 17,467,000 shares of its
Common Stock in connection with the transaction.
Completed Acquisitions
Significant businesses acquired and accounted for under the pooling of
interests method of accounting have been included retroactively in the
supplemental financial statements as if the companies had operated as one entity
since inception. Businesses acquired through June 30, 1996 and accounted for
under the purchase method of accounting are included in the supplemental
financial statements from the date of acquisition.
In August 1996, the Company acquired all of the assets of CarChoice.
CarChoice, which commenced operations in January 1995 and opened its first store
in December 1995, is a developer and operator of used car superstores similar to
those being developed by AutoNation.
In February 1996, the Company acquired all of the outstanding capital stock
of Denver Alarm. Denver Alarm is one of the oldest electronic security alarm
companies in the United States and provides installation, monitoring and
maintenance services to residential and commercial customers throughout
Colorado.
In February 1996, the Company acquired Schaubach. Schaubach provides solid
waste collection and recycling services to residential, commercial, and
industrial customers in southeastern Virginia and eastern North Carolina and
provides transportation of medical waste throughout the Mid-Atlantic states.
The Company issued an aggregate of 9,707,664 shares of Common Stock to
acquire CarChoice, Denver Alarm and Schaubach (the "Pooled Entities"), all of
which have been accounted for under the pooling of interests method of
accounting.
10
<PAGE> 12
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Details of the results of operations of the previously separate companies
for the period before the pooling of interests combinations were consummated are
as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------- ------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
The Company....................... $229,136 $115,074 $260,315 $187,111 $154,301
Pooled Entities................... 38,489 17,551 34,923 31,062 28,194
-------- -------- -------- -------- --------
$267,625 $132,625 $295,238 $218,173 $182,495
======== ======== ======== ======== ========
Net income (loss):
The Company....................... $ 27,209 $ 8,219 $ 22,919 $ 17,116 $(17,052)
Pooled Entities................... (5,247) (631) (3,291) 2,417 2,142
-------- -------- -------- -------- --------
$ 21,962 $ 7,588 $ 19,628 $ 19,533 $(14,910)
======== ======== ======== ======== ========
</TABLE>
During the six months ended June 30, 1996, the Company also acquired 29
other businesses in the solid waste and electronic security industries which
were immaterial to the Company. The aggregate purchase price paid by the Company
related to immaterial acquisitions accounted for under the purchase method of
accounting was approximately $90,060,000 and consisted of cash and 7,654,753
shares of Common Stock. With respect to immaterial acquisitions accounted for
under the pooling of interests method of accounting, the Company issued
7,950,561 shares of Common Stock. These acquisitions were not material in the
aggregate and, consequently, prior period financial statements were not
restated.
In August 1995, the Company merged with Kertz, which provides electronic
security monitoring and maintenance predominantly in the South Florida area. In
October 1995, the Company merged with United and Southland. United provides
solid waste collection, transfer and recycling services in the Atlanta, Georgia
metropolitan area, and Southland provides solid waste collection services in the
Northeast Florida area. In November 1995, the Company merged with Duncan, GDS,
Fennell and Scott. Duncan provides solid waste collection and recycling services
in the Dallas-Fort Worth metropolitan area and throughout west Texas and also
operates two landfills. GDS provides solid waste collection and recycling
services throughout western North Carolina. Fennell is a full-service solid
waste management company, providing services in and around Charleston and
Greenville, South Carolina and also owns a landfill. Scott is an electronic
security alarm company, providing installation, monitoring and maintenance
services in Jacksonville, Orlando and Tallahassee, Florida, and other
metropolitan areas in the southeastern United States, including Charlotte, North
Carolina; Savannah, Georgia and Nashville, Tennessee. The Company issued an
aggregate of 36,255,968 shares of the Company's Common Stock for the above
acquisitions. These acquisitions were accounted for under the pooling of
interests method of accounting and, accordingly, the accompanying Supplemental
Consolidated Financial Statements have previously been restated as if the
Company and Kertz, United, Southland, Duncan, GDS, Fennell and Scott had
operated as one entity since inception.
In August 1995, the Company acquired all of the outstanding shares of
capital stock of Hudson Management Corporation and Envirocycle, Inc.
(collectively, "HMC"). The purchase price paid by the Company was approximately
$72,800,000 and consisted of 16,000,000 shares of Common Stock. HMC, as the
third largest solid waste management company in Florida, provides solid waste
collection and recycling services to commercial, industrial and residential
customers. This acquisition, as well as several other minor business
combinations from January 1, 1993 to December 31, 1995, have been accounted for
under the purchase method of accounting.
11
<PAGE> 13
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes the preliminary purchase price allocation for
business combinations (including historical accounts of immaterial acquisitions
accounted for under the pooling of interests method of accounting) consummated
during the following periods:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------ ---------------------------
1996 1995 1995 1994 1993
-------- ------- -------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Property and equipment.................. $ 34,665 $ 4,931 $ 17,696 $1,619 $ 7,744
Investment in subscriber accounts....... 16,343 -- -- -- --
Intangible assets....................... 77,417 4,737 88,818 3,307 338
Working capital (deficiency), net of
cash acquired......................... (9,007) (3,216) (4,693) 309 37
Long-term debt assumed.................. (22,135) (2,880) (11,519) (459) (1,322)
Other liabilities, net.................. (9,322) -- (15) -- (1,133)
Common stock issued..................... (81,019) (259) (82,983) -- --
-------- ------- -------- ------ -------
Cash used in acquisitions..... $ 6,942 $ 3,313 $ 7,304 $4,776 $ 5,664
======== ======= ======== ====== =======
</TABLE>
The Company's unaudited pro forma supplemental consolidated results of
operations, assuming the acquisition of HMC had occurred at the beginning of
each of the periods presented are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
SIX MONTHS ENDED -------------------
JUNE 30, 1995 1995 1994
---------------- -------- --------
<S> <C> <C> <C>
Revenue........................................... $161,242 $328,439 $266,176
======== ======== ========
Net income from continuing operations............. $ 8,600 $ 20,773 $ 19,059
======== ======== ========
Fully diluted earnings per common and common
equivalent share from continuing operations..... $ .07 $ .14 $ .17
======== ======== ========
</TABLE>
The unaudited pro forma 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 January 1, 1994.
In September 1996, Republic announced that the Agreement and Plan of
Amalgamation, dated as of July 1, 1996 and amended as of July 15, 1996 (the "ADT
Agreement"), by and among Republic, R.I./Triangle, Ltd. and ADT Limited, a
Bermuda corporation ("ADT"), which provided for the acquisition of ADT by
Republic, had been terminated by mutual agreement of the parties. In connection
with the execution of the ADT Agreement, ADT granted to Republic a warrant to
purchase 15,000,000 common shares of ADT at a purchase price $20 per share,
subject to certain antidilution adjustments. The warrant became exercisable
upon the termination of the ADT Agreement and remains exercisable until March
1997. Pursuant to the terms of the warrant, ADT has granted to Republic certain
registration rights with respect to the common shares of ADT issuable to
Republic upon exercise of the warrant.
12
<PAGE> 14
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt and notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------
1996 1995 1994
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revolving credit facility, secured by the stock of
the Company's subsidiaries, interest at prime or
at a Eurodollar rate plus 1.5%, principal repaid
in 1995........................................... $ -- $ -- $ 12,600
Vehicle floorplan credit facility, secured by the
Company's vehicle inventory, interest at LIBOR
plus 2.75%, due on demand......................... 10,745 9,909 --
Notes to banks and financial institutions, secured
by equipment and other assets, interest ranging
from 7.2% to 13.0%, principal due in 1996-2001.... 4,916 4,590 31,937
Other notes, secured by equipment and other assets,
interest ranging from 8.3% to 9.0%................ 1,407 1,288 7,376
-------- -------- --------
17,068 15,787 51,913
Less current maturities............................. (13,801) (11,996) (11,210)
-------- -------- --------
$ 3,267 $ 3,791 $ 40,703
======== ======== ========
</TABLE>
In December 1995, the Company entered into a credit agreement (the "Credit
Agreement") with certain banks pursuant to which such banks have agreed to
advance the Company on an unsecured basis an aggregate of $250,000,000 for a
term of 36 months. Outstanding advances, if any, are payable at the expiration
of the 36-month term. At December 31, 1995, the Company had standby letters of
credit of $5,386,000 which reduce availability under this facility. The Credit
Agreement requires, among other items, that the Company maintain certain
financial ratios and comply with certain financial covenants. Interest is
payable monthly and generally determined using either a competitive bid feature
or a LIBOR based rate. As of December 31, 1995, the Company was in compliance
with all covenants under the Credit Agreement.
In August 1996, the Company refinanced its existing $21,000,000 vehicle
floorplan credit facility with a new $25,000,000 vehicle floorplan credit
facility. Advances under this facility bear interest at LIBOR plus 2.75% and are
secured by the Company's used vehicle inventory.
At December 31, 1995, aggregate maturities of long-term debt were as
follows:
<TABLE>
<S> <C>
1996....................................................................... $11,996
1997....................................................................... 1,193
1998....................................................................... 1,001
1999....................................................................... 726
2000....................................................................... 735
Thereafter................................................................. 136
-------
$15,787
=======
</TABLE>
The Company made interest payments of approximately $5,894,000, $4,373,000
and $2,688,000 in 1995, 1994 and 1993, respectively.
4. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Accordingly, deferred income taxes have been
provided to show the effect of temporary differences between the recognition of
revenue and expenses for financial and income tax reporting purposes and between
the tax basis of assets and liabilities and their reported amounts in the
financial statements.
13
<PAGE> 15
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company files a consolidated federal income tax return which includes
the operations of businesses acquired for periods subsequent to the dates of the
acquisitions. Certain businesses acquired which were accounted for under the
pooling of interests method of accounting were subchapter S corporations for
income tax purposes prior to their acquisition by the Company. For purposes of
these Supplemental Consolidated Financial Statements, federal and state income
taxes have been provided as if these companies had filed subchapter C
corporation tax returns for the pre-acquisition periods, and the current income
tax expense is reflected as an increase to additional paid-in capital. The
subchapter S corporation status of these companies was terminated effective with
the closing date of the acquisitions.
The components of the income tax provision related to continuing operations
for the years ended December 31 are shown below:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Current:
Federal................................................ $ 9,778 $ 5,270 $ 2,815
State.................................................. 1,038 751 405
------- ------- -------
10,816 6,021 3,220
Federal deferred......................................... 3,010 2,482 (1,969)
Tax reserve adjustments.................................. 763 (1,963) --
Change in valuation allowance............................ 945 (1,242) 1,242
------- ------- -------
Income tax provision..................................... $15,534 $ 5,298 $ 2,493
======= ======= =======
</TABLE>
Net operating loss carryforwards are recognized under SFAS No. 109 unless
it is more likely than not that they will not be realized. In 1995, the Company
recorded a $945,000 valuation allowance due to the uncertainty surrounding
future realization of a portion of the deferred tax assets generated as a result
of acquired net operating loss carryforwards. In 1993, the Company recorded a
$1,242,000 valuation allowance related to the realization of deferred tax assets
generated as a result of the 1993 restructuring and unusual charges. This
valuation allowance was recorded due to the uncertainty surrounding the future
utilization of such deferred tax assets. In 1994, the valuation allowance was
eliminated based on the expected realization of such deferred tax assets.
In the years immediately following an acquisition, the Company provides
income taxes at the statutory income tax rate applied to pre-tax income. As part
of its tax planning to reduce effective tax rates and cash outlays for taxes,
the Company employs a number of strategies such as combining entities to reduce
state income taxes, claiming tax credits not previously claimed and recapturing
taxes previously paid by acquired companies. At such time as these reductions in
the Company's deferred tax liabilities are determined to be realizable, the
impact of the reduction is recorded as tax reserve adjustments in the tax
provision.
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate for the years ended December 31 is shown below:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- ------
<S> <C> <C> <C>
Statutory federal income tax rate............................. 35.0% 34.0% 34.0%
Amortization of goodwill...................................... 1.3 .4 3.6
State income taxes, net of federal benefit.................... 2.3 3.0 14.4
Tax reserve adjustments....................................... 2.2 (8.9) --
Change in valuation allowance................................. 2.7 (5.1) 47.3
Other, net.................................................... .3 .5 16.0
---- ---- -----
Effective tax rate.................................. 43.8% 23.9% 115.3%
==== ==== =====
</TABLE>
14
<PAGE> 16
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Components of the net deferred income tax liability at December 31 are
shown below:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Deferred income tax liabilities:
Book basis in property over tax basis.......................... $ 25,507 $ 23,773
Deferred costs................................................. 8,067 8,954
-------- --------
33,574 32,727
-------- --------
Deferred income tax assets:
Net operating losses........................................... (5,414) (5,186)
Deferred revenue............................................... (10,353) (11,240)
Accrued environmental and landfill costs....................... (2,842) (2,761)
Accruals not currently deductible.............................. (1,496) (1,943)
-------- --------
(20,105) (21,130)
-------- --------
Valuation allowance.............................................. 945 --
-------- --------
Net deferred income tax liability................................ $ 14,414 $ 11,597
======== ========
</TABLE>
At December 31, 1995, the Company had available federal net operating loss
carryforwards of approximately $15,500,000 which begin to expire in the year
2006.
The Company made income tax payments of approximately $4,839,000,
$2,278,000 and $1,260,000 in 1995, 1994 and 1993, respectively.
5. SHAREHOLDERS' EQUITY
In May 1996, the Company sold 9,878,400 shares of Common Stock in a private
placement transaction resulting in net proceeds of approximately $197,583,000.
In May 1996, the Board of Directors declared a two-for-one split of the
Company's Common Stock in the form of a 100% stock dividend, payable June 8,
1996, to holders of record on May 28, 1996. As a result, $790,000 (par value of
shares outstanding at December 31, 1995) has been transferred from additional
paid-in capital to common stock.
In May 1996, the Company's Certificate of Incorporation was amended to
increase the number of authorized shares of Common Stock from 350,000,000 shares
to 500,000,000 shares.
In August 1995, the Company sold an aggregate of 16,700,000 shares of
Common Stock and warrants to purchase an additional 33,400,000 shares of Common
Stock to H. Wayne Huizenga, Westbury (Bermuda) Ltd. (a Bermuda corporation
controlled by Michael G. DeGroote, former Chairman of the Board, President and
Chief Executive Officer of Republic), Harris W. Hudson, and certain of their
assigns for an aggregate purchase price of $37,500,000. Mr. Huizenga is the
Chairman of the Board and Chief Executive Officer of the Company; Mr. DeGroote
is the Vice Chairman of the Board of the Company and Mr. Hudson is President and
a Director of the Company. The warrants are exercisable at prices ranging from
$2.25 to $3.50 per share. In August 1995, the Company issued and sold an
additional 2,000,000 shares of Common Stock each to Mr. Huizenga and John J.
Melk (a Director of the Company) for $6.63 per share for aggregate proceeds of
approximately $26,500,000.
In July 1995, the Company sold 10,800,000 shares of Common Stock in a
private placement transaction for $6.63 per share, resulting in net proceeds of
approximately $69,000,000 after deducting expenses, fees and commissions. In
September 1995, the Company sold 10,000,000 shares of Common Stock in an
additional private placement transaction for $10.13 per share resulting in net
proceeds of approximately $99,000,000.
15
<PAGE> 17
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the transactions discussed above, the Company received
approximately $430,000,000 in cash proceeds. The Company used a portion of these
proceeds to repay all outstanding borrowings under its revolving line of credit
facility and a substantial portion of the debt related to acquired businesses.
The Company has 5,000,000 authorized shares of preferred stock par value,
$.01 per share, none of which are issued or outstanding. The Board of Directors
has the authority to issue the preferred stock in one or more series and to
establish the rights, preferences and dividends.
6. STOCK OPTIONS AND WARRANTS
The Company has various stock option plans under which shares of Common
Stock may be granted to key employees and directors of the Company. Options
granted under the plans are non-qualified and are granted at a price equal to
the fair market value of the Common Stock at the date of grant.
A summary of stock option and warrant transactions for the following
periods is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
SIX MONTHS ENDED ---------------------------------------------------
JUNE 30, 1996 1995 1994 1993
---------------- --------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Options and warrants
outstanding at
beginning of
period.............. 48,534 6,786 6,394 14,854
Granted............... 3,876 44,874 752 2,034
Exercised............. (1,857) (2,804) -- --
Canceled.............. (19) (322) (360) (664)
Expired............... -- -- -- (9,830)
--------------- --------------- --------------- ---------------
Options and warrants
outstanding at end
of period........... 50,534 48,534 6,786 6,394
=============== =============== =============== ===============
Average price of
options and warrants
exercised........... $3.11 $4.02 $-- $--
Average price of
options and warrants
outstanding at end
of period........... $5.67 $4.77 $3.80 $3.99
Prices of options and
warrants outstanding
at end of period.... $1.05 to $30.75 $1.05 to $15.50 $ 1.05 to $7.25 $ 1.05 to $7.25
Vested options and
warrants at end of
period.............. 38,990 39,038 3,656 2,800
Options available for
future grants at end
of period........... 12,486 4,344 5,698 5,690
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
Legal Proceedings. On May 3, 1991, the Company filed an action against
G.I. Industries, Inc. ("GI"), Manuel Asadurian, Sr. and Mike Smith in the United
States District Court for the Central District of California (the "Court"). The
Company requested a declaratory judgment that it did not anticipatorily breach a
merger agreement (the "Merger Agreement") between the Company and GI and that
the Merger Agreement had been properly terminated. The Company also sought to
recover $600,000 from GI, plus interest and costs, with respect to a certain
financial guaranty provided by the Company in 1990 for the benefit
16
<PAGE> 18
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of GI. In response to the Company's action, GI filed a counterclaim alleging
that the Company breached the Merger Agreement and that it had suffered damages
in excess of $16,000,000. In August 1993, the Court rendered a ruling favorable
to the Company which GI appealed. In March 1995, the United States Court of
Appeals for the Ninth Circuit vacated the August 1993 decision and remanded the
case for further proceedings. The Court has commenced proceedings that may lead
to a trial on damages.
Subsequent to the commencement of the Company's litigation in this matter,
GI filed for protection under Chapter 11 of the Bankruptcy Code. The Company is
a secured creditor and anticipates a complete recovery of the $600,000 it is
owed from GI, plus interest and costs.
Western Waste Industries, Inc. ("Western") filed an action against the
Company and others on July 20, 1990 alleging various causes of action including
interference with business relations and seeks $24,000,000 in damages. The
lawsuit stems from Western's attempts to acquire Best Pak Disposal, Inc. This
case was scheduled for trial in May 1996, but by stipulation of the parties the
trial date has been postponed pending the outcome of settlement discussions.
The Company's solid waste and environmental services activities are
conducted in the context of a developing and changing statutory and regulatory
framework, aggressive government enforcement and a highly visible political
environment. 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.
In 1992, the Company received notices from Imperial County, California (the
"County") and the California Department of Toxic Substances Control ("DTSC")
that spent filter elements (the "Filters") from geothermal power plants, which
had been deposited at the Company's Imperial Landfill for approximately five
years, were classified as hazardous waste under California environmental
regulations. Under United States EPA regulations, the Filters are not deemed
hazardous waste as they are associated with the production of geothermal energy.
The Company is currently conducting active discussions with all appropriate
California regulatory agencies in order to obtain a variance under California
regulations to reclassify the Filters as a special waste so they may be left in
the landfill. If this occurs, the State, regional and local regulatory agencies
may nevertheless require that the affected area of the landfill be capped and
closed. In the event that the variance is not granted, remedial measures may be
required based on the Filters' classification as a California hazardous waste.
One of those measures could include the removal of the Filters or the closure of
a portion of the landfill.
Management is currently unable to determine (i) whether the waste will
ultimately be classified as hazardous, (ii) if so, what action, if any, will be
required as a result of this issue or (iii) what liability, if any, the Company
will have as a result of this inquiry. In January 1994, the Company filed suit
against the known past and present owners and operators of the geothermal power
plants for all losses, fines and expenses the Company incurs associated with the
resolution of this matter, including loss of airspace at the landfill, in the
United States District Court for the Southern District of California, alleging
claims for CERCLA response costs recovery and intentional misrepresentation
among other claims. The Company seeks to recover actual expenses and punitive
damages. Discovery in this matter has been stayed until November 1996, at which
time the Company expects to be able to quantify more accurately the level of
damages it has suffered. The Company believes it will prevail, but no amounts
have been accrued for any recovery of damages.
While the results of the legal and environmental proceedings described
above and other proceedings which arose in the normal course of business cannot
be predicted with certainty, management believes that losses, if any, resulting
from the ultimate resolution of these matters will not have a material adverse
effect on the Company's supplemental consolidated results of operations or
supplemental consolidated financial
17
<PAGE> 19
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
position. However, unfavorable resolution of each matter individually or in the
aggregate could affect the consolidated results of operations for the quarterly
periods in which they are resolved.
Lease Commitments. The Company and its subsidiaries lease portions of
their premises and certain equipment under various operating lease agreements.
At December 31, 1995, total minimum rental commitments becoming payable under
all operating leases are as follows:
<TABLE>
<S> <C>
1996........................................................................ $1,940
1997........................................................................ $1,285
1998........................................................................ $ 733
1999........................................................................ $ 401
2000........................................................................ $ 119
Thereafter.................................................................. $ 94
</TABLE>
Total rental expense incurred under operating leases was $4,344,000,
$3,672,000 and $2,688,000 in 1995, 1994 and 1993, respectively.
8. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Earnings per common and common equivalent share are based on the combined
weighted average number of common shares and common share equivalents
outstanding which include, where appropriate, the assumed exercise or conversion
of warrants and options. In computing earnings per common and common equivalent
share, the Company utilizes the modified treasury stock method.
The computations of weighted average common and common equivalent shares
used in the calculation of primary and fully diluted earnings per share for the
following periods are presented below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
----------------- -------------------------
1996 1995 1995 1994 1993
------- ------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Primary:
Common shares outstanding................ 189,177 100,331 161,821 96,458 96,782
Common equivalent shares................. 52,226 -- 53,104 164 320
Weighted average treasury shares
purchased............................. (15,981) -- (14,202) 298 --
Effect of using weighted average common
and common equivalent shares
outstanding........................... (15,183) -- (66,300) -- --
------- ------- ------- ------ ------
210,239 100,331 134,423 96,920 97,102
======= ======= ======= ====== ======
Fully diluted:
Common shares outstanding................ 189,177 100,331 161,821 96,458 96,782
Common equivalent shares................. 52,320 7,466 53,104 164 320
Weighted average treasury shares
purchased............................. (12,054) (3,452) (7,646) 298 --
Effect of using weighted average common
and common equivalent shares
outstanding........................... (15,253) (522) (66,000) -- --
------- ------- ------- ------ ------
214,190 103,823 141,279 96,920 97,102
======= ======= ======= ====== ======
</TABLE>
9. DISCONTINUED OPERATIONS
In 1994, the Company announced the contemplation of a plan to spin-off
RESI, its hazardous waste services segment. This segment of the Company's
business has been accounted for as a discontinued operation and, accordingly,
the Company restated its Supplemental Consolidated Financial Statements
presented prior to that date to report separately the operating results of these
discontinued operations. In April 1995, Republic
18
<PAGE> 20
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shareholders received one share of common stock of RESI for every ten shares of
Common Stock of Republic owned on April 21, 1995 in connection with the spin-off
of RESI. Approximately 5,400,000 RESI shares were distributed to Republic
shareholders (the "Distribution"). Revenue of the discontinued operations of
RESI was $12,148,000, $46,599,000 and $61,617,000 in 1995, 1994 and 1993,
respectively. The net income (loss) of the discontinued operations of RESI was
($293,000), $2,684,000 and ($14,579,000) in 1995, 1994 and 1993, respectively.
In connection with the Distribution, the Company entered into a
distribution agreement with RESI which sets forth the terms of the Distribution.
Under this agreement, Republic contributed the intercompany balance to RESI's
equity at the date of the Distribution. In April 1995, Republic contributed
approximately $2,500,000 to RESI to repay RESI's indebtedness and to provide
working capital to RESI. Additionally, the Company reclassified approximately
$36,300,000 to retained earnings from additional paid-in capital to effect the
spin-off under Delaware law. As a result of these transactions, the Company's
equity at the date of the Distribution was reduced by approximately $23,600,000.
10. RESTRUCTURING AND UNUSUAL CHARGES
During the three months ended December 31, 1993, the Company recorded
restructuring and unusual charges of $10,040,000 based on the Company's
reevaluation of each of its solid waste operations. As a result of this
reevaluation, the Company decided to close one of its facilities due to low
waste volumes and abandon its permitting effort at another facility because of
limited market opportunity in that area and delays in the permitting process. In
accordance with industry standards, the Company provides for closure and
post-closure over the life of a facility. Accordingly, the Company fully
provided for these costs on the closed facility. The provision for closure and
post-closure and the write-off of property and equipment and accumulated
permitting costs associated with these facilities totaled $6,600,000. In
conjunction with the reevaluation, the Company also decided to terminate certain
contracts and employees. Costs related to employee relocations and terminations
and other contract terminations totaled $1,200,000. In addition, the Company
also reevaluated its exposure related to litigation and environmental matters
and provided additional accruals aggregating $2,200,000 for the costs to defend
or settle certain litigation and environmental matters.
11. OPERATIONS BY INDUSTRY SEGMENT
The Company is a holding company with major business segments in solid
waste collection, disposal and recycling services, electronic security services
for commercial and residential use and vehicle retailing and related businesses.
19
<PAGE> 21
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables present financial information regarding the Company's
different industry segments for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Solid waste services................................. $245,339 $176,260 $146,107
Electronic security services......................... 49,826 41,913 36,388
Vehicle retailing.................................... 73 -- --
-------- -------- --------
$295,238 $218,173 $182,495
======== ======== ========
Operating income (loss):
Solid waste services................................. $ 31,687 $ 23,201 $ 4,224
Electronic security services......................... 8,255 2,352 114
Vehicle retailing.................................... (4,063) -- --
-------- -------- --------
$ 35,879 $ 25,553 $ 4,338
======== ======== ========
Depreciation, depletion and amortization:
Solid waste services................................. $ 17,727 $ 15,414 $ 13,238
Electronic security services......................... 4,946 4,111 2,353
Vehicle retailing.................................... -- -- --
-------- -------- --------
$ 22,673 $ 19,525 $ 15,591
======== ======== ========
Capital expenditures and investment in subscriber
accounts:
Solid waste services................................. $ 51,436 $ 22,620 $ 12,243
Electronic security services......................... 17,459 18,275 10,643
Vehicle retailing.................................... 10,015 -- --
-------- -------- --------
$ 78,910 $ 40,895 $ 22,886
======== ======== ========
Assets:
Solid waste services................................. $514,220 $202,468 $179,837
Electronic security services......................... 43,834 34,447 20,678
Vehicle retailing.................................... 24,412 -- --
Net assets of discontinued operations................ -- 20,292 16,872
-------- -------- --------
$582,466 $257,207 $217,387
======== ======== ========
</TABLE>
20
<PAGE> 22
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is an analysis of certain items in the Supplemental
Consolidated Statements of Operations by quarter for 1995 and 1994.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue............................................. 1995 $63,094 $69,531 $78,054 $84,559
1994 $50,131 $54,088 $56,070 $57,884
Gross profit........................................ 1995 $21,722 $24,065 $23,092 $32,161
1994 $17,066 $17,593 $19,723 $20,416
Income from continuing operations................... 1995 $ 3,351 $ 3,729 $ 3,886 $ 8,955
1994 $ 2,878 $ 4,261 $ 5,097 $ 4,613
Net income.......................................... 1995 $ 3,859 $ 3,729 $ 3,886 $ 8,154
1994 $ 2,732 $ 5,088 $ 6,085 $ 5,628
Earnings per share from continuing operations....... 1995 $ .03 $ .04 $ .03 $ .05
1994 $ .03 $ .04 $ .05 $ .05
</TABLE>
21
<PAGE> 23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of AutoNation Incorporated:
We have audited the accompanying consolidated balance sheet of AutoNation
Incorporated and subsidiaries (a Florida corporation in the development stage)
as of December 31, 1995, and the related consolidated statements of operations,
shareholders' equity and cash flows for the period from inception (September 12,
1995) to December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AutoNation Incorporated and
subsidiaries as of December 31, 1995, and the results of their operations and
their cash flows for the period from inception (September 12, 1995) to December
31, 1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida,
January 26, 1996 (except with respect to the matters
discussed in Note 10, as to which the date is August 19, 1996).
22
<PAGE> 24
AUTONATION INCORPORATED AND SUBSIDIARIES
(A DEVELOPMENT STAGE CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and contracts in-transit.................................. $ 5,679,300 $ 11,486,865
Vehicle inventories............................................ 8,792,278 --
Accounts receivable............................................ 1,388,818 --
Other current assets........................................... 153,588 --
------------ -----------
TOTAL CURRENT ASSETS................................... 16,013,984 11,486,865
SITE COSTS....................................................... 80,983,100 1,395,407
PROPERTY AND EQUIPMENT, net...................................... 1,835,628 444,480
------------ -----------
TOTAL ASSETS........................................... $ 98,832,712 $ 13,326,752
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Loan payable to related party.................................. $ 40,600,000 $ --
Accounts payable............................................... 2,313,324 741,230
Accrued liabilities............................................ 7,369,264 44,754
Vehicle financing with related party........................... 8,611,018 --
------------ -----------
TOTAL CURRENT LIABILITIES.............................. 58,893,606 785,984
COMMITMENTS AND CONTINGENCIES (Note 9 and 10)
SHAREHOLDERS' EQUITY:
Common stock, par value $.001 per share; 200,000,000 shares
authorized; 80,200,000 (unaudited) and 79,300,000 shares
issued and outstanding as of June 30, 1996 and December 31, 1995,
respectively................................................ 80,200 79,300
Additional paid-in capital..................................... 52,049,800 15,525,200
Deficit accumulated during the development stage............... (12,190,894) (3,063,732)
------------ -----------
39,939,106 12,540,768
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $ 98,832,712 $ 13,326,752
============ ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
23
<PAGE> 25
AUTONATION INCORPORATED AND SUBSIDIARIES
(A DEVELOPMENT STAGE CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION PERIOD FROM
(SEPTEMBER 12, INCEPTION
SIX MONTHS THREE MONTHS 1995) TO (SEPTEMBER 12,
ENDED ENDED DECEMBER 31, 1995) TO
JUNE 30, 1996 JUNE 30, 1996 1995 JUNE 30, 1996
------------- ------------- -------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE................................... $ 3,375,253 $ 2,863,374 $ -- $ 3,375,253
----------- ----------- ----------- ------------
COSTS AND EXPENSES:
Cost of operations...................... 5,140,051 4,689,941 -- 5,140,051
General and administrative.............. 4,152,202 1,454,248 886,978 5,039,180
Information systems development......... 1,541,862 -- 816,649 2,358,511
Marketing, market research and store
design............................... 1,508,005 1,123,101 1,360,105 2,868,110
Interest expense........................ 160,295 160,295 -- 160,295
----------- ----------- ----------- ------------
Total costs and expenses........ 12,502,415 7,427,585 3,063,732 15,566,147
----------- ----------- ----------- ------------
NET LOSS.................................. $ (9,127,162) $ (4,564,211) $ (3,063,732) $ (12,190,894)
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
24
<PAGE> 26
AUTONATION INCORPORATED AND SUBSIDIARIES
(A DEVELOPMENT STAGE CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) AND
FOR THE PERIOD FROM INCEPTION (SEPTEMBER 12, 1995) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE
-------------------- PAID-IN DEVELOPMENT
NUMBER AMOUNT CAPITAL STAGE TOTAL
---------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
INITIAL CAPITALIZATION, September
22, 1995......................... 79,300,000 $79,300 $ 2,920,700 $ -- $ 3,000,000
CAPITAL CONTRIBUTIONS, December 1,
1995............................. -- -- 12,604,500 -- 12,604,500
NET LOSS........................... -- -- -- (3,063,732) (3,063,732)
---------- ------- ----------- ------------ -----------
BALANCE, December 31, 1995......... 79,300,000 79,300 15,525,200 (3,063,732) 12,540,768
ADDITIONAL CAPITALIZATION AND
CAPITAL CONTRIBUTIONS, January 3,
1996 (unaudited)................. 900,000 900 16,474,600 -- 16,475,500
CAPITAL CONTRIBUTIONS, March 1,
1996 (unaudited)................. -- -- 20,050,000 -- 20,050,000
NET LOSS (unaudited)............... -- -- -- (9,127,162) (9,127,162)
---------- ------- ----------- ------------ -----------
BALANCE, June 30, 1996
(unaudited)...................... 80,200,000 $80,200 $52,049,800 $(12,190,894) $39,939,106
========== ======= =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
25
<PAGE> 27
AUTONATION INCORPORATED AND SUBSIDIARIES
(A DEVELOPMENT STAGE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD PERIOD
FROM INCEPTION FROM INCEPTION
SIX (SEPTEMBER 12, (SEPTEMBER 12,
MONTHS ENDED 1995) TO 1995) TO
JUNE 30, 1996 DECEMBER 31, 1995 JUNE 30, 1996
------------- ------------------ -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................... $ (9,127,162) $ (3,063,732) $ (12,190,894)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............ 122,711 -- 122,711
Increase in vehicle inventories.......... (8,792,278) -- (8,792,278)
Increase in accounts receivable.......... (1,388,818) -- (1,388,818)
Increase in other current assets......... (153,588) -- (153,588)
Increase in accounts payable............. 1,572,094 741,230 2,313,324
Increase in accrued liabilities.......... 7,324,510 44,754 7,369,264
----------- ----------- -----------
Net cash used in operating
activities........................ (10,442,531) (2,277,748) (12,720,279)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of land sites and associated
development costs........................ (79,587,693) (1,395,407) (80,983,100)
Purchases of property and equipment......... (1,513,859) (444,480) (1,958,339)
----------- ----------- -----------
Net cash used in investing
activities........................ (81,101,552) (1,839,887) (82,941,439)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loan payable to related
party.................................... 40,600,000 -- 40,600,000
Capital contributions....................... 36,525,500 15,604,500 52,130,000
Increase in vehicle financing with related
party.................................... 8,611,018 -- 8,611,018
----------- ----------- -----------
Net cash provided by financing
activities........................ 85,736,518 15,604,500 101,341,018
----------- ----------- -----------
Net (decrease) increase in cash and
contracts in-transit.............. (5,807,565) 11,486,865 5,679,300
----------- ----------- -----------
CASH AND CONTRACTS IN-TRANSIT, beginning of
period...................................... 11,486,865 -- --
----------- ----------- -----------
CASH AND CONTRACTS IN-TRANSIT, end of
period...................................... $ 5,679,300 $ 11,486,865 $ 5,679,300
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
26
<PAGE> 28
AUTONATION INCORPORATED AND SUBSIDIARIES
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE PERIODS ENDED JUNE 30, 1996 IS UNAUDITED)
1. ORGANIZATION AND DEVELOPMENT STAGE ACTIVITIES
AutoNation Incorporated and subsidiaries (collectively the "Company") is a
Florida corporation in the development stage. AutoNation Incorporated was
incorporated on September 12, 1995 ("Inception") and was formed pursuant to a
Shareholders' Agreement among the Company, H. Wayne Huizenga ("Huizenga"), JM
Family Enterprises, Inc. ("Enterprises") and Steven R. Berrard ("Berrard"),
collectively, the "Shareholders", and certain subscribers discussed further in
Note 5. The Company plans to develop, establish and operate a nationwide chain
of retail stores to purchase, recondition, sell, finance and service new and
used vehicles.
Since Inception, the Company has been principally engaged in organizational
and business activities associated with the opening of several retail stores in
the future, the first of which is planned to open by the fourth quarter of 1996.
In connection with these activities, the Company has purchased or has options to
purchase certain land sites which will serve as locations for future retail
stores and reconditioning centers. Such costs, including associated development
and construction costs, are reflected as Site Costs in the accompanying
consolidated balance sheets.
The Deficit Accumulated During the Development Stage of $12,190,894 and
$3,063,732 represents the net loss from Inception to June 30, 1996 and from
Inception to December 31, 1995, respectively. The net loss consists primarily of
expenses incurred during the development stage for general and administrative
expenses, information systems development, market research and store design.
While the Company has generated insignificant revenue during 1996, planned
principal operations have not yet commenced.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
AutoNation Incorporated and its wholly owned subsidiaries, AutoNation USA
Corporation, Courtesy Wholesale Corporation and Car Stop Corporation. All
significant intercompany balances have been eliminated in consolidation.
VEHICLE INVENTORIES
Vehicle inventories are stated at the lower of cost or market, on a
specific unit basis.
SITE COSTS
Site costs consist primarily of the cost to purchase land sites and costs
associated with the development of the site, including construction in progress,
related architectural and design costs, systems development and implementation
costs, permits, taxes, fees and other costs.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
27
<PAGE> 29
AUTONATION INCORPORATED AND SUBSIDIARIES
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments primarily consist of cash, contracts
in-transit, accounts receivable, accounts payable, accrued liabilities and
vehicle financing with related party, each of which approximates fair market
value due to their short-term nature.
INTERIM FINANCIAL STATEMENTS
The accompanying consolidated balance sheet as of June 30, 1996 and the
related statements of operations, cash flows and shareholders' equity for the
three months and six months ended June 30, 1996 and for the period from
Inception to June 30, 1996 are unaudited and, in the opinion of management,
include all material adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of results for the interim period. The results
of operations for the three months and six months ended June 30, 1996 are not
necessarily indicative of results to be expected for the entire year.
NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-based
Compensation", which requires adoption in 1996. SFAS No. 123 requires that the
Company's financial statements include certain disclosures about stock-based
employee compensation arrangements and permits the adoption of a change in
accounting for such arrangements. Changes in accounting for stock-based
compensation are optional and the Company plans to adopt only the disclosure
requirements in 1996.
PRESENTATION OF FISCAL PERIODS
The Company's fiscal year ends on the Sunday nearest December 31. Fiscal
year 1995 ended on December 31 and fiscal year 1996 will end on December 29.
STATEMENTS OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers
contracts in-transit to be cash equivalents. Additionally, the net change in
vehicle financing is reflected as a financing activity.
3. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
---------- ------------
<S> <C> <C>
Site costs................................................. $6,074,720 $ --
Property and equipment..................................... 171,514 --
Costs of operations........................................ 357,354 --
General and administrative................................. 409,063 44,754
Marketing and store design................................. 150,000 --
Interest................................................... 206,613 --
---------- -------
$7,369,264 $ 44,754
========== =======
</TABLE>
4. CAPITALIZATION
Pursuant to the Shareholders' Agreement and related subscription agreements
discussed in Note 5, the Board of Directors (the "Board") of the Company
determines the amount of capital required by the Company
28
<PAGE> 30
AUTONATION INCORPORATED AND SUBSIDIARIES
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to commence operations. The Shareholders and the Subscribers (the "Investors")
are obligated to make capital contributions not to exceed $80,200,000 in the
aggregate, consistent with the business plan budgets adopted by the
Shareholders.
The Board is required to provide the Investors with written notice,
specifying the time or times when such amounts shall be deposited into the
account of the Company. The Board will also determine, by unanimous vote, what
portion of such capital contributions shall be classified as equity and what
portion shall be classified as debt, and the terms of such debt.
For capital contributions classified as debt, the Company shall issue and
deliver a promissory note in the original principal amount equal to the amount
of such contribution classified as debt. Such promissory note shall accrue
interest at a rate established by the Board, based on then prevailing market
rates.
In the event any Investor fails to make any additional capital
contributions described above, (the "Defaulting Investor"), the Shareholders
(other than a Shareholder which is a Defaulting Investor) shall have the right,
but not the obligation, to contribute, in proportion to their respective common
shares or as they may otherwise mutually agree, the additional funds required to
be contributed by the Defaulting Investor.
If such default occurs when the total capital of the Company contributed by
the Investors is less than $80,200,000 (and with respect to all required
additional capital up to $80,200,000), all funds then contributed to the Company
by the contributing Investors shall be treated as equity and/or debt, as
determined by the Board.
If such default occurs when the total capital of the Company contributed by
the Investors is between $80,200,000 and $100,000,000 (and with respect to all
required additional capital above $80,200,000 and less than $100,000,000),
notwithstanding the Board's classification of such capital contributions as
equity or debt, all funds then contributed to the Company by the contributing
Investors shall be treated as loans to the Company, which loans shall bear
interest at a rate per annum equal to the Investors' cost of funds (as such rate
may change from time to time) plus one percent (1%), and which loans shall be
repayable from the cash flow of the Company prior to the making of additional
distribution or dividends to the Investors.
If such default occurs when the total capital of the Company contributed by
the Investors is in excess of $100,000,000 (and with respect to all required
capital above $100,000,000), notwithstanding the Board's classification of such
capital contributions as equity or debt, the contributing Investors shall have
the option of treating all funds then contributed to the Company by them as
additional contributions to equity capital or as loans to the Company.
The Company has legally issued 80,200,000 and 79,300,000 shares of common
stock which are outstanding at June 30, 1996 and December 31, 1995,
respectively; 58,195,000 of such issued and outstanding shares have been
delivered to the Investors; 7,701,750 and 17,939,250 at June 30, 1996 and
December 31, 1995, respectively, of such issued and outstanding shares are being
held in escrow pursuant to subscription agreements and are released from escrow
to the respective Subscribers (see Note 5) as payments are made.
Since Inception to December 31, 1995, the Investors have made capital
contributions of $15,604,500 all of which were classified by the Board as
equity, $3,165,750 of those capital contributions were made pursuant to
subscription agreements, and accordingly, the Company has released the related
shares from escrow. The Investors are committed to make additional capital
contributions of at least $28,070,000 in the future. For the six months ended
June 30, 1996, the Board called for additional capital contributions of
$36,525,500, all of which was paid by June 30, 1996 and all of which were
classified by the Board as equity.
The Company is required to release from escrow shares paid for by the
Subscribers and any shares remaining are released from escrow upon the first to
occur of the following events: (i) payment in full by the Shareholders and
Subscribers of their commitments; (ii) a determination by the Board that the
Company will
29
<PAGE> 31
AUTONATION INCORPORATED AND SUBSIDIARIES
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not require from the Investors all of the capital agreed to be contributed by
such Investors pursuant to their commitments, and that all shares in escrow
should be released; (iii) the consummation by the Company of an initial public
offering ("IPO") of its common stock registered under the Securities Act of
1933; or (iv) December 1, 2001. Upon release of the last remaining shares held
in escrow, Subscribers shall be released from any further liability to the
Company to pay any remaining unpaid portion of their commitments.
Each Shareholder has the right to transfer ownership of common shares to a
corporation or other entity controlled by such Shareholder or any other person
("Transferee") provided that the Shareholder maintains direct voting control
over the common shares and the Transferee agrees in writing to hold such shares
pursuant to the Shareholders' Agreement and any amendments thereof. Each
Shareholder also has the right to transfer ownership of common shares to any of
Huizenga, Enterprises or Berrard. The right of each Shareholder to transfer
ownership of common shares is also subject to certain other restrictions on
transfers to third parties, including certain co-sale rights and rights of first
refusal available to the Shareholders, all subject to the terms and conditions
of the Shareholders' Agreement. Additionally, until the consummation of an IPO
the Shareholders may implement a mandatory buy-sell procedure whereby the
Shareholder may, upon compliance with certain provisions and conditions,
purchase the common stock of the other Shareholder(s) or sell his common shares
to the other Shareholder(s).
At any time prior to the fifth anniversary date after an IPO of the
Company's common stock registered under the Securities Act of 1933, the
Investors have certain "piggyback" registration rights under which, subject to
certain terms and conditions, the Investors may register a portion or all of
their common shares.
5. CAPITAL SUBSCRIPTION COMMITMENTS
The Shareholders of the Company have assigned to certain subscribers a
portion of their rights to acquire shares of the Company's common stock at the
same price being paid by the assigning Shareholder. In addition to these
subscribers, certain key executive officers, management and consultants
(collectively, the "Subscribers") have signed Subscription Agreements to acquire
shares of the Company's common stock.
As of June 30, 1996 and December 31, 1995, the Subscribers had subscription
commitments for 22,005,000 and 21,105,000 shares, respectively, and were
required to pay 15% of the commitment at the time the Subscription Agreement was
finalized. At June 30, 1996 and December 31, 1995, all Subscription Agreements
have been signed and the Company has received $14,303,250 and $3,165,750,
respectively.
As discussed in Note 4, in the event the Company requires additional
capital, the Board will provide written notice specifying the amount of capital
to be contributed by each Investor and whether it will be classified as debt or
equity.
6. STOCK OPTION PLAN
The Company has adopted the 1995 Employee Stock Option Plan (the "Plan")
which is a qualified, incentive stock option plan offering certain present and
future key employees and officers and independent contractors an opportunity to
become shareholders of the Company. The Board is responsible for the
administration of the Plan and may grant options to purchase shares of the
Company's common stock and issue shares upon exercise of such options as
provided in the Plan.
The Board may grant options to purchase up to 3,200,000 shares of common
stock. The maximum number of shares subject to option that can be granted to any
executive officer is 1,000,000 during the first ten years after the effective
date of the Plan and 500,000 shares per year thereafter. The Plan also provides
that the option price will not be less than the fair market value at the time
the option is granted.
30
<PAGE> 32
AUTONATION INCORPORATED AND SUBSIDIARIES
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Each option shall have a term of not less than five nor more than ten years
and shall become exercisable with respect to 25% of the total number of shares
subject to the option twelve months after the date of its grant and with respect
to each additional 25% at the end of each twelve month period thereafter during
the succeeding three years. The Board, in its discretion may (i) specifically
provide for another time or times of vesting or exercise; (ii) accelerate the
exercisability of any option subject to such terms and conditions as the Board
deems necessary and appropriate; or (iii) at any time prior to the expiration or
termination of any option previously granted, extend the term of any option
(including such options held by officers or directors) for such additional
period as the Board in its discretion shall determine. In no event, however,
shall the aggregate option period with respect to any option, including the
original term of the option and any extensions thereof, exceed ten (10) years.
In the event of a change in control as defined in the Plan following an
IPO, all outstanding options become exercisable immediately. Each officer or
director holding such options has the right to require the Company to purchase
from him any option granted under the Plan at a purchase price equal to the
excess of the fair market value per share over the option price multiplied by
the number of option shares specified for purchase.
For the period from Inception to December 31, 1995, the Company granted
options to acquire 1,105,000 shares of common stock at an exercise price of
$1.00 per share, representing the fair market value at the date of the grant, as
determined by the Board of Directors, all of which were outstanding at December
31, 1995. The Company has 2,095,000 options available for grant under the Plan
at December 31, 1995.
For the six months ended June 30, 1996, the Company granted options to
acquire 903,805 shares of common stock at exercise prices ranging from $1.00 to
$6.07 per share, representing the fair market value at the respective dates of
the grants, as determined by the Board of Directors, all of which were
outstanding at June 30, 1996. The Company has 1,191,195 options available for
grant under the Plan at June 30, 1996.
7. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". As of December 31, 1995 the Company has a net
operating loss ("NOL") carryforward for Federal income tax purposes of
approximately $820,000, which is available to offset future taxable income
through 2010. A valuation allowance has been provided for the deferred tax asset
generated by the NOL due to the present development stage of the Company and
accordingly, no income tax benefit has been recorded in the accompanying
consolidated statements of operations.
8. RELATED PARTY TRANSACTIONS
Pursuant to the Shareholders' Agreement and Merger Agreement discussed in
Note 10, Enterprises, or its affiliates, has a two year arrangement to be the
"preferred" provider and servicer to the Company of all retail finance products,
vehicle service contracts and insurance products sold by or through the Company
and the preferred provider of wholesale inventory financing to the Company.
Enterprises and its affiliates will continue to be the preferred provider of
those products and services so long as such products and services are provided
on terms which are competitive with those of third-party providers.
Through December 31, 1995, Enterprises has not provided to the Company any
of the products or services described above. During the six month period ended
June 30, 1996, the Company entered into a financing arrangement with World Omni
Financial Corp., a wholly owned subsidiary of Enterprises. The financing
arrangement provides for up to $15 million in financing at LIBOR plus 2.75% to
be used to finance vehicle inventory and is required to be repaid within a
maximum of 120 days. At June 30, 1996, the Company has borrowed $8,611,018 under
this arrangement and for the six month period ended June 30, 1996, the
31
<PAGE> 33
AUTONATION INCORPORATED AND SUBSIDIARIES
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company has incurred $53,658 of interest expense under this financing
arrangement which is included in Cost of Operations in the accompanying
consolidated financial statements.
Prior to the formation and capitalization of the Company, Huizenga and
Enterprises incurred direct expenses in connection with the development of the
business. Such expenses of $774,663 have been reimbursed by the Company and are
included in the accompanying consolidated financial statements.
9. COMMITMENTS AND CONTINGENCIES
LEASE AGREEMENTS
As part of its development stage operations, the Company has entered into
various lease agreements for its planned operating locations and corporate
office. Aggregate future minimum lease payments under these leases as of June
30, 1996 are as follows:
<TABLE>
<S> <C>
1996........................................................ $ 763,869
1997........................................................ 2,012,538
1998........................................................ 2,039,019
1999........................................................ 2,034,050
2000........................................................ 1,903,012
Thereafter.................................................. 6,885,051
-----------
$15,637,539
===========
</TABLE>
Rent expense for the six months ended June 30, 1996 is $185,456.
LITIGATION
The Company is involved in certain lawsuits arising since the Company's
Inception. In the opinion of management, the Company is not a party to any
litigation, the probable outcome of which, would have a material adverse effect
upon the Company's financial condition or results of operations.
10. SUBSEQUENT EVENTS
In May 1996, the Company and the Shareholders entered into a definitive
Merger Agreement (the "Agreement") with Republic Industries, Inc. ("Republic")
and a wholly owned subsidiary of Republic. Republic's Chairman and Chief
Executive Officer and certain other officers and directors of Republic are
shareholders of the Company. Consummation of the transaction is subject to the
final approval of Republic's shareholders and other customary conditions,
including regulatory approvals. Pursuant to the Agreement, an aggregate of
17,467,248 shares of common stock, $.01 par value per share, of Republic will be
issued in exchange for all of the issued and outstanding shares of common stock
of the Company. Based on 80,200,000 shares of the Company's common stock issued
and outstanding as of the Closing, each share of the Company's common stock will
be converted into a 0.217796 fractional share of Republic common stock.
In connection with the Plan of Merger, the Company has entered into a Loan
Agreement with Republic to provide advances to the Company up to the amounts
specified in a cash flow needs projection delivered by the Company to Republic.
Such advances carry an interest rate of LIBOR plus 2%. The advances will be
collateralized by the common stock of AutoNation USA Corporation pledged by the
Company to Republic, all trademarks and other intellectual property of the
Company, and the Company's subscription commitments discussed in Notes 4 and 5.
If the merger transaction is consummated, these subscription commitments will no
longer be required. The advances pursuant to the Loan Agreement mature on March
31, 1997. At June 30, 1996, the Company had outstanding $40,600,000 pursuant to
the Loan Agreement and has incurred $160,295 of interest expense since inception
of the Loan Agreement.
32
<PAGE> 34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Continental Waste Industries, Inc.:
We have audited the accompanying consolidated balance sheets of CONTINENTAL
WASTE INDUSTRIES, INC. (a Delaware corporation) and SUBSIDIARIES as of December
31, 1995 and 1994, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. 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 generally accepted auditing
standards. 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 Continental
Waste Industries, Inc. and Subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1995 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
February 20, 1996.
33
<PAGE> 35
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 3,483,154 $ 4,677,237
Accounts and notes receivable, net............................... 8,169,121 5,295,770
Prepaid expenses................................................. 6,878,728 4,710,810
Deferred income taxes............................................ 377,447 523,752
------------ -----------
Total current assets..................................... 18,908,450 15,207,569
------------ -----------
PROPERTY AND EQUIPMENT, at cost:
Land, landfill sites and improvements............................ 55,007,018 44,708,324
Buildings and improvements....................................... 4,423,169 2,426,922
Vehicles and equipment........................................... 32,827,833 19,127,148
Office furniture and equipment................................... 618,413 692,514
------------ -----------
92,876,433 66,954,908
Less -- Accumulated depreciation and amortization................ 14,215,696 7,941,916
------------ -----------
Net property and equipment............................... 78,660,737 59,012,992
------------ -----------
OTHER ASSETS:
Excess cost over fair value of net assets acquired, net.......... 16,681,935 8,010,092
Agreements not to compete, net................................... 1,164,493 1,245,368
Cash held in escrow.............................................. 3,749,038 1,121,220
Land purchase option............................................. 1,000,000 1,000,000
Other............................................................ 6,124,138 2,551,247
------------ -----------
Total other assets....................................... 28,719,604 13,927,927
------------ -----------
$126,288,791 $88,148,488
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable.................................................... $ 2,117,500 $ --
Current maturities of long-term debt............................. 2,528,741 856,731
Accounts payable................................................. 2,543,768 2,908,686
Income taxes payable............................................. 3,538,401 1,567,524
Other accrued liabilities........................................ 6,042,677 3,338,848
------------ -----------
Total current liabilities................................ 16,771,087 8,671,789
------------ -----------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities.......................... 20,774,991 24,491,315
Deferred income taxes............................................ 7,160,625 7,451,264
Accrued landfill closure costs, less current portion............. 6,748,474 6,647,577
Other long-term liabilities...................................... 2,788,640 3,722,788
------------ -----------
Total long-term liabilities.............................. 37,472,730 42,312,944
------------ -----------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Common stock, $.0006 par value, 40,000,000 and 16,666,666 shares
authorized in 1995 and 1994, respectively, 14,089,742 and
10,335,540 shares issued in 1995 and 1994, respectively....... 8,454 6,201
Additional paid-in capital....................................... 63,063,241 32,455,361
Retained earnings................................................ 9,445,378 4,808,742
Treasury stock (79,375 and 18,450 common shares at cost in 1995
and 1994, respectively)....................................... (472,099) (106,549)
------------ -----------
Total stockholders' equity............................... 72,044,974 37,163,755
------------ -----------
$126,288,791 $88,148,488
============ ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these balance sheets.
34
<PAGE> 36
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE................................................. $47,815,275 $28,728,298 $16,203,848
COSTS AND EXPENSES:
Operating expenses.................................... 22,181,707 13,421,788 8,603,304
General and administrative expenses................... 6,882,790 4,484,856 2,066,668
Depreciation and amortization......................... 6,863,120 3,802,461 2,605,576
Office closing charge................................. 1,500,000 -- --
----------- ----------- -----------
Income from operations............................. 10,387,658 7,019,193 2,928,300
----------- ----------- -----------
OTHER INCOME (EXPENSES):
Interest expense...................................... (2,658,912) (1,881,173) (1,303,110)
Other, net............................................ 205,006 (125,878) 48,671
----------- ----------- -----------
Other income (expense), net........................ (2,453,906) (2,007,051) (1,254,439)
----------- ----------- -----------
Income before income taxes and extraordinary
gain............................................. 7,933,752 5,012,142 1,673,861
PROVISION FOR INCOME TAXES.............................. (3,297,116) (2,244,505) (721,070)
----------- ----------- -----------
Income before extraordinary gain................... 4,636,636 2,767,637 952,791
EXTRAORDINARY GAIN, net of $280,280 of
income taxes.......................................... -- 356,720 --
----------- ----------- -----------
Net income......................................... $ 4,636,636 $ 3,124,357 $ 952,791
=========== =========== ===========
EARNINGS PER SHARE:
Primary:
Income before extraordinary gain................... $ 0.38 $ 0.40 $ 0.21
Extraordinary gain................................. -- 0.05 --
----------- ----------- -----------
Net income......................................... $ 0.38 $ 0.45 $ 0.21
=========== =========== ===========
Fully diluted:
Income before extraordinary gain................... $ 0.38 $ 0.36 $ 0.19
Extraordinary gain................................. -- 0.05 --
----------- ----------- -----------
Net income......................................... $ 0.38 $ 0.41 $ 0.19
=========== =========== ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
35
<PAGE> 37
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
SERIES A SERIES B ADDITIONAL
PREFERRED PREFERRED COMMON PAID-IN RETAINED TREASURY
STOCK STOCK STOCK CAPITAL EARNINGS STOCK
----------- ----------- ------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992......... $ 2,642,120 $ 2,379,000 $2,178 $ 664,595 $ 861,584 $ --
Net income....................... -- -- -- -- 952,791 --
Preferred stock dividends
declared....................... -- -- -- -- (129,990) --
Finet Acquisition................ -- -- 267 698,225 -- --
Exchange of common stock for
preferred stock................ (243,992) -- 43 243,949 -- --
Additional common stock issued in
Finet Acquisition.............. -- -- 133 745,447 -- --
Issuance of common stock......... -- -- 44 244,001 -- --
---------- ---------- ------ ----------- ---------- ---------
BALANCE, December 31, 1993......... 2,398,128 2,379,000 2,665 2,596,217 1,684,385 --
Net income....................... -- -- -- -- 3,124,357 --
Issuance of common stock, net of
offering costs................. -- -- 2,184 16,517,493 -- --
Conversion of preferred stock
into common stock.............. (2,398,128) -- 425 2,397,703 -- --
Redemption of preferred stock.... -- (2,379,000) -- -- -- --
Warrants exercised for common
stock.......................... -- -- 137 1,233,673 -- --
Victory Waste Acquisition........ -- -- 746 9,230,769 -- --
Issuance of warrants and options
as obligation settlements...... -- -- -- 165,000 -- --
Purchase of treasury stock....... -- -- -- -- -- (106,549)
Common stock issued for acquired
businesses..................... -- -- 44 314,506 -- --
---------- ---------- ------ ----------- ---------- ---------
BALANCE, December 31, 1994......... -- -- 6,201 32,455,361 4,808,742 (106,549)
Net income....................... -- -- -- -- 4,636,636 --
Issuance of common stock, net of
offering costs................. -- -- 2,007 30,376,294 -- --
Common stock issued for acquired
businesses and investment...... -- -- 99 1,099,671 -- --
Cancellation of previously
recorded stock options......... -- -- -- (2,016,000) -- --
Issuance of common stock and
warrants as obligation
settlements.................... -- -- 108 925,193 -- --
Purchase of treasury stock....... -- -- -- -- -- (365,550)
Warrants and options exercised
for common stock............... -- -- 39 222,722 -- --
---------- ---------- ------ ----------- ---------- ---------
BALANCE, December 31, 1995......... $ - $ - $8,454 $63,063,241 $9,445,378 $(472,099)
========== ========== ====== =========== ========== =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
36
<PAGE> 38
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 4,636,636 $ 3,124,357 $ 952,791
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization...................... 6,863,120 3,802,461 2,605,576
Office closing charge.............................. 1,500,000 -- --
Extraordinary gain, net of income taxes............ -- (356,720) --
Provision (benefit) for deferred income taxes...... (236,825) 845,404 552,786
Compensatory options, warrants and common shares... 30,819 112,836 --
Changes in operating assets and liabilities, net of
effect of business acquisitions --
Accounts and notes receivable, net............... (2,261,776) (1,283,722) (891,621)
Prepaid expenses................................. (1,406,557) (289,984) (116,310)
Other assets..................................... (1,208,643) (480,112) (207,065)
Accounts payable................................. (829,354) 483,638 656,657
Income taxes payable............................. 1,970,877 763,390 68,797
Accrued landfill closure costs................... (1,302,103) 712,941 129,586
Other accrued liabilities........................ 834,240 (2,229,541) (14,543)
----------- ----------- -----------
Net cash provided by operating activities..... 8,590,434 5,204,948 3,736,654
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................. (19,680,791) (12,826,591) (3,485,177)
Landfill development project additions................ (296,937) (1,514,547) --
Cash paid for businesses and investment, net of cash
acquired........................................... (6,664,520) (475,000) (18,087)
Cash paid for common and preferred stock of minority
interest........................................... (948,482) -- --
Cash acquired in businesses purchased with stock...... -- 323,633 699,707
(Increase) decrease in cash held in escrow, net of
effect of business acquisitions.................... (2,627,818) (483,873) 324,410
----------- ----------- -----------
Net cash used in investing activities......... (30,218,548) (14,976,378) (2,479,147)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings under revolving lines of
credit............................................. 16,400,000 (240,000) (160,000)
Issuance of long-term debt............................ 782,000 13,496,468 4,030,355
Payments on long-term debt............................ (26,074,009) (14,659,801) (5,105,108)
Issuance of common stock, net of offering costs....... 30,378,301 16,369,800 64,015
Deferred financing costs paid......................... (909,472) (119,946) (133,565)
Redemption of Series B preferred stock................ -- (2,379,000) --
Preferred stock dividends paid........................ -- (208,164) (44,620)
Warrants and options exercised for common stock....... 222,761 1,233,810 --
Purchase of treasury stock............................ (365,550) (106,549) --
----------- ----------- -----------
Net cash provided by (used in) financing
activities.................................. 20,434,031 13,386,618 (1,348,923)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents................................. (1,194,083) 3,615,188 (91,416)
CASH AND CASH EQUIVALENTS, beginning of year............ 4,677,237 1,062,049 1,153,465
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year.................. $ 3,483,154 $ 4,677,237 $ 1,062,049
========== ========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
37
<PAGE> 39
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE 1 -- ORGANIZATION
BASIS OF PRESENTATION
On September 9, 1993, Continental Waste Industries, Inc. ("Former
Continental") was acquired by (the "Finet Acquisition") Finet, Inc. ("Finet").
Finet was a public corporation which had no operations. The acquisition has been
recorded in accordance with generally accepted accounting principles as a
reverse acquisition under the purchase method. The consolidated financial
statements presented herein for the year ended December 31, 1993, include only
the financial results of Former Continental through September 8, 1993, with all
Former Continental share and per share information being adjusted by the
conversion rate at which such shares were converted into Finet shares. The
consolidated financial information for the periods subsequent to September 8,
1993 include the results of both Continental Waste Industries, Inc. and Finet in
their consolidated form. As part of the acquisition, Finet changed its name to
Continental Waste Industries, Inc. (the "Company"). The Company changed its
state of incorporation from New York to Delaware on February 28, 1994.
On December 28, 1995, the Company effected a 5 for 3 stock split of its
common stock. All common share information has been restated for all periods to
reflect the 5 for 3 stock split. As a result of the restatement, presented per
share and weighted average share information is not comparable to amounts
disclosed in documents previously filed with the Securities and Exchange
Commission. The Company's $.0006 par value common stock is hereinafter referred
to as Shares.
OPERATIONS
The Company provides integrated solid waste management services to
residential, commercial and industrial customers concentrated primarily in the
eastern half of the United States. These services include non-hazardous landfill
disposal, solid waste collection, transfer station operations and recycling
programs. The Company also provides solid waste management services in Costa
Rica.
The Company conducts its domestic solid waste operations in Indiana,
Michigan, Missouri, Illinois, Kentucky, Tennessee, South Carolina, Mississippi
and West Virginia. The Company operates primarily in smaller metropolitan
markets and in rural areas, although some sites are economically accessible from
Chicago and other large cities. At December 31, 1995, the Company owned and
operated a total of nine landfills, eight waste collection operations, thirteen
transfer stations and three municipal recycling facilities.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
CASH EQUIVALENTS
The Company considers those investments which are highly liquid in nature
and have an original maturity of three months or less at the date of purchase to
be cash equivalents.
REVENUE AND RECEIVABLES
The Company recognizes revenue upon receipt of waste at the Company's
facilities. Landfill revenues are reported net of certain governmental taxes
which are collected from customers and remitted to the governments primarily to
assure proper closure and post-closure of the landfill sites. The Company grants
credit to the majority of its customers on terms which range from fifteen to
forty days. Potential loss amounts
38
<PAGE> 40
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
associated with the granting of credit are included in management's estimate of
the allowance for doubtful accounts. It is not the policy of the Company to
require collateral from its customers in order to obtain credit.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization is computed on a straight-line basis
over the estimated useful lives as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET DESCRIPTION USEFUL LIVES
----------------------------------------------------------- -------------
<S> <C>
Buildings and improvements................................. 19 to 32 Yrs.
Vehicles and equipment..................................... 2 to 12 Yrs.
Office furniture and equipment............................. 5 to 7 Yrs.
</TABLE>
Repairs and maintenance costs are expensed as incurred, while major
renewals and betterments are capitalized. Repair and maintenance costs in 1995,
1994 and 1993 were $2,091,625, $1,046,946 and $569,480, respectively. Gains or
losses on retirements and disposals of property and equipment are reflected in
current operations.
Landfill sites represent costs to develop individual landfill cells for
usage which are capitalized as incurred and are amortized as the airspace in
each cell is consumed. Fully amortized cells are written off in the period in
which the cell accepts its last receipt of waste. Landfill site improvement
costs include design, licensing and construction costs necessary to make the
cell ready for receipt of waste. Interest costs are also capitalized while
development activities are undertaken to prepare cells for their intended use.
Interest costs capitalized in 1995, 1994 and 1993 were $457,250, $224,345 and
$114,240, respectively.
The Company classifies landfill site improvement costs which are expected
to be amortized over the next twelve months as prepaid expenses. Prepaid
landfill site improvement costs were $4,421,000 and $3,764,000 as of December
31, 1995 and 1994, respectively.
EXCESS COST OVER THE FAIR VALUE OF NET ASSETS ACQUIRED
The excess cost over the fair value of net assets acquired ("goodwill") is
amortized on a straight-line basis over twenty-five to thirty years. Such costs
are reflected net of accumulated amortization of $1,395,054 and $831,642 at
December 31, 1995 and 1994, respectively. Amortization expense was $563,412,
$317,026 and $255,428 in 1995, 1994 and 1993, respectively. Should events or
circumstances occur subsequent to the acquisition of a business which bring into
question the realizable value or impairment of the related goodwill, the Company
will evaluate the remaining useful life and balance of goodwill and make
appropriate adjustments. The Company's principal considerations in determining
impairment include the strategic benefit to the Company of the particular
business and the current and expected future operating income levels of that
particular business.
AGREEMENTS NOT TO COMPETE
Agreements not to compete represent the cost of obtaining such agreements
pursuant to various business acquisitions. Such costs are amortized over the
term of the related agreement, typically five to ten years. Some such terms do
not commence until after certain consulting arrangements have terminated. Such
costs are reflected net of amortization of $250,758 and $204,205 at December 31,
1995 and 1994, respectively. Amortization expense in 1995, 1994 and 1993 was
$55,248, $57,899 and $64,674, respectively.
39
<PAGE> 41
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LANDFILL CLOSURE COSTS
It is the policy of the Company to accrue the estimated landfill closure
and post-closure maintenance costs expected to be incurred upon and subsequent
to the closing of existing operating landfill areas ratably in relation to the
airspace consumed. Such costs will principally include costs for the final cap
and cover of the landfill area, management of leachate, groundwater monitoring
and general area maintenance. The Company's estimate of these costs in current
dollars is inflated at a rate of 4% until expected time of payment and then
discounted to present value at 8%.
The Company provides for such discounted costs ratably as the airspace in
each cell is consumed. The resulting accrued landfill closure costs are not
reduced by funds set aside by the Company, either voluntarily or by statute, to
pay for such costs. Such funding, if appropriate, is recorded as a long-term
asset. Had the Company not discounted this liability, the amounts recorded would
have been increased by approximately $12.8 million as of December 31, 1995.
Total estimated closure and post-closure costs to be spent after December 31,
1995, inflated as described above, are approximately $50.4 million of which
approximately $1.6 million, on average, is expected to be expended each year
over the next five years.
TRANSLATION OF FOREIGN CURRENCY
The Company translates the financial statements of its foreign subsidiaries
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52,
"Foreign Currency Translation." The cumulative translation adjustment and
translation loss were immaterial to the consolidated financial statements.
LAND PURCHASE OPTION
The $1,000,000 land purchase option is an option to purchase 200 acres of
land adjacent to the Company's Forest Lawn Landfill in Three Oaks, Michigan.
Forty acres of the 200 acres have already been approved by Berrien County for
landfill use and 110 acres have been similarly approved for composting of waste
and various other related activities. The expiration date of the option is
October 16, 2000. The option must be exercised prior to the expiration date or
the date on which the 40 acres of the 200 acres is licensed by the State of
Michigan to receive solid waste for disposal, whichever occurs first. The
exercise price of this option is $4,250,000 or at the seller's option, a royalty
of 10% of gross revenue from disposal activity on the 200 acres.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reporting amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" was issued in March 1995 and is to be
adopted by the Company in 1996. This new pronouncement establishes standards on
when to review long-lived assets and certain identifiable intangible assets for
impairment and how to measure that impairment. Management has not determined the
impact, if any, that adoption of this standard will have on the Company's
financial position or results of operations.
SFAS No. 123, "Accounting for Stock-Based Compensation" was issued in
October 1995 and is to be adopted by the Company in 1996. This new pronouncement
establishes financial accounting and reporting standards for stock-based
employee compensation plans and requires a fair value based method to determine
40
<PAGE> 42
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the compensation cost of such plans. Management has not determined if the
Company will adopt the accounting method prescribed by the new standard or if it
will, as allowed by the standard, only provide supplemental pro forma disclosure
of the effect of such adoption. Management has not determined the effect of
adopting the prescribed accounting on the Company's financial position or
results of operations.
RECLASSIFICATIONS
Certain amounts in previously issued financial statements have been
reclassified to conform to 1995 classifications.
NOTE 3 -- BUSINESS COMBINATIONS:
In January 1993, the Company purchased a landfill disposal business from a
current stockholder and Chairman of the Company's Board of Directors, Thomas A.
Volini, for one Share and the assumption of $214,000 notes payable by Mr. Volini
to the previous business owner.
On September 9, 1993, the Company completed the Finet Acquisition. Finet
issued 3,660,050 Shares in exchange for all of Former Continental's issued and
outstanding common shares, 72,107 Shares in exchange for certain Former
Continental Series A preferred shares and 196,708 Shares and a cash payment of
$44,620 as payment of accrued dividends on Former Continental Series A preferred
shares and indebtedness to certain stockholders. Finet sold 25,000 Shares for
$.0006 per share and issued 425,200 Series A preferred shares and 118,950 Series
B preferred shares in exchange for certain issued and outstanding Former
Continental Series A and Series B preferred shares.
Former Continental common shares were converted into Finet common shares at
a 1 for 4.458705 per share conversion rate. Former Continental Series A
preferred stock was converted into Finet Series A preferred stock at a 1 for
2.675223 per share conversion rate. Former Continental Series B preferred stock
was converted into Finet Series B preferred stock on a 1 for 1 basis.
In July 1994, the Company acquired approximately 73% of the issued and
outstanding stock of Victory Waste Incorporated ("Victory") for 831,425 Shares.
Since July 1994, the Company has issued 482,854 Shares and $948,482 in cash to
acquire the remaining interest in Victory and its subsidiary.
In conjunction with the Victory acquisition, two former directors and
officers of Victory entered into employment agreements with the Company which
included a provision for payment in Shares contingent upon the net income of
Victory for the year ended December 31, 1995. Based on such income, management
estimates the Company will issue 22,740 Shares to each officer. Such Shares are
reflected as outstanding as of December 31, 1995. Such deemed issuance increased
goodwill by $529,000. The officers will also receive 52,778 Shares each if
certain permits are issued for a certain landfill.
As additional consideration for the sale, these employment agreements
provided for the annual issuance of stock options. The fair market value of
these options of approximately $2,520,000 had been reflected as a component of
the purchase price and was recorded as additional paid-in capital in the
December 31, 1994 consolidated balance sheet. In June 1995, $504,000 of such
value was granted in the form of stock options. On December 31, 1995, both
employees terminated their agreements with the Company each in exchange for
$600,000 of cash paid in January 1996 and a $500,000 non-interest bearing note
due in two installments maturing in January 1997 and 1998. The termination of
these agreements prompted the Company to close its administrative office in
Indianapolis, Indiana, and to write-off certain related Victory contracts as
described in Note 4 -- Office Closing Charge. Due to the cancellation of the
employment agreements under which the aforementioned stock options were to be
issued, the Company included the unissued value of such options as an offset to
the office closing charge.
41
<PAGE> 43
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In August 1994, for $700,000, the Company purchased the only
privately-owned, non-hazardous waste landfill operation in Costa Rica. The
definitive agreements provide for the assumption of the residential and
commercial collection contracts of certain cities. The Company paid half of the
purchase price during the first year following the acquisition with the
remainder payable over a seven year period in equal quarterly payments without
interest.
From January 1, 1995 to August 15, 1995, the Company expanded its
operations through the acquisition of six businesses engaged in waste management
operations. The aggregate of these business acquisitions was significant to the
Company. These entities included ASCO Sanitation, Inc., Larry's Disposal, Inc.,
Terre Haute Recycling, Inc., Gilliam Sanitation, Inc./Gilliam Transfer, Inc.,
Anderson Refuse Company, Inc./M.V. Dulworth, and a 72% interest in Procesa
Continental S.A., de C.V. The aggregate purchase price of these businesses was
$8.9 million, plus the assumption or refinancing of $2.1 million of debt and
$0.6 million of future contingent payments. The purchase prices were paid by
issuing 164,846 Shares with a market value of $1.1 million at the time of
issuance, paying $5.8 million of cash obtained from the Company's $45 million
credit facility (the "Credit Facility") and issuing $2.0 million of notes
payable to the sellers.
In October 1995, the Company purchased, through one of its subsidiaries, a
sanitary landfill in Richland County, South Carolina ("Richland"). The acquiring
subsidiary, which is 85% owned by the Company, was organized recently to make
acquisitions of landfills and related solid waste management operations and to
pursue privatization and public-private partnership opportunities in the
Southeastern United States. The Company has an option to acquire the remaining
15% of the subsidiary for approximately $2.4 million of common stock of the
Company. The Company, on behalf of its subsidiary, paid $2.4 million in cash and
notes, and assumed $1.1 million of debt for Richland. As a condition of the
landfill purchase, a South Carolina collection company has entered into, among
other things, a 10-year put-or-pay disposal contract with the Company to provide
a minimum of 300 tons of waste per day, and a 120-day disposal contract for 500
tons of waste per day, with a right of first refusal to the Company for a
long-term extension.
The following table summarizes the pro forma operating results in 1994 and
1993 as if Victory had been acquired as of the beginning of the applicable year
(and as if Victory acquired G.E.M. Environmental Management, Inc. ("GEM") and
GEM acquired several businesses as of January 1, 1993), and the pro forma
operating results in 1995 as if the 1995 business acquisitions (including the
acquisition of the minority interests in Victory and GEM and excluding Richland)
occurred on January 1, 1995.
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Pro forma revenue................................... $54,167,940 $46,866,140 $28,913,757
=========== =========== ===========
Pro forma income before extraordinary gain.......... $ 4,512,443 $ 2,600,540 $ 577,890
=========== =========== ===========
Pro forma net income................................ $ 4,512,443 $ 2,957,260 $ 577,890
=========== =========== ===========
Pro forma primary earnings per share before
extraordinary gain................................ $ 0.37 $ 0.37 $ 0.08
=========== =========== ===========
Pro forma fully diluted earnings per share before
extraordinary gain................................ $ 0.37 $ 0.33 $ 0.08
=========== =========== ===========
</TABLE>
The pro forma operating results include each acquiree's pre-acquisition
results of operations for the indicated years with adjustments to reflect
amortization of goodwill, additional depreciation on the increases to the fair
market value of fixed assets, interest expense on the acquisition borrowings,
the effect of income taxes thereon and the issuance of Shares in such
acquisitions. The pro forma information given above does not purport to be
indicative of the results that actually would have been obtained if the
operations were combined during the periods presented and is not intended to be
a projection of future results or trends.
Excluding the acquisitions described above, the Company also acquired in
1994 and 1993 the common stock, net assets (consisting primarily of hauling
equipment) or customer routes of various independent
42
<PAGE> 44
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
hauling operations for cash, notes and Shares. The effect on consolidated
operating results and financial condition from these acquisitions was not
material.
All of the above acquisitions were accounted for as purchases and,
accordingly, the purchase price, in some cases based on the estimated market
value of the Shares issued as consideration, was allocated to the related assets
acquired and liabilities assumed based upon their estimated fair values at the
date of acquisition. Those estimated fair values have been adjusted as of
December 31, 1995. Future adjustments, if any, will be made prior to the one
year anniversary of the related acquisition and are not expected to be material.
Operating results of acquired businesses have been included in the consolidated
financial statements from the date of acquisition.
In March 1996, the Company purchased two construction and demolition
landfills in central Florida for approximately $5.3 million.
In March 1996, the Company sold its 72% interest in Procesa Continental
S.A. de C.V., which encompassed all of the Company's Mexico City operations, for
approximately $2.6 million in cash.
NOTE 4 -- OFFICE CLOSING CHARGE
Concurrent with the termination of the two officers' employment agreements,
the Company closed its Victory headquarters in Indianapolis, Indiana and
recorded a related $1.5 million pretax charge for such closing. The major
components of the charge include (i) the severance package costs for the two
officers (net of the reversal of the value of previously recorded stock options
to be issued pursuant to the employment agreements), (ii) costs related to
future contractual payments to be made under several agreements in place at the
time the Company acquired Victory, (iii) the write off of certain office
equipment and (iv) other costs, such as lease obligations and severance pay to
office employees, related to the physical closure of the office.
NOTE 5 -- EARNINGS PER SHARE
Earnings per share information presented herein for 1993 reflect the
conversions described in Note 3 related to the Finet Acquisition and for all
years reflect the effect of the stock split described in Note 1.
Earnings per share for the years ended December 31, 1995 and 1994 were
based on the following:
<TABLE>
<CAPTION>
1995 1994
1995 1994 FULLY FULLY
PRIMARY PRIMARY DILUTED DILUTED
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average common and common
equivalent shares:
Shares outstanding.................... 11,277,572 6,275,485 11,277,572 6,275,485
Dilutive stock options, warrants and
convertible Series A preferred
stock.............................. 701,828 530,918 731,735 1,197,605
Contingent shares and options related
to the Victory acquisition......... 45,480 123,362 151,036 212,046
---------- ---------- ---------- ----------
12,024,880 6,929,765 12,160,343 7,685,136
========== ========== ========== =========
Income available to common stockholders:
Income before extraordinary gain...... $4,636,636 $2,767,637 $4,636,636 $2,767,637
Amortization of incremental goodwill
upon issuance of additional
contingent shares.................. (21,000) (17,000) (21,000) (17,000)
---------- ---------- ---------- ----------
4,615,636 2,750,637 4,615,636 2,750,637
Extraordinary gain, net of income
taxes................................. -- 356,720 -- 356,720
---------- ---------- ---------- ----------
$4,615,636 $3,107,357 $4,615,636 $3,107,357
========== ========== ========== ==========
</TABLE>
43
<PAGE> 45
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Primary earnings per share for the year ended December 31, 1993 was based
upon the weighted average number of common and common equivalent shares
outstanding during such year and income available to common stockholders. Common
equivalent shares for that year resulted from dilutive stock options and
warrants. Primary weighted average common and common equivalent shares for the
year ended December 31, 1993 was 3,950,085. Income available to common
stockholders excludes dividends declared on the Company's preferred stock. No
such dividends were declared in 1995 or 1994.
Fully diluted earnings per share for 1993 are similarly computed but
include the dilutive effect of the Company's convertible Series A preferred
stock. Fully dilutive weighted average common and common equivalent shares were
4,739,270 for the year ended December 31, 1993. The Series A preferred stock
converted into Shares in November 1994.
NOTE 6 -- ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following table reflects the activity of the allowance for doubtful
accounts for the years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
CHARGED TO
BALANCE COSTS AND
BEGINNING EXPENSE BALANCE
OF YEAR ACCOUNTS DEDUCTIONS END OF YEAR
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1995................ $ 360,000 $ 95,000 $ (59,000) $ 396,000
Year ended December 31, 1994................ $ 102,000 $368,000 $ (110,000) $ 360,000
Year ended December 31, 1993................ $ 77,000 $ 50,000 $ (25,000) $ 102,000
</TABLE>
NOTE 7 -- ACCRUED LIABILITIES
Current accrued liabilities as of December 31, 1995 and 1994, consisted of
the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Accrued landfill closure costs................................ $1,769,823 $ 221,174
Accrued local landfill taxes.................................. 819,866 904,143
Unearned revenue.............................................. 1,507,019 766,423
Other accrued liabilities..................................... 1,945,969 1,447,108
---------- ----------
$6,042,677 $3,338,848
========== ==========
</TABLE>
Unearned revenue primarily represents quarterly or monthly billings in
advance of service.
NOTE 8 -- DEBT
The $2,117,500 of notes payable as of December 31, 1995, consist of
non-interest bearing promissory notes of $1,537,000 (paid on January 1, 1996) to
the sellers of three of the 1995 acquired businesses and a $580,500 note due in
March 1996 which was assumed in one of the 1995 business acquisitions. This note
has an interest rate of 9.75%.
44
<PAGE> 46
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt, including capital lease obligations which are not material,
at December 31, 1995 and 1994 consisted of the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Credit Facility............................................. $16,400,000 $ --
Notes payable to LaSalle National Bank ("LNB").............. -- 8,843,750
Notes payable to banks and finance companies................ 2,124,370 9,107,310
Notes payable to individuals and companies.................. 4,779,362 7,396,986
----------- -----------
23,303,732 25,348,046
Less current maturities........................... 2,528,741 856,731
----------- -----------
$20,774,991 $24,491,315
=========== ===========
</TABLE>
Of the various notes payable to LNB as of December 31, 1994, the proceeds
from one such loan were used to retire $3.5 million of notes and accrued
interest due to certain individuals at a discount. This early retirement of debt
resulted in an extraordinary gain, net of related expenses and income taxes of
$356,720. Related to this transaction, the Company also issued warrants to
purchase 33,333 shares of common stock currently at a price of $5.40 per share
to the note holders. The warrants expire in 1997.
On March 28, 1995, the Company entered into the Credit Facility with LNB
which expires in March 1998. Borrowing under the Credit Facility refinanced
certain existing indebtedness and provided additional funds for the operation of
the Company. The Credit Facility has been subsequently syndicated to include the
Bank of America and the First National Bank of Boston. Borrowings under the
Credit Facility bore a weighted average interest rate of 9.18% during 1995 with
a weighted average interest rate of 9.05% on outstanding loans as of December
31, 1995.
The Company deferred approximately $909,000 of costs incurred in obtaining
the Credit Facility. Such costs are being amortized over the term of the
Facility. Such accumulated amortization was $258,000 as of December 31, 1995.
In the first quarter of 1996, the Company and the lenders amended the
Credit Facility (the "Amended Credit Facility") effective as of January 1, 1996
with covenants effective as of December 31, 1995. The Amended Credit Facility
expires in January 1999 and is secured by all corporate assets and a pledge of
the stock of all subsidiaries. As amended, each borrowing under the Amended
Credit Facility bears interest based on the Company's leverage ratio, as
defined, of funded debt to earnings before interest, taxes, depreciation and
amortization. If the leverage ratio is 2.0 to 1 or less, then the interest rate
is, at the Company's option, prime or LIBOR plus 1.5% and the fee on outstanding
letters of credit is .75%. If the leverage ratio falls between 2.01 to 2.5
compared to 1, then the interest rate is prime plus 0.5% or LIBOR plus 1.75% and
the fee on outstanding letters of credit is 1.0%. If the leverage ratio falls
between 2.51 and 3.0 compared to 1, then the interest rate is prime plus 1.0% or
LIBOR plus 2.0% and the fee on outstanding letters of credit is 1.5%. If the
leverage ratio is greater than 3.0 to 1, then the interest rate is prime plus 1%
or LIBOR plus 2.5% and the fee on outstanding letters of credit is 2.0%. The
Amended Credit Facility includes provisions for letters of credit up to $10.0
million. The Company will also pay a 0.5% fee on the average unused portion of
the Amended Credit Facility. As of December 31, 1995, $23.6 million of unused
credit under this facility remained available.
Notes payable to banks and finance companies have principal amounts payable
monthly through May 1999, bear interest at rates from 4.8% to 26.6% and are
secured by certain land and buildings, vehicles, equipment and accounts
receivable.
Notes payable to individuals and companies have principal amounts payable
monthly, quarterly, semi-annually and annually through February 2002, bear
interest at rates from 0% to 9.75% and are secured by certain land, vehicles and
equipment.
45
<PAGE> 47
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the terms of the Amended Credit Facility, the Company is required to
meet certain covenants regarding, among other things, financial position and
results of operations. Based on the Company's December 31, 1995 financial
position and results of operations, the Company was in compliance with such
covenants. The terms of the Amended Credit Facility impose restrictions that
affect, among other things, the Company's ability to (i) incur additional
indebtedness, (ii) create liens on assets, (iii) sell assets, (iv) engage in
mergers, acquisitions or consolidations, (v) make investments, (vi) pay
dividends or make distributions and (vii) engage in certain transactions with
affiliates and subsidiaries.
The Amended Credit Facility also contains subjective covenants providing
that the Company would be in default if, in the judgment of the lenders, there
is a material adverse change in the financial condition of the Company.
Management is not aware of, nor does it anticipate, any facts, events or
occurrences which could reasonably be expected to have a material adverse effect
on the operations of the Company that would cause the lenders to demand
repayment of the amounts borrowed under the Amended Credit Facility prior to its
termination.
Principal payments on long-term debt, based on scheduled maturities after
the amendment described above, are due as follows during the years ending
December 31:
<TABLE>
<S> <C>
1996........................................................ $ 2,528,741
1997........................................................ 2,362,055
1998........................................................ 1,134,542
1999........................................................ 16,832,576
2000........................................................ 231,005
After 2001.................................................. 214,813
-----------
$23,303,732
===========
</TABLE>
NOTE 9 -- COMMON STOCK
In June 1993, Former Continental issued 12,988 Shares with an aggregate
value of $6,236 in settlement of outstanding liabilities and sold 17,593 Shares
to current stockholders for $64,000.
On October 12, 1993, as a result of the Finet Acquisition, the Company
issued 4,398,310 Shares in replacement of previously outstanding Finet common
shares, including the 3,953,865 Shares issued to Former Continental stockholders
in the Finet Acquisition. Subsequent to the Finet Acquisition in 1993, an
additional 43,217 Shares with an aggregate value of $173,810 were issued as
settlement of outstanding liabilities. Pursuant to the 5 for 3 stock split, on
December 28, 1995 the Company's authorized Shares were increased to 40,000,000
from 10,000,000 (unadjusted).
In November 1994, the Company and certain stockholders completed a public
offering of 2,556,027 Shares (2,333,333 Shares were sold by the Company and
222,694 Shares were sold by certain stockholders of the Company). The Company
received approximately $11.6 million of net proceeds from the sale of which
approximately $3.1 million was used to redeem all of the outstanding Series B
preferred shares and pay related accrued interest and dividends. The remaining
$8.5 million became available for general corporate purposes.
Concurrent with the public offering, in order to eliminate the accrual of
any further dividends on the Series A preferred stock, the Series A preferred
stockholders agreed to and have converted the 425,200 Series A preferred shares
into 708,667 Shares. The Company, in consideration of the conversion, issued
warrants to purchase 71,093 Shares at an exercise price of $5.70 to the holders
of the Series A preferred shares. The warrants expire in 1999.
Had this public offering, the redemption of the Series B preferred shares
and payment of related accrued interest and dividends and the conversion of the
Series A preferred stock and related issuance of warrants
46
<PAGE> 48
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
occurred on January 1, 1994, earnings per share after the extraordinary gain in
1994 would have been $0.38. Only the portion of the public offering (605,373
Shares) which was necessary to fund the redemption and related payment was
considered for purposes of this pro forma earnings per share disclosure.
During 1995 and 1994, the Company issued 179,448 Shares and 1,308,203
Shares, respectively, in private placements or in settlement of certain
compensation, debt or service fee obligations. The aggregate value of such
issuances was $925,301 in 1995 and $4,919,946 in 1994. In 1995, the Company
issued 164,846 Shares as consideration paid in two business acquisitions and an
investment purchase with an aggregate value of $1,099,770. In 1994, the Company
also issued 72,458 Shares as consideration paid in two business acquisitions
with an aggregate value of $314,550.
See Note 3 for a description of the Victory Waste acquisition and the
resulting 1,314,279 Shares issued at an aggregate value of $6,696,999 over 1995
and 1994.
In October 1995, the Company and certain of its stockholders completed a
public offering of 3,780,680 Shares (3,292,760 Shares were sold by the Company
and 487,920 Shares were sold by certain stockholders of the Company). The
Company received approximately $30.1 million of net proceeds from the sale. The
proceeds were used to reduce the outstanding indebtedness under the Credit
Facility which provided the Company with renewed borrowing capacity under the
Credit Facility for future acquisitions, capital expenditures and general
corporate purposes. Had this public offering and reduction in outstanding
indebtedness occurred on January 1, 1995, earnings per share would have been
$0.38.
NOTE 10 -- PREFERRED STOCK
On October 27, 1993, as a result of the Finet Acquisition, the Company
authorized 644,200 new shares of preferred stock of which 425,200 of such shares
were designated as Series A preferred stock with a par value of $5.64 per share,
119,000 of such shares were designated as Series B preferred stock with a par
value of $20.00 per share, and 100,000 of such shares were designated as
additional preferred stock with a par value of $.001 per share. The 425,200
shares of Series A preferred stock and 118,950 shares of Series B preferred
stock were issued in replacement of the then outstanding shares of Former
Continental Series A and Series B preferred stock, respectively. By agreement of
the holders of the preferred stock, dividends on such stock had been suspended
since April 1, 1993. None of the 100,000 shares of additional preferred stock
has been issued as of December 31, 1995.
In November 1994, all of the Series A preferred stock was converted into
Shares and all of the Series B preferred stock, including related accrued
interest and dividends, were retired with a portion of the proceeds from the
public offering described in Note 9.
NOTE 11 -- STOCK OPTIONS AND WARRANTS
INCENTIVE STOCK OPTIONS
Prior to June 1995, the Board of Directors adopted a policy of issuing
annual stock options to selected employees. The issuance and amount of such
stock option grants were reviewed annually by the Board of Directors and such
grants were solely in its discretion. Options were granted at an exercise price
equal to the then prevailing market value as determined by the Board of
Directors. Granted options vest in equal percentages over a three year period
commencing on the date of the grant and expire five years from such date. No
future options will be granted under this arrangement.
In June 1995, the Company adopted a 1995 Employee Stock Option Plan (the
"1995 Plan") for all officers and employees. The 1995 Plan provides for the
granting of options to purchase not more than an aggregate of 166,667 Shares.
The 1995 Plan is administered by the Stock Option Committee appointed by the
Board of Directors. Upon granting options under the 1995 Plan, the Stock Option
Committee, at its discretion,
47
<PAGE> 49
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determines the type of option (incentive or non-qualified), the exercise price
(not less than 100% of the fair market value for incentive stock options), the
vesting period and manner, and the expiration (not to exceed five years from the
date of grant) of such option. As of December 31, 1995, no options have been
granted under the 1995 Plan.
DIRECTOR STOCK OPTIONS
Prior to December 31, 1995, the Board of Directors adopted a policy of
issuing stock options to certain directors. Granted options vest immediately and
expire from 5 to 10 years from date of grant. The options were granted at an
exercise price equal to the then prevailing market value as determined by the
Board of Directors except for certain issuances in May 1994 which were granted
at less than market value and resulted in a $57,150 charge.
In December 1995, the Company adopted a 1995 Stock Option Plan for Outside
Directors (the "Director Plan"). The Director Plan provides for the granting of
options to purchase not more than an aggregate of 166,667 Shares. Upon election
to the Company's Board of Directors, each new outside director will receive an
option to purchase 8,334 Shares. Upon adoption of the Director Plan, all three
outside directors received an option to purchase an additional 8,334 Shares.
Three days following the date of each Annual Meeting of the Stockholders of the
Company, each outside director will receive an option to purchase an additional
8,334 Shares. Options are granted at an exercise price equal to the then
prevailing market value. All options vest after one year from the date of grant
and expire on the earlier of 10 years from such date or 1 year from the date the
director ceases to be an outside director of the Company. As of December 31,
1995, there were 141,665 Shares available under this plan.
The following table summarizes certain information regarding stock options
during the years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
EMPLOYEE PLANS DIRECTOR PLANS
--------------------- ----------------------
SHARES SHARES
UNDER PRICE RANGE UNDER PRICE RANGE
OPTION PER SHARE OPTION PER SHARE
------- ----------- ------- ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1992................ 31,367 $1.12 2,230 $3.38
Granted................................. 98,086 $1.34 319,752 $2.36-$3.38
Cancelled............................... (2,969) $1.12-$1.34 --
------- ----------- ------- --------
Balance, December 31, 1993................ 126,484 $1.12-$1.34 321,982 $2.36-$3.38
Granted................................. 77,340 $4.50-$5.40 25,000 $6.15
Cancelled............................... (6,756) $1.34-$4.50 --
------- ----------- ------- --------
Balance, December 31, 1994................ 197,068 $1.12-$5.40 346,982 $2.36-$6.15
Granted................................. 25,000 $5.70 25,000 $11.14
Exercised............................... (14,842) $1.12-$1.34 --
Cancelled............................... (1,237) $1.34-$4.50 --
------- ----------- ------- --------
Balance, December 31, 1995................ 205,989 $1.12-$5.70 371,982 $2.36-$11.14
======= =========== ======= ========
Vested options:
December 31, 1993......................... 54,812 321,982
======= =======
December 31, 1994......................... 106,760 346,982
======= =======
December 31, 1995......................... 155,453 371,982
======= =======
</TABLE>
48
<PAGE> 50
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WARRANTS
In connection with the Finet initial public offering, Finet sold detachable
redeemable warrants to purchase up to 333,333 Shares. A majority of those
warrants were exercised in the fourth quarter of 1994 or the first quarter of
1995. Remaining warrants have expired.
Also in connection with the Finet initial public offering, Finet sold to
its underwriter, for $20.00, warrants to purchase from Finet an aggregate of
33,333 Shares. These warrants are exercisable at a price of $3.60 per share for
a four-year period which commenced in October 1992. During 1995, 26,667 warrants
have been exercised into 26,667 Shares. As of December 31, 1995, 6,666 warrants
remain outstanding.
In January 1994, the Company issued warrants to purchase 33,333 Shares at
an exercise price of $5.40 per share. See Note 8 for further description. No
such warrants have been exercised or cancelled.
In November 1994, the Company issued warrants to purchase 71,093 Shares at
an exercise price of $5.70 per share. See Note 9 for further description. No
such warrants have been exercised or cancelled.
In November 1994, the Company issued warrants to its primary underwriter
in connection with the public offering described in Note 9. The warrants allow
for the purchase of 83,334 Shares at an exercise price of $7.98 per share and
expire in 1999. No such warrants have been exercised or cancelled.
During 1994, the Company issued warrants to certain officers as
consideration for compensatory services, as settlement of outstanding debt and
as payment for certain equipment purchases. The warrants issued in 1994 allow
for the purchase of an aggregate of 92,593 Shares at an exercise price of $2.36
per share and expire in 1999. Compensation expense of $30,819 and $12,850 was
recorded as these warrants vested in 1995 and 1994, respectively. No such
warrants have been exercised or cancelled.
NOTE 12 -- LANDFILL DEVELOPMENT PROJECT
In March 1994, the Company purchased from WPP Services, Inc. a landfill
development project located in Gila Bend, Arizona. This development project
currently involves, among other things, various geological studies on the site
and work on permitting portions of the site. In connection with this project,
the Company has obtained: (i) an option to purchase approximately 1,200 acres of
land to construct a solid waste landfill; (ii) an annexation agreement for the
option land with the City of Gila Bend; and (iii) a Host Community Agreement
with the City of Gila Bend. Upon final permitting of the landfill project, the
Company has a put option to sell the project to USA Waste Services, Inc. ("USA")
for the sum of $5.0 million plus reimbursement for land purchase costs.
NOTE 13 -- INCOME TAXES
The Company, except for its two-thirds owned subsidiary, Prichard Landfill
Corporation ("Prichard"), reports taxes on a consolidated basis for federal tax
purposes and by legal entity for state income tax purposes. Income taxes are
provided at statutory rates based on income reported for financial statement
purposes. A summary of income tax expense is shown below:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- --------
<S> <C> <C> <C>
Taxes currently payable:
Federal....................................... $2,752,818 $1,137,696 $125,884
State......................................... 781,123 261,405 42,400
Prepaid and deferred taxes...................... (236,825) 845,404 552,786
---------- ---------- --------
$3,297,116 $2,244,505 $721,070
========== ========== ========
</TABLE>
The table below reconciles the differences between the statutory federal
income tax rate and the Company's effective income tax rate:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- --------
<S> <C> <C> <C>
Statutory federal income tax........................ $2,697,476 $1,743,663 $559,861
State income taxes, net of the federal income tax
benefit........................................... 515,541 317,354 76,865
Nondeductible amortization.......................... 146,741 90,331 73,619
Change in valuation allowance....................... 39,807 (25,020) 47,165
Others, net......................................... (102,449) 118,177 (36,440)
---------- ---------- --------
Reported provision for income taxes................. $3,297,116 $2,244,505 $721,070
========== ========== ========
</TABLE>
49
<PAGE> 51
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax benefits and obligations result from the differences in the
timing of the recognition of certain income and expense items for financial and
tax accounting purposes. The sources of these differences and the related tax
effects were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------ -------------------------
BENEFITS OBLIGATIONS BENEFITS OBLIGATIONS
---------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Property basis differences........... $ -- $(9,547,449) $ -- $(10,736,103)
Reserves for landfill site closure
costs.............................. 1,928,361 -- 1,976,134 --
Office closing charge accrual........ 409,365 -- -- --
Credit carryforwards................. 92,930 -- 175,543 --
Nondeductible bonus accruals......... 68,163 -- 1,117,865 --
Other nondeductible accruals......... 372,716 -- 524,509 --
Other, net........................... -- (107,264) 14,539 --
---------- ----------- ---------- ------------
Total...................... $2,871,535 $(9,654,713) $3,808,590 $(10,736,103)
========== =========== ========== ============
</TABLE>
In the consolidated balance sheets, these deferred benefits and deferred
obligations are classified as deferred income tax assets or deferred income tax
liabilities based on the classification of the related asset or liability for
financial reporting. A deferred tax liability or asset that is not related to an
asset or liability for financial reporting, including deferred tax assets
related to carryforwards, are classified according to the expected reversal date
of the temporary difference. Credit carryforwards primarily consist of net
operating losses subject to various limitations under the current tax laws.
Credit carryforwards as of December 31, 1995 expire, if unused, in 2008.
Valuation allowances of $139,094 and $99,287 as of December 31, 1995 and
1994, respectively, have been recorded to offset credit carryforwards and the
entire net deferred tax assets related to Prichard. As of December 31, 1995, no
other valuation allowances are deemed necessary as management expects to be able
to benefit from all other recognizable future tax deductions.
NOTE 14 -- COMMITMENTS AND CONTINGENCIES
The Company is subject to extensive and evolving environmental and land use
laws and regulations which have become increasingly stringent in recent years as
a result of greater public interest in protecting the environment. These laws
and regulations affect the Company's business in many ways and will continue to
impose substantial costs on the Company. Such laws and regulations dictate
extensive permitting, landfill design, operation and closure requirements,
impose civil or criminal penalties on the Company for violations thereof, impose
liability on the Company for environmental damage caused by the Company and in
certain circumstances, limit the type, quantity and source of the waste streams
that the Company manages. Additionally, any reduction in enforcement or
relaxation of environmental regulations could have a material adverse effect on
the Company's business and financial condition.
The Company is sometimes required to post bid and/or performance bonds in
connection with contracts or projects with government entities and, to a lesser
extent, private sector customers. In addition to bid and performance bond
requirements, existing legislation in various jurisdictions requires or will
require the posting of substantial bonds or the provision of other financial
assurances covering the closure, post-closure monitoring and corrective
activities of certain waste disposal facilities. In this respect, the Company
has various performance bonds and letters of credit outstanding as of December
31, 1995, aggregating to $6.0 million. These instruments are not reflected in
the accompanying consolidated financial statements.
The Company also maintains five separate escrow funds to accumulate money
necessary to pay for estimated future closure and post-closure costs. These
funds are reflected as long-term assets on the accompanying consolidated balance
sheets. In some cases, a regulatory agency controls the escrow account
50
<PAGE> 52
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and will release withdrawals to the Company upon written evidence of permitted
closure or post-closure or of expenditures paid in such an effort. In the fourth
quarter of 1995, the Company recorded $460,000 of revenue at its Forest Lawn
Landfill in Three Oaks, Michigan upon receiving clarification of certain state
regulations. The State of Michigan will return to the Company half of the dump
taxes collected upon the Company fulfilling all closure and post-closure
requirements. These costs were previously subtracted from revenue.
A local citizens' group has filed objections to issuance of a renewal
permit for the Company's United Refuse landfill near Fort Wayne, Indiana. The
Company believes the objections are without merit and intends to vigorously
defend the permit. However, if the Company is not successful in such defense, it
could result in revocation or adverse modification of the permit, and this could
have a material adverse effect on the Company's business and financial
condition.
The Company is involved in various legal proceedings and litigation arising
in the ordinary course of business. In the opinion of the Company's management
and legal counsel, the outcome of such proceedings and litigation will not
materially affect the Company's financial position or results of operations.
The Company does not carry, and does not expect to carry for the
foreseeable future, significant insurance coverage for environmental liability
because the Company believes that the cost for such insurance is not economical.
Accordingly, if the Company were to incur liability for environmental damage,
its financial condition could be materially adversely affected.
Rental expense amounted to $692,794, $503,005 and $168,325 in 1995, 1994,
and 1993, respectively. Future minimum payments under noncancellable leases are
less than $250,000 annually. The Company's Union City, Tennessee collection and
hauling business property was purchased for $450,000 in April 1995 from Obion
Realty, Inc. ("Obion"). The Company leased this property on a month-to-month
basis, at the rate of $3,100 per month prior to purchasing it. Obion is owned
primarily by certain officers of the Company.
The Company purchases material from Mid-America Lining Co. which is
partially owned by certain officers of the Company. Such purchases aggregated
$1,755,091 in 1995 and $391,278 in 1994.
51
<PAGE> 53
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- SUPPLEMENTAL CASH FLOWS AND NON-CASH TRANSACTIONS DISCLOSURE
<TABLE>
<CAPTION>
1995 1994 1993
---------- ----------- ----------
<S> <C> <C> <C>
Cash paid during year for:
Interest, net of interest capitalized....... $2,440,379 $ 1,969,891 $1,308,792
Income taxes................................ 1,218,011 441,105 46,206
========== =========== ==========
Business acquisitions and investment
(excluding Finet):
Shares issued............................... $1,099,770 $ 6,476,049 $ --
Issuable common stock and options........... -- 3,070,008 --
Notes and other payables issued to
sellers.................................. 3,796,240 1,222,500 290,091
Receivables forgiven........................ -- 100,000 --
Cash paid................................... 6,664,520 475,000 81,846
---------- ----------- ----------
Total consideration paid................. 11,560,530 11,343,557 371,937
Assets received.......................... 17,518,297 36,178,649 1,108,784
---------- ----------- ----------
Liabilities assumed...................... $5,957,767 $24,835,092 $ 736,847
========== =========== ==========
Conversion of Series A preferred stock into
shares...................................... $ -- $ 2,398,128 $ --
========== =========== ==========
Shares and warrants issued in settlement of
certain obligations......................... $ 925,301 $ 314,885 $ 180,000
========== =========== ==========
Property received in settlement of accounts
receivable.................................. $ -- $ -- $ 716,000
========== =========== ==========
Finet Acquisition:
Cash acquired............................... $ -- $ -- $ 856,212
Shares issued in replacement of preferred
stock.................................... -- -- 243,992
Shares issued in settlement of amounts due
to certain stockholders.................. -- -- 750,000
========== =========== ==========
</TABLE>
NOTE 16 -- FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
Unless otherwise indicated below, the fair value of the Company's financial
instruments approximates their carrying value. No quoted market values are
available unless otherwise indicated.
<TABLE>
<CAPTION>
ESTIMATED
FAIR MARKET CARRYING
DESCRIPTION VALUE VALUE
-------------------------------------------------------- ------------ ------------
<S> <C> <C>
Investment in unaffiliated company...................... $ 597,750 $ 561,382
Cash held in escrow..................................... 3,749,038 3,749,038
Land purchase option -- Francis Property................ 1,000,000 1,000,000
Option to acquire remaining 15% of South Carolina
subsidiary............................................ -- --
Notes payable........................................... (2,117,500) (2,117,500)
Long-term debt, with current maturities................. (23,303,732) (23,303,732)
</TABLE>
The estimated fair market value of (i) the investment in unaffiliated
company is based on that company's quoted market price per share, (ii) the cash
held in interest-bearing escrow accounts is based on current rates of interest
available to the Company for similar cash investments on similar terms, (iii)
the land purchase option is based on management's estimate of the current value
of similar land in similar geographical areas and (iv) debt is based on
borrowing rates currently available to the Company for borrowings with similar
terms and maturities.
52
<PAGE> 54
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The option to acquire the remaining 15% of the South Carolina subsidiary
was granted to the Company in conjunction with the original formation of such
subsidiary. As the option price approximates the value of the remaining 15%
interest (estimated by management), no market value is assigned to the option.
NOTE 17 -- SUBSEQUENT EVENT (UNAUDITED)
During June 1996, the Company entered into an Agreement and Plan of Merger
with Republic Industries, Inc. (Republic), pursuant to which the parties will
enter into a business combination for which each share of the Company's common
stock will be exchanged for 0.8 shares of Republic's common stock. The proposed
transaction, which is intended to be accounted for as a pooling-of-interests
business combination, is subject to the approval of regulators and Company
shareholders and other customary terms and conditions.
53
<PAGE> 55
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents..................................... $ 1,106,157 $ 3,483,154
Accounts and notes receivable -- net.......................... 10,668,314 8,169,121
Other current assets.......................................... 8,568,412 7,256,175
------------ ------------
Total current assets.................................. 20,342,883 18,908,450
Landfill, property and equipment -- net......................... 90,974,714 78,660,737
Excess cost over the fair value of net assets acquired -- net... 16,589,965 16,681,935
Other assets.................................................... 13,278,100 12,037,669
------------ ------------
Total assets.......................................... $141,185,662 $126,288,791
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable and current maturities of long-term debt........ $ 2,191,834 $ 4,646,241
Accounts payable.............................................. 2,315,681 2,543,768
Other accrued liabilities..................................... 9,560,909 9,581,078
------------ ------------
Total current liabilities............................. 14,068,424 16,771,087
Long-term debt, less current maturities......................... 31,725,789 20,774,991
Accrued landfill closure costs, less current portion............ 6,846,035 6,748,474
Other long-term liabilities..................................... 11,486,423 9,949,265
Stockholders' equity:
Common stock, $.0006, authorized 40,000,000 shares, 14,323,123
and 14,089,742 shares issued in 1996 and 1995,
respectively............................................... 8,594 8,454
Additional paid-in capital.................................... 65,167,272 63,063,241
Retained earnings............................................. 12,355,224 9,445,378
Treasury stock (79,375 common shares at cost)................. (472,099) (472,099)
------------ ------------
Total stockholders' equity............................ 77,058,991 72,044,974
------------ ------------
Total liabilities and stockholders' equity............ $141,185,662 $126,288,791
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
54
<PAGE> 56
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenue............................................................. $16,254,478 $10,769,885
Costs and expenses:
Operating expenses................................................ 8,819,937 4,704,522
General and administrative expenses............................... 2,209,271 1,712,004
Depreciation and amortization..................................... 2,467,447 1,398,791
----------- -----------
Income from operations.............................................. 2,757,823 2,954,568
----------- -----------
Other income (expenses):
Interest expense, net............................................. (492,713) (598,419)
Other, net........................................................ 522,801 (66,608)
----------- -----------
Other income (expenses), net................................... 30,088 (665,027)
----------- -----------
Income before income taxes and minority interest in subsidiaries.... 2,787,911 2,289,541
Provision for income taxes.......................................... (1,143,044) (950,160)
----------- -----------
Income before minority interest in subsidiaries..................... 1,644,867 1,339,381
Minority interest in subsidiaries................................... (52,386) (24,733)
----------- -----------
Net income.......................................................... $ 1,592,481 $ 1,314,648
=========== ===========
Earnings per share.................................................. $ 0.11 $ 0.11
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
55
<PAGE> 57
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenue............................................................. $30,188,957 $20,478,298
Costs and expenses:
Operating expenses................................................ 16,258,761 9,376,272
General and administrative expenses............................... 3,706,738 2,983,937
Depreciation and amortization..................................... 4,755,739 2,758,981
----------- -----------
Income from operations.............................................. 5,467,719 5,359,108
----------- -----------
Other income (expenses):
Interest expense, net............................................. (926,118) (1,127,169)
Other, net........................................................ 512,332 (102,375)
----------- -----------
Other income (expenses), net................................... (413,786) (1,229,544)
----------- -----------
Income before income taxes and minority interest in subsidiaries.... 5,053,933 4,129,564
Provision for income taxes.......................................... (2,072,113) (1,722,970)
----------- -----------
Income before minority interest in subsidiaries..................... 2,981,820 2,406,594
Minority interest in subsidiaries................................... (71,974) (68,696)
----------- -----------
Net income.......................................................... $ 2,909,846 $ 2,337,898
=========== ===========
Earnings per share.................................................. $ 0.20 $ 0.20
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
56
<PAGE> 58
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 2,909,846 $ 2,337,898
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................ 4,755,739 2,758,981
Changes in operating assets and liabilities, net of effect of
acquired businesses:
Accounts and notes receivables, net.......................... (2,439,776) (1,284,921)
Other current assets......................................... (1,602,652) (537,661)
Accounts payable............................................. (283,109) (543,353)
Other current liabilities.................................... (774,082) (204,615)
Other long-term liabilities.................................. 1,655,929 860,826
Other long-term assets....................................... (2,259,107) (470,584)
------------ ------------
Net cash provided by operating activities....................... 1,962,788 2,916,571
------------ ------------
Cash flows from investing activities:
Proceeds from sale of Mexico operations...................... 2,574,089 --
Capital expenditures......................................... (10,380,871) (10,104,903)
Cash paid for businesses, net of cash acquired............... (3,400,240) (1,065,755)
Cash paid for common and preferred stock of minority
interest.................................................... -- (669,824)
Cash held in escrow.......................................... (548,800) (937,571)
------------ ------------
Net cash used in investing activities........................... (11,755,822) (12,778,053)
------------ ------------
Cash flows from financing activities:
Net borrowings under revolving line of credit................ 10,600,000 32,450,000
Issuance of long-term debt................................... 2,063,357 263,054
Payments on long-term debt................................... (5,245,157) (23,176,035)
Deferred financing costs paid................................ -- (716,871)
Issuance of common stock..................................... 69,598 305,479
Purchase of treasury stock................................... -- (365,550)
Exercise of warrants for common stock........................ -- 218,715
Other........................................................ (71,761) --
------------ ------------
Net cash provided by financing activities....................... 7,416,037 8,978,792
------------ ------------
Net decrease in cash and cash equivalents......................... (2,376,997) (882,690)
Cash and cash equivalents, beginning of year...................... 3,483,154 4,677,237
------------ ------------
Cash and cash equivalents, end of period.......................... $ 1,106,157 $ 3,794,547
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
57
<PAGE> 59
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation (consisting of normal recurring accruals) have
been included. Operating results for the three and six months ended June 30,
1996 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1996. For further information, refer to the financial
statements and footnotes thereto included in Continental Waste Industries, Inc.
("the Company's") Form 10-KSB for the year ended December 31, 1995.
On December 28, 1995, the Company effected a 5 for 3 stock split of its
common stock. All common share information has been restated for all periods to
reflect the 5 for 3 stock split. The Company's $0.0006 par value common stock is
hereinafter referred to as Shares. On June 27, 1996, the Company signed a
definitive agreement to be acquired by Republic Industries, Inc. ("Republic").
Under the terms of the agreement, each share of the Company's common stock would
be converted into 4/5ths of a share of Republic's common stock.
The proposed transaction would be accounted for on a pooling of interests
basis and is subject to final approval by the stockholders of the Company, the
filing and clearance of the Republic registration statement and the Company's
related proxy statement by the Securities and Exchange Commission. The Company
anticipates that the merger with Republic will be consummated in the fourth
quarter of 1996.
Certain amounts in previously issued financial statements have been
reclassified to conform to 1996 classifications.
NOTE 2 -- BUSINESS COMBINATIONS AND DISPOSITION
From January 1, 1995 to August 15,1995, the Company expanded its operations
through the acquisition of six businesses engaged in waste management
operations. The aggregate of these business acquisitions was significant to the
Company. These entities included ASCO Sanitation, Inc., Larry's Disposal, Inc.,
Terre Haute Recycling, Inc., Gilliam Sanitation, Inc./Gilliam Transfer, Inc.,
Anderson Refuse Company, Inc./M.V. Dulworth, and a 72% interest in Procesa
Continental S.A., de C.V. The aggregate purchase price of these businesses was
$8.9 million, plus the assumption or refinancing of $2.1 million of debt and
$0.6 million of future contingent payments. The purchase prices were paid by
issuing 164,846 Shares with a market value of $1.1 million at the time of
issuance, paying $5.8 million of cash obtained from the Company's credit
facility (the "Credit Facility") with LaSalle National Bank ("LNB") and issuing
$2.0 million of notes payable to the sellers.
In October 1995, the Company purchased, through one of its subsidiaries, a
sanitary landfill in Richland County, South Carolina ("Richland"). The acquiring
subsidiary, which is 85% owned by the Company, was organized recently to make
acquisitions of landfills and related solid waste management operations and to
pursue privatization and public-private partnership opportunities in the
Southeastern United States. The Company has an option to acquire the remaining
15% of the subsidiary for approximately $2.4 million of common stock of the
Company. The Company, on behalf of its subsidiary, paid $2.4 million in cash and
notes, and assumed $1.1 million of debt for Richland. As a condition of the
landfill purchase, a South Carolina collection company has entered into, among
other things, a 10-year put-or-pay disposal contract with the Company to provide
a minimum of 300 tons of waste per day, and a 120-day disposal contract for 500
tons of waste per day, with a right of first refusal to the Company for a
long-term extension.
58
<PAGE> 60
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
In March 1996, the Company purchased two construction and demolition
landfills in central Florida for approximately $2.1 million in Shares (195,864
Shares) and $2.3 million in cash.
In March 1996, the Company sold its 72% interest in Procesa Continental
S.A., de C.V., which encompassed all of the Company's Mexico City operations,
for approximately $2.6 million in cash resulting in a pre-tax gain of
approximately $500,000 which was recorded in the first quarter of 1996.
In March 1996, the Company decided to suspend operations at its Prichard,
West Virginia landfill. The Company is evaluating whether to re-open or to
dispose of the facility. The Company recorded a pre-tax charge of approximately
$500,000 for this suspension of operations. This charge consisted primarily of
$350,000 of costs related to closure and post-closure of the facility and other
related closing costs and $150,000 of identified severance and miscellaneous
costs.
In May 1996, the Company purchased a residential and commercial collection
business for $1.2 million in cash, which will be combined into the Company's
Jamax division in Terre Haute, Indiana.
NOTE 3 -- EARNINGS PER SHARE
Earnings per share for the three and six months ended June 30, 1996 and
1995 was based on the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
6/30/96 6/30/95 6/30/96 6/30/95
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average common and common
equivalent shares:
Shares outstanding................ 14,229,000 10,433,000 14,123,000 10,387,000
Dilutive stock options and
warrants....................... 633,000 781,000 596,000 781,000
Contingent shares and options
related to the Victory
acquisition.................... -- 245,000 -- 245,000
----------- ----------- ----------- -----------
14,862,000 11,459,000 14,719,000 11,413,000
=========== =========== =========== ===========
Income available to common
stockholders:
Net income........................ $ 1,592,481 $ 1,314,648 $ 2,909,846 $ 2,337,898
Amortization of incremental
goodwill upon issuance of
additional contingent shares... -- (9,321) -- (19,133)
----------- ----------- ----------- -----------
$ 1,592,481 $ 1,305,327 $ 2,909,846 $ 2,318,765
=========== =========== =========== ===========
</TABLE>
59
<PAGE> 61
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 4 -- SUPPLEMENTAL CASH FLOWS DISCLOSURE
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash paid during the period for:
Interest, net of interest capitalized............................... $1,059,352 $1,416,311
========== ==========
Income taxes........................................................ $1,071,521 $1,233,011
========== ==========
Business acquisitions:
Shares issued.................................................... $2,091,039 $ 96,688
Notes issued to sellers.......................................... -- 244,284
Cash paid........................................................ 3,400,240 1,065,755
---------- ----------
Total consideration paid.................................... 5,491,279 1,406,727
Assets received............................................. 7,102,252 2,276,513
---------- ----------
Liabilities assumed......................................... $1,610,973 $ 869,786
========== ==========
</TABLE>
NOTE 5 -- OTHER INFORMATION
Selected balance sheet account disclosures follow:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Allowance for doubtful accounts............................. $ 580,339 $ 396,000
=========== ===========
Accumulated depreciation and amortization of property and
equipment................................................. $18,102,889 $ 14,215,696
=========== ===========
Accumulated amortization of excess cost over the fair value
of net assets acquired.................................... $ 1,671,678 $ 1,395,054
=========== ===========
</TABLE>
NOTE 6 -- DEBT
In the first quarter of 1996, the Company and its lenders amended the
Credit Facility effective as of January 1, 1996 with covenants effective as of
December 31, 1995. As amended, each borrowing under the Credit Facility bears
interest based on the Company's leverage ratio, as defined, of funded debt to
earnings before interest, taxes, depreciation and amortization. If the leverage
ratio is 2.0 to 1 or less, then the interest rate is, at the Company's option,
prime or LIBOR plus 1.5% and the fee on outstanding letters of credit is .75%.
If the leverage ratio falls between 2.01 to 2.5 compared to 1, then the interest
rate is prime plus 0.5% or LIBOR plus 1.75% and the fee on outstanding letters
of credit is 1.0%. If the leverage ratio falls between 2.51 and 3.0 compared to
1, then the interest rate is prime plus 1.0% or LIBOR plus 2.0% and the fee on
outstanding letters of credit is 1.5%. If the leverage ratio is greater than 3.0
to 1, then the interest rate is prime plus 1% or LIBOR plus 2.5% and the fee on
outstanding letters of credit is 2.0%. The Company and its lenders amended the
Credit Facility again during the second quarter of 1996 to increase the line of
credit from $45 million to $70 million. The Credit Facility now expires in June
1999 and is secured by all corporate assets and a pledge of the stock of all
subsidiaries. The Credit Facility includes provisions for letters of credit up
to $15.0 million. The Company will also pay a 0.5% fee on the average unused
portion of the Credit Facility. As of June 30, 1996, $37.9 million of unused
credit under this facility remained available. Borrowings under the Credit
Facility bore a weighted average interest rate of 6.97% on outstanding loans as
of June 30, 1996.
60
<PAGE> 62
CONTINENTAL WASTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
In April 1996, the Company entered into a $10.0 million facility with Bank
of America which has provided funds for capital expenditures. The capital
equipment financed must be delivered to and accepted by the Company no later
than December 31, 1997. As of June 30, 1996, $8.3 million of unused credit under
this facility remained available. Each lease the Company enters into has a term
of six years. Such borrowings will bear interest at the prevalent market rates.
As of June 30, 1996, the outstanding borrowings bore a weighted average interest
rate of 8.48%.
NOTE 7 -- EXCESS COST OVER THE FAIR VALUE OF NET ASSETS ACQUIRED
Prior to 1996, the excess cost over the fair value of assets acquired
("goodwill") was amortized on a straight-line basis over twenty-five to thirty
years. In the first quarter of 1996, the Company changed the amortization period
for goodwill generated from all non-landfill acquisitions to 40 years consistent
with industry trend and due to the life of operating conditions at such
businesses not being dependent on the capacity of available landfill airspace.
The effect of the change in the second quarter and first half of 1996 was to
decrease amortization expense by approximately $50,000 and $84,000,
respectively.
NOTE 8 -- SUBSEQUENT EVENTS
On July 1, 1996, the Company completed its acquisition of Statewide
Environmental Contractors, Inc. and its affiliated companies, Recycling
Industries, Inc. and Lomac Realty (the "Acquisition"). These three companies
have combined revenues of approximately $12 million and all are engaged in the
waste management business in central New Jersey.
The Company paid $6.7 million in cash, issued 555,512 Shares and issued
$3.0 million in Notes payable to the Sellers for the Acquisition. The Company
will record this transaction as a purchase. The cash portion of the purchase
price was paid using proceeds of an advance under the Company's Credit Facility.
Owing to the length of time required to obtain regulatory approval, the
Company does not anticipate closing on any acquisitions until after the
consummation of the Republic merger.
61
<PAGE> 63
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Addington Resources, Inc.:
We have audited the accompanying consolidated balance sheets of Addington
Resources, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Addington Resources, Inc.
and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Louisville, Kentucky,
February 29, 1996.
62
<PAGE> 64
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 3,387 $ 2,719
Short-term investments................................................ -- 1,474
Accounts receivable, net of allowance for doubtful accounts of $1,100
and $358 for 1995 and 1994, respectively........................... 9,090 7,011
Prepaid expenses and other............................................ 2,626 193
Deferred tax benefits................................................. 620 --
-------- --------
Total current assets.......................................... 15,723 11,397
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost.................................. 119,414 89,537
Less accumulated depreciation......................................... (13,667) (8,020)
-------- --------
105,747 81,517
-------- --------
PROPERTY, PLANT AND EQUIPMENT and other long-term assets of discontinued
operations, net....................................................... -- 91,490
DEFERRED TAX BENEFITS................................................... 4,922 --
RESTRICTED CASH......................................................... 40 4,348
OTHER................................................................... 1,850 5,569
-------- --------
Total Assets.................................................. $128,282 $194,321
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................................... $ 4,743 $ 3,183
Current portion of long-term debt..................................... 1,823 880
Accrued expenses and other............................................ 3,504 5,386
Net current liabilities of discontinued operations.................... -- 689
-------- --------
Total current liabilities..................................... 10,070 10,138
-------- --------
NON-CURRENT LIABILITIES:
Long-term debt, less current portion.................................. 14,407 32,767
Accrued closure and post-closure costs................................ 5,168 2,784
Other long-term liabilities........................................... 7,451 2,981
Deferred income taxes................................................. -- 566
Long-term liabilities of discontinued operations...................... -- 24,864
-------- --------
Total non-current liabilities................................. 27,026 63,962
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 30,000,000 shares authorized,
16,054,301 shares and 15,852,851 shares outstanding at December 31,
1995 and 1994, respectively........................................ 16,054 15,853
Paid-in capital....................................................... 85,934 83,789
Retained earnings..................................................... 2,823 20,579
Less treasury stock; 1,000,000 shares in 1995, at cost................ (13,625) --
-------- --------
Total stockholders' equity.................................... 91,186 120,221
-------- --------
Total liabilities and stockholders' equity.................... $128,282 $194,321
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
63
<PAGE> 65
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
-------- ------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES........................................................ $ 56,739 $36,057 $ 22,600
COSTS AND EXPENSES:
Cost of operations............................................ 30,574 19,665 10,966
Provision for asset write-down................................ -- 670 5,122
Depreciation and amortization................................. 7,506 4,133 2,728
Selling, general and administrative........................... 6,631 7,119 6,503
-------- ------- --------
44,711 31,587 25,319
-------- ------- --------
INCOME (LOSS) FROM OPERATIONS................................... 12,028 4,470 (2,719)
-------- ------- --------
INTEREST AND OTHER INCOME (EXPENSE):
Interest income............................................... 444 772 --
Interest expense.............................................. (955) (277) --
Other, net.................................................... (17) (975) 10
-------- ------- --------
(528) (480) 10
-------- ------- --------
Income (loss) before income tax provision (benefit)........... 11,500 3,990 (2,709)
INCOME TAX PROVISION (BENEFIT).................................. 4,426 1,596 (1,029)
-------- ------- --------
Net income (loss) from continuing operations.......... 7,074 2,394 (1,680)
-------- ------- --------
DISCONTINUED OPERATIONS:
Income (loss) from operations of discontinued segment (less
applicable income taxes (benefit) of $1,899, $(5,380) and
$(4,388) for 1995, 1994 and 1993, respectively)............ 5,707 (9,528) (14,509)
Loss on disposal of segment (less applicable income tax
benefit of $10,000)........................................ (30,537) -- --
-------- ------- --------
Loss from discontinued operations............................. (24,830) (9,528) (14,509)
-------- ------- --------
NET LOSS.............................................. $(17,756) $(7,134) $(16,189)
======== ======= ========
EARNINGS PER SHARE:
Income (loss) from continuing operations...................... $ 0.45 $ 0.15 $ (0.11)
Income (loss) from discontinued operations.................... 0.36 (0.60) (0.93)
Loss on disposal of segment................................... (1.94) -- --
-------- ------- --------
Net loss per share............................................ $ (1.13) $ (0.45) $ (1.04)
-------- ------- --------
Equivalent shares of stock outstanding........................ 15,748 15,798 15,563
======== ======= ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
64
<PAGE> 66
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------
SHARES
------------------- PAID-IN RETAINED TREASURY
AUTHORIZED ISSUED AMOUNT CAPITAL EARNINGS STOCK TOTAL
---------- ------ ------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992... 30,000 15,241 $15,241 $77,668 $ 43,902 $ -- $136,811
Issuance of common stock upon
exercise of stock options.. -- 434 434 3,877 -- -- 4,311
Net loss..................... -- -- -- -- (16,189) -- (16,189)
------ ------ ------- ------- -------- -------- --------
Balance, December 31, 1993... 30,000 15,675 $15,675 $81,545 $ 27,713 $ -- $124,933
Issuance of common stock upon
exercise of stock options.. -- 29 29 312 -- -- 341
Issuance of common stock upon
acquisition of subsidiary.. -- 149 149 1,932 -- -- 2,081
Net loss..................... -- -- -- -- (7,134) -- (7,134)
------ ------ ------- ------- -------- -------- --------
Balance, December 31, 1994... 30,000 15,853 $15,853 $83,789 $ 20,579 $ -- $120,221
Issuance of common stock upon
exercise of stock options.. -- 75 75 645 -- -- 720
Issuance of common stock upon
exercise of stock grants... -- 126 126 1,500 -- -- 1,626
Treasury stock received upon
disposal of subsidiary..... -- -- -- -- -- (13,625) (13,625)
Net loss..................... -- -- -- -- (17,756) -- (17,756)
------ ------ ------- ------- -------- -------- --------
Balance, December 31, 1995... 30,000 16,054 $16,054 $85,934 $ 2,823 $(13,625) $ 91,186
====== ====== ======= ======= ======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
65
<PAGE> 67
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................... $(17,756) $ (7,134) $(16,189)
-------- -------- --------
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 7,506 4,133 2,728
(Gain) loss on disposal and write downs of assets......... (12) 2,035 827
Loss from discontinued operations......................... 24,830 9,528 14,509
Change in assets and liabilities, net of effects from
acquisitions and disposals --
(Increase) decrease in --
Accounts receivable..................................... (2,079) (628) (3,240)
Prepaid expenses and other.............................. (2,433) 732 (279)
Deferred income taxes................................... (6,108) (2,504) 759
Other assets............................................ 186 (1,458) (243)
Increase (decrease) in --
Accounts payable........................................ 1,560 216 1,085
Accrued expenses and other.............................. 3,360 3,197 3,140
Accrued closure and post-closure costs.................. 2,384 1,477 1,022
Other long-term liabilities............................. 4,470 2,306 --
-------- -------- --------
Total adjustments.................................... 33,664 19,034 20,308
-------- -------- --------
Net cash provided by operating activities............ 15,908 11,900 4,119
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets, net of disposal costs.......... 4,125 -- --
Proceeds from sale of discontinued operations, net of
disposal costs............................................ 34,286 -- --
(Increase) decrease in --
Restricted cash......................................... 4,308 (2,449) 245
Short-term investments.................................. 1,474 (1,474) --
Additions to property, plant and equipment................... (27,986) (23,525) (18,516)
Acquisition of environmental companies, net of cash
acquired.................................................. -- (1,863) --
Net (increase) decrease in investment in discontinued
operations................................................ (6,804) (2,913) 4,944
-------- -------- --------
Net cash provided by investing activities............ 9,403 (32,224) (13,327)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt................................... 11,410 26,064 --
Repayments of long-term debt................................. (36,773) (3,891) (668)
Issuance of common stock..................................... 720 341 4,311
Borrowings (repayments) on revolving line of credit.......... -- (57) 6,030
Financing costs incurred..................................... -- (213) --
-------- -------- --------
Net cash provided by (used in) financing
activities......................................... (24,643) 22,244 9,673
-------- -------- --------
Net increase in cash and cash equivalents............ 668 1,920 465
CASH AND CASH EQUIVALENTS, beginning of year................... 2,719 799 334
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year......................... $ 3,387 $ 2,719 $ 799
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
66
<PAGE> 68
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. FINANCIAL STATEMENT PRESENTATION AND PREPARATION
The accompanying consolidated financial statements as of December 31, 1995,
1994 and 1993 include the accounts of Addington Resources, Inc. (the Company)
and its wholly-owned subsidiary, Addington Holding Company, Inc. and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain 1994 and 1993 amounts have been
reclassified to conform to 1995 presentation with no effect on net loss.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
B. COMPANY ENVIRONMENT AND RISKS
The Company's continuing operations are within one segment (Environmental)
and consist of providing waste collection services to residential and commercial
customers and operating landfills for waste disposal. The majority of these
operations (and revenues) are located in the Southeastern United States (U.S.),
with emphasis in Kentucky and North Carolina.
The environmental industry exposes the Company to a number of risks
including: the possibility of the termination of waste service agreements,
fluctuating market and competitive conditions, changing governmental
regulations, loss of key employees and the ability of the Company to obtain the
necessary permits to construct, expand and operate its landfills.
The Company recognizes revenue for its waste collection services as such
services are provided. Services are generally billed in advance and are recorded
as deferred revenues until services are performed. Revenues for the Company's
landfills are recognized as waste is received.
The Company grants credit to its customers based on their creditworthiness
and generally does not secure collateral for its receivables.
C. DEPRECIATION AND AMORTIZATION
Property, plant and equipment are stated at cost. Expenditures for major
additions and improvements are capitalized, while minor replacements,
maintenance and repairs are charged to operations as incurred. Depreciation and
amortization are provided using either the straight-line or units produced or
consumed methods. The following estimated useful lives are used under the
straight-line method:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and improvements........................................... 10-20
Machinery and transportation equipment............................... 3-15
Furniture, fixtures and office equipment............................. 5-10
</TABLE>
Capitalized landfill development costs (included in Property, Plant and
Equipment) are amortized as permitted airspace of the landfill or the related
cell, as applicable, is consumed. Units-of-consumption amortization rates
applicable to each of the Company's operating landfills are determined annually.
The rates are based on estimates made by Company and independent engineers,
considering the information provided by aerial surveys which are generally
performed annually.
67
<PAGE> 69
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financing costs (included in Other Assets) are being amortized using the
straight-line method, over the life of the related debt, which approximates the
effective interest rate method.
Intangible assets (included in Other Assets) primarily consist of customer
lists and covenants not to compete. These assets are amortized over their
estimated useful lives, usually no longer than twenty years and five years,
respectively, using the straight-line method.
D. RESTRICTED CASH
The Company sometimes pays amounts into escrow as required under state
regulations related to closure and post-closure costs of its landfills. The
Company also issues letters of credit as an alternative for securing funding for
the closure and post-closure costs relating to its landfills. During 1995, the
Company issued letters of credit in exchange for reducing or eliminating
virtually all of its escrow accounts.
E. ASSETS HELD FOR SALE (INCLUDED IN OTHER ASSETS)
Assets held for sale at December 31, 1994 represented the Company's
corporate jet. The net book value of the corporate jet approximated $3,200 as of
December 31, 1994. During 1995, the Company sold the corporate jet for $4,125.
F. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the weighted average number of
common shares and common equivalent shares outstanding, as applicable, using the
treasury stock method during the periods. The dilutive effect between primary
and fully-dilutive earning per share is less than 3% or is anti-dilutive for all
periods presented and is therefore not disclosed in the accompanying statements
of operations.
G. STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers
investments having maturities of three months or less at the time of purchase to
be cash equivalents.
The cash amounts of interest and income taxes paid by the Company in 1995,
1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ -------
<S> <C> <C> <C>
Interest, net of amounts capitalized of $2,012, $1,464 and
$2,111:
Continuing operations..................................... $ 782 $ 265 $ 250
Discontinued operations................................... -- 1,891 16,184
Income taxes:
Continuing operations..................................... 1,222 79 --
Discontinued operations................................... -- 706 2,281
</TABLE>
As discussed in Note 3b, during 1995 the Company sold all of its citrus
properties in exchange for 1,000 shares of common stock of the Company, valued
at $13,625. This non-cash activity has been excluded from the 1995 statement of
cash flows.
During 1995, the Company issued 126 shares of common stock upon the
exercise, by their employees, of stock grants (Note 12). This non-cash activity
has been excluded from the 1995 statement of cash flows.
During 1995, 1994 and 1993, the Company acquired certain assets, primarily
property, plant and equipment, by assuming liabilities, primarily notes and
other payables, issuing common stock, and making cash payments. The non-cash
portions of approximately $7,947, $4,440 and $14,788 for the years ended
December 31, 1995, 1994 and 1993, respectively, have been excluded from the
statements of cash flows.
68
<PAGE> 70
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The accompanying statements of cash flows exclude the cash flows from
discontinued operations.
H. LANDFILL CLOSURE COST
The Company estimates its future cost requirements for closure and
post-closure monitoring and maintenance for solid waste operating landfills
based on its interpretation of the technical standards of the U.S. Environmental
Protection Agency's Subtitle D regulations and the proposed air emissions
standards under the Clean Air Act as they are being applied on a state-by-state
basis. Closure and post-closure monitoring and maintenance costs represent the
cash expenditures yet to be incurred when a landfill facility ceases to accept
waste and closes. Accruals for closure and post-closure monitoring and
maintenance requirements consider final capping of the site, site inspections,
groundwater monitoring, leachate management, methane gas control and recovery,
and operation and maintenance costs to be incurred during the period after the
facility closes. The Company provides accruals for these costs as the remaining
permitted airspace of such facilities is consumed. Engineering reviews of the
future cost requirements for closure and post-closure monitoring and maintenance
for the Company's operating landfills are performed at least annually. These
engineering reviews are the basis upon which the Company's estimates of these
future costs and the related accrual rates are revised. Though it is not
expected to be significant, these estimates could change over the life of the
landfill based upon these engineering reviews.
I. INCOME TAXES
Deferred income taxes are recorded based upon temporary differences between
the financial statement and tax bases of assets and liabilities and net
operating loss carryforwards and tax credits available for income tax purposes.
2. DISCONTINUED OPERATIONS
During the third quarter of 1995, the Company implemented a formal plan to
dispose of all of its non-environmental operations. These discontinued
operations consisted primarily of the following: coal mining, mining equipment
manufacturing and licensing, citrus properties in Belize, precious and
industrial metals mining and incidental limestone properties. Accordingly, the
Company's continuing operations are comprised of integrated solid waste
management, which includes landfill operations and waste collection and
recycling services. The Company initially recorded a loss on the disposal of the
discontinued operations of approximately $30,500 (net of income tax benefits of
approximately $10,000) which represents the estimated loss on the disposal of
the non-environmental operations and a provision of approximately $2,000 for
expected operating losses through the final disposition of such operations.
Upon ultimate disposal of its discontinued operations, the Company
determined its initial estimates did not require adjustment.
As discussed in Note 3, as of December 31, 1995, the Company has sold all
of its subsidiaries included in discontinued operations, hence fully disposing
of all non-environmental operations. The recorded transactions reflect the
disposal of all of the Company's non-environmental segments and, accordingly,
the operating results of these segments have been classified as discontinued
operations for all periods presented in the
69
<PAGE> 71
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accompanying consolidated financial statements. Operating results from the
discontinued operations for the years ended December 31, were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Operating revenues..................................... $105,056 $115,099 $359,218
-------- -------- --------
Income (loss) before income taxes...................... 7,606 (14,908) (18,897)
Income tax provision (benefit)......................... 1,899 (5,380) (4,388)
-------- -------- --------
Income (loss) from discontinued operations............. $ 5,707 $ (9,528) $(14,509)
-------- -------- --------
</TABLE>
Included in income from discontinued operations for 1995 is approximately
$14,000 of revenue and $13,000 of pre-tax income from the sale of the Company's
mining technology patent rights in Australia, offset by a $5,300 disposal loss
accrual recorded for Addwest Minerals.
Included in the loss from discontinued operations in 1994 are the following
pretax items: $6,157 loss on disposal in connection with Pittston Minerals
Group, Inc. (Pittston) (Note 3e), $6,800 loss on Southern Illinois Mining
Company, Inc. (Note 3f) and $3,400 loss on limestone project.
Included in the loss from discontinued operations in 1993 are the following
pretax items: $9,384 loss on sulfur project, $5,800 loss on Southern Illinois
Mining Company, Inc. (Note 3f) and $4,050 loss on litigation settlements.
Most of the Company's revenues from discontinued operations have been
generated under long-term coal sales contracts with electric utilities or other
coal-related organizations located in the Eastern U.S. Revenues are recognized
on coal sales in accordance with the sales agreement, which is usually when the
coal is shipped to the customer.
The discontinued operations leased various machinery and equipment. Lease
expense for the discontinued operations was $678, $7,183 and $26,422 for 1995,
1994 and 1993, respectively.
The assets and liabilities of the discontinued operations have been
reclassified in the accompanying consolidated balance sheets from the historical
classification in order to separately identify them as net assets of
discontinued operations. These net assets consist primarily of net working
capital, tangible and intangible noncurrent assets and other long-term
liabilities.
3. SALE OF SUBSIDIARIES (INCLUDED IN DISCONTINUED OPERATIONS)
A. COAL MINING, MINING EQUIPMENT MANUFACTURING AND LICENSING
On September 22, 1995, in a related party transaction, the Company entered
into a stock purchase agreement with Addington Enterprises, Inc. (a company
f/k/a Addington Acquisition Company, Inc., owned by Larry Addington, Robert
Addington and Bruce Addington; collectively, the Addington Brothers) whereby the
Company would receive $30,000, subject to a working capital adjustment, in
exchange for all the issued and outstanding shares of common stock of its
subsidiaries, Addington Mining, Inc., Mining Technologies, Inc., Addwest Mining,
Inc. and Addington Coal Holding, Inc. This agreement closed on November 2, 1995,
at which time the proceeds received were used by the Company to pay down its
revolving line of credit. In addition, the Company retained the right to receive
certain contingent payments due under the Company's technology sale to BHP
Australia Coal Pty. Ltd. (Note 4). As of December 31, 1995, the Company
estimates such payments may aggregate $3,000.
Included in the transaction described above and pursuant to an option
agreement dated August 4, 1995, the Company sold to the Addington Brothers all
the issued and outstanding shares of common stock of its subsidiary, Tennessee
Mining, Inc. According to the terms of the option agreement, the Addington
Brothers will pay the Company a royalty based on tons of coal delivered under a
certain coal sales contract, up to a
70
<PAGE> 72
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
maximum aggregate royalty of $12,500. The Company had not received any payments
from the Addington Brothers under this agreement as of December 31, 1995. Due to
contingencies, no receivable for this royalty has been recorded.
B. CITRUS PROPERTIES
On September 22, 1995, in a related party transaction, the Company entered
into an agreement to sell all of the issued and outstanding shares of common
stock of its subsidiary, Belize River Fruit Co., to Larry and Bruce Addington in
exchange for 1,000 shares of common stock of the Company owned by Larry and
Bruce Addington. This transaction was consummated on November 2, 1995, at which
time the Company acquired the 1,000 shares valued at $13,625 and recorded them,
at cost, as treasury stock. The Company retained no obligations in connection
with the sale and has fully divested its investment in citrus operations.
C. ADDWEST MINERALS, INC.
Addwest Minerals, Inc. (Addwest), a wholly-owned subsidiary of the Company,
was organized to mine, extract and market precious and industrial metals. On
November 1, 1995, the Company entered into a letter agreement, which was later
finalized as a Stock Purchase Agreement (the Agreement), that provided for the
sale to an unrelated party of all the capital stock of Addwest. On December 29,
1995, the Company consummated the Agreement to dispose of Addwest.
The terms of the Agreement required the Company to contribute additional
capital to Addwest in an amount sufficient to pay substantially all existing
liabilities of Addwest through the date of the Agreement, with the exception of
the remaining balance on the Rothschild gold loan. The proceeds received from
the sale ($3,525) were used to retire the remaining balance on the Rothschild
gold loan and the Company has been fully released from its obligations under
that loan.
In accordance with the Company's plan to dispose of Addwest, during 1995 it
closed all previously existing hedging positions (i.e. forward sales contracts
and option collars related to gold bullion). A small gain was realized upon
closing these positions and has been reflected within the discontinued
operations' disposal loss.
D. NEW RIVER LIME
On November 17, 1995, the Company sold all of the real property, as well as
all buildings, structures and improvements of its wholly-owned subsidiary, New
River Lime, Inc. (NRL), to an unrelated party for $2,500 in cash. The Company
retained no obligations in connection with the sale and has fully divested its
investment in NRL.
E. PITTSTON DISPOSAL
During September 1993, the Company entered into an agreement to sell the
stock of five of its coal subsidiaries to Pittston. This transaction was
consummated on January 14, 1994 and a loss on disposal was recorded during 1994
of $6,157. In connection with the sale, the Company provided certain guarantees
to Pittston (Note 11g).
F. SOUTHERN ILLINOIS MINING COMPANY, INC.
During April, 1992, the Company sold all of the outstanding stock of one of
its subsidiaries, Southern Illinois Mining Company, Inc. ("SIMC"), to Marion
Mining Corporation ("Marion") for $1,000 in cash and an approximately $10,400
promissory note (the "SIMC Note"). On February 1, 1993, both Marion and SIMC
filed bankruptcy. On November 5, 1993, the Company filed a foreclosure action in
state court in
71
<PAGE> 73
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Illinois to foreclose the security interest in the real property and personal
property of SIMC. SIMC subsequently filed an adversary proceeding against the
Company.
During 1993, the Company established a $5,800 reserve against the SIMC
Note. Such valuation was determined considering the estimated ultimate
realizable value of the assets that would be recovered from bankruptcy. During
the third quarter of 1994, the Company determined that the net value of the
assets to be recovered from bankruptcy would be substantially less than
previously expected. Accordingly, the Company fully reserved for this note
receivable and reserved for certain other costs to be incurred in connection
with bringing the bankruptcy proceeding to a conclusion (total charge of
$6,800).
On November 14, 1994, the U.S. Bankruptcy Court approved a settlement of
all issues between the Company and SIMC. Rights to any property or proceeds to
be received from this settlement were included with the sale of the coal mining,
mining equipment manufacturing and licensing operation as described in Note 3a.
4. SALE OF AUSTRALIAN MINING TECHNOLOGY PATENT RIGHTS
During 1995, the Company entered into a mining technology exchange
agreement with BHP Australia Coal Pty Ltd. (BHPAC) whereby the Company sold its
Australian patent right on highwall mining machines and certain other related
technology. In consideration for the sale, the Company received cash during 1995
of $14,000. The agreement also provides for contingent payments to the Company
(estimated to aggregate $3,000) upon the satisfaction of certain production
requirements related to BHPAC's use of a highwall mining system incorporating
the sold technology.
The Company's subsidiary which developed the sold patent rights and
technology is one of the subsidiaries which have been sold to Addington
Acquisition Company, Inc. (see Note 3a). However, certain rights to receive
contingent payments from BHPAC under the mining technology exchange agreement
have been retained by the Company.
5. SHORT-TERM INVESTMENTS
At December 31, 1994, the Company's short-term investments, which are
deemed to be available-for-sale, consisted of investments in municipal
obligations. The fair value of these instruments approximate their cost of
$1,474 as of December 31, 1994. As the fair value approximates the cost of these
investments, there are no unrealized holding gains or losses associated with
such investments as of December 31, 1994.
During 1995, the Company sold these investments at fair value. As the fair
value of such investments approximated their cost (using the specific
identification method), there were no realized gains or losses associated with
the sale of such investments in 1995.
72
<PAGE> 74
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized by major classification as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Land.............................................................. $ 2,713 $ 2,450
Buildings and improvements........................................ 1,121 1,073
Machinery and transportation equipment............................ 18,448 13,383
Furniture, fixtures and office equipment.......................... 505 710
Landfill and other development costs.............................. 70,867 55,881
Construction in progress.......................................... 25,760 16,040
-------- -------
$119,414 $89,537
======== =======
</TABLE>
Environmental development costs include the costs to develop landfills,
which consist of expenditures for land and related airspace, permitting costs
and preparation costs. Landfill permitting and preparation costs represent only
direct costs related to these activities, including legal, engineering,
construction of landfill improvements, cell development costs and the direct
costs of Company personnel dedicated for these purposes.
Included in property, plant and equipment as of December 31, 1995 and 1994
are approximately $25,760 and $16,040, respectively, related to start-up
development projects for which depreciation and amortization have not yet
commenced. The Company reviews the realization of these projects on a periodic
basis.
7. ACCRUED EXPENSES AND OTHER
As of December 31, 1995 and 1994, accrued expenses and other consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1994
------ ------
(IN THOUSANDS)
<S> <C> <C>
Payroll and employee benefits........................................ $ 697 $1,125
Workers' compensation costs.......................................... 314 477
Deferred revenue..................................................... 858 939
Property taxes....................................................... 106 224
Disposal reserves and other.......................................... 1,529 2,621
------ ------
$3,504 $5,386
====== ======
</TABLE>
8. OTHER NON-CURRENT LIABILITIES
As of December 31, 1995 and 1994, other non-current liabilities consisted
of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1994
------ ------
(IN THOUSANDS)
<S> <C> <C>
Accrued royalties................................................... $ 600 $ 675
Accrued income taxes................................................ 3,385 616
Disposal reserves and other......................................... 3,466 1,690
------ ------
$7,451 $2,981
====== ======
</TABLE>
73
<PAGE> 75
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. CLOSURE AND POST-CLOSURE COSTS
The Company, during its normal course of business, is required to expend
funds for environmental protection and remediation. Such expenditures are not
expected to have a materially adverse effect on its financial condition or
results of operations considering its business is based upon compliance with
environmental laws and regulations and its services are priced accordingly.
As of December 31, 1995, the Company operates several solid waste
landfills. The Company is responsible for closure and post-closure monitoring
and maintenance costs at virtually all of these landfills which are currently
operating or are engaged in expansion efforts. Estimated aggregate closure and
post-closure costs are to be fully accrued for these landfills at the time that
such facilities cease to accept waste and are closed. Considering existing
accruals at the end of 1995, approximately $70 million of additional accruals
are to be provided over the remaining lives of these facilities. This estimate
is calculated with the assistance of independent engineers and is based on the
need for significant future capital costs to complete expansion efforts over the
lives of the landfills. Such additional accruals to be provided have been
estimated based on current costs and existing regulatory requirements, and
assume that the landfills will be filled to capacity. Due to uncertainties and
significant judgments used in determining this amount, the actual amount to be
expended may differ substantially.
10. DEBT
As of December 31, 1995 and 1994 the Company's debt consisted of the
following:
A. REVOLVING LINE OF CREDIT
During 1995, the Company's environmental subsidiaries amended their line of
credit agreement with a bank. This amended agreement, which is secured by
virtually all of the assets and common stock of the environmental subsidiaries,
provides for maximum borrowings of $50 million and bears interest at either a
rate driven by the bank's base rate plus 0% to .75% or the Eurodollar rate plus
1.75% to 2.75%. As of December 31, 1995, the Company had no outstanding balance
under this credit agreement. The available balance under the credit agreement is
reduced by approximately $26,474 in letters of credit issued primarily as
security for solid waste revenue bonds and the closure and post-closure
monitoring and maintenance of landfills. Accordingly, borrowings available under
the credit agreement approximated $23,526 as of December 31, 1995.
As of December 31, 1994, $21,000 was outstanding under the credit
agreement, of which $6,000 was at the bank's base driven rate (9.25%) and
$15,000 was at the Eurodollar rate (9.125%). Since no principal payments are
required under this credit agreement until its expiration in May 1997, the
outstanding balance as of December 31, 1994, was classified as long-term. In
January 1996, the expiration was amended to July 31, 1997.
In connection with the credit agreement, which has been guaranteed by ARI,
the Company has agreed to certain restrictive covenants which, among others,
limit the amount of dividends that the Company can pay, limit its ability to
incur additional indebtedness, and require the Company to maintain certain
financial ratios. The Company is in compliance with these covenants as of
December 31, 1995.
B. REVENUE BONDS
In June, 1994, one of the Company's environmental subsidiaries, Broadhurst
Environmental, Inc., together with the Wayne County Solid Waste Management
Authority, issued $7,400 of tax exempt revenue bonds to finance the construction
and development of a landfill in Wayne County, Georgia. These bonds mature on
July 1, 2014 and bear interest at a rate that floats on a weekly basis, with a
maximum interest rate of 12% per annum. The interest rate as of December 31,
1995 and 1994 was 5.55% and 5.95% per annum, respectively. The bonds are
supported by an irrevocable letter of credit issued under the Company's credit
74
<PAGE> 76
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreement (see Note 10a). The fee charged for the letter of credit as of
December 31, 1995 is 1.75% per annum.
C. LONG-TERM DEBT
As of December 31, 1995 and 1994, long-term debt consisted of the
following:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
(IN THOUSANDS)
Solid waste revenue bonds, see Note 10b............................ $ 7,400 $ 7,400
Note Payable, revolving line of credit, see Note 10a............... -- 21,000
Various capital leases, secured by equipment, bearing interest
ranging from 8.4% to 9.6%, maturing through 2002, see Note 11a... 8,389 --
Note payable, secured by aircraft, bearing interest at 6%, retired
in 1995.......................................................... -- 3,346
Note payable, unsecured, with annual payments of $180,000,
non-interest bearing (imputed at 7%), maturing June 12, 1997..... 338 472
Various other notes payable, bearing interest ranging from 7.5% to
21%.............................................................. 103 1,429
------- -------
$16,230 $33,647
Less-current portion............................................... 1,823 880
------- -------
$14,407 $32,767
======= =======
</TABLE>
Principal payments required for long-term debt after December 31, 1995 are
as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
--------------------------------------------------------------- --------------
(IN THOUSANDS)
<S> <C>
1996........................................................... $ 192
1997........................................................... 185
1998........................................................... 18
1999........................................................... 19
2000........................................................... 21
Thereafter..................................................... 7,406
------
Total.......................................................... $7,841
======
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
A. LEASES
The Company has various operating and capital leases for transportation and
other equipment. Lease expense for continuing operations for the years ending
December 31, 1995, 1994 and 1993 was approximately $2,552, $1,738 and $1,078
respectively. Property under capital leases, included with property, plant and
equipment in the accompanying consolidated balance sheet at December 31, 1995
was $6,174, less accumulated depreciation of $667. Depreciation of assets under
capital leases is included in depreciation expense.
75
<PAGE> 77
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Approximate noncancelable future minimum payments are as follows:
<TABLE>
<CAPTION>
YEAR OPERATING CAPITAL
------------------------------------------------------------------ --------- -------
(IN THOUSANDS)
<S> <C> <C>
1996.............................................................. $ 1,834 $ 2,350
1997.............................................................. 1,629 2,350
1998.............................................................. 979 2,181
1999.............................................................. 564 1,675
2000.............................................................. 213 889
Thereafter........................................................ -- 1,124
--------- -------
Total minimum lease payments............................ $ 5,219 $10,569
=======
Less -- amount representing interest.............................. 2,180
-------
Present value of minimum lease payments (Note 10c)................ 8,389
Less -- current portion........................................... 1,631
-------
$ 6,758
=======
</TABLE>
B. LEGAL MATTERS
The Company is named as defendant in various actions in the ordinary course
of its business. These actions generally involve disputes related to contract
performance, personal injuries, as well as other civil actions that could result
in additional litigation or other adversary proceedings.
While the final resolution of any matter may have an impact on the
Company's consolidated financial results for a particular reporting period,
management believes that the ultimate disposition of these matters will not have
a materially adverse effect upon the consolidated financial position of the
Company.
C. ENVIRONMENTAL SERVICE CONTRACTS
The Company has commitments (primarily with municipalities) to operate
landfills and provide waste hauling services under various contracts for terms
of up to 40 years. Revenues for such contracts are generally at stated rates but
may be adjusted periodically for inflation.
D. ENVIRONMENTAL PROCEEDINGS
The Company is involved in various environmental matters and proceedings,
including permit application proceedings, in connection with the establishment,
operation and expansion activities of certain landfill facilities, as well as
other matters or claims that could result in additional environmental
proceedings.
While the final resolution of any matter may have an impact on the
Company's consolidated financial results for a particular reporting period,
management believes that the ultimate disposition of these matters will not have
a material adverse effect upon the consolidated financial position of the
Company.
E. ENVIRONMENTAL INSURANCE
In order to meet existing government requirements, the Company has obtained
environmental impairment liability insurance coverage for certain environmental
risks arising from the operation of their landfill facilities. However, if an
environmental impairment was of a magnitude that exceeded the Company's
coverage, it could have a material adverse effect on the Company's business or
its financial condition and results of operations.
76
<PAGE> 78
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
F. EMPLOYMENT CONTRACTS
The Company has employment contracts with certain members of management
which include termination benefits based on the occurrence of certain events.
G. SALE OF CERTAIN SUBSIDIARIES
During January 1994, the Company sold the stock of five of its coal
subsidiaries to Pittston. In connection with the sale, the Company provided
certain guarantees of indemnification to Pittston. In connection with the sale
of coal subsidiaries to the Addington Brothers (see Note 3a), the Company
received indemnification related to its guarantees to Pittston as well as other
matters, including its guaranty of certain mineral lease royalty obligations and
workers' compensation benefits.
In connection with the sale of Addwest (Note 3c), the Company agreed to
remain liable for the performance of an Addwest obligation for $175. Certain
royalty rights are being held in escrow until the buyers pay the Addwest
obligation.
12. STOCK OPTION AND STOCK GRANT PLANS
The Company has a non-qualified stock option plan pursuant to which 1,500
shares of common stock were reserved for issuance and may be granted to
officers, directors, and key employees of the Company and to key independent
contractors of the Company in amounts and upon terms and conditions to be
determined from time to time by the Compensation Committee of the Board of
Directors. Stock options generally are exercisable either three years or five
years from the date of issuance. The following stock options have been issued,
exercised or canceled as of December 31:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Outstanding at beginning of year........ 685 490 924
Issued................................ 220 282 --
Canceled.............................. (369) (58) --
Exercised............................. (75) (29) (434)
---------- ---------- ----------
Outstanding at end of year.............. 461 685 490
========== ========== ==========
Exercisable at end of year.............. 187 101 278
Available for future grants at end of
year.................................. 482 276 500
Price range per share:
Issued................................ $ 9.50 $ 9.75 $ --
Canceled.............................. 7.50 -- 14.75 7.50 -- 9.63 --
Exercised............................. 7.50 -- 9.75 9.75 -- 14.75 9.75 -- 14.75
Outstanding at end of year............ 7.50 -- 14.75 7.50 -- 14.75 7.50 -- 14.75
</TABLE>
In connection with the sale of subsidiaries discussed in Note 3, the
Company terminated all non-vested stock options previously granted under its
stock option plan to individuals who ceased being employees of the Company as a
result of the transactions.
In 1994, options for a total of 59 shares of the Company's common stock
previously granted to eleven employees were terminated. The Company compensated
each of these employees in the amount of the number of options held by each
employee multiplied by the difference between the per share option exercise
price and $16. The total cost for such terminations was approximately $416.
The Company also has a non-qualified stock grant plan pursuant to which 500
shares of common stock were reserved for issuance to employees of the Company,
except that officers, directors and owners of more than 10% of the Company's
common stock are not eligible to receive stock grants. All stock grants issued
to
77
<PAGE> 79
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
date specify that the recipient of the stock grant must remain employed by the
Company for 5 years from the date of grant in order to exercise the grant. As of
December 31, the following stock grants were issued or canceled:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of year................................. 161 174 193
Issued......................................................... -- -- --
Canceled....................................................... -- (13 ) (19 )
Exercised...................................................... (126) -- --
---- ---- ----
Outstanding at end of year....................................... 35 161 174
==== ==== ====
Available for issue at year end.................................. 339 339 326
==== ==== ====
</TABLE>
In connection with the transaction discussed in Note 3e, the Company has
amended the stock grant plan to provide, among other things, that service by an
employee with Pittston or an affiliate as a result of the transaction will be
counted toward the time of service required under the stock grants. Employees
holding stock grants for a total of 92 shares of common stock became employees
of Pittston as a result of the transaction. The Company has included the
compensation related to this matter in its measurement of the loss on the
Pittston transaction (see Note 3e).
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), issued in October 1995 and effective for
fiscal years beginning after December 15, 1995, encourages, but does not
require, a fair value based method of accounting for employee stock options or
similar equity instruments. It also allows an entity to elect to continue to
measure compensation cost under Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" (APB No. 25), but requires proforma
disclosures of net income and earning per share as if the fair value based
method of accounting had been applied. The Company expects to adopt SFAS 123 in
1996. While the Company is still evaluating SFAS 123, it currently expects it
will continue to measure compensation cost under APB No. 25 and comply with the
pro forma disclosure requirements.
13. INCOME TAXES
The Company follows the accounting for income taxes under SFAS No.
109 -- "Accounting for Income Taxes". A requirement of SFAS No. 109 is that
deferred income tax liabilities or assets at the end of each period will be
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered. Accordingly, income tax provisions will increase or decrease
in the same period in which a change in tax rates is enacted.
78
<PAGE> 80
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax provision (benefit) for the years ended December 31, 1995,
1994, and 1993 consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................. $(1,901) $ 1,926 $ (285)
State................................................... 393 683 34
------- ------- -------
(1,508) 2,609 (251)
------- ------- -------
Deferred:
Federal................................................. 5,745 (850) (506)
State................................................... 189 (163) (272)
------- ------- -------
5,934 (1,013) (778)
------- ------- -------
$ 4,426 $ 1,596 $(1,029)
======= ======= =======
</TABLE>
The following is a reconciliation (in thousands) of the income tax
provision (benefit) at the statutory tax rate of 34% to the Company's effective
rate for the years ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1995 1994 1993
---------------- ---------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Federal taxes at statutory rate......... $3,910 34.0% $1,357 34.0% $ (921) (34.0)%
Other, net.............................. 132 1.1 (104) (2.6) 49 1.8
State taxes, net of Federal tax
benefit............................... 384 3.4 343 8.6 (157) (5.8)
------ ------- ------ ------- ------- -------
$4,426 38.5% $1,596 40.0% $(1,029) (38.0)%
====== ===== ====== ===== ======= ======
</TABLE>
Deferred tax assets and liabilities as of December 31, 1995 and 1994
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Alternative minimum tax credits.................................. $ 8,062 $ 7,662
Accrued expenses and reserves.................................... 2,807 491
Contingent royalty receivable.................................... 4,560 --
Other............................................................ -- 375
------- -------
15,429 8,528
Valuation allowance.............................................. (4,000) (3,600)
------- -------
Total deferred tax assets................................ 11,429 4,928
------- -------
Deferred tax liabilities:
Property, plant and equipment.................................... (5,887) (5,494)
------- -------
Total deferred tax liabilities........................... (5,887) (5,494)
------- -------
Net deferred tax asset (liability)............................... $ 5,542 $ (566)
======= =======
</TABLE>
The alternative minimum tax credits and their accompanying valuation
allowance (described above) were generated by the Company's discontinued
operations and, accordingly, they have no effect on the income tax provision
(benefit) from continuing operations. In connection with the disposal
transactions described in
79
<PAGE> 81
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Note 3, however, the Company retained this deferred tax asset and it will be
available for future use by the continuing operations.
As of December 31, 1995 and 1994, the Company's alternative minimum tax
credit carryforwards have an unlimited carryforward period. A valuation
allowance is provided when it is more likely than not that some portion of the
deferred tax asset will not be realized. The Company has recorded a valuation
allowance against these credits due to uncertainties in realization using the
"more likely than not" valuation method.
As of December 31, 1995, the Company has Federal alternative minimum tax
net operating loss carryforwards of $4,700, which if not utilized will expire in
2008.
14. 401(K) SAVING PLAN
The Company has a qualifying 401(k) savings plan covering substantially all
employees. Under this plan, the Company matches (up to a maximum of 6% gross
wages) 50% of the employee's contributions. The Company's expense under this
plan was approximately $70 and $18 for 1995 and 1994, respectively.
15. PROVISION FOR ASSET WRITE-DOWNS AND OTHER CHARGES
During 1994 and 1993, the Company recorded certain provisions for asset
write-downs and other one-time charges. These charges are reflected in the
Company's 1994 and 1993 consolidated statement of operations as follows:
(a) During 1994, the Company wrote off approximately $670 associated
with certain environmental projects as they were no longer being pursued by
the Company.
(b) During 1994, the Company wrote off approximately $1,200 associated
with the Company's investment in a recycling technologies company. The
Company wrote off its entire investment in this company in 1994 (included
in other expense) due to the investee experiencing substantial financial
difficulties.
(c) During 1993 the Company wrote off approximately $5,122 of assets
relating to experimental composting and recycling technology.
16. RELATED PARTY TRANSACTIONS
The Company has dealt with certain companies or individuals which are
related parties either by having stockholders/officers in common or because they
are controlled by stockholders/officers or by relatives of stockholders/officers
of the Company. The Company recorded various expenses (included in discontinued
operations) to related parties consisting of approximately $3,809, $7,517 and
$19,296 for trucking services, office rent, flight fees and royalties for the
years ended December 31, 1995, 1994 and 1993, respectively.
The Company had amounts receivable from related parties of $5 as of
December 31, 1995 and amounts payable to related parties of $134 as of December
31, 1994. (See Note 3 for additional related-party transactions).
17. ACQUISITIONS
A. MID STATE ENVIRONMENTAL, INC.
During 1994, one of the Company's subsidiaries, Mid State Environmental,
Inc., acquired a landfill near Macon, Georgia. The purchase price included 149
shares of Addington Resources, Inc. stock, cash of approximately $1,453, future
royalties based on revenue generated from the landfill operations and a
contingent payment of approximately $3,600 upon receipt of a permit allowing the
landfill to accept municipal and solid waste. This acquisition was accounted for
as a purchase.
80
<PAGE> 82
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The landfill, at the date of acquisition, was permitted to accept
construction and demolition waste and certain industrial waste. In October,
1995, a permit allowing the landfill to accept municipal and solid waste became
final and nonappealable. Accordingly, the Company made the $3,600 payment due to
the seller.
During 1995, the seller requested that the Company register the 149 shares
for resale. The sales agreement provided that under certain conditions the
Company is obligated to the seller for the difference, if any, between the per
share market price on the date of receipt of the seller's request for
registration (approximately $13.75 per share) and the per share market price on
the date immediately preceding the effective date of the registration statement
for resale. The Company has not yet filed the requested registration statement.
B. DOZIT COMPANY, INC.
During 1994, one of the Company's subsidiaries, Addington Environmental,
Inc., acquired all of the outstanding stock of Dozit Company, Inc. for
approximately $330, as well as future royalty payments based primarily on tons
of waste received at the landfill. This acquisition was accounted for as a
purchase.
The landfill is located in Union County, Kentucky. The acquisition included
a newly issued contained landfill construction permit. The new facility is
located adjacent to the existing landfill, was built to current federal and
state landfill standards, and opened in November, 1994.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosure about Fair Value of Financial Instruments". The Company has used the
following methods and assumptions to estimate the fair value of each class of
financial instrument:
A. CASH AND CASH EQUIVALENTS
The fair value approximates the carrying amount due to the short maturity
(three months or less) of the instruments.
B. SHORT-TERM INVESTMENTS
The fair value is based on quoted market prices for the same or similar
financial instruments.
C. RESTRICTED CASH
The estimated fair value of financial instruments that reprice or mature in
less than three months approximates the carrying amount due to the short
maturities of the instruments. The fair value of financial instruments with
maturities greater than three months are estimated based on quoted market prices
for the same or similar financial instruments.
D. LONG-TERM DEBT
The fair value of the Company's debt maturing within one year approximates
the carrying amount due to the short-term maturities involved.
The fair value of the solid waste revenue bonds approximates the carrying
amount, as the interest rates on the bonds are reset weekly based on the rate of
interest that competitive securities would bear having similar credit and
maturity characteristics.
81
<PAGE> 83
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of the other debt is estimated by discounting future cash
flows using an interest rate considered market for borrowings of similar credit
quality and maturity.
The carrying and estimated fair values of the Company's financial
instruments are as follows (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------
1995 1994
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents..................... $ 3,387 $ 3,387 $ 2,719 $ 2,719
Short-term investments........................ -- -- 1,474 1,474
Restricted cash............................... 40 40 4,348 4,348
Long-term debt (including current portion).... (16,230) (16,230) (33,647) (33,647)
</TABLE>
The fair value estimates are made at discrete points in time based on
relevant market information and information about the financial instruments.
These estimates may be subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision.
In the normal course of business, the Company has letters of credit,
performance bonds and other guarantees which are not reflected in the
accompanying consolidated balance sheets. In the past, no significant claims
have been made against these financial instruments. Management believes that the
likelihood of performance under these financial instruments is minimal and
expects no material losses to occur in connection with these financial
instruments.
82
<PAGE> 84
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. QUARTERLY FINANCIAL DATA (UNAUDITED -- IN THOUSANDS OF DOLLARS EXCEPT PER
SHARE AMOUNTS)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1995 QUARTER QUARTER QUARTER QUARTER YEAR
- ------------------------------------------- ------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net revenues............................... $10,748 $14,253 $ 16,578 $15,160 $ 56,739
------- ------- -------- ------- --------
Income from operations..................... 1,511 3,195 3,309 4,013 12,028
Net income from continuing operations...... 1,077 1,926 1,899 2,172 7,074
Income from discontinued operations........ 863 3,066 1,778 -- 5,707
Loss on disposal of segment................ -- -- (30,537)(3) -- (30,537)(3)
------- ------- -------- ------- --------
Net income (loss)................ $ 1,940 $ 4,992 $(26,860) $ 2,172 $(17,756)
======= ======= ======== ======= ========
Earnings per share (1):
Income (loss) from continuing
operations............................ $ 0.07 $ 0.12 $ 0.12 $ 0.14 $ 0.45
Income (loss) from discontinued
operations............................ 0.05 0.19 0.11 -- 0.36
Loss on disposal......................... -- -- (1.91) -- (1.94)
------- ------- -------- ------- --------
Net income (loss)................ $ 0.12 $ 0.31 $ (1.68) $ 0.14 $ (1.13)
======= ======= ======== ======= ========
1994
Net revenues............................... $ 6,851 $ 8,867 $ 9,942 $10,397 $ 36,057
------- ------- -------- ------- --------
Income from operations..................... 1,094 1,121 674 1,581 4,470
Net income (loss) from continuing
operations............................... 525 1,022 (244)(2) 1,091 2,394(2)
Income (loss) from discontinued
operations............................... 2,344 521 (11,575) (818) (9,528)
------- ------- -------- ------- --------
Net income (loss)................ $ 2,869 $ 1,543 $(11,819) $ 273 $ (7,134)
======= ======= ======== ======= ========
Earnings per share (1):
Income (loss) from continuing
operations............................ $ 0.03 $ 0.07 $ (0.02) $ 0.07 $ 0.15
Income (loss) from discontinuing
operations............................ 0.15 0.03 (0.73) (0.05) (0.60)
------- ------- -------- ------- --------
Net income (loss)................ $ 0.18 $ 0.10 $ (0.75) $ 0.02 $ (0.45)
======= ======= ======== ======= ========
</TABLE>
- ---------------
(1) Quarters may not add to annual net income (loss) per share due to changes in
shares outstanding
(2) Includes the asset write-downs and other charges described in Note 15
(3) Represents sale of discontinued operations as described in Note 2
20. SUBSEQUENT EVENT (UNAUDITED)
During June 1996, the Company entered into an Agreement and Plan of Merger
with Republic Industries, Inc. (Republic), pursuant to which the parties will
enter into a business combination for which each share of the Company's common
stock will be exchanged for 0.9 shares of Republic's common stock. The proposed
transaction, which is intended to be accounted for as a pooling-of-interests
business combination, is subject to the approval of regulators and Company
shareholders and other customary terms and conditions.
83
<PAGE> 85
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
-------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 2,624 $ 3,387
Accounts receivable, net............................................. 8,957 9,090
Prepaid expenses and other........................................... 3,937 3,246
-------- --------
Total current assets......................................... 15,518 15,723
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost................................. 130,375 119,414
Less accumulated depreciation........................................ (17,177) (13,667)
-------- --------
113,198 105,747
-------- --------
OTHER.................................................................. 7,465 6,812
-------- --------
Total assets................................................. $136,181 $128,282
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................................... $ 4,023 $ 4,743
Current portion of long-term debt.................................... 1,929 1,823
Accrued expenses and other........................................... 5,876 3,504
-------- --------
Total current liabilities.................................... 11,828 10,070
-------- --------
NON-CURRENT LIABILITIES:
Long-term debt, less current portion................................. 15,987 14,407
Accrued closure and post-closure costs............................... 6,159 5,168
Other long-term liabilities.......................................... 5,422 7,451
-------- --------
Total non-current liabilities................................ 27,568 27,026
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 30,000,000 shares authorized,
16,189,284 shares and 16,054,301 shares outstanding at June 30,
1996 and December 31, 1995, respectively.......................... 16,189 16,054
Paid-in capital...................................................... 87,145 85,934
Retained earnings.................................................... 7,076 2,823
Less treasury stock; 1,000,000 shares, at cost....................... (13,625) (13,625)
-------- --------
Total stockholders' equity................................... 96,785 91,186
-------- --------
Total liabilities and stockholders' equity................... $136,181 $128,282
======== ========
</TABLE>
84
<PAGE> 86
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ ------------------
1996 1995 1996 1995
------- ------- ------- -------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
REVENUES............................................... $15,380 $14,253 $29,695 $25,001
------- ------- ------- -------
COSTS AND EXPENSES:
Cost of operations................................... 8,768 7,847 17,506 14,468
Depreciation and amortization........................ 1,908 1,930 3,879 3,191
Selling, general and administrative.................. 1,117 1,281 2,161 2,636
------- ------- ------- -------
11,793 11,058 23,546 20,295
------- ------- ------- -------
Income from operations............................... 3,587 3,195 6,149 4,706
------- ------- ------- -------
INTEREST AND OTHER INCOME (EXPENSE):
Interest income...................................... 1 170 27 284
Interest expense..................................... (79) (123) (142) (174)
Other, net........................................... (435) (31) (208) 188
------- ------- ------- -------
(513) 16 (323) 298
------- ------- ------- -------
Income before income tax provision................... 3,074 3,211 5,826 5,004
INCOME TAX PROVISIONS:
Federal.............................................. 681 1,092 1,231 1,701
State................................................ 149 193 342 300
------- ------- ------- -------
830 1,285 1,573 2,001
------- ------- ------- -------
Income from continuing operations.................... 2,244 1,926 4,253 3,003
DISCONTINUED OPERATIONS
Income from operations of discontinued segment....... -- 3,066 -- 3,929
(less applicable income taxes of $2,030 and $2,219
for the three and six months ended June 30, 1995)
NET INCOME............................................. $ 2,244 $ 4,992 $ 4,253 $ 6,932
======= ======= ======= =======
EARNINGS PER SHARE:
Income from continuing operations.................... $ .15 $ .12 $ .28 $ .19
Income from discontinued operations.................. -- .19 -- .24
------- ------- ------- -------
Net income per share................................. $ .15 $ .31 $ .28 $ .43
======= ======= ======= =======
Equivalent shares of stock outstanding............... 15,369 16,224 15,349 16,127
======= ======= ======= =======
</TABLE>
85
<PAGE> 87
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income............................................................. $ 4,253 $ 6,932
-------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization....................................... 3,879 3,191
Income from discontinued operations................................. -- (3,929)
Gain on sale of assets.............................................. -- (903)
Change in assets and liabilities, net of effects from acquisitions and
disposals --
(Increase) decrease in --
Accounts receivable............................................... 133 (219)
Prepaid expenses and other........................................ (691) (301)
Other assets...................................................... (1,022) 2,211
Increase (decrease) in --
Accounts payable.................................................. (720) (207)
Accrued expenses and other........................................ 343 (2,380)
Accrued closure and post-closure costs............................ 991 1,024
-------- --------
Total adjustments.............................................. 2,913 (1,513)
-------- --------
Net cash provided by operating activities...................... 7,166 5,419
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of assets, net of disposal costs.................... -- 4,125
Decrease in short term investments..................................... 263
Additions to property, plant and equipment............................. (10,961) (11,190)
Net decrease in investment in discontinued operations.................. -- (659)
-------- --------
Net cash used in investing activities.......................... (10,961) (7,461)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Repayments of long-term debt........................................... (314) (4,111)
Issuance of common stock............................................... 1,346 971
Borrowings on revolving line of credit................................. 2,000 3,000
-------- --------
Net cash provided by (used in) financing activities............ 3,032 (140)
-------- --------
Net (decrease) increase in cash and cash equivalents........... (763) (2,182)
CASH AND CASH EQUIVALENTS, beginning of period........................... 3,387 2,719
-------- --------
CASH AND CASH EQUIVALENTS, end of period................................. $ 2,624 $ 537
======== ========
</TABLE>
86
<PAGE> 88
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated unaudited financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission for interim financial information. Accordingly, they do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. Therefore, it is
suggested that the accompanying financial statements be read in conjunction with
the financial statements and notes thereto included in the Company's latest
annual report on Form 10-K.
The accompanying consolidated financial statements as of June 30, 1996 and
1995 include the accounts of Addington Resources, Inc. (the Company) and its
wholly-owned direct and indirect subsidiaries.
In the opinion of management, the accompanying consolidated unaudited
financial statements include all adjustments necessary to present fairly the
Company's financial position as of June 30, 1996, and results of operations for
the six months ended June 30, 1996 and 1995. All adjustments were of a normal
recurring nature. The results of operations for such interim periods are not
necessarily indicative of the results to be expected for the full year.
2. MERGER TRANSACTION
On June 25, 1996, the Company signed a definitive agreement to merge with
Republic Industries, Inc. ("Republic"). Under the terms of the merger
transaction, each outstanding share of the Company's common stock would be
converted into the right to receive .90 of a share of Republic common stock.
The merger transaction, which will be accounted for on a pooling of
interests basis, is subject to customary terms and conditions, including
compliance with covenants, accuracy of representations by the companies to the
merger agreement, approval by the stockholders of the Company, the filing and
clearance of the Republic registration statement and the Company's related proxy
by the Securities and Exchange Commission and the receipt by the Company of
confirmation of the fairness opinion by Oppenheimer & Co., Inc. as of the date
the proxy statement is mailed to Company shareholders. The merger transaction
received HSR clearance on July 31, 1996.
The Company's largest stockholders, HPB Associates, L.P., and Larry, Robert
and Bruce Addington, who collectively own approximately 45% of the Company's
outstanding common stock, have agreed to vote their shares in favor of the
merger transaction, and have delivered to Republic their irrevocable proxies.
During the three months ended June 30, 1996, $750 is included in other
expense in the accompanying June 30, 1996, Consolidated Statements of Operations
in connection with professional fees incurred by the Company related to this
merger transaction.
The Company anticipates that the merger transaction will be consummated in
the fourth quarter of 1996.
3. DISCONTINUED OPERATIONS
During the third quarter of 1995, the Company implemented a formal plan to
dispose of all of its non-environmental operations. These discontinued
operations consisted primarily of the following: coal mining, mining equipment
manufacturing and licensing, citrus properties in Belize, precious and
industrial metals mining and incidental limestone properties. Accordingly, the
Company's continuing operations are comprised of integrated solid waste
management, which includes landfill operations and waste collection and
recycling services.
87
<PAGE> 89
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
As discussed in Note 4, as of December 31, 1995, the Company had sold all
of its subsidiaries included in discontinued operations, hence fully disposing
of all non-environmental operations. The recorded transactions reflect the
disposal of all of the Company's non-environmental segments and, accordingly,
the operating results of these segments have been classified as discontinued
operations for all periods presented in the accompanying consolidated financial
statements. Operating results from the discontinued operations were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1995 JUNE 30, 1995
------------------ ----------------
<S> <C> <C>
Operating revenue................................... $ 38,599 $ 64,675
------- -------
Income before income taxes.......................... 5,096 6,148
Income tax provision................................ 2,030 2,219
------- -------
Net income from discontinued operations............. $ 3,066 $ 3,929
======= =======
</TABLE>
Most of the Company's revenues from discontinued operations were generated
under long-term coal sales contracts with electric utilities or other
coal-related organizations located in the Eastern U.S. Revenues were recognized
on coal sales in accordance with the sales agreement, which was usually when the
coal was shipped to the customer.
4. SALE OF SUBSIDIARIES (INCLUDED IN DISCONTINUED OPERATIONS)
A. COAL MINING, MINING EQUIPMENT MANUFACTURING AND LICENSING
On September 22, 1995, in a related party transaction, the Company entered
into a stock purchase agreement with Addington Enterprises, Inc. (a company
f/k/a Addington Acquisition Company, Inc., owned by Larry Addington, Robert
Addington and Bruce Addington; collectively, the Addington Brothers) whereby the
Company would receive $30,000, subject to a working capital adjustment, in
exchange for all the issued and outstanding shares of common stock of its
subsidiaries, Addington Mining, Inc., Mining Technologies, Inc., Addwest Mining,
Inc. and Addington Coal Holding, Inc. This sale was consummated on November 2,
1995, at which time the proceeds received were used by the Company to pay down
its revolving line of credit. In addition, the Company retained the right to
receive certain contingent payments due under the Company's technology sale to
BHP Australia Coal Pty. Ltd. As of June 30, 1996, the Company estimates such
payments may aggregate $3,000.
Included in the transaction described above and pursuant to an option
agreement dated August 4, 1995, the Company sold to the Addington Brothers all
the issued and outstanding shares of common stock of its subsidiary, Tennessee
Mining, Inc. According to the terms of the option agreement, the Addington
Brothers will pay the Company a royalty based on tons of coal delivered under a
certain coal sales contract, up to a maximum aggregate royalty of $12,500.
During the six months ended June 30, 1996, the Company has recorded royalty
income of $403 (included in other income in the accompanying June 30,1996,
Consolidated Statement of Operations) from the Addington Brothers under this
agreement.
B. CITRUS PROPERTIES
On September 22, 1995, in a related party transaction, the Company entered
into an agreement to sell all of the issued and outstanding shares of common
stock of its subsidiary, Belize River Fruit Co., to Larry and Bruce Addington in
exchange for 1,000 shares of common stock of the Company owned by Larry and
Bruce Addington. This transaction was consummated on November 2, 1995, at which
time the Company acquired the 1,000 shares valued at $13,625 and recorded them,
at cost, as treasury stock. The Company retained no obligations in connection
with the sale and has fully divested its investment in citrus operations.
88
<PAGE> 90
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
C. ADDWEST MINERALS, INC.
Addwest Minerals, Inc. (Addwest), a wholly-owned subsidiary of the Company,
was organized to mine, extract and market precious and industrial metals. On
November 1, 1995, the Company entered into a letter agreement, which was later
finalized as a Stock Purchase Agreement (the Agreement), that provided for the
sale to an unrelated party of all the capital stock of Addwest. On December 29,
1995, the Company consummated the sale of Addwest.
The terms of the Agreement required the Company to contribute additional
capital to Addwest in an amount sufficient to pay substantially all existing
liabilities of Addwest through the date of the Agreement, with the exception of
the remaining balance on the Rothschild gold loan. The proceeds received from
the sale ($3,525) were used to retire the remaining balance on the Rothschild
gold loan and the Company has been fully released from its obligations under
that loan.
D. NEW RIVER LIME
On November 17, 1995, the Company sold all of the real property, as well as
all buildings, structures and improvements of its wholly owned subsidiary, New
River Lime, Inc. (NRL), to an unrelated party for $2,500 in cash. The Company
retained no obligations in connection with the sale and has fully divested its
investment in NRL.
5. COMMITMENTS AND CONTINGENCIES
A. LEGAL MATTERS
In the normal course of its operations, the Company may become involved in
a variety of legal disputes. Currently, the Company is a party to certain
litigation, including workers' compensation matters and other minor business
disputes.
While the final resolution of any matter may have an impact on the
Company's consolidated financial results for a particular reporting period,
management believes that the ultimate disposition of these matters will not have
a material adverse effect on the consolidated financial position of the Company.
B. ENVIRONMENTAL PROCEEDINGS
The Company is involved in various environmental matters and proceedings,
including permit application proceedings, in connection with the establishment,
operation and expansion activities of certain landfill facilities, as well as
other matters or claims that could result in additional environmental
proceedings.
While the final resolution of any matter may have an impact on the
Company's consolidated financial results for a particular reporting period,
management believes that the ultimate disposition of these matters will not have
a material adverse effect on the consolidated financial position of the Company.
C. ENVIRONMENTAL SERVICE CONTRACTS
The Company has commitments (primarily with municipalities) to operate
landfills and provide waste hauling services under various contracts for terms
of up to 40 years. Revenues for such contracts are generally at stated rates but
may be adjusted periodically for inflation.
89
<PAGE> 91
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
D. ENVIRONMENTAL INSURANCE
In order to meet existing government requirements, the Company has obtained
environmental impairment liability insurance coverage for certain environmental
risks arising from the operation of its landfill facilities. However, if an
environmental impairment were of a magnitude that exceeded the Company's
coverage, it could have a material adverse effect on the Company's business or
its financial condition and results of operations.
E. SALE OF CERTAIN SUBSIDIARIES
During January 1994, the Company sold the stock of five of its coal
subsidiaries to Pittston Minerals Group, Inc. (Pittston). In connection with the
sale, the Company provided certain guarantees of indemnification to Pittston. In
connection with the sale of coal subsidiaries to the Addington Brothers (see
Note 4), the Company received indemnification related to its guarantees to
Pittston as well as other matters, including its guaranty of certain mineral
lease royalty obligations and workers' compensation benefits.
6. RELATED-PARTY TRANSACTIONS
The Company has dealt with certain companies or individuals which are
related parties either by having stockholders in common or because they are
controlled by stockholders/officers or by relatives of stockholders/officers of
the Company. The Company recorded various expenses (included in results of
discontinued operations) to related parties consisting of approximately $5,461
for trucking services, office rent and flight fees for the six months ended June
30, 1995. There were no related party transactions during the six months ended
June 30, 1996.
The Company had amounts receivable from related parties of $5 as of
December 31, 1995.
7. STOCKHOLDERS' EQUITY
During the six months ended June 30, 1996, and 1995, 120 and 6
respectively, shares of common stock were issued in connection with the exercise
of stock options.
During the six months ended June 30, 1996 and 1995, 15 and 63 respectively,
shares of common stock were issued in connection with stock grants issued to
employees in 1989 and 1990. These stock grants specified that the recipient of
the stock grant remain employed by the Company for five years from the date of
the grant in order to exercise the grant.
As a result of these options and grants being exercised and shares being
issued, common stock increased $135 and $69 respectively, and paid-in capital
increased $1,211 and $903 respectively, during the six months ended June 30,
1996 and 1995.
8. NEW ACCOUNTING PRONOUNCEMENTS
A. LONG LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS No. 121),
effective for fiscal years beginning after December 15, 1995. The new standard
requires that long-lived assets and certain identified intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing such
impairment review, companies are required to estimate the sum of future cash
flows from an asset and compare such amount to the asset's carrying amount. Any
excess of carrying amount over expected
90
<PAGE> 92
ADDINGTON RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
cash flows will result in a possible write-down of an asset to its fair value.
The Company adopted the provisions of SFAS No. 121 as of January 1, 1996. The
adoption had no effect on the results of operations or financial position of the
Company.
B. STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), effective for fiscal years beginning after
December 15, 1995. The new standard encourages, but does not require, a fair
value based method of accounting for employee stock options or similar equity
instruments. It also allows an entity to elect to continue to measure
compensation cost under Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees" (APB No. 25), but requires pro forma disclosures
of net income and earnings per share as if the fair value based method of
accounting had been applied. The Company expects to adopt SFAS No. 123 for its
annual 1996 financial statements. In addition, the Company will elect to
continue to measure compensation cost under APB No. 25 and comply with the pro
forma disclosure requirements.
91
<PAGE> 93
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CarChoice, Inc.:
We have audited the accompanying consolidated balance sheet of CARCHOICE,
INC. AND SUBSIDIARY (Delaware corporations) as of December 31, 1995, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the period from inception (January 26, 1995) to December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CarChoice, Inc. and
Subsidiary as of December 31, 1995 and the results of their operations and their
cash flows for the period from inception to December 31, 1995 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
June 12, 1996.
92
<PAGE> 94
CARCHOICE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
(IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................................. $ 3,324
Accounts receivable.............................................................. 303
Deposits and prepaid expenses.................................................... 328
Vehicle inventory, net........................................................... 10,442
-------
Total current assets..................................................... 14,397
PROPERTY AND EQUIPMENT:
Land............................................................................. 4,627
Building and improvements........................................................ 4,813
Equipment........................................................................ 537
Furniture and fixtures........................................................... 38
-------
Total property and equipment............................................. 10,015
-------
$24,412
-------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable..................................................................... $ 9,909
Accounts payable and accrued liabilities......................................... 975
-------
Total current liabilities................................................ 10,884
SHAREHOLDERS' EQUITY:
Series A convertible preferred stock, $.01 par value, 1 share issued and
outstanding at December 31, 1995.............................................. --
Common stock, $.01 par value, 120,000 shares authorized, 17,393 issued and
outstanding at December 31,1995............................................... --
Paid-in surplus.................................................................. 18,428
Retained deficit................................................................. (4,085)
Subscriptions receivable......................................................... (815)
-------
Total shareholders' equity............................................... 13,528
-------
$24,412
=======
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
93
<PAGE> 95
CARCHOICE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FROM INCEPTION (JANUARY 26, 1995) TO DECEMBER 31, 1995
(IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<S> <C>
NET SALES......................................................................... $ 73
COST OF SALES..................................................................... 98
--------
Gross profit (loss)............................................................. (25)
SELLING, GENERAL AND ADMINISTRATIVE............................................... 2,151
PRE-OPENING AND START-UP COSTS.................................................... 1,887
--------
Loss from operations............................................................ (4,063)
INTEREST AND FINANCING EXPENSES, NET.............................................. (22)
--------
Loss before provision for income taxes.......................................... (4,085)
PROVISION FOR INCOME TAXES........................................................ --
--------
NET LOSS.......................................................................... $ (4,085)
========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
94
<PAGE> 96
CARCHOICE, INC. AND SUBSIDIARY
STATEMENT OF SHAREHOLDERS' EQUITY
FROM INCEPTION (JANUARY 26, 1995) TO DECEMBER 31, 1995
(IN 000'S, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED
STOCK
--------------
SERIES A COMMON STOCK
-------------- -------------- SUBSCRIPTIONS PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT RECEIVABLE SURPLUS DEFICIT TOTAL
------ ------ ------ ------ ------------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 26, 1995...... -- $ -- -- $ -- $ -- $ -- $ -- $ --
Shares issued.................. 1 -- 17,393 -- -- 17,613 -- 17,613
Shares subscribed.............. -- -- -- -- (815) 815 -- --
Net loss....................... -- -- -- -- -- -- (4,085) (4,085)
------ ------ ------ ------ ------------- ------- -------- --------
BALANCE AT DECEMBER 31, 1995..... 1 $ -- 17,393 $ -- $ (815) $18,428 $ (4,085) $ 13,528
====== ====== ====== ====== ============= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
95
<PAGE> 97
CARCHOICE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FROM INCEPTION (JANUARY 26, 1995) TO DECEMBER 31, 1995
(IN 000'S)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................................ $ (4,085)
Adjustments to reconcile net loss to net cash used in operating
activities -- Change in assets and liabilities --
Accounts receivable.......................................................... (303)
Inventory.................................................................... (10,442)
Deposits and prepaid expenses................................................ (328)
Accounts payable and accrued liabilities..................................... 975
--------
Total adjustments....................................................... (10,098)
--------
Net cash used in operating activities................................... (14,183)
--------
CASH FLOWS FROM INVESTING ACTIVITY:
Purchases of property and equipment............................................. (10,015)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note payable.................................................................... 9,909
Capital contributions........................................................... 17,613
--------
Net cash provided by financing activities............................... 27,522
--------
NET INCREASE IN CASH.............................................................. 3,324
CASH, beginning of period......................................................... --
--------
CASH, end of period............................................................... $ 3,324
========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
96
<PAGE> 98
CARCHOICE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
CarChoice, Inc. and Subsidiary (the "Company"; formerly BOSC Group
Automotive, Inc.) was formed on January 26, 1995. On December 27, 1995, the
Company began operation of a chain of automobile superstores specializing in the
sale of used vehicles. The consolidated financial statements included the
accounts of the Company and its wholly-owned subsidiary, BOSC Automotive Realty,
Inc. Significant intercompany accounts and transactions have been eliminated.
The Lewisville, Texas (Dallas) superstore opened on December 27, 1995. The
Sterling Heights (Detroit) superstore opened May 17, 1996.
ACCOUNTS RECEIVABLE
Accounts receivable consists of vehicle finance contracts in transit to
financial institutions and other receivables from lending sources.
INVENTORIES
The Company values its vehicle inventory at cost, using the specific
identification method. Cost includes acquisition expenses as well as charges to
bring inventory units to their existing location and condition, including
reconditioning costs. Parts and accessories are valued at the lower of cost,
using the first-in, first-out method, or market.
Management periodically reviews inventory levels and valuation to establish
a reserve for expected losses on disposition of excess inventory. The reserve
considers losses the Company has experienced when selling reconditioned vehicles
in the wholesale market. The reserve at December 31, 1995 is $492,000.
PROPERTY AND EQUIPMENT
Additions to property are recorded at cost and are depreciated over the
estimated useful lives of the assets using the straight-line method. Useful
lives are as follows:
<TABLE>
<S> <C>
Building.......................................................... 40 years
Building improvements............................................. 20 years
Equipment......................................................... 10 years
Furniture and fixtures............................................ 2-7 years
</TABLE>
Any expenditures which materially increase the value or extend the useful
life are capitalized, maintenance and repairs which do not improve or extend the
lives of the respective assets are charged against income as incurred.
Construction in progress consists primarily of construction costs related
to the Detroit superstore and costs incurred in developing future locations.
PRE-OPENING AND START-UP COSTS
Expenditures related to the initial concept development and opening of new
stores, other than those for capital assets, are charged to expense in the
period incurred. Store pre-opening expenses consist primarily of advertising and
training costs.
97
<PAGE> 99
CARCHOICE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING COSTS
The Company expenses all costs for advertising as incurred. Advertising
expense for the period from inception through December 31, 1995 was
approximately $51,000 and is included in pre-opening and start-up costs in the
accompanying consolidated statement of operations.
CAPITALIZATION OF INTEREST
Interest expense incurred on properties under development is not
significant and is charged to expense as incurred.
FINANCIAL INSTRUMENTS
The carrying value of all financial instruments is at amounts approximating
fair market value.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the period. Actual results could differ from those estimates.
(2) NOTE PAYABLE
The Company has a $21,000,000 revolving credit agreement. This borrowing
bears interest at Eurodollar or prime rates, as selected by the Company, and is
secured by all assets of the Company excluding land and building. The weighted
average interest rate on borrowings outstanding as of December 31, 1995 is
approximately 8%. The agreement includes a commitment fee of $25,000. This bank
credit arrangement matures in November 1996. The credit agreement contains
restrictive financial covenants, including those related to available borrowing
based on inventory levels, the maintenance of minimum tangible net worth and
maximum ratios of debt to capitalization. As of December 31, 1995 the Company
was not in compliance with certain covenants. The events of noncompliance were
waived by the financial institution.
(3) TAXES
Deferred income taxes relate primarily to temporary differences between the
financial and tax reporting of income recognition related to inventories,
depreciation and certain operating expenses as well as net operating loss
carryforwards which expire in 2010. Deferred taxes are classified as in the
consolidated balance sheets based on the classification of the assets and
liabilities which gave rise to the temporary differences. Net deferred tax
assets total approximately $1,400,000 and are offset by a valuation reserve for
financial reporting purposes.
The reconciliation between the Federal statutory rate and the Company's
effective income tax rate is:
<TABLE>
<S> <C>
Federal statutory rate................................................. 34%
State income taxes..................................................... 2
Valuation reserve...................................................... (36)
---
Effective tax rate..................................................... 0%
===
</TABLE>
(4) RELATED PARTY TRANSACTIONS
Costs related to concept development and acquisition of certain sites were
contracted with The BOSC Group, Inc. (BOSC), an affiliate through common
ownership. BOSC provided services totaling approximately
98
<PAGE> 100
CARCHOICE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$500,000 in 1995, which are included in preopening and startup costs in the
accompanying consolidated statement of operations. In 1996 an agreement was made
between the Company and BOSC which calls for a development fee of 8% of cost for
each superstore. BOSC will continue to provide certain acquisition and
development services through the completion of the third store.
(5) COMMITMENTS
The Company leases certain office equipment under noncancelable operating
leases expiring in 1999. Rental expense was insignificant for the year ended
December 31, 1995. Future minimum lease payments on this equipment are also not
significant at December 31, 1995.
(6) CAPITAL STRUCTURE
SERIES A PREFERRED STOCK
The Series A preferred stock has a class voting right over voluntary
liquidation, dissolution, winding up, recapitalization or reorganization of the
Company, or the consolidation, merger or sale of the Company. Series A preferred
stock has no liquidation preference over common stock; it is convertible into
one share of common stock at the option of the holder, within five years of the
issuance of the preferred stock, upon transfer of the share to another
stockholder, or upon a public offering by the Company.
COMMON STOCK
The Company and its shareholders have entered into various agreements
generally providing the Company the first right to repurchase any shares of
stock offered for sale by the shareholders. In the event the shareholder
receives a bonafide offer to purchase all or any part of the shareholder's
shares, the same terms and conditions will be offered to the Company.
OPTIONS
During 1995, the Company established an incentive stock plan (the Plan) to
increase its ability to attract and retain key employees. Under the Plan,
options to purchase the Company's stock, stock appreciation rights, and/or stock
awards may be granted at the discretion of the Board of Directors. The maximum
number of shares that may be granted is 10% of the sum of (i) the outstanding
shares of the common stock of the Company and (ii) the number of shares of
common stock issuable upon conversion of any outstanding debt or equity
securities at the date of grant. The options shall be granted at a price of at
least 100% of the fair market value of the related stock at the date of the
grant. The options and rights vest over a period of six months to four years or
upon a change of control, as defined in the agreement. Options expire ten years
from the date of grant unless terminated earlier pursuant to the terms of the
agreement. As of December 31, 1995, there were 725 options outstanding with
exercise prices ranging from $1,000 to $5,000 per share. No options had been
exercised as of December 31, 1995. Approximately 150 options outstanding are
currently exercisable as of December 31, 1995.
WARRANTS
As of December 31, 1995, the Company had issued warrants to purchase 13,758
shares of common stock to certain holders of common stock. None of these
warrants have been exercised as of December 31, 1995.
99
<PAGE> 101
CARCHOICE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the terms of the warrant agreements, the exercise price of the
warrants and expiration dates are as follows:
<TABLE>
<CAPTION>
WARRANT NUMBER OF EXERCISE EXPIRATION
SERIES SHARES PRICE DATE
- ------- --------- -------- ----------------
<S> <C> <C> <C>
1 867 $2,000 January 26, 2000
2 867 3,000 January 26, 2000
3 1,220 2,000 May 26, 2000
4 1,220 3,000 May 26, 2000
5 4,792 2,000 August 22, 2000
6 4,792 3,000 August 22, 2000
</TABLE>
(7) SUBSEQUENT EVENTS
In January 1996, the Company took out a $2,000,000 mortgage note, payable
in monthly principal installments of $12,821, commencing February 1, 1998
through February 1, 2001. This note bears interest at 9.5% and is secured by
land and buildings.
In February 1996, the Company entered into a $3,000,000 bank note payable,
payable in installments through November, 1996. The note bears interest at
either the prime rate or 2% over the Eurodollar rate, at the option of the
Company, and is secured by land and buildings, as well as the personal guarantee
of a Company shareholder.
From January 1996 through June 1996, the Company obtained stock
subscriptions for 6,800 shares of Series B convertible preferred stock at $2,500
per share. The stock is convertible into shares of common stock under a
conversion formula as specified in the agreement and carries voting rights based
on the equivalent number of common shares pursuant to the conversion formula.
In April 1996, pursuant to the adoption of an executive compensation plan,
the Company granted 1,220 qualified and 1,200 nonqualified stock options to
employees, officers and advisors at exercise prices of $2,500 per share to
$2,750 per share.
On June 12, 1996, a purchase agreement was entered into in which the
Company agreed to sell its properties, business and all assets to Republic
Industries, Inc. ("Republic") in exchange for shares of Republic. This merger
will be accounted for as a pooling-of-interests. This agreement will be
considered closed upon the fulfillment by both companies of conditions specified
in the purchase agreement.
100
<PAGE> 102
CARCHOICE, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1996 AND DECEMBER 31, 1995
(IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................................. $ 3,689 $ 3,324
Accounts receivable.................................................. 3,564 303
Deposits and prepaid expenses........................................ 87 328
Vehicle inventory, net............................................... 13,269 10,442
-------- --------
Total current assets......................................... 20,609 14,397
PROPERTY AND EQUIPMENT:
Land................................................................. 7,477 4,627
Building and improvements............................................ 11,917 4,813
Equipment............................................................ 2,798 537
Furniture and fixtures............................................... 613 38
Construction in progress............................................. 2,634 --
-------- --------
25,439 10,015
Accumulated depreciation............................................. (326) --
-------- --------
Net property and equipment................................... 25,113 10,015
-------- --------
$ 45,722 $ 24,412
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable......................................................... $ 10,745 $ 9,909
Current portion of long term debt and capital lease obligations...... 3,056 --
Accounts payable and accrued liabilities............................. 7,569 975
-------- --------
Total current liabilities.................................... 21,370 10,884
LONG TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current portion..... 3,267 --
SHAREHOLDERS' EQUITY:
Series A convertible preferred stock, $.01 par value, 1 share issued
and outstanding at June 30, 1996 and December 31, 1995............ -- --
Series B convertible preferred stock, $.01 par value, 6,800 and 0
shares issued and outstanding, at June 30, 1996 and December 31,
1995, respectively................................................ -- --
Common stock, $.01 par value, 120,000 shares authorized, 17,393
issued and outstanding at June 30, 1996 and December 31, 1995..... -- --
Paid-in surplus...................................................... 35,426 18,428
Retained deficit..................................................... (14,341) (4,085)
Subscriptions receivable............................................. -- (815)
-------- --------
Total shareholders' equity................................... 21,085 13,528
-------- --------
$ 45,722 $ 24,412
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
101
<PAGE> 103
CARCHOICE, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -----------------
1996 1995 1996 1995
------- ----- ------- -----
<S> <C> <C> <C> <C>
NET SALES:
Vehicles............................................. $18,115 $ -- $ 28,463 $ --
Warranty............................................. 385 -- 637 --
Financing revenue.................................... 104 -- 173 --
------- ----- ------- -----
18,604 -- 29,273 --
COST OF SALES:
Vehicles............................................. 17,035 -- 26,638 --
Warranty............................................. 221 -- 406 --
------- ----- ------- -----
17,256 -- 27,044 --
------- ----- ------- -----
Gross profit................................. 1,348 -- 2,229 --
SELLING, GENERAL AND ADMINISTRATIVE.................... 5,764 279 8,169 325
PRE-OPENING AND START-UP COSTS......................... 2,369 146 3,800 607
LOSS ON WHOLESALE TRANSACTIONS......................... 83 -- 145 --
------- ----- ------- -----
Loss from operations......................... (6,868) (425) (9,885) (932)
INTEREST AND FINANCING EXPENSES, NET................... 151 -- 371 --
------- ----- ------- -----
Loss before provision for income taxes....... (7,019) (425) (10,256) (932)
PROVISION FOR INCOME TAXES............................. -- -- -- --
------- ----- ------- -----
NET LOSS............................................... $(7,019) $(425) $(10,256) $(932)
======= ===== ======== =====
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
102
<PAGE> 104
CARCHOICE, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(IN 000'S)
<TABLE>
<CAPTION>
1996 1995
-------- ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................... $(10,256) $ (932)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation........................................................ 326 --
Change in assets and liabilities:
Accounts receivable............................................... (3,261) --
Inventories....................................................... (2,827) --
Deposits and prepaid expenses..................................... 241 (26)
Accounts payable and accrued liabilities.......................... 6,594 65
-------- ------
Total adjustments.............................................. 1,073 39
-------- ------
Net cash used in operating activities.......................... (9,183) (893)
-------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................................... (14,018) (58)
-------- ------
Net cash used in investing activities.......................... (14,018) (58)
-------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term debt, net...................................... 4,917 --
Proceeds from notes payable, net....................................... 836 --
Capital contribution................................................... 17,813 3,110
-------- ------
Net cash provided by financing activities...................... 23,566 3,110
-------- ------
NET INCREASE IN CASH..................................................... 365 2,159
CASH, beginning of period................................................ 3,324 --
-------- ------
CASH, end of period...................................................... $ 3,689 $2,159
======== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest............................... $ 273 $ --
======== ======
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
Purchases of equipment under capital lease............................. $ 1,406 $ --
======== ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
103
<PAGE> 105
CARCHOICE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements include the
accounts of CarChoice, Inc. and subsidiary (the "Company"; formerly BOSC Group
Automotive, Inc.) and, in the opinion of management, include all material
adjustments (consisting of normal and recurring adjustments) necessary for a
fair presentation of results for the interim period. All significant
intercompany accounts and transactions have been eliminated. Operating results
for interim periods are not necessarily indicative of the results that can be
expected for a full year.
PRINCIPLES OF CONSOLIDATION
The Company was formed on January 26, 1995. On December 27, 1995, the
Company began operation of a chain of automobile superstores specializing in the
sale of used vehicles. The consolidated financial statements included the
accounts of the Company and its wholly-owned subsidiary, BOSC Automotive Realty,
Inc. Significant intercompany accounts and transactions have been eliminated.
The Lewisville, Texas (Dallas) superstore opened on December 27, 1995. The
Sterling Heights (Detroit) superstore opened May 17, 1996.
ACCOUNTS RECEIVABLE
Accounts receivable consists of vehicle finance contracts in transit to
financial institutions and other receivables from lending sources.
INVENTORIES
The Company values its vehicle inventory at cost, using the specific
identification method. Cost includes acquisition expenses as well as charges to
bring inventory units to their existing location and condition, including
reconditioning costs. Parts and accessories are valued at the lower of cost,
using the first-in, first-out method, or market.
Management periodically reviews inventory levels and valuation to establish
a reserve for expected losses on disposition of excess inventory. The reserve
considers losses the Company has experienced when selling reconditioned vehicles
in the wholesale market. The reserve at June 30, 1996 and December 31, 1995 was
$58,000 and $492,000, respectively.
PROPERTY AND EQUIPMENT
Additions to property are recorded at cost and are depreciated over the
estimated useful lives of the assets using the straight-line method. Useful
lives are as follows:
<TABLE>
<S> <C>
Building.......................................................... 40 years
Building improvements............................................. 20 years
Equipment......................................................... 10 years
Furniture and fixtures............................................ 2-7 years
</TABLE>
Any expenditures which materially increase the value or extend the useful
life are capitalized; maintenance and repairs which do not improve or extend the
lives of the respective assets are charged against income as incurred.
Construction in progress consists primarily of construction costs related
to the Detroit superstore and costs incurred in developing future locations.
104
<PAGE> 106
CARCHOICE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRE-OPENING AND START-UP COSTS
Expenditures related to the initial concept development and opening of new
stores, other than those for capital assets, are charged to expense in the
period incurred. Store pre-opening expenses consist of costs associated with the
identification and selection of sites ultimately deemed unsuitable, as well as
advertising and training costs.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred. Advertising expense
for the six months ended June 30, 1996 and 1995 was $3,100,000 and $3,600,
respectively, and is primarily included in pre-opening and start-up costs in the
accompanying consolidated statement of operations.
CAPITALIZATION OF INTEREST
Interest expense incurred on properties under development and vehicle
inventories is not significant and is charged to expense as incurred.
FINANCIAL INSTRUMENTS
The carrying value of all financial instruments is at amounts approximating
fair market value.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the period. Actual results could differ from those estimates.
(2) NOTE PAYABLE
The Company has a $21,000,000 revolving credit agreement. This borrowing
bears interest at Eurodollar or prime rates, as selected by the Company, and is
secured by all assets of the Company excluding land and building. The weighted
average interest rate on borrowings outstanding as of June 30, 1996 is
approximately 7.7%. The agreement includes a commitment fee of $25,000. This
bank credit arrangement matures in November 1996. The credit agreement contains
restrictive financial covenants, including those related to available borrowing
based on inventory levels, the maintenance of minimum tangible net worth and
maximum ratios of debt to capitalization.
(3) LONG TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long term debt consists of the following at June 30 (in 000's):
<TABLE>
<S> <C>
Bank note payable, payable in installments through November 22, 1996....... $ 2,916
Mortgage note payable, payable in monthly principal installments of $12,821
plus interest, commencing February 1, 1998 through February 1, 2001...... 2,000
Capital lease obligations, payable in monthly principal and interest
installments of $34,272, expiring at various times through February
2001..................................................................... 1,407
-------
6,323
Less -- current portion.................................................... (3,056)
-------
$ 3,267
=======
</TABLE>
105
<PAGE> 107
CARCHOICE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The bank note payable bears interest at either the prime rate or 2% over
the Eurodollar rate, at the option of the Company, and is secured by land and
buildings collectively valued at approximately $10,500,000 as well as the
personal guarantee of a Company shareholder.
The mortgage note payable bears interest at 9.5% and is secured by land and
buildings valued at approximately $7,300,000.
The Company leases a significant portion of its computer and other office
equipment under long-term capital leases. The leases are capitalized at cost and
amortized over the estimated useful life of the related asset on a straight-line
basis. The future minimum lease commitments below include obligations relating
to this lease.
Aggregate maturities of long term debt and capital lease obligations are as
follows (in 000's):
<TABLE>
<S> <C>
1996................................................................ $3,122
1997................................................................ 411
1998................................................................ 552
1999................................................................ 565
2000................................................................ 433
Thereafter.......................................................... 1,554
------
6,637
Less -- amount representing interest................................ (314)
------
$6,323
======
</TABLE>
(4) TAXES
Deferred income taxes relate primarily to temporary differences between the
financial and tax reporting of income recognition related to inventories,
depreciation and certain operating expenses as well as net operating loss
carryforwards which expire in 2010 and 2011. Deferred taxes are classified as
current or non-current in the consolidated balance sheets based on the
classification of the assets and liabilities which gave rise to the temporary
differences. Net deferred tax assets total approximately $4,200,000 and are
offset by a valuation reserve for financial reporting purposes.
Differences between the statutory Federal tax rate and the effective tax
rate are due to certain non-deductible expenses for tax purposes and the
establishment of a 100% valuation reserve against net deferred tax assets.
(5) RELATED PARTY TRANSACTIONS
Costs related to concept development and acquisition of certain sites were
contracted with The BOSC Group, Inc. (BOSC), an affiliate through common
ownership. The agreement between the Company and BOSC calls for a development
fee of 8% of cost for each superstore. BOSC will continue to provide certain
acquisition and development services through the completion of the third store.
Amounts owed to BOSC totaled $23,000 and $-0- at June 30, 1996 and December 31,
1995, respectively, and are included in accounts payable and accrued liabilities
in the accompanying consolidated balance sheets.
(6) COMMITMENTS
The Company leases certain property under an operating lease with a term of
5 years and renewal options for up to a total of 60 years for approximately
$30,000 per year. The lease period begins when the lessor substantially
completes an improvement project on the property.
106
<PAGE> 108
CARCHOICE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also leases certain office equipment under noncancelable
operating leases expiring in 1999. Rental expense was insignificant for the six
months ended June 30, 1996.
Future minimum lease payments as of June 30, 1996 are as follows (in
000's):
<TABLE>
<S> <C>
1996.................................................................. $ 24
1997.................................................................. 48
1998.................................................................. 48
1999.................................................................. 48
2000.................................................................. 38
Thereafter............................................................ 14
----
Total minimum lease payments................................ $220
====
</TABLE>
(7) CAPITAL STRUCTURE
SERIES A CONVERTIBLE PREFERRED STOCK
The Series A preferred stock has a class voting right over voluntary
liquidation, dissolution, winding up, recapitalization or reorganization of the
Company, or the consolidation, merger or sale of the Company. Series A preferred
stock has no liquidation preference over common stock; it is convertible into
one share of common stock at the option of the holder, within five years of the
issuance of the preferred stock, upon transfer of the share to another
stockholder, or upon a public offering by the Company.
SERIES B CONVERTIBLE PREFERRED STOCK
The Series B convertible preferred stock is convertible into shares of
common stock under a conversion formula as specified in the agreement and
carries voting rights based on the equivalent number of common shares pursuant
to the conversion formula. It also has liquidation preferences in the event of
dissolution or winding up of the Corporation as well as dividend preferences
over common stock and Series A preferred stock in the event that dividends are
declared. In the event of a public offering of the Company's common stock, the
shares automatically convert to common stock and the holders have certain rights
to sell shares in the offering, with registration expenses borne by the Company.
A total of 30,000 shares of preferred stock have been authorized, the
rights and preferences to be determined individually by Series. As of June 30,
1996, 6,800 shares have been issued and are outstanding.
COMMON STOCK
The Company and its shareholders have entered into various agreements
generally providing the Company the first right to repurchase any shares of
stock offered for sale by the shareholders. In the event the shareholder
receives a bonafide offer to purchase all or any part of the shareholder's
shares, the same terms and conditions will be offered to the Company.
OPTIONS
During 1995, the Company established an incentive stock plan (the Plan) to
increase its ability to attract and retain key employees. Under the Plan,
options to purchase the Company's stock, stock appreciation rights, and/or stock
awards may be granted at the discretion of the Board of Directors. The maximum
number of shares that may be granted is 10% of the sum of (i) the outstanding
shares of the common stock of the Company and (ii) the number of shares of
common stock issuable upon conversion of any outstanding debt or equity
securities at the date of grant. The options shall be granted at a price of at
least 100% of the fair market value of the related stock at the date of the
grant. The options and rights vest over a period of six months to four years.
Options expire ten years from the date of grant unless terminated earlier
pursuant to the terms of
107
<PAGE> 109
CARCHOICE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the agreement. As of June 30, 1996, there were 1,955 qualified and 1,220
nonqualified options outstanding with exercise prices ranging from $1,000 to
$2,750 per share. No options had been exercised as of June 30, 1996.
Approximately 150 options outstanding are currently exercisable as of June 30,
1996.
WARRANTS
As of June 30, 1996, the Company had issued warrants to purchase 13,758
shares of common stock to certain holders of common stock. None of these
warrants have been exercised as of June 30, 1996.
Under the terms of the warrant agreements, the exercise price of the
warrants and expiration dates are as follows:
<TABLE>
<CAPTION>
WARRANT NUMBER OF EXERCISE EXPIRATION
SERIES SHARES PRICE DATE
- ------- --------- -------- ----------------
<C> <C> <C> <S>
1 867 $2,000 January 26, 2000
2 867 3,000 January 26, 2000
3 1,220 2,000 May 26, 2000
4 1,220 3,000 May 26, 2000
5 4,792 2,000 August 22, 2000
6 4,792 3,000 August 22, 2000
</TABLE>
(8) COMPANY PURCHASE
On June 12, 1996, a purchase agreement was entered into in which the
Company agreed to sell its properties, business and all assets to Republic
Industries, Inc. ("Republic") in exchange for shares of Republic. This
transaction, which closed on August 1, 1996, will be accounted for under the
pooling-of-interests method of accounting.
108
<PAGE> 110
INDEPENDENT AUDITOR'S REPORT
Republic Industries, Inc.
Ft. Lauderdale, Florida
We have audited the accompanying combined balance sheet of Acquired Solid
Waste Companies as of December 31, 1995, and the related combined statements of
operations, equity, and cash flows for the year then ended. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis evidence
supporting the amounts and disclosures in the combined 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 audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Acquired Solid Waste
Companies as of December 31, 1995, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
The combined balance sheets and related statements of operations, equity,
and cash flows for the three months ended March 31, 1995 and 1996, are
unaudited. We did not audit or review those financial statements, and,
accordingly, we express no opinion or other form of assurance on them.
MUNSON, CRONICK & ASSOCIATES
Fullerton, California,
July 18, 1996.
109
<PAGE> 111
ACQUIRED SOLID WASTE COMPANIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current:
Cash.............................................................. $ 2,680,000 $ 2,377,000
Certificates of deposit and marketable securities................. 1,265,000 1,265,000
Accounts receivable, net.......................................... 2,272,000 2,602,000
Deferred taxes.................................................... 15,000 15,000
Prepaid expenses and other........................................ 127,000 291,000
----------- -----------
Total current assets...................................... 6,359,000 6,550,000
Property and equipment, net......................................... 3,853,000 3,891,000
Long-term note receivable from related party........................ 605,000 612,000
Long-term portion of deferred taxes................................. 61,000 61,000
Intangible assets, net.............................................. 2,889,000 2,968,000
Other assets........................................................ 698,000 432,000
----------- -----------
Total assets.............................................. $14,465,000 $ 14,514,000
=========== ===========
LIABILITIES AND EQUITY
Current:
Accounts payable.................................................. $ 1,042,000 $ 1,150,000
Accrued liabilities............................................... 768,000 722,000
Current portion of long-term debt................................. 1,016,000 1,095,000
Deferred income................................................... -- 108,000
Income taxes payable.............................................. -- 53,000
----------- -----------
Total current liabilities................................. 2,826,000 3,128,000
Long-term debt, net of current portion.............................. 3,325,000 3,834,000
Other liabilities................................................... 721,000 724,000
----------- -----------
Total liabilities......................................... 6,872,000 7,686,000
Commitments and contingencies
Equity.............................................................. 7,593,000 6,828,000
----------- -----------
Total liabilities and equity.............................. $14,465,000 $ 14,514,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
110
<PAGE> 112
ACQUIRED SOLID WASTE COMPANIES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
YEAR ENDED
1996 1995 DECEMBER 31,
----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues.................................................. $ 7,838,000 $ 7,731,000 $ 31,488,000
---------- ---------- -----------
Expenses:
Cost of operations...................................... 5,041,000 4,765,000 21,225,000
General and administrative.............................. 1,618,000 1,856,000 6,558,000
Interest expense........................................ 78,000 50,000 428,000
---------- ---------- -----------
Total expenses.................................. 6,737,000 6,671,000 28,211,000
---------- ---------- -----------
Other income.............................................. 56,000 68,000 845,000
---------- ---------- -----------
Income before income taxes.............................. 1,157,000 1,128,000 4,122,000
Provision for income taxes................................ -- -- 104,000
---------- ---------- -----------
Net income...................................... $ 1,157,000 $ 1,128,000 $ 4,018,000
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
111
<PAGE> 113
ACQUIRED SOLID WASTE COMPANIES
COMBINED STATEMENTS OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
CORPORATIONS
------------------------------------------------------------- PARTNERSHIPS
ADDITIONAL C-CORP S-CORP ------------
COMMON PREFERRED PAID-IN RETAINED ACCUMULATED PARTNERS'
STOCK STOCK CAPITAL EARNINGS EARNINGS CAPITAL TOTAL
-------- ---------- ---------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994.................. $193,000 $1,317,000 $504,000 $2,022,000 $ 2,119,000 $ (79,000) $ 6,076,000
Distribution to
owners................ (2,044,000) (1,091,000) (3,135,000)
Dividends............... (131,000) (131,000)
Net income.............. 35,000 2,674,000 1,309,000 4,018,000
-------- ---------- -------- ---------- ----------- ----------- -----------
Balance, December 31,
1995.................. 193,000 1,317,000 504,000 1,926,000 2,749,000 139,000 6,828,000
Distribution to owners
(unaudited)........... (392,000) (392,000)
Net income
(unaudited)........... 179,000 851,000 127,000 1,157,000
-------- ---------- -------- ---------- ----------- ----------- -----------
Balance, March 31, 1996
(unaudited)........... $193,000 $1,317,000 $504,000 $2,105,000 $ 3,208,000 $ 266,000 $ 7,593,000
======== ========== ======== ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
112
<PAGE> 114
ACQUIRED SOLID WASTE COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR END
------------------------- DECEMBER 31,
1996 1995 1995
----------- ----------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 1,157,000 $ 1,128,000 $ 4,018,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 189,000 179,000 1,110,000
Gain on disposal of property and equipment............ (8,000) -- (120,000)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable.............................. 330,000 48,000 102,000
Prepaid expenses................................. -- (47,000) 2,000
Deferred taxes................................... -- -- (76,000)
Intangible and other assets...................... 63,000 211,000 (13,000)
Increase (decrease) in:
Accounts payable and accrued liabilities......... (61,000) 22,000 819,000
Income taxes payable............................. (72,000) -- 48,000
----------- ----------- -----------
Net cash provided by operating activities..... 1,598,000 1,541,000 5,890,000
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of route purchase......................... (10,000) (85,000) (885,000)
Payments of note receivable to related party.......... 5,000 -- (650,000)
Acquisition of property and equipment................. (81,000) (186,000) (1,257,000)
Collection of loans and other......................... 8,000 -- 121,000
----------- ----------- -----------
Net cash (used in) investing activities....... (78,000) (271,000) (2,671,000)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt.......................... $ -- $ 1,687,000 $ 2,274,000
Payment of shareholder loans.......................... (151,000) (937,000) (1,399,000)
Payment of notes payable.............................. (675,000) (381,000) (955,000)
Payment of shareholder distribution................... (391,000) (1,286,000) (3,135,000)
----------- ----------- -----------
Net cash (used in) financing activities....... (1,217,000) (917,000) (3,215,000)
----------- ----------- -----------
Net increase in cash and cash equivalents............... 303,000 353,000 4,000
Cash, beginning of period............................... 2,377,000 1,649,000 2,373,000
----------- ----------- -----------
Cash, end of period..................................... $ 2,680,000 $ 2,002,000 $ 2,377,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
113
<PAGE> 115
ACQUIRED SOLID WASTE COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ACQUIRED SOLID WASTE COMPANIES
Republic Industries, Inc. (the Company) acquired nine solid waste and
related businesses during April and May 1996. The acquisitions were accounted
for using the pooling of interests method of accounting except for Cal Waste
Industries, Inc. which was accounted for as a purchase. The following table
summarizes these acquisitions:
<TABLE>
<CAPTION>
COMPANY BUSINESS
------------------------------------------------------- ------------------------------
<S> <C>
Cal Waste Industries, Inc.............................. Refuse Collection And Disposal
Expert Disposal Service, Inc........................... Refuse Collection And Disposal
Fat Man, Inc........................................... Refuse Collection And Disposal
ASA Leasing, Inc....................................... Equipment Leasing
M-G Disposal Services, Inc............................. Refuse Collection And Disposal
Solid Waste Equipment Maintenance, Inc................. Equipment Maintenance
RWP Services, Inc...................................... Recycling
Oillag................................................. Land And Building Owner
ET Leasing............................................. Equipment Leasing
</TABLE>
These companies are collectively referred to as the Acquired Solid Waste
Companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the accounts of the
Acquired Solid Waste Companies, as defined in Note 1. All significant
intercompany accounts and transactions have been eliminated.
PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS
Property and equipment are recorded at cost. Depreciation is provided using
straight-line and accelerated methods over estimated useful lives ranging from
three to thirty-nine years.
Certain intangible assets are amortized using the straight-line method over
periods ranging from five to fifteen years. Repairs and maintenance costs are
charged to operations as incurred.
INCOME TAXES
The Acquired Solid Waste Companies (nine entities) include two partnerships
and five corporations that have elected to be taxed as S corporations for
federal and state purposes. Income tax liabilities for these seven entities are
the responsibility of the owners.
CASH AND CASH EQUIVALENTS
Highly liquid debt instruments with a maturity of three months or less are
considered cash equivalents.
Cash balances are maintained at various institutions that are in excess of
FDIC insurance limits of $100,000.
INVESTMENTS
Investments in debt securities and investments in equity securities that
have readily determinable fair values are classified into one of three
categories: trading, held-to-maturity, and available-for-sale. These categories
are based on the type of security and the company's ability and intent to hold
the security.
114
<PAGE> 116
ACQUIRED SOLID WASTE COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Certificates of deposit and marketable securities held by the Company are
considered trading investments and are carried at fair value.
INTERIM FINANCIAL INFORMATION
The unaudited combined financial statements as of March 31, 1995 and 1996,
and for the three months ended March 31, 1995 and 1996, reflect, in the opinion
of management, all adjustments (which include only normal recurring adjustments)
necessary to fairly state the financial position and results of operations for
the respective periods. Operating results for interim periods are not
necessarily indicative of the results which can be expected for a full year.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
3. PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS
Property, equipment and the related accumulated depreciation as of December
31, 1995, are comprised of:
<TABLE>
<S> <C>
Buildings..................................................... $ 1,403,000
Transportation equipment...................................... 6,515,000
Bins and boxes................................................ 3,025,000
Equipment..................................................... 1,192,000
Leasehold improvements........................................ 363,000
Land.......................................................... 956,000
-----------
13,454,000
Less, accumulated depreciation and amortization................. (9,563,000)
-----------
$ 3,891,000
===========
</TABLE>
Intangible assets include covenants not to compete, routes and customer
lists with original values totalling $8,453,000 at December 31, 1995.
Accumulated amortization of intangible assets at December 31, 1995 was
$5,485,000.
4. LONG-TERM DEBT
Long-term debt as of December 31, 1995, is comprised of:
<TABLE>
<S> <C>
Note payable, City National Bank, collateralized by company assets and
personal guarantees by two shareholders. Payable in monthly
installments of $54,103 including interest at the bank prime rate..... $ 762,000
Note payable, City National Bank, collateralized by company assets and
personal guarantees by two shareholders. Payable in monthly
installments of $2,332 plus interest at the bank's prime rate plus
1.5%, maturing May 31, 1998........................................... 128,000
Note payable, City National Bank, collateralized by company assets and
personal guarantees by two shareholders. Payable in monthly
installments of $3,533 plus interest at the bank's prime rate plus
1.25%, maturing June 30, 1998......................................... 200,000
Note payable, A One Disposal, collateralized by letter of credit issued
through City National Bank, payable in monthly installments including
interest on portion of note related to lost route at 13%, maturing
September 1, 2003..................................................... 266,000
</TABLE>
115
<PAGE> 117
ACQUIRED SOLID WASTE COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
Note payable, AB Disposal, payable in monthly installments of $2,592
including interest at 5%, maturing April 1, 1998...................... $ 129,000
Note payable, City National Bank, collateralized by company assets and
personal guarantees by two shareholders. Payable in monthly
installments of $8,515 plus interest at the bank's prime rate plus
1.5%, maturing June 1, 2000........................................... 868,000
Note payable, related party, payable in quarterly installments of
$10,767 including interest at 5%...................................... 783,000
Note payable, TransAmerica, collateralized by transportation equipment
purchased. Payable in monthly installments of $9,034 including
interest at 10.5%, final installment due June, 2000................... 387,000
Mortgage note payable, Fullerton Savings and Loan, collateralized by
land. Payable in monthly installments of $9,685 plus interest of
8.375%................................................................ 896,000
Other................................................................... 510,000
-----------
4,929,000
Less, current portion................................................... (1,095,000)
-----------
Long-term debt, net................................................... $ 3,834,000
===========
</TABLE>
5. RELATED PARTY TRANSACTIONS
Note receivable from related party is collateralized by a second trust deed
for a percentage interest in two properties located in the City of Los Angeles.
The long-term receivable at December 31, 1995, matures as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------------------------------------------------ --------
<S> <C>
1996.............................................................. $ 26,000
1997.............................................................. 28,000
1998.............................................................. 30,000
1999.............................................................. 32,000
2000 and thereafter............................................... 522,000
--------
$638,000
========
</TABLE>
Interest received on this note receivable was $23,000 for 1995.
Notes payable to related parties are included in Note 4. Interest expense
on these notes totalled $90,000 for 1995.
6. LEASE COMMITMENTS
Cal Waste Industries, Inc. rents its main office and two storage yards from
two shareholders for $12,700 per month with a consumer price index adjustment
each January in years three, four, and five. This is a five year lease, expiring
in January, 2001.
Expert Disposal Service, Inc., Fat Man, Inc., and ASA Leasing, Inc. rent
facilities and equipment from a company owned by a shareholder on a month to
month basis. The main facility is leased from an unrelated party for $11,000 per
month with a consumer price index adjustment each September. This lease expires
in March, 1997, but can be extended for an additional two and one-half years.
Rent expense for the year ended December 31, 1995, was $333,436.
116
<PAGE> 118
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
REPUBLIC INDUSTRIES, INC., AUTONATION INCORPORATED,
CONTINENTAL WASTE INDUSTRIES, INC., ADDINGTON RESOURCES, INC.,
HUDSON MANAGEMENT CORPORATION AND
ENVIROCYCLE, INC. AND ACQUIRED SOLID WASTE COMPANIES
The following Unaudited Condensed Consolidated Pro Forma Financial
Statements include the supplemental consolidated financial statements of
Republic which include the results of operations of CarChoice which Republic
acquired in August 1996. This transaction has been accounted for under the
pooling of interests method of accounting and, accordingly, Republic's
supplemental consolidated financial statements have been retroactively adjusted
as if Republic and CarChoice, which commenced operations in January 1995, had
operated as one entity since inception.
The following Unaudited Condensed Consolidated Pro Forma Balance Sheet
presents the pro forma financial position of Republic as of June 30, 1996 as if
the pending acquisitions of AutoNation, Continental and Addington had been
consummated as of June 30, 1996. Hudson Management Corporation and Envirocycle,
Inc. (collectively, "HMC") and various other acquired solid waste companies
("Acquired Solid Waste Companies") were acquired by Republic in August 1995
and May 1996, respectively, therefore HMC and the Acquired Solid Waste
Companies, as well as a series of 1995 equity transactions involving the sale
of common stock and warrants (the "Equity Transactions"), are included in
Republic's historical balance sheet as of June 30, 1996. Acquired Solid Waste
Companies include various businesses acquired and accounted for under the
pooling of interests method of accounting and a business acquisition accounted
for under the purchase method of accounting. The Acquired Solid Waste
Companies accounted for under the pooling of interests method of accounting
were not significant individually or in the aggregate and, consequently, prior
period financial statements have not been restated.
The following Unaudited Condensed Consolidated Pro Forma Statement of
Operations for the Six Months Ended June 30, 1996 presents the pro forma results
of continuing operations of Republic as if the pending acquisitions of
AutoNation, Continental and Addington had been consummated at the beginning of
the period presented and includes the pre-acquisition operations (January to
April 1996) of one of the Acquired Solid Waste Companies which was accounted
for under the purchase method of accounting. The following Unaudited Condensed
Consolidated Pro Forma Statement of Operations for the Year Ended December 31,
1995 presents the pro forma results of continuing operations of Republic as if
the pending acquisitions of AutoNation, Continental, Addington and the completed
acquisitions of the Acquired Solid Waste Companies, had been consummated at the
beginning of the period presented and includes the pre-acquisition operations of
HMC (January to July 1995). This statement of operations also contains pro forma
adjustments related to the Equity Transactions as if they had occurred at the
beginning of the period presented. The following Unaudited Condensed
Consolidated Pro Forma Statements of Operations for the Years Ended December 31,
1994 and 1993 present the pro forma results of continuing operations of Republic
as if the pending acquisitions of Continental and Addington, which will be
accounted for under the pooling of interests method of accounting, had been
consummated at the beginning of the periods presented. These Unaudited Condensed
Consolidated Pro Forma Financial Statements should be read in conjunction with
the respective historical consolidated and/or supplemental consolidated
financial statements and notes thereto of Republic, AutoNation, Continental,
Addington, HMC, CarChoice and Acquired Solid Waste Companies.
The unaudited pro forma income from continuing operations per common and
common equivalent share is based on the combined weighted average number of
common shares and common share equivalents outstanding which include, where
appropriate, the assumed exercise or conversion of warrants and options. In
computing the unaudited pro forma income from continuing operations per common
and common equivalent share, Republic utilizes the modified treasury stock
method. Unless otherwise presented, the difference between primary and
fully diluted earnings per share is not significant.
These Unaudited Condensed Consolidated Pro Forma Financial Statements were
prepared utilizing the accounting policies of the respective entities as
outlined in their historical financial statements except as described in the
accompanying notes. The pending acquisition of AutoNation and the completed
acquisitions
117
<PAGE> 119
of HMC and one of the Acquired Solid Waste Companies will be or have been
accounted for under the purchase method of accounting. Accordingly, the
Unaudited Condensed Consolidated Pro Forma Financial Statements reflect
Republic's preliminary allocations of the purchase prices of AutoNation, HMC
and one of the Acquired Solid Waste Companies which will be subject to
further adjustments as Republic finalizes the allocations of the purchase prices
in accordance with generally accepted accounting principles. The unaudited pro
forma condensed consolidated results of operations do not necessarily reflect
actual results which would have occurred if the acquisitions or Equity
Transactions had taken place on the assumed dates, nor are they necessarily
indicative of the results of future combined operations.
118
<PAGE> 120
REPUBLIC INDUSTRIES, INC., AUTONATION INCORPORATED,
CONTINENTAL WASTE INDUSTRIES, INC., AND ADDINGTON RESOURCES, INC.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
AS OF JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------
REPUBLIC AUTONATION CONTINENTAL ADDINGTON COMBINED DR. CR. PRO FORMA
-------- ---------- ----------- --------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............. $263,540 $ 5,679 $ 1,106 $ 2,624 $ 272,949 $ 272,949
Accounts receivable,
net..................... 61,952 -- 10,668 8,957 81,577 81,577
Prepaid expenses and other
current assets.......... 73,121 10,335 8,568 3,937 95,961 $ 40,600(f) 55,361
-------- ------- -------- -------- ---------- -------- -------- ----------
Total current
assets............ 398,613 16,014 20,342 15,518 450,487 40,600 409,887
Property and equipment,
net....................... 283,101 80,983 90,975 113,198 568,257 568,257
Investment in subscribers,
net....................... 70,940 -- -- -- 70,940 70,940
Intangible assets, net...... 180,565 -- 16,590 -- 197,155 $152,111(a) 349,266
Other assets................ 9,222 1,836 13,278 7,465 31,801 31,801
-------- ------- -------- -------- ---------- -------- -------- ----------
Total assets........ $942,441 $98,833 $141,185 $136,181 $1,318,640 $152,111 $ 40,600 $1,430,151
======== ======= ======== ======== ========== ======== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued expenses........ $ 63,290 $ 9,683 $ 10,145 $ 9,899 $ 93,017 $ 93,017
Current maturities of
long-term debt and notes
payable................. 13,801 49,211 2,192 1,929 67,133 $ 40,600(f) 26,533
Deferred revenue and other
current liabilities..... 41,501 -- 1,731 -- 43,232 43,232
-------- ------- -------- -------- ---------- -------- -------- ----------
Total current
liabilities....... 118,592 58,894 14,068 11,828 203,382 40,600 162,782
Long-term debt, net of
current maturities........ 3,267 -- 31,726 15,987 50,980 50,980
Accrued environmental and
landfill costs, net of
current maturities........ 7,219 -- 6,846 6,159 20,224 20,224
Deferred revenue............ 12,371 -- -- -- 12,371 12,371
Deferred income taxes and
other liabilities......... 28,600 -- 11,486 5,422 45,508 45,508
-------- ------- -------- -------- ---------- -------- -------- ----------
Total liabilities... 170,049 58,894 64,126 39,396 332,465 40,600 291,865
-------- ------- -------- -------- ---------- -------- -------- ----------
Shareholders' equity:
Common stock.............. 1,891 80 9 16,189 18,169 80(b) $ 175(c) 2,316
16,198(e) 250(d)
Additional
paid-in-capital......... 724,882 52,050 65,167 87,145 929,244 52,050(b) 191,875(c) 1,070,920
14,097(e) 16,198(e)
250(d)
Retained earnings......... 45,619 (12,191) 12,355 7,076 52,859 12,191(b) 65,050
Treasury stock............ -- -- (472) (13,625) (14,097) 14,097(e) --
-------- ------- -------- -------- ---------- -------- -------- ----------
Total shareholders'
equity............ 772,392 39,939 77,059 96,785 986,175 82,675 234,786 1,138,286
-------- ------- -------- -------- ---------- -------- -------- ----------
Total liabilities
and shareholders'
equity............ $942,441 $98,833 $141,185 $136,181 $1,318,640 $123,275 $234,786 $1,430,151
======== ======= ======== ======== ========== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
119
<PAGE> 121
REPUBLIC INDUSTRIES, INC., AUTONATION INCORPORATED,
CONTINENTAL WASTE INDUSTRIES, INC., ADDINGTON RESOURCES, INC.
AND AN ACQUIRED SOLID WASTE COMPANY
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACQUIRED PRO FORMA
SOLID ADJUSTMENTS
WASTE -----------------
REPUBLIC AUTONATION CONTINENTAL ADDINGTON COMPANY COMBINED DR. CR. PRO FORMA
-------- ---------- ----------- --------- --------- -------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................ $267,625 $ 3,375 $30,189 $29,695 $ 3,769 $334,653 $334,653
Expenses:
Cost of operations... 184,050 8,190 21,014 21,385 1,934 236,573 $1,986(g) 238,559
Selling, general and
administrative..... 52,605 4,152 3,707 2,161 964 63,589 63,589
Other (income) expense:
Interest and other
income............. (5,981) -- (597) 181 -- (6,397) (6,397)
Interest expense..... 1,811 160 1,083 142 -- 3,196 3,196
-------- ---------- ----------- --------- --------- -------- ------ ------ ---------
232,485 12,502 25,207 23,869 2,898 296,961 1,986 298,947
-------- ---------- ----------- --------- --------- -------- ------ ------ ---------
Income (loss) from
continuing operations
before income
taxes................ 35,140 (9,127) 4,982 5,826 871 37,692 1,986 35,706
Income tax provision... 13,178 -- 2,072 1,573 -- 16,823 $3,892(k) 12,931
-------- ---------- ----------- --------- --------- -------- ------ ------ ---------
Income (loss) from
continuing
operations........... $21,962 $ (9,127) $ 2,910 $ 4,253 $ 871 $20,869 $1,986 $3,892 $ 22,775
======== ========== ========== ========= ========== ========= ====== ====== ==========
Fully-diluted:
Earnings per share
from continuing
operations......... $ .10 $ .09
======== ==========
Weighted average
shares
outstanding........ 214,190 257,775
======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
120
<PAGE> 122
REPUBLIC INDUSTRIES, INC., AUTONATION INCORPORATED,
CONTINENTAL WASTE INDUSTRIES, INC.,
ADDINGTON RESOURCES, INC., HUDSON MANAGEMENT CORPORATION AND
ENVIROCYCLE, INC. AND ACQUIRED SOLID WASTE COMPANIES
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION> ACQUIRED
SOLID
WASTE
REPUBLIC AUTONATION CONTINENTAL ADDINGTON HMC COMPANIES COMBINED
-------- ---------- ----------- --------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue............. $295,238 $ -- $ 47,815 $ 56,739 $33,201 $31,488 $464,481
Expenses:
Cost of
operations....... 192,311 2,177 29,045 38,080 21,772 21,225 304,610
Selling, general
and
administrative... 67,048 887 6,882 6,631 9,298 6,558 97,304
Restructuring and
unusual
charges.......... -- -- 1,500 -- -- -- 1,500
Other (income)
expense:
Interest and other
income........... (5,715) -- (205) (427) -- (845) (7,192)
Interest expense... 6,139 -- 2,659 955 489 428 10,670
-------- ------- ------- ------- ------- ------- --------
259,783 3,064 39,881 45,239 31,559 27,366 406,892
-------- ------- ------- ------- ------- ------- --------
Income (loss) from
continuing
operations before
income taxes....... 35,455 (3,064) 7,934 11,500 1,642 4,122 57,589
Income tax
provision.......... 15,534 -- 3,297 4,426 657 104 24,018
-------- ------- ------- ------- ------- ------- --------
Income (loss) from
continuing
operations......... $ 19,921 $ (3,064) $ 4,637 $ 7,074 $ 985 $ 4,018 $ 33,571
======== ======= ======= ======= ======= ======= ========
Primary:
Earnings per share
from continuing
operations....... $ .15
========
Weighted average
shares
outstanding...... 134,423
========
Fully Diluted:
Earnings per share
from continuing
operations....... $ .14
========
Weighted average
shares
outstanding...... 141,279
========
<CAPTION>
PRO FORMA
ADJUSTMENTS
------------------ PRO
DR. CR. FORMA
------ ------- --------
<S> <C> <C> <C>
Revenue............. $464,481
Expenses:
Cost of
operations....... $5,126(g) $ 289(h) 309,447
Selling, general
and
administrative... 447(i) 96,857
Restructuring and
unusual
charges.......... 1,500
Other (income)
expense:
Interest and other
income........... (7,192)
Interest expense... 10,670(j) --
------ ------- --------
5,126 11,406 400,612
------ ------- --------
Income (loss) from
continuing
operations before
income taxes....... 5,126 11,406 63,869
Income tax
provision.......... 2,652(k) 26,670
------ ------- --------
Income (loss) from
continuing
operations......... $7,778 $11,406 $ 37,199
====== ======= ========
Primary:
Earnings per share
from continuing
operations....... $ .17
========
Weighted average
shares
outstanding...... 218,150
========
Fully Diluted:
Earnings per share
from continuing
operations....... $ .16
========
Weighted average
shares
outstanding...... 229,422
========
</TABLE>
The accompanying notes are an integral part of these statements.
121
<PAGE> 123
REPUBLIC INDUSTRIES, INC.,
CONTINENTAL WASTE INDUSTRIES, INC.
AND ADDINGTON RESOURCES, INC.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
---------------
REPUBLIC CONTINENTAL ADDINGTON COMBINED DR. CR. PRO FORMA
-------- ----------- ---------- -------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue......................................... $218,173 $ 28,728 $ 36,057 $282,958 $ 282,958
Expenses:
Cost of operations............................. 143,375 17,224 23,798 184,397 184,397
Selling, general and administrative............ 49,245 4,485 7,119 60,849 60,849
Restructuring and unusual charges.............. -- -- 670 670 670
Other (income) expense:
Interest and other income...................... (1,081) 126 (772) (1,727) (1,727)
Interest expense............................... 4,487 1,881 1,252 7,620 7,620
-------- ----------- ----------- -------- ------- ------- ---------
196,026 23,716 32,067 251,809 251,809
-------- ----------- ----------- -------- ------- ------- ---------
Income from continuing operations before income
taxes.......................................... 22,147 5,012 3,990 31,149 31,149
Income tax provision............................ 5,298 2,244 1,596 9,138 9,138
-------- ----------- ----------- -------- ------- ------- ---------
Income from continuing operations............... $16,849 $ 2,768 $ 2,394 $22,011 $ 22,011
======== =========== =========== ======= ======= ======= =========
Fully-Diluted:
Earnings per share from continuing
operations................................... $ .17 $ .19
======= =========
Weighted average shares outstanding............ 96,920 117,286
======= =========
</TABLE>
The accompanying notes are an integral part of these statements.
122
<PAGE> 124
REPUBLIC INDUSTRIES, INC.,
CONTINENTAL WASTE INDUSTRIES, INC.
AND ADDINGTON RESOURCES, INC.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
-------------
REPUBLIC CONTINENTAL ADDINGTON COMBINED DR. CR. PRO FORMA
-------- ----------- --------- -------- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................................. $182,495 $ 16,204 $ 22,600 $221,299 $221,299
Expenses:
Cost of operations..................... 121,640 11,209 13,694 146,543 146,543
Selling, general and administrative.... 46,477 2,067 6,503 55,047 55,047
Restructuring and unusual charges...... 10,040 -- 5,122 15,162 15,162
Other (income) expense:
Interest and other income.............. (760) (49) (10) (819) (819)
Interest expense....................... 2,936 1,303 -- 4,239 4,239
-------- -------- -------- -------- ---- ---- --------
180,333 14,530 25,309 220,172 220,172
-------- -------- -------- -------- ---- ---- --------
Income (loss) from continuing operations
before income taxes.................... 2,162 1,674 (2,709) 1,127 1,127
Income tax provision.................... 2,493 721 (1,029) 2,185 2,185
-------- -------- --------- -------- ---- ---- --------
Income (loss) from continuing
operations............................. $ (331) $ 953 $ (1,680) $ (1,058) $ (1,058)
======= ======== ========= ======== ==== ==== ========
Fully-Diluted:
Earnings (loss) per share from
continuing operations................ $ -- $ (.01)
======= ========
Weighted average shares outstanding.... 97,102 114,900
======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
123
<PAGE> 125
REPUBLIC INDUSTRIES, INC., AUTONATION INCORPORATED,
CONTINENTAL WASTE INDUSTRIES, INC.,
ADDINGTON RESOURCES, INC., HUDSON MANAGEMENT CORPORATION AND
ENVIROCYCLE, INC. AND ACQUIRED SOLID WASTE COMPANIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA FINANCIAL STATEMENTS
(a) Represents an entry to record intangible assets resulting from the
preliminary allocation of the purchase price for the proposed acquisition
of AutoNation as follows (in thousands):
<TABLE>
<S> <C>
Shares of Republic Common Stock to be issued.................... 17,467
Value of Republic Common Stock consideration.................... $192,050
Historical net tangible assets.................................. (39,939)
----------
Allocation to intangible assets................................. $152,111
==========
</TABLE>
The value of the Republic Common Stock consideration was computed based
upon the 5 day average quoted stock price before and after the signing and
public announcement of the definitive agreement to acquire AutoNation,
adjusted to reflect a discount from market value to account for selling
restrictions imposed on the sellers of AutoNation. The above purchase price
has been allocated on a preliminary basis using the historical value of the
tangible assets and liabilities as of June 30, 1996, which represents a
reasonable estimate of the fair value, with the remaining balance allocated
to intangible assets. The pro forma purchase price will be adjusted based
on the actual closing date balance sheet and thereafter for a period not to
exceed one year in accordance with generally accepted accounting principles
for settlement of pre-acquisition contingencies, if any.
(b) Represents an entry to eliminate the historical equity balances of
AutoNation.
(c) Represents the recording of equity resulting from Republic's issuance of
Republic Common Stock to the stockholders of AutoNation.
(d) Represents an entry to record the par value of the shares of Republic
Common Stock issued to the stockholders of Continental and Addington both
of which will be accounted for under the pooling of interests method of
accounting.
(e) Represents an entry to reclassify the historical common and treasury stock
balances of Continental and Addington to additional paid-in capital.
(f) Represents an entry to eliminate advances from Republic to AutoNation.
(g) Represents a net adjustment related to the elimination of the historical
amortization of intangible assets and the recording of amortization, on a
straight-line basis, on the intangible assets resulting from the
preliminary purchase price allocations of AutoNation, an Acquired Solid
Waste Company and HMC, as applicable. Intangible assets resulting from
the purchases of AutoNation, an Acquired Solid Waste Company and HMC are
being amortized over a 40 year life which approximates the estimated
useful life.
(h) Represents a reduction to depreciation expense resulting from the revision
of estimated lives of acquired property and equipment of HMC to conform
with Republic's policies.
(i) Represents the contractual reduction of salary and benefits of the sellers
of HMC.
(j) Represents the assumed interest savings on the payoff of all existing
indebtedness of Republic, Continental, Addington, HMC and Acquired Solid
Waste Companies with the proceeds from the Equity Transactions.
(k) Represents the incremental change in the combined entity's provision for
income taxes as a result of the pre-tax earnings (loss) of AutoNation,
Acquired Solid Waste Companies and HMC, as applicable, and all pro forma
adjustments as described above.
124
