<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) January 27, 1997
----------------
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.)
450 East Las Olas Boulevard
Ft. Lauderdale, FL 33301
--------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (954) 713-5200
--------------
N.A.
-------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 5. OTHER EVENTS
REPORTING OF CERTAIN FINANCIAL INFORMATION FOR REGISTRATION AND OTHER PURPOSES.
In connection with the consummation or probable consummation of certain
acquisitions of insignificant businesses which, in the aggregate, are
significant, as well as the proposed acquisition by the Registrant of National
Car Rental System, Inc., 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 or probable acquisitions and National.
In addition, the Registrant is filing herewith audited supplemental
consolidated financial statements which give retroactive effect to the
acquisitions of Alamo Rent-A-Car, Inc. and certain related entities,
Continental Waste Industries, Inc., Addington Resources, Inc. and Carlisle
Motors, Inc., all of which have been accounted for under the pooling of
interests method of accounting. Such financial information is attached hereto
as Exhibit 99 and incorporated herein by reference. Exhibit 99 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, 333-18009, on Form S-4, file number 333-17915 and on
Form S-8, file numbers 33-93742, 333-07623 and 333-19453.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) None.
(b) None.
(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 S. Karsner
----------------------------------
Michael S. Karsner
Senior Vice President
and Chief Financial Officer
Date: January 27, 1997
----------------
<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 Deloitte and Touche LLP
23.3 Consent of Ernst and Young LLP
23.4 Consent of Dixon, Odom & Co., LLP
23.5 Consent of George B. Jones & Co., P.C.
24. None
27. None
99. 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 Form S-3
(Registration Nos. 33-61649, 33-64289, 33-63735, 33-65289, 333-01757, 333-04269,
333-08479 and 333-18009), Form S-4 (Registration No. 333-17915) and Form S-8
(Registration Nos. 33-93742, 333-07623 and 333-19453).
ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida,
January 27, 1997
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference into the previously filed
Registration Statements of Republic Industries, Inc. on Form S-3 (Registration
Nos. 33-61649, 33-62489, 33-63735, 33-65289, 333-01757, 333-04269, 333-08479,
and 333-18009), Form S-4 (Registration No. 333-17915) and Form S-8 (Registration
Nos. 33-93742, 333-07623, and 333-19453) of our report dated February 2, 1996
relating to the consolidated financial statements of National Car Rental System,
Inc. and subsidiaries as of and for the five months ended May 31, 1995 and as of
and for the years ended December 31, 1994 and 1993 appearing in this Current
Report on Form 8-K.
Deloitte & Touche LLP
Minneapolis, Minnesota
January 27, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the previously filed
Registration Statements of Republic Industries, Inc. on Form S-3 (Nos.
33-61649, 33-62489, 33-63735, 33-65289, 333-01757, 333-04269, 333-08479 and
333-18009), Form S-4 (No. 333-17915), and Form S-8 (Nos. 33-93742, 333-07623
and 333-19453) of our report dated October 31, 1996, with respect to the
combined financial statements of Grubb Automotive, Inc., Jack Sherman
Chevrolet, Inc., Lou Grubb Chevrolet, Inc., Lou Grubb Ford, Inc., Lou Grubb
Saturn, Inc., and Saturn of Tempe, Inc. as of and for the year ended December
31, 1995 included in this Current Report on Form 8-K.
ERNST & YOUNG LLP
Phoenix, Arizona
January 27, 1997
<PAGE> 1
EXHIBIT 23.4
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,
333-08479, and 33-18009), Form S-4 (Registration No. 333-17915) and Form S-8
(Registration Nos. 33-93742, 333-07623, and 333-19453).
Dixon, Odom & Co., L.L.P.
Greensboro, North Carolina
January 27, 1997
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our report 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, 333-08479, and
33-18009), Form S-4 (Registration No. 333-17915) and Form S-8 (Registration Nos.
33-93742, 333-07623, and 333-19453).
George B. Jones & Co., P.C.
Tampa, Florida
January 27, 1997
<PAGE> 1
EXHIBIT 99
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
(a) Historical Financial Information
REPUBLIC INDUSTRIES, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants........................................................ F-2
Supplemental Consolidated Balance Sheets as of September 30, 1996 (unaudited)
and December 31, 1995 and 1994.......................................................................... F-3
Supplemental Consolidated Statements of Operations for the Nine Months Ended
September 30, 1996 and 1995 (unaudited) and for the Years Ended December
31, 1995, 1994 and 1993................................................................................. F-4
Supplemental Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1995, 1994 and 1993.................................................................. F-5
Supplemental Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1996 and 1995 (unaudited) and for the Years Ended December
31, 1995, 1994 and 1993................................................................................. F-6
Notes to Supplemental Consolidated Financial Statements................................................... F-7
CARLISLE MOTORS, INC.
Independent Auditors' Report.............................................................................. F-29
Combined Balance Sheet as of November 30, 1996............................................................ F-30
Combined Statement of Operations and Retained Earnings for the Eleven Month
Period Ended November 30, 1996.......................................................................... F-32
Combined Statement of Cash Flows for the Eleven Month Period Ended November 30, 1996...................... F-34
Notes to Combined Financial Statements.................................................................... F-36
NATIONAL CAR RENTAL SYSTEM,INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................................................................. F-46
Consolidated Balance Sheet as of May 31, 1996............................................................. F-47
Consolidated Statement of Operations for the Period from Inception (April 4, 1995)
through May 31, 1996.................................................................................... F-48
Consolidated Statement of Shareholders' Equity for the Period from Inception (April 4, 1995)
through May 31, 1996.................................................................................... F-49
Consolidated Statement of Cash Flows for the Period from Inception (April 4, 1995)
through May 31, 1996.................................................................................... F-50
Notes to Consolidated Financial Statements................................................................ F-51
Consolidated Balance Sheets as of November 30, 1996 (unaudited) and May 31, 1996.......................... F-63
Consolidated Statements of Operations for the Six Months Ended November 30, 1996 (unaudited)
and for the Period from Inception (April 4, 1995) through November 30, 1995............................. F-64
Consolidated Statements of Cash Flows for the Six Months Ended November 30, 1996 (unaudited)
and for the Period from Inception (April 4, 1995) through November 30, 1995............................. F-65
Notes to Consolidated Financial Statements................................................................ F-66
Independent Auditors' Report.............................................................................. F-69
Consolidated Balance Sheets as of May 31, 1995 and December 31, 1994...................................... F-70
Consolidated Statements of Operations for the Five-Month Period Ended May 31, 1995 and
for the Years Ended December 31, 1994 and 1993.......................................................... F-71
Consolidated Statements of Changes in Shareholder's Deficit for the Five-Month Period Ended
May 31, 1995 and for the Years Ended December 31, 1994 and 1993......................................... F-72
Consolidated Statements of Cash Flows for the Five-Month Period Ended May 31, 1995 and
for the Years Ended December 31, 1994 and 1993.......................................................... F-73
Notes to Consolidated Financial Statements................................................................ F-74
ED MULLINAX, INC. AND SUBSIDIARIES
Independent Auditor's Report.............................................................................. F-87
Consolidated Balance Sheets as of October 31, 1996 (unaudited) and April 30, 1996 and 1995................ F-88
Consolidated Statements of Earnings and Retained Earnings for the Six Months Ended October 31, 1996
and 1995 (unaudited) and for the Years Ended April 30, 1996 and 1995.................................... F-90
Consolidated Statements of Cash Flows for the Six Months Ended October 31, 1996
and 1995 (unaudited) and for the Years Ended April 30, 1996 and 1995.................................... F-91
Notes to Consolidated Financial Statements................................................................ F-93
GRUBB AUTOMOTIVE
Report of Independent Auditors............................................................................ F-103
Combined Balance Sheets as of December 31, 1995 and September 30, 1996 (unaudited)........................ F-104
Combined Statements of Income for the Year Ended December 31, 1995 and for the
Nine Months Ended September 30, 1995 and 1996 (unaudited)............................................... F-105
Combined Statements of Shareholders' Equity for the Year Ended December 31, 1995 and for the
Nine Months Ended September 30, 1996 (unaudited)........................................................ F-106
Combined Statements of Cash Flows for the Year Ended December 31, 1995 and for the
Nine Months Ended September 30, 1995 and 1996 (unaudited)............................................... F-107
Notes to Combined Financial Statements.................................................................... F-108
(b) Pro Forma Financial Information
REPUBLIC INDUSTRIES, INC., AUTONATION INCORPORATED, ED MULLINAX, INC., GRUBB AUTOMOTIVE,
NATIONAL CAR RENTAL SYSTEMS, INC. AND HUDSON MANAGEMENT CORPORATION
Unaudited Condensed Consolidated Pro Forma Financial Statements........................................... F-124
Unaudited Condensed Consolidated Pro Forma Balance Sheet as of September 30, 1996......................... F-125
Unaudited Condensed Consolidated Pro Forma Statement of Operations for the
Nine Months Ended September 30, 1996.................................................................... F-126
Unaudited Condensed Consolidated Pro Forma Statement of Operations for the
Year Ended December 31, 1995............................................................................ F-127
Notes to Unaudited Condensed Consolidated Pro Forma Financial Statements.................................. F-128
</TABLE>
F-1
<PAGE> 2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Republic Industries, Inc.:
We have audited the 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 consolidated
statements of operations, shareholders' equity and cash flows (restated) for
each of the three years in the period ended December 31, 1995, included on
pages 3 through 22 of Exhibit 99.1 to Form 8-K/A dated November 25, 1996.
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 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 (restated) for each of the
three years in the period ended December 31, 1995, all in conformity with
generally accepted accounting principles.
We have also made similar audits of the accompanying supplemental
consolidated balance sheets of Republic 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 mergers with Alamo
Rent-A-Car, Inc. and Affiliates on November 25, 1996; Addington Resources, Inc.
on December 19, 1996; Continental Waste Industries, Inc. on December 30, 1996;
and Carlisle Motors, Inc. on January 21, 1997, which have been accounted for as
poolings 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 did not audit the financial statements of DKBERT Assoc. ("DKBERT")
and Guy Salmon USA, Ltd. and subsidiaries, ("GUSA Ltd."), affiliates of Alamo
Rent-A-Car, Inc. and Affiliates, companies acquired during 1996 in a
transaction accounted for as a pooling of interests, as described in Note 1.
Such statements are included in the supplemental consolidated financial
statements of Republic Industries, Inc. and subsidiaries and reflect total
assets and revenues constituting 12.1 percent and 6.3 percent, respectively, in
1995, 10.5 percent and 3.9 percent, respectively in 1994, and 3.5 percent of
total revenue in 1993, of the related supplemental consolidated totals. These
statements were audited by other auditors whose reports thereon have been
furnished to us and our opinion expressed herein, insofar as it relates to the
amounts included for DKBERT and GUSA Ltd., is based solely upon the reports of
the other auditors.
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 and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the reports of the other
auditors, 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 mergers with Alamo Rent-A-Car, Inc. and Affiliates, Addington Resources,
Inc., Continental Waste Industries, Inc., and Carlisle Motors, Inc. as described
in Note 1, all in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida,
January 27, 1997.
F-2
<PAGE> 3
REPUBLIC INDUSTRIES, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------------
1996 1995 1994
------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................................... $ 196,341 $ 187,782 $ 39,647
Receivables, net............................................................ 348,431 232,150 236,606
Revenue earning vehicles, net............................................... 2,201,583 1,478,409 1,732,515
Inventory................................................................... 53,504 59,672 42,602
Prepaid expenses and other current assets................................... 290,964 125,345 153,123
------------- ---------- ----------
TOTAL CURRENT ASSETS.................................................. 3,090,823 2,083,358 2,204,493
Property and equipment, net................................................... 790,131 617,436 506,331
Investment in subscriber accounts, net of accumulated amortization of $17,603,
$11,446 and $6,977, respectively............................................ 78,940 42,240 24,193
Intangible assets, net of accumulated amortization of $25,759, $14,461 and
$6,308, respectively........................................................ 222,992 135,799 42,528
Other assets.................................................................. 31,718 18,989 110,790
------------- ---------- ----------
TOTAL ASSETS.......................................................... $ 4,214,604 $2,897,822 $2,888,335
============= ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................................ $ 171,563 $ 145,430 $ 125,425
Accrued liabilities......................................................... 131,614 42,836 51,318
Estimated auto liability claims............................................. 125,761 112,448 125,331
Revenue earning vehicle financing........................................... 2,254,703 1,546,122 1,794,802
Current maturities of other long-term debt and notes payable................ 82,535 81,694 85,222
Other current liabilities................................................... 40,646 49,813 30,344
------------- ---------- ----------
TOTAL CURRENT LIABILITIES............................................. 2,806,822 1,978,343 2,212,442
Other long-term debt and notes payable, net of current maturities............. 284,312 155,371 193,918
Other liabilities............................................................. 131,207 122,673 126,557
------------- ---------- ----------
TOTAL LIABILITIES..................................................... 3,222,341 2,256,387 2,532,917
------------- ---------- ----------
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; 241,487,573, 211,083,232 and
142,583,009 shares issued and outstanding, respectively................... 2,415 2,111 1,425
Additional paid-in capital.................................................. 930,057 587,340 253,807
Retained earnings........................................................... 71,101 63,024 98,079
Translation adjustment...................................................... 2,315 2,585 2,780
Notes receivable arising from stock purchase agreements..................... -- -- (673)
Treasury stock; 900,000 shares in 1996 and 1995, at cost.................... (13,625) (13,625) --
------------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY............................................ 992,263 641,435 355,418
------------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................ $ 4,214,604 $2,897,822 $2,888,335
============= ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 4
REPUBLIC INDUSTRIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------------- ------------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Vehicle rentals...................... $1,170,360 $1,065,501 $1,389,351 $1,311,967 $1,148,251
Service revenue...................... 471,435 285,701 399,792 282,958 221,299
Vehicle sales........................ 249,756 206,882 274,342 267,071 249,428
Other................................ 3,837 1,868 5,725 3,467 947
---------- ---------- -------- ---------- ----------
1,895,388 1,559,952 2,069,210 1,865,463 1,619,925
Expenses:
Vehicle rental operating expenses.... 437,505 450,393 594,323 496,588 371,755
Cost of services..................... 326,869 188,711 259,436 185,067 151,665
Cost of vehicle sales................ 221,280 179,591 240,967 235,432 213,919
Selling, general and
administrative..................... 824,269 718,697 956,277 879,619 822,497
Restructuring and unusual charges.... 7,623 -- 3,264 -- 10,040
---------- ---------- -------- ---------- ----------
Operating income....................... 77,842 22,560 14,943 68,757 50,049
Interest income........................ 13,022 6,161 12,041 5,639 4,744
Interest expense....................... (23,526) (15,574) (25,125) (17,496) (16,213)
Other income (expense)................. 3,318 1,362 3,677 (3,894) (6,560)
---------- ---------- -------- ---------- ----------
Income from continuing
operations before income taxes....... 70,656 14,509 5,536 53,006 32,020
Income tax provision................... 33,169 7,560 5,374 21,685 15,501
---------- ---------- -------- ---------- ----------
Income from continuing
operations........................... 37,487 6,949 162 31,321 16,519
Discontinued operations:
Income (loss) from discontinued
operations, net.................... -- 6,215 5,414 (2,764) (25,492)
Loss on disposal of segment.......... -- (30,537) (30,537) -- --
---------- ---------- -------- ---------- ----------
Loss from discontinued operations.... -- (24,322) (25,123) (2,764) (25,492)
Income (loss) before extraordinary gain 37,487 (17,373) (24,961) 28,557 (8,973)
Extraordinary gain..................... -- -- -- 357 --
---------- ---------- -------- ---------- ----------
Net income (loss)...................... $ 37,487 $ (17,373) $ (24,961) $ 28,914 $ (8,973)
========== ========== ========== ========== ==========
Fully diluted earnings (loss) per
common and common equivalent share:
Continuing operations................ $ .14 $ .04 $ -- $ .22 $ .12
Discontinued operations.............. -- (.15) (.15) (.01) (.18)
---------- ---------- ---------- ---------- ----------
Net income (loss)............. $ .14 $ (.11) $ (.15) $ .21 $ (.06)
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 5
REPUBLIC INDUSTRIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
ARISING
ADDITIONAL FROM STOCK
COMMON PAID-IN RETAINED TRANSLATION PURCHASE TREASURY
STOCK CAPITAL EARNINGS ADJUSTMENT AGREEMENTS STOCK
------ ---------- --------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992................ $1,370 $ 212,388 $ 145,416 $ 3,015 $(673) $ --
Contributions to capital from former
owners of pooled companies............. -- 3,971 279 -- -- --
Distributions to former owners of pooled
companies.............................. -- -- (49,335) -- -- --
Other..................................... 10 6,729 (548) 100 -- --
Net loss.................................. -- -- (8,973) -- -- --
------ -------- -------- ------- ----- --------
BALANCE AT DECEMBER 31, 1993................ 1,380 223,088 86,839 3,115 (673) --
Distributions to former owners of pooled
companies.............................. -- -- (17,868) -- -- --
Other..................................... 45 30,719 194 (335) -- --
Net Income................................ -- -- 28,914 -- -- --
------ -------- -------- ------- ----- --------
BALANCE AT DECEMBER 31, 1994................ 1,425 253,807 98,079 2,780 (673) --
Sales of common stock..................... 442 261,967 -- -- -- --
Stock issued in acquisitions.............. 172 83,911 -- -- -- --
Exercise of stock options and warrants,
including tax benefit of $4,068........ 28 13,346 -- -- -- --
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.............................. -- -- (22,932) -- -- --
Other..................................... 44 10,614 112 (195) 673 (13,625)
Net loss.................................. -- -- (24,961) -- -- --
------ -------- -------- ------- ----- --------
BALANCE AT DECEMBER 31, 1995................ $2,111 $ 587,340 $ 63,024 $ 2,585 $ -- $(13,625)
====== ========= ========= ======= ===== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 6
REPUBLIC INDUSTRIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 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 from continuing operations................... $ 37,487 $ 6,949 $ 162 $ 31,321 $ 16,519
Adjustments to reconcile income from
continuing operations to net cash provided by
continuing operations:
Restructuring and unusual charges................. 6,298 -- 3,264 -- 10,593
Depreciation and amortization..................... 383,299 351,473 465,440 405,844 339,595
Changes in assets and liabilities, net of effects
from business acquisitions:
Accounts receivable............................. (63,214) (38,879) (4,686) (35,004) (29,534)
Inventory....................................... 10,447 9,142 (14,735) (758) (7,265)
Prepaid expenses and other assets............... (77,799) 1,445 5,613 10,374 (5,314)
Accounts payable and accrued liabilities........ 67,467 28,151 22,752 18,851 45,589
Other liabilities............................... 31,368 (17,141) (47,595) 703 32,953
----------- ----------- ----------- ----------- -----------
Net cash provided by continuing operations.... 395,353 341,140 430,215 431,331 403,136
----------- ----------- ----------- ----------- -----------
CASH PROVIDED BY DISCONTINUED OPERATIONS ............ -- 4,752 6,105 12,168 4,403
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances and loans.................................. (112,900) -- -- -- --
Purchases of revenue earning vehicles from third
party suppliers................................... (1,808,621) (1,666,917) (1,961,343) (2,762,648) (2,276,065)
Purchases of revenue earning vehicles from related
party suppliers................................... (567,954) (295,071) (351,755) (551,157) (576,895)
Sales of revenue earning vehicles................... 1,281,044 1,580,650 2,182,698 2,673,654 2,214,528
Business acquisitions, net of cash acquired......... (28,186) (10,825) (13,969) (11,797) (5,682)
Purchases of property and equipment................. (138,679) (118,527) (176,168) (137,164) (105,312)
Investment in subscriber accounts................... (24,943) (10,775) (15,980) (17,512) (9,569)
Other............................................... 13,587 32,645 76,231 166,992 14,564
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities......... (1,386,652) (488,820) (260,286) (639,632) (744,431)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of revenue earning vehicle financing....... (1,717,883) (1,933,683) (2,606,436) (3,071,250) (2,674,907)
Proceeds from revenue earning vehicle financing..... 2,427,356 2,002,832 2,348,791 3,348,787 3,048,121
Payments of other long-term debt and notes
payable........................................... (66,404) (100,268) (188,435) (185,592) (57,375)
Proceeds from other long-term debt and notes
payable........................................... 150,969 129,117 130,932 80,867 47,330
Sales of common stock............................... 197,583 232,031 232,031 -- --
Exercise of stock options and warrants.............. 9,355 6,333 9,306 -- --
Other............................................... (978) 13,251 45,823 25,607 (21,807)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities........................ 999,998 349,613 (27,988) 198,419 341,362
----------- ----------- ----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............... (140) 1,887 89 (1,344) (1,243)
----------- ----------- ----------- ----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS................. 8,559 208,572 148,135 942 3,227
CASH AND CASH EQUIVALENTS:
Beginning of Period................................. 187,782 39,647 39,647 38,705 35,478
----------- ----------- ----------- ----------- -----------
End of Period....................................... $ 196,341 $ 248,219 $ 187,782 $ 39,647 $ 38,705
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<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 10, 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. Actual results could differ from those estimates.
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 September 30, 1996, and the supplemental
consolidated results of its operations and cash flows for the nine months ended
September 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; The Denver Fire Reporter & Protective Co. and
affiliate ("Denver Alarm") and Incendere, Inc. and affiliates ("Schaubach"),
with which the Company merged in February 1996; and CarChoice, Inc.
("CarChoice") which the Company acquired in August 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, Schaubach and CarChoice had operated as one entity
since inception. See Note 2 for further discussion of these transactions.
All per share data and numbers of shares of the Company's common stock,
par value $.01 per share ("Common Stock") for all periods included in the
financial statements and notes thereto have been adjusted to reflect a
two-for-one stock split in the form of a 100% stock dividend that was effected
in June 1996, as more fully described in Note 6.
Supplemental Consolidated Financial Statements. The accompanying
Supplemental Consolidated Financial Statements give retroactive effect to the
acquisitions of Carlisle Motors, Inc. ("Carlisle") which took place in January
1997, Continental Waste Industries, Inc. ("Continental") and Addington
Resources, Inc., ("Addington") which took place in December 1996 and the
acquisition of Alamo Rent-A-Car, Inc. and Affiliates ("Alamo") which took
place in November 1996. The acquisitions of Carlisle, Continental, Addington
and Alamo have been accounted for under the pooling of interests method of
accounting. See Note 2 for further discussion of these transactions.
Accounts Receivable. Accounts receivable include trade receivables from
the Company's various operating business segments which consist of amounts due
from retail and service customers, travel agents and
F-7
<PAGE> 8
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tour operators. Accounts receivable also include vehicle receivables from
automobile manufacturers which consist of amounts due under vehicle repurchase
programs and incentive programs and also from vehicle renters for damages
incurred on revenue earning vehicles.
The components of accounts receivable, net of allowance for doubtful
accounts are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
1996 1995 1994
------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Trade..................................... $ 199,299 $136,864 $103,903
Vehicle................................... 141,605 94,408 111,519
Other..................................... 18,099 10,184 26,307
------------- -------- --------
359,003 241,456 241,729
Less: allowance for doubtful accounts..... (10,572) (9,306) (5,123)
------------- -------- --------
$ 348,431 $232,150 $236,606
============= ======== ========
</TABLE>
Investments. Investments have a maturity of three months or less, are
classified as held-to-maturity securities, are recorded at amortized cost
adjusted for the amortization or accretion of premiums or discounts, which
approximates market value and are included in other current assets.
Investments consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Eurodollar deposits...................................... $26,727 $36,784
Repurchase agreements.................................... 24,000 --
Certificate of deposit................................... 9,548 44,358
Other.................................................... 2,351 6,575
------- -------
$62,626 $87,717
======= =======
</TABLE>
Investments serve as collateral for irrevocable letters of credit issued in
favor of the Company's auto liability insurance carriers. Collateral equal to
the stated amount of the letter of credit is required. At December 31, 1995,
letters of credit totaling $31,800,000 expire October 1, 1996. The Company also
has a $7,600,000 irrevocable letter of credit issued in connection with airport
facilities, expiring October 15, 1996, under which no amounts were outstanding
at December 31, 1995. The letter of credit is secured by investments of
$3,800,000. Repurchase agreements are restricted for the settlement of specific
estimated auto liability claims.
Revenue Earning Vehicles and Depreciation. Revenue earning vehicles are
stated at cost less accumulated depreciation and allowances for stolen vehicles.
The straight-line method is used to depreciate revenue earning vehicles to their
estimated residual values over the anticipated periods of use based on the
Company's fleet plan, typically ranging from 4 to 20 months in the United States
and from 4 to 9 months in Canada and Europe. Depreciation expense also includes
those costs relating to losses from damaged and wrecked vehicles, and gains and
losses on vehicle sales in the ordinary course of business. Depreciation expense
related to revenue earning vehicles was $398,592,000, $352,523,000 and
$271,326,000 for the years ended December 31, 1995, 1994 and 1993, respectively,
and is included as a component of vehicle rental operating expenses in the
accompanying Supplemental Consolidated Statements of Operations.
A summary of revenue earning vehicles is shown below:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------------
1996 1995 1994
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Revenue earning vehicles............ $2,459,240 $1,701,945 $1,870,795
Less accumulated depreciation....... (257,657) (223,536) (138,280)
------------ ---------- ----------
$2,201,583 $1,478,409 $1,732,515
============ ========= =========
</TABLE>
F-8
<PAGE> 9
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue earning vehicles with depreciated cost of $1,310,000,000 and
$1,640,000,000 at December 31, 1995 and 1994, respectively were acquired under
programs that allow the Company to require counterparties to repurchase vehicles
held for periods of up to 24 months. The Company estimates the future value of
revenue earning vehicles under such repurchase programs to be $1,000,000,000 and
$1,200,000,000 at December 31, 1995 and 1994, respectively. The agreements
contain varying mileage and damage limitations.
The Company also leases vehicles under operating lease agreements which
require the Company to provide normal maintenance and liability coverage. The
agreements generally have terms of 4 to 12 months. Many agreements provide for
an option to terminate the leases early and allow the purchase of leased
vehicles subject to certain restrictions. Most leases provide for an initial
minimum monthly charge, with contingent rental charges for changes in interest
rates and adjustments for wear, damage and mileage in excess of stipulated
amounts. Contingent rental charges totaled $13,191,000, $2,774,000 and
$1,983,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Gains (losses) on sales of revenue earning vehicles were $(6,431,000),
$(852,000) and $871,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
Inventory. Inventory consists primarily of retail vehicles held for sale
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.
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 trucks 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.
Interest costs are capitalized in connection with the construction of
automotive rental facilities and landfill sites. Interest capitalized in 1995,
1994 and 1993 was $3,277,000, $2,682,000 and $2,448,000, respectively.
Depreciation, amortization and depletion expense related to property and
equipment was $57,163,000, $47,352,000 and $64,335,000 in 1995, 1994 and 1993,
respectively.
A summary of property and equipment is shown below:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------
1996 1995 1994
------------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Land, landfills and improvements................... $ 427,126 $ 337,211 $ 298,070
Furniture, fixtures and equipment.................. 445,390 319,126 247,356
Buildings and improvements......................... 206,150 190,286 157,044
---------- --------- ---------
1,078,666 846,623 702,470
Less: accumulated depreciation and amortization.... (288,535) (229,187) (196,139)
---------- --------- ---------
$ 790,131 $ 617,436 $ 506,331
========== ========= =========
</TABLE>
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.
F-9
<PAGE> 10
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The costs are amortized over periods ranging from eight to twelve years
(based on estimated and 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
periods ranging from fifteen to forty years on a straight-line basis.
Amortization expense related to intangible assets was $5,328,000, $2,592,000 and
$2,133,000 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 cash flows over the remaining life of the intangible assets in
measuring their recoverability.
Accrued Environmental and Landfill Costs. Accrued environmental and
landfill costs are included in other liabilities and 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
$99,231,000 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.
In addition to the Company's solid waste collection and disposal
operations, the Company's vehicle rental operations also involve the storage and
dispensing of petroleum products, primarily gasoline. The Company records as
expense, on a current basis, costs associated with remediation of environmental
pollution. The Company also accrues for its proportionate share of costs
associated with the remediation of environmental pollution when it becomes
probable that a liability has been incurred and the amount can be reasonably
estimated. Estimated costs include anticipated site testing, consulting,
remediation, disposal, post-remediation monitoring and legal fees, as
appropriate. The liability does not reflect possible recoveries from insurance
companies or reimbursement of remediation costs.
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 8, 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.
Estimated Auto Liability Claims. The Company assumes responsibility for up
to $1,000,000 per claim under its domestic automobile rental liability insurance
program for property damage and bodily injury claims. Costs in excess of
$1,000,000 and up to $50,000,000 per claim are insured under various contracts
with insurance carriers. Estimated costs for claims up to $1,000,000 are
actuarially determined based on historical claims experience, adjusted for
current trends and changes in claims-handling procedures, and are discounted to
the net present value. The assumptions used have a significant effect on the
amounts reported. During the year ended December 31, 1994, the Company changed
its methodology used to discount its estimated automobile rental liability
claims to a weighted average rate based on Treasury notes with maturity dates
related to the actuarially determined payout curve. Previously, the rate used
for discounting was based on a
F-10
<PAGE> 11
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
three-year average of U.S. Treasury notes with three-year maturities. Management
believes its current methodology better reflects the anticipated payout of
claims. The rates used at December 31, 1995 and 1994 were 5.30% and 7.62%,
respectively. The effect of the change in 1994 was a reduction in the accrual of
$3,700,000.
In its foreign car rental operations, the Company assumes responsibility,
subject to a deductible, per incident, under the auto liability insurance
programs and for property and bodily injury claims.
The Company also assumes responsibility, subject to a deductible, per
incident, under its vehicle collision damage and theft insurance policy. Losses
are accrued as incurred.
Revenue Recognition. Revenue from the Company's automotive business
segments consist primarily of vehicle rentals and retail sales of new and used
vehicles and parts. Revenue is recognized at the time vehicles or parts are
rented or sold. 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. The Company recognizes revenue from its solid waste and
electronic security services segments in the period services are provided or
products are sold.
Financial Instruments. The Company utilizes interest rate swaps in the
management of interest rate risk. The differentials between the amounts paid and
received from these swaps are recognized over the terms of the agreements and
are recorded as adjustments to interest expense. Amounts receivable or payable
under the agreements are included in other receivables or accrued expenses in
the consolidated balance sheets and were not material at December 31, 1995 or
1994.
Foreign Currency Translation. Assets and liabilities of foreign
subsidiaries are translated into United States dollars at the current rates of
exchange. Income and expenses are translated at the average rate of exchange in
effect during the period. The related translation adjustments are reported as a
separate component of shareholders' equity. Foreign currency transaction gains
and losses are included in determining net income and are not material.
Advertising. The Company expenses the cost of advertising as incurred or
when such advertising initially takes place. No advertising costs were
capitalized at December 31, 1995 or 1994. Advertising expense was $64,762,000,
$71,528,000 and $43,270,000 for the years ended December 31, 1995, 1994 and
1993, respectively.
Statements of Cash Flows. The Company considers all highly liquid
investments with purchased maturities of three months or less to be cash
equivalents unless the investments are legally or contractually restricted for
more than three months. 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.
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 of. 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.
F-11
<PAGE> 12
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS COMBINATIONS
PENDING ACQUISITIONS
In January 1997, the Company signed a definitive agreement to acquire
Maroone Automotive Group ("Maroone"). Maroone owns and operates seven new and
used vehicle dealerships located in Florida and New York. The transaction,
which is valued at approximately $200,000,000, includes the acquisition of
Maroone's existing dealerships, new locations and franchises under development
and all related real estate and other ancillary businesses, in exchange for
Common Stock. The Closing of the transaction is subject to customary
conditions, including approval by appropriate manufacturers and regulatory
agencies. The transaction will be accounted for under the pooling of
interests method of accounting.
In January 1997, the Company signed a definitive agreement to acquire
National Car Rental System, Inc. ("National") in a stock for stock exchange.
National has approximately 800 car rental locations in the United States and
Canada and has marketing affiliations in Latin America, Europe, Japan and the
Caribbean. National's business is conducted through company-owned, licensed
and affiliated operations. Domestically, National operates an average fleet of
approximately 100,000 vehicles. The transaction, which will be accounted for
under the pooling of interests method of accounting, is subject to customary
conditions including receipt of all required regulatory approvals, and
is expected to close during the first quarter of 1997. It is contemplated
that the Company will issue approximately 21,712,000 shares of Common Stock
in connection with the transaction.
In addition, the Company has agreed to acquire various other businesses
which own and operate vehicle dealerships. The aggregate purchase price to be
paid for these acquisitions is approximately $127,000,000 and consists of cash
and approximately 3,962,000 shares of Common Stock. These transactions are
subject to customary conditions including appropriate manufacturers' and
regulatory approvals and are expected to close during the first quarter of
1997.
COMPLETED ACQUISITIONS
Significant businesses acquired and accounted for under the pooling of
interests method of accounting have been included retroactively in the financial
statements as if the companies had operated as one entity since inception.
Businesses acquired through September 30, 1996 and accounted for under the
purchase method of accounting are included in the financial statements from the
date of acquisition.
In January 1997, upon approval by the shareholders of the Company, the
Company acquired AutoNation Incorporated ("AutoNation"). AutoNation is
developing a chain of megastores for the sale of new and used vehicles in a
customer friendly environment and was partially owned by the Company's Co-Chief
Executive Officers, and certain other officers and directors of the Company.
The Company issued 17,467,000 shares of Common Stock, in connection with this
acquisition which will be accounted for under the purchase method of accounting.
In January 1997, the Company acquired Carlisle. Carlisle owns and
operates Lincoln-Mercury, Ford and Hyundai dealerships in St. Petersburg and
Clearwater, Florida.
In December 1996, the Company acquired Continental and Addington.
Continental provides integrated solid waste management services to residential,
commercial and industrial customers primarily in the mid-south and eastern
United States. Addington provides integrated solid waste disposal services
for cities and counties in the southeastern United States.
In November 1996, the Company acquired Alamo in a merger transaction. Alamo
is the fourth largest rental car company in the United States and operates a
fleet of approximately 130,000 vehicles. Alamo operates in 42 states in the
United States and has operations in 10 European countries and Canada.
Subsequent to September 30, 1996, the Company also acquired various other
businesses in the automotive, solid waste and electronic security service
industries which were immaterial to the Company. The aggregate purchase price
paid for such acquisitions accounted for under the purchase method of accounting
was approximately $90,300,000 and consisted of 3,633,184 shares of Common Stock.
With respect to immaterial acquisitions accounted for under the pooling of
interests method of accounting, the Company issued 5,159,508 shares of Common
Stock. These acquisitions were not significant in the aggregate and,
consequently, prior period supplemental financial statements were not restated
for such acquisitions.
In August 1996, the Company acquired all of the net 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.
F-12
<PAGE> 13
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1996, the Company acquired all of the outstanding capital stock
of Denver Alarm. Denver Alarm 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 60,400,066 shares of Common Stock to
acquire Carlisle, Continental, Addington, Alamo, CarChoice, Denver Alarm and
Schaubach (the "Pooled Entities"), all of which have been accounted for under
the pooling of interests method of accounting.
Details of the results of operations of the previously separate companies
for the periods before the pooling of interests combinations were consummated
are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------------- ------------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
The Company................ $ 376,548 $ 185,207 $ 260,315 $ 187,111 $ 154,301
Pooled Entities............ 1,518,840 1,374,745 1,808,895 1,678,352 1,465,624
---------- ---------- ---------- ---------- ----------
$1,895,388 $1,559,952 $2,069,210 $1,865,463 $1,619,925
========= ========= ========= ========= =========
Net income (loss):
The Company................ $ 44,057 $ 13,136 $ 22,919 $ 17,116 $ (17,052)
Pooled Entities............ (6,570) (30,509) (47,880) 11,798 8,079
---------- ---------- ---------- ---------- ----------
$ 37,487 $ (17,373) $ (24,961) $ 28,914 $ (8,973)
========= ========= ========= ========= =========
</TABLE>
During the nine months ended September 30, 1996, the Company also acquired
various other businesses in the solid waste and electronic security services
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 $119,529,000 and consisted of
cash and 9,074,637 shares of Common Stock. With respect to immaterial
acquisitions accounted for under the pooling of interests method of accounting,
the Company issued 8,684,400 shares of Common Stock. These acquisitions were not
significant in the aggregate and, consequently, prior period financial
statements were not restated for such acquisitions.
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
F-13
<PAGE> 14
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 insignificant business
combinations from January 1, 1993 to December 31, 1995, have been accounted for
under the purchase method of accounting.
The following summarizes the preliminary purchase price allocations for
business combinations accounted for under the purchase method of accounting
(including historical accounts of immaterial acquisitions accounted for under
the pooling of interests method of accounting) consummated during the following
periods:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- -------------------------
1996 1995 1995 1994 1993
-------- -------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Property and equipment................... $ 86,677 $ 29,620 $25,272 $45,301 $ 8,228
Investment in subscriber accounts........ 17,914 -- -- -- --
Intangible assets........................ 97,501 81,464 97,017 18,802 781
Working capital (deficiency), net of cash
acquired............................... (34,746) (7,964) (4,900) (10,536) (37)
Long-term debt assumed................... (33,679) (18,739) (18,484) (15,445) (2,005)
Other liabilities, net................... (14,138) -- (853) (17,879) (1,285)
Common stock issued...................... (91,343) (73,556) (84,083) (8,446) --
-------- -------- ------- ------- ------
Cash used in acquisitions.............. $ 28,186 $ 10,825 $13,969 $11,797 $5,682
======== ======== ======= ======= ======
</TABLE>
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
the Company, had been terminated by mutual agreement of the parties. Included in
selling, general and administrative expenses for the nine months ended September
30, 1996 are approximately $3,000,000 of transaction costs associated with the
terminated ADT Agreement. In connection with the execution of the ADT Agreement,
ADT granted to Republic a warrant (the "ADT Warrant") to purchase 15,000,000
common shares of ADT at a purchase price $20 per share (which approximated fair
market value), subject to certain anti-dilution 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. Upon termination of the ADT
Agreement, the Company recorded the estimated fair value of the ADT Warrant
totaling approximately $5,670,000 based upon an option pricing model
computation. The Company has recorded $3,000,000 of the $5,670,000 value
attributed to the ADT Warrant as a credit to selling, general and administrative
expenses for the nine months ended September 30, 1996 to offset the transaction
costs incurred in connection with the ADT Agreement as described above. The
remaining value of the ADT Warrant totaling $2,670,000 has been included as a
component of other income for the nine months ended September 30, 1996.
F-14
<PAGE> 15
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. NOTES PAYABLE AND LINES OF CREDIT SECURED BY REVENUE EARNING VEHICLES
Notes payable and lines of credit secured by revenue earning vehicles
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
SEPTEMBER 30, ---------- ----------
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Amounts under $750 million revolving credit
agreement and predecessor agreements with
termination date of June 30, 1999; secured by
eligible vehicle collateral and vehicle
receivable balances; interest at formulas based
on prime, Federal funds or LIBOR at the Company's
discretion....................................... $ 576,995 $ 19,393 $ 364,385
Amounts under $580 million loan agreement with
termination date of June 10, 1997; secured by
eligible vehicle collateral and vehicle
receivable balances; interest based on market
dictated commercial paper rates.................. 576,232 579,001 575,857
Senior secured notes payable with interest at fixed
rates ranging from 5.58% to 7.08% with various
maturity dates and amounts as follows: December
15, 1996 -- $133 million; December 15,
1997 -- $25 million; December 15, 1998 -- $113
million; December 15, 2000 -- $94 million; and,
December 15, 2003 -- $80.5 million; secured by
eligible vehicle collateral and vehicle
receivable balances.............................. 445,500 445,500 445,500
Amounts under $250 million loan agreement with
termination date of September 19, 1997; secured
by eligible vehicle collateral and vehicle
receivable balances; interest based on market
dictated commercial paper rates.................. 246,982 236,357 247,965
Amounts under $175 million revolving credit
agreement and predecessor agreements with
termination date of December 1, 1997; secured by
eligible vehicle collateral and vehicle
receivable balances; interest at formulas based
on prime or LIBOR at the Company's discretion.... 134,000 -- --
Amounts under various uncommitted revolving lease
facilities with financing institutions in Great
Britain; secured by eligible vehicle collateral;
interest based on an as quoted basis dictated by
market competition; no stated expiration dates,
reviewed annually................................ 167,998 157,088 72,697
Other, including amounts to be financed after
period end, under various revolving credit
agreements and lease facilities.................. 106,996 108,783 88,398
------------- ---------- ----------
$ 2,254,703 $1,546,122 $1,794,802
============= ========= =========
</TABLE>
F-15
<PAGE> 16
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain of the notes payable and lines of credit secured by revenue earning
vehicles contain various restrictive covenants, including provisions relating to
the maintenance of tangible net worth and debt to tangible net worth ratios,
incurrence of additional indebtedness, and limitations on the payment of
dividends and certain investments. The effective economic interest rate on notes
payable and lines of credit secured by revenue earning vehicles was 6.94%, 6.02%
and 5.45% at December 31, 1995, 1994 and 1993, respectively. Interest expense on
notes payable and lines of credit secured by revenue earning vehicles is
included as a component of vehicle rental operating expenses in the accompanying
Supplemental Consolidated Statements of Operations.
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. Interest protection
agreements with several counterparties are used to manage the impact of interest
rate changes. At December 31, 1995 and 1994, the Company effectively converted
interest rates on the following notional principal amounts:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- LATEST
1995 1994 MATURITY
-------- -------- --------------
<S> <C> <C> <C>
Variable-rate (capped) into fixed-rate obligations... $175,000 $ 75,000 February 1997
Variable-rate into fixed-rate obligations............ -- 100,000 September 1995
Fixed-rate into variable-rate obligations............ -- 125,000 December 1995
-------- --------
Aggregate notional principal......................... $175,000 $300,000
======== ========
</TABLE>
F-16
<PAGE> 17
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt and notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
SEPTEMBER 30, -------- --------
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
11 3/4% Senior Notes due 2006, interest payable
semi-annually on January 31 and July 31 of each year,
commencing July 31, 1996; unsecured...................... $ 100,000 $ -- $ --
Mortgages payable to GMAC and predecessor agreements with
interest at 9.193%; payable in monthly installments, due
July 2005; secured by real property...................... 108,169 107,840 69,335
Note payable to bank with interest at a formula based on
LIBOR or prime paid quarterly; secured by a building;
principal payable in quarterly installments beginning
March 1996 and based on the balance outstanding at that
date, due December 2003.................................. 7,800 8,700 8,700
Amounts under Great Britain pound (GBP) 10 million
revolving credit commitment to expire December 21, 1996;
interest based on Sterling LIBOR plus 125 basis points or
base rate plus 125 basis points; secured by non-vehicle
equipment and leaseholds................................. 13,563 11,431 9,708
Revolving credit facility, secured by the stock of the
Company's subsidiaries, interest at prime or at a
Eurodollar rate plus 0% to 2.75%......................... 3,000 16,400 33,600
Vehicle floorplan credit facility, secured by the Company's
vehicle inventory, ...................................... 51,863 51,068 38,969
Notes to banks and financial institutions, secured by real
property, equipment and other assets, interest ranging
from 4.8% to 26.6%....................................... 55,097 16,618 63,503
Other notes, secured by equipment and other assets,
interest ranging from 0% to 21%.......................... 27,355 25,008 55,325
------------- -------- --------
366,847 237,065 279,140
Less current maturities.................................... (82,535) (81,694) (85,222)
------------- -------- --------
$ 284,312 $155,371 $193,918
========== ======== ========
</TABLE>
The 11 3/4% Senior Notes due 2006 (the "Senior Notes") were issued in
February 1996 by certain subsidiaries of the Company that were affiliated with
Alamo (the "Alamo Issuers"). The Senior Notes are unsecured, joint and several
obligations of each of the Alamo Issuers and rank pari passu in right of payment
with all existing and future debt (as defined) of the Alamo Issuers. The Senior
Notes are effectively subordinated to all existing and future secured
indebtedness of each of the Alamo Issuers. In November 1996, a subsidiary of the
Company conducted a Tender Offer for all outstanding Senior Notes. Concurrently
with the Tender Offer, the Company conducted a Consent Solicitation in order to
effect certain changes to the indenture relating to the Senior Notes. Aggregate
consideration to Noteholders that tender and consent will be $1,206.25 per
$1,000 principal amount plus accrued and unpaid interest to the tender date.
Such amount consists of $1,196.25 per $1,000 principal amount plus accrued and
unpaid interest for tendered notes and, for Noteholders providing their consent
by December 10, 1996, $10 per $1,000 principal amount for their consent. In
December 1996, the Company completed the Tender Offer and Consent Solicitation
repurchasing substantially all of the Tender Notes. The Company estimates that
it will record an extraordinary charge of approximately $32,000,000, net of tax,
during the fourth quarter of 1996 related to the early extinguishment of the
Senior Notes and certain other debt. Included in the potential charge related to
the early
F-17
<PAGE> 18
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
extinguishment of debt is the premium related to the Tender Offer and
capitalized debt costs, prepayment penalties and legal fees related to the
Tender Offer and the repayment of other debt.
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. 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, no
amounts were outstanding and the Company was in material 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 retail vehicle inventory. In October 1996, the Company
repaid all borrowings under this facility.
At December 31, 1995, aggregate maturities of long-term debt were as
follows:
<TABLE>
<S> <C>
1996...................................................................... $ 81,694
1997...................................................................... 8,715
1998...................................................................... 8,490
1999...................................................................... 22,406
2000...................................................................... 5,501
Thereafter................................................................ 110,259
--------
$237,065
========
</TABLE>
The Company made interest payments on revenue earning vehicle financing and
other long-term debt and notes payable of approximately $144,194,000,
$119,862,000 and $105,258,000 in 1995, 1994 and 1993, respectively.
5. 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.
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.
F-18
<PAGE> 19
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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................................................ $ 848 $ 6,122 $ 1,849
State.................................................. 625 1,914 826
------- ------- -------
1,473 8,036 2,675
Federal and state deferred............................... 2,193 16,854 11,584
Foreign.................................................. (1,406) (2,617) (176)
Tax reserve adjustments.................................. 763 (1,963) --
Change in valuation allowance............................ 2,351 1,375 1,418
------- ------- -------
Income tax provision (benefit)........................... $ 5,374 $21,685 $ 15,501
======= ======= =======
</TABLE>
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% 35.0% 35.0%
Amortization of intangible assets............................ 12.4 .5 .8
Non-deductible expenses...................................... 14.4 2.0 1.3
State income taxes, net of federal benefit................... (23.0) 4.6 6.7
Tax reserve adjustments...................................... 13.8 (3.7) --
Change in valuation allowance................................ 43.2 2.8 4.5
Other, net................................................... 1.3 (.3) .1
---- ---- -----
Effective tax rate......................................... 97.1% 40.9% 48.4%
==== ==== =====
</TABLE>
Components of the net deferred income tax liability included in other
liabilities in the accompanying Supplemental Consolidated Balance Sheets at
December 31 are shown below:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Deferred income tax liabilities:
Book basis in property over tax basis........................ $130,813 $147,642
Deferred costs............................................... 8,676 9,289
-------- --------
139,489 156,931
-------- --------
Deferred income tax assets:
Net operating losses......................................... (23,538) (20,400)
Deferred revenue............................................. (14,913) (11,240)
Accruals not currently deductible............................ (53,010) (64,962)
-------- --------
(91,461) (96,602)
-------- --------
Valuation allowance............................................ 14,149 11,798
-------- --------
Net deferred income tax liability.............................. $ 62,177 $ 72,127
======== ========
</TABLE>
At December 31, 1995, the Company had available federal net operating loss
carryforwards of approximately $33,000,000 which begin to expire in the year
2006 and foreign net operating loss carryforwards of approximately $24,900,000
the majority of which have an indefinite carryforward. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The Company has provided a valuation allowance to offset a portion of
the federal and foreign net operating loss carryforwards due to uncertainty
surrounding the future
F-19
<PAGE> 20
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
realization of such deferred tax assets. The Company adjusts the valuation
allowance in the period management determines it is more likely than not that
deferred tax assets will or will not be realized.
The Company made income tax payments of approximately $5,077,000,
$2,280,000 and $4,215,000 in 1995, 1994 and 1993, respectively.
6. SHAREHOLDERS' EQUITY
In January 1997, the Company sold 15,792,600 shares of Common Stock in a
private placement transaction resulting in net proceeds of approximately
$552,676,000.
In November 1996, the Company sold 12,079,532 shares of Common Stock in
a private placement transaction resulting in net proceeds of approximately
$353,000,000.
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.
In October 1995, one of the Pooled Entities completed a public offering of
approximately 2,634,000 equivalent shares of Common Stock resulting in net
proceeds of approximately $30,100,000.
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.
7. 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.
F-20
<PAGE> 21
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of stock option and warrant transactions for the following
periods is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1995 1994 1993
--------------- -------------- --------------
<S> <C> <C> <C>
Options and warrants outstanding at
beginning of period.................... 8,062 7,195 15,714
Granted.................................. 45,110 1,310 2,368
Exercised................................ (2,884) (26) (391)
Canceled................................. (653) (417) (666)
Expired.................................. -- -- (9,830)
--------------- -------------- --------------
Options and warrants outstanding at end
of period.............................. 49,635 8,062 7,195
=============== ============== ==============
Average price of options and warrants
exercised.............................. $4.02 $13.61 $13.61
Average price of options and warrants
outstanding at end of period........... $4.77 $3.80 $ 3.99
Prices of options and warrants
outstanding at end of period........... $1.05 to $16.39 $1.05 to $16.39 $1.05 to $16.39
Vested options and warrants at end of
period................................. 39,852 4,334 3,352
Options available for future grants at
end of period.......................... 4,344 5,698 5,690
</TABLE>
8. 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 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.
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. By
mutual agreement of the parties, the litigation was settled and the matter was
dismissed with prejudice in October 1996. Such settlement had no material impact
of the Company's consolidated financial position, results of operations or cash
flows.
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
F-21
<PAGE> 22
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. This suit was settled in November 1996 without material
impact on the Company's Supplemental Consolidated financial position, results of
operations or cash flows.
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 consolidated results of operations, consolidated cash
flows or consolidated financial position. However, unfavorable resolution of
each matter individually or in the aggregate could affect the consolidated
results of operations or cash flows for the quarterly periods in which they are
resolved.
Lease Commitments. The Company and its subsidiaries lease real property,
equipment and software under various operating leases with terms from 1 to 20
years. The Company has also entered into various airport concession and permit
agreements which generally provide for payment of a percentage of revenue from
vehicle rentals with a guaranteed minimum.
Expenses under real property, equipment and software leases and airport
concession agreements (excluding amounts charged through to customers) for the
years ended December 31, 1995, 1994 and 1993 were as follows:
F-22
<PAGE> 23
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Real property................................................... $ 22,052 $ 21,775 $21,944
Equipment and software.......................................... 24,513 22,890 21,175
Airport concession and permit fees:
Minimum fixed obligations..................................... 46,061 36,328 27,912
Additional amounts, based on revenue from vehicle rentals..... 28,397 27,617 24,766
-------- -------- -------
Total.................................................... $121,023 $108,610 $95,797
======== ======== =======
</TABLE>
Future minimum lease obligations under noncancelable real property and
equipment leases and airport agreements with initial terms in excess of one year
at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
REAL PROPERTY,
EQUIPMENT AND AIRPORT
SOFTWARE AGREEMENTS TOTAL
-------------- ---------- --------
<S> <C> <C> <C>
Year ending December 31:
1996.................................................. $ 45,446 $ 36,865 $ 82,311
1997.................................................. 17,490 26,833 44,323
1998.................................................. 11,682 21,446 33,128
1999.................................................. 7,870 14,151 22,021
2000.................................................. 6,292 10,685 16,977
Thereafter............................................ 17,913 14,270 32,183
-------------- ---------- --------
$106,693 $124,250 $230,943
============= ========== ========
</TABLE>
The Company has options to acquire or extend its leases through the year
2002 on certain properties and has rights of first refusal on certain other
properties it currently leases.
In August 1995, the Company entered into a ten-year lease agreement from an
unrelated entity for Alamo's Fort Lauderdale, Florida corporate headquarters
facility. In December 1996, the Company acquired the headquarters facility for
approximately $23,500,000, including the assumption of debt totaling
approximately $22,700,000 which was repaid by the Company in January 1997.
9. EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Earnings (loss) 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.
F-23
<PAGE> 24
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The computation of weighted average common and common equivalent shares
used in the calculation of fully diluted earnings (loss) per share, which is
substantially the same as the computation used to calculate primary earnings per
share, for the following periods is presented below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- -------------------------------
1996 1995 1995 1994 1993
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Common shares outstanding...... 240,587 206,382 211,083 142,599 138,047
Common equivalent shares....... 52,858 42,617 -- 1,234 320
Weighted average treasury
shares purchased............ (12,682) (5,302) -- 298 --
Effect of using weighted
average common and common
equivalent shares
outstanding................. (12,503) (77,275) (39,229) (3,298) (493)
-------- ------- ------- ------- -------
268,260 166,422 171,854 140,833 137,874
======== ======= ======= ======= =======
</TABLE>
For the year ended December 31, 1995, common share equivalents have been
omitted since they are anti-dilutive. For the nine months ended September 30,
1995, the effect of common share equivalents totaling 9,971,000 shares has been
omitted from the calculation of loss per share from discontinued operations and
net loss per share since they are anti-dilutive.
10. DISCONTINUED OPERATIONS
During the third quarter of 1995, the Company implemented a formal plan to
dispose of all of its mining and citrus 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. The Company
initially recorded a loss on the disposal of the discontinued operations of
approximately $30,500,000 (net of income tax benefits of approximately
$10,000,000) which represents the estimated loss on the disposal of the
non-environmental operations and a provision of approximately $2,000,000 for
expected operating losses through the final disposition of such 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 Consolidated Financial Statements presented prior to
that date to report separately the operating results of these discontinued
operations. In April 1995, Republic 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"). 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.
As of December 31, 1995, the Company has sold or spun-off all of its
subsidiaries included in discontinued operations, hence fully disposing of all
hazardous waste and mining and citrus operations. Upon ultimate disposal of its
discontinued operations, the Company determined its initial estimates did not
require adjustment. The recorded transactions reflect the disposal of all of
the Company's hazardous waste and mining and citrus segments and, accordingly,
the operating results of these segments have been classified as discontinued
operations for all periods presented in the accompanying supplemental
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>
Revenue..................................... $118,392 $161,698 $420,835
-------- -------- --------
Income (loss) before income taxes........... 7,120 (14,072) (28,886)
Income tax provision (benefit).............. 1,706 (5,752) (3,394)
-------- -------- --------
Income (loss) from discontinued operations.. 5,414 (8,320) (25,492)
Extraordinary gain on conversion of debt,
net of income tax provision of $3,092..... -- 5,556 --
-------- -------- --------
$ 5,414 $ (2,764) $(25,492)
======== ======== ========
</TABLE>
Included in income from discontinued operations for 1995 is approximately
$14,000,000 of revenue and $13,000,000 of pre-tax income from the sale of the
Company's mining technology patent rights in Australia, offset by a $5,300,000
disposal loss accrual recorded for a mining subsidiary.
Included in the loss from discontinued operations in 1994 are the following
pretax items: $6,157,000 loss on disposal in connection with the sale of
certain coal subsidiaries to Pittston Minerals Group, Inc. and a $3,400,000 loss
on a limestone project.
Included in the loss from discontinued operations in 1993 are the following
pretax items: $9,384,000 loss on a sulfur project and a $4,050,000 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 operation was $678,000, $7,183,000 and $26,422,000
for 1995, 1994 and 1993, respectively.
The assets and liabilities of the discontinued operations have been
reclassified in the accompanying supplemental 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.
11. RESTRUCTURING AND UNUSUAL CHARGES
During the third quarter of 1996, the Company recorded a $7,623,000 charge
related to merger expenses in connection with the acquisition of Continental,
the write-off of certain intangible assets and accrual of closure/post closure
costs associated with the Company's suspended operations at its West Virginia
landfill. Additionally, the Company intends to take a one-time pre-tax charge
of approximately $88,000,000 in the fourth quarter of 1996 related primarily to
the integration of the operations of Alamo as well as additional merger costs
associated with the acquisitions of Alamo, Addington and Continental.
In 1995, the Company recorded a $3,264,000 pre-tax charge related to the
closing of a subsidiary's headquarters office in Indianapolis, Indiana. The
major components of the charge include approximately (i) $2,237,000 of
severance package costs for two officers, (ii) $917,000 of costs related to
future contractual payments required under pre-existing contracts and (iii)
other costs related to the write-off of equipment and other obligations related
to the physical closure of the office.
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
F-24
<PAGE> 25
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, investments, receivables,
other assets (excluding goodwill, intangibles and deferred costs), accounts
payable, accrued expenses (nonderivatives) and customer deposits, approximates
fair value because of the short maturity of these instruments.
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment, and therefore cannot be determined with precision. The assumptions
used have a significant effect on the estimated amounts reported.
The Company has interest protection agreements with several counterparties
to manage the impact of interest rate changes. The estimated fair values of the
interest protection agreements were determined from dealer quotations and
represent the discounted future cash flows through maturity or expiration using
current rates, and are effectively the amounts the Company would pay or receive
to terminate the agreements. The estimated fair values of the interest rate
protection agreements at December 31, 1995 and 1994 was a net payable position
of $(3,479,000) and $(2,247,000), respectively.
The estimated fair value of the Company's secured notes payable at December
31, 1995 and 1994 was $440,506,000 and $401,885,000, respectively. The carrying
amount was $445,500,000 for each period. The estimated fair value of mortgages
payable to GMAC at December 31, 1995 and 1994 was $109,000,000 and $70,368,000
respectively. Estimated fair values were derived by discounting expected cash
flows at the rates currently offered to the Company for debt of similar terms
and remaining maturities. The carrying amount of the remaining debt approximates
fair value because interest rates are variable and, accordingly, approximate
current market rates.
13. BUSINESS AND CREDIT CONCENTRATIONS
Automotive Rental Industry Segment
At December 31, 1995 the Company had 133 corporate owned vehicle rental
facilities at airport, near-airport and downtown locations throughout the United
States. The Company also had 28 corporate owned vehicle rental facilities in the
United Kingdom, 22 in Germany, 4 in Switzerland, 2 in Canada, 1 in Belgium, 1 in
The Netherlands and 1 in Austria. In addition to its corporate owned locations,
the Company's licensee network operates 102 locations throughout Europe,
including 86 locations in Germany. The automobile rental industry in which the
Company operates is highly seasonal.
Trade receivables at December 31, 1995 and 1994 include $57,207,000 and
$39,681,000, respectively from travel agents and tour operators. Of the travel
agent and tour operator receivable balances, $24,208,000 and $16,975,000 at
December 31, 1995 and 1994, respectively are maintained outside the United
States. The Company holds minimum collateral in the form of cash, letters of
credit or insurance from most of these vendors. The Company continually
evaluates the credit risk of these customers and believes that the allowance for
doubtful accounts relative to its trade receivables is adequate. At December 31,
1995 and 1994, the Company had vehicle receivables from manufacturers of
$65,015,000 and $90,615,000, respectively. Of the receivable balances from
manufacturers, $12,701,000 and $7,785,000 are maintained outside the United
States. Vehicle receivables also include amounts due from renters for damages
incurred on revenue earning vehicles.
F-25
<PAGE> 26
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company enters into vehicle repurchase programs with one principal
vehicle manufacturer, as well as other vehicle manufacturers. During model year
1995, the Company purchased 68% of its vehicle fleet under repurchase programs
with one vehicle manufacturer.
Automotive Retailing, Solid Waste Services and Electronic Security Services
Industry Segments
Concentrations of credit risk with respect to trade receivables related to
the Company's automotive retailing, solid waste services and electronic security
services segments are limited due to the wide variety of customers and markets
in which the Company's products are sold and services are provided as well as
their dispersion across many different geographic areas in the United States. As
a result, at December 31, 1995, the Company does not consider itself to have any
significant concentrations of credit risk in the automotive retailing, solid
waste services and electronic security services segments.
14. RELATED PARTY TRANSACTIONS
The Company purchased approximately $351,755,000, $551,157,000 and
$576,895,000 of revenue earning vehicles from a group of dealerships owned
primarily by a former director of Alamo during the years ended December 31,
1995, 1994 and 1993, respectively. Pursuant to an automobile purchase agreement
which expired on December 31, 1995, the Company agreed to purchase and/or lease
a minimum number of vehicles and pay to these dealerships a specific amount (in
addition to the manufacturer's sales price) for each vehicle purchased. Although
the Company does not expect to renew this agreement to purchase and/or lease a
minimum number of vehicles, it intends to purchase vehicles on an annual basis
from these dealerships, and to continue its agreement to pay these dealerships a
specified amount (in addition to the manufacturer's sales price) for any vehicle
purchased.
Included in other current assets at September 30, 1996 are approximately
$112,900,000 in advances made to AutoNation during the nine months ended
September 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 which occurred in January 1997. Interest income
recognized on such advances was approximately $1,296,000 for the nine months
ended September 30, 1996.
In September 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 certain former shareholders
of Addington; collectively, the Addington Brothers) whereby the Company would
receive $30,000,000, 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 certain
borrowings under a revolving line of credit.
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 $12,500,000.
The Company had not received any payments from the Addington Brothers under
this agreement as of December 31, 1995. No receivable for this royalty has
been recorded.
In September 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 certain former shareholders
of Addington in exchange for 900,000 shares of Common Stock of the Company
owned by such shareholders. This transaction was consummated on November 2,
1995, at which time the Company acquired the 900,000 shares valued at
$13,625,000 (based on quoted share market price) and recorded them, at cost, as
treasury stock. The Company retained no obligations in connection with the
sales and has fully divested its investment in citrus operations.
15. OPERATIONS BY INDUSTRY SEGMENT
The Company is a holding company with major business segments in automotive
rental and retailing, solid waste collection, disposal and recycling services
and electronic security services for commercial and residential use. The Company
operates primarily in the United States.
F-26
<PAGE> 27
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables present financial information regarding the Company's
different industry segments as of and for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Automotive rental................................ $1,391,654 $1,312,922 $1,149,198
Solid waste services............................. 349,893 241,045 184,911
Electronic security services..................... 49,826 41,913 36,388
Automotive retailing............................. 277,837 269,583 249,428
---------- ---------- ----------
$2,069,210 $1,865,463 $1,619,925
========== ========== ==========
Operating income (loss):
Automotive rental................................ $ (42,552) $ 30,283 $ 40,418
Solid waste services............................. 51,306 34,438 4,433
Electronic security services..................... 8,255 2,352 114
Automotive retailing............................. (2,066) 1,684 5,084
---------- ---------- ----------
$ 14,943 $ 68,757 $ 50,049
========== ========== ==========
Depreciation and amortization:
Automotive rental................................ $ 422,614 $ 372,544 $ 289,616
Solid waste services............................. 36,654 28,149 46,402
Electronic security services..................... 4,946 4,111 2,353
Automotive retailing............................. 1,226 1,040 1,224
---------- ---------- ----------
$ 465,440 $ 405,844 $ 339,595
========== ========== ==========
Capital expenditures, purchases of revenue earning
vehicles and investment in subscriber accounts:
Automotive rental................................ $2,346,632 $3,347,988 $2,887,785
Solid waste services............................. 128,233 100,120 66,973
Electronic security services..................... 17,459 18,275 10,643
Automotive retailing............................. 12,922 2,098 2,440
---------- ---------- ----------
$2,505,246 $3,468,481 $2,967,841
========== ========== ==========
Assets:
Automotive rental................................ $2,000,745 $2,310,448 $1,942,217
Solid waste services............................. 760,804 393,653 416,926
Electronic security services..................... 43,834 34,447 20,678
Automotive retailing............................. 92,439 63,558 65,051
Net assets of discontinued operations............ -- 86,229 96,129
---------- ---------- ----------
$2,897,822 $2,888,335 $2,541,001
========== ========== ==========
</TABLE>
F-27
<PAGE> 28
REPUBLIC INDUSTRIES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The automotive rental industry in which the Company operates, particularly
the leisure travel segment, is highly seasonal. The Company's third quarter,
which includes the peak summer travel months, has historically been the
strongest quarter of the year. During the peak season the Company increases
their fleet and workforce to accommodate increased rental activity. The
Company's results during the first and fourth quarters are generally their
weakest, when there is limited leisure family travel and a greater potential for
adverse weather conditions. Many of the Company's operating expenses such as
rent, general insurance and administrative personnel are fixed and cannot be
reduced during periods of decreased rental demand.
The fourth quarter of 1995 included the recognition of approximately
$2,600,000 of losses originally attributable to the minority shareholder of a
business acquired in 1994.
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 $452,336 $502,433 $605,640 $ 508,801
1994 $400,394 $448,610 $553,646 $ 462,813
Gross profit........................... 1995 $210,222 $236,795 $295,295 $ 232,172
1994 $206,522 $225,363 $298,527 $ 217,964
Income (loss) from continuing
operations........................... 1995 $(12,543) $ (2,188) $ 23,013 $ (8,120)
1994 $ 4,105 $ 7,948 $ 19,656 $ (388)
Net income (loss)...................... 1995 $(11,173) $ 878 $ (5,746) $ (8,920)
1994 $ 6,303 $ 9,296 $ 13,506 $ (191)
Earnings (loss) per share from
continuing operations................ 1995 $ (.09) $ (.01) $ .11 $ (.04)
1994 $ .02 $ .05 $ .14 $ (.01)
</TABLE>
F-28
<PAGE> 29
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Carlisle Motors, Inc.
Clearwater, Florida
We have audited the accompanying combined balance sheet of Carlisle Motors,
Inc., and S Corporation, as of November 30, 1996, and the related combined
statements of operations and retained earnings and cash flows for the eleven
month period then ended. 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Carlisle Motors,
Inc. as of November 30, 1996 and the results of its operations and its cash
flows for the eleven month period then ended in conformity with generally
accepted accounting principles.
George B. Jones & Co., P.C.
Tampa, Florida
December 20, 1996
F-29
<PAGE> 30
Carlisle Motors, Inc.
COMBINED BALANCE SHEET
November 30, 1996
ASSETS
<TABLE>
<S> <C>
Current Assets
Cash $ 323,530
Contracts in transit 2,569,280
------------
Total cash and cash equivalents 2,892,810
Accounts receivable, less allowance for
doubtful accounts of $38,375 3,162,892
Factory receivables 1,626,634
Other receivables 161,110
Notes receivable-stockholders 338,150
Related company receivables 738,848
Vehicle inventories 36,556,006
Parts inventories 1,864,241
Other inventories 48,446
LIFO reserves (10,034,668)
Prepaid expenses 704,671
------------
Total Current Assets 38,059,140
------------
Property and equipment, net of accumulated
depreciation and amortization 15,694,494
------------
Other Assets
Non-current receivables 30,263
Intangible assets-net of accumulated amortization 562,376
Other non-current assets 1,153,020
------------
Total Other Assets 1,745,659
------------
TOTAL ASSETS $ 55,499,293
============
</TABLE>
F-30
<PAGE> 31
LIABILITIES
<TABLE>
<S> <C>
Current Liabilities
Bank overdraft $ 263,716
Vehicle floorplan payable 34,972,442
Notes payable-current maturities 1,256,494
Mortgages payable-current maturities 512,150
Notes payable-stockholder 1,509,147
Accounts payable 2,169,124
Other payables 220,311
Profit sharing plan payable 160,000
Taxes payable 706,791
Other accrued liabilities 1,303,040
Estimated contingent losses 300,000
-----------
Total Current Liabilities 43,373,215
-----------
Long-Term Liabilities
Notes payable 3,140,522
Mortgages payable 8,043,486
Deferred compensation plan 580,765
-----------
Total Long-Term Liabilities 11,764,773
-----------
Commitments and contingencies -
-----------
Total Liabilities 55,137,988
-----------
STOCKHOLDERS' EQUITY
Capital stock-common stock, $1 par value, 11,000 shares authorized,
1,998 shares issued and outstanding 1,998
Additional paid-in capital 5,156,100
Accumulated deficit (4,796,793)
-----------
Total Stockholders' Equity 361,305
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $55,499,293
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-31
<PAGE> 32
Carlisle Motors, Inc.
COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
For The Eleven Month Period Ended November 30, 1996
<TABLE>
<S> <C>
Revenues
Vehicle sales $209,667,476
Finance and insurance-net 1,764,612
Parts and service 27,660,711
------------
Total Revenue 239,092,799
------------
Cost of Sales
Vehicles 195,143,387
Parts and service 14,878,235
------------
Total Cost of Sales 210,021,622
------------
Gross Profit 29,071,177
------------
Operating expenses
Variable selling expenses 6,870,724
Semi-fixed expenses (including interest of $652,334) 11,312,397
Fixed expenses (including interest of $505,442) 8,668,849
Depreciation and amortization 917,051
------------
Total operating expenses 27,769,021
------------
Operating income 1,302,156
------------
Adjustments to income
Other income 1,336,810
Other expenses (including interest of $556,894
and amortization of $41,000) (795,121)
Management fees (726,000)
Bonuses (1,488,524)
------------
Total adjustments to income (1,672,835)
------------
Net loss (370,679)
</TABLE>
The accompanying notes are an integral part of this statement.
F-32
<PAGE> 33
Carlisle Motors, Inc.
COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS - Continued
For The Eleven Month Period Ended November 30, 1996
<TABLE>
<CAPTION>
<S> <C>
Net loss (carried forward) $ (370,679)
Accumulated deficit-beginning of year (4,426,114)
------------
Accumulated deficit-end of year $ (4,796,793)
============
</TABLE>
The accompanying notes are an integral part of this statement.
F-33
<PAGE> 34
Carlisle Motors, Inc.
COMBINED STATEMENT OF CASH FLOWS
For The Eleven Month Period Ended November 30, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (370,679)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 1,038,342
Provision for losses on accounts receivable 30,054
Provision for contingent losses 650,889
Interdepartmental sales of rental vehicles 510,640
Loss on disposal of equipment 81,356
(Increase) decrease in operating assets:
Accounts receivable (900,152)
Factory receivables 883,093
Other receivables 142,375
Vehicle inventories 6,229,929
Parts inventories 49,840
Other inventories 201,161
Prepaid expenses 203,273
Non-current receivables 37,061
Other assets (288,751)
Increase (decrease) in operating liabilities:
Vehicle floorplan payable (6,089,711)
Accounts payable 489,500
Other payables (52,463)
Taxes payable (25,137)
Profit sharing plan payable (315,000)
Other accrued liabilities (543,098)
Charges against provision for contingent losses (350,889)
-----------
Net Cash Provided by Operating Activities $ 1,611,633
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-34
<PAGE> 35
Carlisle Motors, Inc.
COMBINED STATEMENT OF CASH FLOWS - Continued
For The Eleven Month Period Ended November 30, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment $ (628,139)
Purchases of rental vehicles (128,601)
Increase in life insurance-cash value (287,740)
Issuance of notes receivable-stockholders (331,643)
Collection of notes receivable-affiliates (738,843)
-----------
Net Cash Used by Investing Activities (2,114,966)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in bank overdraft 263,716
Principal payments on long-term debt (2,113,745)
Net decrease of notes payable-rental vehicles (646,992)
Increases in revolving line of credit 5,300,000
Payments on revolving line of credit (3,794,099)
-----------
Net Cash Used by Financing Activities (991,120)
-----------
Net change in cash and cash equivalents (1,494,453)
Cash and cash equivalents at beginning of year 4,387,263
Cash and cash equivalents at end of year $ 2,892,810
===========
Cash Paid During the Year for:
Interest $ 2,115,204
===========
Property acquired under capital leases:
Assets $ 49,202
===========
Liabilities $ 49,202
===========
Property acquired by debt:
Land and building $ 1,600,000
===========
Property acquired by capital contribution:
Assets $ 5,325,296
===========
Liabilities $ 3,849,846
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-35
<PAGE> 36
Carlisle Motors, Inc.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
For the Eleven Month Period Ended November 30, 1996
NOTE 1 - DESCRIPTION OF BUSINESS
Carlisle Motors, Inc. (the Company), a Florida corporation
organized on April 5, 1948, consists of the following divisions:
CARLISLE LINCOLN-MERCURY operates an automobile dealership in
Clearwater, Florida under sales and service agreements with the
Lincoln-Mercury Division of Ford Motor Company.
CARLISLE FORD operates an automobile dealership in St. Petersburg,
Florida under sales and service agreements with Ford Motor Company.
CARLISLE ACURA-HYUNDAI operates an automobile dealership in
St. Petersburg, Florida under sales and service agreements with
American Honda Motor Co., Inc. and Hyundai Motor of America.
All significant intercompany transactions and balances have been
eliminated in the combination of the financial statements.
On November 1, 1996, the shareholders of SDS Investments, an
affiliate, contributed the assets of the partnership at net book value
to Carlisle Motors, Inc. The net effect of the contribution was an
increase in additional paid-in capital of $575,702. The corresponding
assets and liabilities are reflected on the balance sheet and
statement of operations for Carlisle Lincoln-Mercury.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS - For purposes of the statement of cash
flows, the Company considers contracts in transit to be cash
equivalents, as the contracts are normally purchased by a financial
institution for face value within several business days.
CONCENTRATIONS OF CREDIT RISK ARISING FROM CASH DEPOSITS IN EXCESS OF
INSURED LIMITS - The Company maintains its cash balances in one
financial institution. The balances are insured by the Federal
Deposit Insurance Corporation up to $100,000.
F-36
<PAGE> 37
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES...Continued
ACCOUNTS RECEIVABLE - The Company grants credit to the franchisors and
to customers, substantially all of whom are local businesses. The
Company believes it maintains an adequate allowance for any
uncollectible accounts.
INVENTORIES - New vehicles, used vehicles and parts inventories are
stated at cost (determined on the Last-In, First-Out method) while all
other inventories are valued at the lower of cost (determined by
specific identification) or market.
If the specific identification cost method of inventory valuation had
been used for new and used vehicles and parts, inventories would have
been $10,034,668 higher at November 30, 1996 compared to
$9,832,295 at December 31, 1995.
INTERDEPARTMENTAL SALES OF VEHICLES - Rental vehicles are removed from
service by transferring of these assets to used vehicle inventory at
their fair market values. These vehicles are subsequently sold
through normal operations.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Expenditures which materially increase the values or extend the useful
lives of the respective assets are capitalized, while replacements,
maintenance and repairs which do not improve the values or extend the
useful lives of the respective assets are charged against income as
incurred.
The cost of property and equipment is depreciated over the estimated
useful lives of the assets. The cost of leasehold improvements is
amortized over the lesser of the length of the related leases or the
estimated useful lives of the assets. Depreciation and amortization
are computed using the straight-line and accelerated methods.
INCOME TAXES - The Company has elected by consent of its stockholders
to be treated as an S Corporation under Internal Revenue Code and
Florida provisions. Under those provisions, the Company does not pay
Federal or State corporate income taxes on its taxable income.
Instead, the stockholders are liable for individual income taxes on
their respective share of the Company's taxable income.
INTEREST EXPENSE - Interest expense resulting from the floorplanning
of vehicle inventories has been reduced by the floorplan assistance
rebates offered by Ford Motor Company.
FINANCIAL INSTRUMENTS - The Company has financial instruments
consisting of notes receivable, related party receivables, notes
payable, mortgage payable, and floorplan payable. The carrying value
of these financial instruments approximates fair value at November 30,
1996.
F-37
<PAGE> 38
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES...Continued
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 report amounts of revenues
and expenses during the period. Actual results could differ from those
estimates.
ADVERTISING - Advertising costs are charged to operations when
incurred. The amount expensed for advertising totaled $2,048,091 in
1996.
NOTE 3- NOTES RECEIVABLE--STOCKHOLDERS
<TABLE>
<S> <C>
Due on demand from Steven D. Carlisle, a shareholder,
interest at 9.25% unsecured. $203,265
Due on demand from Scott A. Wilkerson, a shareholder, 134,885
interest at 9.25%, unsecured. --------
Total $338,150
========
</TABLE>
The above notes have been classified as current because it is the
Company's intention to demand payment during the next year.
NOTE 4- RELATED COMPANY RECEIVABLES
Related company receivables consist of amounts due from entities
controlled by the Company's stockholders:
<TABLE>
<S> <C>
Due from Credit Management Acceptance Corp., an S
Corporation, unsecured, due in monthly installments of
$23,995 including interest at 7.5% $718,630
Due from Carlisle Outdoors, a partnership, interest at
prime plus 1%, due on demand, unsecured. 20,218
--------
Total $738,848
========
</TABLE>
NOTE 5- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Lease vehicles
Rental vehicles
F-38
<PAGE> 39
NOTE 5- PROPERTY AND EQUIPMENT..Continued
<TABLE>
<S> <C>
Land and improvements 7,432,923
Buildings 5,455,288
Parts and service equipment 3,905,677
Office equipment and signs 959,440
Service vehicles 360,127
Leasehold improvements 2,018,579
-----------
Subtotal 20,418,107
Less accumulated depreciation
and amortization 4,723,613
-----------
Net carrying amount $15,694,494
===========
</TABLE>
Parts and service equipment includes $13,594 of equipment held under
capital leases with accumulated depreciation of $7,452. Office
equipment includes $883,179 of equipment held under capital leases
with accumulated depreciation of $477,107. Service vehicles include
$10,750 of equipment held under capital lease with accumulated
depreciation of $10,660.
Depreciation and amortization expense relating to property and
equipment totaled $917,051 during 1996 and includes depreciation on
equipment held under capital leases.
NOTE 6- INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<S> <C>
Goodwill $ 100,000
Franchise costs 650,000
Loan closing costs 26,473
---------
Subtotal 776,473
Less accumulated amortization (214,097)
---------
Total intangible assets $ 562,376
=========
</TABLE>
Goodwill is amortized over 40 years using the straight-line method. The current
period amortization of goodwill total $4,583. Franchise costs are amortized
over 10 and 25 years using the straight-line method. The current period
amortization of franchise costs totaled $33,000.
F-39
<PAGE> 40
NOTE 7- OTHER ASSETS
<TABLE>
<S> <C>
Other assets consist of the following:
Cash surrender value of life insurance $ 826,565
Other investments and assets 326,455
----------
Total other assets $1,153,020
==========
</TABLE>
Cash surrender value of life insurance includes $676,993 invested in
cash value life insurance in connection with a deferred compensation
plan with certain key executives.
NOTE 8- VEHICLE FLOORPLAN PAYABLE
This is the total due from the financing of vehicle inventories and is
secured by all inventories, receivables, and intangibles with Ford Motor
Credit Company. At November 30, 1996 the combined credit line was
$26,700,000 with an interest rate of 9.25%.
NOTE 9- PROFIT SHARING PLAN PAYABLE
The Company has established a qualified contributory trust profit
sharing plan covering substantially all employees. The method and
amount of the Company's contributions are determined annually by the
Board of Directors, but cannot exceed the amount permitted under
Section 404 of the Internal Revenue Code as a deductible expense.
Expense related to this plan for the period ended November 1996
totaled $160,000.
NOTE 10-NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<S> <C>
Notes payable for the financing of rental vehicles secured by chattel
mortgages on the vehicles, due in monthly payments ranging from $249 to
$296, plus interest ranging from 7.5% to 9.25%. $ 74,350
Notes payable for the financing of lease vehicles secured by chattel
mortgages on the vehicles, due in monthly payments ranging from $305 to
$525, plus interest at 10.25% 278,009
</TABLE>
F-40
<PAGE> 41
NOTE 10-NOTES PAYABLE...Continued
<TABLE>
<S> <C>
Note payable to Ford Motor Credit, secured collectively by all
intangibles and all personal property including all furniture,
furnishings, fixtures, supplies, machinery and equipment, and all
personal property held for resale, machinery and equipment, and all
personal property held for resale, including vehicle inventories and
parts and accessories inventories of the Company and its affiliates.
Due in 22 monthly installments of $70,400 plus interest at the prime
rate plus 1.25%. 1,889,300
Revolving line of credit of $3,400,000 payable Ford Motor Credit,
interest at 1.50% above prime, due 367 days from demand, secured
by all intangibles and all personal property including all furniture,
furnishings, fixtures, supplies, machinery and equipment, and all
personal property held for resale, including vehicle inventories and
parts and accessories inventories of the Company and its affiliates. 1,700,000
Capital lease obligation payable to ADP Credit Corporation, due in
31 remaining payments averaging $9,002 each, including interest at
7%, less unamortized interest of $30,088, collateralized by computer
equipment. 164,320
Capital lease obligations payable to various financing companies, due
in payments ranging from $223 to $4,381, including interest ranging
from 6.5% to 8.0%, collateralized by equipment. 291,037
-----------
Totals 4,397,016
Less current portion (1,256,494)
-----------
Total long term portion $ 3,140,522
===========
Annual maturities are as follows:
1997 $ 1,256,494
1998 2,727,148
1999 405,019
2000 8,355
-----------
Total maturities 4,397,016
===========
</TABLE>
F-41
<PAGE> 42
<TABLE>
<S> <C> <C>
NOTE 11 - MORTGAGES PAYABLE
Mortgage note payable to Ford Motor credit, secured by all
assets of the Company. Due in 85 monthly installments of $30,728 at
the prime rate plus .75% with a final balloon payment of $630,422. $3,726,686
Mortgage note payable to Ford Motor Credit, secured by all assets of
the Company. Due in 171 monthly installments of $9,790 including
interest at the commercial paper rate plus 3.0%. 971,046
Mortgage note payable to Ford Motor Credit, secured by all assets of
the Company. Due in 69 monthly installments of $39,045 including
interest at the prime rate plus .75% with remaining interest and
principal due on August 1, 2002. 3,857,904
----------
Subtotal 8,555,636
Less current portion (512,150)
----------
Total long-term $8,043,486
==========
Annual maturities are as follows:
1997 $ 512,150
1998 515,030
1999 522,085
2000 529,771
2001 538,144
2002 and subsequent years 5,938,456
----------
Total maturities $8,555,636
==========
NOTE 12 - NOTES PAYABLE - STOCKHOLDER
Note payable to Daniel W. Carlisle, a stockholder, interest at 1% above
prime, due on demand, unsecured, and subordinated to Ford Motor Credit
debt. $1,509,147
==========
</TABLE>
F-42
<PAGE> 43
NOTE 13 - OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
Salaries payable $ 971,963
Interest payable 331,077
----------
Total other accrued liabilities $1,303,040
==========
NOTE 14 - ESTIMATED CONTINGENT LOSSES
The Company is contingently liable for finance and certain other
chargebacks due to repossessions and early payoffs of notes on
vehicles financed for customers, substantially all of whom are local
residents. The Company has estimated losses based on loss experience
and outstanding contingencies.
NOTE 15 - OTHER LONG-TERM LIABILITIES
The Company has a deferred compensation plan with certain key
executives through which the Company agrees to pay the plan
participants compensation in the future for services currently
rendered by the plan participants. The deferred compensation plan is
generally structured to provide for the plan participants' benefits to
be continued over a certain period of years after retirement or other
termination of service. The plan allows each plan participant the
option to defer present compensation, which is matched up to 5% by
the Company. The Company may also make discretionary contributions.
The liability for the plan for November 30, 1996 is $580,765 with net
plan assets of $676,993 invested in cash value life insurance which is
included with Other Assets in the accompanying balance sheet.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
The Company has an unused letter of credit with Barnett Bank
of Pinellas County for $730,000 maturing on December 31, 1996 that
automatically renews on an annual basis. The letter is unsecured.
The Company has guaranteed and collateralized a revolving line of
credit and a mortgage between Ford Motor Credit Company and Credit
Management Acceptance Corporation, an affiliate. The collateral is
all inventories, receivables, and intangibles. The amount borrowed
by Credit Management Acceptance Corporation at November 30, 1996
totaled $6,069,803.
F-43
<PAGE> 44
NOTE 17-LEASE COMMITMENTS
The following operating leases are in effect;
<TABLE>
<CAPTION>
Description Annual
Lessor of Assets Lease Terms Rental
-------------------- ------------------ ----------------------- --------
<S> <C> <C> <C>
James E. McFrederick Land and building Expires April 28, 1998 $231,864
Harris & Harris 1675 Missouri Ave. Expires Jan. 15, 1997 21,600
Emro Marketing 5510 US 19 North Expires April 1, 1997 36,000
The Hertz Corp. 7206 N. Dale Mabry Expires February 1, 1999 44,400
Michael & Ann Susik 15235-A Cortez Blvd. Expires January 1, 1998 42,000
Future minimum lease commitments are summarized as follows:
Year ending December 31, 1997 $332,064
Year ending December 31, 1998 124,088
Year ending December 31, 1999 3,900
--------
Total $460,052
========
Rent expense relating to this lease totaled $212,542 during 1996.
</TABLE>
NOTE 18-RELATED PARTY TRANSACTIONS
The Company engages in the ordinary course of business, in transactions
with Tri-Citi Automotive Warehouse, Inc., Credit Management Acceptance
Corporation, and Carlisle Management Company, which are wholly-owned by
one or more of the stockholders of Carlisle Motors, Inc. Purchases from
Tri-Citi Automotive Warehouse were $897,572. Retail sales of finance
contracts of Credit Management Acceptance were $7,447,337. These
contracts were sold at discounts from 10 - 34%. Management fees paid
to Carlisle Management Company were $726,000.
NOTE 19-SUBSEQUENT EVENTS
An agreement in principal was reached with Republic Industries, Inc. on
November 19, 1996 for the acquisition of Carlisle Motors, Inc. by
Republic Industries, Inc. in a transaction treated as a
pooling-of-interest in conformity with generally accepted accounting
principles. The transaction was completed on January 21, 1997.
F-44
<PAGE> 45
Note 19 - SUBSEQUENT EVENTS...Continued
On December 30, 1996, the Acura division of Carlisle Motors, Inc.
was sold to Crown Motors of Clearwater, Inc. Franchise right, title and
interest in the Acura Franchise Agreement, Acura new vehicles and
demonstrators, and Acura parts and accessories were all included in the sale.
F-45
<PAGE> 46
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
National Car Rental System, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of National Car
Rental System, Inc. (a Delaware corporation) and Subsidiaries as of May 31,
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for the period from April 4, 1995 (inception) through May
31, 1996. 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 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of National Car Rental
System, Inc. and Subsidiaries as of May 31, 1996, and the results of their
operations and their cash flows for the period from April 4, 1995 (inception)
through May 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
July 19, 1996, except as
to Note 17, which is as
of January 5, 1997
F-46
<PAGE> 47
NATIONAL CAR RENTAL SYSTEM, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
As of May 31, 1996
(In Thousands)
<TABLE>
<S> <C>
ASSETS
CASH AND CASH EQUIVALENTS $ 230,983
RECEIVABLES, net 60,850
PREPAID EXPENSES AND OTHER ASSETS 14,239
REVENUE-EARNING ASSETS, net 1,724,750
PROPERTY AND EQUIPMENT, net 83,739
INTANGIBLES 11,565
----------
$2,126,126
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
ACCOUNTS PAYABLE $ 76,266
ACCRUED LIABILITIES 61,944
DEFERRED INCOME TAXES 47,413
SELF-INSURANCE RESERVES 54,547
REVENUE-EARNING ASSET OBLIGATIONS 1,745,969
POSTRETIREMENT BENEFIT OBLIGATION 15,215
SUBORDINATED DEBT 73,056
----------
Total liabilities 2,074,410
COMMITMENTS AND CONTINGENCIES (Notes 9, 10, 12, 13, 15 and 16)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000 shares authorized;
Series A, 1,000 shares issued 10
Common stock, $.01 par value, 1,000 shares authorized; 100 issued 1
Capital in excess of par value 29,989
Retained earnings 21,716
----------
Total shareholders' equity 51,716
----------
$2,126,126
==========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-47
<PAGE> 48
NATIONAL CAR RENTAL SYSTEM, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
For the Period From April 4, 1995 (Inception) Through May 31, 1996
(In Thousands)
<TABLE>
<S> <C>
REVENUE:
Vehicle rental $ 979,949
Licensee 27,762
Other 3,035
---------
Total revenue 1,010,746
---------
COSTS AND EXPENSES:
Direct operating expenses 402,690
Depreciation of revenue-earning assets 255,127
Selling and administrative expenses 219,236
Interest expense 91,650
---------
Total costs and expenses 968,703
---------
INCOME BEFORE PROVISION FOR INCOME TAXES 42,043
PROVISION FOR INCOME TAXES 16,817
---------
NET INCOME $ 25,226
=========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-48
<PAGE> 49
NATIONAL CAR RENTAL SYSTEM, INC. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
For the Period From April 4, 1995 (Inception) Through May 31, 1996
(In Thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
---------------- --------------- Paid-In Retained
Shares Amount Shares Amount Capital Earnings Total
------ ------ ------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL CAPI-
TALIZATION . . . . . . 1,000 $ 10 100 $ 1 $ 29,989 $ -- $ 30,000
Net income . . . . . . -- -- -- -- -- 25,226 25,226
Dividends
declared . . . . . . -- -- -- -- -- (3,510) (3,510)
----- -------- ---- -------- -------- -------- --------
BALANCE,
May 31, 1996 1,000 $ 10 100 $ 1 $ 29,989 $ 21,716 $ 51,716
===== ======== ==== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-49
<PAGE> 50
NATIONAL CAR RENTAL SYSTEM, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the Period From April 4, 1995 (Inception) Through May 31, 1996
(In Thousands)
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net income $ 25,226
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization:
Revenue-earning assets 255,127
Other assets 10,794
Deferred income taxes 8,913
Accretion of financing discounts 80,396
Change in operating items:
Receivables (13,847)
Prepaid expenses and other assets (982)
Accounts payable 24,945
Accrued liabilities 11,363
Self-insurance reserves 40,857
------------
Net cash provided by operating activities 442,792
------------
INVESTING ACTIVITIES:
Acquisition of net assets of Old National, net of cash received (1,314,666)
Purchase of revenue-earning assets (1,798,418)
Sale of revenue-earning assets 1,292,853
Purchase of property and equipment, net (18,220)
------------
Net cash used for investing activities (1,838,451)
------------
FINANCING ACTIVITIES:
Sale of common and preferred stock 30,000
Issuance of revenue-earning asset obligations 16,600,020
Payments on revenue-earning asset obligations (14,977,397)
Payments on subordinated debt (9,444)
Debt issuance costs (13,927)
Dividends paid (2,610)
------------
Net cash provided by financing activities 1,626,642
------------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 230,983
============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 85,484
============
Cash paid for income taxes $ 14,400
============
CASH DIVIDENDS DECLARED, not paid $ 900
============
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-50
<PAGE> 51
NATIONAL CAR RENTAL SYSTEM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1996
(In Thousands)
1. BUSINESS DESCRIPTION AND ACQUISITION OF THE COMPANY:
National Car Rental System, Inc. (the Company) is engaged primarily in the
business of renting automobiles. The Company was formed on April 4, 1995 as NCR
Acquisition Corp. Effective with the closing of an asset purchase agreement (the
Agreement) on June 9, 1995, the Company acquired substantially all of the
operating assets and assumed certain liabilities from the predecessor, National
Car Rental System, Inc. (Old National). Subsequent to the purchase, the Company
changed its name to National Car Rental System, Inc. and Old National changed
its name to GM National Holding Co. The Company was initially capitalized,
concurrent with the closing of the Agreement, through the issuance of $5 million
of common stock and $25 million of Series A preferred stock to Santa Anna
Holdings Company (Santa Anna). In December 1995, Santa Anna sold 10% of its
ownership interest to Emerald Investors, LLC, a limited liability company owned
by certain licensees of the Company. As consideration for the net assets
purchased, the Company paid, at closing, cash equal to Old National's
revenue-earning asset obligation ($1,558.7 million as of May 31, 1995), issued a
$35 million subordinated note payable to Old National and paid approximately
$10.1 million in December 1995 to reflect net assets acquired in excess of a
target amount. The Company paid Electronic Data Systems Corporation (EDS), a
wholly owned subsidiary of General Motors Corp. (General Motors) prior to its
spinoff on June 7, 1996, $12 million at closing for an option to terminate an
existing services agreement (see Note 9). The purchase price for the net assets
was increased for transaction costs totaling approximately $9.5 million and
reduced by a $32 million cash payment received from General Motors, the parent
of Old National. In connection with the Agreement, General Motors also made a
$47.5 million cash advance to the Company in exchange for a subordinated note
payable (see Note 7).
The acquisition was accounted for using the purchase method. Accordingly, the
purchase price has been allocated to the assets acquired and liabilities assumed
based on their estimated fair values. This resulted in negative goodwill of
approximately $25 million, which was applied to reduce the amounts assigned to
property and equipment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts have been
eliminated in consolidation.
F-51
<PAGE> 52
FISCAL YEAR AND REPORTING PERIOD
The Company's fiscal year-end is May 31. These financial statements cover the
period from April 4, 1995 (inception) through May 31, 1996. The Company had
minimal activity between its inception date and the effective date of the
Agreement.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments, consisting primarily
of commercial paper, purchased with original maturities of three months or less,
to be cash equivalents.
REVENUE-EARNING ASSETS
Revenue-earning assets are comprised of daily rental vehicles, recorded at cost,
and receivables from vehicle disposals. Essentially all vehicles are purchased
under manufacturer repurchase programs, which provide for a guaranteed
repurchase amount that is dependent upon the month the vehicle is returned to
the manufacturer, plus adjustments for excess mileage and damage. Depreciation
expense is computed using daily rates which are intended to measure the
reduction in value necessary to approximate the guaranteed repurchase amount at
the end of the estimated average holding period of the vehicle (generally, 9 to
12 months). Gains or losses on vehicle disposals through manufacturer repurchase
programs and wholesaling activities are recognized at dates of disposal and are
included as a component of depreciation.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives or lease terms. Estimated
useful lives range from 4 to 8 years for fixtures and equipment and up to 25
years for buildings and leasehold improvements.
INTANGIBLES
Intangibles consist of debt structuring and issuance costs and are being
amortized over the lives of the underlying debt agreements.
EMERALD CLUB LIABILITY
The Company accrues a liability for an estimate of its obligation under its
frequent renter program (Emerald Club). The liability is determined based on the
points earned by the participants and the related historical cost per point of
providing the associated awards.
PUBLIC LIABILITY AND PROPERTY DAMAGE
The Company self-insures for public liability and property damage (PLPD) claims
and is liable up to a maximum of $1 million per occurrence. Coverage is
purchased for losses in excess of such maximum liability through an umbrella
policy. Provision for liability on self-insured PLPD claims is made by charges
to expense based upon estimates of ultimate liabilities on reported and
estimated incurred but unreported claims. All PLPD claims that relate to the
periods prior to the acquisition date of the Company were retained by Old
National. The amount of self-insurance reserves accrued by the Company as of May
31, 1996 relates to estimated losses incurred subsequent to the acquisition
date. The Company periodically analyzes its reserve requirements for PLPD
liability and adjusts such reserves accordingly.
F-52
<PAGE> 53
Pursuant to the Agreement, the Company continues to administer claims for PLPD
relating to periods prior to the acquisition date on behalf of Old National. In
exchange for such services, the Company will receive an annual fee of $3 million
through fiscal 1998 and an annual fee of $1 million for fiscal 1999 through
2001.
ENVIRONMENTAL CLEANUP LIABILITIES
In connection with the purchase agreement, the Company and Old National
identified various car rental locations which were known or expected to have
contamination associated with underground storage tanks. The environmental
liability related to such sites was retained by Old National. The Company is
required, pursuant to environmental regulations, to retrofit storage tanks at a
number of its other locations by 1998. To the extent environmental contamination
is identified during this retrofitting process, the related environmental costs
will be accrued by the Company when it becomes probable that a liability has
been incurred and the amount can be reasonably estimated. Costs will include
site testing, consultation, cleanup, disposal, postcleanup monitoring and legal
fees, as applicable.
INCOME TAXES
The Company accounts for income taxes using the liability method. Under this
method, deferred income taxes are recognized for temporary differences between
the tax and financial reporting bases of the Company's assets and liabilities
using enacted tax rates in effect for the year in which the differences are
expected to reverse.
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.
Principal estimates involve depreciation expense on revenue-earning assets and
charges for PLPD claims. The ultimate results could differ from those estimates.
FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents, revenue-earning asset
obligations (excluding medium-term notes payable) and subordinated debt
approximate fair value because of the short duration or variable interest rate
terms of these financial instruments. The fair value of the Company's
medium-term notes payable is estimated based on the quoted market prices for the
same or similar issues or on the current rates offered to the Company for debt
of the same remaining maturities. The estimated fair value of the medium-term
notes payable as of May 31, 1996 was $777.3 million.
F-53
<PAGE> 54
3. RECEIVABLES:
Receivables consisted of the following as of May 31, 1996:
<TABLE>
<S> <C>
Receivables:
Trade $30,473
Licensee 6,879
Manufacturers 6,567
Taxes 6,500
Other 11,476
-------
61,895
Allowance for doubtful accounts (1,045)
-------
$60,850
=======
</TABLE>
Manufacturers receivables consist primarily of vehicle purchase allowances and
incentives that are due in the event certain vehicle purchasing goals, primarily
related to the total number and mix of vehicles purchased during the model year,
are met. Based on historical experience and current model year purchase
projections, management believes that these goals will be met. Accordingly, the
purchase allowances and incentives are accrued pro rata as vehicles are
purchased.
4. REVENUE-EARNING ASSETS:
Revenue-earning assets consisted of the following as of May 31, 1996:
<TABLE>
<S> <C>
Revenue-earning vehicles $1,800,488
Receivables from vehicles disposals 52,889
----------
1,853,377
Accumulated depreciation (128,627)
----------
$1,724,750
==========
</TABLE>
As explained in Note 3, the Company receives certain vehicle purchase allowances
and incentives, which are deferred and amortized as a reduction of depreciation
expense over the estimated average holding period of vehicles. These separately
determined items, the estimated depreciation provision and the ultimate gain or
loss on disposal, are considered by management to be inseparable elements of the
total depreciation charge. The net gain on disposal of revenue-earning vehicles
through manufacturer repurchase programs and wholesaling activities included in
depreciation for the period from inception through May 31, 1996 was $4.1
million. Allowances and incentives amortized as a reduction of depreciation
expense for the period from inception through May 31, 1996 were $12.2 million.
F-54
<PAGE> 55
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following as of May 31, 1996:
<TABLE>
<S> <C>
Land $ 8,756
Building and leasehold improvements 63,235
Fixtures and equipment 20,385
-------
92,376
Accumulated depreciation and amortization (8,637)
-------
$83,739
=======
</TABLE>
6. REVENUE-EARNING ASSET OBLIGATIONS:
Revenue-earning asset (vehicle) obligations consisted of the following as of May
31, 1996:
<TABLE>
<S> <C>
Commercial paper notes payable $ 903,553
Medium-term notes payable 799,466
Payables to dealers for vehicles yet to be financed 42,950
----------
$1,745,969
==========
</TABLE>
The commercial paper notes payable were issued by National Fleet Funding
Corporation (NFFC), a special-purpose wholly owned subsidiary of the Company,
under an asset-backed commercial paper program. Funds obtained through the
issuance of the commercial paper notes payable are advanced to the Company
pursuant to a loan agreement (the Loan Agreement) and used by the Company to
purchase vehicles.
The commercial paper program is supported by a $973 million liquidity facility
commitment with a group of banks (the Liquidity Facility), and $102 million in
letters of credit with certain financial institutions. The letters of credit are
further supported by $14.8 million of restricted cash. The amount of commercial
paper outstanding at any time plus the amount of borrowing under the Liquidity
Facility is limited to the sum of the aggregate liquidity commitment and the
$102 million in letters of credit ($1,075 million as of May 31, 1996). Such
borrowings are also limited to the net book value, as defined, of vehicles being
financed by such borrowings ($904 million as of May 31, 1996). The Liquidity
Facility and the letters of credit mature in May 1997 and carry annual
commitment fees of .225% and .1875%, respectively. The Company intends to renew
the Liquidity Facility and letters of credit beyond their existing maturity
date.
The commercial paper program, the Liquidity Facility and $102 million in letters
of credit are collateralized by, among other things, vehicles and the Company's
rights under manufacturer repurchase programs. The agreements also contain
various restrictive covenants, including provisions related to earnings, cash
flow and limits on declaring dividends or other distributions, as defined (see
Note 11).
Notes outstanding under the commercial paper program have maturities of 58 days
or less and had a weighted average interest rate of 6.42% during the period from
inception through May 31, 1996.
F-55
<PAGE> 56
The Company has entered into interest rate exchange agreements with financial
institutions that limit its exposure to interest rate volatility by effectively
converting a portion of variable rate debt to fixed rate debt. As of May 31,
1996, the notional principal amount of these agreements totaled $350 million,
with fixed rates ranging from 5.4% to 6.1%. Of this amount, $200 million expires
in 1998 and the remaining $150 million expires in 2000. Notional amounts are not
reflective of the Company's obligations under these agreements because the
Company is only obligated to pay the net amount of interest rate differential
between the fixed and variable rates specified in the contracts. The Company's
exposure to any credit loss in the event of nonperformance by the counterparties
is further mitigated by the fact that all of these financial instruments are
with significant financial institutions rated "A" or better by major credit
rating agencies. As of May 31, 1996, the fair value of all outstanding
contracts, which represents the estimated amount that the bank would receive or
pay to terminate the swap agreements at the reporting date taking into account
current interest rates and the current creditworthiness of the swap
counterparties, was a net receivable position of $4.9 million.
The medium-term notes payable (the Medium-Term Notes) were issued by National
Car Rental Financing Limited Partnership (NFLP), a special-purpose wholly owned
subsidiary of the Company. The proceeds from the issuance of the Medium-Term
Notes were used to repay a portion of commercial paper notes previously issued
by NFFC and to finance the acquisition of eligible vehicles.
The Medium-Term Notes are supported by $15 million in letters of credit with a
financial institution, $37.8 million of restricted cash and are collateralized
by, among other things, vehicles and the Company's rights under manufacturer
repurchase programs.
The Medium-Term Notes bear interest payable monthly at fixed or floating rates,
dependent on the series. The fixed rates had an average rate of 7.15% during the
period from inception through May 31, 1996. The floating rate is based upon a
three-month LIBOR plus .5% (5.98% at May 31, 1996). The Medium-Term Notes are
due in installments of interest only through December 1998 and thereafter of
principal and interest in varying amounts through July 2001.
The Company was in compliance with all debt covenants as of May 31, 1996.
As of May 31, 1996, the revenue-earning asset obligations are scheduled to
mature as follows:
<TABLE>
<S> <C>
Years ending May 31:
1997 $ 946,503
1998 -
1999 239,462
2000 60,493
2001 259,059
Thereafter 240,452
----------
$1,745,969
==========
</TABLE>
F-56
<PAGE> 57
7. SUBORDINATED DEBT:
Subordinated debt is subordinate to the commercial paper and medium-term notes
programs, the Liquidity Facility and the Loan Agreement discussed in Note 6 and
consisted of the following as of May 31, 1996:
<TABLE>
<S> <C>
Note payable to General Motors, interest at 7.04%, due in
annual installments of principal and interest of $11,200
through December 1999 $38,056
Note payable to GM National Holding Co., interest at the
12-month LIBOR (6.0% as of May 31, 1996), due in
June 2002 35,000
-------
$73,056
=======
</TABLE>
As of May 31, 1996 the subordinated debt is scheduled to mature as follows:
<TABLE>
<S> <C>
Years ending May 31:
1997 $ 8,530
1998 9,130
1999 9,774
2000 10,622
2001 -
Thereafter 35,000
-------
$73,056
=======
</TABLE>
8. INCOME TAXES:
The provision for income taxes for the period from inception through May 31,
1996 consisted of the following:
<TABLE>
<S> <C>
Current:
Federal $ 7,550
State, local and other 354
Deferred:
Federal 6,345
State, local and other 2,568
-------
$16,817
=======
</TABLE>
F-57
<PAGE> 58
The provision for income taxes, calculated using the federal statutory rate,
differs from the actual income tax provision as follows for the period from
inception through May 31, 1996:
<TABLE>
<S> <C>
Federal statutory rate $14,715
State and local income taxes, net of federal benefit 1,900
Other items 202
-------
Actual income tax provision $16,817
=======
</TABLE>
The components of the deferred tax asset and liability were as follows as of May
31, 1996:
<TABLE>
<S> <C>
Deferred tax asset:
Net operating loss carryovers $23,516
Self-insurance reserves 19,291
Accrued liabilities 8,100
Alternative minimum tax credit 7,550
Postretirement and postemployment benefits 6,286
Other 5,072
-------
69,815
Less- Valuation allowance (22,958)
-------
Total 46,857
-------
Deferred tax liability:
Depreciation 94,270
-------
Total 94,270
-------
Net deferred tax liability $47,413
=======
</TABLE>
A valuation allowance was provided to reduce the deferred tax assets to a level
which, more likely than not, will be realized. Based on the lack of an earnings
history for the Company and the losses incurred by Old National in recent years,
management provided a valuation allowance for all of the deferred tax assets
that resulted from the application of purchase accounting to the Company's
opening balance sheet.
9. LEASES:
The Company has entered into various concession and permit agreements which
generally provide for payment of a percentage of gross revenues with a
guaranteed minimum. The Company also leases equipment under various operating
leases. The Company's concession agreements and leases have remaining terms of
up to 18 years.
F-58
<PAGE> 59
penses under concession agreements and leases (excluding amounts charged
through to customers) for the period from inception through May 31, 1996 were as
follows:
<TABLE>
<S> <C>
Concession and permit fees:
Minimum fixed obligations $ 53,003
Additional amounts, based on gross revenues 56,040
Equipment rentals 692
--------
$109,735
========
</TABLE>
Future minimum lease obligations under noncancelable concession agreements and
equipment leases with initial terms in excess of one year as of May 31, 1996 are
as follows:
<TABLE>
<CAPTION>
Years ending May 31:
<S> <C>
1997 $ 35,945
1998 32,504
1999 22,391
2000 13,365
2001 7,682
Thereafter 36,538
--------
$148,425
========
</TABLE>
The Company also has a services agreement with EDS which provides the Company
with its electronic data processing and communications capabilities. The
agreement, as amended, requires the Company to pay a minimum of $35 million per
year through 2003. In connection with the Agreement (see Note 1), in June 1995
the Company paid $12 million for an option to terminate the services agreement
in June 1997. This payment was included in the determination of the purchase
price of the Company. In the event this option is exercised, an additional $5
million will be payable to the services provider. The Company is still in the
process of analyzing whether or not it will exercise this option. In the event
it is exercised, the Company will need to either enter into a similar agreement
with another third party or commit significant funds and internal resources
towards the acquisition and/or development of an in-house system.
10. POSTRETIREMENT BENEFITS AND POSTEMPLOYMENT BENEFITS:
The Company provides postretirement healthcare and other benefits to certain
employees. Eligible participants include employees who (i) reached the age of 50
by June 1, 1995, (ii) were employed by the Company as of December 31, 1990,
(iii) retire from the Company between the ages of 55 and 61 with ten or more
years of service (or who at age 62 or over have five or more years of service),
and (iv) are eligible to receive, and elect to receive, pension benefits from a
National Car Rental System, Inc. Employees Pension Plan immediately following
separation from active service.
F-59
<PAGE> 60
The components of net periodic postretirement benefit cost were as follows for
the period from inception through May 31, 1996:
<TABLE>
<S> <C>
Service cost of benefits earned during the period $ 372
Interest cost on accumulated postretirement benefit obligation 1,050
------
$1,422
======
</TABLE>
The amounts recognized in the Company's balance sheet are as follows as of May
31, 1996:
<TABLE>
<S> <C>
Accumulated postretirement benefit obligation:
Retirees $ 5,625
Fully eligible active plan participants 4,854
Other active plan participants 4,239
-------
Projected benefit obligation 14,718
Unrecognized net gain 497
-------
Accrued benefit costs $15,215
=======
</TABLE>
Accrued benefit costs represent an unfunded liability, as the Company has not
funded the projected liability.
The postretirement benefit obligation was determined using the following
assumptions:
<TABLE>
<S> <C>
Average discount rate 7.39%
Medical cost trend rates:
Medical plan 8.76%, grading to 6% ultimate over 5 years
Dental plan 7.38%, grading to 6% ultimate over 5 years
</TABLE>
The medical cost trend rate assumption has a significant effect on the above
amounts reported. To illustrate, increasing the assumed medical cost trend rates
by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of May 31, 1996 by $2.1 million, and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for the period from inception through May 31, 1996
would increase by $0.2 million.
The Company's benefit plans also provide for certain postemployment benefits,
primarily related to long-term disability. Old National retained all obligations
related to postemployment benefits that existed as of the acquisition date of
the Company. As of May 31, 1996, there is no significant postemployment
liability.
11. SHAREHOLDERS' EQUITY:
The Company has the authorization to issue up to one million shares of common
stock and five million shares of Series A preferred stock. The par value of all
shares of common and preferred stock is $.01 per share. In connection with its
formation (see Note 1) the Company issued 100,000 shares of common stock at a
price of $50 per share and one million shares of Series A preferred stock at a
price of $25 per share.
F-60
<PAGE> 61
Dividends accrue on the Series A preferred stock at an annual rate of 14.4%,
increasing to 16% by June 1999 and thereafter, are cumulative and are payable
annually in arrears, when and if declared by the board of directors. Accrued and
unpaid dividends, if any, do not bear interest. The holders of the Series A
preferred stock have no general voting rights except with respect to the
issuance of securities that would rank on a parity with or senior to the Series
A preferred stock and certain merger and asset disposition transactions.
Subsequent to May 31, 1996, the Company redeemed 530,000 shares of Series A
preferred stock at $25 per share plus all accrued and unpaid dividends.
Pursuant to the Loan Agreement (see Note 6), cumulative dividends are limited to
12% of the Company's initial capitalization through May 31, 1996 ($3.6 million),
62% of the initial capitalization through May 31, 1997 ($18.6 million) and 100%
of the initial capitalization through May 31, 1998 ($30 million). Through May
31, 1996, cumulative dividends declared totaled $3.5 million.
12. EMPLOYEE BENEFIT PLANS:
The Company has a long-term incentive plan covering certain members of
management. Amounts due under the plan are based on cumulative earnings of the
Company, subject to certain vesting requirements. The total amount accrued under
the plan for the period from inception through May 31, 1996 was approximately
$0.6 million.
The Company sponsors a defined contribution plan covering certain hourly and
salaried employees. The Company also contributes to union-administered,
multiemployer pension plans for certain employees covered under collective
bargaining agreements. The Company's contributions to the defined contribution
plan were $0.5 million for the period from inception through May 31, 1996.
Multiemployer pension plan expense was $0.5 million for the same period.
13. COMMITMENTS:
The Company has a $16.2 million letter-of-credit facility for a portion of its
PLPD self-insurance reserve. The Company has $8.9 million of letters of credit
to cover the Company's performance under certain concession and license
agreements. Fees of .5% per annum are payable on these outstanding letters of
credit and cash totaling $19 million is restricted and pledged as collateral on
these letters of credit.
Subsequent to May 31, 1996, the Company entered into an operating lease
agreement for buses to use at its rental car facilities. The Company is
committed to expend $23.8 million over the four- to seven-year lease terms.
14. RELATED-PARTY TRANSACTIONS AND BALANCES:
In connection with the acquisition of the Company by NCR Acquisition Corp.,
Santa Anna performed a number of acquisition-related activities on behalf of NCR
Acquisition Corp. Such activities consisted primarily of transaction structuring
and negotiation, due diligence and services related to the raising of equity and
debt financing. The Company paid Santa Anna fees totaling $4.85 million for
these services. These fees were included in the determination of the purchase
price of the Company.
F-61
<PAGE> 62
The Company and Santa Anna entered into a management services agreement in June
1995 pursuant to which Santa Anna provides management and consultation services
related to the sale of franchises and management of the Company's franchise and
corporate car rental system in exchange for a monthly management fee. Total fees
paid to Santa Anna pursuant to the agreement were $1.0 million for the period
from inception through May 31, 1996, including an initial payment of $0.3
million for the start-up of the Company.
The Company has entered into a lease agreement with an affiliated entity for a
reservation center in Charleston, South Carolina. Total rent expense for this
lease was $0.2 million for the period from inception through May 31, 1996.
15. LITIGATION:
Various claims, legal actions and complaints which affect the Company arise in
the normal course of business. Management believes that the ultimate outcome of
the lawsuits will not have a material effect on the Company's operations or
financial position.
16. PURCHASE OF TILDEN CORPORATION, INC. AND SUBSIDIARIES:
On June 13, 1996, the Company entered into an agreement to purchase certain
assets and liabilities of Tilden Corporation, Inc. and Subsidiaries (Tilden Car
Rental Inc. and Tilden Rent-a-Car System, Ltd.), a Canadian automobile rental
company, for $83 million, which includes $75 million of revenue-earning asset
obligations. This acquisition will be accounted for under the purchase method.
17. MERGER AGREEMENT WITH REPUBLIC INDUSTRIES, INC.:
On January 5, 1997, the Company entered into a definitive merger agreement with
Republic Industries, Inc. The transaction is valued at $600 million and will be
accounted for under the pooling-of-interests method of accounting.
F-62
<PAGE> 63
NATIONAL CAR RENTAL SYSTEM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
November 30, May 31,
1996 1996
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 246,508 $ 230,983
RECEIVABLES, net 73,926 60,850
PREPAID EXPENSES AND OTHER ASSETS 13,796 14,239
REVENUE-EARNING ASSETS, net 1,709,183 1,724,750
PROPERTY AND EQUIPMENT, net 92,527 83,739
INTANGIBLES 12,150 11,565
---------- ----------
$2,148,090 $2,126,126
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
ACCOUNTS PAYABLE $ 70,694 $ 76,266
ACCRUED LIABILITIES 75,677 61,944
DEFERRED TAXES 59,095 47,413
SELF-INSURANCE RESERVES 75,875 54,547
REVENUE-EARNING ASSET OBLIGATIONS 1,718,931 1,745,969
POSTRETIREMENT BENEFIT OBLIGATION 15,695 15,215
SUBORDINATED DEBT 73,056 73,056
---------- ----------
Total liabilities 2,089,023 2,074,410
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000 shares authorized-
Series A, 500 and 1,000 shares issued 5 10
Common stock, $.01 par value, 1,000 shares authorized, 100 1 1
issued
Capital in excess of par value 16,744 29,989
Retained earnings 42,317 21,716
---------- ----------
Total shareholders' equity 59,067 51,716
---------- ----------
$2,148,090 $2,126,126
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-63
<PAGE> 64
NATIONAL CAR RENTAL SYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In Thousands)
<TABLE>
<CAPTION>
Period From
April 4, 1995
Six Months (Inception)
Ended Through
November 30, November 30,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
REVENUE:
Vehicle rental $ 586,476 $ 490,815
Other 20,376 10,344
---------- ----------
Total revenue 606,852 501,159
---------- ----------
COSTS AND EXPENSES:
Direct operating expenses 236,587 196,874
Depreciation of revenue-earning assets 151,328 126,879
Selling and administrative expenses 129,171 99,427
Interest expense 55,084 46,385
---------- ----------
Total costs and expenses 572,170 469,565
---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 34,682 31,594
PROVISION FOR INCOME TAXES 13,182 12,638
---------- ----------
NET INCOME $ 21,500 $ 18,956
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-64
<PAGE> 65
NATIONAL CAR RENTAL SYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Period From
April 4, 1995
Six Months (Inception)
Ended Through
November 30, November 30,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash provided by operating activities $ 229,437 $ 243,719
------------- ------------
INVESTING ACTIVITIES:
Acquisition of net assets of Old National, net of
cash received -- (1,314,666)
Acquisition of Tilden, net of cash received (13,686) --
Purchase of revenue-earning assets (590,254) (676,936)
Sale of revenue-earning assets 542,509 569,803
Purchase of property and equipment (9,228) (5,652)
------------- ------------
Net cash used for investing activities (70,659) (1,427,451)
------------- ------------
FINANCING ACTIVITIES:
Sale of common and preferred stock -- 30,000
Issuance of revenue-earning asset obligations 6,154,623 7,527,813
Payments on revenue-earning asset obligations (6,282,950) (6,163,185)
Debt issuance costs (300) (7,082)
Dividends paid and redemption of preferred stock (14,626) (810)
------------- ------------
Net cash provided by (used for)
financing activities (143,253) 1,386,736
------------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 15,525 203,004
CASH AND CASH EQUIVALENTS, beginning of period 230,983 --
------------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 246,508 $ 203,004
============= ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 51,091 $ 38,598
============= ============
Cash paid (received) for income taxes $ (4,211) $ 6,076
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-65
<PAGE> 66
NATIONAL CAR RENTAL SYSTEM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
November 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
National Car Rental System, Inc. (the Company) and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The accompanying interim consolidated financial statements of the Company are
unaudited as of November 30, 1996 and for the six months then ended; however, in
the opinion of management, all adjustments necessary for a fair presentation of
such consolidated financial statements have been reflected in the interim period
presented. Such adjustments consisted only of normal recurring items. The
Company's business is seasonal and, accordingly, interim results are not
indicative of results for a full year. The significant accounting policies and
certain financial information which are normally included in financial
statements prepared in accordance with generally accepted accounting principles,
but which are not required for interim reporting purposes, have been condensed
or omitted. The accompanying consolidated financial statements of the Company
should be read in conjunction with the Company's May 31, 1996 audited financial
statements and related notes included therein.
2. ACQUISITION OF TILDEN CORPORATION, INC. AND SUBSIDIARIES:
On June 3, 1996, the Company entered into an agreement to purchase certain
assets and liabilities of Tilden Corporation, Inc. and Subsidiaries (Tilden), a
Canadian automobile rental company, for $83 million, which includes $75 million
of revenue-earning asset obligations. The acquisition was accounted for using
the purchase method.
The consolidated financial statements include the operating results of Tilden
from the date of acquisition. Pro forma results of operations have not been
presented as the effect of the acquisition was not significant to the historical
operating results of the Company.
F-66
<PAGE> 67
3. REVENUE-EARNING ASSETS:
Revenue-earning assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
November 30, May 31,
1996 1996
------------ ----------
<S> <C> <C>
Revenue-earning vehicles $1,763,207 $1,800,488
Receivables from vehicle disposals 119,746 52,889
---------- ----------
1,882,953 1,853,377
Accumulated depreciation (173,770) (128,627)
---------- ----------
$1,709,183 $1,724,750
========== ==========
</TABLE>
4. REVENUE-EARNING ASSET OBLIGATIONS:
Revenue earning asset obligations consisted of the following (in thousands):
<TABLE>
<CAPTION>
November 30, May 31,
1996 1996
------------ -------
<S> <C> <C>
Commercial paper notes payable $ 808,427 $ 903,553
Medium-term notes payable 799,516 799,466
Payables to dealer for vehicles 49,786 42,950
Credit facility 40,863 --
GMAC credit facility 20,339 --
---------- ----------
$1,718,931 $1,745,969
========== ==========
</TABLE>
The commercial paper program is supported by a liquidity facility commitment
with a group of banks (the Liquidity Facility) and letters of credit with a
financial institution. The amount of commercial paper outstanding at any time
plus the amount of borrowing under the Liquidity Facility is limited to the sum
of the aggregate liquidity commitment and the outstanding letters of credit
($1,075 million at November 30, 1996). Such borrowings are also limited to the
net book value, as defined, of vehicles being financed by such borrowings ($988
million at November 30, 1996). The Company intends to renew the Liquidity
Facility and letters of credit at maturity.
Notes outstanding under the commercial paper program have maturities of 58 days
or less and bear interest at rates ranging from 5.31% to 5.50% at November 30,
1996.
The medium-term notes payable (the Medium-Term Notes) are supported by $15
million in letters of credit with a financial institution, and $37.8 million of
restricted cash and are collateralized by, among other things, vehicles and the
Company's rights under manufacturer repurchase programs.
The Medium-Term Notes bear interest payable monthly at fixed or floating rates,
dependent on the series. The floating rate is based upon a three-month LIBOR
plus .5% (6.04% at November 30, 1996). The Medium-Term notes are due in
installments of interest only through December 1998 and thereafter of principal
and interest in varying amounts through July 2001.
F-67
<PAGE> 68
In June 1996, Tilden obtained a credit facility of Canadian $120 million with an
association of banks expiring May 31, 1997. Borrowings may be either Bankers'
Acceptances or loans based upon the Canadian prime rate. The weighted average
interest rate at November 30, 1996 was 4.41%.
In June 1996, Tilden established a Canadian $30 million credit facility with
General Motors Acceptance Corporation of Canada, Limited (GMAC). All borrowings
bear interest payable monthly at the Canadian prime rate plus .25% (5.25% at
November 30, 1996).
5. SUBORDINATED DEBT:
Subordinated debt consists of a $47.5 million note payable to General Motors
Corp. bearing interest at 7.04%, due in annual installments of principal and
interest totaling $11.2 million through December 1999, and subordinated debt of
$35 million payable to GM National Holding Corp. bearing interest based on the
LIBOR rate (6.06% at November 30, 1996), due in June 2002. Both of these amounts
are subordinate to the commercial paper and medium term notes programs, as
discussed in Note 4.
6. SUBSEQUENT EVENT:
On January 5, 1997, the Company entered into a definitive merger agreement with
Republic Industries, Inc. The transaction was valued at $600 million and will be
accounted for under the pooling-of-interests method of accounting.
F-68
<PAGE> 69
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
National Car Rental System, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of National Car
Rental System, Inc. and Subsidiaries (the Company) as of May 31, 1995 and
December 31, 1994 and the related consolidated statements of operations,
changes in shareholder's deficit, and cash flows for the five-month period
ended May 31, 1995 and for the years ended December 31, 1994 and 1993. These
consolidated 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, rather than absolute, 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of May 31, 1995 and
December 31, 1994 and the results of its operations and cash flows for the
five-month period ended May 31, 1995 and for the years ended December 31,
1994, and 1993 in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for postemployment benefits in 1994 to conform
with Statement of Financial Accounting Standards No. 112, Employers' Accounting
for Postemployment Benefits.
As discussed in Note 14 to the consolidated financial statements, the Company
has material amounts of intercompany transactions with and liabilities payable
to its parent, General Motors Corporation (GM) and its subsidiaries.
As discussed in Note 1 to the consolidated financial statements, the Company
sold substantially all of its operating assets and transferred certain
liabilities to NCR Acquisition Corp. subsequent to May 31, 1995.
DELOITTE & TOUCHE LLP
February 2, 1996
Minneapolis, Minnesota
F-69
<PAGE> 70
NATIONAL CAR RENTAL SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1995 AND DECEMBER 31, 1994
(MILLIONS OF DOLLARS EXCEPT FOR SHARE INFORMATION)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAY 31, DECEMBER 31,
1995 1994
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 180.7 $ 118.9
Receivables 53.9 46.6
Revenue-earning assets 1,474.8 1,237.9
Properties and equipment 95.0 96.8
Other 17.3 15.0
-------- --------
$1,821.7 $1,515.2
======== ========
LIABILITIES AND SHAREHOLDER'S DEFICIT
LIABILITIES:
Accounts payable $ 38.4 $ 39.1
Accrued insurance 152.4 150.1
Accrued liabilities 102.7 91.5
Revenue-earning asset obligations 1,582.5 1,275.7
Note payable 34.5 37.0
Postretirement benefit obligation 30.9 30.4
-------- --------
1,941.4 1,623.8
SHAREHOLDER'S DEFICIT
Convertible preferred stock - authorized, issued and outstanding,
100,000 nonvoting shares; par value: $.01 per share, total par
value $1,000; liquidation value $250 per share, total liquidation
value $25,000,000 - -
Common stock - authorized: 1,000,000 voting shares and 222,222
nonvoting shares; issued 1,000,000 voting shares; outstanding:
815,000 shares at May 31, 1995 and December 31, 1994, par value
$.01 per share - -
Additional paid-in capital 912.8 912.8
Retained deficit (1,010.0) (1,008.8)
Excess pension obligation (9.9) -
Common stock in treasury at cost (185,000 shares at May 31, 1995
and December 31, 1994) (12.6) (12.6)
-------- --------
Total Shareholders Deficit (119.7) (108.6)
-------- --------
$1,821.7 $1,515.2
======== ========
</TABLE>
See notes to consolidated financial statements.
F-70
<PAGE> 71
NATIONAL CAR RENTAL SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FIVE-MONTH PERIOD ENDED MAY 31, 1995 AND YEARS ENDED
DECEMBER 31, 1994 AND 1993
(MILLIONS OF DOLLARS EXCEPT FOR SHARE INFORMATION)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAY 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
<S> <C> <C> <C>
REVENUES:
Vehicle rental $ 337.3 $ 729.0 $ 651.3
Other 8.2 18.3 19.6
-------- -------- --------
Total revenues 345.5 747.3 670.9
COSTS AND EXPENSES:
Direct operating 138.4 330.3 329.3
Depreciation of revenue-earning assets 92.1 154.1 128.8
Selling and administrative expenses 72.4 172.8 142.0
Restructuring credit (6.5)
-------- -------- --------
Total costs and expenses 302.9 650.7 600.1
-------- -------- --------
INCOME BEFORE INTEREST AND
CUMULATIVE EFFECT OF
ACCOUNTING CHANGES 42.6 96.6 70.8
Interest expense 43.8 70.5 125.6
-------- -------- --------
(LOSS) INCOME BEFORE
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (1.2) 26.1 (54.8)
Cumulative effect of accounting change (4.2)
-------- -------- --------
NET (LOSS) INCOME $ (1.2) $ 21.9 $ (54.8)
======== ======== ========
(LOSS) EARNINGS PER COMMON
AND COMMON EQUIVALENT SHARE $ (1.47) $ 23.36 $ (57.46)
======== ======== ========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 815,000 937,449 953,750
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-71
<PAGE> 72
NATIONAL CAR RENTAL SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S DEFICIT
(MILLIONS OF DOLLARS, EXCEPT FOR SHARE INFORMATION)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED
AND COMMON
SHARES OF SHARES OF STOCK AND NOTES
PREFERRED COMMON ADDITIONAL RECEIVABLE EXCESS
STOCK STOCK PAID-IN TREASURY FROM PENSION RETAINED
OUTSTANDING OUTSTANDING CAPITAL STOCK SHAREHOLDERS OBLIGATION DEFICIT NET
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1992 100,000 1,000,000 $65.0 $ - $(10.9) $(1.8) $ (975.9) $(923.6)
Excess pension obligation (8.5) (8.5)
Treasury stock purchased (185,000) (12.6) 8.1 (4.5)
Conversion of debt 847.8 2.6 850.4
Other 0.2 0.2
Net loss (54.8) (54.8)
------- --------- ----- ----- ------ ----- -------- -------
BALANCE AT
DECEMBER 31, 1993 100,000 815,000 912.8 (12.6) - (10.3) (1,030.7) (140.8)
Excess pension obligation 10.3 10.3
Net income 21.9 21.9
------- --------- ----- ----- ------ ----- -------- -------
BALANCE AT
DECEMBER 31, 1994 100,000 815,000 912.8 (12.6) - - (1,008.8) (108.6)
Excess pension obligation (9.9) (9.9)
Net loss (1.2) (1.2)
------- --------- ----- ----- ------ ----- -------- -------
BALANCE AT
MAY 31, 1995 100,000 815,000 912.8 (12.6) - (9.9) (1,010.0) (119.7)
======= ========= ===== ===== ====== ===== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-72
<PAGE> 73
NATIONAL CAR RENTAL SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIVE-MONTH PERIOD ENDED MAY 31, 1995 AND YEARS ENDED
DECEMBER 31, 1994 AND 1993
(MILLIONS OF DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAY 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (1.2) $ 21.9 $ (54.8)
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Cumulative effect of accounting change 4.2
Depreciation and amortization:
Revenue-earning assets 92.1 154.1 128.8
Properties and equipment 5.7 13.6 13.2
Accrued interest on subordinated debt 36.8
Receivables (7.3) (5.4) (3.1)
Other (liabilities) assets (2.3) (1.5) 4.8
Accounts payable (.7) 7.6 0.8
Accrued insurance 2.3 7.8 4.8
Other accrued assets (liabilities) 1.8 (22.2) 1.4
------- ------- -------
Cash provided by operating activities 90.4 180.1 132.7
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of revenue-earning assets (Note 16) (5.2) (2.1) (4.6)
Sale of revenue-earning assets (Note 16) 174.1 284.5 73.2
Proceeds from manufacturer incentives 24.6 50.8 42.0
Purchase of properties and equipment (4.1) (10.1) (9.3)
Sale of properties and equipment .5 1.5 3.5
------- ------- -------
Cash provided by investing activities 189.9 324.6 104.8
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (4.5)
Issuance of revenue-earning asset obligations (Note 16) 4.8
Payments on revenue-earning asset obligations (Note 16) (96.5) (457.3) (237.0)
Payments on other senior debt (119.5) (0.4) (0.4)
Payments on note payable (2.5) (5.0) (2.1)
------- ------- -------
Cash used in financing activities (218.5) (462.7) (239.2)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 61.8 42.0 (1.7)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 118.9 76.9 78.6
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 180.7 $ 118.9 $ 76.9
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-73
<PAGE> 74
NATIONAL CAR RENTAL SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIVE-MONTH PERIOD ENDED MAY 31, 1995 AND YEARS ENDED
DECEMBER 31, 1994 AND 1993
- -----------------------------------------------------------------------------
1. FINANCIAL RESTRUCTURING AND SALE OF SIGNIFICANT OPERATIONS AND NET
ASSETS
Prior to 1994, National Car Rental System, Inc. (the Company) incurred
significant losses, including a $551.7 million loss in 1992 when the
Company recorded $415.5 million of restructuring charges, including a
$362.5 million write-off of goodwill. In 1992, as a result of the
Company's poor operating results and various debt covenant violations,
the Company's parent, General Motors Corporation (GM), acquired all of
the common stock held by the former chairman and chief executive
officer of the Company and initiated a major restructuring of the
Company's debt. In 1993, the Company finalized its debt
restructuring, which resulted in GM converting $850.4 million of term
and subordinated debt (including $664.4 million of such debt which was
purchased by GM in 1993 from banks and GM affiliates) into equity,
reduced by a $2.6 million shareholder note receivable from GM. In
1993, the Company also acquired all of the remaining minority
shareholders' common stock from management in exchange for
cancellation of $8.1 million of notes receivable and the payment of
$4.5 million cash.
Effective with the closing of an asset purchase agreement (the
Agreement) on June 9, 1995, the Company sold substantially all of its
operating assets and transferred certain liabilities as of June 1,
1995 to NCR Acquisition Corp.
As consideration for the net assets purchased, NCR Acquisition Corp.
paid cash at the closing equal to the balance of revenue-earning asset
obligations owed by the Company to General Motors Acceptance
Corporation (GMAC), which were $1,558.7 million at May 31, 1995 (Note
6), issued a $35 million subordinated note payable to the Company due
June 2002 with annual interest due at the then-current LIBOR rate, and
paid $10.5 million to the Company in December 1995 to reflect net
assets acquired in excess of a target amount, which included $0.4
million of interest earned from June 1, 1995 through such date. NCR
Acquisition Corp. also paid Electronic Data Systems Corporation (EDS),
a wholly owned subsidiary of GM, $12 million at closing for an option
to terminate the Company's service agreement with EDS (see Note 7).
The purchase price for the net assets was reduced by a $32 million
cash payment made by GM to NCR Acquisition Corp. at closing for NCR
Acquisition Corp.'s assumption of certain liabilities and incentive
fee for closing the sale. In connection with the Agreement, GM also
made a $47.5 million cash advance to NCR Acquisition Corp. in exchange
for a subordinated note payable bearing interest at 7.04% and payable
in annual principal and interest installments through December 1999.
Net liabilities of $203.9 million at May 31, 1995 were retained by the
Company, consisting primarily of the $34.5 million EDS note payable
(Note 7), accrued insurance, accrued environmental, and certain other
accrued liabilities. Subsequent to the sale of net assets, the
Company changed its name to GM National Holding Co. (GM National), and
NCR Acquisition Corp. changed its name to National Car Rental System,
Inc. After the sale, GM and GM National will be responsible for the
sale and liquidation of the assets and liabilities not sold to NCR
Acquisition Corp.
F-74
<PAGE> 75
The accompanying financial statements reflect the financial position,
results of operations, and cash flows of the Company prior to the
closing of the Agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation - The financial statements include the accounts
of the Company and its subsidiaries. All significant intercompany
accounts have been eliminated in consolidation.
Cash and Cash Equivalents - For purposes of the statements of cash
flows, the Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash
equivalents.
Revenue Recognition - Revenue is recognized upon completion of the car
rental contract. At each period-end, however, an accrual is recorded
for uncompleted car rental contracts. This car rental revenue accrual
totaled $7.5 million at May 31, 1995 and December 31, 1994.
Earnings Per Share Data - Common stock equivalents used in computing
earnings per share relate to convertible preferred stock which, if
converted, would have a dilutive effect on earnings per share for the
year ended December 31, 1994. Common stock equivalents are excluded
from the per share calculation for the five months ended May 31, 1995
and the year ended December 31, 1993 because the effect would be
antidilutive.
Revenue-Earning Assets - Revenue-earning assets are comprised of daily
rental vehicles, recorded at cost, and receivables from vehicle
disposals. Essentially all vehicles are purchased under manufacturer
repurchase programs, which provide for a guaranteed repurchase amount
that is dependent upon the month the vehicle is returned to the
manufacturer and various other factors. The vehicles must meet
certain conditions (such as lack of excess damage) to be eligible for
the repurchase guarantee. However, the Company does have the ability
to opt out of the manufacturer repurchase programs and sell the
vehicles on its own. Depreciation expense is computed using monthly
rates that are intended to measure the reduction in value necessary to
approximate the guaranteed repurchase amount at the end of the
estimated average holding period of the vehicle (generally 9 to 12
months). Gains or losses on vehicle disposals through manufacturer
repurchase programs and wholesaling activities are recognized at dates
of disposal and are included in depreciation. The Company also
receives certain other vehicle purchase allowances and incentives,
which are deferred and amortized to depreciation expense over the
estimated average holding period of vehicles. These separately
determined items, estimated depreciation provision and ultimate gain
or loss on disposal, are considered by management to be inseparable
elements of the total depreciation charge.
The net gain on disposal of revenue-earning vehicles through
manufacturer repurchase programs and wholesaling activities included
in depreciation for the five-month period ended May 31, 1995 and the
years ended December 31, 1994 and 1993 was $1.9 million, $10.2
million, and $1.8 million, respectively. Allowances and incentives
amortized as a reduction of depreciation expense for the five-month
period ended May 31, 1995 and the years ended December 31, 1994 and
1993 were $18.5 million, $44.2 million, and $34.9 million,
respectively.
Properties and Equipment - Properties and equipment are recorded at
cost and depreciated or amortized using the straight-line method over
estimated useful lives or lease terms. Estimated useful
F-75
<PAGE> 76
lives range from 3 to 8 years for fixtures and equipment and up to 25
years for buildings and leasehold improvements.
Income Taxes - Effective January 1, 1993, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes. As explained further in Note 8, the adoption of
SFAS No. 109 in 1993 had no effect on the Company's financial
statements. The Company is included in the consolidated federal
income tax return of GM. The income tax provision is generally
determined as if the Company filed a separate tax return.
Emerald Club Liability - The Company accrues a liability for an
estimate of its obligation under its frequent renter program (Emerald
Club). The liability is determined based on the points earned by the
participants and the related historical cost per point of providing
the associated awards.
Public Liability and Property Damage - The Company self-insures for
public liability and property damage claims and, effective September
1, 1992, is liable up to a maximum of $1 million per occurrence.
Prior to September 1, 1992, the Company was liable for claims up to a
maximum per occurrence ranging from $0.3 million to $3.0 million.
Coverage is purchased for losses in excess of such maximum liability
through an umbrella policy. Provision for liability on self-insured
public liability and property damage claims is made by charges to
expense based upon estimates of ultimate liabilities on reported and
estimated incurred but unreported claims. As a result of an actuarial
review as of May 31, 1995, the Company decreased the provision for
self-insured public liability and property damage claims by $12.0
million to reflect a reduction in the estimated ultimate liabilities
for prior open policy periods which reduced the Company's net loss by
$12.0 million for the five-month period ended May 31, 1995. Similar
actuarial adjustments for changes in estimated ultimates were recorded
which increased income by $5.7 million and $1.8 million in the years
ended December 31, 1994 and 1993, respectively.
Accounting Changes - Effective January 1, 1994, the Company adopted
SFAS No. 112, Employers' Accounting for Postemployment Benefits. This
statement establishes accounting standards for accruing postemployment
benefits provided to employees, their beneficiaries, and covered
dependents after employment but before retirement. Postemployment
benefits include, but are not limited to, salary continuation,
severance benefits, workers' compensation and other disability related
benefits, and the postemployment continuation of health care benefits,
life insurance benefits, and similar benefits. The 1994 cumulative
effect of adopting SFAS No. 112 amounted to a $4.2 million noncash
charge. The ongoing effect of implementing this statement is not
expected to be material. In prior years, the costs of these benefits
were charged to expenses as incurred with approximately $1.3 million
expensed in 1993.
Restructuring Expense/Credit - In December 1992, the Company recorded
noncash charges of $415.5 million for restructuring charges, including
a $362.5 million write-off of goodwill, which was based upon
management's determination that the Company's future net income would
not be sufficient to recover the future amortization. The
restructuring charges also included $35.0 million for certain
long-term contractual obligations, which management believes have
impaired value, and $18.0 million for future lease costs associated
with abandoned locations (including $16.5 million of lease costs
payable to partnerships with former shareholders) and other less
significant restructuring costs. Payments on long-term contractual
obligations of $2.5 million, $5.3 million, and $4.2 million were
charged against the $35.0 million reserve for the five months ended
May 31, 1995 and the years ended December 31, 1994 and 1993,
respectively. In addition, during 1994, several leases on abandoned
properties had final settlements of $9.7 million that were more
favorable than the original estimate and resulted in the Company
reversing $6.5 million of restructuring charges in 1994. At
F-76
<PAGE> 77
May 31, 1995 and December 31, 1994, the Company had accrued
restructuring reserves of $24.8 million and $27.3 million,
respectively, which are included in accrued liabilities.
Environmental Clean-up Liabilities - The Company accrues for estimated
environmental clean-up costs related to various car rental locations
that are known or expected to have contamination associated with
underground storage tanks. The estimated costs accrued are
principally based upon the historical cost experience of remediating
such sites. At May 31, 1995 and December 31, 1994, the Company has
accrued environmental clean-up reserves of $13.4 million and $13.8
million, respectively, which are included in accrued liabilities.
3. RECEIVABLES
Receivables consisted of the following at May 31, 1995 and December
31, 1994 (millions of dollars):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Receivables $54.4 $47.3
Allowance for doubtful accounts (0.5) (0.7)
----- -----
$53.9 $46.6
===== =====
</TABLE>
4. REVENUE-EARNING ASSETS
Revenue-earning assets consisted of the following at May 31, 1995 and
December 31, 1994 (millions of dollars):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Revenue-earning vehicles $1,569.4 $1,249.2
Accumulated depreciation (109.1) (85.2)
-------- --------
1,460.3 1,164.0
Receivables from vehicle disposals 14.5 73.9
-------- --------
$1,474.8 $1,237.9
======== ========
</TABLE>
5. PROPERTIES AND EQUIPMENT
Properties and equipment consisted of the following at May 31, 1995
and December 31, 1994 (millions of dollars):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Land $14.7 $14.7
Building and leasehold improvements 114.0 114.6
Fixtures and equipment 26.6 25.6
----- -----
155.3 154.9
Accumulated depreciation and amortization (60.3) (58.1)
----- -----
$95.0 $96.8
===== =====
</TABLE>
F-77
<PAGE> 78
6. REVENUE-EARNING ASSET OBLIGATIONS
Revenue-earning asset obligations include notes payable under
financing agreements and accounts payable for revenue-earning vehicles
to be financed and consisted of the following at May 31, 1995 and
December 31, 1994 (millions of dollars):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Notes payable to GMAC $1,558.7 $1,242.9
Payables to dealers for vehicles 23.8 32.8
-------- --------
$1,582.5 $1,275.7
======== ========
</TABLE>
Substantially all revenue-earning assets are pledged as collateral to
the notes. The notes must be repaid following the sale of the vehicle
and are expected to be replaced by similar obligations to the extent
of new vehicle purchases. The notes, among other requirements,
require a minimum capitalization level (as defined) and prohibit the
outstanding notes payable (excluding payables to dealers for vehicles)
from exceeding the revenue-earning asset collateral, as defined, by
more than 15%.
Notes payable to GMAC require monthly payments ranging from 1.42% to
2.25% of the original borrowings plus interest at prime plus .25% to
prime plus .75% (9.25% and 9.75% at May 31, 1995 and 8.75% and 9.25%
at December 31, 1994). The interest rate is fixed at the time of
borrowing for the holding period of the vehicle. The monthly
amortization rate, which is intended to approximate the monthly
vehicle depreciation, is subject to annual review by GMAC. Any
changes in the monthly amortization of vehicle debt which occur based
on this review only apply to vehicles subsequently purchased. At May
31, 1995, the December 31, 1994 amended GMAC vehicle line of credit
totaled $1,550 million, with up to $400 million of the line guaranteed
by GM, and required a commitment fee of .25% per annum on the average
unused portion. The line of credit was terminated after May 31, 1995,
and GM agreed to pay $14.0 million of prepayment penalties required
under the terms of the GMAC line of credit.
7. NOTE PAYABLE
In December 1990, the Company sold essentially all of its computer
hardware and software to EDS, a wholly owned subsidiary of GM. In
connection with the sale, the Company entered into a ten-year service
agreement whereby the Company purchased essentially all of its data
processing services (using the software sold to EDS) and systems
development services from EDS.
Due to the interrelationship between the simultaneous sale of the
hardware and software and the consummation of the service agreement,
the Company deferred recognition of the gain on the sale in 1990 and
recorded a financing obligation (classified as a note payable in the
accompanying balance sheet) to recognize the portion of the annual fee
under the service agreement representing the financing element of the
transaction.
Effective March 1, 1994, the Company repurchased the computer software
sold to EDS in 1990 for $42.0 million, reduced the annual service fees
to $35.0 million (subject to annual inflation adjustments), and agreed
to a three-year extension (through December 31, 2003) of the service
agreement. The software purchase was financed by issuing a $42.0
million note requiring monthly principal and interest payments through
February 2001. The note was secured by the software and
F-78
<PAGE> 79
required interest which reset annually at the LIBOR rate plus 400
basis points (10.75% at May 31, 1995). The Company sold the
repurchased software, transferred its rights and obligations under the
EDS service agreement, and repaid the note in June 1995 in connection
with the sale discussed in Note 1.
8. INCOME TAXES
As discussed in Note 2, the Company adopted SFAS No. 109 effective as
of January 1, 1993. Under the provisions of SFAS No. 109, the Company
recorded as of the beginning of 1993 net deferred income tax assets
aggregating $203.2 million, which represented future tax benefits
resulting from differences in the tax basis of assets and liabilities
versus their financial accounting basis and the tax benefits of
operating loss and tax credit carryforwards. However, because of the
uncertainty regarding the ability to utilize these future tax
benefits, the Company also recorded a $203.2 million valuation
allowance at the beginning of 1993 which fully offset the net deferred
income tax asset. Accordingly, there was no income effect of adopting
SFAS No. 109 in 1993.
Due to the history of operating losses and the excess of deferred tax
assets over deferred tax liabilities before applying the valuation
allowance, no current or deferred tax provisions were recorded by the
Company under SFAS No. 109 for the five-month period ended May 31,
1995 or any of the years ended December 31, 1994 and 1993.
Deferred tax assets (liabilities) are comprised of the following at
May 31, 1995 and December 31, 1994 (millions of dollars):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Insurance accruals $ 62.0 $ 58.1
Postretirement and postemployment benefits 13.9 13.5
Restructuring reserves 15.3 16.5
Repurchased software/deferred gain (Note 7) 10.2 12.1
Tax loss and credit carryforwards 175.5 177.9
Other 26.9 25.4
------ ------
Deferred tax assets 303.8 303.5
Deferred tax liabilities - depreciation (95.3) (85.8)
Valuation allowance (208.5) (217.7)
------ ------
Net deferred taxes $ - $ -
====== ======
</TABLE>
F-79
<PAGE> 80
The tax loss and credit carryforwards for tax return purposes as of
May 31, 1995 are as follows (millions of dollars):
<TABLE>
<CAPTION>
Expiration
Type Amount Dates
<S> <C> <C>
Regular net operating losses $472.7 1999 - 2009
Alternative minimum tax net operating losses 395.2 2003 - 2009
Investment tax credits 1.8 1999
Alternative minimum tax credits 1.2 No expiration
Other general business credits 1.3 1998 - 2008
Foreign tax credits .5 1996 - 1999
</TABLE>
The Company is included in the consolidated federal income tax return
of GM due to its ownership exceeding an 80% interest. The tax loss
and credit carryforwards listed above are presented for the Company on
a stand-alone basis. The above carryforwards have not been reduced
for amounts utilized by GM, if any, through inclusion of the Company
in GM's consolidated tax return. As of May 31, 1995, no intercompany
tax balances exist between the Company and GM.
Under the terms of the 1986 purchase of the Company from Household
International, Inc., future tax return benefits from investment tax
credit, alternative minimum tax credit, general business tax credit,
and the tax effect of net operating loss carryforwards existing at May
31, 1995, which totaled $3.3 million, must be remitted to Household
International, Inc. when realized.
9. CONVERTIBLE PREFERRED STOCK
The 100,000 shares of convertible preferred stock were issued to GM in
1989 for $25.0 million and may be converted, at GM's option, into
122,449 shares of nonvoting common stock. The convertible preferred
stock does not require any dividends but is entitled to share equally,
share for share, in dividends or distributions declared or paid on
outstanding shares of common stock (voting or nonvoting). Upon any
liquidation, dissolution, or winding-up of the Company, the holders of
the convertible preferred stock are entitled to receive, prior to
distributions to the holders of any voting or nonvoting common stock,
an amount equal to $250 per share plus any unpaid dividends.
10. LEASES
The Company leases service vehicles and administrative facilities,
some of which provide for payment of a percentage of revenue with a
guaranteed minimum for periods generally ranging up to 20 years with
various renewal options. Gross rent expense was as follows for the
five-month period ended May 31, 1995 and for the years ended December
31, 1994 and 1993 (millions of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Rental, service, and administrative facilities:
Minimum rentals $21.5 $52.8 $52.8
Contingent rentals (based on revenues in excess
of minimums) 18.6 35.8 30.2
Service vehicles 1.4 5.3
----- ----- -----
$40.1 $90.0 $88.3
===== ===== =====
</TABLE>
F-80
<PAGE> 81
Future minimum lease payments, net of an aggregate of $10.9 million of
sublease income over the period presented, under noncancelable
operating leases and agreements referred to above for the period from
June 1, 1995 to May 31, 1996 (fiscal year 1996) and thereafter are as
follows (millions of dollars):
<TABLE>
<S> <C>
Fiscal year 1996 $37.8
Fiscal year 1997 28.7
Fiscal year 1998 22.0
Fiscal year 1999 14.5
Fiscal year 2000 7.7
Thereafter 31.8
</TABLE>
Subsequent to May 31, 1995, upon the close of the Agreement, NCR
Acquisition Corp. assumed the obligation for such leases, excluding
certain leases associated with abandoned locations for which the
Company had accrued reserves as of May 31, 1995 (see Note 2).
11. EMPLOYEE BENEFIT PLANS
The Company sponsors two defined benefit pension plans and a defined
contribution plan covering certain hourly and salaried employees. The
Company also contributes to union-administered, multiemployer pension
plans for certain employees covered under collective bargaining
agreements. The Company's contributions to the defined contribution
plan were $0.2 million and $0.5 million for the five-month period
ended May 31, 1995 and the year ended December 31, 1994, respectively.
The Company made no contributions to the defined contribution plan in
1993. Multiemployer pension plan expense was $0.2 million, $0.5
million, and $0.4 million for the five-month period ended May 31, 1995
and for the years ended December 31, 1994 and 1993, respectively.
As of December 31, 1990, by amendment of the plans, the Company
suspended the earning of additional benefits for the two defined
benefit pension plans. Employees covered by the defined benefit
pension plans as of December 31, 1990 are vested in benefits earned
through December 31, 1990. Net pension cost for the defined benefit
pension plans for the five-month period ended May 31, 1995 and the
years ended December 31, 1994 and 1993 was as follows (millions of
dollars):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Service cost - benefits earned $0.0 $0.1 $0.1
Interest cost on projected benefit obligation 0.9 2.1 2.0
Actual return on asset (1.5) (0.3) (2.7)
Net amortization and deferral 0.6 (1.3) 0.7
---- ---- ----
Adjusted net pension cost $ - $0.6 $0.1
==== ==== ====
</TABLE>
F-81
<PAGE> 82
The funded status of defined benefit pension plans was as follows at
May 31, 1995 and December 31, 1994 (millions of dollars):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Actuarial present value of:
Vested benefits obligation $31.3 $25.0
Nonvested benefits obligation 0.2 0.2
----- -----
Projected benefit obligation 31.5 25.2
Plan assets at fair value 26.1 25.5
----- -----
Plan assets at fair value (less than) in excess of
projected benefit obligation (5.4) 0.3
Unrecognized net loss 9.9 4.2
----- -----
Prepaid pension cost 4.5 4.5
Adjustment to recognize minimum liability (9.9)
----- -----
Net pension (liability)/prepaid pension cost $(5.4) $ 4.5
===== =====
</TABLE>
Assets held by the defined benefit pension plans consist of cash
investments, common and preferred stocks, and bonds. The projected
benefit obligation was determined using the following assumptions at
May 31, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Average discount rate 7.50% 8.75%
Long-term rate of return on plan assets 9.25 9.25
</TABLE>
Pursuant to the Agreement, subsequent to May 31, 1995, NCR Acquisition
Corp. did not assume any responsibility for the two defined benefit
pension plans but did assume the Company's obligations with respect to
the defined contribution and multiemployer pension plans. There were
no amounts accrued with respect to the multiemployer plans at May 31,
1995.
12. POSTRETIREMENT BENEFITS
The Company provides postretirement health care and other benefits to
certain employees. Eligible participants include employees who retire
from the Company between ages 55 and 61 with 10 or more years of
service (or who at age 62 or over have 5 or more years of service) and
who are eligible to receive, and elect to receive, pension benefits
from a National Car Rental System, Inc. Employees Pension Plan
immediately following separation from active service.
The components of net periodic postretirement benefit cost are as
follows for the five-month period ended May 31, 1995 and for the years
ended December 31, 1994 and 1993 (millions of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Service cost of benefits earned during the period $0.3 $1.3 $1.7
Interest cost on accumulated postretirement
benefit obligation 0.6 1.7 1.8
Net amortization and deferral (0.3)
---- ---- ----
$0.6 $3.0 $3.5
==== ==== ====
</TABLE>
F-82
<PAGE> 83
The amounts recognized in the Company's consolidated balance sheets
are as follows at May 31, 1995 and December 31, 1994 (millions of
dollars):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 6.3 $ 5.1
Fully eligible active plan participants 4.4 3.9
Other active plan participants 10.4 7.5
----- -----
Projected benefit obligation 21.1 16.5
Unrecognized net gain 9.8 13.9
----- -----
Accrued benefit costs $30.9 $30.4
===== =====
</TABLE>
Total accrued benefit costs represent an unfunded liability, as the
Company has not funded the projected liability. The changes in the
unrecognized net gain in 1994 and 1995 are principally due to changes
in the discount rate.
The postretirement benefit obligation was determined using the
following assumptions:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Average discount rate 7.50% 8.75%
Medical cost trend rates:
Medical plan 9.2% grading to 6% 9.4% grading to 6%
ultimate over 7 years ultimate over 7 years
Dental plan 7.6% grading to 6% 7.7% grading to 6%
ultimate over 7 years ultimate over 7 years
</TABLE>
The medical cost trend rate assumption has a significant effect on the
above amounts reported. To illustrate, increasing the assumed medical
cost trend rates by 1 percentage point in each year would increase the
accumulated postretirement benefit obligation as of May 31, 1995 by
$4.1 million and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for the
five-month period ended May 31, 1995 by $0.2 million.
In connection with the sale discussed in Note 1, GM paid NCR
Acquisition Corp. $10.5 million, which represented 80% of the
accumulated postretirement benefit obligation as of May 31, 1995. In
the event that actual future expenditures for accumulated
postretirement benefits as of May 31, 1995 actually exceed this
amount, GM will reimburse NCR Acquisition Corp. 80% of such excess.
13. COMMITMENTS
The Company has a $32.4 million letter of credit facility for a
portion of the Company's public liability and property damage
self-insurance reserve maintained with Barclay's Bank that was fully
utilized as of May 31, 1995. Fees of .40% to 1.00% per annum are
payable on any outstanding letters of credit. The letters of credit
are guaranteed by GM.
The Company has $31.4 million of performance, guarantee, and dealer
bonds relative to operations at various facilities. The bonds are
guaranteed by GM.
F-83
<PAGE> 84
In February 1995, the Company established a new severance plan for
certain exempt employees. A severance plan remains in effect for
substantially all employees not covered under this new severance plan.
There were no amounts due under any severance plan at May 31, 1995.
14. RELATED-PARTY TRANSACTIONS AND BALANCES
In addition to the transactions and balances with GM, GMAC, and EDS
discussed in Notes 1, 2, 6, 7, and 9, the Company had the following
transactions with GM, GMAC, and EDS for the five-month period ended
May 31, 1995 and each of the two years ended December 31, 1994
(millions of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Vehicle purchases from GM (net of
manufacturer incentives) $770.4 $1,566.2 $1,528.1
Vehicle sales to GM 357.4 1,025.3 1,346.2
Vehicle notes payable to GMAC:
Borrowings 877.9 1,701.8 1,613.0
Principal payments 562.2 1,504.8 1,571.9
Interest expense to GMAC 42.0 66.9 77.0
Interest income from GMAC 5.1 8.5 4.1
Interest expense to GM 36.7
Interest expense to EDS 1.5 2.8
Car rental revenues from GM and subsidiaries 9.3 17.3 13.3
Service costs paid to EDS 17.3 43.8 53.3
</TABLE>
<TABLE>
<CAPTION>
May 31, December 31,
1995 1994
<S> <C> <C>
Balances with GM, GMAC, and EDS included:
Cash equivalents invested with GMAC $187.8 $129.6
Receivables from GM for vehicle disposals 12.0 74.8
Receivables from GM for vehicle incentives 8.6 9.6
Interest payable to GMAC 12.8 8.9
Note payable to EDS 34.5 37.0
</TABLE>
Certain members of management and the Board of Directors were
associated with a consulting firm that rendered services to the
Company. For the five-month period ended May 31, 1995 and for each of
the years ended December 31, 1994 and 1993, the Company had consulting
expenses of $0.7 million, $10.4 million, and $6.7 million,
respectively. At May 31, 1995 and December 31, 1994, the Company had
accounts payable to the consulting firm of $3.8 million and $4.5
million, respectively. Also, the Company paid $6.4 million of
transaction fees to the consulting firm in connection with the
subsequent sale of assets discussed in Note 1.
15. LITIGATION
The Company is a party to certain actions brought by Northwest
Airlines and other parties alleging that it is at least partially
responsible for the liability resulting from the Northwest Airlines
crash
F-84
<PAGE> 85
at the Detroit Metro Airport on August 16, 1987. The actions allege
that the crash was at least partially due to the plane hitting a
lightpole at the Company's service facility. While the ultimate
result of these actions cannot be predicted with certainty, management
does not expect that the actions will have a material adverse effect
on the operations or financial position of the Company.
Other litigation arising in the normal course of business is pending
against the Company. Management believes that the ultimate outcome of
the lawsuits will not have a material effect on the Company's
operations or financial position. Also, in connection with the sale
discussed in Note 1, the Company is responsible for any litigation,
defense, or settlement costs for any actions of the Company prior to
June 1, 1995.
16. SUPPLEMENTAL CASH FLOW INFORMATION
The Company made the following cash payments for interest and income
taxes for the five-month period ended May 31, 1995 and the years ended
December 31, 1994 and 1993 (millions of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Interest $40.1 $68.6 $64.3
Income taxes 0.8 0.1
</TABLE>
Noncash Transactions - In 1993, the Company changed its process for
financing vehicle purchases and for the payoff of the related vehicle
debt upon sale. Beginning in 1993, the proceeds from debt issued for
vehicles purchased under the GMAC vehicle financing agreement
discussed in Note 6 were no longer received by the Company; rather,
they were paid directly by GMAC to the related dealer from which the
vehicle was purchased. Furthermore, beginning in 1993 proceeds from
the sale of vehicles under the vehicle repurchase programs with the
manufacturers were no longer received by the Company; rather, they
were paid directly to GMAC to pay off the remaining debt due on the
related vehicle. The noncash effects of the above transactions
excluded from the cash flow statement are as follows (millions of
dollars):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Revenue-earning asset purchases financed by revenue-
earning asset obligations issued $877.9 $1,701.8 $1,642.6
Revenue-earning asset obligation payments made to
GMAC for revenue-earning assets sold 355.2 1,055.1 1,333.5
</TABLE>
As discussed in Note 1, GM converted $850.4 million of senior and
subordinated debt and accrued interest to equity in 1993. The effects
of this noncash transaction have been excluded from the statement of
cash flows as follows (millions of dollars):
<TABLE>
<CAPTION>
1993
<S> <C>
Senior debt converted to equity $ 496.4
Subordinated debt converted to equity 326.9
Accrued interest payable converted to equity 27.1
-------
Noncash increase in shareholder's equity $ 850.4
=======
</TABLE>
F-85
<PAGE> 86
The Company bought all of the remaining shares of common stock from
certain members of management in exchange for cancellation of $8.1
million of shareholder notes receivable and payment of $4.5 million in
cash in 1993. The $8.1 million noncash portion of the change in equity
for the purchase of treasury stock in exchange for the shareholders'
notes receivable has been excluded from the cash flow statement.
17. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of financial instruments:
Cash and Cash Equivalents - The carrying amount of cash and cash
equivalents approximates fair value because of the short maturity of
these financial instruments.
Revenue-Earning Asset Obligations - The carrying amount approximates
fair value because interest rates are variable and, accordingly,
approximate current market rates.
Note Payable - The carrying amount of this note approximates fair
value due to the floating, market-based rate of interest.
F-86
<PAGE> 87
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Ed Mullinax, Inc. and Subsidiaries
Amherst, Ohio
We have audited the accompanying consolidated balance sheets of Ed Mullinax,
Inc. and Subsidiaries as of April 30, 1996 and 1995 and the related
consolidated statements of earnings and retained earnings and cash flows for
the years then ended. 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 consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
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 Ed Mullinax, Inc.
and Subsidiaries as of April 30, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
DIXON, ODOM & Co., L.L.P.
Greensboro, North Carolina,
July 31, 1996
F-87
<PAGE> 88
ED MULLINAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, April 30, April 30,
ASSETS 1996 1996 1995
------ ------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 3,752,256 $ 3,295,683 $ 4,400,560
Receivables:
Trade 1,064,066 2,753,261 2,393,184
Finance contracts in-transit 12,392,330 8,165,069 8,825,271
Due from finance companies 480,366 442,037 352,087
Factory claims 1,929,098 1,314,798 1,643,739
Employees and officers 106,012 69,513 71,299
Affiliated companies 569,311 569,311 674,344
------------- ------------ ------------
16,541,183 13,313,989 13,959,924
Advance to affiliate company 1,250,000 500,000 -
Inventories:
New vehicles 61,162,749 59,974,389 73,159,770
Used vehicles 17,701,510 14,568,577 14,531,177
Rental vehicles, net 3,047,465 3,994,579 3,339,220
Parts and accessories 2,979,050 3,000,004 2,779,767
------------- ------------ ------------
84,890,774 81,537,549 93,809,934
Prepaid expenses 1,052,460 1,298,722 1,147,778
Deferred income taxes 152,198 151,198 94,837
------------- ------------ ------------
TOTAL CURRENT ASSETS 107,638,871 100,097,141 113,413,033
PROPERTY AND EQUIPMENT 15,120,363 14,926,694 11,244,974
DEFERRED INCOME TAXES 157,056 157,056 111,898
INTANGIBLES AND OTHER
ASSETS 14,500 14,500 14,500
------------- ------------ ------------
$ 122,930,790 $115,195,391 $124,784,405
============= ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-88
<PAGE> 89
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS'
---------------------------- October 31, April 30, April 30,
EQUITY 1996 1996 1995
------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Notes payable - floorplan $ 79,318,704 $ 76,391,845 $ 90,741,731
Notes payable - demand - 497,745 798,376
Accounts payable and accrued expenses:
Trade 2,967,512 1,664,413 2,588,396
Accrued salaries and wages 971,749 867,722 834,517
Taxes, other than income 203,751 753,648 984,663
Accrued interest 4,770 735,524 785,328
Other accrued liabilities 2,642,398 1,028,904 1,190,332
Affiliated companies 175,000 175,000 175,000
------------- ------------ ------------
6,965,180 5,225,211 6,558,236
Current portion of capital lease
obligations 151,900 151,900 127,536
Current portion of long-term debt 873,459 873,459 6,194,137
------------- ------------ ------------
TOTAL CURRENT LIABILITIES 87,309,243 83,140,160 104,420,016
CAPITAL LEASE OBLIGATIONS 341,838 416,838 523,024
LONG-TERM DEBT 9,709,432 10,146,162 1,920,671
NOTES PAYABLE - OFFICERS 2,699,949 2,599,383 2,665,516
STOCKHOLDERS' EQUITY:
Common stock, $10 par value; 4,000
shares authorized and issued,
3,240 shares outstanding 40,000 40,000 40,000
Additional paid-in capital 143,476 143,476 143,476
Retained earnings 22,695,900 18,718,420 15,080,750
------------- ------------ ------------
22,879,376 18,901,896 15,264,226
Less treasury stock - 760 shares,
at cost (9,048) (9,048) (9,048)
------------- ------------ ------------
22,870,328 18,892,848 15,255,178
------------- ------------ ------------
$ 122,930,790 $115,195,391 $124,784,405
============= ============ ============
</TABLE>
F-89
<PAGE> 90
ED MULLINAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Six Month Six Month
Period Ended Period Ended Year Ended Year Ended
October 31, October 31, April 30, April 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Sales $343,059,199 $313,555,921 $606,008,095 $534,217,653
Other income (principally financing,
warranty, and insurance) 5,634,660 5,816,660 11,903,977 9,011,010
------------ ------------ ------------ ------------
348,693,859 319,372,581 617,912,072 543,228,663
COSTS AND EXPENSES:
Cost of sales 313,357,548 286,265,489 553,042,632 484,793,862
Operating expenses 27,522,356 26,421,172 55,135,249 48,263,735
Depreciation and amortization 482,224 472,317 1,045,083 965,946
Interest expense 702,598 1,334,490 2,727,688 2,075,956
------------ ------------ ------------ ------------
342,064,726 314,493,468 611,950,652 536,099,499
------------ ------------ ------------ ------------
EARNINGS BEFORE INCOME
TAXES 6,629,133 4,879,113 5,961,420 7,129,164
PROVISION FOR INCOME TAXES 2,651,653 1,951,645 2,323,750 2,968,763
------------ ------------ ------------ ------------
NET EARNINGS 3,977,480 2,927,468 3,637,670 4,160,401
RETAINED EARNINGS, BEGINNING
OF PERIOD 18,718,420 15,080,750 15,080,750 10,920,349
------------ ------------ ------------ ------------
RETAINED EARNINGS, END
OF PERIOD $ 22,695,900 $ 18,008,218 $ 18,718,420 $ 15,080,750
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-90
<PAGE> 91
ED MULLINAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Month Six Month
Period Ended Period Ended Year Ended Year Ended
October 31, October 31, April 30, April 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings $ 3,977,480 $ 2,927,468 $ 3,637,670 $ 4,160,401
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation 482,224 - 1,045,083 965,946
Amortization of organizational costs - 472,317 - 18,005
(Increase) decrease in deferred
income taxes (1,000) - (101,519) 1,063,103
Changes in assets and liabilities
that relate to operations:
(Increase) decrease in receivables (3,227,194) (1,847,768) 645,935 (1,464,298)
(Increase) decrease in inventories (3,353,225) 14,534,840 12,272,385 (42,506,910)
(Increase) decrease in prepaid
expenses 246,262 22,539 (150,944) 281,439
Increase (decrease) in notes
payable - floorplan 2,926,859 (18,597,755) (14,349,886) 41,558,176
Increase (decrease) in notes
payable - demand (497,745) - (300,631) 85,575
Decrease in accounts payable
and accrued expenses 1,739,969 92,740 (1,333,025) (2,562,362)
------------ ------------ ------------ ------------
Total adjustments (1,683,850) (5,323,087) (2,272,602) (2,561,326)
------------ ------------ ------------ ------------
Net cash (used) provided by
operating activities 2,293,630 (2,395,619) 1,365,068 1,599,075
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from long-term debt - - 3,911,137 1,455,434
Payments on long-term debt (436,730) (344,137) (1,006,324) (1,079,163)
Proceeds from (payments on) notes
payable - officers 100,566 (104,536) (66,133) (182,919)
Payments on capital lease obligations (75,000) (47,560) (134,170) (166,261)
------------ ------------ ------------ ------------
Net cash (used) provided by
financing activities (411,164) (496,233) 2,704,510 27,091
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to property and equipment (675,893) (315,414) (4,777,643) (2,424,472)
Proceeds from the sale of property
and equipment - - 103,188 172,203
Advance to affiliate company (750,000) - (500,000) -
Increase in other assets - - - (3,000)
------------ ------------ ------------ ------------
Net cash used by investing activities (1,425,893) (315,414) (5,174,455) (2,255,269)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 456,573 (3,207,266) (1,104,877) (629,103)
CASH, BEGINNING OF PERIOD 3,295,683 4,400,560 4,400,560 5,029,663
------------ ------------ ------------ ------------
CASH, END OF PERIOD $ 3,752,256 $ 1,193,294 $ 3,295,683 $ 4,400,560
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-91
<PAGE> 92
ED MULLINAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Six Month Six Month
Period Ended Period Ended Year Ended Year Ended
October 31, October 31, April 30, April 30,
SUPPLEMENTAL DISCLOSURES OF 1996 1995 1996 1995
CASH FLOW INFORMATION:
------------ ----------- ----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash paid during the year for:
Interest $ 1,433,352 $ 2,114,256 $ 2,777,492 $ 1,626,045
Income taxes 1,387,000 1,170,000 2,443,915 1,353,762
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the years ended April 30, 1996 and 1995, the Company incurred capital
lease obligations of $52,348 and $528,606, respectively, for equipment
purchased.
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES:
The consolidated balance sheet at April 30, 1996 gives effect to short-term
debt refinanced on a long-term basis in May 1996: accordingly, $5,200,004 has
been reclassified to long-term debt at April 30, 1996.
F-92
<PAGE> 93
ED MULLINAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The operations of Ed Mullinax, Inc. and subsidiaries (the Company) consist
primarily of the sales of new and used cars and trucks, parts, and service.
The Company grants credit on a short-term basis primarily for parts and service
sales. In addition, the Company places finance and insurance contracts on
behalf of certain financial institutions and insurance companies and leases
vehicles. The Company operates Ford and Lincoln-Mercury franchises in the area
of Cleveland and North Canton, Ohio and a Ford franchise in Margate, Florida.
Concentrations of credit risk with respect to trade receivables are limited due
to the Company's large number of customers. A summary of the significant
accounting policies employed in accounting for these operations is presented
below.
Principles of consolidation
The financial statements include the accounts of the parent Ed Mullinax, Inc.
and its wholly-owned subsidiaries: Ed Mullinax Ford, Inc., EMX Leasing, Inc.,
Mullinax East, Inc., Mullinax Ford South, Inc., Mullinax Ford North Canton,
Inc., and Mullinax Lincoln-Mercury, Inc. All significant intercompany
transactions and account balances have been eliminated from the consolidated
financial statements.
Interim financial statements
In the opinion of management, the unaudited consolidated financial statements
contain all material adjustments, consisting of only normal recurring
adjustments, necessary to present fairly the consolidated financial position of
the Company at October 31, 1996 and the consolidated results of its operations
and cash flows for the six months ended October 31, 1996 and 1995. Operating
results for these interim periods are not necessarily indicative of the results
that can be expected for a full year.
Cash
The Company maintains checking accounts with high quality financial
institutions. At times such cash accounts may be in excess of FDIC insurance
limits.
Inventories
Inventories of new vehicles are valued at the lower of last-in, first-out
(LIFO) cost or market. Inventories of parts and accessories are valued at the
lower of first-in, first-out (FIFO) cost or market and inventories of used and
rental vehicles are stated at the lower of specific identified cost or market.
Property and equipment
Property and equipment are stated at cost. Depreciation on buildings,
machinery and equipment (including assets utilized under capital lease
agreements), furniture and fixtures, and company vehicles is computed
principally on a straight line basis over the estimated useful lives of the
assets. Amortization of leasehold improvements is computed principally on a
straight line basis over the estimated useful lives of the improvements but not
in excess of the remaining term of the lease.
F-93
<PAGE> 94
ED MULLINAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Finance and insurance commissions
The recognition of finance and insurance commission revenue is governed by the
type of agreement that the Company has with each financial or insurance
institution. Based upon the types of agreements currently in effect, finance
and insurance commission revenue is recognized principally at the time the
contract is placed with the financial or insurance institution. The contracts
generally specify that a portion of the commission is refundable if there is an
early payoff on the contract. No liability for such potential refund is
recorded on the books because the effect on the financial position and results
of operations is not deemed material.
Employee benefit plan
The Company has a defined contribution plan organized under section 401(k) of
the Internal Revenue Code in which all full-time employees who are at least 21
years of age and have one year of service may participate. The Company matches
25% of the employee's contribution, up to 4% of the employee's earnings,
subject to tax law ceilings. Contributions to the plan amounted to $141,753
and $115,557 for the years ended April 30, 1996 and 1995, respectively.
Income taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to accelerated depreciation utilized for income tax purposes,
the capitalization of additional inventory costs for income tax purposes, the
capitalization and amortization of insurance costs related to extended
warranties for income tax purposes, the classification of certain equipment
leases as capital leases for financial reporting purposes and operating leases
for income tax purposes, and the deductibility of accrued management fees on a
cash basis for income tax purposes. In addition, deferred taxes are recognized
for operating losses that are available to offset future taxable income. The
deferred tax assets and liabilities represent the future tax return
consequences of these differences, which will either be taxable or deductible
when the assets and liabilities are recovered or settled.
Use of estimates
The process of preparing 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 the
disclosures 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 these estimates.
F-94
<PAGE> 95
ED MULLINAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Fair value of financial instruments
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the consolidated
balance sheet. The fair value of financial instruments is defined as the
amount at which the instruments can be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale. The
following methods and assumptions were used to estimate the fair value of each
class of financial instrument.
ADVANCES TO AFFILIATE COMPANY: The estimated fair value is based on the
effective interest rate discounted over the maturity of the advance.
LONG-TERM DEBT, NOTES PAYABLE - FLOORPLAN, AND NOTES PAYABLE - DEMAND: The
estimated fair value is estimated based on the borrowing rates currently
available to the Company for loans with similar terms and average maturities.
Since the notes payable - officers have no stated maturity dates, it is not
practical to estimate the fair value of such financial instruments.
NOTE B - INVENTORIES AND RELATED NOTES PAYABLE - FLOORPLAN:
The excess of current replacement cost over the stated LIFO value of the new
vehicles at April 30, 1996 and 1995, is $11,542,357 and $9,286,867,
respectively.
During the year ended April 30, 1996, new vehicle inventory quantities were
reduced, resulting in a liquidation of LIFO inventory quantities carried at
lower costs prevailing in prior years as compared with the cost of 1996
purchases. The effect of this liquidation was to reduce cost of sales and
increase pretax earnings by approximately $586,223.
At April 30, 1996 and 1995, notes payable - floorplan of $72,895,012 and
$88,096,887, respectively, represents amounts due under floorplan agreements on
new and used vehicle inventories. The notes are collateralized by all new
vehicle inventories and certain used vehicle inventories with a carrying value
of $2,336,477 and $1,745,999 at April 30, 1996 and 1995, respectively.
Interest is payable monthly on the outstanding balance at the prime rate (8.25%
at April 30, 1996). However, the effective interest rate is reduced,
attributable to floorplan assistance received from the manufacturer. Total
floorplan interest expense amounted to $8,066,569 and $6,977,803 for the years
ended April 30, 1996 and 1995, respectively, and floorplan assistance received
amounted to $6,591,381 and $5,905,620, respectively. The floorplan interest
assistance received is reported as a reduction of interest expense in the
consolidated statements of earnings.
Rental units are financed by the issuance of installment notes amounting to
$3,496,833 and $2,644,844 at April 30, 1996 and 1995, respectively, with terms
generally no greater than 12 months. Interest is paid monthly at the prime
rate. These installment notes are collateralized by the rental vehicles.
F-96
<PAGE> 96
ED MULLINAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1996 and 1995
NOTE B - INVENTORIES AND RELATED NOTES PAYABLE - FLOORPLAN (CONTINUED):
EMX Leasing, Inc. rents vehicles with a carrying value of $497,745 and $694,376
at April 30, 1996 and 1995, respectively, to the Cleveland Browns on a
month-to-month basis. These vehicles serve as collateral for a demand note
payable to a bank of $497,745 and $798,376 at April 30, 1996 and 1995,
respectively, with interest payable monthly at the prime rate plus 3/4 percent.
Total rental income received for these rental vehicles amounted to $189,019
and $152,085 for the years ended April 30, 1996 and 1995, respectively.
NOTE C - PROPERTY AND EQUIPMENT:
A summary of property and equipment is presented below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $ 2,097,205 $ 2,097,207
Buildings and leasehold improvements 8,531,306 8,344,680
Parts and service equipment 3,157,130 2,894,391
Office equipment, furniture and fixtures 3,038,594 2,877,940
Leased vehicles 32,821 79,479
Company vehicles 327,617 271,587
Construction in progress 4,050,591 -
------------ ------------
21,235,264 16,565,284
Less accumulated depreciation and amortization (6,308,570) (5,320,310)
------------ ------------
$ 14,926,694 $ 11,244,974
============ ============
</TABLE>
Included in the above amounts are assets utilized under capital lease
agreements with a cost basis of $758,996 and $706,648 and accumulated
depreciation of $222,084 and $130,942 at April 30, 1996 and 1995, respectively.
<PAGE> 97
ED MULLINAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1996 and 1995
NOTE D - LONG-TERM DEBT:
A summary of long-term debt is presented below:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Mortgage note of $5,200,004 which ballooned in July 1995
and a $3,850,000 unsecured loan which were both refinanced
in May 1996 as a $8,910,000 mortgage note payable to
bank in monthly principal payments of $37,125, plus
interest at 1/4% below the prime rate, through May 2006
with a balloon payment of $4,455,000 due June 2006,
collateralized by the first deed of trust and all
tangible assets of Mullinax Ford South, Inc and the
personal guarantee of the stockholders of the parent
company. $ 9,050,004 $ 5,450,004
Note payable to Ford Motor Credit Corporation in monthly
installments of principal and interest based on an
180 month amortization and a floating interest rate
(8.29% at April 30, 1996), with a balloon payment due
May 2001, collateralized by first deed of trust on
the used car showroom and premises of Mullinax Ford
South, Inc. and the personal guarantee of three
minority stockholders of Ed Mullinax, Inc. 1,365,099 1,415,736
Note payable to bank in monthly installments of $16,667,
plus interest at the prime rate plus 1/2%, through
January 1997, collateralized by accounts receivable,
inventories, and equipment and fixtures of
Mullinax East, Inc. 150,003 350,003
Note payable to bank in monthly installments of $12,500,
plus interest at the prime rate plus 1/2%, through
June 1997, collateralized by accounts receivable,
inventories, and equipment and fixtures of Mullinax
Ford North Canton, Inc. 162,500 312,500
Note payable to bank in monthly installments of
$6,667, plus interest at the prime rate, through
December 1997, collateralized by accounts
receivable, inventories, and equipment and
fixtures of Mullinax Lincoln-Mercury, Inc. 213,333 293,333
</TABLE>
F-97
<PAGE> 98
ED MULLINAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1996 and 1995
<TABLE>
<CAPTION>
NOTE D - LONG-TERM DEBT (CONTINUED):
<S> <C> <C>
Various other notes 78,682 43,232
Notes paid in 1996 - 250,000
----------- ----------
11,019,621 8,114,808
Less current portion 873,459 6,194,137
----------- ----------
$10,146,162 $1,920,671
=========== ==========
</TABLE>
The future maturities of debt are as follows:
<TABLE>
<CAPTION>
Year ending
April 30,
-----------
<S> <C>
1997 $ 873,459
1998 580,216
1999 545,174
2000 495,107
2001 1,515,673
Thereafter 7,009,992
-----------
$11,019,621
===========
</TABLE>
NOTE E - INCOME TAXES:
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Currently payable:
Federal $ 1,964,313 $ 1,384,185
State and Local 460,955 521,475
----------- -----------
2,425,268 1,905,660
Deferred (101,518) 1,063,103
----------- -----------
$ 2,323,750 $ 2,968,763
=========== ===========
</TABLE>
F-98
<PAGE> 99
ED MULLINAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1996 and 1995
NOTE E - INCOME TAXES (CONTINUED):
The gross deferred tax assets and liabilities are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets $ 547,225 $ 420,888
Deferred tax liabilities (238,971) (214,153)
----------- -----------
$ 308,254 $ 206,735
=========== ===========
<CAPTION>
Included in the accompanying consolidated balance sheets under the following
captions:
1996 1995
----------- -----------
<S> <C> <C>
Current deferred tax assets $ 151,198 $ 94,837
Non-current deferred tax assets 157,056 111,898
----------- -----------
$ 308,254 $ 206,735
=========== ===========
</TABLE>
The income tax provision differs from the expense that would result from
applying federal statutory rates to earnings before income taxes due to
nondeductible officers' life insurance, nondeductible business meals, and
deductible state/local income taxes.
NOTE F - LEASE COMMITMENTS:
The Company leases a portion of its equipment subject to agreements which have
been accounted for as capital leases. Generally, these capital leases require
fixed monthly payments over a period of 3 to 7 years.
The Company operates from various facilities under agreements classified as
operating leases. The lease agreements are as follows:
Mullinax East, Inc.
Mullinax East, Inc. operates from facilities leased from a partnership related
by virtue of common ownership. An agreement was entered into in March 1994
requiring monthly rental payments of $42,000 through February 1998. Total
rental expense for the years ended April 30, 1996 and 1995 amounted to $504,000
for both years.
F-99
<PAGE> 100
ED MULLINAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1996 and 1995
NOTE F - LEASE COMMITMENTS (CONTINUED):
Ed Mullinax Ford, Inc.
Ed Mullinax Ford, Inc. operates from facilities leased from the majority
stockholder of the parent company on a month-to-month basis, requiring monthly
rental payments of $37,500. Total rent expense amounted to $450,000 for both
years ended April 30, 1996 and 1995, respectively.
In addition, Ed Mullinax Ford, Inc. leases another building and land on a
month-to-month basis from a partnership related by virtue of common ownership.
Total rent expense amounted to $18,000 and $18,000 for the years ended April
30, 1996 and 1995.
Mullinax Lincoln-Mercury, Inc.
Mullinax Lincoln-Mercury, Inc. operates from facilities leased from a
non-related party. The original lease was rolled into a new lease commencing
June 1995. The new lease requires monthly payments of $12,864 through July
2002, with a renewal option for an additional three years or seven years.
Total rent expense amounted to $152,376 and $130,464 for the years ended April
30, 1996 and 1995, respectively.
Mullinax Ford North Canton, Inc.
Mullinax Ford North Canton, Inc. operates from facilities sub-leased from a
non-related party. The lease requires monthly payments of $20,650 through
September 2002. Total rent expense amounted to $247,800 for both years ended
April 30, 1996 and 1995.
In addition, Mullinax Ford North Canton, Inc. leases a building and land from a
non-related party. The lease requires monthly payments of $6,000 through May
1998. The lease will automatically be renewed for an additional two years
unless the lessor is given written notice by February 28, 1998 that the lease
will terminate in May 1998. Total rent expense amounted to $66,000 for the
year ended April 30, 1996.
F-100
<PAGE> 101
ED MULLINAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1996 and 1995
NOTE F - LEASE COMMITMENTS (CONTINUED):
The future rental commitments under both capital and noncancellable operating
leases are as follows:
<TABLE>
<CAPTION>
Operating Leases
Capital ---------------------------------
Year ending Lease Related Non-related
April 30, Obligations Party Party Total
----------- ----------- ------- ----------- ---------
<S> <C> <C> <C> <C>
1997 $ 191,494 $ 504,000 $ 474,168 $ 978,168
1998 189,495 420,000 474,168 894,168
1999 178,270 - 408,168 408,168
2000 92,119 - 402,168 402,168
2001 - - 402,168 402,168
Thereafter - - 544,010 544,010
----------- --------- ----------- ----------
Total minimum lease payments 651,378 $ 924,000 $ 2,704,850 $3,628,850
========= =========== ==========
Less amounts representing interest 82,640
-----------
Capital lease obligation 568,738
Current portion 151,900
-----------
$ 416,838
===========
</TABLE>
NOTE G - RELATED PARTY TRANSACTIONS:
Certain subsidiaries pay management fees to Mullinax Management, Inc., a
company related by virtue of common ownership. A summary of management fees is
as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Ed Mullinax Ford, Inc. $ 1,427,750 $ 475,150
Mullinax East, Inc. 950,700 296,688
Mullinax Ford South, Inc. 1,749,189 651,621
Mullinax Ford North Canton, Inc. 268,500 174,343
Mullinax Lincoln-Mercury, Inc. 186,500 179,567
----------- ----------
$ 4,582,639 $1,777,369
=========== ==========
</TABLE>
Notes payable - officers have been classified as non-current since the
companies do not intend to repay the funds within one year. Interest is
accrued annually at the prime rate (8.25% at April 30, 1996).
F-101
<PAGE> 102
ED MULLINAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1996 and 1995
NOTE H - FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair value of advance to affiliate company, notes payable -
floorplan, notes payable - demand, and long-term debt approximate the carrying
value at April 30, 1996 and 1995.
F-102
<PAGE> 103
Report of Independent Auditors
The Board of Directors and Members
Grubb Automotive, Inc.
Jack Sherman Chevrolet, Inc.
Lou Grubb Chevrolet, Inc.
Lou Grubb Ford, Inc.
Lou Grubb Saturn, Inc.
Saturn of Tempe, Inc.
We have audited the accompanying combined balance sheet of the corporations
listed in Note 1 (the Company) as of December 31, 1995 and the related combined
statements of income, shareholders' 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 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, assessing
the accounting principles used and significant estimates made by management,
and 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 combined financial position of the
corporations listed in Note 1 at December 31, 1995, and the combined results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
October 31, 1996
Phoenix, Arizona
F-103
<PAGE> 104
Grubb Automotive
Combined Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
---------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,471 $ 8,012
Receivables, net 11,817 11,432
Due from shareholders 654 -
Inventories 45,255 37,997
Advances to affiliates 200 -
Other current assets 152 192
----------------------
Total current assets 65,549 57,633
Land, buildings, equipment, and rental and lease vehicles, net 11,584 11,672
Land held for development 1,755 2,147
Cash surrender value of officers' life insurance, less policy
loans of approximately $240 at December 31, 1995 and
September 30, 1996 550 598
Other assets 103 288
----------------------
$79,541 $72,338
======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $51,306 $39,672
Accounts payable 2,444 2,803
Accrued expenses 4,020 4,309
Notes payable to shareholders due within one year 3,250 3,650
Long-term debt due within one year 370 294
----------------------
Total current liabilities 61,390 50,728
Deferred compensation 550 590
Notes payable to shareholders due after one year 2,575 2,575
Long-term debt due after one year 4,127 3,979
Shareholders' equity:
Common stock 3,025 3,025
Additional paid-in capital 646 646
Retained earnings 8,528 12,095
Less treasury stock, at cost (1,300) (1,300)
----------------------
Total shareholders' equity 10,899 14,466
----------------------
$79,541 $72,338
======================
</TABLE>
See accompanying notes.
F-104
<PAGE> 105
Grubb Automotive
Combined Statements of Income
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1995 1996
--------------------------------
(Unaudited)
<S> <C> <C> <C>
REVENUES
Vehicle sales $339,087 $252,861 $289,970
Parts and service sales 51,084 36,479 43,426
Finance fees and insurance commissions 5,176 2,691 3,391
Other revenue 2,463 1,226 1,356
------------------------------
397,810 293,257 338,143
COSTS AND EXPENSES
Vehicles cost of sales 317,448 235,950 268,730
Parts and service cost of sales 32,988 23,102 27,774
Selling, general and administrative expenses 40,744 28,408 32,332
Depreciation and amortization 1,451 758 902
------------------------------
392,631 288,218 329,738
OTHER INCOME (EXPENSE)
Interest income 2,784 2,324 1,536
Interest expense (4,704) (3,686) (3,220)
------------------------------
(1,920) (1,362) (1,684)
------------------------------
Net income $ 3,259 $ 3,677 $ 6,721
==============================
</TABLE>
See accompanying notes.
F-105
<PAGE> 106
Grubb Automotive
Combined Statements of Shareholders' Equity
(In thousands)
<TABLE>
<CAPTION>
GRUBB JACK SHERMAN LOU GRUBB
AUTOMOTIVE, INC. CHEVROLET, INC. CHEVROLET, INC.
------------------- -------------------------------------- -----------------
ADDITIONAL
COMMON RETAINED COMMON PAID-IN RETAINED TREASURY COMMON RETAINED
STOCK EARNINGS STOCK CAPITAL EARNINGS STOCK STOCK EARNINGS
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1994 $11 $(1) $1 $403 $ 2,229 $(1,300) $463 $3,949
Net income (loss) - (8) - - 395 - - 84
Shareholder distributions - - - - (1,079) - - -
-------------------------------------------------------------------------------
Balances at December 31,
1995 11 (9) 1 403 1,545 (1,300) 463 4,033
Net income (unaudited) - - - - 799 - - 2,097
Shareholder
distributions
(unaudited) - - - - (659) - - (824)
-------------------------------------------------------------------------------
Balances at September
30, 1996 (unaudited) $11 $(9) $1 $403 $ 1,685 $(1,300) $463 $5,306
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
LOU GRUBB LOU GRUBB SATURN OF
FORD, INC. SATURN, INC. TEMPE, INC.
--------------------------- ----------------------------------------
ADITIONAL
COMMON PAID-IN RETAINED COMMON RETAINED COMMON RETAINED
STOCK CAPITAL EARNINGS STOCK EARNINGS STOCK EARNINGS TOTAL
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1994 $750 $243 $ 95 $800 $ 706 $1,000 $ 741 $10,090
Net income (loss) - - 959 - 602 - 1,227 3,259
Shareholder distributions - - (645) - (246) - (480) (2,450)
------------------------------------------------------------------------------
Balances at December 31,
1995 750 243 409 800 1,062 1,000 1,488 10,899
Net income (unaudited) - - 1,449 - 874 - 1,502 6,721
Shareholder
distributions
(unaudited) - - (435) - (467) - (769) (3,154)
------------------------------------------------------------------------------
Balances at September
30, 1996 (unaudited) $750 $243 $1,423 $800 $1,469 $1,000 $2,221 $14,466
==============================================================================
</TABLE>
See accompanying notes.
F-106
<PAGE> 107
Grubb Automotive
Combined Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
1995 1995 1996
----------------------------------
(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,259 $ 3,677 $ 6,721
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,451 758 902
Provision for doubtful accounts - - 82
Provision for chargeback allowances 1,704 1,278 1,435
Loss on sale of assets 3 - -
Increase in cash surrender value of officers' life
insurance (47) (47) (48)
Changes in operating assets and liabilities:
Receivables (3,570) (4,939) (1,132)
Inventories (7,703) 5,533 7,258
Other current assets 8 (255) (40)
Other assets 12 (209) (185)
Accounts payable 753 1,577 359
Accrued expenses 583 53 289
Deferred compensation 50 40 40
-------------------------------
Net cash provided by (used in) operating activities (3,497) 7,466 15,681
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of land, buildings, equipment, and rental
and lease vehicles (1,280) (441) (990)
Purchase of land held for development (875) - (392)
Proceeds from disposal of land, buildings,
equipment, and rental and lease vehicles 222 - -
Decrease (increase) in advances to affiliates (200) - 200
-------------------------------
Net cash used in investing activities (2,133) (441) (1,182)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (payments on) short-term
borrowings 12,530 254 (11,634)
Repayment of long-term debt (345) (308) (224)
Increase in notes payable to shareholders 1,500 1,461 400
Shareholder distributions (2,450) (2,155) (2,500)
-------------------------------
Net cash provided by (used in) financing activities 11,235 (748) (13,958)
-------------------------------
Increase in cash 5,605 6,277 541
Cash and cash equivalents, beginning of period 1,866 1,866 7,471
-------------------------------
Cash and cash equivalents, end of period $ 7,471 $ 8,143 $ 8,012
===============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 4,665 $ 3,686 $ 3,220
===============================
</TABLE>
See accompanying notes.
F-107
<PAGE> 108
Grubb Automotive
Notes to Combined Financial Statements
December 31, 1995 and September 30, 1996
(The information as of September 30, 1996 and for the nine months
ended September 30, 1995 and 1996 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined financial statements reflect the combined operations
of Grubb Automotive, Inc. (Grubb), Jack Sherman Chevrolet, Inc. (JSC), Lou
Grubb Chevrolet, Inc. (LGC), Lou Grubb Ford, Inc. (LGF), Lou Grubb Saturn, Inc.
(LGS), and Saturn of Tempe, Inc. (SOT) (collectively, the Company or Grubb
Automotive).
The Company operates in one business segment - the retail sales of new and used
automobiles and the service thereof. The company has two Chevrolet
dealerships, two Saturn dealerships and a Ford dealership. The dealerships are
located in metropolitan Phoenix, Arizona, except for one Chevrolet dealership
which is located in Midland, Texas.
The accompanying combined financial statements include the accounts of the
corporations listed above. All material intercompany accounts and transactions
have been eliminated.
The financial information included in the combined financial statements may not
necessarily reflect the financial position, results of operations and cash
flows of the Company in the future or what the financial position, results of
operations and cash flows would have been if the separate dealerships had
continued to be separate, stand-alone dealerships during the period presented.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash on deposit with a
manufacturer, and all highly liquid investments with maturities of three months
or less when purchased.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by
last-in, first-out (LIFO) for new and used vehicles, and factory list price for
parts and accessories, which approximates first-in, first-out (FIFO).
F-108
<PAGE> 109
Grubb Automotive
Notes to Combined Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Land, Buildings, Equipment, and Rental and Lease Vehicles
Land, buildings, equipment, and rental and lease vehicles are stated at cost.
Depreciation is provided using the straight-line method for buildings and
improvements and declining-balance methods for equipment, furniture and
fixtures, and vehicles. The estimated useful lives of the assets for
depreciation purposes are:
<TABLE>
<S> <C>
Buildings and improvements 15 to 39 years
Parts equipment 5 to 8 years
Machinery and shop equipment 5 to 8 years
Furniture and fixtures 5 to 8 years
Service vehicles 3 to 5 years
Rental and lease vehicles 3 to 5 years
</TABLE>
When depreciable assets are sold or retired, the related cost and accumulated
depreciation are removed from the accounts. Major additions and betterments
are capitalized. Maintenance and repairs which do not materially improve or
extend the lives of the respective assets are charged to operating expenses as
incurred.
Land Held for Development
Land held for development, which represents land acquired for development of
additional dealerships in metropolitan Phoenix, Arizona, is carried at cost,
which is not in excess of fair value.
Unearned Income
Unearned income on receivables is recognized over the term of the receivable on
the interest method.
Revenues
Revenues from vehicle and parts sales and from service operations are
recognized at the time the vehicle is delivered to the customer or service is
completed.
F-109
<PAGE> 110
Grubb Automotive
Notes to Combined Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Finance Fees and Insurance Commissions
Finance fees represent revenue earned by the Company for notes placed with
financial institutions in connection with customer vehicle financing. Finance
fees are recognized in income upon acceptance of the credit by the financial
institution. Insurance income represents commissions earned on credit life,
accident and disability insurance sold in connection with the vehicle on behalf
of third-party insurance companies. Insurance commissions are recognized in
income upon customer acceptance of the insurance terms as evidenced by contract
execution.
The Company is charged back for a portion of these fees and commissions should
the customer terminate the finance contract prior to its scheduled maturity.
The estimated allowance for these chargebacks (chargeback allowance) is based
upon the Company's historical experience for prepayments or defaults on the
finance contracts.
Other Revenue
Other revenue consists primarily of license and title fees.
Advertising and Promotional Costs
Advertising and promotional costs are expensed as incurred and are included in
selling, general and administrative expense in the accompanying combined
statement of income. Total advertising and promotional expenses were
approximately $3,874,000 for the year ended December 31, 1995 and $2,917,000
and $3,109,000 for the nine months ended September 30, 1995 and 1996,
respectively.
Income Taxes
The Company elected, with the consent of its shareholders, to have its income
taxed directly to its shareholders as S corporations under the provisions of
the Internal Revenue Code. Accordingly, the Company is generally not subject
to income taxes as the taxable income and related losses are allocated and
taxed directly to the shareholders.
F-110
<PAGE> 111
Grubb Automotive
Notes to Combined Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board (FASB) issued Financial
Accounting Standard (FAS) No. 121, Accounting for the Impairment of Long-live
Assets and for Long-Lived Assets to be Disposed of (FAS 121), which is
effective for fiscal years beginning after December 15, 1995. In the first
quarter of fiscal year 1996, the Company adopted FAS 121 which requires that
long-lived assets (i.e., property, plant and equipment and goodwill) held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the net book value of the asset may not be
recoverable. An impairment loss will be recognized if the sum of the expected
future cash flows (undiscounted and before interest) from the use of the asset
is less than the net book value of the asset. Generally, the amount of the
impairment loss is measured as the difference between the net book value of the
assets and the estimated fair value of the related assets. The adoption of
this statement did not have a significant impact on the Company's results of
operations or its financial position.
Fair Value of Financial Instruments
The fair value of financial instruments is determined by reference to various
market data and other valuation techniques, as appropriate. Unless otherwise
disclosed, the fair value of financial instruments approximates their recorded
values due primarily to the short-term nature of their maturities.
Interim Financial Statements
The accompanying combined balance sheet at September 30, 1996 and the
combined statements of income, shareholders' equity and cash flows for the
nine month periods ended September 30, 1995 and 1996 are unaudited and have
been prepared on the same basis as the audited combined financial
statements included herein. In the opinion of management, such unaudited
combined financial statements include all adjustments (all of which are of
a normal recurring nature) necessary to present fairly the combined
financial position and the results of operations for the periods presented.
The results of operations for such interim periods are not necessarily
indicative of results for the full year.
F-111
<PAGE> 112
Grubb Automotive
Notes to Combined Financial Statements (continued)
2. RECEIVABLES
Receivables are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(Unaudited)
(In thousands)
<S> <C> <C>
Contracts in transit and vehicle receivables $ 7,450 $ 6,995
Trade receivables 2,354 2,576
Due from automakers 1,716 1,440
Note receivables from customers 867 824
Other 261 510
----------------------
12,648 12,345
Less: allowance for doubtful accounts (708) (790)
Less: unearned income (123) (123)
----------------------
$11,817 $11,432
======================
</TABLE>
Contracts in transit and vehicle receivables primarily represent receivables
from financial institutions such as General Motor Acceptance Corporation
(GMAC), and regional banks which provide funding for customer vehicle
financing. These receivables are normally collected in less than 30 days of
the sale of the vehicle. Trade receivables primarily relate to the sale of
parts to commercial customers. Due from automakers represent receivables for
parts and service work performed on vehicles pursuant to the automakers'
warranty coverages and amounts due in connection with the purchase of vehicles
(holdbacks) pursuant to the dealership agreement. Such holdbacks are generally
remitted to the Company on a quarterly basis. Note receivables from customers
are derived from certain sales of used vehicles at JSC under which the
dealership finances the sale and carries the related note.
3. DUE FROM SHAREHOLDERS
Due from shareholders represents cash advances made to shareholders of the
Company. The due from shareholder amounts were paid in 1996 by the offset of
$654,000 of shareholder distributions.
F-112
<PAGE> 113
Grubb Automotive
Notes to Combined Financial Statements (continued)
4. INVENTORIES
The components of inventory are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(Unaudited)
(In thousands)
<S> <C> <C>
New vehicles, at cost determined under the
specific identification method $ 45,799 $ 38,073
Used vehicles, at cost determined under the
specific identification method 9,475 9,654
Parts and accessories, at cost determined by the
latest factory invoice price, which approximates
the FIFO method 6,208 6,929
-----------------------
61,482 54,656
Less adjustment to reduce new vehicles inventories
to cost determined under the LIFO method (13,852) (14,279)
Less adjustment to reduce used vehicles
inventories to cost determined under the LIFO
method (2,375) (2,380)
-----------------------
$ 45,255 $ 37,997
=======================
</TABLE>
While the Company believes that the LIFO method of accounting provides a better
matching of costs and revenues, if the FIFO method of accounting had been used
by the Company, net income would have increased by approximately $2,418,000 for
the year ended December 31, 1995 and $1,396,000 and $432,000 for the nine
months ended September 30, 1995 and 1996, respectively. During the nine months
ended September 30, 1996, the Company realized a liquidation of certain LIFO
inventory pools which resulted in an increase to net income of approximately
$900,000. Interim LIFO calculations must reasonably be based on management's
estimates of expected year-end inventory levels and costs. Because these are
subject to many forces beyond management's control, interim results are subject
to the year-end LIFO inventory valuation.
F-113
<PAGE> 114
Grubb Automotive
Notes to Combined Financial Statements (continued)
5. LAND, BUILDINGS, EQUIPMENT, AND RENTAL AND LEASE VEHICLES
Land, buildings, equipment, and rental and lease vehicles, consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(Unaudited)
(In thousands)
<S> <C> <C>
Land $ 5,295 $ 5,585
Buildings and improvements 6,192 6,216
Furniture and fixtures 2,897 3,113
Machinery and shop equipment 1,212 1,317
Parts equipment 762 812
Rental and lease vehicles 695 724
Service vehicles 880 977
----------------------
17,933 18,744
Less accumulated depreciation and amortization (6,349) (7,072)
----------------------
$11,584 $11,672
======================
</TABLE>
6. SHORT-TERM BORROWINGS
Short-term borrowings consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(Unaudited)
(In thousands)
<S> <C> <C>
$24,000,000 line of credit with a bank, interest
payable monthly at the lower of the bank's prime
rate plus 0.50 percent or the 30-day LIBOR rate
plus 2.50 percent, maturing July 1996 (extended to
July 1997 subsequent to year-end), and
collateralized by all inventories and accounts
receivable of LGF. The line of credit is
guaranteed by a shareholder of LGF up to
$3,000,000. $18,349 $15,697
$18,000,000 line of credit with a bank, interest
payable monthly at the lower of the bank's prime
rate plus 0.50 percent or the 30-day LIBOR rate
plus 2.50 percent, maturing July 1996 (extended to
July 1997 subsequent to year-end), and
collateralized by all inventories and accounts
receivable of LGC. The line of credit is
guaranteed by a shareholder of LGC up to
$3,000,000. 17,574 10,802
</TABLE>
F-114
<PAGE> 115
Grubb Automotive
Notes to Combined Financial Statements (continued)
6. SHORT-TERM BORROWINGS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(Unaudited)
(In thousands)
<S> <C> <C>
$14,000,000 line of credit with General Motors
Acceptance Corporation, interest payable monthly
at prime plus 1.00 percent on new stock vehicles
and prime plus 1.50 percent on demo vehicles, no
stated maturity date, and collateralized by new
vehicles inventories of JSC. $10,160 $ 5,775
$6,000,000 line of credit with a bank, interest
payable monthly at the lower of the bank's prime
rate plus 0.50 percent or the 30-day LIBOR rate
plus 2.50 percent, maturing July 1996 (extended to
July 1997 subsequent to year-end), and
collateralized by all inventories and accounts
receivable of SOT. The line of credit is
guaranteed by a shareholder of SOT up to
$4,700,000. 2,307 3,421
$5,000,000 line of credit with a bank, interest
payable monthly at the lower of the bank's prime
rate plus 0.50 percent or the 30-day LIBOR rate
plus 2.50 percent, maturing July 1996 (extended to
July 1997 subsequent to year-end), and
collateralized by all inventories and accounts
receivable of LGS. The line of credit is
guaranteed by a shareholder of LGS up to
$2,000,000. 1,910 2,942
$1,500,000 line of credit with Ford Motor Credit
Company, interest payable monthly at prime plus
1.00 percent on new vehicles and prime plus 1.50
percent on demo vehicles, no stated maturity date,
and collateralized by new vehicles inventories of
JSC. Subsequent to year-end, the line of credit
was changed to $700,000. 918 993
Other 88 42
----------------------
$51,306 $39,672
======================
</TABLE>
LGF has an additional $1,500,000 line of credit available for the acquisition
of used vehicles and other short-term needs. The line of credit is at prime
and expires July 1996 (extended to July 1997 subsequent to year-end). LGC has
$500,000 and $250,000 lines of credit available at prime plus 0.50 percent and
prime plus 1.50 percent, respectively. The lines expire July 1996 (extended to
July 1997 subsequent to year-end). At December 31, 1995, no amounts had been
drawn on these lines of credit.
F-115
<PAGE> 116
Grubb Automotive
Notes to Combined Financial Statements (continued)
6. SHORT-TERM BORROWINGS (CONTINUED)
The weighted average interest rate on short-term borrowings outstanding as of
December 31, 1995 and September 30, 1996 was approximately 8.70 percent.
Interest expense on short-term borrowings during the year ended December 31,
1995 was approximately $3,496,000 and $2,780,000 and $2,370,000 for the nine
months ended September 30, 1995 and 1996, respectively.
7. NOTES PAYABLE TO SHAREHOLDERS
Notes payable to shareholders consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(Unaudited)
(In thousands)
<S> <C> <C>
Unsecured note payable to shareholder, interest
payable monthly at prime, due on demand $ 1,750 $ 1,750
Unsecured notes payable to shareholders, interest
payable monthly at prime plus 1.00 percent, due on
demand 1,500 1,900
Unsecured notes payable to shareholder, interest
payable monthly at 8.50 percent, due on demand. 2,575 2,575
----------------------
5,825 6,225
Less portion due within one year (3,250) (3,650)
----------------------
$ 2,575 $ 2,575
======================
</TABLE>
At December 31, 1995 and September 30, 1996, the $2,575,000, unsecured notes
payable to shareholder are classified as long-term as the shareholder has
represented that there are no intentions to require payment within one year.
Interest expense on notes payable to shareholders during the year ended
December 31, 1995 was approximately $567,000 and $425,000 and $440,000 for the
nine months ended September 30, 1995 and 1996, respectively.
F-116
<PAGE> 117
Grubb Automotive
Notes to Combined Financial Statements (continued)
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(Unaudited)
(In thousands)
<S> <C> <C>
Mortgage note payable to a bank payable in monthly
installments of $12,500 plus interest at prime,
due and payable in full in January 1998, and
collateralized by first deed of trust on property.
Guaranteed by a shareholder of SOT. $2,263 $2,150
$3,500,000 line of credit with a bank, interest
payable monthly at prime, maturing July 1996
(extended to July 1997 subsequent to year-end) at
which time the amount outstanding will be termed
out over five years, and collateralized by all
assets of LGF until July 2002 at which time the
line of credit will be collateralized by a first
deed of trust on the property. Guaranteed by a
shareholder of the LGF. 1,626 1,626
Mortgage note payable to a bank payable in 60
monthly installments of $15,667 plus interest at
prime through October 1998, and collateralized by
all inventories and accounts receivable of LGC,
subordinate to the 8,000,000 line of credit. 533 392
Other 75 105
---------------------
4,497 4,273
Less portion due within one year (370) (294)
---------------------
$4,127 $3,979
=====================
</TABLE>
F-117
<PAGE> 118
Grubb Automotive
Notes to Combined Financial Statements (continued)
8. LONG-TERM DEBT (CONTINUED)
At December 31, 1995, the aggregate maturities on long-term debt are as
follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
1996 $ 370
1997 1,993
1998 2,134
------
$4,497
======
</TABLE>
Interest expense on long-term debt during the year ended December 31, 1995 was
approximately $641,000 and $481,000 and $410,000 for the nine months ended
September 30, 1995 and 1996, respectively.
9. SHAREHOLDERS' EQUITY
The common stock par value and authorized, issued, and outstanding shares for
each of the corporations, at December 31, 1995 and September 30, 1996, is
summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
-------------------------------------
PAR VALUE AUTHORIZED ISSUED OUTSTANDING
------------------------------------------------
(In thousands, except par value)
<S> <C> <C> <C> <C>
Grubb Automotive, Inc. $ 1.00 1,000 11 11
Jack Sherman Chevrolet, Inc. 0.01 1,500 40 40
Lou Grubb Chevrolet, Inc. 100.00 250 5 5
Lou Grubb Ford, Inc. 1.00 2,000 750 750
Lou Grubb Saturn, Inc. 1.00 1,000 800 800
Saturn of Tempe, Inc. 1.00 2,000 1,000 1,000
</TABLE>
At December 31, 1995 and September 30, 1996, JSC holds $1,300,000 in treasury
stock resulting from the purchase of 16,800 shares common stock, at cost, from
a previous shareholder.
F-118
<PAGE> 119
Grubb Automotive
Notes to Combined Financial Statements (continued)
10. PENSION AND DEFERRED COMPENSATION PLANS
The Company has a 401(k) defined contribution retirement savings plan for
employees. The Company is required to contribute an amount equal to 50 percent
of each participating employee's deferred cash contribution, limited to a
maximum deferred contribution of 2 percent. The Company's funding policy is to
make quarterly contributions to the plan. Participants may elect to contribute
to the plan. Total expense recognized by the Company was approximately
$122,000 for the year ended December 31, 1995 and $83,000 and $102,000 for the
nine months ended September 30, 1995 and 1996, respectively.
The Company has executed a deferred compensation agreement with an officer of
the Company. The agreement provides supplemental salary continuation benefits
to this officer or his beneficiaries upon normal retirement for 15 years at
$8,333 per month. Upon death, early retirement or termination, the officer
will receive a reduced level of benefits as defined in the agreement. At
December 31, 1995 and September 30, 1996, the benefits are unfunded and the
Company has accrued $550,000 and $590,000, respectively, discounted at 7.50
percent, as a long-term liability. The projected benefit obligation was
estimated using the 1980 Commissioners Standard Ordinary Mortality table.
Total expense recognized by the Company was approximately $50,000 for the year
ended December 31, 1995 and $40,000 for the nine months ended September 30,
1995 and 1996. The agreement also provides for disability benefits should the
officer become permanently and totally disabled and the amount of benefits will
be determined by the Board of Directors at the time of disability.
11. MAJOR SUPPLIERS AND FRANCHISE AGREEMENTS
The Company owns and operates two Chevrolet, two Saturn, and one Ford
automobile dealerships. The Company enters into agreements (Dealer Agreements)
with the automakers that supply new vehicles and parts to its dealerships. The
Company's overall sales could be impacted by the automakers' ability or
unwillingness to supply the dealerships with an adequate supply of popular
models. The Company's existing Chevrolet Dealer Agreements have remaining
terms of approximately five years expiring in October 2000. The Saturn and
Ford Dealership Agreements have no stated expiration date. Management
currently believes that it will be able to renew all the Chevrolet Dealer
Agreements upon expiration; however, there can be no assurance that the
Chevrolet Dealer Agreements will be renewed.
The Dealer Agreements generally limit locations of dealerships and retain
automaker approval rights over changes in dealership management. The Dealer
Agreement with Chevrolet stipulates that the Company could lose its Chevrolet
dealership upon any change in ownership of a controlling number of shares in the
Company. Each automaker also is entitled to terminate the dealership agreement
if the dealership is in material breach of the terms.
F-119
<PAGE> 120
Grubb Automotive
Notes to Combined Financial Statements (continued)
11. MAJOR SUPPLIERS AND FRANCHISE AGREEMENTS (CONTINUED)
The Company's ability to expand operations depends, in part, on obtaining the
consent of the automakers to the acquisition or establishment of additional
dealerships.
12. CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentration
of credit risk, consist principally of cash and cash equivalents and
receivables. The Company invests a substantial portion of its excess cash with
GMAC and, to a lesser extent, with financial institutions with strong credit
ratings. Cash investments with GMAC can be withdrawn at any time. At December
31, 1995 and September 30, 1996, amounts invested with GMAC approximated
$1,500,000 and $1,900,000, respectively, with an interest rate of approximately
9.75 percent. At times, amounts invested with financial institutions may be in
excess of FDIC insurance limits. As of December 31, 1995 and September 30,
1996, the Company has not experienced any losses on its cash equivalents.
Concentrations of credit risk with respect to customer receivables are limited
primarily to automakers and financial institutions such as GMAC and regional
banks. Credit risk arising from receivables from commercial customers is
minimal due to the large number of customers comprising the Company's customer
base. However, they are concentrated in the Company's two market areas in
metropolitan Phoenix, Arizona and Midland, Texas.
13. PROVISION FOR FINANCE FEES AND INSURANCE COMMISSION CHARGEBACKS
Presented below is the change in the allowance for estimated finance fees and
insurance commission chargebacks:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -----------------
(Unaudited)
(In thousands)
<S> <C> <C>
Balance at beginning of period $ 1,406 $ 1,593
Provision 1,704 1,435
Actual chargebacks (1,517) (1,140)
--------------------------
Balance at end of period $ 1,593 $ 1,888
==========================
</TABLE>
F-120
<PAGE> 121
Grubb Automotive
Notes to Combined Financial Statements (continued)
14. COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal actions arising in the ordinary course
of its business. The liability, if any, associated with these matters was not
determinable at December 31, 1995 and September 30, 1996. While it is not
feasible to determine the outcome of these actions, the Company's information,
including discussions with legal counsel, at this time does not indicate that
these matters will have a material adverse effect upon financial condition,
results of operations or cash flows.
The Company is also subject to federal and state environmental regulations,
including rules relating to air and water pollution and the storage and
disposal of gasoline, oil, other chemicals and waste. Local, state and federal
regulations also affect automobile dealerships' advertising, sales, service and
financing activities. The Company believes that it complies with all
applicable laws relating to its business.
In general, the Company is required to pay for all vehicles purchased from the
automakers upon completion of the vehicle, upon which time a draw upon the
Company's available bank lines of credit is made directly by the automakers. A
regional bank provides the financing for all new vehicles except at JSC where
GMAC and Ford Motor Credit Company provide financing for all new vehicles and
certain used vehicles. These types of financings are known as "floor plan
financing" or "flooring." Under the arrangement with GMAC, the Company may
deposit funds with GMAC in an amount up to 75 percent of the amount of the
floor plan financing. Such funds earn interest at the same rate charged by
GMAC to the Company for its flooring. From time to time, certain shareholders
will advance funds to the Company primarily for the purpose of investing their
excess cash with GMAC. The Company acts only as an intermediary in this
process. Aggregate amounts outstanding pursuant to these arrangements at
December 31, 1995 and September 30, 1996 are included in notes payable to
shareholders in the accompanying combined balance sheets.
15. LEASES
The Company leases from outside parties, under operating leases, land and
buildings relating to certain of its dealership properties and certain computer
equipment. The property and equipment leases expire in 1997 through 1999.
Total related rental expense with outside parties was approximately $499,000
for the year ended December 31, 1995, and $375,000 and $622,000 for the nine
months ended September 30, 1995 and 1996, respectively.
F-121
<PAGE> 122
Grubb Automotive
Notes to Combined Financial Statements (continued)
15. LEASES (CONTINUED)
LGF leases land and buildings from a shareholder under an operating lease for
$690,000 per annum. The lease is currently under an extension period through
1998 and can be extended through 2013. LGS also leases land and holdings from
a shareholder under an operating lease for $118,800 per annum expiring in 2001.
Total related rental expense with shareholders was approximately $837,000 for
the year ended December 31, 1995, and $630,000 and $635,000 for the nine months
ended September 30, 1995 and 1996, respectively.
The aggregate minimum rental commitments for all noncancelable operating leases
as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
LEASES WITH OTHERS LEASES WITH
OTHERS SHAREHOLDERS
-------------------------------
(In thousands)
<S> <C> <C>
1996 $338 $ 809
1997 241 809
1998 179 809
1999 - 119
2000 - 119
Thereafter - 119
--------------------
$758 $2,784
====================
</TABLE>
16. SUBSEQUENT EVENT
In September 1996, an unrelated third party entered into definitive agreements
to purchase the assets of, acquire a portion of the outstanding stock of
certain dealerships, and merge certain dealerships with the acquiring company.
The assets, properties, and business of Grubb, JSC and LGC are to be acquired
for approximately $46,000,000 in the acquiring company's common stock less
long-term debt assumed and working capital and purchase price adjustments as
defined in the agreements.
LGF and SOT are to be merged with and into a subsidiary of the acquiring company
with the dealerships being the surviving corporations in the merger and
becoming a wholly owned subsidiary of the acquiring company. The common stock
issued and outstanding immediately prior to the merger will be converted into
the right to receive a number of shares of common stock of the acquiring
company worth approximately $47,000,000 less long-term debt assumed and working
capital and purchase price adjustments as defined in the agreements.
F-122
<PAGE> 123
Grubb Automotive
Notes to Combined Financial Statements (continued)
16. SUBSEQUENT EVENT (CONTINUED)
LGS on the closing date, shall sell and convey to the acquiring company 50
percent of the outstanding capital stock for $7,500,000 in the acquiring
company's common stock less working capital and purchase price adjustments as
defined in the agreements. In addition, the acquiring company will pay
$3,750,000 for an option to acquire the balance of the common stock for an
additional $3,750,000.
The agreements can be terminated by either party if the closing has not been
completed by November 30, 1996, or in other circumstances as defined. The
Company must obtain each respective manufacturers' consents for the
acquisitions and mergers to occur, and should the appropriate consents not be
obtained by November 30, 1996, the termination date of the agreements will be
extended to February 28, 1997. Should Ford not approve the assignment of the
dealership agreements in the merger, the acquiring company would acquire 85
percent of the outstanding stock of LGF in exchange for the acquiring company's
common stock with a value equal to 85 percent of the purchase price discussed
above with an option granted to the acquiring company to acquire the remaining
15 percent of the stock upon Ford's approval of such transfer.
Additionally, it is anticipated that certain notes payable to shareholders may
be paid off with funds provided by the acquiring company. There can be no
assurance as to whether the manufacturers' consents can be obtained or whether
the acquisitions and mergers will be closed.
F-123
<PAGE> 124
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
REPUBLIC INDUSTRIES, INC., AUTONATION INCORPORATED, ED MULLINAX, INC., GRUBB
AUTOMOTIVE, NATIONAL CAR RENTAL SYSTEMS, INC. AND HUDSON MANAGEMENT CORPORATION
The following Unaudited Condensed Consolidated Pro Forma Financial
Statements include the supplemental consolidated financial statements of
Republic Industries, Inc. and subsidiaries (the "Company") which include the
results of operations of Alamo Rent-A-Car, Inc. and affiliates ("Alamo") which
the Company acquired in November 1996, Addington Resources, Inc. and
subsidiaries ("Addington") and Continental Industries, Inc. and subsidiaries
("Continental") which the Company acquired in December 1996 and also Carlisle
Motors, Inc. ("Carlisle") which the Company acquired in January 1997. These
transactions have been accounted for under the pooling of interests method of
accounting and, accordingly, the Company's supplemental consolidated financial
statements have been retroactively adjusted as if the Company, Alamo,
Addington, Continental and Carlisle had operated as one entity since inception.
The following Unaudited Condensed Consolidated Pro Forma Balance Sheet
presents the pro forma financial position of the Company as of September 30,
1996 as if the January 1997 acquisitions of AutoNation Incorporated
("AutoNation") and Ed Mullinax, Inc. and subsidiaries ("Mullinax") and the
pending acquisitions of Grubb Automotive ("Grubb") and National Car Rental
Systems, Inc. and subsidiaries ("National") had been consummated as of
September 30, 1996. This pro forma balance sheet also includes pro forma
adjustments related to the November 1996 and January 1997 sales of the
Company's common stock, par value $.01 per share ("Common Stock") which
resulted in net proceeds of approximately $883,000,000 (the "1996 and 1997
Equity Transactions").
The following Unaudited Condensed Consolidated Pro Forma Statements of
Operations for the nine months ended September 30, 1996 and the year ended
December 31, 1995 present the pro forma results of continuing operations of the
Company as if the acquisitions of AutoNation and Mullinax and the pending
acquisition of Grubb, which will all be accounted for under the purchase method
of accounting, had been consummated as of January 1, 1995, and as if the pending
acquisition of National, which will be accounted for under the pooling of
interests method of accounting, had been consummated as of April 4, 1995, the
date of its inception. These pro forma statements of operations also contain
pro forma adjustments related to the 1996 and 1997 Equity Transactions. In
addition, the Unaudited Condensed Consolidated Pro Forma Statement of Operations
for the year ended December 31, 1995 includes the results of operations of
Hudson Management Corporation and Envirocycle, Inc. (collectively, "HMC") which
was acquired in August 1995 and accounted for under the purchase method of
accounting and pro forma adjustments related to a series of 1995 equity
transactions which resulted in net proceeds of approximately $232,000,000 (the
"1995 Equity Transactions").
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, the Company utilizes the modified treasury stock
method. Primary earnings per share is not presented as it does not
significantly differ from fully diluted earnings per share.
These Unaudited Condensed Consolidated Pro Forma Financial Statements
should be read in conjunction with the respective historical consolidated
financial statements and notes thereto of the Company, Alamo, Addington,
Continental, Carlisle, AutoNation, Mullinax, Grubb, National and HMC. 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 acquisitions of AutoNation and Mullinax and the pending acquisition
of Grubb will be accounted for under the purchase method of accounting.
Accordingly, the Unaudited Condensed Consolidated Pro Forma Financial Statements
reflect the Company's preliminary allocations of the purchase prices of such
acquisitions which will be subject to further adjustments as the Company
finalizes the allocations of the purchase prices in accordance with generally
accepted accounting principles. The unaudited condensed consolidated pro forma
results of operations do not necessarily reflect actual results which would have
occurred if the acquisitions or the 1995, 1996 or 1997 Equity Transactions had
taken place on the assumed dates, nor are they necessarily indicative of the
results of future combined operations.
F-124
<PAGE> 125
REPUBLIC INDUSTRIES, INC.,
AUTONATION INCORPORATED, ED MULLINAX, INC.,
GRUBB AUTOMOTIVE AND NATIONAL CAR RENTAL SYSTEMS, INC.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
SUPPLEMENTAL
REPUBLIC AUTONATION MULLINAX (1) GRUBB NATIONAL COMBINED
-------- ---------- ------------ ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 196,341 $ 8,599 $ 16,144 $ 8,012 $ 151,819 $ 380,915
Accounts receivable, net 348,431 6,266 4,149 11,432 72,937 443,215
Prepaid expenses and other
current assets 290,964 167 2,455 192 11,241 305,019
Inventory 53,504 40,769 84,891 37,997 217,161
Revenue earning vehicles, net 2,201,583 -- -- -- 1,756,955 3,958,538
---------- ---------- ------------ ------- ---------- ----------
Total current assets 3,090,823 55,801 107,639 57,633 1,992,952 5,304,848
Property and equipment, net 790,131 134,373 15,120 13,819 90,277 1,043,720
Investment in subscribers, net of
accumulated amortization 78,940 -- -- -- -- 78,940
Intangible assets, net of accumulated
amortization 222,992 -- -- -- 11,231 234,223
Other assets 31,718 -- 172 886 -- 32,776
---------- ---------- ------------ ------- ---------- ----------
Total assets $4,214,604 $ 190,174 $ 122,931 $72,338 $2,094,460 $6,694,507
========== ========== ============ ======= ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses $ 303,177 $ 17,322 $ 6,966 $ 7,112 $ 134,816 $ 469,393
Current maturities of long-term
debt and notes payable 2,337,238 142,118 80,344 43,616 892,691 3,496,007
Deferred revenue and other
current liabilities 166,407 -- -- -- 70,069 236,476
---------- ---------- ------------ ------- ---------- ----------
Total current liabilities 2,806,822 159,440 87,310 50,728 1,097,576 4,201,876
Long-term debt, net of current
maturities 284,312 -- 12,751 6,554 864,125 1,167,742
Deferred Income taxes on other liabs 131,207 -- -- 590 74,029 205,826
---------- ---------- ------------ ------- ---------- ----------
Total liabilities 3,222,341 159,440 100,061 57,872 2,035,730 5,575,444
---------- ---------- ------------ ------- ---------- ----------
Shareholders' equity:
Common stock 2,415 80 40 3,025 6 5,566
Additional paid-in capital 930,057 52,050 143 646 16,744 999,640
Retained earnings 71,101 (21,396) 22,696 12,095 41,980 126,476
Translation adjustment 2,315 -- -- -- -- 2,315
Treasury stock (13,625) -- (9) (1,300) -- (14,934)
---------- ---------- ------------ ------- ---------- ----------
Total shareholders' equity 992,263 30,734 22,870 14,466 58,730 1,119,063
---------- ---------- ------------ ------- ---------- ----------
Total liabilities and
shareholders' equity $4,214,604 $ 190,174 $ 122,931 $72,338 $2,094,460 $6,694,507
========== ========== ============ ======= ========== ==========
<CAPTION>
PRO FORMA
ADJUSTMENTS
-----------------------------
DR. CR. PRO FORMA
------------ ------------ -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 380,915
Accounts receivable, net 443,215
Prepaid expenses and other
current assets $ 112,900(f) 192,119
Inventory $ 29,331(i) 246,492
Revenue earning vehicles, net 3,958,538
------------ ------------ -------------
Total current assets 29,331 112,900 5,221,279
Property and equipment, net 1,043,720
Investment in subscribers, net of
accumulated amortization
Intangible assets, net of accumulated 78,940
amortization 268,795(a) 503,018
Other assets 32,776
------------ ------------ -------------
Total assets $ 298,126 $ 112,900 $ 6,879,733
============ ============ =============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses $ 469,393
Current maturities of long-term
debt and notes payable $ 112,900(f) 2,842,586
540,521(g)
Deferred revenue and other
current liabilities 236,476
------------ ------------ -------------
Total current liabilities 653,421 3,548,455
Long-term debt, net of current
maturities 365,443(g) 802,299
Deferred Income taxes on other liabs 205,826
------------ ------------ -------------
Total liabilities 1,018,864 4,556,580
------------ ------------ -------------
Shareholders' equity:
Common stock 3,145(b) $ 250(c) 3,161
6(e) 217(d)
279(g)
Additional paid-in capital 52,839(b) 365,946(c) 2,218,221
217(d) 6(e)
905,685(g)
Retained earnings 13,395(b) 113,081
Translation adjustment 2,315
Treasury stock 1,309(b) (13,625)
------------ ------------ -------------
Total shareholders' equity 69,602 1,273,692 2,323,153
------------ ------------ -------------
Total liabilities and
shareholders' equity $ 1,088,466 $ 1,273,692 $ 6,879,733
============ ============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
(1) Balance sheet as of October 31, 1996.
F-125
<PAGE> 126
REPUBLIC INDUSTRIES, INC.,
AUTONATION INCORPORATED, ED MULLINAX, INC.,
GRUBB AUTOMOTIVE AND NATIONAL CAR RENTAL SYSTEMS, INC.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
SUPPLEMENTAL
REPUBLIC AUTONATION MULLINAX GRUBB NATIONAL COMBINED
--------- ---------- -------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $1,895,388 $ 9,190 $502,498 $338,143 $854,182 $3,599,401
Expenses:
Cost of operations 985,654 14,297 451,235 296,504 622,255 2,369,945
Selling, general and
administrative 824,269 11,929 41,026 33,234 185,024 1,095,482
Special charge 7,623 -- -- -- -- 7,623
Other (income) expense:
Interest and other income (16,340) -- -- (1,536) (5,663) (23,539)
Interest expense 23,526 1,296 1,549 3,220 3,869 33,460
---------- -------- -------- -------- -------- ----------
1,824,732 27,522 493,810 331,422 805,485 3,482,971
---------- -------- -------- -------- -------- ----------
Income (loss) from
continuing operations before
income taxes 70,656 (18,332) 8,688 6,721 48,697 116,430
Income tax provision 33,169 -- 3,475 -- 18,674 55,318
---------- -------- -------- -------- -------- ----------
Income (loss) from continuing
operations $ 37,487 $(18,332) $ 5,213 $ 6,721 $ 30,023 $ 61,112
========== ======== ======== ======== ======== ==========
Fully-diluted:
Earnings per share from
continuing operations $ .14
==========
Weighted average shares
outstanding 268,260 17,467 3,633 3,962 21,712 315,034
========== ======== ======== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
-------------------------
DR. CR. PRO FORMA
---------- ---------- --------------
<S> <C> <C> <C>
Revenue $3,599,401
Expenses:
Cost of operations $ 5,040(h) $ 2,132(i) 2,340,999
31,854(j)
Selling, general and
administrative 1,095,482
Special charge 7,623
Other (income) expense:
Interest and other income 1,296(f) (22,243)
1,296(f)
Interest expense 32,164(j) --
------- -------- ----------
6,336 67,446 3,421,861
------- -------- ----------
Income (loss) from
continuing operations
before income taxes 6,336 67,446 177,540
Income tax provision 18,054(k) 73,372
------- -------- ----------
Income (loss) from
continuing operations $24,390 $ 67,446 $ 104,168
======= ======== ==========
Fully-diluted:
Earnings per share
from continuing operations $ .30
==========
Weighted average shares
outstanding 27,873(l) 342,907
======= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-126
<PAGE> 127
REPUBLIC INDUSTRIES, INC.,
AUTONATION INCORPORATED, ED MULLINAX, INC.,
GRUBB AUTOMOTIVE, NATIONAL CAR RENTAL SYSTEMS, INC. AND
HUDSON MANAGEMENT CORPORATION
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
SUPPLEMENTAL
REPUBLIC AUTONATION MULLINAX GRUBB NATIONAL HMC
--------- ---------- -------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $2,069,210 $579,904 $397,810 $576,014 $ 33,201
Expenses:
Cost of operations 1,094,726 $ 2,177 519,911 353,932 430,956 21,772
Selling, general and
administrative 956,277 887 50,751 42,195 121,328 9,298
Special charge 3,264
Other (income) expense:
Interest and other income (15,718) -- -- (2,784) (6,911) --
Interest expense 25,125 -- 2,815 1,208 3,833 489
---------- ------- -------- -------- -------- --------
2,063,674 3,064 573,477 394,551 549,206 31,559
---------- ------- -------- -------- -------- --------
Income (loss) from
continuing operations before
income taxes 5,536 (3,064) 6,427 3,259 26,808 1,642
Income tax provision 5,374 -- 2,571 -- 10,724 657
---------- ------- -------- -------- -------- --------
Income (loss) from continuing
operations $ 162 $(3,064) $ 3,856 $ 3,259 $ 16,084 $ 985
========== ======= ======== ======== ======== ========
Fully-diluted:
Earnings per share from
continuing operations $ --
==========
Weighted average shares
outstanding 188,749 17,467 3,633 3,962 21,712 16,000
========== ======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
------------------------
COMBINED DR. CR. PRO FORMA
------------ ---------- ---------- --------------
<S> <C> <C> <C> <C>
Revenue $3,656,139 $3,656,139
Expenses:
Cost of operations 2,423,474 $ 6,720(h) $ 4,658(i) 2,365,434
Selling, general and 1,180,736 60,102(j)
administrative 3,264 1,180,736
Special charge 3,264
Other (income) expense:
Interest and other income (25,413) (25,413)
Interest expense 33,470 33,470(j) --
---------- ------- -------- ----------
3,615,531 6,720 98,230 3,524,021
---------- ------- -------- ----------
Income (loss) from
continuing operations
before income taxes 40,608 6,720 98,230 132,118
Income tax provision 19,326 33,688(k) 53,014
---------- ------- -------- ----------
Income (loss) from
continuing operations $ 21,282 $40,408 $ 98,230 $ 79,104
========== ======= ======== ==========
Fully-diluted:
Earnings per share
from continuing operations $ .25
==========
Weighted average shares
outstanding 251,523 62,657(l) 314,180
========== ======= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-127
<PAGE> 128
REPUBLIC INDUSTRIES, INC., AUTONATION INCORPORATED,
ED MULLINAX, INC., GRUBB AUTOMOTIVE, NATIONAL CAR RENTAL SYSTEMS, INC.
AND HUDSON MANAGEMENT CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA FINANCIAL STATEMENTS
(a) Represents an entry to record intangible assets resulting from the
preliminary allocations of the purchase price for the acquisitions of
AutoNation and Mullinax and the pending acquisition of Grubb as follows
(in thousands):
<TABLE>
<S> <C>
Shares of Republic Common Stock to be issued............... 25,062
Value of Republic Common Stock consideration............... $366,196
Historical net tangible assets............................. (68,070)
Write-up of inventory to fair value........................ (29,331)
--------
Allocation to intangible assets............................ $268,795
========
</TABLE>
(b) Represents an entry to eliminate the historical equity balances of
AutoNation, Mullinax and Grubb.
(c) Represents the recording of equity resulting from the Company's issuance of
Common Stock to effect the acquisitions of AutoNation and Mullinax and the
pending acquisition of Grubb.
(d) Represents an entry to record the par value of the shares of Common Stock
to be issued to the stockholders of National which will be accounted for
under the pooling of interests method of accounting.
(e) Represents an entry to reclassify the historical common stock balances of
National to additional paid-in capital.
(f) Represents an entry to eliminate advances from the Company to AutoNation
and related interest on such advances.
(g) Represents an entry to record the 1996 and 1997 Equity Transactions and the
assumed repayment of indebtedness as of September 30, 1996.
(h) 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, Mullinax and Grubb.
Intangible assets resulting from these purchases are being amortized over
a 40 year life which approximates the estimated useful life.
(i) Represents an entry to conform the inventory accounting policies of
acquired companies from LIFO to the specific identification method.
(j) Represents the assumed interest savings on the payoff of all or a
portion of the existing indebtedness outstanding as of the beginning of
the period presented of the Company with the proceeds from the 1995, 1996
and 1997 Equity Transactions which are also assumed to have occurred as of
the beginning of the period presented.
(k) Represents the incremental change in the combined entity's provision for
income taxes as a result of the pre-tax income (loss) of AutoNation,
Mullinax, Grubb and National and all pro forma adjustments as described
above.
(l) Includes the weighted average effect of shares and common share
equivalents issued in the 1995, 1996 and 1997 Equity Transactions.
F-128
