<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 MARCH 31, 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 May 5, 2000 the registrant had 361,134,189 outstanding shares of
common stock, par value $.01 per share.
<PAGE> 2
AUTONATION, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets as
of March 31, 2000 and December 31, 1999................................................... 3
Unaudited Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2000 and 1999........................................ 4
Unaudited Condensed Consolidated Statement of Shareholders'
Equity for the Three Months Ended March 31, 2000.......................................... 5
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 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................................... 27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................................................ 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................. 28
</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>
MARCH 31, DECEMBER 31,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 413.4 $ 369.3
Receivables, net.................................................... 1,118.5 1,151.0
Inventory........................................................... 2,658.8 2,706.8
Other current assets................................................ 74.5 73.8
--------- ---------
Total Current Assets.......................................... 4,265.2 4,300.9
INVESTMENTS............................................................ 157.8 175.8
PROPERTY AND EQUIPMENT, NET............................................ 1,339.4 1,360.4
INTANGIBLE ASSETS, NET................................................. 2,897.5 2,831.0
OTHER ASSETS........................................................... 210.9 218.7
NET ASSETS OF DISCONTINUED OPERATIONS.................................. 857.1 726.6
--------- ---------
$ 9,727.9 $ 9,613.4
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................... $ 150.3 $ 163.1
Accrued liabilities................................................. 526.7 622.9
Notes payable and current maturities of
long-term debt................................................... 2,252.5 2,248.7
Other current liabilities........................................... 202.6 129.8
--------- ---------
Total Current Liabilities..................................... 3,132.1 3,164.5
LONG-TERM DEBT, NET OF CURRENT MATURITIES.............................. 1,031.6 836.1
DEFERRED INCOME TAXES.................................................. 806.3 804.8
OTHER LIABILITIES ..................................................... 207.5 206.8
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;
475,287,998 and 474,965,676 shares
issued including shares held in
treasury, respectively........................................... 4.8 4.7
Additional paid-in capital.......................................... 4,662.1 4,661.5
Retained earnings................................................... 1,276.1 1,213.8
Accumulated other comprehensive income.............................. 2.7 6.6
Treasury stock, at cost; 114,163,709 and
99,602,444 shares held, respectively............................. (1,395.3) (1,285.4)
--------- ---------
Total Shareholders' Equity........................... 4,550.4 4,601.2
--------- ---------
$ 9,727.9 $ 9,613.4
========= =========
</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
MARCH 31,
------------------------------
2000 1999
----------- -----------
<S> <C> <C>
REVENUE ........................................... $ 5,230.2 $ 4,562.7
COST OF OPERATIONS ................................ 4,553.1 3,952.5
----------- -----------
GROSS MARGIN ...................................... 677.1 610.2
SELLING,GENERAL AND
ADMINISTRATIVE EXPENSES ......................... 550.8 517.3
PROPERTY CARRYING COSTS ........................... 10.8 --
----------- -----------
OPERATING INCOME .................................. 115.5 92.9
INTEREST INCOME ................................... 3.8 3.4
INTEREST EXPENSE .................................. (12.0) (6.7)
OTHER INCOME (EXPENSE), NET ....................... (3.8) 1.7
----------- -----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ............................. 103.5 91.3
PROVISION FOR INCOME TAXES ........................ 38.8 32.9
----------- -----------
INCOME FROM CONTINUING OPERATIONS ................. 64.7 58.4
----------- -----------
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF INCOME TAXES ................. (2.4) 21.7
----------- -----------
NET INCOME ........................................ $ 62.3 $ 80.1
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE:
Continuing operations ........................... $ .18 $ .13
Discontinued operations ......................... (.01) .05
----------- -----------
Net income ...................................... $ .17 $ .18
=========== ===========
Weighted average common shares outstanding ...... 367.3 456.2
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations ........................... $ .18 $ .13
Discontinued operations ......................... (.01) .04
----------- -----------
Net income ...................................... $ .17 $ .17
=========== ===========
Weighted average common and common equivalent
shares outstanding ............................ 367.5 465.0
=========== ===========
</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 (LOSS) 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........... -- -- -- -- (106.9) (106.9)
Other comprehensive
loss..................... -- -- -- (3.9) -- (3.9)
Exercise of stock
options.................. .1 .6 -- -- -- .7
Other...................... -- -- -- -- (3.0) (3.0)
Net income................. -- -- 62.3 -- -- 62.3
---- -------- -------- ------ --------- --------
BALANCE AT MARCH 31, 2000....... $4.8 $4,662.1 $1,276.1 $ 2.7 $(1,395.3) $4,550.4
==== ======== ======== ====== ========= ========
</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>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
-------- --------
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income.................................................................. $ 62.3 $ 80.1
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................................. 33.1 26.4
Loss (income) from discontinued operations................................ 2.4 (21.7)
Changes in assets and liabilities, net of effects from business
combinations:
Receivables......................................................... 33.9 (46.6)
Inventory........................................................... 53.2 (72.9)
Other assets........................................................ (3.3) (13.2)
Accounts payable and accrued liabilities............................ (35.5) 64.6
Other liabilities................................................... 90.3 2.0
-------- --------
236.4 18.7
-------- --------
CASH USED IN INVESTING ACTIVITIES:
Purchases of property and equipment.......................................... (26.5) (69.1)
Proceeds from sale of property and equipment
and assets held for sale.................................................. 32.1 11.5
Purchases of marketable securities........................................... -- (17.2)
Sales of marketable securities............................................... 5.4 19.0
Cash used in business acquisitions, net of
cash acquired............................................................. (131.0) (435.0)
Cash received from business divestitures..................................... 21.9 2.8
Other ....................................................................... 2.3 (2.2)
-------- --------
(95.8) (490.2)
-------- --------
CASH PROVIDED BY FINANCING ACTIVITIES:
Net proceeds (payments) under vehicle inventory
financing facilities....................................................... (2.7) 141.0
Net proceeds under revolving credit
facilities................................................................. 211.0 552.0
Purchases of treasury stock.................................................. (106.9) (99.3)
Payments of notes payable and long-term debt................................. (16.5) (44.1)
Other ....................................................................... 1.9 (.2)
-------- --------
86.8 549.4
-------- --------
CASH PROVIDED BY CONTINUING OPERATIONS.......................................... 227.4 77.9
-------- --------
CASH USED IN DISCONTINUED OPERATIONS............................................ (195.8) (474.8)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ 31.6 (396.9)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD,
INCLUDING CASH AND CASH EQUIVALENTS OF
DISCONTINUED OPERATIONS OF $26.7 MILLION AND
$590.1, RESPECTIVELY......................................................... 396.0 773.9
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD,
INCLUDING CASH AND CASH EQUIVALENTS OF
DISCONTINUED OPERATIONS OF $14.2 MILLION AND
$129.8, RESPECTIVELY......................................................... $ 427.6 $ 377.0
======== ========
</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")
and have been prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission. All significant intercompany accounts
and transactions have been eliminated. Certain information related to the
Company's organization, significant accounting policies and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These unaudited
condensed consolidated financial statements reflect, in the opinion of
management, all material adjustments (which include only normal recurring
adjustments) necessary to fairly state the financial position and the results of
operations for the periods presented and the disclosures herein are adequate to
make the information presented not misleading.
Operating results for interim periods are not necessarily indicative of
the results that can be expected for a full year. These interim financial
statements should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto included in the Company's most recent
Annual Report on Form 10-K.
In August 1999, the Company announced its intention to separate the
Company's automotive rental businesses, which have been organized under ANC
Rental Corporation ("ANC Rental"), from the Company. The Company intends to
distribute its entire interest in ANC Rental to the Company's stockholders on a
tax-free basis, subject to, among other things, ANC Rental securing the
necessary financing and third party approvals to operate as an independent
public company as well as certain other conditions. The Company has obtained a
private letter ruling from the Internal Revenue Service that, subject to the
conditions set forth in the letter, the distribution will qualify as a tax-free
distribution for federal income tax purposes under Section 355 of the Internal
Revenue Code of 1986, as amended. As discussed in Note 18, Discontinued
Operations, the Company's 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, certain amounts have been reclassified from the previously reported
financial statements to conform with the financial statement presentation of the
current period.
2. BUSINESS COMBINATIONS
Businesses acquired through March 31, 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 three months ended March 31, 2000, the Company acquired
various automotive retail businesses which have been accounted for under the
purchase method of accounting. The Company paid approximately $39.6 million of
cash for these acquisitions. During the three months ended March 31, 2000 the
Company also paid approximately $91.4 million in the purchase price for certain
prior year automotive retail acquisitions.
7
<PAGE> 8
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The following summarizes the preliminary purchase price allocations for
business combinations accounted for under the purchase method of accounting
consummated during the three months ended March 31 related to continuing
operations:
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Property and equipment.......................................................... $ 1.6 $ 64.8
Intangible and other assets..................................................... 37.3 410.6
Working capital................................................................. 20.7 205.3
Debt assumed.................................................................... (20.0) (230.0)
Other liabilities............................................................... -- (15.7)
------- -------
Cash used in acquisitions, net of cash acquired................................. $ 39.6 $ 435.0
======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
------ -------
<S> <C> <C>
Revenue......................................................................... $5,241.8 $5,326.4
Income from continuing operations............................................... 64.6 68.4
Diluted earnings per share from continuing
operations.................................................................... .18 .15
</TABLE>
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.
3. CASH AND CASH EQUIVALENTS
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. Cash and
cash equivalents includes restricted cash deposits primarily related to
insurance and inventory financing programs totaling $180.0 million and $212.4
million at March 31, 2000 and December 31, 1999, respectively.
4. RECEIVABLES
The components of receivables, net of allowance for doubtful accounts,
are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
-------- --------
<S> <C> <C>
Contracts in transit............................................................ $ 354.9 $ 422.3
Finance receivables............................................................. 397.9 413.1
Trade receivables............................................................... 216.0 166.5
Manufacturer receivables........................................................ 134.4 134.1
Other........................................................................... 55.4 57.5
-------- --------
1,158.6 1,193.5
Less: allowance for doubtful accounts........................................... (40.1) (42.5)
-------- --------
$1,118.5 $1,151.0
======== ========
</TABLE>
8
<PAGE> 9
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Finance receivables consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------ ------
<S> <C> <C>
Finance leases.................................................................. $184.7 $196.3
Installment loans............................................................... 69.2 83.8
Retained interests in securitized installment loans............................. 144.0 133.0
------ ------
$397.9 $413.1
====== ======
</TABLE>
The Company securitizes installment loan receivables through a $1.7
billion commercial paper warehouse facility with unrelated financial
institutions, as amended. During the three months ended March 31, 2000, the
Company securitized approximately $195.0 million of receivables under this
program, net of retained interests. At March 31, 2000, $1.11 billion 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. At March
31, 2000, $650.8 million was outstanding under this program.
5.INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
-------- --------
<S> <C> <C>
New vehicles.................................................................... $2,132.5 $2,085.0
Used vehicles................................................................... 374.8 470.1
Parts, accessories and other.................................................... 151.5 151.7
-------- --------
$2,658.8 $2,706.8
======== ========
</TABLE>
6.INVESTMENTS
Investments consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
-------- --------
<S> <C> <C>
Marketable securities........................................................... $ 91.9 $ 106.2
Equity method investments....................................................... 65.9 69.6
-------- --------
$ 157.8 $ 175.8
======== ========
</TABLE>
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>
MARCH 31, DECEMBER 31,
2000 1999
-------- --------
<S> <C> <C>
Land............................................................................ $ 525.4 $ 529.7
Buildings and improvements...................................................... 665.1 670.9
Furniture, fixtures and equipment............................................... 306.3 310.5
-------- --------
1,496.8 1,511.1
Less: accumulated depreciation and amortization................................. (157.4) (150.7)
-------- --------
$1,339.4 $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 over 40 years on a straight-line
basis. Accumulated amortization of intangible assets at March 31, 2000 and
December 31, 1999 was $140.9 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 $203.6 million and
$212.0 million at March 31, 2000 and December 31, 1999, respectively. As
described in Note 13, Restructuring and Impairment Charges, in the fourth
quarter of 1999, the Company recorded asset impairment charges related to
exiting the used vehicle megastore business.
10. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
-------- --------
<S> <C> <C>
Vehicle inventory credit facilities; secured
by the Company's vehicle inventory..................................... $2,220.4 $ 2,212.6
$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........................................ 880.0 669.0
Capital leases and other debt............................................ 183.7 203.2
-------- ---------
3,284.1 3,084.8
Less: current portion.................................................... (2,252.5) (2,248.7)
-------- ---------
$1,031.6 $ 836.1
======== =========
</TABLE>
Interest expense related to vehicle inventory credit facilities is
included in cost of operations.
10
<PAGE> 11
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
11. SHAREHOLDERS' EQUITY
During the three months ended March 31, 2000, the Company repurchased
14.3 million shares of the Company's common stock, par value $.01 per share
("Common Stock") for an aggregate purchase price of $106.9 million under its
$1.75 billion Board authorized cumulative share repurchase programs. Through
March 31, 2000, an aggregate of 114.4 million shares of Common Stock have been
acquired under these programs for an aggregate purchase price of $1.4 billion.
Repurchases are made pursuant to Rule 10b-18 of the Securities Exchange Act of
1934, as amended.
12. OTHER COMPREHENSIVE INCOME
The changes in components of the other comprehensive income (loss) are
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
------ ------
<S> <C> <C>
Net income.............................................................................. $ 62.3 $ 80.1
------ ------
Other comprehensive income (loss):
Unrealized gain (loss) on
marketable securities and
interest-only strip receivables,
net of income taxes............................................................... (7.1) 2.5
Reclassification of realized losses
(gains), net of income taxes...................................................... 2.0 (.7)
Foreign currency translation
adjustments, net of income
taxes............................................................................. 1.2 (.4)
------ ------
(3.9) 1.4
------ ------
Comprehensive income $ 58.4 $ 81.5
====== ======
</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. 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
consisting primarily of non-cash asset impairment charges for closed properties.
The Company will dispose of its closed properties primarily through
sale to independent third parties. Although the Company intends to aggressively
market these properties, the ultimate disposition could exceed one year. During
the three months ended March 31, 2000, the Company incurred $10.8 million in
carrying costs related to closed properties. Expected annual carrying costs
associated with closed properties total approximately $40.4 million and will be
charged to expense as incurred. Revenue and operating losses for the operations
to be disposed for the three months ended March 31, 1999 were $391.6 million and
$(7.1) million, respectively.
11
<PAGE> 12
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The following summarizes activity in the Company's restructuring and
impairment reserves for the three months ended March 31, 2000:
<TABLE>
<CAPTION>
Q1 2000 ACTIVITY
BALANCE -------------------------- BALANCE
RESERVE DECEMBER 31, 1999 CASH NON-CASH MARCH 31, 2000
- ------- ----------------- ------- -------- --------------
<S> <C> <C> <C> <C>
Asset reserves:
Asset impairment.................. $263.3 $ -- $(10.8) $252.5
Inventory......................... 15.0 -- (15.0) --
Accrued liabilities:
Lease residual
value guarantees................ 103.3 (3.9) -- 99.4
Severance and other
exit costs...................... 17.3 (12.3) -- 5.0
------ ------- ------- ------
$398.9 $(16.2) $(25.8) $356.9
====== ======= ======= ======
</TABLE>
14. INCOME TAXES
Income taxes have been provided for based upon the Company's
anticipated annual effective income tax rate.
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 quoted market price of the Common Stock at the date of
grant. Generally, options granted have a term of ten years from the date of
grant, and vest in increments of 25% per year over a four year period on the
yearly anniversary of the grant date.
A summary of stock option transactions for the three months ended March
31, 2000 is as follows:
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
------ --------------
Options outstanding at
beginning of year............................ 50.9 $ 15.84
Granted......................................... .1 9.25
Exercised....................................... (.3) 2.09
Canceled........................................ (2.5) 13.86
------
Options outstanding at March 31, 2000........... 48.2 16.01
======
Options exercisable at March 31, 2000........... 29.7 16.65
Options available for future
grants at March 31, 2000................... 26.5
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 or operations, financial condition and/or
cash flows.
12
<PAGE> 13
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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
MARCH 31,
------------------------
2000 1999
------ ------
<S> <C> <C>
Weighted average common shares outstanding used in
calculating basic earnings per share.................................................... 367.3 456.2
Effect of dilutive options and warrants................................................... .2 8.8
------ ------
Weighted average common and common equivalent shares used in
calculating diluted earnings per share.................................................. 367.5 465.0
====== ======
</TABLE>
At March 31, 2000 and 1999, the Company had approximately 47.9 million
and 20.5 million stock options outstanding, respectively, which have been
excluded from the computation of diluted earnings per share since they are
anti-dilutive.
18. 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 unaudited condensed consolidated financial
statements. During the three months ended March 31, 2000, the Company recorded a
loss from discontinued operations totaling $2.4 million, net of income taxes.
Such amount represents the excess of actual losses incurred during the period of
$24.5 million, net of income taxes, over previously estimated losses of $22.1
million which were accrued in the fourth quarter of 1999.
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 $377.0 million.
Accordingly, operating results of RSG for the three months ended March 31, 1999
have been classified as discontinued operations in the accompanying unaudited
condensed consolidated financial statements.
A summary of the net assets of the Company's discontinued automotive
rental business is as follows:
MARCH 31, DECEMBER 31,
2000 1999
-------- --------
Current assets............................. $5,593.9 $5,349.3
Non-current assets......................... 991.2 1,000.2
-------- --------
Total assets............................. 6,585.1 6,349.5
-------- --------
Current liabilities........................ 2,337.4 2,235.8
Non-current liabilities.................... 3,390.6 3,387.1
-------- --------
Total liabilities........................ 5,728.0 5,622.9
-------- --------
Net assets of discontinued
operations............................... $ 857.1 $ 726.6
======== ========
13
<PAGE> 14
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Selected statement of operations data for the Company's discontinued
operations is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------------------------------------------
2000 1999
---------- --------------------------------------------
AUTOMOTIVE AUTOMOTIVE SOLID
RENTAL RENTAL WASTE TOTAL
--------- --------- ------ --------
<S> <C> <C> <C> <C>
Revenue .................................. $ 810.6 $ 791.0 $403.5 $1,194.5
======= ======= ====== ========
Pre-tax income (loss)...................... $ (40.2) $ (12.0) $ 73.3 $ 61.3
Provision (benefit) for
income taxes............................ (15.7) (4.3) 28.2 23.9
Minority interest in RSG................... -- -- 15.7 15.7
------- ------- ------ --------
Net income (loss).......................... (24.5) (7.7) 29.4 21.7
Previously estimated and
accrued losses.......................... (22.1) -- -- --
------- ------- ------ --------
Income (loss) from
discontinued operations................. $ (2.4) $ (7.7) $ 29.4 $ 21.7
======= ======= ====== ========
</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
In August 1999, the Company announced its intention to separate the
Company's automotive rental businesses, which have been organized under ANC
Rental Corporation ("ANC Rental"), from the Company. The Company intends to
distribute its entire interest in ANC Rental to the Company's stockholders on a
tax-free basis, subject to, among other things, ANC Rental securing the
necessary financing and third party approvals to operate as an independent
public company as well as certain other conditions. The Company has obtained a
private letter ruling from the Internal Revenue Service that, subject to the
conditions set forth in the letter, the distribution will qualify as a tax-free
distribution for federal income tax purposes under Section 355 of the Internal
Revenue Code of 1986, as amended. As discussed in Note 18, Discontinued
Operations, the Company's 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. Upon
completion of the planned ANC Rental distribution, the Company's consolidated
shareholders' equity will be reduced by the net assets of ANC Rental as of the
distribution date.
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, the Company's former solid waste services segment has
been accounted for as discontinued operations and accordingly, the operating
results of RSG for the three months ended March 31, 1999 have been classified as
discontinued operations in the accompanying unaudited condensed consolidated
financial statements presented herein.
BUSINESS COMBINATIONS
The Company has established framework agreements with various
manufacturers that allow the Company to acquire franchised automotive
dealerships subject to various limits and conditions. Since 1996, the Company
has aggressively expanded its automotive retail operations through the
acquisition of franchised automotive dealerships. The Company currently expects
to continue to complete acquisitions of franchised automotive dealerships during
2000. However, the Company does not expect to complete acquisitions at the same
pace as in prior years. Acquisitions completed in 2000 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 March 31, 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 three months ended March 31, 2000, the Company acquired
various automotive retail businesses which have been accounted for under the
purchase method of accounting. The Company paid approximately $39.6 million of
cash for these acquisitions. During the three months ended March 31, 2000 the
Company also paid approximately $91.4 million in purchase price for certain
prior year automotive retail acquisitions.
15
<PAGE> 16
SHARE REPURCHASES
During the three months ended March 31, 2000, the Company repurchased
14.3 million shares of common stock, par value $.01 per share ("Common Stock"),
for an aggregate purchase price of $106.9 million under the Company's Board
authorized share repurchase program. On a cumulative basis, through March 31,
2000, the Company has acquired an aggregate of 114.4 million shares of Common
Stock for an aggregate purchase price of $1.4 billion. As of March 31, 2000, the
Company has $349.0 million remaining for share repurchases under its share
repurchase program.
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>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------
2000 1999
------------------------- -------------------------
DILUTED DILUTED
PER PER
GROSS SHARE GROSS SHARE
------ ------- ------ -------
<S> <C> <C> <C> <C>
Income from continuing
operations............................... $ 64.7 $ .18 $ 58.4 $ .13
Income (loss) from
discontinued operations:
Automotive rental...................... (2.4) (.01) (7.7) (.02)
Solid waste services................... -- -- 29.4 .06
------ ------ ------ ------
(2.4) (.01) 21.7 .04
------ ------ ------ ------
Net income................................. $ 62.3 $ .17 $ 80.1 $ .17
====== ====== ====== ======
</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 the Company's aggressive expansion through
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 months ended March 31, 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 MARCH 31,
---------------------------------------------------------
2000 1999 % CHANGE
-------- -------- ---------
<S> <C> <C> <C>
Revenue:
New vehicle........................................... $2,467.6 $2,191.1 12.6
Used vehicle.......................................... 753.1 769.2 (2.1)
Fixed operations...................................... 437.5 413.8 5.7
Other................................................. 278.0 299.3 (7.1)
-------- --------
$3,936.2 $3,673.4 7.2
======== ========
Gross Margin............................................ $ 502.6 $ 478.5 5.0
%....................................................... 12.8% 13.0% (.2)
S, G & A................................................ $ 366.8 $ 354.6 3.4
%....................................................... 9.3% 9.6% (.3)
Store Performance Margin................................ $ 135.8 $ 123.9 9.6
%....................................................... 3.5% 3.4% .1
</TABLE>
Overall, the Company's same store performance margins increased 9.6% to
$135.8 million during the three months ended March 31, 2000, primarily due to
increases in same store sales and improvement in S,G & A partially offset by
lower gross margins and other factors described below.
Same store sales were $3.94 billion for the three months ended March
31, 2000 versus $3.67 billion for the comparable 1999 period, an increase of
7.2%. The primary components of these same store sales increases are described
below.
During the quarter, the automotive retail industry continued to
experience record increases in new vehicle unit sales volume. The Company's new
vehicle same store sales increased 12.6% to $2.47 billion during the three
months ended March 31, 2000. The increase is primarily due to an increase in
unit volume of 8.3% and price increases of 4.3%.
The used vehicle market has been less robust due, in part, to strong
manufacturer incentives for new vehicles which the Company expects to continue
during the remainder of 2000. Used vehicle same store sales decreased 2.1% to
$753.1 million during the three months ended March 31, 2000. This decrease is
primarily attributed to a 7.4% decrease in unit volume partially offset by price
increases of 5.3%.
Fixed operations same store sales increased 5.7% to $437.5 million
during the three months ended March 31, 2000. This increase is primarily due to
volume.
Same store other sales consist primarily of wholesale revenue. Same
store other sales decreased 7.1% to $278.0 million during the three months ended
March 31, 2000. This variance is primarily due to a decline in wholesale volume
and pricing during the period.
Same store gross margins were $502.6 million and $478.5 million or as a
percentage of same store total revenue 12.8% and 13.0% for the three months
ended March 31, 2000 and 1999, respectively. The decrease in same store gross
margin as a percentage of same store total revenue is primarily due to a shift
in mix as a result of stronger new vehicle sales compared to used vehicle sales
and compression in new vehicle margins resulting from higher floorplan interest
due to increased inventory levels entering the year 2000. The Company's
inventory levels have decreased since the beginning of the year and the Company
expects to maintain its planned inventory levels through the remainder of the
year. The margin compression due to mix and floorplan interest were partially
offset by improved used vehicle margins.
17
<PAGE> 18
Same store selling, general and administrative expenses were $366.8
million and $354.6 million or as a percentage of same store total revenue 9.3%
and 9.6% for the three months ended March 31, 2000 and 1999, respectively. The
increase in aggregate dollars is due to higher selling expenses associated with
increased same store sales. The decrease in same store selling, general and
administrative expenses as a percentage of same store sales is primarily due to
cost cutting initiatives.
Same store performance margins were $135.8 million and $123.9 million
or as a percentage of same store total revenue 3.5% and 3.4% for the three
months ended March 31, 2000 and 1999, respectively. The increase in same store
performance margins is a result of lower selling, general and administrative
costs which more than offset lower gross margins.
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, corporate and district overhead, property carrying costs and
operating income, with percentages of total revenue, on a reported basis for the
periods indicated (in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------
2000 % 1999 %
-------- ----- -------- ------
<S> <C> <C> <C> <C>
Revenue:
New vehicle............................... $3,219.6 61.5 $2,548.9 55.9
Used vehicle.............................. 1,047.9 20.0 1,122.9 24.6
Fixed operations.......................... 587.9 11.3 508.7 11.1
Other..................................... 374.8 7.2 382.2 8.4
-------- ----- -------- -----
$5,230.2 100.0 $4,562.7 100.0
======== ===== ======== =====
Gross Margin................................ $ 677.1 13.0 $ 610.2 13.4
Store S, G & A.............................. 511.3 9.8 471.3 10.4
Store Performance Margin.................... 165.8 3.2 138.9 3.0
Overhead.................................... 39.5 .8 46.0 1.0
Property carrying costs..................... 10.8 .2 -- --
Operating Income............................ 115.5 2.2 92.9 2.0
</TABLE>
Revenue was $5.23 billion for the three months ended March 31, 2000
versus $4.56 billion for the comparable 1999 period, an increase of 14.6%. The
primary components of this increase are described below.
New vehicle sales increased 26.3% to $3.22 billion during the three
months ended March 31, 2000. During the quarter, the Company sold approximately
126,000 new vehicles versus 105,000 new vehicles last year, an increase of 20%.
The increase in new vehicle revenue is attributed to acquisitions, strong unit
growth and higher pricing.
Used vehicle sales decreased 6.7% to $1.05 billion during the three
months ended March 31, 2000. During the quarter, the Company sold approximately
67,000 used vehicles versus 79,000 used vehicles last year. The decrease in
revenue is primarily due to volume associated with the used vehicle megastores
that were closed in connection with restructuring activities in the fourth
quarter of 1999. Excluding the closed megastores, used vehicle revenue increased
approximately 11% with an increase in unit volume of 3%. These increases are
primarily due to acquisitions which more than offset decreases in used vehicle
same store sales.
Fixed operations revenue increased 15.6% to $587.8 million during the
three months ended March 31, 2000. The increase is primarily due to acquisitions
and internal growth.
18
<PAGE> 19
Gross margins were $677.1 million and $610.2 million for the three
months ended March 31, 2000 and 1999, respectively. The increases in aggregate
dollars are primarily due to acquisitions and same store sales increases. Gross
margins as a percentage of revenue were 13.0% and 13.4% for the three months
ended March 31, 2000 and 1999, respectively. The decrease in gross margins as a
percentage of revenue is due to the same factors which resulted in the decrease
in same store gross margins previously described.
Store level selling, general and administrative expenses were $511.3
million and $471.3 million for the three months ended March 31, 2000 and 1999,
respectively. The increase in aggregate dollars is primarily due to acquisitions
and higher volume related selling expenses. Store level selling, general and
administrative expenses as a percentage of revenue were 9.8% and 10.4% for the
three months ended March 31, 2000 and 1999, respectively. The decrease in these
costs as a percentage of revenue is due to cost cutting initiatives.
Store performance margins were $165.8 million and $138.9 million for
the three months ended March 31, 2000 and 1999, respectively. The increases in
aggregate dollars are primarily due to acquisitions and same store sales
increases. Store performance margins as percentages of revenue were 3.2% and
3.0% for the three months ended March 31, 2000 and 1999, respectively. The
increase in store performance margins is a result of lower selling, general and
administrative costs which more than offset lower gross margins.
Corporate and district overhead was $39.5 million and $46.0 million for
the three months ended March 31, 2000 and 1999, respectively. Overhead as a
percentage of revenue was .8% and 1.0% for the three months ended March 31, 2000
and 1999, respectively. The overhead decrease in aggregate dollars and as a
percentage of revenue is a result of cost cutting initiatives. 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 $4.0 million for the
three months ended March 31, 1999. Due to the establishment of ANC Rental's
corporate infrastructure and decreasing reliance on AutoNation, allocations of
corporate overhead were discontinued in 2000.
Property carrying costs represent costs associated with megastore and
other properties held for sale by the Company. The Company incurred $10.8
million of property carrying costs during the three months ended March 31, 2000.
Expected annual carrying costs associated with closed properties total
approximately $40.4 million and are charged to expense as incurred.
NON-OPERATING INCOME (EXPENSE)
INTEREST INCOME
Interest income was $3.8 million and $3.4 million for the three months
ended March 31, 2000 and 1999, respectively. The increase is primarily the
result of investments in marketable securities.
INTEREST EXPENSE
Interest expense was incurred primarily on borrowings under the
Company's revolving credit facilities for general corporate purposes. Interest
expense was $12.0 million and $6.7 million for the three months ended March 31,
2000 and 1999, respectively. The increases are primarily due to higher average
borrowings and higher interest rates. Interest expense related to vehicle
inventory credit facilities is included in cost of operations.
INCOME TAXES
The provision for income taxes from continuing operations was $38.8
million and $32.9 million for the three months ended March 31, 2000 and 1999,
respectively. Income taxes have been provided based upon the Company's
anticipated annual effective income tax rate.
19
<PAGE> 20
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. 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
consisting primarily of non-cash asset impairment charges for closed properties.
The Company will dispose of its closed properties primarily through
sale to independent third parties. Although the Company intends to aggressively
market these properties, the ultimate disposition could exceed one year. Revenue
and operating losses for the operations to be disposed for the three months
ended March 31, 1999 were $391.6 million and $(7.1) million, respectively.
The following summarizes activity in the Company's restructuring and
impairment reserves for the three months ended March 31, 2000:
<TABLE>
<CAPTION>
Q1 2000 ACTIVITY
BALANCE -------------------------- BALANCE
RESERVE DECEMBER 31, 1999 CASH NON-CASH MARCH 31, 2000
- ------- ----------------- ------- -------- --------------
<S> <C> <C> <C> <C>
Asset reserves:
Asset impairment.................. $263.3 $ -- $(10.8) $252.5
Inventory......................... 15.0 -- (15.0) --
Accrued liabilities:
Lease residual
value guarantees................ 103.3 (3.9) -- 99.4
Severance and other
exit costs...................... 17.3 (12.3) -- 5.0
------ ------ ------ ------
$398.9 $(16.2) $(25.8) $356.9
====== ====== ====== ======
</TABLE>
FINANCIAL CONDITION
At March 31, 2000, the Company had $233.4 million of unrestricted cash
and $568.1 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 existing $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 March 31, 2000, the Company had approximately $244.1 million of
availability under the commercial paper conduit facility. This facility
supplements the new and used vehicle inventory finance facilities provided by
vehicle manufacturer finance companies.
The Company is the lessee under a $500.0 million lease facility that
was established to acquire and develop the used vehicle megastores and other
properties. At March 31, 2000, $445.6 million was funded under this facility of
which $139.2 million has been accounted for as capital leases and $306.4 has
been accounted for as operating leases. The Company has guaranteed the residual
value of the properties under this facility which guarantee totaled
approximately $392.1 million at March 31, 2000. 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. As of March 31, 2000, $99.4 million remained
accrued for this liability. The Company intends to fund the residual value
guarantee obligation primarily using proceeds from the sale of owned properties.
20
<PAGE> 21
The Company securitizes installment loan receivables through a $1.7
billion commercial paper warehouse facility with certain financial institutions,
as amended. During the three months ended March 31, 2000, the Company
securitized approximately $195.0 million of loan receivables under this program,
net of retained interests. At March 31, 2000, the Company had $629.6 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 the securitization were 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. At March
31, 2000, $650.8 million was outstanding under this program. The Company expects
to continue to refinance loans previously securitized under the warehouse
facility through the issuance of asset-backed notes.
Since the 1998 inception of the Company's Board authorized $1.75
billion cumulative share repurchase programs through March 31, 2000, the Company
has repurchased 114.4 million shares of Common Stock for an aggregate purchase
price of $1.4 billion. During the three months ended March 31, 2000, 14.3
million shares of Common Stock have been acquired under the $500.0 million
program authorized in December 1999 for an aggregate purchase price of $106.9
million. 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.
The Company's automotive rental operations are financed through various
revenue earning vehicle and working capital debt facilities. The Company
provides certain credit enhancements related to this financing in the form of
guarantees and letters of credit. In conjunction with the planned spin-off of
ANC Rental, a financing is currently being arranged, which, if completed, will
provide up to $400.0 million of funding to be available for ANC Rental's general
corporate purposes and to modify existing revenue earning vehicle financing
programs by replacing certain letters of credit guaranteed by AutoNation with
restricted cash or vehicle collateral for credit enhancement purposes. The
Company expects the closing of this financing to occur before the spin-off date,
but the Company cannot assure that this financing will occur. In addition to the
debt financing previously described, in February 2000, the Company contributed
$180.0 million in cash as capital to ANC Rental to replace maturing letters of
credit. The Company will contribute an additional $20.0 million in cash as
capital to ANC Rental prior to the planned spin-off. At March 31, 2000, letters
of credit totaling $285.0 million which mature through November 2000 were
outstanding related to ANC Rental's financing. ANC Rental's ultimate financing
structure may include additional capital funding from the Company and/or credit
support in the form of guarantees or letters of credit.
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 increased by $31.6 million and decreased by
$396.9 million during the three months ended March 31, 2000 and 1999,
respectively. The major components of these changes are discussed below.
21
<PAGE> 22
CASH FLOWS FROM OPERATING ACTIVITIES
Cash provided by operating activities was $236.4 million and $18.7
million during the three months ended March 31, 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 proceeds
(payments) under these secured vehicle financings which totaled $(2.7) million
and $141.0 million during the three months ended March 31, 2000 and 1999,
respectively. Including net proceeds (payments) under these secured vehicle
financings, the Company generated operating cash flow of $233.7 million and
$159.7 million during the three months ended March 31, 2000 and 1999,
respectively.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash flows from investing activities consist primarily of cash used for
business acquisitions, capital additions and other transactions as further
described below.
Cash used in business acquisitions was $131.0 million and $435.0
million for the three months ended March 31, 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. Cash used in
business acquisitions during the three months ended March 31, 2000 includes
$91.4 million in purchase price for certain prior year automotive retail
acquisitions. See "Business Combinations" of Management's Discussion and
Analysis of Financial Condition and Results of Operations and Note 2, Business
Combinations, of notes to unaudited condensed consolidated financial statements
for a further discussion of businesses acquired.
Capital expenditures were $26.5 million and $69.1 million during the
three months ended March 31, 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 $32.1 million and $11.5 million during the three months ended March
31, 2000 and 1999, respectively. The increase is primarily due to the sale of
certain corporate assets and closed properties.
The Company intends to finance capital expenditures and business
acquisitions through cash flow from operations, revolving credit facilities and
other financings.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from financing activities during the three months ended
March 31, 2000 and 1999 consisted of revolving credit and vehicle floorplan
financings, repayments of acquired debt and treasury stock purchases.
During the three months ended March 31, 2000 and 1999, the Company
spent approximately $106.9 million and $99.3 million, respectively to repurchase
shares of Common Stock under the Company's Board approved share repurchase
programs.
Payments of notes payable and long-term debt were $16.5 million and
$44.1 million during the three months ended March 31, 2000 and 1999,
respectively. These amounts consist of the repayment of debt assumed in
acquisitions and the repayment of other debt. The decrease is primarily due to a
reduction in acquired debt and related repayments due to fewer acquisitions in
the first quarter of 2000.
22
<PAGE> 23
CASH FLOWS FROM DISCONTINUED OPERATIONS
Cash used in discontinued operations was as follows during the three
months ended March 31,:
2000 1999
------- -------
Automotive rental......................... $(195.8) $ 49.6
Solid waste services...................... -- (524.4)
------- -------
$(195.8) $(474.8)
======= =======
Cash used in the discontinued automotive rental business during the
three months ended March 31, 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 three months ended March 31, 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 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.
DISCONTINUED OPERATIONS
AUTOMOTIVE RENTAL
As a result of the Company's decision to separate ANC Rental from the
Company, 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 unaudited condensed consolidated financial
statements. During the three months ended March 31, 2000, the Company recorded a
loss from discontinued operations totaling $2.4 million, net of income taxes.
Such amount represents the excess of actual losses incurred during the period of
$24.5 million, net of income taxes, over previously estimated losses of $22.1
million which were accrued in the fourth quarter of 1999.
23
<PAGE> 24
A summary of the Company's automotive rental operations is as follows
for the three months ended March 31 (in millions):
<TABLE>
<CAPTION>
2000 % 1999 %
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Revenue.................................. $ 810.6 100.0 $ 791.0 100.0
Expenses:
Cost of operations..................... 654.9 80.8 633.3 80.1
Selling, general and
administrative....................... 192.2 23.7 166.7 21.1
-------- ----- -------- -----
Operating loss........................... (36.5) (4.5) (9.0) (1.2)
====== =====
Interest and other
expense, net........................... 3.7 3.0
-------- --------
Pre-tax loss............................. (40.2) (12.0)
Benefit for income taxes................. (15.7) (4.3)
-------- --------
Net loss................................. $ (24.5) $ (7.7)
======== ========
</TABLE>
Revenue was $810.6 million for the three months ended March 31, 2000
and $791.0 million for the three months ended 1999. The increase in revenue in
2000 over 1999 of $19.6 million or 2.5% is primarily due to price increases of
approximately 4.3%. Offsetting this increase is a decrease in rental days of
1.5%. The increase in price is primarily due to repositioning brands and
associated management pricing decisions. The decline in rental days is a result
of weak volume in the early part of January as well as an expected decline in
certain price sensitive business channels, the result of repositioning the
National brand from a price perspective. ANC Rental currently expects pricing to
grow at a slower pace in the second quarter as compared to the first quarter of
2000.
Cost of operations was $654.9 million for the three months ended March
31, 2000 and $633.3 million for the three months ended 1999 or as a percentage
of revenue 80.8% for the three months ended March 31, 2000 and 80.1% for the
three months ended 1999. The increase in operating cost in aggregate dollars and
as a percentage of revenue is primarily due to higher fleet cost and cost
related to fleet reductions primarily incurred in January. The fleet reductions
were undertaken to reduce fleet size in light of the weak volumes. Costs
associated with the fleet reductions included depreciation and turn-in charges
imposed under the terms of the manufacturer repurchase agreements for vehicles
returned ahead of schedule.
Selling, general and administrative expenses were $192.2 million for
the three months ended March 31, 2000 and $166.7 million for the three months
ended March 31, 1999, or, as a percentage of revenue 23.7% for the three months
ended March 31, 2000 and 21.1% for the three months ended March 31, 1999. The
increase in selling, general and administrative cost in aggregate dollars and as
a percentage of revenue is due to higher marketing and administrative costs.
Additionally, ANC Rental continued to execute its 1999 restructuring plan
described below and as such has incurred approximately $7.3 million of charges
in the period primarily related to employee retention, relocation of information
systems, training costs and relocation of personnel. ANC Rental expects the
majority of the retention payments to be paid in June and September 2000. As
previously described, ANC Rental's S,G & A expenses include allocations of
AutoNation corporate overhead totaling $4.0 million for the three months ended
March 31, 1999. Due to the establishment of ANC Rental's corporate
infrastructure and decreasing reliance on AutoNation, the corporate overhead
allocation was discontinued in 2000.
During the year ended December 31, 1999, ANC Rental approved and
implemented a plan to restructure certain of its operations. Included in the
plan are actions to (1) consolidate ANC Rental's North American headquarters,
(2) reduce non-field headcount as a result of the consolidation of the North
American headquarters, (3) renegotiate certain existing international vehicle
supply agreements and rationalize revenue earning vehicle fleet, (4) exit and
consolidate certain unprofitable or marginally profitable operating locations
both domestically and internationally. ANC Rental anticipates substantially
completing the restructuring plan prior to December 31, 2000.
24
<PAGE> 25
At March 31, 2000, $19.4 million remains accrued relative to the 1999
plan with most of the costs to be incurred by the end of 2000, except for
certain lease commitments. During the three months ended March 31, 2000 ANC
Rental charged $2.3 million of severance and rent to these reserves.
Also in connection with its exit plans ANC Rental has contracted to
sell its Minneapolis headquarters and excess property in Fort Lauderdale to
unrelated third parties. ANC Rental currently expects to consummate this
transaction by the end of June 2000. The gross proceeds are expected to
approximate $26.8 million for both locations.
ANC Rental finances vehicle purchases for its domestic automotive
rental operations primarily through commercial paper and medium-term note
financings. At March 31, 2000, ANC Rental had a $1.89 billion commercial paper
program. This program was supported by bank lines of credit of $1.69 billion
which terminated in April 2000 that provided liquidity back-up for the facility,
as well as letters of credit of $200.0 million, which provide credit enhancement
and additional liquidity back-up for the facilities. In April 2000, ANC Rental
reduced its commercial paper program to approximately $1.69 billion supported by
$1.49 billion of bank lines of credit terminating the sooner of the spin-off or
July 2000. Concurrent with the planned spin-off, ANC Rental expects to revise
its commercial paper program to approximately $1.1 billion. Borrowings under
this program are secured by eligible vehicle collateral and bear interest at
market-based commercial paper rates. As of March 31, 2000, ANC Rental had
approximately $314.3 million available under this program. ANC Rental expects to
continue to fund its revenue earning vehicle purchases with secured vehicle
financings.
In 1999, ANC Rental issued $2.5 billion of rental vehicle asset-backed
medium-term notes, including $1.25 billion in the form of floating rate notes,
$750.0 million at a rate of 5.88% and $500.0 million at a rate of 6.02%. ANC
Rental fixed the effective interest rate on the $1.25 billion floating rate
notes at 6.03% through the use of certain derivative transactions. Currently,
letters of credit totaling $70.0 million provide credit enhancement for the
notes. ANC Rental expects that these letters of credit will be replaced with
restricted cash and overcollateralization in connection with the spin-off.
ANC Rental's operations and particularly the leisure travel market are
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, ANC Rental increases its rental fleet and workforce to
accommodate increased rental activity. As a result, any occurrence that disrupts
travel patterns during the summer period could have a material adverse effect on
ANC Rental's business, results of operations, cash flows and financial
condition. The first and fourth quarters for ANC Rental's operations are
generally the weakest, when there is limited leisure travel and a greater
potential for adverse or unseasonable 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.
SOLID WASTE SERVICES
In July 1998, the Company completed an initial public offering of 36.1%
of Republic Services resulting in net proceeds of $1.43 billion. The Company
sold substantially all of our remaining interest in RSG in May 1999 resulting in
an after tax gain of approximately $377.0 million. Accordingly, operating
results of the Company's former solid waste services segment have been
classified as discontinued operations for the three months ended March 31, 1999
in the accompanying unaudited condensed consolidated financial statements.
Revenue from these discontinued operations was $403.5 million for the three
months ended March 31, 1999. Income from these discontinued operations, net of
minority interest, was $29.4 million.
25
<PAGE> 26
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 describe 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; successfully
rollout 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
ability to retain key personnel; extensive governmental and environmental
regulation; various legal and administrative proceedings; matters relating to
imported products; and the ability to complete the spin-off of ANC Rental.
26
<PAGE> 27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following information about the Company's market sensitive
financial instruments constitutes a "forward-looking statement." The Company's
major market risk exposure is changing interest rates, primarily in the United
States. 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 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. The Company uses interest
rate caps and floors to manage the impact of interest rate changes on
securitized installment loan receivables. With respect to the Company's
discontinued automotive rental operations, the Company uses variable to fixed
interest rate swaps and interest rate caps/floors to manage the impact of
interest rate changes on the Company's variable rate revenue earning vehicle
debt.
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.
CONTINUING OPERATIONS
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 March 31, 2000, notional principal
amounts related to interest rate swaps (variable to fixed rate) were $150.0
million maturing in December 2000. At March 31, 2000 the weighted average fixed
rate payment on variable to fixed rate swaps was 6.13%. 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 $1.09 billion contractually maturing
through 2006 which effectuate a variable to fixed rate swap at a weighted
average rate of 6.21%. Variable rates on the underlying portfolio are indexed to
the Commercial Paper Nonfinancial rate.
DISCONTINUED OPERATIONS
ANC Rental uses interest rate swap and interest rate caps and floors to
manage the impact of interest rate changes on variable revenue earning vehicle
debt. At March 31, 2000, notional principal amounts related to interest rate
swaps (variable to fixed rate) were $600.0 million maturing as follows: $300.0
million in the remainder of 2000; $100.0 million in 2001 and $200.0 million in
2003. As of March 31, 2000, the weighted average fixed rate payment on variable
to fixed rate swaps was 5.78%. Variable rates received are indexed to the
Commercial Paper Nonfinancial rate. The notional principal amounts related to
interest rate caps and floors as of March 31, 2000 were both $1.25 billion. The
interest rate caps and floors effectuate a variable to fixed rate swap with a
weighted average rate of 5.77% at March 31, 2000. Variable rates on interest
rate caps and floors are indexed to LIBOR.
27
<PAGE> 28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A patent infringement suit naming the Company as a defendant was filed
in January 2000 in the U.S. District Court for the Eastern District of Texas by
an individual, Allan Konrad, who holds three patents allegedly covering
intranet/internet use. Mr. Konrad also owns a fourth patent application
allegedly covering e-commerce. Thirty-eight other companies, including General
Motors, Ford and DaimlerChrysler are codefendants in this litigation. The
Company procures all products and services related to this infringement
allegation from suppliers and the Company believes that it is entitled to be
indemnified by these suppliers for any loss that may result from this
litigation. The technology covered in the Konrad patents relates to computer
system configuration and a method of using that configuration. More
specifically, a local host (personal workstation), remote host (server), a
network connecting the local host to the remote host, and various computer
service functionalities are claimed to be covered by these patents. Technology
of this type is widely used by the Company and its continued use is required.
The Company is a party to numerous other legal proceedings which arose
in the ordinary course of business. The Company does not believe that the
ultimate resolution of these matters, as well as the matter described above,
will have a material adverse effect on the Company's business, results of
operations, financial condition or cash flows. However, the results of any of
these matters cannot be predicted with certainty, and an unfavorable resolution
of one or more of these matters could have a material adverse effect on the
Company's consolidated results of operations or cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
<S> <C>
27.1* Financial Data Schedule for the Three Months ended March 31, 2000 (for SEC use only)
27.2* Financial Data Schedule for the Three Months ended March 31, 1999 (restated for discontinued operations)
(for SEC use only)
</TABLE>
- -------------------------------
*Filed herewith
(b) Reports on Form 8-K:
None
28
<PAGE> 29
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 AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
Date: May 15, 2000
29
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000350698
<NAME> AUTONATION, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 413,400
<SECURITIES> 0
<RECEIVABLES> 1,158,600
<ALLOWANCES> 40,100
<INVENTORY> 2,658,800
<CURRENT-ASSETS> 4,265,200
<PP&E> 1,496,800
<DEPRECIATION> 157,400
<TOTAL-ASSETS> 9,727,900
<CURRENT-LIABILITIES> 3,132,100
<BONDS> 1,031,600
0
0
<COMMON> 4,800
<OTHER-SE> 4,545,600
<TOTAL-LIABILITY-AND-EQUITY> 9,727,900
<SALES> 5,230,200
<TOTAL-REVENUES> 5,230,200
<CGS> 4,553,100
<TOTAL-COSTS> 4,553,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,000
<INCOME-PRETAX> 103,500
<INCOME-TAX> 38,800
<INCOME-CONTINUING> 64,700
<DISCONTINUED> (2,400)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,300
<EPS-BASIC> .17
<EPS-DILUTED> .17
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000350698
<NAME> AUTONATION, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<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> 4,562,700
<TOTAL-REVENUES> 4,562,700
<CGS> 3,952,500
<TOTAL-COSTS> 3,952,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,700
<INCOME-PRETAX> 91,300
<INCOME-TAX> 32,900
<INCOME-CONTINUING> 58,400
<DISCONTINUED> 21,700
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,100
<EPS-BASIC> .18
<EPS-DILUTED> .17
</TABLE>
