<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) October 21, 1999
-----------------
AUTONATION, INC.
----------------
(Exact name of registrant as specified in its charter)
Delaware
--------
(State or other jurisdiction of incorporation)
1-13107 73-1105145
------- ----------
(Commission (IRS Employer
File Number) Identification No.)
110 SE 6th Street 33301
Ft. Lauderdale, FL -----
------------------------ (Zip Code)
(Address of principal executive offices)
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 AND OTHER INFORMATION FOR REGISTRATION AND OTHER
PURPOSES
In August 1999, AutoNation, Inc. (the "Registrant") reported that it
plans to separate its automotive rental division that includes Alamo
Rent-A-Car, National Car Rental and CarTemps USA. The Registrant is filing
herewith Selected Financial Data, Management's Discussion and Analysis of
Financial Condition and Results of Operations and audited consolidated
financial statements each of which have been restated to present the Company's
automotive rental division as discontinued operations. 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, 333-08479, 333-18009, 333-20667, 333-23415,
333-29217, 333-35749 and 333-44611; on Form S-4, file numbers 333-17915 and
333-41505; and on Form S-8, file numbers 33-93742, 333-07623, 333-19453,
333-20669, 333-29265, 333-42891 and 333-56967.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits.
The Exhibits to this Report are listed in the Exhibit Index set forth
elsewhere herein.
2
<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.
AutoNation, Inc.
By: /s/ Mary E. Wood
--------------------------------------
Mary E. Wood
Vice President and Corporate Controller
(Principal Accounting Officer)
Date: October 21, 1999
----------------
3
<PAGE> 4
AUTONATION, INC.
EXHIBIT INDEX
Number and
Description of Exhibit
- ----------------------
1. None
2. None
3. None
4. None
15. None
16. None
17. None
21. None
23.1 Consent of Arthur Andersen LLP
24. None
27.1 Financial Data Schedule for the Year Ended December 31,
1998 (for SEC use only)
27.2 Financial Data Schedule for the Year Ended December 31,
1997 (for SEC use only)
27.3 Financial Data Schedule for the Year Ended December 31,
1996 (for SEC use only)
99. Financial Information
4
<PAGE> 1
EXHIBIT 23.1
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 AutoNation, Inc. on Forms S-3 (Registration
Nos. 33-61649, 33-62489, 33-63735, 33-65289, 333-01757, 333-04269, 333-08479,
333-18009, 333-20667, 333-23415, 333-29217, 333-35749 and 333-44611), Forms S-4
(Registration Nos. 333-17915 and 333-41505) and Forms S-8 (Registration Nos.
33-93742, 333-07623, 333-19453, 333-20669, 333-29265, 333-42891 and 333-56967).
Fort Lauderdale, Florida,
October 19, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 183,800
<SECURITIES> 0
<RECEIVABLES> 1,000,200
<ALLOWANCES> 33,800
<INVENTORY> 1,849,500
<CURRENT-ASSETS> 3,061,200
<PP&E> 1,628,700
<DEPRECIATION> 107,200
<TOTAL-ASSETS> 8,412,200
<CURRENT-LIABILITIES> 1,997,300
<BONDS> 520,900
0
0
<COMMON> 4,700
<OTHER-SE> 5,419,500
<TOTAL-LIABILITY-AND-EQUITY> 8,412,200
<SALES> 12,664,600
<TOTAL-REVENUES> 12,664,600
<CGS> 10,909,600
<TOTAL-COSTS> 10,909,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,000
<INCOME-PRETAX> 352,600
<INCOME-TAX> 126,800
<INCOME-CONTINUING> 225,800
<DISCONTINUED> 273,700
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 499,500
<EPS-BASIC> 1.10
<EPS-DILUTED> 1.06
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 84,300
<SECURITIES> 0
<RECEIVABLES> 321,800
<ALLOWANCES> 8,500
<INVENTORY> 1,081,300
<CURRENT-ASSETS> 1,521,100
<PP&E> 983,100
<DEPRECIATION> 70,700
<TOTAL-ASSETS> 4,852,100
<CURRENT-LIABILITIES> 752,500
<BONDS> 261,100
0
0
<COMMON> 4,300
<OTHER-SE> 3,480,000
<TOTAL-LIABILITY-AND-EQUITY> 4,852,100
<SALES> 6,122,800
<TOTAL-REVENUES> 6,122,800
<CGS> 5,459,000
<TOTAL-COSTS> 5,459,000
<OTHER-EXPENSES> 85,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,500
<INCOME-PRETAX> 21,400
<INCOME-TAX> 8,000
<INCOME-CONTINUING> 13,400
<DISCONTINUED> 426,300
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 439,700
<EPS-BASIC> 1.09
<EPS-DILUTED> 1.02
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 2,933,700
<TOTAL-REVENUES> 2,933,700
<CGS> 2,611,300
<TOTAL-COSTS> 2,611,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,200
<INCOME-PRETAX> 9,200
<INCOME-TAX> 10,300
<INCOME-CONTINUING> (1,100)
<DISCONTINUED> 26,000
<EXTRAORDINARY> (31,600)
<CHANGES> 0
<NET-INCOME> (6,700)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
<PAGE> 1
EXHIBIT 99
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(a) Selected Financial Data.......................................................... F-1
(b) Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... F-2
(c) Historical Financial Statements and Schedule
Report of Independent Certified Public Accountants.......................... F-17
Consolidated Balance Sheets as of December 31, 1998 and 1997................ F-18
Consolidated Statements of Operations for Each of the
Three Years Ended December 31, 1998....................................... F-19
Consolidated Statements of Shareholders' Equity for Each of the
Three Years Ended December 31, 1998....................................... F-20
Consolidated Statements of Cash Flows for Each of the Three Years
Ended December 31, 1998................................................... F-21
Notes to Consolidated Financial Statements.................................. F-22
Financial Statement Schedule II, Valuation and Qualifying
Accounts and Reserves, for Each of the Three Years Ended
December 31, 1998......................................................... F-40
</TABLE>
<PAGE> 2
SELECTED FINANCIAL DATA
The following Selected Financial Data should be read in conjunction
with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS," the Company's Consolidated Financial Statements and Notes
thereto and other financial information included elsewhere in this Form 8-K.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenue ...................................... $12,664.6 $ 6,122.8 $ 2,933.7 $2,361.7 $2,067.7
Income (loss) from continuing
operations before
extraordinary charge....................... 225.8 13.4 (1.1) 17.1 15.3
Net income (loss).............................. 499.5 439.7 (6.7) 34.6 57.6
Basic earnings (loss) per share:
Continuing operations...................... $ .50 $ .03 $ -- $ .07 $ .07
Discontinued operations.................... .60 1.06 .08 .06 .20
Extraordinary charge....................... -- -- (.10) -- --
--------- --------- ---------- -------- --------
Net income (loss).......................... $ 1.10 $ 1.09 $ (.02) $ .13 $ .27
========= ========= ========== ======== ========
Diluted earnings (loss) per share:
Continuing operations...................... $ .48 $ .03 $ -- $ .06 $ .07
Discontinued operations.................... .58 .99 .08 .07 .20
Extraordinary charge....................... -- -- (.10) -- --
--------- --------- ---------- -------- --------
Net income (loss).......................... $ 1.06 $ 1.02 $ (.02) $ .13 $ .27
========= ========= ========== ======== ========
Total assets................................... $ 8,412.2 $ 4,852.1 $ 2,229.1 $1,378.0 $ 946.7
Long-term debt,
net of current maturities.................. 520.9 261.1 269.3 69.7 76.9
Shareholders' equity........................... 5,424.2 3,484.3 1,419.9 789.0 427.4
</TABLE>
See Notes 2, 3, 6, 10 and 11 of Notes to Consolidated Financial
Statements for discussion of business combinations, notes payable and long-term
debt, shareholders' equity, restructuring and other charges and discontinued
operations, respectively, and their effect on comparability of year-to-year
data.
F-1
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of AutoNation, Inc. (the
"Company") which are included elsewhere herein. All references to historical
share and per share data of the Company's common stock, par value $.01 per
share ("Common Stock"), have been retroactively adjusted to reflect the
two-for-one stock split that occurred in June 1996, which is more fully
described in Note 6, Shareholders' Equity, of Notes to Consolidated Financial
Statements.
In August 1999, the Company announced its intention to separate the
Company's automotive rental subsidiary, ANC Rental Corporation ("ANC") from the
Company. In September 1999, the Company announced its intention to distribute
its entire interest in ANC to the Company's stockholders on a tax-free basis in
January 2000, subject to certain conditions and consents. The Company has
obtained a private letter ruling from the Internal Revenue Service that the
distribution of ANC will qualify as a tax-free distribution for federal income
tax purposes under Section 355 of the Internal Revenue Code of 1986, as
amended. As discussed in Note 11, Discontinued Operations, of Notes to
Consolidated Financial Statements, the Company's automotive rental segment has
been accounted for as discontinued operations and the accompanying Consolidated
Financial Statements presented herein have been restated to report separately
the net assets and operating results of these discontinued operations.
In May 1999, the Company sold substantially all of its remaining
interest in its former solid waste subsidiary, Republic Services, Inc. ("RSG")
in a public offering resulting in proceeds of approximately $1.78 billion, net
of underwriting fees. As discussed in Note 11, Discontinued Operations, of
Notes to Consolidated Financial Statements, the Company's solid waste services
segment has been accounted for as discontinued operations and, accordingly, the
net assets and results of operations have been classified as discontinued
operations in the accompanying Consolidated Financial Statements.
In October 1997, the Company sold its electronic security services
division. Accordingly, the operating results and gain on disposition of the
electronic security services segment have been classified as discontinued
operations in the accompanying Consolidated Financial Statements.
BUSINESS COMBINATIONS
The Company makes its decisions to acquire or invest in businesses
based on financial and strategic considerations.
Businesses acquired through December 31, 1998 and accounted for under
the purchase method of accounting are included in the Consolidated Financial
Statements from the date of acquisition. Businesses acquired and accounted for
under the pooling of interests method of accounting have been included
retroactively in the Consolidated Financial Statements as if the companies had
operated as one entity since inception.
During the year ended December 31, 1998, the Company acquired various
businesses in the automotive retail, solid waste services and automotive rental
industries. With respect to continuing operations, the Company issued
approximately 21.9 million shares of Common Stock valued at $473.2 million and
paid approximately $727.0 million in cash for acquisitions accounted for under
the purchase method of accounting. With respect to discontinued operations, the
Company issued approximately 3.4 million shares of Common Stock valued at $68.0
million and paid approximately $494.4 million in cash and certain properties
for acquisitions accounted for under the purchase method of accounting.
F-2
<PAGE> 4
During the year ended December 31, 1997, the Company acquired various
businesses in the automotive retail, automotive rental, solid waste services
and electronic security services industries. With respect to continuing
operations, the Company issued approximately 43.6 million shares of Common
Stock valued at $739.1 million and paid approximately $84.6 million in cash for
acquisitions accounted for under the purchase method of accounting and issued
approximately 23.6 million shares of Common Stock for acquisitions accounted
for under the pooling of interests method of accounting. With respect to
discontinued operations, the Company issued approximately 10.1 million shares
of Common Stock valued at $224.3 million and paid approximately $163.9 million
in cash and notes for acquisitions accounted for under the purchase method of
accounting and issued approximately 59.9 million shares of Common Stock for
acquisitions accounted for under the pooling of interests method of accounting.
During the year ended December 31, 1996, the Company acquired various
businesses in the automotive retail, automotive rental, solid waste services
and electronic security services industries. With respect to continuing
operations, the Company issued approximately 1.0 million shares of Common Stock
valued at $11.6 million and paid approximately $18.3 million in cash for
acquisitions accounted for under the purchase method of accounting and issued
approximately 4.2 million shares of Common Stock for acquisitions accounted for
under the pooling of interests method of accounting. With respect to
discontinued operations, the Company issued approximately 8.1 million shares of
Common Stock valued at $75.0 million and paid approximately $33.2 million in
cash for acquisitions accounted for under the purchase method of accounting and
issued approximately 67.2 million shares of Common Stock for acquisitions
accounted for under the pooling of interests method of accounting.
See Note 2, Business Combinations, of Notes to Consolidated Financial
Statements, for further discussion of business combinations.
CONSOLIDATED RESULTS OF OPERATIONS
The following is a summary of the Company's consolidated results of
operations both in gross dollars and on a diluted per share basis for the
periods indicated (in millions, except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- -------------------
DILUTED DILUTED DILUTED
PER PER PER
GROSS SHARE GROSS SHARE GROSS SHARE
----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing
operations........................... $225.8 $ .48 $ 13.4 $ .03 $(1.1) $ --
------ ----- ------ ----- ----- -------
Income from discontinued
operations:
Automotive rental.................. 108.8 .23 51.2 .12 (49.9) (.16)
Solid waste services............... 153.3 .33 135.6 .31 67.5 .21
Electronic security
services...................... -- -- 9.5 .02 8.4 .03
Gain on sale of
electronic security
services division............. 11.6 .02 230.0 .54 -- --
Extraordinary charge................... -- -- -- -- (31.6) (.10)
------ ----- ----- ----- ----- -------
Net income (loss)...................... $499.5 $1.06 $439.7 $1.02 $(6.7) $ (.02)
====== ===== ====== ===== ===== =======
</TABLE>
The 1997 results from continuing operations include restructuring and
other pre-tax charges and a non-recurring gain from the sale of the ADT Limited
common stock further described below. The diluted earnings per share effect of
restructuring and other pre-tax charges and the non-recurring gain was to
decrease diluted earnings per share from continuing operations by $.07 from
$.10 to $.03 in 1997.
F-3
<PAGE> 5
CONTINUING OPERATIONS
The Company's business consists primarily of the sale of new and used
vehicles and related automotive services and products. The Company owns and
operates franchised automotive dealerships and used vehicle megastores under
the name AutoNation USA(SM). The Company has significantly expanded its
operations through the acquisition of franchised automotive dealerships and
currently plans to continue this expansion. The Company has established
framework agreements with various manufacturers which allow the Company to
acquire franchised automotive dealerships nationwide.
The following table sets forth the components of revenue, with
percentages of total revenue, gross margin, selling, general and administrative
expenses, restructuring charges and operating income, with percentages of total
revenue, for the periods indicated (in millions):
<TABLE>
<CAPTION>
1998 % 1997 % 1996 %
-------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
New vehicle....................... $ 6,879.1 54.3 $3,683.7 60.2 $1,783.7 60.8
Used vehicle...................... 3,326.3 26.3 1,496.7 24.4 658.3 22.4
Fixed operations.................. 1,383.2 10.9 519.5 8.5 304.3 10.4
Other............................. 1,076.0 8.5 422.9 6.9 187.4 6.4
--------- ----- -------- ----- -------- -----
$12,664.6 100.0 $6,122.8 100.0 $2,933.7 100.0
========= ===== ======== ===== ======== =====
Gross Margin........................ $ 1,755.0 13.8 $ 663.8 10.9 $ 322.4 11.0
S, G & A:
Divisional...................... $ 1,359.2 10.7 $ 647.2 10.6 $ 289.1 9.9
Corporate....................... 39.5 .3 25.6 .4 27.7 .9
--------- ----- -------- ----- -------- -----
$ 1,398.7 11.0 $ 672.8 11.0 $ 316.8 10.8
========= ===== ======== ===== ======== =====
Restructuring charges............... -- -- $ 85.0 1.4 -- --
Operating Income (Loss):
Divisional...................... $ 395.8 3.1 $ (68.4) (1.1) $ 33.3 1.1
Corporate....................... (39.5) (.3) (25.6) (.4) (27.7) (.9)
--------- ----- -------- ----- -------- -----
$ 356.3 2.8 $ (94.0) (1.5) $ 5.6 .2
========= ===== ======== ===== ======== =====
</TABLE>
Revenue was $12.66 billion, $6.12 billion and $2.93 billion for the
years ended December 31, 1998, 1997 and 1996, respectively. The increase in
1998 over 1997 of $6.54 billion, or 106.8%, is a result of acquisitions which
accounted for 97.5%, new AutoNation USA megastores which accounted for 10.4%
and volume declines offset by price increases which accounted for (1.1)%. The
increase in 1997 over 1996 of $3.19 billion, or 108.7%, is a result of
acquisitions which accounted for 85.4%, new AutoNation USA megastores which
accounted for 19.5% and price increases offset by volume declines which
accounted for 3.8%.
Gross margin was $1.76 billion, $663.8 million and $322.4 million or,
as percentages of revenue, 13.8%, 10.9% and 11.0% for the years ended December
31, 1998, 1997 and 1996, respectively. The increases in aggregate dollars are
primarily attributed to acquisitions. The 1998 increase in gross margin as a
percentage of revenue is primarily due to reduced inventory costs and product
mix.
Divisional selling, general and administrative expenses were $1.36
billion, $647.2 million and $289.1 million or, as percentages of revenue,
10.7%, 10.6% and 9.9% for the years ended December 31, 1998, 1997 and 1996,
respectively. The increases in aggregate dollars primarily reflect the
expansion of the Company's operations.
F-4
<PAGE> 6
Corporate general and administrative expenses were $39.5 million,
$25.6 million and $27.7 million for the years ended December 31, 1998, 1997 and
1996, respectively. The 1998 increase is a result of the overall growth
experienced by the Company. Corporate expenses which will no longer be incurred
following the separation of the automotive rental division have been allocated
to income from discontinued operations. These allocated costs totaled
approximately $14.8 million and $9.6 million for the years ended December 31,
1998 and 1997, respectively.
During the year ended December 31, 1997, the Company recorded
approximately $150.0 million of pre-tax charges associated with combining the
Company's franchised automotive dealerships and used vehicle megastore
operations into one division. Approximately $85.0 million of these charges
appear as restructuring charges in the Company's 1997 Consolidated Statement of
Operations and consists of: $42.5 million for consolidation of information
systems; $25.3 million related primarily to relocating certain operations; and
$17.2 million of severance and other costs. The remaining $65.0 million of
these charges relates to inventory consolidation and is included in cost of
operations in the Company's 1997 Consolidated Statement of Operations. During
the year ended December 31, 1998, the Company reduced its estimated
restructuring reserves for information systems and increased its estimated
reserves for the relocation of certain operations by approximately $21.0
million. The decrease in the information systems reserve is a result of the
Company's decision to eliminate or delay the conversion of certain systems. The
increase in the relocation reserve is due to the Company's decision to close
its reconditioning centers and relocate the reconditioning operations to the
Company's AutoNation USA megastores.
Through December 31, 1998, the Company has spent approximately $30.3
million related to restructuring activities and has recorded $30.6 million of
these restructuring charges against certain assets. As of December 31, 1998,
approximately $24.1 million remained in accrued liabilities related primarily
to closed reconditioning centers which the Company is actively marketing for
sale.
INTEREST INCOME
Interest income was $8.8 million, $5.4 million and $6.6 million for
the years ended December 31, 1998, 1997 and 1996, respectively. The increase in
1998 versus 1997 is primarily the result of investments in marketable
securities. The decrease in 1997 versus 1996 is primarily the result of lower
average cash balances on hand during 1997.
INTEREST EXPENSE
Interest expense was incurred primarily on borrowings under the
Company's revolving credit facility for acquisitions and debt assumed in
acquisitions. Interest expense was $14.0 million, $4.5 million and $7.2 million
for the years ended December 31, 1998, 1997 and 1996, respectively. The
increase in 1998 over 1997 is primarily due to borrowings for acquisitions. The
decrease in 1997 versus 1996 is primarily due to the repayment of debt.
Interest expense related to vehicle inventory financing is included in cost of
operations in the accompanying Consolidated Statements of Operations.
OTHER INCOME (EXPENSE)
Other income for the year ended December 31, 1997 consists primarily
of 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. Such
shares of ADT Limited common stock were received in March 1997 upon the
Company's exercise of a warrant which became exercisable upon termination of
the Company's agreement to acquire ADT Limited by mutual agreement of the
parties in September 1996.
F-5
<PAGE> 7
INCOME TAXES
The provision for income taxes from continuing operations was $126.8
million, $8.0 million and $10.3 million for the years ended December 31, 1998,
1997 and 1996, respectively. The effective income tax rate was 36.0%, 37.4% and
112.0% for the years ended December 31, 1998, 1997 and 1996, respectively. The
higher 1996 effective income tax rate is primarily due to varying higher
historical effective income tax rates of acquired businesses.
Effective with RSG's initial public offering on July 1, 1998, RSG has
not been included in the Company's consolidated federal income tax return.
DISCONTINUED OPERATIONS
Automotive Rental
As a result of the Company's decision to separate ANC from the
Company, the net assets and operating results of the Company's rental segment
have been classified as discontinued operations for all periods presented in
the accompanying Consolidated Financial Statements.
ANC primarily rents vehicles on a daily or weekly basis through Alamo
Rent-A-Car, Inc. ("Alamo"), National Car Rental System, Inc. ("National") and
CarTemps USA ("CarTemps"). The Company's automotive rental operations and
particularly the leisure travel market 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. 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.
A summary of the Company's rental operations is as follows for the
years ended December 31 (in millions):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenue ......................................................... $3,453.6 $3,055.1 $2,699.4
Expenses:
Cost of operations........................................... 2,622.9 2,337.5 2,167.2
Selling, general and administrative.......................... 651.8 557.5 547.1
Restructuring and other charges.............................. -- 78.0 13.5
-------- -------- --------
Operating income (loss)........................................... 178.9 82.1 (28.4)
Interest expense.................................................. (8.0) (6.6) (30.3)
Interest and other income......................................... (.8) 6.0 13.8
-------- -------- --------
Income (loss) before income taxes................................. 170.1 81.5 (44.9)
Provision for income taxes........................................ 61.3 30.3 5.0
-------- -------- --------
Net income (loss)................................................. $ 108.8 $ 51.2 $ (49.9)
======== ======== ========
</TABLE>
Automotive rental revenue was $3.45 billion, $3.06 billion and $2.7
billion for the years ended December 31, 1998, 1997 and 1996, respectively. The
increase in 1998 over 1997 of $398.5 million, or 13.0%, is a result of
acquisitions which accounted for 10.3% and volume and primarily price which
accounted for 2.7%. The increase in 1997 over 1996 of $355.7 million, or 13.2%,
is a result of volume which accounted for 4.6%, price which accounted for 4.4%
and acquisitions which accounted for 4.2%.
Cost of automotive rental operations was $2.62 billion, $2.34 billion
and $2.17 billion or, as a percentage of automotive rental revenue, 76.0%,
76.5% and 80.3% for the years ended December 31, 1998, 1997 and 1996,
respectively. The increases in aggregate dollars for 1998 and 1997 are
primarily attributed to acquisitions, maintaining a larger fleet and, in 1997,
higher rental volume. The decreases in such expenses as percentages of revenue
are primarily a result of revenue improvement from rental rate increases.
F-6
<PAGE> 8
Selling, general and administrative expenses were $651.8 million,
$557.5 million and $547.1 million or, as percentages of automotive rental
revenue, 18.8%, 18.2% and 20.3% for the years ended December 31, 1998, 1997 and
1996, respectively. The increases in aggregate dollars are primarily due to
acquisitions and, in 1998, costs associated with implementing the Company's
Global Odyssey operating system ("Global Odyssey"). The 1998 increase in
selling, general and administrative expenses as a percentage of revenue versus
1997 is primarily due to costs associated with implementing Global Odyssey and
higher selling costs. The 1997 decrease as a percentage of automotive rental
revenue versus 1996 is primarily due to the reduction of selling and
administrative expenses of acquired businesses.
During the year ended December 31, 1997, the Company recorded
approximately $78.0 million of restructuring and other charges associated with
integrating the Company's automotive rental operations. These charges primarily
include costs related to elimination of redundant information systems, fleet
consolidation, closure or sale of duplicate rental facilities and other
non-recurring expenses. As of December 31, 1998, approximately $19.5 million of
restructuring reserves remained related to these charges. The Company expects
the majority of these reserves to be utilized during 1999, however certain
contractual obligations for closed locations extend through 2002.
During the year ended December 31, 1996, the Company recorded
approximately $13.5 million of restructuring charges related to the integration
of the operations of Alamo into those of the Company. These costs primarily
include severance benefits. The activities associated with these charges were
substantially completed during 1997.
The Company finances vehicle purchases for its domestic automotive
rental operations through commercial paper and medium-term note financings. At
December 31, 1998, the Company had commercial paper programs aggregating $3.55
billion comprised of a $2.3 billion single-seller commercial paper program and
three bank-sponsored multi-seller commercial paper conduit facilities totaling
$1.25 billion. Borrowings under these programs are secured by eligible vehicle
collateral and bear interest at market-based commercial paper rates. As of
December 31, 1998, the Company had approximately $202.6 million of availability
under these programs. As of December 31, 1998, approximately 90% of the revenue
earning vehicles financed under these programs were acquired under programs
that allow the Company to require counterparties to repurchase vehicles held
for periods up to 24 months. The Company expects to continue to fund its
revenue earning vehicle purchases with secured vehicle financings.
In January 1999, the Company increased the commercial paper program to
$3.9 billion through an increase in the conduit facilities from $1.25 billion
to $1.6 billion. In February 1999, the Company issued $1.8 billion of rental
vehicle asset-backed medium-term notes consisting of $550.0 million floating
rate notes maturing through 2003; $750.0 million 5.88% fixed rate notes
maturing through 2003; and $500.0 million 6.02% fixed rate notes maturing
through 2005. In May 1999, the Company issued an additional $700.0 million of
floating rate asset-backed medium-term notes maturing through 2005
(collectively, the "Notes"). The Company fixed the effective interest rate on
the $1.25 billion floating rate notes at 6.03% through the use of certain
derivative transactions. Letters of credit totaling $250.0 million provide
credit enhancement for the Notes. Proceeds from the Notes were used to
refinance amounts outstanding under the commercial paper programs. As a result
of the refinancing, the Company has reduced its commercial paper program from
$3.9 billion to $2.39 billion, comprised of a $1.99 billion single-seller
program and a bank-sponsored multi-seller commercial paper conduit facility
totaling $400.0 million.
F-7
<PAGE> 9
The Company uses interest rate swap agreements to manage the impact of
interest rate changes on the Company's variable rate revenue earning vehicle
debt. The amounts exchanged by the counterparties to interest rate swap
agreements 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, and
therefore, do not represent a measure of the Company's exposure as an end user
of derivative financial instruments. At December 31, 1998, notional principal
amounts related to revenue earning vehicle debt interest rate swaps (variable
to fixed rate) were $2.45 billion. As of December 31, 1998, the weighted
average fixed rate payment on variable to fixed rate swaps was 5.88%. Variable
rates received are indexed to the Commercial Paper Nonfinancial Rate.
Solid Waste Services
The Company sold its remaining interest in RSG in May 1999 resulting
in an after tax gain of approximately $379.3 million. The net assets and
operating results of the Company's former solid waste services segment have
been classified as discontinued operations for all periods presented in the
accompanying Consolidated Financial Statements.
A summary of the Company's former solid waste services operations is
as follows for the years ended December 31 (in millions):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenue ......................................................... $1,369.1 $1,127.7 $953.3
Expenses:
Cost of operations........................................... 949.0 809.1 703.6
Selling, general and administrative.......................... 120.8 107.1 126.9
Restructuring and other charges.............................. -- -- 8.8
-------- -------- ------
Operating income.................................................. 299.3 211.5 114.0
Interest expense.................................................. (7.4) (5.7) (10.9)
Interest and other income......................................... .6 6.7 13.9
-------- -------- ------
Income before income taxes........................................ 292.5 212.5 117.0
Provision for income taxes........................................ 105.3 76.9 49.5
-------- -------- ------
Net income before minority interest............................... 187.2 135.6 67.5
Minority interest................................................. 33.9 -- --
-------- -------- ------
Net income........................................................ $ 153.3 $ 135.6 $ 67.5
======== ======== ======
</TABLE>
Revenue from the Company's solid waste services operations was $1.37
billion, $1.13 billion and $953.3 million for the years ended December 31,
1998, 1997 and 1996, respectively. The increase in 1998 over 1997 of $241.4
million, or 21.4%, is a result of internal growth which accounted for 12.8% of
the increase and acquisitions which accounted for 8.6% of the increase. Price
and primarily volume contributed 7.0% of the internal growth increase and
"tuck-in" acquisitions contributed 5.8% of the increase. The increase in 1997
over 1996 of $174.4 million, or 18.3%, is a result of internal growth which
accounted for 10.8% of the increase and acquisitions which accounted for 7.5%
of the increase. Price and primarily volume contributed 7.4% of the internal
growth increase and "tuck-in" acquisitions contributed 3.4%.
Cost of solid waste services operations was $949.0 million, $809.1
million and $703.6 million or, as a percentage of solid waste revenue, 69.3%,
71.7% and 73.8% for the years ended December 31, 1998, 1997 and 1996,
respectively. The increases in aggregate dollars are a result of the expansion
of the Company's solid waste services operations through acquisitions and
internal growth. The decreases in cost of solid waste services operations as a
percentage of revenue are primarily a result of improved operating
efficiencies.
F-8
<PAGE> 10
Selling, general and administrative expenses related to the Company's
solid waste services operations were $120.8 million, $107.1 million and $126.9
million or, as percentages of solid waste revenue, 8.8%, 9.5% and 13.3% for the
years ended December 31, 1998, 1997 and 1996, respectively. The decreases in
selling, general and administrative expenses as percentages of revenue in each
of the years are primarily due to leveraging the existing overhead structure
over an expanding revenue base.
During the year ended December 31, 1996, the Company recorded
restructuring and other charges totaling $8.8 million. These charges consist
primarily of the cost of closing certain landfills, asset write-offs and merger
expenses. The activities associated with these charges were completed during
1997.
Minority interest during the year ended December 31, 1998 represents
36.1% (the percentage of RSG common stock issued in the initial public offering
described below under "Financial Condition") of RSG's net income during the
period subsequent to the initial public offering. Such amount has been
reflected as a reduction of income from discontinued operations in the
accompanying Consolidated Statements of Operations.
Electronic Security Services
In October 1997, the Company sold its electronic security services
division for approximately $610.0 million resulting in an after tax gain of
approximately $230.0 million. In 1998, the Company finalized the sale resulting
in an additional after tax gain of approximately $11.6 million. The operating
results and gain on disposition of the electronic security services segment
have been classified as discontinued operations for all periods presented in
the accompanying Consolidated Financial Statements. Revenue and net income from
the electronic security services segment was $83.8 million and $9.5 million in
1997 for the period prior to disposition, respectively, and $85.3 million and
$8.4 million for 1996, respectively.
See Note 11, Discontinued Operations, of Notes to Consolidated
Financial Statements, for further discussion of these discontinued operations.
EXTRAORDINARY CHARGE
During the year ended December 31, 1996, in connection with
refinancing Alamo's debt at substantially lower interest rates, the Company
recorded an extraordinary charge of approximately $31.6 million, net of income
taxes. Included in this charge are bond redemption premiums, the write-off of
debt issue costs, prepayment penalties and other related fees. See Note 3,
Notes Payable and Long-Term Debt, of Notes to Consolidated Financial Statements
for further discussion of this charge.
FINANCIAL CONDITION
At December 31, 1998, the Company had $183.8 million in cash and cash
equivalents and approximately $426.2 million of availability under its $1.0
billion unsecured revolving credit facility which may be used for general
corporate purposes. In March 1999, the Company entered into a $500.0 million
364-day unsecured bank revolving credit facility. This facility will be used
for general corporate purposes and complements the $1.0 billion bank revolving
credit facility maturing in April 2002.
In July 1998, the Company's solid waste subsidiary, RSG, completed an
initial public offering resulting in net proceeds of approximately $1.43
billion. In May 1999, the Company sold substantially all of its remaining
interest in RSG in a public offering resulting in proceeds of approximately
$1.78 billion. Proceeds from the offerings were used to finance the growth of
the Company's automotive operations and to repurchase shares under the
Company's repurchase program.
F-9
<PAGE> 11
The Company has vehicle inventory financing and other credit
facilities to fund its automotive retail operations. In November 1998, the
Company entered into a $500.0 million bank-sponsored multi-seller commercial
paper conduit facility to finance new and used vehicle inventory for the
Company's automotive retail operations. This facility supplements the new and
used vehicle inventory finance facilities provided by vehicle manufacturer
captive finance companies. As of December 31, 1998, approximately $7.5 million
was financed under this facility. 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 $418.6 million at
December 31, 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. This facility was increased to $1.7 billion in
1999. Through December 31, 1998, the Company has securitized approximately
$698.8 million of loan receivables under this program, net of retained
interests. Installment loans sold under this program are nonrecourse beyond the
Company's retained interests. 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. The Company has 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 which effectuate a variable to fixed rate swap at a weighted average
rate of 5.18% at December 31, 1998. Variable rates on the underlying portfolio
are indexed to the Commercial Paper Nonfinancial Rate.
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 December 31, 1998, the Company had repurchased 9.1 million shares of Common
Stock for an aggregate price of approximately $136.0 million. In July 1999, the
Company's Board of Directors authorized the repurchase of an additional $500.0
million of Common Stock.
The Company's automotive rental operations are financed through various
revenue earning vehicle and working capital debt facilities. The Company
provides certain guarantees related to these financings. For a transition period
following the distribution of ANC in January 2000, the Company may continue to
provide certain guarantees until ANC is able to amend or replace certain debt
facilities.
The Company believes that it has sufficient operating cash flow and
other financial resources necessary to meet its anticipated capital
requirements and obligations as they come due.
CASH FLOWS
Cash and cash equivalents increased $644.7 million and decreased by
$215.5 million and $13.1 million during the years ended December 31, 1998, 1997
and 1996, respectively. The major components of these changes are discussed
below.
Cash Flows from Operating Activities
Cash (used in) provided by operating activities of continuing
operations was ($34.2) million, ($517.7) million and $6.6 million for the years
ended December 31, 1998, 1997 and 1996, respectively. The 1997 increase in cash
used in operating activities is primarily attributed to the development of the
Company's used vehicle megastore operations.
F-10
<PAGE> 12
Cash used in operating activities of discontinued operations was $50.8
million, $158.1 million and $312.2 million for the years ended December 31,
1998, 1997 and 1996, respectively.
Cash Flows from Investing Activities
Cash flows from investing activities consist primarily of cash used
for business acquisitions and capital additions and other transactions as
further described below.
Cash used in business acquisitions was $727.0 million, $84.6 million
and $18.3 million for the years ended December 31, 1998, 1997 and 1996,
respectively. See "Business Combinations" of Management's Discussion and
Analysis of Financial Condition and Results of Operations and Note 2, Business
Combinations, of Notes to Consolidated Financial Statements for a further
discussion of business combinations.
Capital additions were $244.4 million, $210.0 million and $68.1
million during the years ended December 31, 1998, 1997 and 1996, respectively.
The increases are primarily a result of expansion of the Company's business.
In July 1998, the Company's solid waste subsidiary, RSG, completed an
initial public offering resulting in net proceeds of approximately $1.43
billion.
In October 1997, the Company sold its electronic security services
division for approximately $610.0 million.
In March 1997, the Company exercised its warrant to acquire 15.0
million common shares of ADT Limited 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.
Cash used in investing activities of discontinued operations was
$872.7 million, $396.4 million and $205.7 million during the years ended
December 31, 1998, 1997 and 1996, respectively, and consists primarily of
business acquisitions and capital additions.
The Company intends to finance capital expenditures and cash used in
business acquisitions through cash on hand, the Company's revolving credit
facility and other financings.
Cash Flows from Financing Activities
Cash flows from financing activities during the years ended December
31, 1998, 1997 and 1996 included commercial bank borrowings, repayments of debt
and other transactions as further described below.
During the year ended December 31, 1998, the Company repurchased
approximately 9.1 million shares of Common Stock for an aggregate price of
approximately $136.0 million under its $500.0 million share repurchase program.
During the year ended December 31, 1997, the Company sold 15.8 million
shares of Common Stock in a private placement transaction resulting in net
proceeds of approximately $552.7 million.
During the year ended December 31, 1996, the Company sold an aggregate
of 22.0 million shares of Common Stock in private placement transactions
resulting in net proceeds of approximately $550.9 million.
Cash provided by (used in) financing activities of discontinued
operations was $1.35 billion, $353.0 million and $(1.1) million during the
years ended December 31, 1998, 1997 and 1996, respectively, and consists
primarily of bank borrowings and/or repayments.
F-11
<PAGE> 13
These financing activities were used to fund capital additions and
acquisitions as well as to repay debt assumed in acquisitions and expand the
Company's business during these years.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The tables below provide information about the Company's market
sensitive financial instruments and constitute "forward-looking statements".
All items described are non-trading.
The Company's primary market risk exposure is changing interest rates,
primarily in the United States. Due to its limited foreign operations, the
Company does not have material market risk exposures relative to changes in
foreign exchange rates. The Company's policy is to manage interest rates
through the use of a combination of fixed and floating rate debt. Interest rate
derivatives may be used to adjust interest rate exposures when appropriate,
based upon market conditions. These derivatives consist of interest rate swaps,
caps and floors which are entered into with a group of financial institutions
with investment grade credit ratings, thereby minimizing the risk of credit
loss.
In its automotive retail operations, the Company has entered into a
series of interest rate caps and floors contractually maturing in 2004 to
manage the impact of interest rate changes on securitized installment loan
receivables. Expected maturity dates are based upon the estimated repayment of
the underlying receivables after considering estimated prepayments and credit
losses. Average rates on interest rate caps and floors are based upon
contractual rates. In addition, the Company uses variable to fixed interest
rate swaps to manage the impact of interest rate changes on borrowings under
the Company's variable rate revolving credit facility. Expected maturity dates
for variable rate debt and interest rate swaps are based upon contractual
maturity dates. Average pay rates under interest rate swaps are based upon
contractual fixed rates. Average variable receive rates under interest rate
swaps are based on implied forward rates in the yield curve at the reporting
date.
In its automotive rental operations, the Company uses variable to
fixed interest rate swap agreements to manage the impact of interest rate
changes on the Company's variable rate revenue earning vehicle debt. Expected
maturity dates for variable rate debt and interest rate swaps are based upon
contractual maturity dates. Average pay rates under interest rate swaps are
based upon contractual fixed rates. Average variable receive rates under
interest rate swaps are based on implied forward rates in the yield curve at
the reporting date.
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
judgement. The fair value of variable rate debt approximates the carrying value
since interest rates are variable and, thus, approximate current market rates.
The fair value of interest rate swaps, caps and floors is determined from
dealer quotations and represents the discounted future cash flows through
maturity or expiration using current rates, and is effectively the amount the
Company would pay or receive to terminate the agreements.
F-12
<PAGE> 14
<TABLE>
<CAPTION>
Expected Maturity Date Fair Value
----------------------------- December 31,
December 31, 1998 1999 2000 2001 2002 2003 Thereafter Total 1998
- ----------------- ---- ---- ---- ---- ---- ---------- ----- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Asset)/Liability
CONTINUING OPERATIONS:
Variable rate debt........... $1,339.2 $ -- $ -- $500.0 $ -- $ -- $1,839.2 $1,839.2
Average interest rates... 5.81% -- -- 6.57% -- --
Interest rate caps........... 287.2 192.6 146.1 90.3 20.9 -- 737.1 (8.9)
Average rate............. 5.47% 5.47% 5.47% 5.47% 5.47% --
Interest rate floors......... 287.2 192.6 146.1 90.3 20.9 -- 737.1 7.1
Average rate............. 4.61% 4.61% 4.61% 4.61% 4.61% --
Interest rate swaps.......... -- -- -- -- 100.0 -- 100.0 1.7
Average pay rate......... -- -- -- -- 5.60% --
Average receive rate..... -- -- -- -- 5.65% --
DISCONTINUED OPERATIONS:
Variable rate debt........... $3,043.8 $ 1,263.3 $ 3.2 $ 38.0 $ 503.1 $ 35.9 $4,887.3 $4,887.3
Average interest rates... 5.73% 5.54% 5.31% 5.83% 6.42% 5.21%
Interest rate swaps.......... 650.0 1,000.0 250.0 150.0 400.0 -- 2,450.0 45.3
Average pay rate......... 5.83% 5.94% 6.15% 5.88% 5.64% --
Average receive rate..... 5.19% 5.41% 5.53% 5.53% 5.53% --
</TABLE>
<TABLE>
<CAPTION>
Expected Maturity Date Fair Value
----------------------------- December 31,
December 31, 1997 1998 1999 2000 2001 2002 Thereafter Total 1997
- ----------------- ---- ---- ---- ---- ---- ---------- ----- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Asset)/Liability
CONTINUING OPERATIONS:
Variable rate debt........... $ 472.5 $ -- $ -- $ -- $250.0 $ -- $ 722.5 $ 722.5
Average interest rates... 6.36% -- -- -- 5.93% --
DISCONTINUED OPERATIONS:
Variable rate debt........... $2,242.5 $155.2 $1,074.4 $ 1.8 $ 36.9 $ 35.1 $3,545.9 $3,545.9
Average interest rates... 6.13% 6.19% 5.86% 4.75% 6.20% 4.75%
Interest rate swaps.......... 300.0 650.0 1,000.0 150.0 150.0 -- 2,250.0 8.0
Average pay rate......... 5.85% 5.81% 5.95% 6.50% 5.88% --
Average receive rate..... 5.50% 5.50% 5.50% 5.50% 5.50% --
</TABLE>
SEASONALITY
The Company's operations generally experience higher volumes of
vehicle sales in the second and third quarters of each year in part due to
consumer buying trends and the introduction of new vehicle models.
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 addressing the issue of computer programs, embedded chips and
third party suppliers that may be impacted by Y2K. The Company has developed a
dedicated Y2K Project Office to coordinate compliance efforts and ensure that
the project status is monitored and reported throughout the organization.
The Company has identified four core phases in preparing for Y2K:
Assessment -- In the assessment phase, an inventory is performed of
software, hardware, telecommunications equipment and embedded chip technology.
Also, critical systems and vendors are identified and prioritized.
Analysis -- In the analysis phase, each system or item assessed as
critical is reviewed to determine Y2K compliance. Key vendors are also
evaluated at this time to determine their compliance status.
F-13
<PAGE> 15
Remediation -- In the remediation phase, modifications or replacements
are made to critical systems and equipment to make them Y2K-compliant or the
systems and/or vendors are replaced with compliant systems or vendors.
Decisions are also made as to whether changes are necessary or feasible for key
third-party suppliers.
Testing and Validation -- In this phase, the Company prepares,
executes and verifies the testing of critical systems.
The Company has developed plans to correct Y2K issues and, to date,
have made progress as follows:
Automotive Retail:
The Company's franchised automotive dealerships and AutoNation USA
megastores use one of six Dealer Management Systems ("DMS"), which perform the
core functions of a dealership's operations. The assessment and analysis of
these systems is complete indicating, subject to verification and testing, that
the DMS systems provided by these vendors are Y2K compliant or will be Y2K
compliant with an upgrade. Approximately 90% of the Company's franchised
automotive dealerships using these DMS systems have been upgraded to a
compliant version The remaining 10% are scheduled for upgrades by the vendor
during October and November 1999.
The Company is substantially complete with its assessment, analysis,
remediation and testing of its other software applications, other business
systems, products, suppliers, and embedded chips in use at its AutoNation USA
megastores and franchised automotive dealerships.
Automotive Rental:
For several years, the Company, in conjunction with external
consultants, has been developing the Global Odyssey system, which will replace
substantially all rental systems, as well as the applicable hardware and
operating systems. This system was designed to be Y2K compliant and Y2K testing
was completed prior to the implementation of the Global Odyssey reservation,
operations and financial systems at National's domestic operations prior to the
end of 1998. The Global Odyssey fleet system was implemented at National's
North American locations during the first quarter of 1999.
Alamo has completed remediation of all of its existing systems.
Testing is substantially complete but will continue throughout the remainder of
1999.
The Automotive Rental Division has assessed the majority of its North
American rental locations to identify other critical business systems, products
and vendors, including embedded chip issues. Remediation is ongoing to modify
or replace business systems, products and vendors that are not Y2K compliant.
Remediation was substantially complete as of September 1999. The Company has
also developed a plan for its European locations, some of which are supported
by Alamo. The remaining European locations are supported by systems developed
and supported by the United Kingdom headquarters. These systems have been
remediated and testing is scheduled to be completed by the end of October 1999.
CarTemps USA has only one automated mission critical application. That
application is believed to be compliant and is undergoing testing which is
scheduled to be completed by the end of October 1999.
F-14
<PAGE> 16
Costs To Address Y2K
Through June 30, 1999, the Company has spent approximately $14.4
million on Y2K efforts across all areas; of which $5.6 million relates to the
Company's continuing automotive retail operations and $8.8 million relates to
the Company's discontinued automotive rental operations. The Company currently
expects to spend a total of approximately $24.1 million when complete ($12.7
million for continuing automotive retail operations and $11.4 million for
discontinued automotive rental operations); $4.5 million of which has or is
expected to be incurred as automotive retail capital expenditures and
depreciated accordingly. Automotive rental amounts exclude costs associated
with replacing the Company's automotive rental systems with Global Odyssey
since the Global 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. 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, embedded technology, and compliance by key vendors 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, the Company believes
that the most likely worst case scenario would be a delay or disruption in the
delivery of products, including but not limited to, the supply of new vehicles
and/or original equipment manufacturer replacement (OEM) parts to the Retail
and/or Rental divisions. Either of these conditions could have a material
adverse impact on the Company's operations including, but not limited to, loss
of revenue, increased operating costs, loss of customers or suppliers, or other
significant disruptions to the Company's business.
The Company has developed comprehensive business contingency plans for
all mission critical business processes. These plans will be modified and
updated throughout the remainder of 1999.
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. The Company has identified its material third-party
relationships and has surveyed these parties. The results are being analyzed as
surveys are received. 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
reliable 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 prospectively 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.
F-15
<PAGE> 17
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.
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" ("SFAS 137"). SFAS 137 amends FASB Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133") by deferring the effective date of SFAS 133 to
fiscal years beginning after June 15, 2000. 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. The
Company will adopt SFAS 133 beginning January 1, 2001. 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, 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 dependence on vehicle manufacturers to
approve franchised automotive dealership acquisitions and the restrictions
imposed by vehicle manufacturers on franchised automotive dealership
acquisitions and operations; the risk of unfavorable economic conditions on the
Company's operations; the Company's dependence on key personnel; 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 risks and costs associated with complying with
the date change in the year 2000; the ability to develop and implement
operational and financial systems to manage rapidly growing operations; and
other factors contained in the Company's filings with the Securities and
Exchange Commission.
F-16
<PAGE> 18
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of AutoNation, Inc.:
We have audited the accompanying consolidated balance sheets of
AutoNation, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
schedule 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
AutoNation, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for the purpose of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic consolidated financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida,
October 15, 1999.
F-17
<PAGE> 19
AUTONATION, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 183.8 $ 84.3
Receivables, net................................................................. 966.4 313.3
Inventory........................................................................ 1,849.5 1,081.3
Other current assets............................................................. 61.5 42.2
-------- --------
Total Current Assets....................................................... 3,061.2 1,521.1
INVESTMENTS......................................................................... 167.7 8.7
PROPERTY AND EQUIPMENT, NET......................................................... 1,521.5 912.4
INTANGIBLE AND OTHER ASSETS, NET.................................................... 2,092.9 866.8
NET ASSETS OF DISCONTINUED OPERATIONS............................................... 1,568.9 1,543.1
-------- --------
$8,412.2 $4,852.1
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................. $ 117.6 $ 56.4
Accrued liabilities.............................................................. 428.5 218.7
Notes payable and current maturities of long-term
debt.......................................................................... 1,344.8 476.0
Other current liabilities........................................................ 106.4 1.4
-------- --------
Total Current Liabilities.................................................. 1,997.3 752.5
LONG-TERM DEBT, NET OF CURRENT MATURITIES........................................... 520.9 261.1
DEFERRED INCOME TAXES............................................................... 323.0 316.5
OTHER LIABILITIES................................................................... 146.8 37.7
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; 467,240,307
and 432,705,796 shares issued and outstanding
including shares held in treasury, respectively............................... 4.7 4.3
Additional paid-in capital....................................................... 4,628.9 3,051.5
Retained earnings................................................................ 930.9 431.4
Accumulated other comprehensive loss............................................. (4.3) (2.9)
Treasury stock, at cost; 9,110,400 shares held
at December 31, 1998.......................................................... (136.0) --
-------- --------
Total Shareholders' Equity................................................. 5,424.2 3,484.3
-------- --------
$8,412.2 $4,852.1
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-18
<PAGE> 20
AUTONATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUE ......................................................... $12,664.6 $6,122.8 $2,933.7
COST OF OPERATIONS................................................ 10,909.6 5,459.0 2,611.3
--------- -------- --------
GROSS MARGIN...................................................... 1,755.0 663.8 322.4
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES....................................................... 1,398.7 672.8 316.8
RESTRUCTURING CHARGES............................................. -- 85.0 --
--------- -------- --------
OPERATING INCOME (LOSS)........................................... 356.3 (94.0) 5.6
INTEREST INCOME................................................... 8.8 5.4 6.6
INTEREST EXPENSE.................................................. (14.0) (4.5) (7.2)
OTHER INCOME, NET................................................. 1.5 114.5 4.2
--------- -------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES............................................ 352.6 21.4 9.2
PROVISION FOR INCOME TAXES........................................ 126.8 8.0 10.3
--------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY CHARGE.................................... 225.8 13.4 (1.1)
--------- -------- --------
DISCONTINUED OPERATIONS:
Income from discontinued operations,
net of income taxes......................................... 262.1 196.3 26.0
Gain on disposal of segment, net of
income taxes of $8.4 and $233.7............................. 11.6 230.0 --
--------- -------- -------
273.7 426.3 26.0
INCOME BEFORE EXTRAORDINARY CHARGE................................ 499.5 439.7 24.9
EXTRAORDINARY CHARGE RELATED TO EARLY
EXTINGUISHMENT OF DEBT, NET OF BENEFIT
FOR INCOME TAXES OF $15.0...................................... -- -- (31.6)
--------- -------- --------
NET INCOME (LOSS)................................................. $ 499.5 $ 439.7 $ (6.7)
========= ======== ========
BASIC EARNINGS (LOSS) PER SHARE:
Continuing operations.......................................... $ .50 $ .03 $ --
Discontinued operations........................................ .60 1.06 .08
Extraordinary charge........................................... -- -- (.10)
--------- -------- --------
Net income (loss).............................................. $ 1.10 $ 1.09 $ (.02)
========= ======== =========
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations.......................................... $ .48 $ .03 $ --
Discontinued operations........................................ .58 .99 .08
Extraordinary charge........................................... -- -- (.10)
--------- -------- --------
Net income (loss).............................................. $ 1.06 $ 1.02 $ (.02)
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-19
<PAGE> 21
AUTONATION, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
Accumulated
Other
Compre- Compre-
Additional hensive hensive
Common Paid-in Retained Income Treasury Income
Stock Capital Earnings (Loss) Stock (Loss)
------ ---------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995..................... $3.0 $ 675.6 $107.8 $ 2.6 $ --
Comprehensive loss:
Net loss.................................... -- -- (6.7) -- -- $ (6.7)
Other comprehensive loss--
foreign currency translation
adjustments............................. -- -- -- (.8) -- (.8)
------
Comprehensive loss...................... -- -- -- -- -- $ (7.5)
======
Sales of common stock......................... .2 550.7 -- -- --
Stock issued in acquisitions.................. .1 86.5 -- -- --
Exercise of stock options and
warrants, including income tax
benefit of $20.3............................ -- 43.7 -- -- --
Distributions to former owners
of pooled companies......................... -- -- (78.4) -- --
Other ........................................ .1 31.1 4.4 -- --
---- -------- ------ ----- -------
BALANCE AT DECEMBER 31, 1996..................... 3.4 1,387.6 27.1 1.8 --
Comprehensive income (loss):
Net income.................................. -- -- 439.7 -- -- $439.7
Other comprehensive loss--
foreign currency translation
adjustments............................. -- -- -- (4.7) -- (4.7)
------
Comprehensive income.................... -- -- -- -- -- $435.0
======
Sales of common stock......................... .2 552.5 -- -- --
Stock issued in acquisitions.................. .6 962.8 -- -- --
Exercise of stock options and
warrants, including income tax
benefit of $32.7............................ .1 92.0 -- -- --
Distributions to former owners
of pooled companies......................... -- -- (31.4) -- --
Other ........................................ -- 56.6 (4.0) -- --
---- -------- ------ ----- -------
BALANCE AT DECEMBER 31, 1997..................... 4.3 3,051.5 431.4 (2.9) --
Comprehensive income (loss):
Net income.................................. -- -- 499.5 -- -- $499.5
------
Other comprehensive income
(loss):
Foreign currency translation
adjustments........................... -- -- -- -- -- (1.6)
Unrealized loss on marketable
securities............................ -- -- -- -- -- (.4)
Unrealized gain on interest-
only strip receivables................ -- -- -- -- -- .6
------
Other comprehensive loss................ -- -- -- (1.4) -- (1.4)
------
Comprehensive income.................. -- -- -- -- -- $498.1
======
Stock issued in acquisitions.................. .3 540.9 -- -- --
Sale of common stock of RSG................... -- 998.5 -- -- --
Purchases of treasury stock................... -- -- -- -- (136.0)
Exercise of stock options and
warrants, including income tax
benefit of $4.8............................. .1 38.0 -- -- --
---- -------- ------ ----- -------
BALANCE AT DECEMBER 31, 1998..................... $4.7 $4,628.9 $930.9 $(4.3) $(136.0)
==== ======== ====== ===== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE> 22
AUTONATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss)................................................. $ 499.5 $ 439.7 $ (6.7)
Adjustments to reconcile net income
(loss) to net cash provided by (used in) operating
activities:
Depreciation and amortization of
property and equipment...................................... 40.1 23.2 10.3
Amortization of intangible assets.............................. 39.6 15.6 .6
Deferred income tax provision.................................. 12.2 75.9 1.1
Non-cash restructuring and other charges....................... -- 118.6 73.2
Loss on extinguishment of debt,
net of income taxes......................................... -- -- 31.6
Gain on sale of marketable securities.......................... -- (102.3) --
Income from discontinued operations............................ (273.7) (426.3) (26.0)
Changes in assets and liabilities,
net of effects from business
acquisitions:
Receivables................................................. (400.4) (125.5) (19.7)
Inventory................................................... 66.5 (207.6) (21.4)
Other assets................................................ (23.0) 30.6 (16.1)
Accounts payable and accrued liabilities.................... (85.2) (100.7) (24.6)
Other liabilities........................................... 90.2 (258.9) 4.3
--------- --------- ---------
(34.2) (517.7) 6.6
--------- --------- ---------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Cash used in business acquisitions,
net of cash acquired........................................... (727.0) (84.6) (18.3)
Purchases of property and equipment............................... (244.4) (210.0) (68.1)
Purchases of marketable securities................................ (193.6) (300.0) --
Sales of marketable securities.................................... 94.1 402.3 --
Proceeds from sale of common stock of RSG......................... 1,433.6 -- --
Cash received on disposal of electronic
security division.............................................. -- 610.0 --
Other ............................................................ (64.0) .2 (239.2)
--------- --------- ---------
298.7 417.9 (325.6)
--------- --------- ---------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from long-term debt
and notes payable.............................................. 17.0 328.4 124.5
Payments of long-term debt and notes payable...................... (277.3) (663.9) (100.2)
Net proceeds (payments) from
revolving credit and vehicle
inventory financing facilities................................. 315.1 (139.7) 158.6
Sales of common stock............................................. -- 552.7 550.9
Purchases of treasury stock....................................... (136.0) -- --
Other ............................................................ 32.2 8.3 91.1
--------- --------- ---------
(49.0) 85.8 824.9
--------- --------- ---------
CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS:
Operating activities.............................................. (50.8) (158.1) (312.2)
Investing activities.............................................. (872.7) (396.4) (205.7)
Financing activities.............................................. 1,352.7 353.0 (1.1)
--------- --------- ---------
429.2 (201.5) (519.0)
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................... 644.7 (215.5) (13.1)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD,
INCLUDING CASH AND CASH EQUIVALENTS OF
DISCONTINUED OPERATIONS OF $44.9,
$256.3 AND $195.5, RESPECTIVELY................................... 129.2 344.7 357.8
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD,
INCLUDING CASH AND CASH EQUIVALENTS OF
DISCONTINUED OPERATIONS OF $590.1,
$44.9 AND $256.3, RESPECTIVELY.................................... $ 773.9 $ 129.2 $ 344.7
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE> 23
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL TABLES IN MILLIONS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying Consolidated Financial Statements include the
accounts of AutoNation, Inc. and its subsidiaries (the "Company"). All
intercompany accounts and transactions have been eliminated.
In August 1999, the Company announced its intention to separate its
automotive rental subsidiary, ANC Rental Corporation ("ANC") from the Company.
In September 1999, the Company announced its intention to distribute its entire
interest in ANC to the Company's stockholders on a tax-free basis in January
2000, subject to certain conditions and consents (the "ANC Distribution"). The
Company has obtained a private letter ruling from the Internal Revenue Service
("IRS") that the ANC 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. As discussed in Note 11, Discontinued Operations, the
Company's automotive rental segment has been accounted for as discontinued
operations and the accompanying Consolidated Financial Statements presented
herein have been restated to report separately the net assets and operating
results of these discontinued 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 Company also announced its intention 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 "RSG
Distribution"). The RSG Distribution was conditioned, in part, on the Company
obtaining a private letter ruling from the IRS to the effect that, among other
things, the RSG Distribution would 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 July 1998, the Company filed its request for the private letter
ruling with the IRS, and continued to process the request through February 1999
with the expectation of completing the RSG Distribution in mid-1999. In March
1999, the IRS advised the Company in writing that the IRS would not rule as
requested. In light of the IRS action, the Company's Board of Directors decided
not to complete the RSG Distribution. Alternatively, the Company decided to
sell its remaining interest in RSG. In May 1999, the Company sold substantially
all of its remaining interest in RSG in a public offering resulting in proceeds
of approximately $1.7 billion, net of underwriting fees. As discussed in Note
11, Discontinued Operations, the Company's solid waste services segment has
been accounted for as discontinued operations and the accompanying Consolidated
Financial Statements presented herein have been restated to report separately
the net assets and operating results of these discontinued operations.
In October 1997, the Company sold its electronic security services
division. Accordingly, as discussed in Note 11, Discontinued Operations, these
operations have been accounted for as discontinued operations and the
accompanying Consolidated Financial Statements presented herein have been
restated to report separately the 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 to conform with the financial statement presentation of
the current period.
F-22
<PAGE> 24
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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 consolidated 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
occurred in June 1996, as is more fully described in Note 6, Shareholders'
Equity.
RECEIVABLES
The components of receivables, net of allowance for doubtful accounts
at December 31 are as follows:
1998 1997
---- ----
Trade receivables.................................. $ 501.7 $ 218.6
Finance receivables................................ 354.0 38.1
Manufacturer receivables........................... 86.1 39.6
Other.............................................. 58.4 25.5
-------- --------
1,000.2 321.8
Less: allowance for doubtful accounts.............. (33.8) (8.5)
-------- --------
$ 966.4 $ 313.3
======== ========
Finance receivables are generated by the Company's automotive retail
finance subsidiary and include finance lease receivables, installment loan
receivables and retained interests in securitized installment loan receivables.
In 1998, the Company entered into a $1.0 billion commercial paper warehouse
facility with certain financial institutions for the securitization of
installment loan receivables. This facility was increased to $1.7 billion in
1999. Through December 31, 1998, the Company has securitized approximately
$698.8 million of loan receivables under this program. Installment loans sold
under this program are nonrecourse beyond the Company's retained interests. The
Company sells its receivables to a commercial paper conduit, but retains
responsibility for servicing the loans for which it is paid a servicing fee.
The Company retains a subordinated interest in the sold receivables and the
future excess cash flow from the loan portfolio after required interest
payments, servicing and other fees and expenses. The Company provides
additional credit enhancement in the form of restricted cash deposits. As
further discussed in Note 12, Derivative Financial Instruments, the Company
enters into interest rate protection agreements to manage the impact of
interest rate changes on amounts securitized.
The Company accounts for the sale of receivables in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". Gains or losses from the sales of finance receivables are
recognized in the period in which sales occur. In determining the gain or loss
for each sale, the Company allocates the book value of the loan portfolio
between amounts sold and retained interests based upon relative fair values.
The Company's retained interests in securitized installment loan receivables
consist of retained interests in sold principal, interest-only strip
receivables representing the present value of future excess cash flow and
servicing assets. Retained interests in the sold principal are carried at
allocated carrying amounts and subsequently assessed for impairment.
Interest-only strip receivables are carried at fair value and marked to market
as a component of other comprehensive income. Servicing assets are initially
recorded at allocated carrying amounts and subsequently amortized over the
servicing period and assessed for impairment.
F-23
<PAGE> 25
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INVENTORY
Inventory consists primarily of retail vehicles held for sale valued
using the specific identification method, net of reserves. Cost includes
acquisition, reconditioning and transportation expenses. Parts and accessories
are valued at the factory list price which approximates lower of cost
(first-in, first-out) or market.
A summary of inventory at December 31 is as follows:
1998 1997
---- ----
New vehicles.................................... $1,274.3 $ 657.9
Used vehicles................................... 457.3 371.2
Parts, accessories and other.................... 117.9 52.2
-------- --------
$1,849.5 $1,081.3
======== ========
INVESTMENTS
Investments consist of marketable securities and investments in
businesses accounted for under the equity method. Marketable securities include
investments in debt securities classified as available for sale and are stated
at fair value with unrealized gains and losses included in other comprehensive
income. Fair value is estimated based on quoted market prices. Equity method
investments represent investments in 50% or less owned automotive businesses
over which the Company has the ability to exercise significant influence. The
Company records its initial equity method investments at cost and subsequently
adjusts the carrying amounts of the investments for the Company's share of the
earnings or losses of the investee after the acquisition date as a component of
other income (loss) in the Company's Consolidated Statements of Operations.
A summary of investments at December 31 is as follows:
1998 1997
---- ----
Marketable securities................................. $ 96.8 $ --
Equity method investments............................. 70.9 8.7
------ -----
$167.7 $ 8.7
====== =====
Investments in marketable securities at December 31, 1998 are as
follows:
U.S. government debt securities................................... $ 70.0
Corporate debt securities......................................... 26.8
------
$ 96.8
======
At December 31, 1998, aggregate maturities of marketable securities
are as follows:
Fair
Cost Value
------ ------
Due in 2 - 5 years.......................... $ 87.3 $ 86.7
Due in 6 - 10 years......................... 3.0 3.0
Due after 10 years.......................... 7.1 7.1
------ ------
$ 97.4 $ 96.8
====== ======
F-24
<PAGE> 26
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Gross unrealized losses on U.S. government debt securities and
corporate debt securities were $.6 million and $0 at December 31, 1998,
respectively. There were no gross unrealized gains on U.S. government or
corporate debt securities at December 31, 1998. Proceeds from sales of
available for sale securities were $94.1 million and $402.3 million for the
years ended December 31, 1998 and 1997, respectively. Gross realized gains and
losses were not material for the years ended December 31, 1998 and 1996. During
the year ended December 31, 1997, realized gains of $102.3 million were
recognized on the sale of 15.0 million common shares of ADT Limited. Such
shares of ADT Limited common stock were received in March 1997 upon the
Company's exercise of a warrant which became exercisable upon termination of
the Company's agreement to acquire ADT Limited by mutual agreement of the
parties in September 1996.
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 the
Consolidated Statements of 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 equipment and five to ten years for
furniture and fixtures.
A summary of property and equipment at December 31 is as follows:
1998 1997
---- ----
Land................................................ $ 558.5 $ 359.9
Buildings and improvements.......................... 751.2 452.6
Furniture, fixtures and equipment................... 319.0 170.6
-------- --------
1,628.7 983.1
Less: accumulated depreciation and amortization..... (107.2) (70.7)
-------- --------
$1,521.5 $ 912.4
======== ========
INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist primarily of the cost of acquired
businesses in excess of the fair value of net assets acquired. The cost in
excess of the fair value of net assets is amortized over forty years on a
straight-line basis. Accumulated amortization of intangible assets was $59.7
million and $19.4 million at December 31, 1998 and 1997, 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.
REVENUE RECOGNITION
Revenue consists of sales of new and used vehicles, sales from fixed
operations (parts, service and body shop) and sales of other products and
services including finance and insurance products. The Company recognizes
revenue over the period in which products are sold or services are provided. An
estimated allowance for chargebacks against revenue recognized from sales of
finance and insurance products is established during the period in which
related revenue is recognized.
F-25
<PAGE> 27
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of the Company's revenue by major products and services for
the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
New vehicles.................................................. $ 6,879.1 $3,683.7 $1,783.7
Used vehicles................................................. 3,326.3 1,496.7 658.3
Fixed operations.............................................. 1,383.2 519.5 304.3
Other......................................................... 1,076.0 422.9 187.4
--------- -------- --------
$12,664.6 $6,122.8 $2,933.7
========= ======== ========
</TABLE>
DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes interest rate derivatives to manage the impact of
interest rate changes on securitized installment loan receivables. The Company
also utilizes interest rate derivatives to manage the impact of interest rate
changes on borrowings under the Company's variable rate revolving credit
facility. The Company does not use derivative financial instruments for trading
purposes.
Derivative financial instruments entered into concurrently with
securitizations are accounted for at fair value as part of the proceeds
received in the determination of the gain or loss on sale. If a derivative
financial instrument entered into concurrently with a securitization is
terminated, any resulting gain or loss is recognized in earnings upon
termination.
Interest rate swaps are used to manage the impact of interest rate
changes on revolving credit facility borrowings. Under interest rate swaps, the
Company agrees with other parties to exchange, at specified intervals, the
difference between fixed-rate and floating-rate interest amounts calculated by
reference to an agreed notional principal amount. Income or expense under these
instruments is recorded on an accrual basis, as an adjustment to the yield of
the underlying exposures over the periods covered by the contracts. If an
interest rate swap is terminated early, any resulting gain or loss is deferred
and amortized as an adjustment of the cost of the underlying exposure position
over the remaining periods originally covered by the terminated swap. If all or
part of an underlying position is terminated, the related pro-rata portion of
any unrecognized gain or loss on the swap is recognized in income at that time
as part of the gain or loss on the termination. Amounts receivable or payable
under the agreements are included in receivables or accrued liabilities in the
accompanying Consolidated Balance Sheets and were not material at December 31,
1998 or 1997.
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, 1998 or 1997. Advertising expense was $158.0 million, $94.7
million and $27.7 million for the years ended December 31, 1998, 1997 and 1996,
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, Business Combinations, and other non-cash transactions are
excluded from the accompanying Consolidated Statements of Cash Flows.
The Company made interest payments of approximately $190.2 million,
$76.4 million and $27.7 million for the years ended December 31, 1998, 1997 and
1996, respectively, including interest on vehicle inventory financing. The
Company made income tax payments of approximately $139.8 million, $59.0 million
and $14.2 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
F-26
<PAGE> 28
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 prospectively 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.
In June 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS
137 amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") by deferring the effective date of SFAS 133 to fiscal
years beginning after June 15, 2000. 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. The
Company will adopt SFAS 133 beginning January 1, 2001. 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.
2. BUSINESS COMBINATIONS
Businesses acquired through December 31, 1998 and accounted for under
the purchase method of accounting are included in the Consolidated Financial
Statements from the date of acquisition. Businesses acquired and accounted for
under the pooling of interests method of accounting have been included
retroactively in the Consolidated Financial Statements as if the companies had
operated as one entity since inception.
During the year ended December 31, 1998, the Company acquired various
businesses in the automotive retail, solid waste services and automotive rental
industries. With respect to continuing operations, the Company issued
approximately 21.9 million shares of Common Stock valued at $473.2 million and
paid approximately $727.0 million in cash for acquisitions accounted for under
the purchase method of accounting. With respect to discontinued operations, the
Company issued approximately 3.4 million shares of Common Stock valued at $68.0
million and paid approximately $494.4 million in cash and certain properties
for acquisitions accounted for under the purchase method of accounting.
F-27
<PAGE> 29
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During the year ended December 31, 1997, the Company acquired various
businesses in the automotive retail, automotive rental, solid waste services
and electronic security services industries. With respect to continuing
operations, the Company issued approximately 43.6 million shares of Common
Stock valued at $739.1 million and paid approximately $84.6 million in cash for
acquisitions accounted for under the purchase method of accounting and issued
approximately 23.6 million shares of Common Stock for acquisitions accounted
for under the pooling of interests method of accounting. With respect to
discontinued operations, the Company issued approximately 10.1 million shares
of Common Stock valued at $224.3 million and paid approximately $163.9 million
in cash and notes for acquisitions accounted for under the purchase method of
accounting and issued approximately 59.9 million shares of Common Stock for
acquisitions accounted for under the pooling of interests method of accounting.
During the year ended December 31, 1996, the Company acquired various
businesses primarily in the automotive retail, automotive rental, solid waste
services and electronic security services industries. With respect to
continuing operations, the Company issued approximately 1.0 million shares of
Common Stock valued at $11.6 million and paid approximately $18.3 million in
cash for acquisitions accounted for under the purchase method of accounting and
issued approximately 4.2 million shares of Common Stock for acquisitions
accounted for under the pooling of interests method of accounting. With respect
to discontinued operations, the Company issued approximately 8.1 million shares
of Common Stock valued at $75.0 million and paid approximately $33.2 million in
cash for acquisitions accounted for under the purchase method of accounting and
issued approximately 67.2 million shares of Common Stock for acquisitions
accounted for under the pooling of interests method of accounting.
The preliminary purchase price allocations for business combinations
accounted for under the purchase method of accounting related to continuing
operations for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Property and equipment............................................ $ 372.3 $ 468.8 $ 4.7
Intangible and other assets....................................... 1,239.7 824.9 25.9
Working capital................................................... 735.8 198.4 2.1
Debt assumed...................................................... (1,074.5) (618.3) --
Other liabilities................................................. (73.1) (50.1) (2.8)
Common stock issued............................................... (473.2) (739.1) (11.6)
--------- ------- ------
Cash used in business acquisitions,
net of cash acquired......................................... $ 727.0 $ 84.6 $ 18.3
========= ======= ======
</TABLE>
The Company's unaudited pro forma consolidated results of continuing
operations assuming acquisitions accounted for under the purchase method of
accounting had occurred at the beginning of each period presented are as
follows for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenue.................................................. $15,150.5 $13,540.8
Income from continuing operations........................ 252.1 76.5
Diluted earnings per share from
continuing operations................................. .53 .17
</TABLE>
The unaudited pro forma results of continuing 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.
F-28
<PAGE> 30
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt at December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Vehicle inventory credit facilities; secured by the Company's vehicle
inventory; weighted average interest rates of 5.81% and
6.36% at December 31, 1998 and 1997, respectively............................... $ 1,339.2 $ 472.5
$1.0 billion unsecured revolving credit facility;
interest payable using LIBOR based rates; weighted average interest rates of
6.57% and 5.93% at December 31, 1998 and 1997, respectively;
matures 2002.................................................................... 500.0 250.0
Other notes; secured by real property,
equipment and other assets; interest ranging
from 6.0% to 10.0%; maturing through 2009....................................... 26.5 14.6
--------- ---------
1,865.7 737.1
Less: current portion.............................................................. (1,344.8) (476.0)
--------- ---------
$ 520.9 $ 261.1
========= =========
</TABLE>
The Company's revolving credit facility requires, among other items,
that the Company maintain certain financial ratios and comply with certain
financial covenants. The Company was in compliance with these ratios and
covenants at December 31, 1998.
In March 1999, the Company entered into a $500.0 million 364-day
unsecured bank revolving credit facility. This facility will be used for
general corporate purposes and complements the $1.0 billion bank revolving
credit facility maturing 2002.
In November 1998, the Company entered into a $500.0 million
bank-sponsored multi-seller commercial paper conduit facility to finance new
and used vehicle inventory for the Company's automotive retail operations. The
facility supplements the new and used vehicle inventory finance facilities
provided by vehicle manufacturer captive finance companies. At December 31,
1998, approximately $7.5 million was financed under this facility.
In December 1996, the Company completed a tender offer and consent
solicitation resulting in the repurchase of approximately $100.0 million
aggregate principal amount 11.75% senior notes due 2006 ("Senior Notes"), which
were issued in February 1996. The Company recorded an extraordinary charge of
$31.6 million, net of income taxes, during 1996 related to the early
extinguishment of the Senior Notes and certain other debt. Included in this
charge are bond redemption premiums, the write-off of debt issue costs,
prepayment penalties and other fees related to the tender offer and the
repayment of other debt.
Interest expense on vehicle inventory credit facilities is included as
a component of cost of operations in the accompanying Consolidated Statements
of Operations.
At December 31, 1998, aggregate maturities of notes payable and
long-term debt were as follows:
1999........................................... $1,344.8
2000........................................... 10.1
2001........................................... 2.3
2002........................................... 502.2
2003........................................... 1.2
Thereafter..................................... 5.1
--------
$1,865.7
========
F-29
<PAGE> 31
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Accordingly, deferred income taxes have been
provided to show the effect of temporary differences between the recognition of
revenue and expenses for financial and income tax reporting purposes and
between the tax basis of assets and liabilities and their reported amounts in
the financial statements.
Certain businesses acquired in 1997 and 1996 and accounted for under
the pooling of interests method of accounting were subchapter S corporations
for income tax purposes. The subchapter S corporation status of these companies
was terminated effective with the closing date of the acquisitions. For
purposes of these Consolidated Financial Statements, federal and state income
taxes have been recorded 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.
Effective with the RSG initial public offering on July 1, 1998 as
further described in Note 6, Shareholders' Equity, RSG has not been included in
the Company's consolidated federal income tax return.
The components of the provision for income taxes from continuing
operations for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal....................................................................... $105.5 $(63.5) $12.5
State ........................................................................ 9.1 (4.4) (3.3)
Federal and state deferred....................................................... 26.7 75.9 (1.5)
Change in valuation allowance.................................................... (14.5) -- 2.6
------ ------ -----
Provision for income taxes....................................................... $126.8 $ 8.0 $10.3
====== ====== =====
</TABLE>
A reconciliation of the provision for income taxes calculated using
the statutory federal income tax rate to the Company's provision for income
taxes from continuing operations for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Provision for income taxes at statutory rate.................................... $123.4 $ 7.6 $ 3.2
Non-deductible expenses......................................................... 10.3 2.6 .2
State income taxes, net of federal benefit...................................... 7.6 .5 .8
Change in valuation allowance................................................... (14.5) -- 2.6
Other, net...................................................................... -- (2.7) 3.5
------ ------ ------
Provision for income taxes...................................................... $126.8 $ 8.0 $ 10.3
====== ====== ======
</TABLE>
Components of the net deferred income tax liability at December 31 are
as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred income tax liabilities:
Book basis in property over tax basis............................................ $389.6 $268.6
Deferred income tax assets:
Net operating losses............................................................. (33.6) (28.4)
Accruals not currently deductible................................................ (163.0) (18.0)
Valuation allowance................................................................... 130.0 94.3
------ ------
Net deferred income tax liability..................................................... $323.0 $316.5
====== ======
</TABLE>
F-30
<PAGE> 32
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At December 31, 1998, the Company had available domestic net operating
loss carryforwards of approximately $91.4 million which begin to expire in the
year 2008. 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 provides valuation
allowances to offset portions of deferred tax assets due to uncertainty
surrounding the future 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.
5. OTHER COMPREHENSIVE INCOME
During the year ended December 31, 1998, the Company adopted SFAS No.
130, "Reporting Comprehensive Income," which establishes standards for
reporting and displaying comprehensive income and its components in a financial
statement that is displayed with the same prominence as other financial
statements. The changes in the components of other comprehensive income (loss),
net of income taxes, are as follows for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- ------------------------- ------------------------
Pre-tax Tax Net Pre-tax Tax Net Pre-tax Tax Net
Amount Effect Amount Amount Effect Amount Amount Effect Amount
------- ------ ------ ------- ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Foreign currency
translation adjustments............ $(1.6) $ -- $(1.6) $(4.7) $ -- $(4.7) $(.8) $ -- $(.8)
Unrealized loss on
marketable securities.............. (.6) .2 (.4) -- -- -- -- -- --
Unrealized gain on interest-only
strip receivables.................. .9 (.3) .6 -- -- -- -- -- --
----- ---- ----- ----- ---- ----- ---- ---- ----
Other comprehensive loss............... $(1.3) $(.1) $(1.4) $(4.7) $ -- $(4.7) $(.8) $ -- $(.8)
===== ==== ===== ===== ==== ===== ==== ==== ====
</TABLE>
Accumulated other comprehensive loss consists of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Foreign currency translation adjustments..................................................... $ (4.5) $ (2.9)
Unrealized loss on marketable securities..................................................... (.4) --
Unrealized gain on interest-only strip receivables........................................... .6 --
------ ------
$ (4.3) $ (2.9)
====== ======
</TABLE>
No material reclassification adjustments were recorded in 1998 or
1996. During the year ended December 31, 1997, the Company reclassified
unrealized holding gains totaling approximately $65.0 million, net of income
taxes of approximately $37.3 million, to realized gains in connection with the
sale of the shares of ADT Limited common stock in May 1997.
6. SHAREHOLDERS' EQUITY
During the year ended December 31, 1998, the Company's former solid
waste subsidiary, RSG, completed an initial public offering of approximately
36.1% of its outstanding common stock, resulting in net proceeds of
approximately $1.43 billion. In addition, 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 December 31, 1998, the Company had repurchased
an aggregate of 9.1 million shares of Common Stock for an aggregate purchase
price of approximately $136.0 million. In July 1999, the Company's Board of
Directors authorized the repurchase of an additional $500.0 million of shares
of Common Stock.
F-31
<PAGE> 33
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During the year ended December 31, 1997, the Company sold 15.8 million
shares of Common Stock in a private placement transaction resulting in net
proceeds of approximately $552.7 million. In addition, in May 1997, the
Company's Certificate of Incorporation was amended to increase the number of
authorized shares of Common Stock from 500.0 million to 1.5 billion shares.
During the year ended December 31, 1996, the Company sold an aggregate
of 22.0 million shares of Common Stock in private placement transactions
resulting in net proceeds of approximately $550.9 million. 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. In addition, in May 1996 the Company's Certificate of
Incorporation was amended to increase the number of authorized shares of Common
Stock from 350.0 million shares to 500.0 million shares.
The Company has 5.0 million 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 quoted market price of the Common Stock at the date of grant.
Generally, options granted will have a term of 10 years from the date of grant,
and will vest in increments of 25% per year over a four-year period on the
yearly anniversary of the grant date. 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.
A summary of stock option and warrant transactions is as follows for
the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- ------------------- ------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Options and warrants outstanding
at beginning of period................................ 48.1 $15.67 52.5 $ 7.63 49.6 $ 4.87
Granted ................................................. 16.9 21.89 15.2 28.52 8.7 21.86
Exercised................................................. (9.3) 3.62 (18.7) 3.24 (5.6) 4.03
Canceled ................................................. (1.1) 25.34 (.9) 24.59 (.2) 9.44
----- -----
Options and warrants outstanding
at end of period...................................... 54.6 12.52 48.1 15.67 52.5 7.63
===== ===== =====
Options and warrants exercisable
at end of period...................................... 18.8 11.27 26.8 8.71 38.5 4.12
Options available for future grants....................... 28.2 14.0 7.9
</TABLE>
F-32
<PAGE> 34
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes information about outstanding and
exercisable stock options and warrants at December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------------------- -------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
EXERCISE PRICE OR CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE(YRS.) PRICE SHARES PRICE
------------------------ ------ ----------- --------- ------ ---------
<S> <C> <C> <C> <C> <C>
$ 1.13-$12.38.................................... 15.3 3.10 $ 7.29 14.1 $ 6.96
12.75......................................... 32.1 7.98 12.75 -- --
13.38-31.19................................... 7.2 8.33 23.24 4.7 24.19
---- ----
54.6 6.66 12.52 18.8 11.27
==== ====
</TABLE>
In March 1999, approximately 8.0 million options held by employees of
RSG were canceled and replaced with options to acquire common shares of RSG.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" in accounting for stock-based
employee compensation arrangements whereby no compensation cost related to
stock options is deducted in determining net income (loss). Had compensation
cost for the Company's stock option plans been determined pursuant to SFAS No.
123, "Accounting for Stock-Based Compensation", the Company's net income (loss)
and earnings (loss) per share would have decreased (increased) accordingly.
Using the Black-Scholes option pricing model for all options granted after
December 31, 1994, the Company's pro forma net income (loss), pro forma
earnings (loss) per share and pro forma weighted average fair value of options
granted, with related assumptions, are as follows for the years ended December
31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pro forma net income (loss)............................. $368.5 $375.3 $(25.4)
Pro forma diluted earnings
(loss) per share................................... .81 .88 (.08)
Pro forma weighted average fair
value of options granted........................... 13.87 10.03 9.80
Risk free interest rates................................ 4.76-4.82% 5.74-5.78% 5.98-6.17%
Expected lives.......................................... 5-7 years 5-7 years 5-7 years
Expected volatility..................................... 40% 40% 40%
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
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. On December 2, 1998, CarMax filed a notice of appeal of the trial
court's decision with the U.S. Court of Appeals for the Eleventh Circuit. The
Company is confident the appellate court will affirm the lower court's
decision.
F-33
<PAGE> 35
AUTONATION, INC.
NOTES TO 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, as well as the matter described above, 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.
LEASE COMMITMENTS
The Company and its subsidiaries lease real property, equipment and
software under various operating leases with terms from 1 to 25 years.
Expenses under real property, equipment and software leases were $45.0
million, $12.0 million and $12.5 million for the years ended December 31 1998,
1997 and 1996, respectively.
Future minimum lease obligations under noncancelable real property,
equipment and software leases with initial terms in excess of one year at
December 31, 1998 are as follows:
Year Ending December 31:
1999............................................. $ 62.6
2000............................................. 58.5
2001............................................. 50.3
2002............................................. 28.2
2003............................................. 24.5
Thereafter....................................... 116.5
------
$340.6
======
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 $418.6 million at December 31, 1998.
OTHER MATTERS
In the normal course of business, the Company is required to post
performance and surety bonds, letters of credit, and/or cash deposits as
financial guarantees of the Company's performance. To date, the Company has
satisfied financial responsibility requirements for regulatory agencies by
making cash deposits, obtaining surety bonds or by obtaining bank letters of
credit. At December 31, 1998, surety bonds and letters of credit totaling
$196.4 million expire through 2005.
9. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
year. Diluted earnings (loss) 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 (loss) per share, the Company has
utilized the treasury stock method.
F-34
<PAGE> 36
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The computation of weighted average common and common equivalent
shares used in the calculation of basic and diluted earnings (loss) per share
is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average shares outstanding used
in calculating basic earnings per share...................................... 455.1 403.1 320.9
Effect of dilutive options and warrants......................................... 15.8 27.8 --
----- ----- -----
Weighted average common and common equivalent
shares used in calculating diluted
earnings per share........................................................... 470.9 430.9 320.9
===== ===== =====
</TABLE>
At December 31, 1998 and 1997, the Company had approximately 4.8
million and 5.4 million stock options outstanding, respectively, which have
been excluded from the computation of diluted earnings per share since they are
anti-dilutive. For the year ended December 31, 1996, weighted average common
equivalent shares of approximately 34.6 million shares have been excluded from
the computation of diluted earnings per share since they are anti-dilutive.
10. RESTRUCTURING AND OTHER CHARGES
During the year ended December 31, 1997, the Company recorded pre-tax
charges of approximately $150.0 million associated with combining the Company's
franchised automotive dealerships and used vehicle megastore operations into
one division. Approximately $85.0 million appears as restructuring charges in
the Company's 1997 Consolidated Statement of Operations and consists of: $42.5
million for consolidation of information systems; $25.3 million related
primarily to relocating certain operations; and $17.2 million of severance and
other costs. The remaining $65.0 million of this charge relates to inventory
consolidation and is included in cost of operations in the Company's 1997
Consolidated Statement of Operations. During the year ended December 31, 1998,
the Company reduced its estimated restructuring reserves for information
systems and increased its estimated reserves for the relocation of certain
operations by approximately $21.0 million. The decrease in the information
systems reserve is a result of the Company's decision to eliminate or delay the
conversion of certain systems. The increase in the relocation reserve is due to
the Company's decision to close its reconditioning centers and relocate the
reconditioning operations to the Company's AutoNation USA megastores. Through
December 31, 1998, the Company has spent approximately $30.3 million related to
restructuring activities and has recorded $30.6 million of these restructuring
charges against certain assets. As of December 31, 1998, approximately $24.1
million remained in accrued liabilities related primarily to closed
reconditioning centers which the Company is actively marketing for sale.
11. DISCONTINUED OPERATIONS
As a result of the Company's decision to separate its automotive
rental business, the net assets and operating results of the Company's
automotive rental segment have been classified as discontinued operations for
all periods presented in the accompanying Consolidated Financial Statements.
In May 1999, the Company sold its remaining interest in RSG resulting
in an after tax gain of approximately $379.3 million. The net assets and
operating results of RSG have been classified as discontinued operations for
all periods presented in the accompanying Consolidated Financial Statements.
The minority shareholders' interest in the equity of RSG as of December 31,
1998 and the net earnings of RSG for the period subsequent to the July 1, 1998
initial public offering have been included as a reduction of the net assets and
income from discontinued operations, respectively.
F-35
<PAGE> 37
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In October 1997, the Company sold its electronic security services
division for approximately $610.0 million resulting in an after tax gain of
approximately $230.0 million. In 1998, the Company finalized the sale resulting
in an additional after tax gain of approximately $11.6 million. The operating
results and gain on disposition of the electronic security services segment
have been classified as discontinued operations in the accompanying
Consolidated Financial Statements.
A summary of the net assets of discontinued operations is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------------------------------- --------------------------------------
AUTOMOTIVE SOLID AUTOMOTIVE SOLID
RENTAL WASTE TOTAL RENTAL WASTE TOTAL
---------- --------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Current assets................... $5,345.1 $ 784.0 $6,129.1 $ 5,124.2 $ 175.9 $5,300.1
Non-current assets............... 907.5 2,028.1 2,935.6 746.1 1,172.1 1,918.2
--------- --------- --------- ----------- --------- ----------
Total assets................... 6,252.6 2,812.1 9,064.7 5,870.3 1,348.0 7,218.3
--------- --------- --------- ----------- --------- ----------
Current liabilities.............. 3,438.6 783.8 4,222.4 3,025.3 158.0 3,183.3
Non-current liabilities.......... 2,075.3 729.2 2,804.5 2,318.8 173.1 2,491.9
--------- --------- --------- ----------- --------- ----------
Total liabilities.............. 5,513.9 1,513.0 7,026.9 5,344.1 331.1 5,675.2
--------- --------- --------- ----------- --------- ----------
Minority interest................ -- 468.9 468.9 -- -- --
--------- --------- --------- ---------- --------- ----------
Net assets of discontinued
operations..................... $ 738.7 $ 830.2 $1,568.9 $ 526.2 $1,016.9 $1,543.1
========== ========= ========= =========== ========= =========-
</TABLE>
Selected statement of operations data for the Company's discontinued
operations is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------------------- --------------------------------------
Automotive Solid Automotive Solid Electronic Automotive Solid Electronic
Rental Waste Total Rental Waste Security Total Rental Waste Security Total
---------- ----- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue........... $3,453.6 $1,369.1 $4,822.7 $3,055.1 $1,127.7 $83.8 $4,266.6 $2,699.4 $953.3 $85.3 $3,738.0
Operating income
(loss)....... 178.9 299.3 478.2 82.1 211.5 14.7 308.3 (28.4) 114.0 14.5 100.1
Provision for
income taxes. 61.3 105.3 166.6 30.3 76.9 5.2 112.4 5.0 49.5 6.1 60.6
Minority interest
in RSG....... -- 33.9 33.9 -- -- -- -- -- -- -- --
Income (loss) from
discontinued
operations... 108.8 153.3 262.1 51.2 135.6 9.5 196.3 (49.9) 67.5 8.4 26.0
</TABLE>
12. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses interest rate swap agreements to manage the impact of
interest rate changes on borrowings under the Company's variable rate revolving
credit facility. The amounts exchanged by the counterparties to interest rate
swap agreements 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 and,
therefore, do not represent a measure of the Company's exposure as an end user
of derivative financial instruments. At December 31, 1998, notional principal
amounts related to interest rate swaps (variable to fixed rate) were $100.0
million maturing in 2003. At December 31, 1998, the weighted average fixed rate
payment on variable to fixed rate swaps was 5.6%. Variable rates are indexed to
LIBOR.
F-36
<PAGE> 38
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In 1998, the Company entered into 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 $737.1 million contractually maturing in
2004 which effectuate a variable to fixed rate swap at a weighted average rate
of 5.18% at December 31, 1998. Variable rates on the underlying portfolio are
indexed to the Commercial Paper Nonfinancial Rate.
The amounts exchanged by the counterparties to interest rate
derivatives are based upon the notional amounts and other terms, generally
related to interest rates, of the derivatives. While notional amounts of
interest rate derivatives form part of the basis for the amounts exchanged by
the counterparties, the notional amounts are not themselves exchanged and,
therefore, do not represent a measure of the Company's exposure as an end user
of derivative financial instruments.
The Company is exposed to credit related losses in the event of
non-performance by counterparties to derivative financial instruments. The
Company monitors the credit worthiness of the counterparties and presently does
not expect default by any of the counterparties. The Company does not obtain
collateral in connection with its derivative financial instruments.
The credit exposure that results from interest rate contracts is
represented by the fair value of contracts with a positive fair value as of the
reporting date. See Note 13, Fair Value of Financial Instruments, for the fair
value of derivatives. The Company's credit exposure on its interest rate
derivatives was not material at December 31, 1998.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument represents the amount at
which the instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation.
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 following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
o Cash and cash equivalents, trade and manufacturer
receivables, other current assets, accounts payable, accrued
liabilities, other current liabilities and variable rate
debt: The amounts reported in the accompanying Consolidated
Balance Sheets approximate fair value.
o Installment loans receivable and retained interests in
securitized receivables: The fair value of installment loans
receivable and retained interests in securitized receivables
are estimated based upon the discounted value of the future
cash flows expected to be received. Significant assumptions
used to estimate the fair value at December 31, 1998 are as
follows: discount rate--8.13%; default rate--1.0% per year;
and prepayment rate--1.5% per month.
o Other fixed rate debt: The fair value of other fixed rate
debt is based upon the discounted expected cash flows at
rates then offered to the Company for debt of similar terms.
F-37
<PAGE> 39
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
o Interest rate swaps, caps and floors: The fair value of
interest rate swaps, caps and floors is determined from
dealer quotations and represents the discounted future cash
flows through maturity or expiration using current rates, and
is effectively the amount the Company would pay or receive to
terminate the agreements.
The following table sets forth the carrying amounts and fair values of
the Company's financial instruments, except for those noted above for which
carrying amounts approximate fair value, as of December 31:
<TABLE>
<CAPTION>
1998 1997
------------------------- ----------------------
CARRYING FAIR CARRYING FAIR
ASSETS (LIABILITIES) AMOUNT VALUE AMOUNT VALUE
- -------------------- ---------- ------- ------- -------
<S> <C> <C> <C> <C>
Installment loans receivable........................... $ 95.6 $ 99.2 $ 36.8 $ 36.5
Retained interests in
securitized receivables:
Principal........................................... 44.2 44.6 -- --
Interest-only strips................................ 38.2 38.2 -- --
Servicing assets.................................... 3.1 3.1 -- --
Other fixed rate debt.................................. (26.5) (27.0) (14.6) (14.6)
Interest rate swaps.................................... -- 1.7 -- --
Interest rate caps..................................... -- 8.9 -- --
Interest rate floors................................... -- (7.1) -- --
</TABLE>
14. BUSINESS AND CREDIT CONCENTRATIONS
The Company owns and operates franchised automotive dealerships and
used vehicle megastores in the United States.
Automotive dealerships operate pursuant to franchise agreements with
vehicle manufacturers. Franchise agreements generally provide the manufacturers
with considerable influence over the operations of the dealership and generally
provide for termination of the franchise agreement for a variety of causes. The
success of any franchised automotive dealership is dependent, to a large
extent, on the financial condition, management, marketing, production and
distribution capabilities of the vehicle manufacturers of which the Company
holds franchises. At December 31, 1998 and 1997, the Company had receivables
from manufacturers of $86.1 million and $39.6 million, respectively.
The Company purchases substantially all of its new vehicles from
various manufacturers at the prevailing prices charged by the manufacturers to
all franchised dealers. The Company's sales volume could be adversely impacted
by the manufacturers' inability to supply the dealerships with an adequate
supply of vehicles.
Concentrations of credit risk with respect to non-manufacturer trade
receivables are limited due to the wide variety of customers and markets in
which the Company's products are sold as well as their dispersion across many
different geographic areas in the United States. Consequently, at December 31,
1998, the Company does not consider itself to have any significant
non-manufacturer concentrations of credit risk.
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The Company's operations generally experience higher volumes of
vehicle sales in the second and third quarters of each year in part due to
consumer buying trends and the introduction of new vehicle models.
F-38
<PAGE> 40
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Income from continuing operations in the second quarter of 1997
includes a pre-tax gain on the sale of ADT Limited common shares of
approximately $102.3 million as described in Note 1, Summary of Significant
Accounting Policies, Investments. Operating income (loss) in the fourth quarter
of 1997 includes restructuring and other pre-tax charges of approximately $150.0
million, as described in Note 10, Restructuring and Other Charges.
The following is an analysis of certain items in the Consolidated
Statements of Operations by quarter for 1998 and 1997.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue................................................ 1998 $2,343.4 $3,172.6 $3,508.0 $3,640.6
1997 1,037.7 1,490.7 1,728.4 1,866.0
Operating income (loss)................................ 1998 45.9 94.9 119.7 95.8
1997 9.4 7.5 18.8 (129.7)
Income (loss) from continuing operations............... 1998 27.7 54.2 81.3 62.6
1997 7.4 68.4 14.7 (77.1)
Basic earnings (loss) per share from
continuing operations.............................. 1998 .06 .12 .18 .13
1997 .02 .17 .04 (.18)
Diluted earnings (loss) per share from
continuing operations.............................. 1998 .06 .11 .17 .13
1997 .02 .16 .03 (.18)
Net income............................................. 1998 77.1 127.4 179.7 115.3
1997 38.7 74.5 125.3 201.2
</TABLE>
F-39
<PAGE> 41
AUTONATION, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II
(IN MILLIONS)
<TABLE>
<CAPTION>
BALANCE
AT ADDITIONS BALANCE
BEGINNING CHARGED TO AT END
CLASSIFICATIONS OF YEAR INCOME DEDUCTIONS OTHER OF YEAR
- --------------- --------- ---------- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
1998.................................... $ 8.5 $ 1.8 $ (3.1)(2) $ 26.6(1) $ 33.8
1997.................................... 2.4 1.4 (1.6)(2) 6.3(1) 8.5
1996.................................... 1.5 3.8 (3.8)(2) .9(1) 2.4
Restructuring reserves(3):
1998.................................... 46.0 --(6) (15.5)(5) (6.4)(4) 24.1
1997.................................... -- 85.0 (14.8)(5) (24.2)(4) 46.0
1996.................................... -- -- -- -- --
</TABLE>
- -----------------
(1) Allowance of acquired businesses.
(2) Accounts written off.
(3) Included under the caption "Accrued Liabilities" in the accompanying
Consolidated Balance Sheets.
(4) Primarily asset write-offs.
(5) Primarily cash payments of costs associated with restructuring
activities.
(6) During the year ended December 31, 1998, the Company reduced its
estimated restructuring reserves for information systems and increased
its estimated reserves for the relocation of certain operations by
approximately $21.0 million.
F-40
