<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ___________
COMMISSION FILE NUMBER: 1-13107
AUTONATION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 73-1105145
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
110 S.E. 6TH STREET
FT. LAUDERDALE, FLORIDA 33301
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 769-6000
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No[ ]
On November 6, 2000 the registrant had 357,875,886 outstanding shares
of common stock, par value $.01 per share.
<PAGE> 2
AUTONATION, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets as
of September 30, 2000 and December 31, 1999............................................... 3
Unaudited Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 2000 and 1999........................... 4
Unaudited Condensed Consolidated Statement of Shareholders'
Equity for the Nine Months Ended September 30, 2000....................................... 5
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2000 and 1999..................................... 6
Notes to Unaudited Condensed Consolidated Financial Statements............................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................................. 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................... 26
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................. 27
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUTONATION, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................... $ 133.5 $ 218.6
Receivables, net ............................................................ 1,102.3 1,179.5
Inventory ................................................................... 2,403.3 2,706.8
Other current assets ........................................................ 188.8 165.6
-------- --------
Total Current Assets .................................................. 3,827.9 4,270.5
INVESTMENTS .................................................................... 81.8 175.8
PROPERTY AND EQUIPMENT, NET .................................................... 1,485.0 1,360.4
INTANGIBLE ASSETS, NET ......................................................... 2,939.9 2,831.0
OTHER ASSETS ................................................................... 174.6 218.8
NET ASSETS OF DISCONTINUED OPERATIONS .......................................... -- 726.6
---------- ----------
$ 8,509.2 $ 9,583.1
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................ $ 136.0 $ 163.1
Accrued liabilities ......................................................... 455.5 622.9
Notes payable and current maturities of
long-term debt ............................................................ 2,004.6 2,218.3
Other current liabilities ................................................... 173.8 129.9
---------- ----------
Total Current Liabilities ............................................. 2,769.9 3,134.2
LONG-TERM DEBT, NET OF CURRENT MATURITIES ...................................... 926.7 836.1
DEFERRED INCOME TAXES .......................................................... 845.1 804.8
OTHER LIABILITIES .............................................................. 111.5 206.8
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, par value $.01 per share;
5,000,000 shares authorized; none issued ................................. -- --
Common stock, par value $.01 per share; 1,500,000,000 shares authorized;
475,548,554 and 474,965,676 shares issued including shares held in
treasury, respectively ................................................... 4.8 4.7
Additional paid-in capital .................................................. 4,663.2 4,661.5
Retained earnings ........................................................... 579.2 1,213.8
Accumulated other comprehensive income ...................................... 7.9 6.6
Treasury stock, at cost; 114,799,209
and 99,602,444 shares held, respectively ................................. (1,399.1) (1,285.4)
---------- ----------
Total Shareholders' Equity ............................................ 3,856.0 4,601.2
---------- ----------
$ 8,509.2 $ 9,583.1
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
AUTONATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -------------------------------
2000 1999 2000 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUE ........................... $ 5,338.1 $ 5,459.7 $ 15,907.8 $ 15,092.0
COST OF OPERATIONS ................ 4,560.7 4,656.6 13,594.3 12,874.9
----------- ----------- ------------ ------------
GROSS MARGIN ...................... 777.4 803.1 2,313.5 2,217.1
SELLING,GENERAL AND
ADMINISTRATIVE EXPENSES ......... 540.3 600.9 1,623.5 1,656.0
DEPRECIATION ...................... 14.6 16.0 42.4 43.4
AMORTIZATION ...................... 20.4 16.0 58.7 44.5
PROPERTY CARRYING COSTS ........... 7.0 -- 26.9 --
ASSET IMPAIRMENT GAIN, NET ........ (2.2) -- (2.2) --
----------- ----------- ------------ ------------
OPERATING INCOME .................. 197.3 170.2 564.2 473.2
FLOORPLAN INTEREST EXPENSE ........ (47.8) (28.8) (146.8) (84.0)
OTHER INTEREST EXPENSE ............ (13.8) (5.3) (36.2) (21.9)
INTEREST INCOME ................... 3.0 6.9 11.7 15.6
OTHER INCOME, NET ................. 10.3 1.7 14.1 4.8
----------- ----------- ------------ ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ............. 149.0 144.7 407.0 387.7
PROVISION FOR INCOME TAXES ........ 55.9 52.1 152.6 139.6
----------- ----------- ------------ ------------
INCOME FROM CONTINUING OPERATIONS.. 93.1 92.6 254.4 248.1
INCOME FROM DISCONTINUED
OPERATIONS, NET OF INCOME TAXES -- 12.1 1.8 437.9
----------- ----------- ------------ ------------
NET INCOME ........................ $ 93.1 $ 104.7 $ 256.2 $ 686.0
=========== =========== ============ ============
BASIC EARNINGS PER SHARE:
Continuing operations ....... $ .26 $ .22 $ .70 $ .56
Discontinued operations ..... -- .03 .01 .99
----------- ----------- ------------ ------------
Net income .................. $ .26 $ .25 $ .71 $ 1.55
=========== =========== ============ ============
Weighted average common
shares outstanding ........ 361.3 424.4 363.2 441.5
=========== =========== ============ ============
DILUTED EARNINGS PER SHARE:
Continuing operations ....... $ .26 $ .22 $ .70 $ .55
Discontinued operations ..... -- .02 .01 .98
----------- ----------- ------------ ------------
Net income .................. $ .26 $ .24 $ .71 $ 1.53
=========== =========== ============ ============
Weighted average common
and common equivalent
shares outstanding ........ 361.3 429.7 363.4 449.1
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
AUTONATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Income Stock Total
-------- --------- -------- ---------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1999 ....... $ 4.7 $4,661.5 $ 1,213.8 $ 6.6 $(1,285.4) $4,601.2
Purchases of
treasury stock ..... -- -- -- -- (110.7) (110.7)
Other comprehensive
income ............. -- -- -- 1.3 -- 1.3
Exercise of stock
options ............ .1 1.2 -- -- -- 1.3
Spin-off of ANC
Rental Corporation.. -- -- (890.8) -- -- (890.8)
Other ................ -- .5 -- -- (3.0) (2.5)
Net income ........... -- -- 256.2 -- -- 256.2
------ -------- --------- ------- --------- ---------
BALANCE AT
SEPTEMBER 30, 2000 ..... $ 4.8 $4,663.2 $ 579.2 $ 7.9 $(1,399.1) $ 3,856.0
====== ======== ========= ======= ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE> 6
AUTONATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
2000 1999
---------- ----------
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income ...................................................................... $ 256.2 $ 686.0
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................ 101.1 87.9
Income from discontinued operations .......................................... (1.8) (437.9)
Changes in assets and liabilities, net of effects from business combinations:
Receivables ............................................................ 63.8 (209.2)
Inventory .............................................................. 357.8 68.0
Other assets ........................................................... (37.3) 10.9
Accounts payable and accrued liabilities ............................... (163.7) 30.2
Other liabilities ...................................................... 116.3 119.2
---------- ----------
692.4 355.1
---------- ----------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases of property and equipment ............................................. (82.8) (168.5)
Proceeds from sale of property and equipment and assets held for sale ........... 116.6 59.6
Purchases of marketable securities .............................................. (.8) (74.2)
Sales of marketable securities .................................................. 82.7 87.4
Cash used in business acquisitions, net of cash acquired ........................ (242.8) (717.8)
Cash received from business divestitures ........................................ 77.5 124.3
Cash received on disposal of solid waste services segment ....................... -- 1,779.6
Restricted cash deposits ........................................................ (63.4) (83.5)
Other ........................................................................... (.5) (15.9)
---------- ----------
(113.5) 991.0
---------- ----------
CASH USED IN FINANCING ACTIVITIES:
Net payments under vehicle inventory financing facilities ....................... (231.8) (32.5)
Net proceeds (payments) under revolving credit facilities ....................... -- (178.0)
Purchases of treasury stock ..................................................... (110.7) (859.5)
Payments of notes payable and long-term debt .................................... (168.8) (108.4)
Proceeds from sale leaseback financing .......................................... 52.1 --
Other ........................................................................... 1.2 28.6
---------- ----------
(458.0) (1,149.8)
---------- ----------
CASH PROVIDED BY CONTINUING OPERATIONS ............................................. 120.9 196.3
---------- ----------
CASH USED IN DISCONTINUED OPERATIONS ............................................... (223.4) (629.4)
---------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS .............................................. (102.5) (433.1)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD,
INCLUDING CASH AND CASH EQUIVALENTS OF
DISCONTINUED OPERATIONS OF $17.4 MILLION AND
$590.1 MILLION, RESPECTIVELY .................................................... 236.0 726.0
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD,
INCLUDING CASH AND CASH EQUIVALENTS OF
DISCONTINUED OPERATIONS OF $62.3 MILLION
AT SEPTEMBER 30, 1999 ........................................................... $ 133.5 $ 292.9
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN MILLIONS, EXCEPT PER SHARE DATA)
1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
include the accounts of AutoNation, Inc. and its subsidiaries (the "Company" or
"AutoNation") and have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. All significant
intercompany accounts and transactions have been eliminated. Certain information
related to the Company's organization, significant accounting policies and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. These unaudited condensed consolidated financial statements reflect, in
the opinion of management, all material adjustments (which include only normal
recurring adjustments) necessary to fairly state the financial position and the
results of operations for the periods presented and the disclosures herein are
adequate to make the information presented not misleading in any material
respect.
Operating results for interim periods are not necessarily indicative of
the results that can be expected for a full year. These interim financial
statements should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto included in the Company's most recent
Annual Report on Form 10-K.
On June 30, 2000, the Company completed the spin-off of its former
automotive rental businesses, which have been organized under ANC Rental
Corporation ("ANC Rental"), by distributing 100% of ANC Rental's common stock to
AutoNation's stockholders as a tax-free dividend. As a result of the spin-off,
AutoNation stockholders received one share of ANC Rental common stock for every
eight shares of AutoNation common stock owned as of the June 16, 2000 record
date. As discussed in Note 18, Discontinued Operations, the Company's former
automotive rental segment has been accounted for as discontinued operations and
the accompanying unaudited condensed consolidated financial statements presented
herein have been restated to report separately the net assets and operating
results of these discontinued operations.
In order to maintain consistency and comparability between periods
presented, floorplan interest expense, depreciation and amortization and certain
other amounts have been reclassified from the previously reported financial
statements to conform with the financial statement presentation of the current
period.
2. BUSINESS ACQUISITIONS AND DIVESTITURES
Businesses acquired through September 30, 2000 and accounted for under
the purchase method of accounting are included in the unaudited condensed
consolidated financial statements from the date of acquisition.
During the nine months ended September 30, 2000, the Company acquired
various businesses which have been accounted for under the purchase method of
accounting. The Company paid approximately $122.5 million of cash for these
acquisitions. During the nine months ended September 30, 2000, the Company also
paid approximately $120.3 million in purchase price for certain prior year
automotive retail acquisitions. As of September 30, 2000, the Company has
accrued approximately $17.4 million of additional purchase price due to former
owners of acquired businesses.
The following summarizes the preliminary purchase price allocations for
business combinations accounted for under the purchase method of accounting
consummated during the nine months ended September 30 related to continuing
operations:
2000 1999
-------- ---------
Property and equipment................................. $ 7.0 $ 141.8
Intangible and other assets............................ 120.1 898.8
Working capital........................................ 67.7 299.5
Debt assumed........................................... (69.9) (587.6)
Other liabilities...................................... (2.4) (34.7)
------- --------
Cash used in acquisitions, net of cash acquired........ $ 122.5 $ 717.8
======== ========
7
<PAGE> 8
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company's unaudited pro forma consolidated results of continuing
operations assuming acquisitions accounted for under the purchase method of
accounting had occurred as of the beginning of each period presented are as
follows:
Nine Months Ended
September 30,
-----------------------------
2000 1999
---------- ----------
Revenue......................................... $16,161.5 $16,913.2
Income from continuing operations............... 254.9 268.1
Diluted earnings per share from continuing
operations.................................... .70 .60
The unaudited pro forma consolidated 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.
As described in Note 13, Restructuring and Impairment Charges, the
Company is disposing of certain non-core franchised automotive dealerships.
During the nine months ended September 30, 2000, the Company received
approximately $77.5 million of cash from the divestiture of franchised
automotive dealerships. Gains and losses on divestitures are included in asset
impairment charges and were not material during the period. In October 2000, the
Company signed a definitive agreement to sell its Flemington dealer group for
approximately $67.0 million. The Company expects to complete the sale by the end
of the first quarter of 2001, subject to the satisfaction or waiver of customary
conditions.
In November 2000, the Company completed the sale of its billboard
advertising business for approximately $104.0 million. The Company expects to
recognize a pre-tax gain on the sale of approximately $50.0 million to be
recorded in the fourth quarter of 2000.
3. RECEIVABLES
The components of receivables, net of allowance for doubtful accounts,
are as follows:
September 30, December 31,
2000 1999
------------- -------------
Vehicle receivables ................. $ 491.2 $ 467.6
Finance receivables ................. 361.0 441.5
Trade receivables ................... 120.0 121.2
Manufacturer receivables ............ 136.8 134.1
Other ............................... 48.3 57.6
---------- ----------
1,157.3 1,222.0
Less: allowance for doubtful accounts (55.0) (42.5)
---------- ----------
$ 1,102.3 $ 1,179.5
========== ==========
Finance receivables consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Finance leases ..................... $ 157.5 $ 196.3
Installment loans .................. 60.8 83.8
Retained interests in securitized
installment loans ................ 142.7 161.4
-------- --------
$ 361.0 $ 441.5
======== ========
</TABLE>
8
<PAGE> 9
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company securitizes installment loan receivables through a $1.0
billion commercial paper warehouse facility with unrelated financial
institutions. In September 2000, the Company decreased the capacity of the
commercial paper warehouse facility from $1.7 billion to $1.0 billion. During
the nine months ended September 30, 2000, the Company securitized approximately
$460.7 million of receivables under this program, net of retained interests. At
September 30, 2000, $511.4 million was outstanding under this program.
The Company also securitizes installment loan receivables through the
issuance of asset-backed notes through a non-consolidated special purpose entity
under a $2.0 billion shelf registration statement. Proceeds from these notes are
used to refinance installment loans previously securitized under the warehouse
facility and to securitize additional loans held by the Company. The Company
provides credit enhancement related to these notes in the form of 1%
overcollateralization, a reserve fund and a third party surety bond. In August
2000, approximately $691.7 million in additional asset-backed notes were issued
under this program. At September 30, 2000, $1.15 billion was outstanding under
this program.
As described in Note 13, Restructuring and Impairment Charges, during
the three months ended September 30, 2000, the Company recognized an impairment
charge totaling $16.6 million associated with the residual value of finance
lease receivables.
4. INVENTORY
Inventory consists of the following:
September 30, December 31,
2000 1999
------------- ------------
New vehicles ...................... $ 1,929.9 $ 2,085.0
Used vehicles ..................... 323.6 470.1
Parts, accessories and other....... 149.8 151.7
---------- ----------
$ 2,403.3 $ 2,706.8
========== ==========
5. OTHER CURRENT ASSETS
Other current assets consist primarily of restricted cash deposits
related to insurance programs totaling $135.7 million and $91.9 million at
September 30, 2000 and December 31, 1999, respectively.
6. INVESTMENTS
Investments consist of the following:
September 30, December 31,
2000 1999
------------ -------------
Marketable securities ............ $ 13.0 $ 106.2
Equity method investments......... 68.8 69.6
-------- --------
$ 81.8 $ 175.8
======== ========
During the three and nine months ended September 30, 2000, the Company
sold 1.1 million and 2.5 million shares of common stock, respectively, of the
Company's former solid waste subsidiary, Republic Services, Inc., resulting in
pre-tax gains of $9.7 million and $19.6 million, respectively, included in other
income. As of September 30, 2000, the Company had approximately 600,000
remaining shares of Republic Services, Inc. with a fair value of $8.0 million.
These securities are classified as available for sale and are stated at fair
value with unrealized gains or losses included in other comprehensive income.
9
<PAGE> 10
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Land ................................................. $ 586.4 $ 529.7
Buildings and improvements ........................... 763.3 670.9
Furniture, fixtures and equipment .................... 295.6 310.5
-------- --------
1,645.3 1,511.1
Less: accumulated depreciation and amortization....... (160.3) (150.7)
-------- --------
$1,485.0 $ 1,360.4
======== ========
</TABLE>
8. INTANGIBLE ASSETS
Intangible 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 acquired is amortized primarily over 40 years on a
straight-line basis. Accumulated amortization of intangible assets at September
30, 2000 and December 31, 1999 was $179.9 million and $122.5 million,
respectively.
9. OTHER ASSETS
Other assets consist primarily of megastore and other properties held
for sale, net of impairment reserves, totaling approximately $166.9 million and
$212.0 million at September 30, 2000 and December 31, 1999, respectively. As
described in Note 13, Restructuring and Impairment Charges, in the fourth
quarter of 1999, the Company exited the used vehicle megastore business.
10. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Vehicle inventory credit facilities;
secured by the Company's vehicle inventory........ $1,997.7 $ 2,210.6
$1.5 billion revolving credit facilities;
interest payable using LIBOR based rates;
unsecured; $500.0 million matures March 2001;
$1.0 billion matures April 2002 .................. 669.0 669.0
Capital leases and other debt ....................... 264.6 174.8
--------- ---------
2,931.3 3,054.4
Less: current portion ............................... (2,004.6) (2,218.3)
--------- ---------
$ 926.7 $ 836.1
========= =========
</TABLE>
The Company is a lessee under a $500.0 million lease facility that was
established to acquire and develop the Company's former used vehicle megastore
properties and other properties. In September 2000, the Company amended the
terms of the facility by exercising its option to purchase the leased properties
at the end of the lease term. In addition, the facility size was reduced to
$210.0 million. As a result of the lease amendment, the leases were required to
be accounted for as capital leases with the property and related debt included
in the accompanying unaudited condensed consolidated balance sheet. At September
30, 2000, $196.7 million was outstanding under this facility and is included in
long-term debt in the accompanying unaudited condensed consolidated balance
sheet.
10
<PAGE> 11
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
11. SHAREHOLDERS' EQUITY
During the nine months ended September 30, 2000, the Company
repurchased 14.9 million shares of its common stock, par value $.01 per share
("Common Stock"), under its Board authorized share repurchase program for an
aggregate purchase price of $110.7 million. Through September 30, 2000, an
aggregate of 115.0 million shares of Common Stock have been repurchased under
the Company's share repurchase program, which was initially authorized by the
Company's Board of Directors in 1998, for an aggregate purchase price of $1.4
billion. In October 2000, the Company repurchased an additional 2.7 million
shares of Common Stock for an aggregate purchase price of $16.7 million, leaving
approximately $328.5 million available for share repurchases under the program.
Repurchases are made pursuant to Rule 10b-18 of the Securities Exchange Act of
1934, as amended.
As discussed in Note 18, Discontinued Operations, on June 30, 2000, the
Company completed the tax-free spin-off of ANC Rental. As a result of the
spin-off, the Company's retained earnings was reduced by the net assets of ANC
Rental totaling $890.8 million. The equity adjustment resulting from the
spin-off is subject to further adjustment resulting from changes in estimated
shared assets and liabilities of AutoNation and ANC Rental and certain other
matters. However, such adjustments, if any, are not expected to be significant.
12. OTHER COMPREHENSIVE INCOME
The changes in components of the other comprehensive income (loss) are
as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2000 1999 2000 1999
------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income .................................. $ 93.1 $ 104.7 $ 256.2 $ 686.0
------- -------- -------- --------
Other comprehensive income (loss):
Unrealized gain (loss) on marketable
securities and interest-only strip
receivables, net of income taxes . (3.7) (30.4) (3.0) 7.8
Foreign currency translation
adjustments, net of income taxes . -- (3.3) 3.0 (4.4)
Reclassification of realized losses
(gains), net of income taxes ..... 1.0 (.9) 1.3 (2.4)
------- -------- -------- --------
(2.7) (34.6) 1.3 1.0
------- -------- -------- --------
Comprehensive income ........................ $ 90.4 $ 70.1 $ 257.5 $ 687.0
======= ======== ======== ========
</TABLE>
13. RESTRUCTURING AND IMPAIRMENT CHARGES
During the fourth quarter of 1999, the Company approved a plan to
restructure certain of its operations. The restructuring plan is comprised of
the following major components: (1) exiting the used vehicle megastore business;
and (2) reducing the corporate workforce. The restructuring plan also includes
divesting of certain non-core franchised automotive dealerships. Approximately
2,000 positions were eliminated as a result of the restructuring plan of which
1,800 were megastore positions and 200 were corporate positions. These
restructuring activities resulted in pre-tax charges of $443.7 million in the
fourth quarter of 1999. These pre-tax charges include $286.9 million of asset
impairment charges; $103.3 million of reserves for residual value guarantees for
closed leased properties; $26.2 million of severance and other exit costs; and
$27.3 million of inventory related costs. The $286.9 million asset impairment
charge consists of: $244.9 million of megastore and other property impairments;
$26.6 million of goodwill impairment reserves for the divestiture of certain
non-core franchised automotive dealerships; and $15.4 million for information
systems impairments.
11
<PAGE> 12
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Following the sale of the Flemington dealer group described in Note 2,
Business Acquisitions and Divestitures, the Company will have substantially
completed its non-core dealership divestiture plan. The Company is disposing of
its closed megastores and other properties through sales to third parties.
Although the Company is aggressively marketing these closed properties, the
ultimate disposition will not be substantially completed until 2001. During the
nine months ended September 30, 2000, the Company incurred $26.9 million in
carrying costs related to closed properties which are charged to expense as
incurred. Revenue for the operations disposed or to be disposed was $855.6
million and $1.75 billion during the nine months ended September 30, 2000 and
1999, respectively. Operating income for the operations disposed or to be
disposed was $12.9 million and $13.0 million for the nine months ended September
30, 2000 and 1999, respectively.
The following summarizes activity in the Company's restructuring and
impairment reserves for the nine months ended September 30, 2000:
<TABLE>
<CAPTION>
Deductions
Balance Amounts Charged -------------------- Balance
Reserve December 31, 1999 (Credited) to Income Cash Non-cash September 30, 2000
------- ----------------- -------------------- -------- -------- ------------------
<S> <C> <C> <C> <C> <C>
Asset reserves:
Asset impairment ...... $ 263.3 $ (9.3) $ -- $ (58.3) $ 195.7
Inventory ............. 15.0 -- -- (15.0) --
Accrued liabilities:
Property lease residual
value guarantees .... 103.3 (14.8) (88.5) -- --
Severance and other
exit costs .......... 17.3 5.3 (20.2) -- 2.4
Finance lease residual
value write-down ..... -- 16.6 -- (16.6) --
-------- -------- -------- -------- --------
$ 398.9 $ (2.2) $ (108.7) $ (89.9) $ 198.1
======== ======== ======== ======== ========
</TABLE>
The following summarizes the components of the $2.2 million net
impairment gain credited to income during the nine months ended September 30,
2000 as shown in the table above:
<TABLE>
<CAPTION>
Property
Placed
Back Net Gain On
Into Service Sold Properties Other Total
------------- --------------- ------- --------
<S> <C> <C> <C> <C>
Asset reserves:
Asset impairment ......... $ (7.7) $ (1.6) $ -- $ (9.3)
Accrued liabilities:
Property lease residual
value guarantees .... (13.0) (1.8) -- (14.8)
Other megastore exit costs -- -- 5.3 5.3
Finance lease residual
value write-down ......... -- -- 16.6 16.6
------- ------- ------- -------
$ (20.7) $ (3.4) $ 21.9 $ (2.2)
======= ======= ======= =======
</TABLE>
The $20.7 million of income from property placed back into service
resulted primarily from the Company's decision in the third quarter of 2000 to
place a former megastore leased property back into service to operate a new
vehicle franchise. Based upon the Company's re-evaluation of the fair value of
the property, the Company determined that the asset impairment and lease
residual value reserves for the property were no longer required. Accordingly,
the Company was required to reverse into income its estimated reserves on the
property. In addition, during the third quarter, the Company recognized an
impairment charge totaling $16.6 million associated with the residual value of
finance lease receivables. The Company discontinued writing finance leases in
mid-1999 and the majority of the leases terminate in 2001. The charge was based
upon deterioration in used vehicle residual values.
14. INCOME TAXES
Income taxes have been provided for based upon the Company's
anticipated annual effective income tax rate.
12
<PAGE> 13
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
15. STOCK OPTIONS
The Company has various stock option plans under which options to
purchase 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 closing market price of the Common Stock on the trading
day immediately preceding the date of grant. Generally, options granted have a
term of ten years from the date of grant, and vest in increments of 25% per year
over a four year period on the yearly anniversary of the grant date.
A summary of stock option transactions for the nine months ended
September 30, 2000 is as follows:
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
------ ----------------
<S> <C> <C>
Options outstanding at beginning of year.................... 50.9 $ 15.84
Granted..................................................... 11.8 6.94
Exercised................................................... (.6) 2.02
Canceled.................................................... (9.5) 12.81
Spin-off adjustment......................................... 4.6 (1.57)
------
Options outstanding at September 30, 2000................... 57.2 12.80
======
Options exercisable at September 30, 2000................... 32.7 14.62
Options available for future grants at September 30, 2000... 25.3
</TABLE>
On June 30, 2000, options to purchase approximately 2.8 million shares
of Common Stock held by employees of ANC Rental were canceled. In May 2000, in
accordance with the terms of the Company's stock option plans, the Company's
Board of Directors authorized the Company to adjust employee stock options to
take into account the market adjustments to AutoNation's Common Stock as a
result of the ANC Rental spin-off.
16. LEGAL MATTERS
The Company is a party to numerous legal proceedings which arose in the
ordinary course of business. The Company does not believe that the ultimate
resolution of these matters will have a material adverse effect on the Company's
consolidated results of operations, financial condition or cash flows. However,
the results of these matters cannot be predicted with certainty and unfavorable
resolution of one or more of these matters could have a material adverse effect
on the Company's consolidated results of operations, financial condition and/or
cash flows.
17. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is based on the combined weighted average number of common
shares and common share equivalents outstanding which include, where
appropriate, the assumed exercise or conversion of options and warrants.
The computation of weighted average common and common equivalent shares
used in the calculation of basic and diluted earnings per share is shown below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
2000 1999 2000 1999
------ ------ ------- -------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding used in
calculating basic earnings per share...................... 361.3 424.4 363.2 441.5
Effect of dilutive options and warrants..................... -- 5.3 .2 7.6
------- ----- ----- -----
Weighted average common and common equivalent shares
used in calculating diluted earnings per share............ 361.3 429.7 363.4 449.1
======= ===== ===== =====
</TABLE>
13
<PAGE> 14
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
At September 30, 2000 and 1999, the Company had outstanding options to
purchase approximately 57.1 million and 25.9 million shares of Common Stock,
respectively, which have been excluded from the computation of diluted earnings
per share since they are anti-dilutive.
18. DISCONTINUED OPERATIONS
On June 30, 2000, the Company completed the tax-free spin-off of ANC
Rental. Accordingly, the net assets and operating results of ANC Rental have
been classified as discontinued operations for all periods presented in the
accompanying unaudited condensed consolidated financial statements. Income from
discontinued operations during the nine months ended September 30, 2000 is net
of previously estimated losses of $22.1 million which were accrued in the fourth
quarter of 1999 and additional costs associated with the spin-off totaling $11.3
million recorded in the second quarter of 2000.
In connection with the spin-off, the Company made certain capital
contributions to ANC Rental prior to the spin-off. These contributions include
cash of approximately $200.0 million and the net assets of an insurance
subsidiary. The Company also entered into various agreements with ANC Rental
which set forth the terms of the distribution and other agreements governing the
Company's relationship with ANC Rental after the spin-off. As a result of the
spin-off, the Company's equity was reduced by the net assets of ANC Rental
totaling $890.8 million.
In connection with the spin-off, the Company agreed to continue to
provide ANC Rental with guarantees and other credit enhancements, currently with
respect to certain indebtedness and certain property and vehicle lease
obligations. The Company receives fees for providing these guarantees
commensurate with market rates. In September 2000, ANC Rental notified the
Company that it had refinanced $60.0 million of letters of credit previously
guaranteed by the Company with alternative financing. Accordingly, the Company
is no longer obligated under its guarantee with respect to these letters of
credit.
In July 1998, the Company's former solid waste services subsidiary,
Republic Services, Inc. ("RSG"), completed an initial public offering of 36.1%
of its outstanding common stock 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 net proceeds of approximately
$1.78 billion and an after tax gain of approximately $379.3 million in the
second quarter of 1999. Accordingly, operating results of RSG for the period
prior to disposition have been classified as discontinued operations in the
accompanying unaudited condensed consolidated financial statements.
During the three months ended September 30, 1999, the Company's
automotive rental discontinued operations recognized revenue and net income of
$1.02 billion and $18.5 million, respectively. The Company also recognized $6.4
million in costs, net of income taxes, primarily related to the separation of
the rental division. These costs are included in the income from discontinued
operations in the accompanying unaudited condensed consolidated statement of
operations.
Selected statement of operations data for the Company's discontinued
operations is as follows for the nine months ended September 30:
<TABLE>
<CAPTION>
2000 1999
----------- ----------------------------------------------
Automotive Automotive Solid
Rental Rental Waste Total
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Revenue ................................ $ 1,721.2 $ 2,707.1 $ 552.5 $ 3,259.6
========== ========== ======== ==========
Pre-tax income ......................... $ (14.8) $ 38.4 $ 100.8 $ 139.2
Provision (benefit) for
income taxes ........................ (5.8) 13.8 38.8 52.6
Minority interest in RSG ............... -- -- 21.6 21.6
---------- ---------- -------- ----------
Net income (loss) ...................... (9.0) 24.6 40.4 65.0
Previously estimated and accrued losses,
net of income taxes ............... 22.1 -- -- --
Gain/(loss) on disposal of segment,
net of income taxes ............... (11.3) (6.4) 379.3 372.9
---------- ---------- -------- ----------
Income from discontinued operations,
net of income taxes ............. $ 1.8 $ 18.2 $ 419.7 $ 437.9
========== ========== ======== ==========
</TABLE>
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto included
under Item 1. In addition, reference should be made to the Company's audited
consolidated financial statements and notes thereto and related Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's most recent Annual Report on Form 10-K.
DISCONTINUED BUSINESS SEGMENTS
On June 30, 2000, the Company completed the spin-off of its former
automotive rental businesses, which have been organized under ANC Rental
Corporation ("ANC Rental"), by distributing 100% of ANC Rental's common stock to
AutoNation's stockholders as a tax-free dividend. As a result of the spin-off,
AutoNation stockholders received one share of ANC Rental common stock for every
eight shares of AutoNation common stock owned as of the June 16, 2000 record
date. As discussed in Note 18, Discontinued Operations, of notes to unaudited
condensed consolidated financial statements, ANC Rental has been accounted for
as discontinued operations and the accompanying unaudited condensed consolidated
financial statements presented herein have been restated to report separately
the net assets and operating results of these discontinued operations.
In July 1998, the Company completed an initial public offering of 36.1%
of the common stock of the Company's former solid waste subsidiary, Republic
Services, Inc. ("RSG"). In May 1999, the Company sold substantially all of its
remaining interest in RSG in a public offering. As discussed in Note 18,
Discontinued Operations, of notes to unaudited condensed consolidated financial
statements the Company's former solid waste services segment has been accounted
for as discontinued operations and accordingly, the operating results of RSG for
the period prior to disposition have been classified as discontinued operations
in the accompanying unaudited condensed consolidated financial statements
presented herein.
BUSINESS ACQUISITIONS AND DIVESTITURES
The Company has entered into framework agreements with various
automotive manufacturers that allow the Company to acquire franchised automotive
dealerships subject to various limits and conditions. Since 1996, the Company
has expanded its automotive retail operations through the acquisition of
franchised automotive dealerships. The Company has continued to complete
acquisitions of franchised automotive dealerships during 2000. However, the
Company has not completed and does not expect to complete acquisitions at the
same pace as in prior years. Acquisitions completed in 2000 have been and will
continue to be single dealerships or small dealership groups focused in key
existing markets, or strategic acquisitions to enhance the Company's e-commerce
business.
Businesses acquired through September 30, 2000 and accounted for under
the purchase method of accounting are included in the unaudited condensed
consolidated financial statements from the date of acquisition.
During the nine months ended September 30, 2000, the Company acquired
various businesses which have been accounted for under the purchase method of
accounting. The Company paid approximately $122.5 million of cash for these
acquisitions. During the nine months ended September 30, 2000 the Company also
paid approximately $120.3 million in purchase price for certain prior year
automotive retail acquisitions. As of September 30, 2000, the Company has
accrued approximately $17.4 million of additional purchase price due to former
owners of acquired businesses.
As described below under the heading "Restructuring Activities", the
Company is disposing of certain non-core franchised automotive dealerships.
During the nine months ended September 30, 2000 the Company received
approximately $77.5 million of cash from the disposal of certain dealerships. In
October 2000, the Company signed a definitive agreement to sell its Flemington
dealer group located in a non-core market for approximately $67.0 million. The
Company expects to complete the sale by the end of the first quarter of 2001,
subject to satisfaction or waiver of customary conditions.
In November 2000, the Company completed the sale of its billboard
advertising business for approximately $104.0 million. The Company expects to
recognize a pre-tax gain on the sale of approximately $50.0 million during the
fourth quarter of 2000.
15
<PAGE> 16
SHARE REPURCHASES
During the nine months ended September 30, 2000, the Company
repurchased 14.9 million shares of its common stock, par value $.01 per share
("Common Stock"), under the Company's Board authorized share repurchase program
for an aggregate purchase price of $110.7 million. On a cumulative basis,
through September 30, 2000, the Company has acquired an aggregate of 115.0
million shares of Common Stock for an aggregate purchase price of $1.4 billion
since the commencement of the share repurchase program in 1998. In October 2000,
the Company repurchased an additional 2.7 million shares of Common Stock for an
aggregate purchase price of $16.7 million leaving approximately $328.5 million
remaining for share repurchases under the program.
CONSOLIDATED RESULTS OF OPERATIONS
During the third quarter of 2000, the Company expanded its financial
reporting by providing separate disclosure of floorplan interest expense,
depreciation and amortization in the accompanying unaudited condensed
consolidated statements of operations. Additionally, floorplan interest expense,
which previously was presented as a component of cost of operations, is now
classified as interest expense below operating income. Prior periods have been
reclassified to conform with the current presentation.
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>
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------- -----------------------------------------
2000 1999 2000 1999
------------------ ------------------ ------------------- ------------------
Diluted Diluted Diluted Diluted
Per Per Per Per
Gross Share Gross Share Gross Share Gross Share
------- --------- --------- -------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income from continuing
operations ............ $ 93.1 $ .26 $ 92.6 $ .22 $ 254.4 $ .70 $ 248.1 $ .55
Income from discontinued
operations:
Automotive rental ..... -- -- 18.5 .04 1.8 .01 24.6 .06
Solid waste services .. -- -- -- -- -- -- 40.4 .09
Gain (loss) on disposal
of segment .......... -- -- (6.4) (.02) -- -- 372.9 .83
------- --------- --------- -------- --------- ---------- --------- --------
-- -- 12.1 .02 1.8 .01 437.9 .98
------- --------- --------- -------- --------- ---------- --------- --------
Net income ................ $ 93.1 $ .26 $ 104.7 $ .24 $ 256.2 $ .71 $ 686.0 $ 1.53
======= ========= ========= ======== ======= == ========== ========= ========
</TABLE>
CONTINUING OPERATIONS
Historical operating results include the results of acquired businesses
from the date of acquisition for acquisitions accounted for under the purchase
method of accounting. Due to acquisitions, year over year comparisons of
reported operating results do not provide a meaningful representation of
internal performance. Accordingly, presented below are operating results for the
three and nine months ended September 30, 2000 and 1999 on a same store basis to
better represent internal performance.
16
<PAGE> 17
SAME STORE OPERATING DATA:
The following table sets forth the components of same store revenue,
with the percentage change between periods, and same store gross margin, same
store selling, general and administrative expenses ("S,G&A"), and same store
performance margin, with percentages of total same store revenue and with the
percentage change between periods, for the periods indicated (in millions):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------- -----------------------------------------
2000 1999 % Change 2000 1999 % Change
---------- ---------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
New vehicle................... $2,941.4 $2,919.7 0.7 $ 8,133.5 $ 7,707.1 5.5
Used vehicle.................. 874.6 894.1 (2.2) 2,461.3 2,541.9 (3.2)
Fixed operations.............. 509.1 504.7 0.9 1,417.3 1,375.0 3.1
Other......................... 322.6 327.0 (1.3) 891.9 934.4 (4.5)
--------- --------- ----------- -----------
$4,647.7 $4,645.5 -- $ 12,904.0 $ 12,558.4 2.8
========= ========= ========== ==========
Gross margin.................... $ 670.8 $ 671.6 (0.1) $ 1,855.9 $ 1,813.9 2.3
%............................... 14.4% 14.5% 14.4% 14.4%
S,G&A........................... $ 441.8 $ 453.3 (2.5) $ 1,212.5 $ 1,217.4 (0.4)
%............................... 9.5% 9.8% 9.4% 9.7%
Store performance margin........ $ 229.0 $ 218.3 4.9 $ 643.4 $ 596.5 7.9
%............................... 4.9% 4.7% 5.0% 4.7%
</TABLE>
Overall, the Company's same store performance margins during the third
quarter of 2000 increased $10.7 million or as a percentage of same store revenue
20 basis points to 4.9% over the prior period. Same store performance margins
increased $46.9 million or as a percentage of same store revenue 30 basis points
to 5.0% during the nine months ended September 30, 2000 over the prior period.
The increases are primarily due to reduced same store S,G&A.
Same store sales were $4.65 billion for both the three months ended
September 30, 2000 and the comparable 1999 period. Same store sales were $12.90
billion for the nine months ended September 30, 2000 versus $12.56 billion for
the comparable 1999 period, an increase of 2.8%. The primary components of these
same store sales changes are described below.
During the third quarter, the automotive retail industry continued to
experience strong new vehicle sales. The Company's new vehicle same store sales
increased .7% to $2.94 billion during the three months ended September 30, 2000.
The increase is due to price increases of 2.7% offset by a 2% decline in volume.
Same store new vehicle sales increased 5.5% to $8.13 billion during the nine
months ended September 30, 2000. The increase is due to increases in price of
3.7% and volume of 1.8%.
The used vehicle market has been less robust due, in part, to strong
manufacturer incentives for new vehicles, especially light trucks. Used vehicle
same store sales decreased 2.2% to $874.6 million during the three months ended
September 30, 2000. The decrease is due to lower volume of 6.2% offset by price
increases of 4.0%. Same store used vehicle sales decreased 3.2% to $2.46 billion
during the nine months ended September 30, 2000. The decrease is attributed to
lower volume of 7.7% offset by price increases of 4.5%.
Fixed operations same store sales increased .9% to $509.1 million
during the three months ended September 30, 2000 and 3.1% to $1.42 billion
during the nine months ended September 30, 2000. The increases are primarily due
to volume.
Same store gross margins were $670.8 million and $1.86 billion for the
three and nine months ended September 30, 2000, respectively, versus $671.6
million and $1.81 billion for the comparable 1999 periods. Same store gross
margins as a percentage of same store revenue were 14.4% for the three and nine
months ended September 30, 2000, respectively, versus 14.5% and 14.4% for the
comparable 1999 periods. The decrease in same store gross margins as percentage
17
<PAGE> 18
of same store total revenue during the three months ended September 30, 2000 is
primarily due to higher mix of lower margin new, versus higher margin used
vehicle sales.
Same store S,G&A was $441.8 million and $1.21 billion during the three
and nine months ended September 30, 2000, respectively, versus $453.3 million
and $1.22 billion for the comparable 1999 periods. Same store S,G&A as a
percentage of same store total revenue was 9.5% and 9.4% for the three and nine
months ended September 30, 2000 respectively, versus 9.8% and 9.7% for the
comparable 1999 periods. The decreases in same store S,G&A in aggregate dollars
and as percentages of same store sales are primarily due to the Company's
ongoing cost reduction initiatives.
Same store performance margins were $229.0 million and $643.4 million
for the three and nine months ended September 30, 2000, respectively, versus
$218.3 million and $596.5 million for the comparable 1999 periods. Same store
performance margins as a percentage of same store total revenue were 4.9% and
5.0% for the three and nine months ended September 30, 2000, respectively,
versus 4.7% for both comparable 1999 periods. The increases in same store
performance margins in aggregate dollars and as percentages of same store
revenue are primarily due to decreases in S,G&A.
REPORTED OPERATING DATA:
The following table sets forth the components of revenue, with
percentages of total revenue, and gross margin, store level S,G&A, store
performance margin, overhead, depreciation, amortization, property carrying
costs, asset impairment gain and operating income, with percentages of total
revenue, on a reported basis for the periods indicated (in millions):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------- -------------------------------------------
2000 % 1999 % 2000 % 1999 %
-------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
New vehicle................... $3,327.2 62.3 $ 3,207.6 58.7 $ 9,855.0 61.9 $ 8,662.8 57.4
Used vehicle.................. 1,027.0 19.3 1,220.5 22.4 3,128.5 19.7 3,578.7 23.7
Fixed operations.............. 586.7 11.0 583.9 10.7 1,763.4 11.1 1,642.2 10.9
Other......................... 397.2 7.4 447.7 8.2 1,160.9 7.3 1,208.3 8.0
-------- ----- --------- ----- --------- ----- --------- -----
$5,338.1 100.0 $ 5,459.7 100.0 $15,907.8 100.0 $15,092.0 100.0
======== ===== ========= ===== ========= ===== ========= =====
Gross margin.................... $ 777.4 14.6 $ 803.1 14.7 $ 2,313.5 14.5 $ 2,217.1 14.7
Store S,G&A..................... 510.6 9.6 548.9 10.0 1,530.0 9.6 1,526.0 10.1
Store performance margin........ 266.8 5.0 254.2 4.7 783.5 4.9 691.1 4.6
Overhead........................ 29.7 .6 52.0 1.0 93.5 .6 130.0 .9
Depreciation.................... 14.6 .3 16.0 .3 42.4 .3 43.4 .3
Amortization.................... 20.4 .3 16.0 .3 58.7 .4 44.5 .3
Property carrying costs......... 7.0 .1 -- -- 26.9 .1 -- --
Asset impairment gain, net...... (2.2) -- -- -- (2.2) -- -- --
Operating income................ 197.3 3.7 170.2 3.1 564.2 3.5 473.2 3.1
</TABLE>
Revenue was $5.34 billion for the three months ended September 30, 2000
versus $5.46 billion for the comparable 1999 period, a decrease of 2.2%. Revenue
was $15.91 billion for the nine months ended September 30, 2000 versus $15.09
billion for the comparable 1999 period, an increase of 5.4%. The primary
components of these changes are described below.
New vehicle sales increased 3.7% to $3.33 billion during the three
months ended September 30, 2000. During the quarter, the Company sold
approximately 130,000 new vehicles versus 129,000 new vehicles last year, an
increase of .8%. The increase in new vehicle revenue during the quarter is due
to acquisitions and higher pricing partially offset by a decline in same store
unit volume. During the nine months ended September 30, 2000, new vehicle sales
increased 13.8% to $9.86 billion and the Company sold 383,000 new vehicles
versus 353,000 new vehicles last year, an increase of 8.5%. The increase in new
vehicle revenue during the nine months ended September 30, 2000 is attributed to
acquisitions, higher pricing and unit growth.
18
<PAGE> 19
Used vehicle sales decreased 15.9% to $1.03 billion during the three
months ended September 30, 2000 and 12.6% to $3.13 billion during the nine
months ended September 30, 2000. During the quarter, the Company sold
approximately 65,000 used vehicles versus 83,000 used vehicles last year, a
decrease of 21.7%. During the nine months ended September 30, 2000, the Company
sold 199,000 used vehicles versus 246,000 used vehicles last year, a decrease of
19.1%. The decline in revenue and unit volume for both periods is primarily
attributable to volume associated with the used vehicle megastores that were
closed in connection with the restructuring activities in the fourth quarter of
1999 and strong manufacturer incentives on new vehicles. Excluding the closed
megastores, used vehicle revenue during the quarter is comparable to last year,
and for the nine months increased 4.5% over last year. The increase for the nine
months ended September 30, 2000 is primarily due to acquisitions which more than
offset decreases in used vehicle same store sales.
Fixed operations revenue increased .5% to $586.7 million during the
three months ended September 30, 2000 and 7.4% to $1.76 billion during the nine
months ended September 30, 2000. The increases are primarily due to volume.
Gross margins were $777.4 million and $2.31 billion for the three and
nine months ended September 30, 2000, respectively, versus $803.1 million and
$2.22 billion for the comparable 1999 periods. Gross margins as a percentage of
revenue were 14.6% and 14.5% for the three and nine months ended September 30,
2000, respectively, versus 14.7% for both the comparable 1999 periods. The
decreases in gross margins as percentages of revenue are primarily due to a
higher mix of lower margin new versus higher margin used vehicle sales.
Store level S,G&A was $510.6 million and $1.53 billion for the three
and nine months ended September 30, 2000, respectively, versus $548.9 million
and $1.53 billion for the comparable 1999 periods. Store level S,G&A as a
percentage of revenue was 9.6% for the three and nine months ended September 30,
2000, respectively, versus 10.0% and 10.1% for the comparable 1999 periods. The
decreases in these costs as a percentage of revenue are due to the Company's
ongoing cost reduction initiatives.
Store performance margins were $266.8 million and $783.5 million for
the three and nine months ended September 30, 2000, respectively, versus $254.2
million and $691.1 million for the comparable 1999 periods. Store performance
margins as percentages of revenue were 5.0% and 4.9% for the three and nine
months ended September 30, 2000, respectively, versus 4.7% and 4.6% for the
comparable 1999 periods. The increases in store performance margins for the
three and nine months ended September 30, 2000 are a result of lower selling,
general and administrative expenses partially offset by gross margin
compression.
Overhead was $29.7 million and $93.5 million for the three and nine
months ended September 30, 2000, respectively, versus $52.0 million and $130.0
million for the comparable 1999 periods. Overhead as a percentage of revenue was
.6% for the three and nine months ended September 30, 2000, respectively versus
1.0% and .9% for the comparable 1999 periods. The overhead decreases in
aggregate dollars and as percentages of revenue are a result of the Company's
cost cutting initiatives. In 1999, corporate expenses related to supporting ANC
Rental have been allocated to income from discontinued operations. These
allocated costs totaled approximately $4.0 million and $12.0 million for the
three and nine months ended September 30, 1999, respectively. Due to the
establishment of ANC Rental's corporate infrastructure and decreasing reliance
on AutoNation, allocations of corporate overhead were discontinued in 2000.
Depreciation and amortization was $35.0 million and $101.1 million for
the three and nine months ended September 30, 2000, respectively, versus $32.0
million and $87.9 million for the comparable 1999 periods. Depreciation and
amortization as percentages of revenue were .6% and .7% for the three and nine
months ended September 30, 2000, respectively versus .6% for both the comparable
1999 periods.
Property carrying costs represent costs associated with megastore and
other properties held for sale by the Company. The Company incurred $7.0 million
and $26.9 million of property carrying costs during the three and nine months
ended September 30, 2000, respectively. The Company expects carrying costs
associated with closed properties to total approximately $33.0 million for the
year ended December 31, 2000.
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<PAGE> 20
NON-OPERATING INCOME (EXPENSE)
FLOORPLAN INTEREST EXPENSE
Floorplan interest expense was $47.8 million and $146.8 million for the
three and nine months ended September 30, 2000, respectively, versus $28.8
million and $84.0 million for the comparable 1999 periods. The increases are due
to higher floorplan debt associated with higher inventory levels and higher
interest rates. The Company has made substantial progress in reducing new
vehicle inventory levels from 79 days supply at the end of December 1999 to 55
days supply at the end of September 2000.
OTHER INTEREST EXPENSE
Interest expense was incurred primarily on borrowings under the
Company's revolving credit facilities. Interest expense was $13.8 million and
$36.2 million for the three and nine months ended September 30, 2000,
respectively, versus $5.3 million and $21.9 million for the comparable 1999
periods. The increases are primarily due to higher average borrowings and higher
interest rates.
INTEREST INCOME
Interest income was $3.0 million and $11.7 million for the three and
nine months ended September 30, 2000, respectively, versus $6.9 million and
$15.6 million for the comparable 1999 periods. The decreases during the three
and nine months ended September 30, 2000 are primarily the result of lower cash
and investment balances on hand during the periods.
OTHER INCOME, NET
Other income for the three and nine months ended September 30, 2000
includes gains of approximately $9.7 million and $19.6 million, respectively, on
the sale of approximately 1.1 million shares and 2.5 million shares,
respectively, of common stock of the Company's former solid waste subsidiary,
Republic Services, Inc. Also included is a $2.9 million gain on the sale of an
office facility occupied by ANC Rental in September 2000 that was no longer
required following the spin-off.
INCOME TAXES
The provision for income taxes from continuing operations was $55.9
million and $152.6 million for the three and nine months ended September 30,
2000, respectively, versus $52.1 million and $139.6 million for the comparable
1999 periods. Income taxes have been provided based upon the Company's
anticipated annual effective income tax rate.
RESTRUCTURING ACTIVITIES
During the fourth quarter of 1999, the Company approved a plan to
restructure certain of its operations. The restructuring plan is comprised of
the following major components: (1) exiting the used vehicle megastore business;
and (2) reducing the corporate workforce. The restructuring plan also includes
divesting of certain non-core franchised automotive dealerships. Approximately
2,000 positions were eliminated as a result of the restructuring plan of which
1,800 were megastore positions and 200 were corporate positions. These
restructuring activities resulted in pre-tax charges of $443.7 million in the
fourth quarter of 1999. These pre-tax charges include $286.9 million of asset
impairment charges; $103.3 million of reserves for residual value guarantees for
closed leased properties; $26.2 million of severance and other exit costs; and
$27.3 million of inventory related costs. The $286.9 million asset impairment
charge consists of: $244.9 million of megastore and other property impairments;
$26.6 million of goodwill impairment reserves for the divestiture of certain
non-core franchised automotive dealerships; and $15.4 million for information
systems impairments.
Following the sale of the Flemington dealer group previously described
under the heading, "Business Acquisitions and Divestitures," the Company will
have substantially completed its non-core dealership divestiture plan. The
Company is disposing of its closed megastores and other properties through sales
to third parties. Although the Company is aggressively marketing these closed
properties, the ultimate disposition will not be substantially completed until
2001. Revenue for the operations disposed or to be disposed was $855.6 million
and $1.75 billion during the nine months ended September 30, 2000 and 1999,
respectively. Operating income for the operations disposed or to be disposed was
$12.9 million and $13.0 million during the nine months ended September 30, 2000
and 1999, respectively.
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<PAGE> 21
The following summarizes activity in the Company's restructuring and
impairment reserves for the nine months ended September 30, 2000:
<TABLE>
<CAPTION>
Deductions
Balance Amounts Charged --------------------- Balance
Reserve December 31, 1999 (Credited) to Income Cash Non-cash September 30, 2000
------- ----------------- -------------------- -------- -------- ------------------
<S> <C> <C> <C> <C> <C>
Asset reserves:
Asset impairment............. $ 263.3 $ (9.3) $ -- $ (58.3) $ 195.7
Inventory.................... 15.0 -- -- (15.0) --
Accrued liabilities:
Property lease residual
value guarantees........... 103.3 (14.8) (88.5) -- --
Severance and other
exit costs................. 17.3 5.3 (20.2) -- 2.4
Finance lease residual
value write down.......... -- 16.6 -- (16.6) --
------- ------- ------- -------- -------
$ 398.9 $ (2.2) $(108.7) $ (89.9) $ 198.1
======= ======= ======= ======== =======
</TABLE>
The following summarizes the components of the $2.2 million net
impairment gain credited to income during the nine months ended September 30,
2000 as shown in the table above:
<TABLE>
<CAPTION>
Property Placed Net Gain On
Back Into Service Sold Properties Other Total
----------------- --------------- ------ -------
<S> <C> <C> <C> <C>
Asset reserves:
Asset impairment............... $ (7.7) $ (1.6) $ -- $ (9.3)
Accrued Liabilities:
Property lease residual
value guarantees.......... (13.0) (1.8) -- (14.8)
Other megastore exit costs..... -- -- 5.3 5.3
Finance lease residual
value write-down............... -- -- 16.6 16.6
-------- ------ ------ -------
$ (20.7) $ (3.4) $ 21.9 $ (2.2)
======== ====== ====== =======
</TABLE>
The $20.7 million of income from property placed back into service
resulted primarily from the Company's decision in the third quarter of 2000 to
place a former megastore leased property back into service to operate a new
vehicle franchise. Based upon the Company's re-evaluation of the fair value of
the property, the Company determined that the asset impairment and lease
residual value reserves for the property were no longer required. Accordingly,
the Company was required to reverse into income its estimated reserves on the
property. In addition, during the third quarter, the Company recognized an
impairment charge totaling $16.6 million associated with the residual value of
finance lease receivables. The Company discontinued writing finance leases in
mid-1999 and the majority of the leases terminate in 2001. The charge was based
upon deterioration in used vehicle residual values.
FINANCIAL CONDITION
At September 30, 2000, the Company had $133.5 million of unrestricted
cash and $825.5 million available under its $1.5 billion unsecured revolving
credit facilities which may be used for general corporate purposes. In March
2000, the Company entered into a new $500.0 million 364-day unsecured bank
revolving credit facility to replace the $500.0 million 364-day facility which
matured in March 2000. This facility complements the $1.0 billion unsecured bank
revolving credit facility maturing in April 2002.
The Company finances its vehicle inventory through secured financings
including floor plan facilities with manufacturer captive finance companies as
well as a $500.0 million bank-sponsored multi-seller commercial paper conduit
facility. At September 30, 2000, the Company had approximately $314.4 million of
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<PAGE> 22
availability under the commercial paper conduit facility. In October 2000, the
Company decreased the facility capacity from $500.0 million to $300.0 million.
The facility terminates in January 2001 and the Company expects to replace the
facility with alternative financing sources.
The Company is the lessee under a $500.0 million lease facility that
was established to acquire and develop the Company's former used vehicle
megastores and other properties. In September 2000, the Company amended the
terms of the facility by exercising its option to purchase the leased properties
at the end of the lease term. In addition, the facility size was reduced to
$210.0 million. As a result of the lease amendment, the leases were required to
be accounted for as capital leases with the property and related debt included
in the accompanying unaudited condensed consolidated balance sheet. At September
30, 2000, $196.7 million was outstanding under this facility and is included in
long-term debt in the accompanying unaudited condensed consolidated balance
sheet. The Company has guaranteed the residual value of the properties under
this facility. In connection with the Company's 1999 restructuring activities
previously described, the Company accrued an estimate of its liability under the
residual value guaranty totaling approximately $103.3 million. In September
2000, the Company funded its remaining lease residual value guarantee obligation
to the lessor.
The Company securitizes installment loan receivables through a $1.0
billion commercial paper warehouse facility with certain financial institutions.
In September 2000, the Company decreased the capacity of the commercial paper
warehouse facility from $1.7 billion to $1.0 billion. During the nine months
ended September 30, 2000, the Company securitized approximately $460.7 million
of loan receivables under this program, net of retained interests. At September
30, 2000, the Company had approximately $488.6 million of capacity under this
program. 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. Installment
loans sold under this program are nonrecourse beyond the Company's retained
interests. Proceeds from securitizations are primarily used to repay borrowings
under the Company's revolving credit facilities and to invest in the Company's
business. The Company expects to continue to securitize receivables under this
facility and/or other programs.
The Company also securitizes installment loan receivables through the
issuance of asset-backed notes through a non-consolidated special purpose entity
under a $2.0 billion shelf registration statement. Proceeds from these notes are
used to refinance installment loans previously securitized under the warehouse
facility and to securitize additional loans held by the Company. The Company
provides credit enhancement related to these notes in the form of 1%
overcollateralization, a reserve fund and a third party surety bond. In August
2000, approximately $691.7 million in additional asset-backed notes were issued
under this program. At September 30, 2000, $1.15 billion was outstanding under
this program.
Since the 1998 inception of the Company's Board authorized $1.75
billion cumulative share repurchase programs through September 30, 2000, the
Company has repurchased 115.0 million shares of Common Stock for an aggregate
purchase price of $1.4 billion. The Company repurchased 14.9 million shares of
its Common Stock for an aggregate purchase price of $110.7 million during the
nine months ended September 30, 2000. In October 2000, the Company repurchased
an additional 2.7 million shares of Common Stock for an aggregate purchase price
of $16.7 million leaving approximately $328.5 million remaining for share
repurchases under the program. Repurchases are made pursuant to Rule 10b-18 of
the Securities Exchange Act of 1934, as amended. The Company will continue to
evaluate share repurchases based upon financial and other investment
considerations.
In connection with the ANC Rental spin-off, the Company made certain
capital contributions to ANC Rental prior to the spin-off. These contributions
include cash of approximately $200.0 million and the net assets of an insurance
subsidiary. The Company also entered into various agreements with ANC Rental
which set forth the terms of the distribution and other agreements governing the
Company's relationship with ANC Rental after the spin-off. As a result of the
spin-off, the Company's equity as of September 30, 2000 was reduced by the net
assets of ANC Rental totaling $890.8 million. The equity adjustment resulting
from the spin-off is subject to further adjustment resulting from changes in
estimated shared assets and liabilities of AutoNation and ANC Rental and certain
other matters. However, such adjustments, if any, are not expected to be
significant.
In connection with the spin-off, the Company agreed to continue to
provide ANC Rental with guarantees and other credit enhancements, currently with
respect to certain indebtedness and certain property and vehicle lease
obligations. The Company receives fees for providing these guarantees
commensurate with market rates. In September 2000, ANC Rental notified the
Company that it had refinanced $60.0 million of letters of credit previously
guaranteed by the Company with alternative financing. Accordingly, the Company
is no longer obligated under its guarantee with respect to these letters of
credit.
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<PAGE> 23
The Company has and will continue to take steps to further strengthen
its balance sheet, including selling non-core or non-operating assets and
redeploying proceeds into its core business. During the third quarter, the
Company entered into a sale leaseback financing of its corporate headquarters
facility resulting in proceeds of approximately $52.1 million. Additionally,
during the third quarter the Company sold an office building occupied by ANC
Rental no longer required after the spin-off resulting in proceeds of
approximately $18.7 million. As previously described, in November 2000 the
Company completed the sale of its billboard advertising business and expects to
complete the sale of its Flemington dealer group by the end of the first quarter
of 2001. The Company will continue to evaluate opportunities to sell non-core or
non-operating assets and reinvest in its core business.
The Company believes that it has sufficient operating cash flow and
other financial resources available to meet its anticipated capital requirements
and obligations as they come due.
CASH FLOWS
Cash and cash equivalents decreased by $102.5 million and $433.1
million during the nine months ended September 30, 2000 and 1999, respectively.
The major components of these changes are discussed below.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash provided by operating activities was $692.4 million and $355.1
million during the nine months ended September 30, 2000 and 1999, respectively.
Cash flows from operating activities include purchases of vehicle
inventory which are separately financed through secured vehicle financings.
Accordingly, the Company measures its operating cash flow including net payments
under these secured vehicle financings which totaled $231.8 million and $32.5
million during the nine months ended September 30, 2000 and 1999, respectively.
Including net payments under these secured vehicle financings, the Company
generated operating cash flow of $460.6 million and $322.6 million during the
nine months ended September 30, 2000 and 1999, respectively.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash flows from investing activities include business acquisitions and
divestitures, capital additions, property dispositions and other transactions as
further described below.
Cash used in business acquisitions was $242.8 million and $717.8
million for the nine months ended September 30, 2000 and 1999, respectively. The
decrease in cash used in business acquisitions was primarily due to the
Company's shift in 2000 to acquire single dealerships or small dealership groups
focused in key markets in which business is already conducted as well as
strategic e-commerce acquisitions. Cash used in business acquisitions during the
nine months ended September 30, 2000 includes $120.3 million in purchase price
for certain prior year automotive retail acquisitions. Cash received from
business divestitures was $77.5 million and $124.3 million for the three and
nine months ended September 30, 2000, respectively. See "Business Acquisitions &
Divestitures" of Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note 2, Business Acquisitions & Divestitures, of notes
to unaudited condensed consolidated financial statements for a further
discussion of acquisitions and divestitures.
Capital expenditures were $82.8 million and $168.5 million during the
nine months ended September 30, 2000 and 1999, respectively. The decrease is due
to the megastore closures and fewer acquisitions. The Company expects capital
expenditures in 2000 to be less than 1999 due to the megastore closures, fewer
acquisitions and other factors.
Proceeds from the sale of property and equipment and assets held for
sale were $116.6 million and $59.6 million during the nine months ended
September 30, 2000 and 1999, respectively. The increase is primarily due to
sales of megastore and other properties held for sale and the sale of the
building occupied by ANC Rental.
During the nine months ended September 30, 2000, the Company sold 2.5
million shares of common stock of the Company's former solid waste subsidiary,
Republic Services, Inc., resulting in proceeds of approximately $39.3 million.
The Company intends to finance capital expenditures and business
acquisitions through cash flow from operations, revolving credit facilities and
other financings.
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<PAGE> 24
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from financing activities during the nine months ended
September 30, 2000 and 1999 consisted of revolving credit, vehicle floorplan
and other financings, repayments of debt and share repurchases.
During the nine months ended September 30, 2000 and 1999, the Company
spent approximately $110.7 million and $859.5 million, respectively to
repurchase shares of Common Stock under the Company's Board approved share
repurchase programs.
During the nine months ended September 30, 2000, the Company repaid
various debt obligations totaling approximately $168.8 million primarily related
to amounts financed under its $500.0 million property lease facility.
During the three months ended September 30, 2000, the Company entered
into a sale leaseback transaction involving its corporate headquarters facility
which resulted in net proceeds of approximately $52.1 million. This transaction
has been accounted for as a financing.
CASH FLOWS FROM DISCONTINUED OPERATIONS
Cash used in discontinued operations was as follows during the nine
months ended September 30:
2000 1999
------- --------
Automotive rental........................... $ 223.4 $ 83.4
Solid waste services........................ -- 546.0
------- --------
$ 223.4 $ 629.4
======= ========
Cash used in the Company's former automotive rental business during the
nine months ended September 30, 2000 consists primarily of cash used to replace
maturing letters of credit which provide credit enhancement for ANC Rental's
vehicle financing. Cash used in the Company's former discontinued solid waste
operations during the nine months ended September 30, 1999 primarily consists of
cash used by RSG for acquisitions.
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. Also, demand for cars
and light trucks is generally lower during the winter months than in other
seasons, particularly in regions of the United States where dealerships may be
subject to harsh winters. Accordingly, the Company expects its revenue and
operating results to be generally lower in the first and fourth quarters as
compared to the second and third quarters.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. In June 2000, the FASB issued Statement of Financial Accounting Standards
No. 138 ("SFAS 138") which amends SFAS 133 for certain derivative instruments
and certain hedging activities. SFAS 133, as amended, is effective for fiscal
years beginning after June 15, 2000. The Company will adopt SFAS 133 beginning
January 1, 2001. The Company does not expect adoption of SFAS 133, as amended,
to have a material impact on the Company's consolidated financial statements.
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<PAGE> 25
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities -- A Replacement of FASB Statement No. 125"
("SFAS 140"). SFAS 140 revises the standards for accounting for securitizations
and other transfers of financial assets and collateral and requires certain
disclosures. SFAS 140 disclosure requirements are effective for fiscal years
ending after December 15, 2000 and accounting for transfers and servicing of
financial assets and extinguishment of liabilities is effective for transactions
occurring after March 31, 2001. The Company has not yet quantified the impact of
adopting SFAS 140 on the Company's consolidated financial statements.
DISCONTINUED OPERATIONS
AUTOMOTIVE RENTAL
On June 30, 2000, the Company completed the tax-free spin-off of ANC
Rental. Accordingly, the net assets and operating results of the Company's
former automotive rental segment have been classified as discontinued operations
for all periods presented in the accompanying unaudited condensed consolidated
financial statements. Revenue and income for these discontinued operations was
$1.72 billion and $1.8 million, respectively, during 2000 for the period prior
to the spin-off. Income from discontinued operations is net of previously
estimated losses of $22.1 million which were accrued in the fourth quarter of
1999 and $11.3 million of additional costs associated with the spin-off recorded
in the second quarter of 2000.
SOLID WASTE SERVICES
In July 1998, the Company completed an initial public offering of 36.1%
of RSG resulting in net proceeds of $1.43 billion. The Company sold
substantially all of its remaining interest in RSG in May 1999 resulting in an
after tax gain of approximately $379.3 million in the second quarter of 1999.
Accordingly, operating results of the Company's former solid waste services
segment have been classified as discontinued operations for the nine months
ended September 30, 1999 in the accompanying unaudited condensed consolidated
financial statements. Revenue from these discontinued operations was $552.5
million in 1999 for the period prior to disposition. Income from these
discontinued operations, net of minority interest, was $40.4 million in 1999 for
the period prior to disposition.
FORWARD-LOOKING STATEMENTS
The Company's financial condition, results of operations, cash flows
and future prospects, and the prevailing market price and performance of the
Company's common stock, may be adversely affected by a number of factors,
including the matters discussed below. Some of the statements and information
contained 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 Company's actual results, performance, or
achievements to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. Such
factors include, among other things, competition in the automotive retail
industry; the need for substantial additional capital; significant indebtedness
outstanding; the cyclical and highly seasonal nature of the automobile retail
industry and its sensitivity to changing economic conditions; consumer demand
for vehicles, automotive service and parts and other Company products and
services; the successful rollout of the Company's strategy to existing markets;
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 ability to
integrate and successfully operate acquired businesses and the risks associated
with such businesses; the dependence on vehicle manufacturers for inventory
supply; the level of manufacturer incentives on new vehicle sales; the ability
to retain key personnel; extensive governmental and environmental regulation;
various legal and administrative proceedings; and matters relating to imported
products.
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<PAGE> 26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following information about the Company's market sensitive
financial instruments constitutes a "forward-looking statement." The Company's
major market risk exposure is changing interest rates. Following the spin-off of
ANC Rental, the Company does not have any foreign operations and therefore has
no material market risk exposures relative to changes in foreign exchange rates.
The Company's policy is to manage interest rates through 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.
Reference is made to the Company's quantitative disclosures about
market risk as of December 31, 1999 included in the Company's Annual Report on
Form 10-K.
The Company uses interest rate swap agreements to manage the impact of
interest rate changes on borrowings under the Company's variable rate vehicle
inventory and revolving credit facilities. At September 30, 2000, notional
principal amounts related to interest rate swaps (variable to fixed rate) were
$50.0 million maturing in December 2000. At September 30, 2000 the weighted
average fixed rate payment on variable to fixed rate swaps was 6.10%. Variable
rates are indexed to LIBOR.
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
with an aggregate notional amount of $508.8 million contractually maturing
through 2006 which effectuate a variable to fixed rate swap at a weighted
average rate of 6.70%. Variable rates on the underlying portfolio are indexed to
the Commercial Paper Nonfinancial rate.
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<PAGE> 27
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2.2 Separation and Distribution Agreement dated June 30, 2000,
between AutoNation, Inc. and ANC Rental Corporation
(incorporated by reference to Exhibit 2.1 to AutoNation's
Report on Form 8-K dated June 30, 2000).
3.1 Third Amended and Restated Certificate of Incorporation of
AutoNation, Inc. (incorporated by reference to Exhibit 3.1
to AutoNation's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999).
3.2 Bylaws of AutoNation, Inc., as amended to date
(incorporated by reference to Exhibit 3.2 to AutoNation's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1999).
10.1* Employment Agreement dated August 1, 2000 between
AutoNation, Inc. and Michael E. Maroone, President and
Chief Operating Officer.
27.1* Financial Data Schedule for the Nine Months Ended September
30, 2000 (for SEC use only).
27.2* Financial Data Schedule for the Nine Months Ended September
30, 1999 (restated for reclassification of floorplan
interest, depreciation and amortization) (for SEC use
only).
(b) Reports on Form 8-K:
Form 8-K, dated June 30, 2000 (filed July 17, 2000), Item 2,
reporting that on June 30, 2000, AutoNation, Inc. completed the
tax-free spin-off of ANC Rental Corporation to AutoNation's
stockholders. As part of the transaction, AutoNation's stockholders
received one share of ANC Rental Corporation for every eight shares
of AutoNation common stock owned as of the record date for the
spin-off, which was June 16, 2000.
-------------------------------
*Filed herewith
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<PAGE> 28
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant, AutoNation, Inc., has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AUTONATION, INC.
By: /s/ Ronald L. Rubin
-------------------------------
Ronald L. Rubin
VICE PRESIDENT, CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
Date: November 14, 2000
28
