<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ___________
COMMISSION FILE NUMBER: 1-13107
REPUBLIC INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 73-1105145
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
110 S.E. 6TH STREET
FT. LAUDERDALE, FLORIDA 33301
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 769-6000
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No[ ]
On November 9, 1998 the registrant had 467,087,563 outstanding shares
of common stock, par value $.01 per share.
<PAGE> 2
REPUBLIC INDUSTRIES, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets as
of September 30, 1998 and December 31, 1997......................... 3
Unaudited Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 1998 and
1997................................................................ 4
Unaudited Condensed Consolidated Statement of Shareholders'
Equity for the Nine Months Ended September 30, 1998................. 5
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1998 and 1997............... 6
Notes to Unaudited Condensed Consolidated Financial Statements......... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................... 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............. 25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................................... 26
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............................. 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................... 26
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPUBLIC INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 325.1 $ 148.0
Receivables, net.................................................... 1,588.3 977.3
Revenue earning vehicles, net....................................... 4,746.7 4,466.5
Inventory ..................................................... 1,490.8 1,094.8
Other current assets................................................ 215.2 139.2
--------- ---------
Total Current Assets.......................................... 8,366.1 6,825.8
PROPERTY AND EQUIPMENT, NET............................................ 2,811.3 2,096.9
INTANGIBLE AND OTHER ASSETS, NET....................................... 2,922.0 1,604.6
--------- ---------
$14,099.4 $10,527.3
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................... $ 361.2 $ 260.8
Accrued liabilities................................................. 786.7 557.9
Insurance reserves.................................................. 227.0 204.7
Revenue earning vehicle debt........................................ 2,383.0 2,209.4
Notes payable and current maturities of
long-term debt.................................................... 1,038.2 532.0
Other current liabilities........................................... 327.1 405.3
--------- ---------
Total Current Liabilities..................................... 5,123.2 4,170.1
LONG-TERM DEBT, NET OF CURRENT MATURITIES.............................. 164.2 370.9
LONG-TERM REVENUE EARNING VEHICLE DEBT................................. 2,284.4 1,962.7
OTHER LIABILITIES ..................................................... 654.7 539.3
MINORITY INTEREST ..................................................... 451.8 --
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;
1,500,000,000 shares authorized;
467,025,645 and 432,705,796 shares
issued and outstanding, respectively............................. 4.7 4.3
Additional paid-in capital.......................................... 4,622.8 3,051.5
Retained earnings................................................... 815.6 431.4
Accumulated other comprehensive income.............................. 2.3 (2.9)
Treasury stock, at cost; 1,400,000 shares........................... (24.3) --
--------- ---------
Total Shareholders' Equity........................... 5,421.1 3,484.3
--------- ---------
$14,099.4 $10,527.3
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
REPUBLIC INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
(RESTATED)
<S> <C> <C> <C> <C>
REVENUE:
Automotive retail sales.............................. $3,508.0 $1,728.4 $9,024.0 $4,256.8
Automotive rental revenue............................ 1,005.6 905.3 2,646.1 2,286.1
Solid waste services revenue......................... 355.0 287.6 991.7 834.5
-------- -------- -------- --------
4,868.6 2,921.3 12,661.8 7,377.4
EXPENSES:
Cost of automotive retail sales...................... 3,003.2 1,547.1 7,770.3 3,793.3
Cost of automotive rental
operations......................................... 721.0 640.9 1,991.1 1,716.1
Cost of solid waste operations....................... 246.8 202.0 688.2 603.1
Selling, general and administrative.................. 593.1 341.0 1,572.9 918.5
Restructuring and other charges...................... -- -- -- 94.1
-------- -------- -------- ---------
OPERATING INCOME........................................ 304.5 190.3 639.3 252.3
INTEREST INCOME......................................... 3.0 3.1 6.3 14.9
INTEREST EXPENSE........................................ (4.2) (3.1) (18.2) (13.7)
OTHER INCOME (EXPENSE), NET............................. 3.5 1.5 (1.1) 106.6
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES................................... 306.8 191.8 626.3 360.1
PROVISION FOR INCOME TAXES.............................. 110.4 69.7 225.4 131.1
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST............................. 196.4 122.1 400.9 229.0
MINORITY INTEREST IN NET INCOME
OF SUBSIDIARY........................................ (16.7) -- (16.7) --
-------- ------- -------- -------
INCOME FROM CONTINUING OPERATIONS....................... 179.7 122.1 384.2 229.0
INCOME FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES.................................. -- 3.2 -- 9.5
-------- -------- -------- --------
NET INCOME.............................................. $ 179.7 $ 125.3 $ 384.2 $ 238.5
======== ======== ======== ========
BASIC EARNINGS PER SHARE:
Continuing operations............................. $ .39 $ .30 $ .85 $ .58
Discontinued operations........................... -- -- -- .02
-------- -------- -------- --------
Net income........................................ $ .39 $ .30 $ .85 $ .60
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Continuing operations............................. $ .38 $ .28 $ .82 $ .54
Discontinued operations........................... -- .01 -- .02
-------- --------- --------- --------
Net income........................................ $ .38 $ .29 $ .82 $ .56
======== ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
REPUBLIC INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY
STOCK CAPITAL EARNINGS INCOME STOCK
------ ---------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997.............. $4.3 $3,051.5 $431.4 $(2.9) $ --
Stock issued in
acquisitions........................ .3 540.9 -- -- --
Issuance of common stock
of a subsidiary..................... -- 998.5 -- -- --
Purchases of treasury stock............ -- -- -- -- (24.3)
Exercise of stock options
and warrants........................ .1 31.9 -- -- --
Foreign currency translation
adjustments......................... -- -- -- 4.3 --
Unrealized gain on marketable
securities.......................... -- -- -- .9 --
Net income............................. -- -- 384.2 -- --
---- -------- ------ ----- ------
BALANCE AT SEPTEMBER 30, 1998............. $4.7 $4,622.8 $815.6 $ 2.3 $(24.3)
==== ======== ====== ===== ======
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE> 6
REPUBLIC INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998 1997
---- ----
<S> <C> <C>
CASH USED IN OPERATING ACTIVITIES:
Net income ................................................................ $ 384.2 $ 238.5
Adjustments to reconcile net income to net cash
used in operating activities:
Non-cash restructuring and other charges............................. -- 78.6
Minority interest in net income of subsidiary........................ 16.7 --
Depreciation of revenue earning vehicles............................. 670.0 611.5
Depreciation and amortization........................................ 184.6 124.6
Gain on sale of marketable securities................................ -- (102.3)
Income from discontinued operations, net of
income taxes...................................................... -- (9.5)
Purchases of revenue earning vehicles................................ (5,155.2) (3,984.9)
Sales of revenue earning vehicles.................................... 3,969.8 2,796.4
Changes in assets and liabilities, net of effects from business
combinations:
Receivables.................................................... (418.0) (96.6)
Inventory...................................................... 271.1 (115.9)
Other assets................................................... 9.3 21.8
Accounts payable and accrued liabilities....................... (53.6) (135.3)
Other liabilities.............................................. 42.3 208.9
--------- --------
(78.8) (364.2)
--------- --------
CASH USED IN INVESTING ACTIVITIES:
Purchases of property and equipment..................................... (478.5) (324.6)
Purchases of marketable securities...................................... (115.2) (300.0)
Sales of marketable securities.......................................... 35.1 402.3
Cash used in business acquisitions, net of
cash acquired ...................................................... (728.0) (99.7)
Other .................................................................. (5.8) (50.1)
--------- --------
(1,292.4) (372.1)
--------- --------
CASH PROVIDED BY FINANCING ACTIVITIES:
Payments of revenue earning vehicle financing........................... (31,797.5) (10,877.0)
Proceeds from revenue earning vehicle financing......................... 32,532.7 11,344.7
Payments of notes payable and long-term debt............................ (299.6) (765.2)
Proceeds from notes payable and long-term debt.......................... 12.1 348.7
Net proceeds (payments) from revolving credit
and vehicle inventory financing facilities........................... (341.2) 5.3
Proceeds from sale of common stock of a
subsidiary ...................................................... 1,433.6 --
Proceeds from sale of common stock...................................... -- 552.7
Purchases of treasury stock............................................. (24.3) --
Other .................................................................. 32.5 13.0
--------- --------
1,548.3 622.2
--------- --------
CASH USED IN DISCONTINUED OPERATIONS....................................... -- (44.1)
--------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... 177.1 (158.2)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................... 148.0 364.4
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................. $ 325.1 $ 206.2
========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
REPUBLIC INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN MILLIONS, EXCEPT PER SHARE DATA)
1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
include the accounts of Republic Industries, Inc. and its subsidiaries (the
"Company") and have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. All significant
intercompany accounts and transactions have been eliminated. Certain information
related to the Company's organization, significant accounting policies and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. These unaudited condensed consolidated financial statements reflect, in
the opinion of management, all material adjustments (which include only normal
recurring adjustments) necessary to fairly state the financial position and the
results of operations for the periods presented and the disclosures herein are
adequate to make the information presented not misleading.
Operating results for interim periods are not necessarily indicative of
the results that can be expected for a full year. These interim financial
statements should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto.
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.
In May 1998, the Company announced its intention to separate the
Company's solid waste subsidiary, Republic Services, Inc. ("RSG") from the
Company (the "Separation"). On July 1, 1998, RSG completed an initial public
offering of approximately 36.1% of its outstanding common stock resulting in net
proceeds of approximately $1.4 billion. The Company intends to distribute its
remaining shares of common stock in RSG as of the distribution date to the
Company's stockholders in 1999, subject to certain conditions and consents (the
"Distribution"). The Company and RSG have entered into certain agreements
providing for the Separation and governing various interim and ongoing
relationships between the companies. The Distribution is contingent, in part, on
the Company obtaining a private letter ruling from the Internal Revenue Service
to the effect that, among other things, the Distribution will qualify as a tax
free distribution for federal income tax purposes under Section 355 of the
Internal Revenue Code of 1986, as amended, in form and substance satisfactory to
the Company.
In October 1997, the Company sold its electronic security services
division. Accordingly, operating results of the electronic security services
segment for the periods prior to disposition have been classified as
discontinued operations in the accompanying unaudited condensed consolidated
financial statements. Revenue of the discontinued operations was $29.2 million
and $83.8 million for the three and nine months ended September 30, 1997,
respectively.
7
<PAGE> 8
REPUBLIC INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. BUSINESS COMBINATIONS
In September 1998, RSG entered into a definitive agreement with Waste
Management, Inc. ("Waste Management") to acquire certain assets. The assets to
be acquired include 16 landfills, 11 transfer stations and 136 commercial
collection routes across the United States as well as disposal agreements at
various Waste Management facilities. RSG will pay approximately $500.0 million
in cash plus certain additional properties in this transaction, which will be
accounted for under the purchase method of accounting. The closing of this
transaction is subject to approvals by various state and federal agencies.
Businesses acquired through September 30, 1998 and accounted for under
the purchase method of accounting are included in the unaudited condensed
consolidated financial statements from the date of acquisition.
During the nine months ended September 30, 1998, the Company acquired
various businesses in the automotive retail and solid waste services industries.
The Company issued an aggregate of approximately 21.9 million shares of its
common stock, par value $.01 per share ("Common Stock") and paid approximately
$683.5 million of cash for automotive retail acquisitions accounted for under
the purchase method of accounting. The Company issued an aggregate of 3.4
million shares of Common Stock and paid approximately $132.7 million of cash for
solid waste acquisitions 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
consummated during the nine months ended September 30:
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Property and equipment..................................... $ 371.6 $ 472.8
Revenue earning vehicles................................... -- 179.5
Intangible assets.......................................... 1,302.4 928.6
Working capital............................................ 549.8 7.7
Debt assumed............................................... (937.3) (721.9)
Other liabilities, net..................................... (17.3) 1.0
Common stock issued........................................ (541.2) (768.0)
--------- ---------
Cash used in acquisitions, net of cash acquired............ $ 728.0 $ 99.7
========= =========
</TABLE>
The Company's unaudited pro forma consolidated results of operations
assuming acquisitions accounted for under the purchase method of accounting had
occurred as of the beginning of each period presented are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenue............................................... $14,135.7 $12,565.9
Income from continuing operations after minority
interest........................................... $ 397.4 $ 274.2
Diluted earnings per share from continuing
operations.......................................... $ .84 $ .59
</TABLE>
8
<PAGE> 9
REPUBLIC INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The unaudited pro forma consolidated results of operations are
presented for informational purposes only and may not necessarily reflect the
future results of operations of the Company or what the results of operations
would have been had the Company owned and operated these businesses as of the
beginning of each period presented.
3. RECEIVABLES
The components of receivables, net of allowance for doubtful accounts
are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
Automotive retail receivables............................ $ 435.8 $ 198.7
Automotive rental and solid waste trade receivables...... 460.3 346.7
Vehicle manufacturer receivables......................... 432.0 366.4
Automotive finance receivables........................... 256.6 38.1
Other.................................................... 72.5 78.3
-------- --------
1,657.2 1,028.2
Less: allowance for doubtful accounts.................... (68.9) (50.9)
-------- --------
$1,588.3 $ 977.3
======== ========
</TABLE>
In September 1998, the Company entered into a $1.0 billion commercial
paper warehouse facility with unrelated financial institutions for the
securitization of installment loan receivables generated by the Company's
automotive finance subsidiary. During the three months ended September 30, 1998,
the Company securitized approximately $461.8 million of loan receivables under
this program.
4. REVENUE EARNING VEHICLES
Revenue earning vehicles consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ -----------
<S> <C> <C>
Revenue earning vehicles..................................... $5,282.3 $4,980.1
Less: accumulated depreciation............................... (535.6) (513.6)
--------- ---------
$4,746.7 $4,466.5
========= =========
</TABLE>
5. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
New vehicles..................................................... $ 930.6 $ 642.7
Used vehicles.................................................... 443.4 377.4
Parts and accessories............................................ 104.6 55.2
Other............................................................ 12.2 19.5
-------- --------
$1,490.8 $1,094.8
======== ========
</TABLE>
9
<PAGE> 10
REPUBLIC INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -----------
<S> <C> <C>
Land, landfills and improvements............................... $1,083.8 $ 895.0
Furniture, fixtures and equipment.............................. 1,260.1 968.7
Buildings and improvements..................................... 1,189.3 878.6
--------- ----------
3,533.2 2,742.3
Less: accumulated depreciation and depletion................... (721.9) (645.4)
--------- ---------
$2,811.3 $2,096.9
========= ==========
</TABLE>
7. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist primarily of the cost of acquired
businesses in excess of the fair value of net assets acquired and other
intangible assets. The cost in excess of the fair value of net assets acquired
is amortized over 40 years on a straight-line basis. Other intangible assets
include values assigned to customer lists, long-term contracts and covenants not
to compete and are amortized generally over periods ranging from 5 to 25 years.
Accumulated amortization of intangible assets at September 30,
1998 and December 31, 1997 was $137.3 million and $89.6 million, respectively.
8. REVENUE EARNING VEHICLE DEBT
Revenue earning vehicle debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -----------
<S> <C> <C>
Amounts under various commercial paper programs
secured by eligible vehicle collateral;
interest at market based commercial paper rates............... $3,661.9 $2,919.4
Amounts under various medium-term note programs
secured by eligible vehicle collateral:
Fixed rate component; maturities through 2003............... 655.9 736.3
Floating rate component based on 3 month LIBOR;
maturities through 2001..................................... 143.7 166.5
Other financings secured by eligible vehicle
collateral; interest at LIBOR based rates..................... 205.9 349.9
-------- --------
4,667.4 4,172.1
Less: long-term portion......................................... (2,284.4) (1,962.7)
-------- --------
$2,383.0 $2,209.4
======== ========
</TABLE>
10
<PAGE> 11
REPUBLIC INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
9. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Revolving credit facility; interest payable
using LIBOR based rates; unsecured;
matures through 2002...................................... $ -- $ 250.0
RSG revolving credit facility; interest payable
using LIBOR based rates; unsecured;
$500.0 million matures July 1999 and
$500.0 million matures 2003................................. 42.0 --
Vehicle inventory credit facilities; secured
by the Company's vehicle inventory........................ 990.2 472.5
Other notes; maturities through 2009.......................... 170.2 180.4
---------- --------
1,202.4 902.9
Less: current portion........................................ (1,038.2) (532.0)
---------- --------
$ 164.2 $ 370.9
========== =========
</TABLE>
10. SHAREHOLDERS' EQUITY
In August 1998, the Company's Board of Directors authorized the
repurchase of up to $500.0 million of Common Stock over the following 12 months.
Repurchases are made either pursuant to Rule 10b-18 of the Securities Exchange
Act of 1934, as amended, or in privately negotiated transactions. As of
September 30, 1998, the Company had repurchased an aggregate of 1.4 million
shares of Common Stock for an aggregate purchase price of approximately $24.3
million. As of November 6, 1998, the Company had repurchased an additional 2.6
million shares of Common Stock for an aggregate price of approximately $36.6
million subsequent to September 30, 1998.
11. RESTRUCTURING AND OTHER CHARGES
During the nine months ended September 30, 1997, the Company recorded
restructuring and other charges related to the Company's automotive rental
operations totaling approximately $94.1 million. The primary components of this
charge were as follows: $32.0 million related to elimination of redundant
information systems; $18.0 million related to fleet consolidation; and $44.1
million related to closure or sale of duplicate rental facilities and merger and
other non-recurring expenses. Through September 30, 1998, the Company spent
approximately $37.7 million related to integration and other activities and has
recorded $27.7 million of these charges against certain assets. At September 30,
1998, approximately $28.7 million remained in accrued liabilities related to
these charges.
11
<PAGE> 12
REPUBLIC INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
12. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income", effective January 1, 1998. SFAS
130 establishes standards for reporting and display of comprehensive income and
its components in financial statements. The components of the Company's
comprehensive income are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income................................................ $179.7 $125.3 $384.2 $238.5
Unrealized gain on marketable
securities, net of income taxes....................... .9 -- .9 65.0
Reclassification of realized gain on
sale of marketable securities, net
of income taxes....................................... -- -- -- (65.0)
Foreign currency translation
adjustments, net of income taxes...................... 3.9 (1.1) 4.3 (4.3)
------ ------ ------ ------
Comprehensive income...................................... $184.5 $124.2 $389.4 $234.2
====== ====== ====== ======
</TABLE>
13. INCOME TAXES
Income taxes have been provided for based upon the Company's
anticipated annual effective income tax rate.
14. STOCK OPTIONS AND WARRANTS
The Company has various stock option plans under which shares of Common
Stock are granted to 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. Generally, options
granted have a term of ten years from the date of grant, and vest in increments
of 25% per year over a four year period on the yearly anniversary of the grant
date.
A summary of stock option and warrant transactions for the nine months
ended September 30, 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
OPTIONS WARRANTS TOTAL PRICE
------- -------- ----- ---------
<S> <C> <C> <C> <C>
Options and warrants outstanding
at beginning of year............................ 32.4 15.7 48.1 $15.67
Granted.............................................. 15.5 -- 15.5 22.42
Exercised............................................ (.9) (8.2) (9.1) 3.58
Canceled............................................. (.9) -- (.9) 12.56
------ ----- -----
Options and warrants outstanding
at September 30, 1998........................... 46.1 7.5 53.6 19.39
====== ===== =====
Options and warrants exercisable
at September 30, 1998........................... 16.0 7.5 23.5 14.09
Options and warrants available
for future grants at
at September 30, 1998........................... 29.4 N/A 29.4 N/A
</TABLE>
12
<PAGE> 13
REPUBLIC INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In October 1998, the Company's Board of Directors approved the
repricing of approximately 32.1 million employee stock options at $12.75 per
share, equal to the closing price of the Company's Common Stock on the last
business day prior to the date of the repricing. Option holders will be
precluded from exercising any of their repriced options prior to January 2,
2000. All other terms of the existing options, including the vesting schedules,
remain unchanged. After giving effect to the repricing, the weighted average
exercise price of options and warrants outstanding is approximately $11.11 per
share.
15. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is based on the combined weighted average number of common
shares and common share equivalents outstanding which include, where
appropriate, the assumed exercise or conversion of warrants and options. In
computing diluted earnings per share, the Company has utilized the treasury
stock method.
The computation of weighted average common and common equivalent shares
used in the calculation of basic and diluted earnings per share is shown below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares outstanding
used in calculating basic
earnings per share.................................... 462.8 411.7 452.6 394.8
Gross common equivalent shares.......................... 29.8 46.8 46.7 62.9
Weighted average treasury
shares purchased...................................... (12.5) (15.4) (25.5) (24.2)
Effect of using weighted average
common equivalent shares
outstanding........................................... (4.5) (5.8) (4.5) (8.1)
------ ------ ------ ------
Weighted average common and common
equivalent shares used in
calculating diluted earnings per
share ............................................... 475.6 437.3 469.3 425.4
====== ====== ====== ======
</TABLE>
16. LEGAL MATTERS
By letter dated January 11, 1996, Acme Commercial Corp. d/b/a CarMax,
The Auto Superstore, ("CarMax") accused the Company's wholly-owned subsidiary,
AutoNation USA of infringing CarMax's trademark rights by using the marks
AutoNation USA(sm) and "The Better Way to Buy a Car(sm)." AutoNation USA denied
such allegations and on February 5, 1996, filed suit in the U.S. District Court
for the Southern District of Florida seeking a declaratory judgment that its use
and registration of such marks do not violate any of the rights of CarMax. On or
about October 11, 1996, CarMax filed a counterclaim against AutoNation USA
seeking damages and an order enjoining AutoNation USA from using certain marks,
including the marks AutoNation USA and "The Better Way to Buy a Car." On
November 5, 1998, following a jury trial, the Court entered a judgement in favor
of AutoNation USA and against CarMax with respect to the marks in question.
13
<PAGE> 14
REPUBLIC INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company is also a party to various other general corporate legal
proceedings which have arisen in the ordinary course of business. While the
results of these matters cannot be predicted with certainty, the Company
believes that losses, if any, resulting from the ultimate resolution of these
matters will not have a material adverse effect on the Company's consolidated
results of operations, cash flows or financial position. However, unfavorable
resolution could affect the consolidated results of operations or cash flows for
the quarterly periods in which they are resolved.
17. RESTATEMENT
The Company has restated its unaudited condensed consolidated statement
of operations for the three months ended September 30, 1997 for various
businesses acquired in 1997 accounted for under the pooling of interests method
of accounting. These acquisitions had been accounted for as immaterial pooling
of interests transactions in the quarter of acquisition and prior quarters were
not restated in the Company's previously issued financial statements. The
quarterly restatement has no impact on previously reported 1997 operating
results for the nine months ended September 30, 1997 or for the year ended
December 31, 1997. The restatement is a result of a change in the Company's
evaluation of the aggregate impact of individually immaterial pooling of
interests transactions on the Company's prior period financial statements. The
effect of the restatement for the three months ended September 30, 1997 is as
follows:
<TABLE>
<CAPTION>
DILUTED
REVENUE NET INCOME NET INCOME PER SHARE
-------- ---------- --------------------
<S> <C> <C> <C>
As previously reported...................... $3,123.6 $127.6 $.29
Effect of restatement....................... (202.3) (2.3) --
--------- ------- -----
As restated ................................ $2,921.3 $125.3 $.29
========= ======= ====
</TABLE>
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto included
under Item 1. In addition, reference should be made to the Company's audited
consolidated financial statements and notes thereto and related Management's
Discussion and Analysis of Financial Condition and Results of Operations.
In May 1998, the Company announced its intention to separate the
Company's solid waste subsidiary, Republic Services, Inc. ("RSG") from the
Company (the "Separation"). On July 1, 1998, RSG completed an initial public
offering (the "Initial Public Offering") of approximately 36.1% of its
outstanding common stock resulting in net proceeds of approximately $1.4
billion. Such proceeds will be used to finance the growth of the Company's
automotive retail and rental operations. The Company intends to distribute its
remaining shares of common stock in RSG as of the distribution date to the
Company's stockholders in 1999, subject to certain conditions and consents (the
"Distribution"). The Company and RSG have entered into certain agreements
providing for the Separation and governing various interim and ongoing
relationships between the companies. The Distribution is contingent, in part, on
the Company obtaining a private letter ruling from the Internal Revenue Service
to the effect that, among other things, the Distribution will qualify as a tax
free distribution for federal income tax purposes under Section 355 of the
Internal Revenue Code of 1986, as amended, in form and substance satisfactory to
the Company.
In October 1997, the Company sold its electronic security services
division. Accordingly, operating results of the electronic security services
segment for the periods prior to disposition have been classified as
discontinued operations in the accompanying unaudited condensed consolidated
financial statements.
BUSINESS COMBINATIONS
The Company makes its decisions to acquire or invest in businesses
based on financial and strategic considerations.
In September 1998, RSG entered into a definitive agreement with Waste
Management, Inc. ("Waste Management") to acquire certain assets. The assets to
be acquired include 16 landfills, 11 transfer stations and 136 commercial
collection routes across the United States as well as disposal agreements at
various Waste Management facilities. RSG will pay approximately $500.0 million
in cash plus certain additional properties in this transaction, which will be
accounted for under the purchase method of accounting. The closing of this
transaction is subject to approvals by various state and federal agencies.
Businesses acquired through September 30, 1998 and accounted for under
the purchase method of accounting are included in the Unaudited Condensed
Consolidated Financial Statements from the date of acquisition.
During the nine months ended September 30, 1998, the Company acquired
various businesses in the automotive retail and solid waste services industries.
The Company issued an aggregate of approximately 21.9 million shares of its
common stock, par value $.01 per share ("Common Stock") and paid approximately
$683.5 million of cash for automotive retail acquisitions accounted for under
the purchase method of accounting. The Company issued an aggregate of 3.4
million shares of Common Stock and paid approximately $132.7 million of cash for
solid waste acquisitions accounted for under the purchase method of accounting.
15
<PAGE> 16
CONSOLIDATED RESULTS OF OPERATIONS
The Company's consolidated revenue was $4.9 billion and $12.7 billion
for the three and nine months ended September 30, 1998, respectively, versus
$2.9 billion and $7.4 billion for the comparable 1997 periods. Consolidated
operating income was $304.5 million and $639.3 million for the three and nine
months ended September 30, 1998, respectively, versus $190.3 million and $252.3
million for the comparable 1997 periods. Net income was $179.7 million and
$384.2 million for the three and nine months ended September 30, 1998,
respectively, versus $125.3 million and $238.5 million for the comparable 1997
periods. Diluted earnings per share from continuing operations was $.38 and $.82
for the three and nine months ended September 30, 1998, respectively, versus
$.28 and $.54 for the comparable 1997 periods. The operating results for each of
the Company's business segments are discussed below.
BUSINESS SEGMENT INFORMATION
The following table sets forth revenue with percentages of total
revenue, and cost of operations, selling, general and administrative expenses,
restructuring and other charges and operating income with percentages of the
applicable segment revenue for each of the Company's business segments for the
periods indicated (in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- ---------------------------------------
1998 % 1997 % 1998 % 1997 %
---- - ---- - ---- - ---- -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Automotive retail.............. $3,508.0 72.0 $1,728.4 59.2 $9,024.0 71.3 $4,256.8 57.7
Automotive rental.............. 1,005.6 20.7 905.3 31.0 2,646.1 20.9 2,286.1 31.0
Solid waste
services..................... 355.0 7.3 287.6 9.8 991.7 7.8 834.5 11.3
------- ----- ------- ----- -------- ----- ------- -----
4,868.6 100.0 2,921.3 100.0 12,661.8 100.0 7,377.4 100.0
Cost of Operations:
Automotive retail.............. 3,003.2 85.6 1,547.1 89.5 7,770.3 86.1 3,793.3 89.1
Automotive rental.............. 721.0 71.7 640.9 70.8 1,991.1 75.2 1,716.1 75.0
Solid waste
services..................... 246.8 69.5 202.0 70.2 688.2 69.4 603.1 72.3
------- ------- -------- -------
3,971.0 2,390.0 10,449.6 6,112.5
Selling, General and
Administrative:
Automotive retail.............. 375.3 10.7 156.5 9.1 963.6 10.7 408.5 9.6
Automotive rental.............. 175.1 17.4 149.3 16.5 481.3 18.2 408.7 17.9
Solid waste
services..................... 29.2 8.2 26.7 9.3 87.3 8.8 79.8 9.5
Corporate expenses............. 13.5 -- 8.5 -- 40.7 -- 21.5 --
------- ----- ------- ------
593.1 341.0 1,572.9 918.5
Restructuring and
Other Charges:
Automotive rental.............. -- -- -- -- -- -- 94.1 4.1
Operating Income:
Automotive retail.............. 129.5 3.7 24.8 1.4 290.1 3.2 55.0 1.3
Automotive rental.............. 109.5 10.9 115.1 12.7 173.7 6.6 67.2 3.0
Solid waste
services..................... 79.0 22.3 58.9 20.5 216.2 21.8 151.6 18.2
Corporate expenses............. (13.5) -- (8.5) -- (40.7) -- (21.5) --
------- ------- ------- -------
$304.5 $190.3 $639.3 $252.3
======= ======= ======= ========
</TABLE>
16
<PAGE> 17
AUTOMOTIVE RETAIL
Automotive retail revenue was $3.5 billion for the three months ended
September 30, 1998 versus $1.7 billion for the comparable 1997 period, an
increase of 103.0%. Acquisitions accounted for 97.4% of the increase, new
AutoNation USA megastores accounted for 8.8% of the increase and volume declines
offset by price increases accounted for (3.2)%. The decline in volume during the
three months ended September 30, 1998 is attributed primarily to the effects of
the General Motors strike and a weak used car market. Automotive retail revenue
was $9.0 billion for the nine months ended September 30, 1998 versus $4.3
billion for the comparable 1997 period, an increase of 112.0%. Acquisitions
accounted for 100.2% of the increase, new AutoNation USA megastores accounted
for 13.4% of the increase and volume declines offset by price increases
accounted for (1.6)%.
Cost of automotive retail operations was $3.0 billion and $7.8 billion
for the three and nine months ended September 30, 1998, respectively, versus
$1.5 billion and $3.8 billion for the comparable 1997 periods. The increases in
aggregate dollars are primarily due to acquisitions. Cost of automotive retail
operations as a percentage of automotive retail revenue was 85.6% and 86.1% for
the three and nine months ended September 30, 1998, respectively, versus 89.5%
and 89.1% for the comparable 1997 periods. The decreases in such costs as
percentages of automotive retail revenue are primarily due to reduced inventory
costs and product mix.
Selling, general and administrative expenses were $375.3 million and
$963.6 million for the three and nine months ended September 30, 1998,
respectively, versus $156.5 million and $408.5 million for the comparable 1997
periods. The increases in aggregate dollars are primarily due to acquisitions.
Selling, general and administrative expenses as a percentage of automotive
retail revenue were 10.7% for the three and nine months ended September 30, 1998
versus 9.1% and 9.6% for the comparable 1997 periods. The increases in selling,
general and administrative expenses as percentages of automotive retail revenue
are primarily due to higher costs of acquired businesses and lower volume during
the periods.
AUTOMOTIVE RENTAL
Automotive rental revenue was $1.0 billion for the three months ended
September 30, 1998 versus $905.3 million for the comparable 1997 period, an
increase of 11.1%. Acquisitions accounted for 7.3% of the increase and price and
volume accounted for 3.8% of the increase. Automotive rental revenue was $2.6
billion for the nine months ended September 30, 1998 versus $2.3 billion for the
comparable 1997 period, an increase of 15.7%. Acquisitions accounted for 13.6%
of the increase and primarily price accounted for 2.1% of the increase.
Cost of automotive rental operations was $721.0 million and $2.0
billion for the three and nine months ended September 30, 1998, respectively,
versus $640.9 million and $1.7 billion for the comparable 1997 periods. The
increases in aggregate dollars are due to acquisitions and costs associated with
maintaining a larger fleet. Cost of automotive rental operations as a percentage
of automotive rental revenue was 71.7% and 75.2% for the three and nine months
ended September 30, 1998, respectively, versus 70.8% and 75.0% for the
comparable 1997 periods. The increases in such costs as percentages of revenue
are due to lower fleet utilization primarily in the leisure segment.
17
<PAGE> 18
Selling, general and administrative expenses were $175.1 million and
$481.3 million for the three and nine months ended September 30, 1998,
respectively, versus $149.3 million and $408.7 million for the comparable 1997
periods. The increases in aggregate dollars are primarily due to acquisitions,
growth of existing operations and costs associated with implementing the
Company's Odyssey operating system ("Odyssey"). Selling, general and
administrative expenses were 17.4% and 18.2% for the three and nine months ended
September 30, 1998, respectively, versus 16.5% and 17.9% for the comparable 1997
periods. The increases in such costs as percentages of revenue for the three and
nine months ended September 30, 1998 versus the comparable 1997 periods are
primarily due to costs associated with implementing Odyssey and, during the
three months ended September 30, 1998, higher selling costs.
During the nine months ended September 30, 1997, the Company recorded
restructuring and other charges related to the Company's automotive rental
operations totaling approximately $94.1 million. The primary components of this
charge were as follows: $32.0 million related to elimination of redundant
information systems; $18.0 million related to fleet consolidation; and $44.1
million related to closure or sale of duplicate rental facilities and merger and
other non-recurring expenses. Through September 30, 1998, the Company spent
approximately $37.7 million related to integration and other activities and has
recorded $27.7 million of these charges against certain assets. At September 30,
1998, approximately $28.7 million remained in accrued liabilities related to
these charges.
SOLID WASTE SERVICES
Solid waste services revenue was $355.0 million for the three months
ended September 30, 1998 versus $287.6 million for the comparable 1997 period,
an increase of 23.4%. Internal growth accounted for 14.9% of the increase, of
which price and primarily volume contributed 10.1% and "tuck-in" acquisitions
contributed 4.8%. Acquisitions accounted for the remaining 8.5% of the increase.
Solid waste services revenue was $991.7 million for the nine months ended
September 30, 1998 versus $834.5 million for the comparable 1997 period, an
increase of 18.8%. Internal growth accounted for 11.5% of the increase, of which
price and primarily volume contributed 6.7% and "tuck-in" acquisitions
contributed 4.8%. Acquisitions accounted for the remaining 7.3% of the increase.
Cost of solid waste services operations was $246.8 million and $688.2
million for the three and nine months ended September 30, 1998, respectively,
versus $202.0 million and $603.1 million for the comparable 1997 periods. The
increases in aggregate dollars are primarily due to acquisitions. Cost of solid
waste services operations as a percentage of solid waste services revenue was
69.5% and 69.4% for the three and nine months ended September 30, 1998,
respectively, versus 70.2% and 72.3% for the comparable 1997 periods. The
decreases in such costs as percentages of solid waste services revenue are
primarily a result of improved operating efficiencies.
Selling, general and administrative expenses were $29.2 million and
$87.3 million for the three and nine months ended September 30, 1998,
respectively, versus $26.7 million and $79.8 million for the comparable 1997
periods. The increases in aggregate dollars are primarily due to acquisitions.
Selling, general and administrative expenses as a percentage of solid waste
services revenue were 8.2% and 8.8% for the three and nine months ended
September 30, 1998, respectively, versus 9.3% and 9.5% for the comparable 1997
periods. The decreases in such expenses as percentages of solid waste services
revenue are primarily due to leveraging the existing overhead structure on an
expanding revenue base.
CORPORATE
Corporate expenses were $13.5 million and $40.7 million for the three
and nine months ended September 30, 1998, respectively, versus $8.5 million and
$21.5 million for the comparable 1997 periods. Such increases are a result of
the overall growth experienced by the Company.
18
<PAGE> 19
INTEREST INCOME
Interest income was $3.0 million and $6.3 million for the three and
nine months ended September 30, 1998, respectively, versus $3.1 million and
$14.9 million for the comparable 1997 periods. The decrease in interest income
for the nine months ended September 30, 1998 versus the comparable 1997 period
is primarily due to lower cash balances on hand during the periods.
INTEREST EXPENSE
Interest expense was incurred primarily on borrowings under the
Company's revolving credit facilities for acquisitions. Interest expense was
$4.2 million and $18.2 million for the three and nine months ended September 30,
1998, respectively, versus $3.1 million and $13.7 million for the comparable
1997 periods. Such increases are primarily due to borrowings for acquisitions.
Interest expense related to revenue earning vehicle financing and vehicle
inventory financing is included in cost of operations for automotive rental and
automotive retail, respectively.
OTHER INCOME (EXPENSE), NET
Other income (expense), net for the nine months ended September 30,
1997 includes a $102.3 million pre-tax gain from the May 1997 sale of the
Company's 15.0 million shares of ADT Limited common stock, net of fees and
expenses.
INCOME TAXES
The provision for income taxes was $110.4 million and $225.4 million
for the three and nine months ended September 30, 1998, respectively, versus
$69.7 million and $131.1 million for the comparable 1997 periods. Income taxes
have been provided based upon the Company's anticipated annual effective income
tax rate.
Effective with the Initial Public Offering on July 1, 1998, RSG is no
longer included in the Company's consolidated federal income tax return.
MINORITY INTEREST IN NET INCOME OF SUBSIDIARY
Minority interest in net income of subsidiary was $16.7 million for the
three months ended September 30, 1998. Such amount represents 36.1% (the
percentage of RSG common stock issued in the Initial Public Offering) of RSG's
net income during the period.
FINANCIAL CONDITION
At September 30, 1998, the Company had $325.1 million in cash and
approximately $961.0 million of availability under its $1.0 billion unsecured
revolving credit facility which may be used for general corporate purposes.
As previously discussed, on July 1, 1998 the Company's solid waste
subsidiary, RSG, completed the Initial Public Offering resulting in net proceeds
of approximately $1.4 billion. Proceeds from the offering were partially used to
repay in full amounts outstanding under the Company's revolving credit facility.
Effective with the Initial Public Offering, RSG is financed autonomously.
Accordingly, RSG's operating cash flow is retained by RSG and is no longer
commingled with the Company's cash flow from its automotive operations. In
addition, borrowings under the Company's $1.0 billion revolving credit facility
are no longer used to finance RSG's working capital requirements or
acquisitions. In July 1998, RSG entered into a $1.0 billion unsecured revolving
credit facility (the "RSG Credit Facility") with a group of banks to finance its
working capital requirements and future acquisitions. $500.0 million of the RSG
Credit Facility has a term of 364 days and the remaining $500.0 million has a
term of 5 years. Borrowings under the RSG Credit Facility bear interest at LIBOR
based interest rates. At September 30, 1998, RSG had approximately $949.0
million of availability under the RSG Credit Facility.
19
<PAGE> 20
The Company finances vehicle purchases for its domestic automotive
rental operations through a $3.35 billion program comprised of a $2.3 billion
commercial paper program and three commercial paper conduit facilities totaling
$1.05 billion. In June 1998, the Company increased the commercial paper conduit
facilities by $500.0 million to $3.85 billion through November 1998. In October
1998, the Company extended the maturity of certain bank lines of credit totaling
$2.3 billion which provide liquidity backup for these facilities from October
1998 to January 1999. Borrowings under this program are secured by eligible
vehicle collateral and bear interest at market based commercial paper rates. As
of September 30, 1998, the Company had approximately $203.9 million of
availability under this program. The Company expects to continue to fund its
revenue earning vehicle purchases with secured vehicle financings.
The Company has vehicle inventory financing and other credit facilities
to fund its automotive retail operations. In connection with the development of
the AutoNation USA megastores, the Company is the lessee under a $500.0 million
operating lease facility established to acquire and develop properties used in
its business. The Company has guaranteed the residual value of the properties
under this facility which guarantee totaled approximately $389.2 million at
September 30, 1998.
In September 1998, the Company entered into a $1.0 billion commercial
paper warehouse facility with unrelated financial institutions for the
securitization of installment loan receivables generated by the Company's
automotive finance subsidiary. During the three months ended September 30, 1998,
the Company securitized approximately $461.8 million of loan receivables under
this program. Proceeds from the securitization were primarily used to repay
borrowings under the Company's revolving credit facility. The Company expects to
continue to securitize receivables under this facility and/or other programs.
In August 1998, the Company's Board of Directors authorized the
repurchase of up to $500.0 million of Common Stock over the following 12 months.
Repurchases are made either pursuant to Rule 10b-18 of the Securities Exchange
Act of 1934, as amended, or in privately negotiated transactions. As of
September 30, 1998, the Company had repurchased 1.4 million shares of Common
Stock for an aggregate price of approximately $24.3 million. As of November 6,
1998, the Company had repurchased an additional 2.6 million shares of Common
Stock for an aggregate price of approximately $36.6 million subsequent to
September 30, 1998.
The Company believes that it has sufficient financial resources
available to meet its anticipated capital requirements and obligations as they
come due.
CASH FLOWS
Cash and cash equivalents increased by $177.1 million and decreased by
$158.2 million during the nine months ended September 30, 1998 and 1997,
respectively. The major components of these changes are discussed below.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash used in operating activities was $78.8 million and $364.2 million
during the nine months ended September 30, 1998 and 1997, respectively. As
previously discussed, the Company finances its revenue earning vehicle purchases
with secured vehicle financings. The Company generated positive operating cash
flow of $436.6 million and $212.8 million during the nine months ended September
30, 1998 and 1997, respectively, excluding revenue earning vehicle depreciation
and purchases of revenue earning vehicles (net of sales) totaling $515.4 million
and $577.0 million during the nine months ended September 30, 1998 and 1997,
respectively.
20
<PAGE> 21
CASH FLOWS FROM INVESTING ACTIVITIES
Cash flows from investing activities consist primarily of cash used for
business acquisitions, capital additions and other transactions as further
described below.
Cash used in business acquisitions was $728.0 million and $99.7 million
for the nine months ended September 30, 1998 and 1997, respectively. In
addition, as discussed under "Cash Flows from Financing Activities," the Company
repaid debt assumed in acquisitions. See "Business Combinations" of Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Note 2, "Business Combinations" of Notes to Unaudited Condensed Consolidated
Financial Statements for a further discussion of businesses acquired.
Capital additions were $478.5 million and $324.6 million during the
nine months ended September 30, 1998 and 1997, respectively.
In March 1997, the Company exercised its warrant to acquire 15.0
million common shares of ADT Limited (the "ADT Shares") for $20 per share. In
May 1997, the Company sold the 15.0 million ADT Limited common shares for $27.50
per share to certain institutional investors.
The Company expects capital expenditures and cash used in business
acquisitions to increase during the remainder of 1998 and in the foreseeable
future due to expansion of the Company's existing businesses. The Company
intends to finance capital expenditures and business acquisitions through cash
on hand, revolving credit facilities and other financings.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from financing activities during the nine months ended
September 30, 1998 and 1997 consisted of revenue earning vehicle financings,
commercial bank borrowings, repayments of debt, proceeds from the July 1998 RSG
Initial Public Offering, treasury stock purchases and, in 1997, the sale of
Common Stock in a private placement transaction.
Payments of notes payable and long-term debt were $299.6 million and
$765.2 million during the nine months ended September 30, 1998 and 1997,
respectively. These amounts consist primarily of the repayment of debt assumed
in acquisitions and, in 1997, approximately $300.0 million borrowed to fund the
purchase of the ADT Shares described above.
SEASONALITY
The Company's automotive retail operations generally experience higher
volumes of vehicle sales in the second and third quarters of each year in part
due to manufacturer incentives and consumer buying trends.
The Company's automotive rental operations and particularly the leisure
travel segment is highly seasonal. In these operations, the 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 its rental
fleet and workforce to accommodate increased rental activity. As a result, any
occurrence that disrupts travel patterns during the summer period could have a
material adverse effect on the annual performance of this segment. The first and
fourth quarters for the Company's automotive rental operations are generally the
weakest, when there is limited leisure travel and a greater potential for
adverse weather conditions. Many of the operating expenses such as rent, general
insurance and administrative personnel are fixed and cannot be reduced during
periods of decreased rental demand.
21
<PAGE> 22
YEAR 2000
The Company utilizes software and related technologies throughout its
businesses that will be affected by the date change in the year 2000 ("Y2K").
The Company is currently addressing the impact of Y2K on its computer programs,
embedded chips and third party suppliers. The Company has developed a dedicated
Year 2000 Project Office to coordinate compliance efforts and ensure that the
project status is monitored and reported throughout the organization.
Each division of the Company has developed plans to correct Y2K issues
and, to date, has made progress as follows:
Automotive Retail Division:
Approximately 80% of the Company's auto dealerships currently use one
of two major vendor's Dealer Management Systems (DMS), which perform the core
functions of a dealership's operations. The Company has determined, subject to
verification and testing, that these vendors are or will be Y2K compliant by
early 1999. Company-owned dealerships using these DMS systems have been or will
be upgraded to the compliant version. The Company intends to obtain further
documentation to support such compliance as well as conduct testing to verify
compliance. The DMS in operation at the remaining 20% of the Company's
dealerships are currently believed to be compliant. Further documentation is
being obtained and testing is being conducted to verify this compliance.
The Company has developed other software applications that are in use
at its AutoNation USA megastores as well as some of its new car dealerships.
These applications have been developed recently and are not believed to contain
any significant Y2K issues. However, the Company has retained a consulting firm
to complete a pilot assessment of the code to determine if any significant
issues exist. This effort is scheduled for completion at the end of November
1998. Any additional actions necessary will be based on the result of that
assessment.
The Company has completed an inventory of its dealerships, megastores
and reconditioning centers to identify other critical business systems, products
and vendors, including embedded chip issues. The identification of
non-compliance issues is scheduled to be completed by the end of 1998 and any
issues are expected to be remedied or replaced in mid 1999.
Automotive Rental Division:
Over the past year, the Company, in conjunction with external
consultants, has been developing the "Odyssey" system, which will replace
substantially all rental systems, as well as the hardware and operating systems
used to support these systems. This system has been designed to be Y2K compliant
and Y2K testing will be completed prior to implementation. This system is
scheduled to be implemented at the Company's North American National Car Rental
("National")locations prior to the end of 1998.
The Odyssey system is scheduled to be implemented at the Company's
Alamo Car Rental ("Alamo") locations prior to the year 2000. As a contingency,
assuming the Odyssey system fails to be available and compliant on a timely
basis, Alamo's existing systems are being remediated and that process, which
began in 1997, is approximately 50% complete. Testing of the corrected code is
taking place as changes are made.
The Rental Division is in the process of surveying all North American
rental locations to identify other critical business systems, products and
vendors, including embedded chip issues. The identification of non-compliance
issues is scheduled to be completed by the end of 1998 and any issues are
expected to be remediated or replaced by mid 1999. A plan is currently being
developed to address foreign locations and licensees and should be finalized by
November 1998.
22
<PAGE> 23
Solid Waste Division:
The Solid Waste Division has identified six critical systems or
processes related to Y2K compliance. These are hauling and disposal fleet
operations, electrical systems, telecommunications, payroll processing, billing
systems and payments to critical third parties. The Company expects to be
complete with the inventory and assessment of this information by December 1998.
As information is received related to these areas, the Company analyzes the
compliance of products and develops a strategy for repair or replacement of
non-compliant systems as well as testing and validation of such items. The
Company expects to be substantially complete with the analysis of this
information by early 1999. The remediation phase is expected to be complete by
mid 1999.
Costs To Address Y2K
To date, the Company estimates that it has spent approximately $6.4
million on Y2K efforts across all areas and expects to spend a total of
approximately $30.0 million when complete. Such amounts exclude costs associated
with replacing the Company's automotive rental systems with Odyssey since the
Odyssey implementation was planned in advance and not accelerated as a result of
Y2K. The Company expects to fund Y2K costs through operating cash flow. All
system modification costs associated with Y2K will be expensed as incurred. Y2K
expenditures vary significantly in project phases and vary depending on
remedial methods used, and past expenditures in relation to total estimated
costs should not be considered or relied on as a basis for estimating progress
to completion for any element of the Y2K project.
Risks and Contingency Plans
The Company presently believes, that upon remediation of its business
software applications, as well as other equipment with embedded technology, the
Y2K issue will not present a materially adverse risk to the Company's future
consolidated results of operations, liquidity and capital resources. However, if
such remediation is not completed in a timely manner or the level of timely
compliance by key suppliers or vendors is not sufficient, the Y2K issue could
have a material adverse impact on the Company's operations including, but not
limited to, delays in delivery of products resulting in loss of revenue,
increased operating costs, loss of customers or suppliers, or other significant
disruptions to the Company's business. The Company has initiated comprehensive
contingency and business continuation plans which are expected to be in place in
early 1999 in order to ensure enough time for implementation of such plan, if
necessary and thus possibly avoid such risks.
Determining the Y2K readiness of third party products and business
dependencies requires pursuit, collection and appraisal of voluntary
statements made or provided by those parties, if available, together with
independent factual research. Although the Company has taken, and will continue
to take, reasonable efforts to gather information to determine and verify the
readiness of products and dependencies, there can be no assurances that
realiable information will be offered or otherwise available. In addition,
verification methods (including testing methods) may not be reliable or fully
implemented. Accordingly, notwithstanding the foregoing efforts, there are no
assurances that the Company is correct in its determination or belief that a
product (information technology and other computerized equipment) or a business
dependency (including a supplier, distributor or ancillary industry group) is
Y2K ready.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
requires computer software costs associated with internal use software to be
expensed as incurred until certain capitalization criteria are met. The Company
will adopt SOP 98-1 beginning January 1, 1999. Adoption of this Statement will
not have a material impact on the Company's consolidated financial position or
results of operations.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting
on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires all costs
associated with pre-opening, pre-operating and organization activities to be
expensed as incurred. The Company's accounting policies conform with the
requirements of SOP 98-5, therefore adoption of this statement will not impact
the Company's consolidated financial position or results of operations.
23
<PAGE> 24
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. SFAS 133 is effective for fiscal years beginning after June 15, 1999. SFAS
133 cannot be applied retroactively. The Company will adopt SFAS 133 beginning
January 1, 2000. The Company has not yet quantified the impact of adopting SFAS
133 on the Company's consolidated financial statements. However, SFAS 133 could
increase volatility in earnings and other comprehensive income.
FORWARD-LOOKING STATEMENTS
Certain statements and information included herein constitute
"forward-looking statements" within the meaning of the Federal Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance, or achievements of the Company to be materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements. Such factors include, among other
things, the ability to develop and implement operational and financial systems
to manage rapidly growing operations; competition in the Company's lines of
business; the ability to integrate and successfully operate acquired businesses
and the risks associated with such businesses; the ability to obtain financing
on acceptable terms to finance the Company's operations and growth strategy and
for the Company to operate within the limitations imposed by financing
arrangements; the dependence on vehicle manufacturers to approve dealership
acquisitions and the restrictions imposed by vehicle manufacturers on dealership
acquisitions and operations; the possibility of unfavorable changes to the cost
or financing of the Company's vehicle rental fleet; the Company's dependence on
key personnel; the risks and costs associated with complying with the date
change in the year 2000; and other factors contained in the Company's filings
with the Securities and Exchange Commission.
24
<PAGE> 25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following information about the Company's market sensitive
financial instruments constitutes a "forward-looking statement." The Company's
major market risk exposure is changing interest rates, primarily in the United
States. The Company's policy is to manage interest rates through use of a
combination of fixed and floating rate debt. Interest rate swaps may be used to
adjust interest rate exposures when appropriate, based upon market conditions.
The amounts exchanged by the counterparties to interest rate swap agreements
normally are based upon the notional amounts and other terms, generally related
to interest rates, of the derivatives. While notional amounts of interest rate
swaps form part of the basis for the amounts exchanged by the counterparties,
the notional amounts are not themselves exchanged, therefore, do not represent a
measure of the Company's exposure as an end user of derivative financial
instruments. Interest rate swaps are entered into with a group of financial
institutions with investment grade credit ratings, thereby minimizing the risk
of credit loss.
Reference is made to the Company's quantitative disclosures about
market risk as of December 31, 1997 included under Item 7A of the Company's most
recent Annual Report on Form 10-K. At September 30, 1998, notional principal
amounts related to interest rate swaps (variable to fixed rate) were $2.7
billion maturing as follows: $100.0 million in the remainder of 1998; $650.0
million in 1999; $1.0 billion in 2000; $250.0 million in 2001; $150.0 million in
2002; and $500.0 million in 2003. As of September 30, 1998, the weighted average
fixed rate payment on variable to fixed rate swaps was 5.86%. Variable rates
received are indexed to the Commercial Paper Nonfinancial rate ($2.6 billion
notional principal amount) and LIBOR ($100.0 million notional principal amount).
Including the Company's variable to fixed interest rate swaps, the Company's
ratio of fixed interest rate debt to total debt outstanding was 57% as of
September 30, 1998.
In September 1998, the Company entered into certain interest rate
derivative transactions with certain financial institutions to manage the impact
of interest rate changes on securitized installment loan receivables. These
derivative transactions consist of a series of interest rate caps and floors
with an aggregate notional amount of $498.0 million maturing in 2004 which
effectuate a variable to fixed rate swap at a weighted average rate of 5.17% at
September 30, 1998. Variable rates on the underlying portfolio are indexed to
the Commercial Paper Nonfinancial rate.
25
<PAGE> 26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
By letter dated January 11, 1996, Acme Commercial Corp. d/b/a CarMax,
The Auto Superstore, ("CarMax") accused the Company's wholly-owned subsidiary,
AutoNation USA of infringing CarMax's trademark rights by using the marks
AutoNation USA(sm) and "The Better Way to Buy a Car(sm)." AutoNation USA denied
such allegations and on February 5, 1996, filed suit in the U.S. District Court
for the Southern District of Florida seeking a declaratory judgment that its use
and registration of such marks do not violate any of the rights of CarMax. On or
about October 11, 1996, CarMax filed a counterclaim against AutoNation USA
seeking damages and an order enjoining AutoNation USA from using certain marks,
including the marks AutoNation USA and "The Better Way to Buy a Car." On
November 5, 1998, following a jury trial, the Court entered a judgement in favor
of AutoNation USA and against CarMax with respect to the marks in question.
The Company is also a party to various other general corporate legal
proceedings which have arisen in the ordinary course of business. While the
results of these matters cannot be predicted with certainty, the Company
believes that losses, if any, resulting from the ultimate resolution of these
matters will not have a material adverse effect on the Company's consolidated
results of operations, cash flows or financial position. However, unfavorable
resolution could affect the consolidated results of operations or cash flows for
the quarterly periods in which they are resolved.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sales of Unregistered Shares:
All transactions listed below involve the issuance of shares of Common
Stock by the Company in reliance upon Section 4(2) of the Securities Act of
1933, as amended.
From time to time throughout the three months ended September 30, 1998,
the Company issued an aggregate of 7,180,127 shares of Common Stock to certain
warrant holders in connection with the exercise of warrants to purchase shares
of Common Stock at exercise prices ranging from $2.75 to $3.50.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule for the Nine Months Ended September 30,
1998 (for SEC use only)
(b) Reports on Form 8-K:
Form 8-K, filed and dated July 22, 1998, Item 5, reporting restated
consolidated financial statements for certain 1996 and 1997 business
combinations accounted for under the pooling of interests method of
accounting.
Form 8-K/A, dated July 22, 1998 (filed September 11, 1998), Item 5,
reporting restated consolidated financial statements for certain 1996
and 1997 business combinations accounted for under the pooling of
interests method of accounting.
Form 8-K, filed and dated August 15, 1998, Item 5, reporting that the
Company's Board of Directors had authorized the repurchase of up to
$500 million of the Company's common stock over the next 12 months.
26
<PAGE> 27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant, Republic Industries, Inc., has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
REPUBLIC INDUSTRIES, INC.
By: /s/ Mary E. Wood
------------------------------
Mary E. Wood
VICE PRESIDENT AND
CORPORATE CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
Date: November 13, 1998
27
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