-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WB0WHVWIeIo2I0Jdt+7cTkd7urZIl4I9iEEO4Q4nLUq/jnd2t1uXNM6YarzJgRRO 1HU0MOC8IwaNWGQp1BC5zg== 0000950144-99-003789.txt : 19990402 0000950144-99-003789.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950144-99-003789 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REPUBLIC INDUSTRIES INC CENTRAL INDEX KEY: 0000350698 STANDARD INDUSTRIAL CLASSIFICATION: REFUSE SYSTEMS [4953] IRS NUMBER: 731105145 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-13107 FILM NUMBER: 99582318 BUSINESS ADDRESS: STREET 1: 110 SE 6TH ST CITY: FT LAUDERDALE STATE: FL ZIP: 33301 BUSINESS PHONE: 9547696000 MAIL ADDRESS: STREET 1: 110 SE 6TH ST CITY: FT LAUDERDALE STATE: FL ZIP: 33301 FORMER COMPANY: FORMER CONFORMED NAME: REPUBLIC WASTE INDUSTRIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: REPUBLIC RESOURCES CORP DATE OF NAME CHANGE: 19900226 10-K405 1 REPUBLIC INDUSTRIES, INC. FORM 10-K405 12/31/98 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 1-13107 REPUBLIC INDUSTRIES, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 73-1105145 (State of Incorporation) (I.R.S. Employer Identification No.) 110 S.E. 6TH STREET FORT LAUDERDALE, FLORIDA 33301 (Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (954) 769-6000 Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, Par Value $.01 Per Share The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 24, 1999, the registrant had 453,764,032 shares of Common Stock outstanding and, at such date, the aggregate market value of the shares of Common Stock held by non-affiliates of the registrant was approximately $4,983,642,485. DOCUMENTS INCORPORATED BY REFERENCE Part III Portions of the Registrant's Proxy Statement relative to the 1999 Annual Meeting of Stockholders. Part IV Portions of previously filed reports and registration statements. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INDEX TO FORM 10-K
PAGE NUMBER ----------- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 15 Item 3. Legal and Administrative Proceedings........................ 24 Item 4. Submission of Matters to a Vote of Security Holders......... 24 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters......................................... 25 Item 6. Selected Financial Data..................................... 26 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 27 Item 8. Financial Statements and Supplementary Data................. 41 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 70 PART III Item 10. Directors and Executive Officers of the Registrant.......... 71 Item 11. Executive Compensation...................................... 71 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 71 Item 13. Certain Relationships and Related Transactions.............. 71 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................... 72
i 3 PART I ITEM 1. BUSINESS INTRODUCTION Republic Industries, Inc. (the "Company") is the largest automotive retailer in the United States and one of the country's leading providers of vehicle rental services. The Company owns approximately 380 franchised automotive dealerships in 20 states. The Company also owns 37 and franchises 8 AutoNation USA used vehicle megastores in 13 states. In addition, the Company owns National Car Rental System, Inc. ("National"), Alamo Rent-A-Car, Inc. ("Alamo") and CarTemps USA. The Company's automotive retail business consists of the sale, lease and financing of new and used vehicles and related automotive services and products. The Company's retail operations are organized into 10 regional districts which cover 28 major domestic markets. The Company owns and operates franchises granted by the manufacturers of 39 different brands of cars and light trucks. The Company's automotive rental business rents vehicles on a daily or weekly basis to leisure and business travelers principally from on-airport or near airport locations through National and Alamo and to local customers who need replacement vehicles from locations in suburban areas through CarTemps USA. The Company's automotive rental business operates in all 50 states in the United States, and in Canada, the Caribbean, Latin America, the Pacific, Australia, Europe, Africa and the Middle East. The Company was incorporated in Oklahoma in 1980 and reincorporated in Delaware in 1991. The Company's common stock, par value $.01 per share ("Common Stock"), is listed on the New York Stock Exchange ("NYSE") under the symbol "RII". For information concerning financial condition, results of operations, related financial data and business segment information, and regarding business combinations, see "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." For certain risk factors related to the Company's business, operations and financial performance, see "-- Risk Factors." RECENT EVENTS In May 1998, the Company announced its intention to separate its solid waste services business, Republic Services, Inc. ("RSG"), from the Company. The Company and RSG have entered into certain agreements providing for the separation and governing various interim and ongoing relationships between the companies. The Company also announced its intention to distribute its remaining shares of RSG's common stock as of the distribution date to the Company's stockholders in 1999, subject to conditions and consents. The distribution was contingent on the Company obtaining a private letter ruling from the Internal Revenue Service ("IRS") to the effect that, among other things, the distribution would qualify as a tax free distribution for federal income tax purposes under Section 355 of the Internal Revenue Code of 1986, as amended, in form and substance satisfactory to the Company. In July 1998, the Company filed its request for the private letter ruling with the IRS, and continued to process the request through February 1999 with the expectation of completing the distribution in mid-1999. In March 1999, the IRS advised the Company in writing that the IRS would not rule as requested. In light of the IRS action, the Company's Board of Directors decided in March 1999 not to make the distribution but to sell its remaining stock in RSG. Accordingly, the Company's solid waste services segment has been accounted for as discontinued operations. The operations of RSG primarily consist of the collection and disposal of non-hazardous solid waste. RSG is 63.9% owned by the Company and is a public company traded on the New York Stock Exchange. Information about RSG's business, including its business strategy and operations, is incorporated by reference to Item 1 of RSG's Annual Report on Form 10-K for the year ended December 31, 1998 as filed with the Securities and Exchange Commission (Commission File No. 1-14267). 1 4 BUSINESS STRATEGY The Company's business strategy is to improve stockholder value by enhancing its market share and earnings by (1) improving customer satisfaction, (2) building strong national brands, (3) broadening the Company's operations by making selective acquisitions of businesses and (4) continuing to integrate and consolidate operations in the Company's existing lines of business to maximize revenue and minimize costs. Although management believes that the Company can compete effectively in the automotive retail and rental businesses by obtaining business efficiencies, economies of scale and related costs savings, there can be no assurance that future results will improve as a result of any cost savings and efficiencies. For certain risks involved in the Company's business strategy, see "-- Risk Factors." AUTOMOTIVE RETAIL STRATEGY Even though the Company is the largest automotive retailer in the United States, its share of the total automotive retail industry is small. Accordingly, the Company's management believes that growth opportunities remain in the fragmented automotive retail markets, and expects that the Company's significant growth will continue for the foreseeable future. Three-Step Growth Model The Company's strategic model for building its automotive retail business follows a three-step plan: - Acquire the best franchised automotive dealerships in the nation. - Build these franchised dealerships into a national retail network. - Re-define the customer experience by changing the sales and service processes to better serve customers needs. Acquire the Best Franchised Dealerships. The Company has acquired many of the finest franchised automotive dealerships in some of the fastest-growing markets in the United States. The Company has sought out dealerships with well established reputations for quality service, competitive pricing and programs designed to improve customer convenience and satisfaction. The objective of the Company's acquisition strategy is to be the leading automotive retailer in every market in which it operates. Currently, the Company owns dealerships in 28 markets. The Company will continue making acquisitions in 1999, especially to build its presence in existing markets. Build a Retail Network. In 1998 the Company progressed to the second level of its strategic model, building a strong retail network. The Company has organized its franchised automotive dealerships and AutoNation USA megastores into districts, and market clusters within these districts. The Company's 10 automotive retail districts are organized to leverage the strengths of the franchised dealerships and AutoNation USA megastores. The Company is now managing the combined resources of each district to reduce costs, become the low-price provider and build market share. The district structure leverages economies of scale in advertising, inventory sharing, cross-selling and other retail functions. The district structure also supports the dealerships and places the day-to-day decision-making in the local market, closer to the customer. The district structure also provides opportunities for the Company's dealerships to share best practices. The Company's automotive dealerships are sharing people, vehicle and parts inventories, service and collision assignments, and administrative operations. In this highly competitive business, the Company intends to be the low-price provider -- delivering every product and service our customers require at the lowest possible price. The Company is also finding new ways to attract and retain customers as the Company's network expands. During 1998, the Company opened nine AutoNation USA megastores and acquired Driver's Mart Worldwide, Inc., the franchisor of eight Driver's Mart used vehicle locations which were subsequently re-branded AutoNation USA. The total number of megastores at the end of 1998 was 42. Three more megastores were opened in 1999, bringing the total to 45 locations in 13 states. The Company does not plan to open any 2 5 additional AutoNation USA megastores in 1999. During 1999 a number of the megastore sites will be re-configured to add franchised automotive dealerships. These franchises will create new profit centers and should drive more traffic to the megastores. Re-Define the Customer Experience. Each of the Company's districts is focused on building a retail network of new and used vehicle stores, increasing market share, revenue and earnings and delivering superior customer satisfaction. In the Denver district, the Company is also focused on the third part of the strategy -- redefining the customer experience. In December 1998, the Company launched the "Mile High Project" and converted all of its franchised automotive dealerships in Denver into a single network co-branded "AutoNation USA." The Denver stores feature common sales, service and operating practices including, a one-price, no-haggle policy which emphasizes customer service and owner retention initiatives. The Company's stores also offer a guarantee on certain repair work for twelve months or 12,000 miles. Other innovations include touch-screen kiosks that allow customers to browse Denver-wide inventories, appraisals for trade-ins that are valid at all Denver locations, a menu finance and insurance selling system and a three-day, 150-mile refund policy on all vehicles. Customer reaction to date has been positive. The Company anticipates that its unique and extensive network of franchised automotive dealerships and AutoNation USA megastores will provide consumers with access to benefits not available elsewhere. The ownership and operation of numerous franchised automotive dealerships and AutoNation USA megastores within each district permit the Company to sell to customers many brands and models of vehicles from the vast inventory within the district. The large number of stores within each district also permit the Company to capture the warranty, service and parts needs of consumers who purchase many brands and models of vehicles, and to offer local/replacement vehicle rental service to customers through CarTemps USA at many of the Company's larger dealerships and AutoNation USA megastores when vehicles are being serviced or repaired. The Company's goal is to establish AutoNation as a brand which consumers identify with trust, innovation, value and service. The Company also believes that its programs and benefits will result in higher customer satisfaction ratings. These programs and benefits will continue to improve as the Company implements the best dealer practices in its retail network. Finally, the Company will be able to accumulate a unique customer database to further identify and meet consumer needs. E-Commerce Strategy In 1998 the Company established websites for each of the Company's franchised automotive dealerships and AutoNation USA megastores. The Company began selling vehicles on-line via the internet in the fourth quarter of 1998. The Company has developed an e-commerce sales force of specially trained internet sales consultants based at the Company's franchised automotive dealerships and AutoNation USA megastores. These consultants use "Compass," a proprietary software program to track and service internet sales leads. Compass, which can alert an internet sales consultant as soon as an inquiry is received, can be accessed wherever internet service is available -- 24 hours a day, seven days a week. That allows rapid response times to e-commerce inquiries. Unlike internet lead generators, however, the Company owns the lead from the moment the prospective buyer clicks onto one of its sites until the moment they purchase the vehicle. The Company has also developed relationships with most third party lead generators. AUTOMOTIVE RENTAL STRATEGY In its automotive rental business, the Company's goal is to become a fully integrated and leading provider of services to consumers in the business and leisure travel markets and to continue to expand its presence in the local/replacement vehicle rental market. The Company intends to maximize the benefits of the brand equity that both National and Alamo enjoy while realizing significant economies of scale through the consolidation of overlapping administrative functions. A "two brands, supported by a common organization" business strategy will be used to leverage the strengths of each company. The Company formed the North American Rental Group in 1998 to manage National and Alamo and reduce operating costs, share fleet and build a state-of-the-art operating and revenue management system. In 1998, the Company installed this system, called Global Odyssey, at each National Car Rental location. This 3 6 system will be installed at each Alamo location and once the installation is completed, the two companies will share a common information technology platform facilitating more sophisticated inventory management and fleet sharing. The Company's local/replacement vehicle rental business was rebranded under the CarTemps USA brand name in 1998. The Company expects to have a total of 500 CarTemps USA locations in the United States by the end of 1999. The Company also expects to have CarTemps USA locations at most of the Company's larger franchised automotive dealerships and AutoNation USA megastores. OPERATIONS The Company's operations are organized primarily into two general industry segments, automotive retail and automotive rental. The Company has classified its solid waste services segment as discontinued operations. See "Business-Recent Events." AUTOMOTIVE RETAIL The Company owns approximately 380 franchised automotive dealerships in 20 states. The Company also owns 37 and franchises 8 AutoNation USA megastores in 13 states. The new vehicle franchises include practically all brands of cars and light trucks. The Company has established 10 automotive retail districts to operate its automotive retail businesses, including its franchised automotive dealerships and its AutoNation USA megastores. Each automotive retail district is designed to serve local retail consumers in a defined geographic area and function as a distinct business unit under one local management team. The number of stores in each district vary. Each of the Company's franchised automotive dealerships offers brand name new and used vehicles. Customers generally have a choice of purchasing or leasing any vehicle. In recent years the number of leasing transactions has increased due to the rising prices of new vehicles and the support of vehicle manufacturers. Through the use of captive leasing companies, manufacturers have supported the residual values of leased vehicles which has lowered the monthly payments on leased vehicles relative to purchased vehicles that are financed. Each of the Company's franchised automotive dealerships also offers aftermarket products such as cellular phones, upgraded sound systems, alarms, extended service contracts and other finance and insurance products. Almost all of the Company's franchised automotive dealerships have service facilities which provide a wide range of vehicle maintenance and repair services. The Company provides financial products and services to the Company's customers through its automotive finance subsidiary, AutoNation Financial Services, and through third parties, including the vehicle manufacturers' finance companies. Having its own in-house finance company allows the Company to maintain the quality and consistency of financial products offered throughout its network of automotive retailers. The range of AutoNation Financial Services products includes retail and lease financing, secondary customer referral programs, vehicle protection and maintenance programs and insurance products. New vehicles are acquired directly from the manufacturers and the mix of vehicles is generally determined by the manufacturers based on several factors including the size and location of the dealership and the dealer's sales record and customer satisfaction rating. Used vehicles are generally acquired from customer trade-ins and off-lease vehicles. The Company has several other sources of supply for used vehicles, including purchasing from automotive dealerships and, to a lesser extent, auctions and other sources. At the auctions, the Company purchases used vehicles through competitive bidding. Generally, used vehicles acquired for retail sale at its franchised automotive dealerships and AutoNation USA megastores are reconditioned by the Company. The Company uses the service facilities at its AutoNation USA megastores and franchised automotive dealerships to recondition used vehicles. Each of the Company's automotive dealerships operates under a franchise agreement with a vehicle manufacturer. The franchise agreements generally grant the franchised automotive dealership a non-exclusive right to sell the manufacturer's brand of vehicles and offer related parts and service within a specified market area. Generally, a manufacturer will retain the discretion to allocate the mix of vehicles distributed to its 4 7 franchised dealerships within a given market area. The franchise agreements also grant the dealerships the right to use the manufacturer's trade names in connection with the sale of its vehicles. The franchise agreements generally impose operational requirements and restrictions on the automotive dealerships relating to inventory levels, working capital requirements, showroom, service facilities and signage, personnel and monthly financial reporting, among other things. The franchise agreements generally provide for termination of the agreement by the manufacturer or non-renewal for a variety of causes including changes of ownership without prior approval, certain bankruptcy related events, the death, disability or conviction of the dealer principal, the failure to maintain certain customer satisfaction ratings, or any material breach of the franchise agreement. The Company has entered into framework agreements with most major vehicle manufacturers. These agreements generally contain provisions relating to the Company's acquisition, ownership structure, management and operation of automotive dealerships franchised by such manufacturers. Such agreements also set limits on the number of dealerships which the Company may acquire of the particular manufacturer, based upon either retail sales or a fixed number of dealerships. From time to time, the Company will approach these limits with respect to a few manufacturers as it continues to expand and acquire franchised automotive dealership groups. In addition, certain of the agreements provide that the manufacturer will have the right to acquire, for fair market value, any of a manufacturer's franchised automotive dealerships operated by the Company under certain circumstances, in the event of a change in control of the Company, the acquisition of 20% or more of the voting stock of the Company by another manufacturer or certain other extraordinary corporate transactions such as a merger or sale of all of the Company's assets. There are also various federal and state laws that govern the relationships between franchised automotive dealerships and vehicle manufacturers. These include statutes that prohibit manufacturers from terminating or failing to renew a franchise without good cause and that prohibit manufacturers from unreasonably withholding approval of a proposed change in ownership. Under such statutes, a vehicle manufacturer may disapprove of a proposed change in ownership only for certain enumerated reasons involving such matters as the moral character, financial capability and/or business experience of the proposed transferee. AUTOMOTIVE RENTAL The automotive rental industry is composed of three principal markets: the market for business travelers, the market for leisure travelers and the market for local replacement vehicles. In the business and leisure markets, the Company rents vehicles principally from on-airport or near-airport locations. In the local/replacement market, the Company rents vehicles primarily to individuals who have temporarily lost the use of their vehicles through accident, theft, breakdown or other occurrences. The local/replacement market rents principally from locations in suburban areas. National principally targets the general use market for business travelers. National's vehicle rental business operates in all 50 states in the United States and in Canada, the Caribbean, Latin America, the Pacific, Australia, Europe, Africa and the Middle East. National serves its customers in Japan and other parts of the Pacific through a marketing affiliation with Nippon Rent-A-Car. Prior to February 1, 1998, National served its customers in Europe, Africa and the Middle East through a marketing affiliation with Europcar/Interrent. Beginning February 1, 1998, as a result of the Company's acquisition of EuroDollar plc in the fourth quarter of 1997, National began to operate, and in some cases license, locations in Europe, Africa and the Middle East. EuroDollar operations in Europe were rebranded as National operations in 1998. Alamo principally targets the general use market for leisure travelers. Alamo's vehicle rental business operates in 35 states in the United States and in Canada, Mexico and Europe. As a result of the Company's acquisition of EuroDollar plc, Alamo is being co-branded with National at numerous locations through Europe, Africa and the Middle East. In the United States, all of Alamo's rental locations and most of National's rental locations in large markets are corporate-owned. National licenses a number of its locations to third party operators, generally in smaller domestic markets and in many foreign markets. Alamo licenses a number of its international locations to third party operators. All of the CarTemps USA locations are corporate-owned. 5 8 General Motors has been the principal supplier of rental vehicles to National and Alamo for many years. In the 1998 model year, vehicles manufactured by General Motors made up approximately 70% of National and Alamo's domestic rental fleet purchases. A large percentage of the Company's fleet purchases are subject to manufacturer repurchase programs. National and Alamo purchased approximately 94% of their combined U.S. rental fleet during model year 1997 and 91% during 1998 under repurchase programs pursuant to which either the manufacturer is obligated to repurchase vehicles within designated periods of time or the manufacturer has guaranteed that the vehicles will not depreciate more than a specified amount compared to actual auction prices. Approximately 80% of the Company's combined vehicle rental fleet in 1999 will be acquired under repurchase programs. The Company may, at its option, require the manufacturers to repurchase vehicles under the repurchase programs at any time during allowable periods. If vehicles subject to repurchase programs are returned earlier than originally anticipated, the depreciation expense is usually increased for the period such vehicles were in service. Vehicle depreciation is the single largest cost component of the Company's automotive rental operations, and it is materially affected by vehicle manufacturers' repurchase programs. Under the repurchase programs with General Motors, the rental fleets of National and Alamo must consist of specified minimum percentages of General Motors vehicles. Through model year 2000, National and Alamo must maintain at least 51% of General Motors vehicles in order to be eligible for certain incentives under the repurchase programs. In return, General Motors has agreed to make available a specified minimum number of vehicles each model year. Purchases made outside of repurchase programs are made from a number of sources, including private and public auctions, wholesalers, automotive dealerships and vehicle manufacturers. Vehicles that are not subject to repurchase programs are disposed of through private and public auctions and resales to wholesalers and automotive dealerships, among other methods. Concession fees for airport locations are generally based on a percentage of total revenue (as determined by each airport), subject to a minimum guaranteed amount. Concessions are typically awarded by airport authorities every three to five years based upon competitive bids. At near-airport locations, airport authorities generally charge permit fees for the privilege of customer pick-up and drop-off at terminals by courtesy vans or buses. At almost all airports at which they operate, National and Alamo are two of several vehicle rental concessionaires. The Company operates five reservations centers used primarily for bookings by business and leisure travelers. The systems reroute calls to less utilized centers so that customers get the best and quickest service. In addition, the National and Alamo systems are linked so that if one is sold out the customer will be rerouted to the other for service. A large percentage of National's and Alamo's bookings are also made through an automated global distribution system as commercial renters typically book reservations through travel agencies. In addition to basic vehicle rental charges, the sale of rental related products generates a significant, but declining, percentage of revenue. Such rental related products include collision damage waivers, additional liability protection, personal accident and personal effects protection, other travel related insurance coverages and travel related products such as vehicle upgrades, gasoline services, inter-city drop-off charges, and miscellaneous items such as child restraint seats, ski racks, cellular phones and additional driver fees. SALES AND MARKETING The Company believes in providing quality services which will enable it to maintain high levels of satisfaction from its customers in all business segments. The Company derives its business from a broad customer base which the Company believes will enable it to experience stable growth. Marketing efforts focus on continuing and increasing business with existing customers as well as attracting new customers. Automotive Retail. With respect to the Company's automotive retail operations, the Company engages in mass marketing and advertising in various media to attract a broad retail customer base in the markets in which it operates and to make AutoNation USA a nationally-recognized brand. 6 9 The Company's marketing and advertising activities may vary among its automotive retail districts and advertising purchases are determined at the local level in each district. The Company advertises primarily through newspapers, radio and television in each district's local market. The Company expects to continue to realize cost savings and efficiencies with respect to advertising expenses, due to volume discounts and other concessions as it clusters multiple franchised automotive dealerships and AutoNation USA megastores within particular markets. Automotive Rental. The Company's sales and marketing strategy for National and Alamo is to continue to promote their distinctive brands through a variety of media, relationships with airlines, hotels and others in the travel industry. National principally targets business travelers who are typically covered under corporate travel contracts. National's objective is to be the global vehicle rental service of choice by developing time-saving options which enhance customer loyalty and satisfaction and to be the value leader in its market segment. Alamo principally targets leisure and other cost-conscious travelers. Alamo's objective is to be the low-price provider of vehicle rental service and to increase customer satisfaction and retention by developing innovative products and services which fit its customers' unique needs. CarTemps USA, the Company's local/replacement vehicle rental brand, generates the majority of its revenue from insurance replacement customers, with the remainder coming from dealership referrals and local body shops. CUSTOMERS As of December 31, 1998, no one customer individually comprised more than 10% of the total revenue of any business segment of the Company. REGULATIONS Automotive Regulations The Company's automotive retail operations are subject to various federal, state and local laws and regulations including those relating to taxing and licensing of vehicles, consumer protection, finance, insurance, advertising, currency controls, used vehicle sales, zoning and land use, environmental and labor matters. The Company's automotive rental operations generally are subject to similar laws and regulations. In addition, approximately 40 states have considered legislation affecting the sale of collision damage waiver products. To date, 18 of those states have enacted legislation requiring the disclosure to each customer at the time of rental that damage to the rental vehicle may be covered by the customer's personal automobile insurance and that purchase of a collision damage waiver may not be necessary. In addition, adoption of national or state legislation limiting the sale, or capping the rates, of collision damage waiver products could further restrict sales of this product and additional limitations of potential customer liability would increase the cost of the Company's vehicle rental operations. During the past two years, however, one state enacted legislation to rescind the price control of collision damage waiver (also known as loss damage waiver) and another state enacted legislation to partially rescind renter immunity from liability and permitted the sale of collision damage waivers/loss damage waivers. As a result of private and past governmental regulatory legal proceedings in certain states regarding the sale of optional service items at the rental counter, including liability insurance, personal accident coverage, personal effects coverage and other travel related coverages, the vehicle rental industry has requested regulatory agencies and legislative bodies to provide affirmative authorization for the sale of these services and products. To date, several states have adopted clarifying legislation to either fully exempt the industry from licensing requirements or have enacted special or limited licenses to specifically cover the sale of insurance products incidental to the vehicle rental. However, the outcome of the legal proceedings and the initiation of any future governmental regulatory proceeding could negatively impact the revenue generated from the sale of these services and products. The Company's automotive rental operations are also subject to various federal, state and local consumer protection laws and regulations including those relating to advertising and disclosure of charges to customers. 7 10 The National Association of Attorneys General has promulgated suggested guidelines for vehicle rental advertisements. Alamo and two other industry participants are subject to substantially similar consent decrees resulting from Federal Trade Commission inquiries initiated in 1989, which consent decrees require certain disclosures to customers at each stage of the rental transaction, including in advertisements, of charges that are mandatory and not otherwise reasonably avoidable. The rental car industry has sought and obtained legislation in numerous states which expressly permits the separate itemization of vehicle registration fees, airport facility charges and transportation surcharges. The Company's automotive retail and rental operations are also subject to the National Traffic and Motor Vehicle Safety Act, Federal Motor Vehicle Safety Standards promulgated by the United States Department of Transportation and various state motor vehicle regulatory agencies. Environmental Regulations The operation of the Company's businesses is subject to a variety of federal, state and local requirements which regulate health, safety, the environment, zoning and land use. Each state in which the Company operates has its own laws and regulations governing the management of hazardous materials, water and air emissions, solid waste disposal, and, in most cases, the release and cleanup of regulated substances, and liability for such matters. In addition, permits may be required for certain activities at the Company's facilities, and these permits are subject to renewal, modification, and revocation. Governmental authorities can enforce compliance with these regulatory requirements, and may seek to obtain injunctions or impose fines and other sanctions, including criminal penalties, for alleged violations. These regulatory and enforcement programs are administered by the United States Environmental Protection Agency ("EPA") and various other federal, state and local environmental, health and safety agencies and authorities. The Company strives to conduct its operations in compliance with applicable laws and regulations. The Company's automotive businesses involve the use, handling, storage, and/or contracting for recycling or disposal of materials such as used motor oil and filters, transmission fluids, antifreeze, refrigerants, paints, thinners, batteries, cleaning solvents, lubricants, degreasing agents and fuel. In response to the trend in many states toward waste reduction and recycling programs, the Company is reviewing additional opportunities to implement different applications (for example, air brush painting), and to use alternative products, thereby reducing waste generation and related disposal or recycling costs. Water quality protection programs under the Federal Water Pollution Control Act of 1972, as amended (the "Clean Water Act") and other federal laws such as the Safe Drinking Water Act (as amended) affect certain Company operations. Similarly, certain operations of the Company are subject to the federal Clean Air Act, and related state and local laws regarding air emissions. The Occupational Safety and Health Act of 1970, as amended ("OSHA"), authorizes the Occupational Safety and Health Administration of the U.S. Department of Labor to promulgate occupational safety and health standards. Various standards, including those providing employees information and training to manage hazardous materials, apply to the Company's business operations. The costs of complying with applicable water and air quality programs, and OSHA regulations are not expected to have a material adverse effect on the Company. The Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976, as amended (collectively, "RCRA"), and the related regulations establish a frame-work for regulating the handling, transportation, treatment and disposal of hazardous and non-hazardous solid wastes. In addition, a subchapter of RCRA regulates underground storage tanks ("USTs"). Many of the Company's businesses operate USTs, which are used primarily to store petroleum-based products. RCRA and various federal, state and local laws and regulations mandate periodic testing, upgrading, closure and/or removal of USTs and, in the event of leaks from USTs, require clean-up of the affected groundwater and soils. The Company has a number of USTs which have been, or are being upgraded, removed or closed in place. If USTs owned or operated by the Company leak, and such leakage migrates onto the property of others, the Company could be subject to liability for response costs, and other damages to third parties. Compliance with regulations related to USTs has not had, and is not expected to have, a material adverse effect on the Company. 8 11 The Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA"), provides, among other things, for the cleanup of sites from which there is a release or threatened release of a hazardous substance into the environment. CERCLA imposes strict, retroactive, joint and several liability for the costs of cleanup and for damages to natural resources upon past and current owners and operators of the site, as well as parties who transported or arranged for disposal. Under CERCLA, EPA may clean up sites where hazardous substances were deposited. Alternatively, the agency may order persons potentially responsible for the cleanup of the hazardous substances to perform the clean-up, or offer them an opportunity to do so voluntarily. The Company could be liable under CERCLA for the cost of cleaning up regulated substances deposited at certain sites and for damages to nearby natural resources. Certain entities acquired by the Company were, or have been, designated as potentially responsible parties at CERCLA sites, typically as a result of disposal or recycling activities. The Company generally has indemnification rights against the former entity owners, and certain former owners have been paying remedial costs for CERCLA cleanups. COMPETITION The Company operates in highly competitive industries. Entry into either of the Company's lines of business and the ability to operate profitably in such industries requires substantial amounts of capital and managerial experience. Competition in the Automotive Retail Industry. According to the National Automotive Dealers Association, Automotive News and reports of various financial analysts, the automotive retail industry is served by approximately 22,000 franchised automotive dealerships, approximately 56,000 independent used vehicle dealers, and individual consumers who sell used vehicles in casual private transactions primarily through classified ads and by word of mouth. In addition to the Company, several other companies attempting to establish national automotive retail chains with significant used vehicle operations have conducted initial public offerings of their securities, with proceeds generally targeted to be used for acquisitions of automotive dealerships. The Company believes that the principal competitive factors in the automotive retail business are price, service, location, availability of vehicles and warranties. Competition in the Automotive Rental Industry. The automotive rental industry is characterized by intense price and service competition. In any given location, the Company's vehicle rental business may encounter competition from national, regional and local vehicle rental companies. The Company's main domestic competitors in the business and leisure travel markets are Avis, Inc., Budget Rent A Car Corporation, The Hertz Corporation, and, in certain locations, Dollar-Thrifty Rent A Car and, in the local/replacement vehicle rental market, those companies and Enterprise Rent-A-Car Company. In Europe and other foreign markets, the Company's vehicle rental business competes with the companies listed above, as well as with their international affiliates and licensees and other national and local vehicle rental companies. At times, the major vehicle rental companies have been adversely affected by industry-wide price pressures, and the Company's vehicle rental business has, on such occasions, priced its product in response to such pressures. Moreover, at times when the vehicle rental industry has experienced vehicle oversupply, there has been intensified competitive pressure. This oversupply has had a negative impact on the industry's rental rates. The Company's vehicle rental business has taken steps to address its fixed cost structure to improve its overall competitive position; however, future oversupply or other factors affecting competition could still adversely affect the Company's business, financial condition and future prospects. LIABILITY INSURANCE AND BONDING General The nature of the Company's automotive businesses exposes it to the risk of liabilities arising out of its operations. Such potential liabilities could involve, for example, claims of employees, customers or third parties for personal injury or property damage occurring in the course of the Company's operations; claims for remediation costs, personal injury, property damage, and damage to the environment in cases where the Company may be held responsible for the escape of harmful materials; or claims alleging negligence or 9 12 professional errors and omissions in the planning or performance of work. The Company could also be subject to fines and civil and criminal penalties in connection with alleged violations of regulatory requirements. The nature of the Company's automotive retail business exposes it to the risk of liability for damages arising out of its operations. Additionally, this industry segment has substantial risk of property loss due to the significant concentration of property values at the Company's automotive retail locations. Accordingly, the Company has purchased liability and property insurance as discussed below. The nature of the Company's automobile rental business exposes it to significant risk of liability for damages arising primarily out of accidents involving automobiles rented from the Company's vehicle rental fleet. Some states impose vicarious liability on the Company which increases the Company's risk. The Company manages its exposure through a combination of qualified self insurance and risk transfer to insurance companies, subject to the risk levels discussed below, which are rated as financially sound by insurance rating agencies. The Company carries substantial limits of liability coverage, but there is no assurance that catastrophic losses might not exceed such limits. The Company either purchases commercial insurance or is a qualified self insurer for automobile liability, general liability, workers compensation and employer's liability claims. The Company retains up to $1 million of risk per claim, plus claims handling expense under its various liability insurance programs, primarily relating to claims arising from the Company's automotive rental operations. Umbrella liability insurance is purchased to provide insurance in excess of the primary insurance policy and/or retained losses. Additionally, the Company purchases property insurance subject to a $100,000 loss retention. The level of risk retained by the Company may change in the future as insurance market conditions or other factors affecting the economics of the Company's insurance purchasing change. Although the Company strives to operate safely and prudently and has, subject to certain limitations and exclusions, substantial liability insurance, no assurance can be given that the Company will not be exposed to uninsured or underinsured liabilities which could have a material adverse effect on its financial condition. Provisions for retained or self insured claims are made by charges to expense based upon periodic evaluations of the estimated ultimate liabilities on reported and unreported claims. The Company's collateral requirements are set by insurance companies which underwrite the Company's insurance programs. The Company's collateral requirements may change from time to time, based on, among other things, the Company's claims experience. EMPLOYEES As of December 31, 1998, the Company employed approximately 42,000 full time employees, approximately 2,400 of whom were covered by collective bargaining agreements. The Company believes that it has good relations with its employees. SEASONALITY The Company's automotive retail operations generally experience higher volumes of vehicle sales in the second and third quarters of each year due in part to consumer buying trends and the introduction of new vehicle models. The Company's automotive rental operations and particularly the leisure travel segment is highly seasonal. In these operations, the third quarter, which includes the peak summer travel months, has historically been the strongest quarter of the year. During the peak season, the Company increases its vehicle rental fleet and workforce to accommodate increased rental activity. As a result, any occurrence that disrupts travel patterns during the summer period could have a material adverse effect. The first and fourth quarters for the Company's automotive rental operations are generally the weakest, when there is limited leisure travel and a greater potential for adverse weather conditions. Many of the operating expenses such as rent, general insurance and administrative personnel are fixed and cannot be reduced during periods of decreased vehicle rental demand. 10 13 TRADEMARKS The Company, through its automotive retail operations, owns a number of registered service marks and trademarks and also has a number of applications pending to register, among other marks, AUTONATION(SM), AUTONATION USA(SM), IT'S ABOUT LOWER PRICES, IT'S ABOUT HIGHER STANDARDS, IT'S ABOUT TIME(SM) and THE BETTER WAY TO BUY A CAR(SM). Pursuant to agreements with vehicle manufacturers, the Company has the right to use and display manufacturers' trademarks, logos and designs at its automotive dealerships and in its advertising and promotional materials, subject to certain restrictions. The Company, through its automotive rental operations, owns a number of registered trademarks and service marks, including ALAMO(R), ALAMO RENT A CAR(R), NATIONAL CAR RENTAL(R), EMERALD CLUB(R) and CARTEMPS USA(SM), and also has a number of applications pending to register, among other marks, JUST ASK ALAMO(SM), DRIVE HAPPY(SM) and TRAVEL SMART(SM). The current registrations of the Company's service marks and trademarks in the United States and foreign countries are effective for varying periods of time, and may be renewed periodically provided that the registered owner complies with all applicable laws. For a description of certain challenges to the Company's marks, See "ITEM 3. LEGAL AND ADMINISTRATIVE PROCEEDINGS." RISK FACTORS The businesses, financial condition, results of operations and future prospects of the Company, 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. Certain statements and information contained throughout this report on Form 10-K constitute "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements generally can be identified by the use of terms such as "may," "will," "should," "expect," "anticipate," "believe," "estimate" or "continue" or variations thereof, or the use of such terms in the negative, or words of similar import in the context presented. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements, expressed or implied, by such forward-looking statements. Such risks, uncertainties and other factors include, among other things: Risks of Rapid Expansion in Automotive Retail Business. The Company has rapidly expanded and anticipates that it will continue to expand its operations in automotive retail and related businesses through acquisitions of franchised automotive dealerships. The success of the Company's expansion plans in the automotive retail industry is dependent on a number of factors including, but not limited to, economic conditions, competitive environment, adequate capital, supply of new and used vehicles, consumer acceptance of the Company's one-price, no-haggle automotive retail process, vehicle manufacturers' approval and control over dealership franchises, and the building of brand recognition. There can be no assurance that the Company will be successful in the automotive retail business. Competition in the Automotive Retail Industry. The Company's automotive retail business operates in a highly competitive environment. The Company's competition includes franchised automotive dealerships selling the same or similar makes of new and used vehicles offered by the Company in the same markets as the Company and sometimes at lower prices than those of the Company. In particular markets, these dealer competitors may be larger and more established than the Company. Other competitors include franchised automotive dealerships selling other brands of vehicles, private market buyers and sellers of used vehicles, used vehicle dealers, service center chains and independent service and repair shops. The Company faces increasing competition from non-traditional outlets such as used-car superstores, internet lead generators and others. Some of these competitors use sales techniques similar to the Company's, including one price shopping and generating sales leads through the internet. One-price, no-haggle sales methods are also being promoted for new vehicles by various dealerships. In addition, Ford Motor Company has directly entered several retail markets by acquiring several of its franchisees and other manufacturers may directly enter the retail market in 11 14 the future, which could have a material adverse effect on the Company. The increased popularity of short-term vehicle leasing also has resulted, as these leases expire, in a large increase in the number of late model vehicles available in the market, which puts added pressure on margins. Also, incentives, such as discounts and rebates, offered by several manufacturers have effectively lowered the price of new vehicles relative to used vehicles in recent months, which has led to slower than expected used vehicle sales and downward pressure on used vehicle margins. As the Company seeks to acquire dealerships in new markets, it may face increasingly significant competition (including from other large dealer groups and dealer groups that have publicly-traded equity) as it strives to gain market share through acquisitions or otherwise. The Company's franchise agreements generally do not give the Company the exclusive right to sell a manufacturer's product within a given geographic area. The Company could be materially adversely affected if any of its manufacturers award franchises to others in the same markets where the Company is operating. A similar adverse effect could occur if existing competing franchised dealers increase their market share in the Company's markets. The Company's gross margin may decline over time as it expands into markets where it does not have a leading position. These and other competitive pressures could materially adversely affect the Company's results of operations. Dependence On and Restrictions Imposed by Vehicle Manufacturers. In connection with the Company's acquisition of franchised automotive dealerships, prior approval of the applicable vehicle manufacturer may be required under the franchise agreement of each franchised automotive dealership to be acquired, subject to state laws protecting a franchisee's right to transfer such franchise. Although the Company has established framework agreements with most major manufacturers to facilitate the acquisition of dealerships operating their franchises, no assurance can be given that these manufacturers or any other manufacturers will approve any particular franchised automotive dealership acquisition by the Company or will not otherwise seek to impose restrictions on the Company's future acquisitions, operations or capital structure as a condition to granting such approval. Moreover, with respect to several leading brands of vehicles, the Company and the manufacturers have negotiated limits on the number of dealerships which the Company may acquire based upon either retail sales or a fixed number of dealerships. The Company will approach these limits as it continues to expand and may divest some dealerships from time to time to provide more options under these limits. No assurance can be given that the Company's growth strategy will be unaffected by these limits. In addition, once the Company has acquired a franchised automotive dealership, the Company must operate the dealership in accordance with the applicable franchise agreement and in some cases, a framework agreement. Such agreements generally provide the manufacturers with considerable influence over the operations of the dealership and generally provide for termination of the franchise agreement for a variety of causes. Manufacturers may attempt to impose restrictions which could limit the Company's ability to implement some of its strategic initiatives relating to the operation and marketing of its franchised automotive dealerships. Finally, the success of any franchised automotive dealership is dependent, to a large extent, on the success of the vehicle manufacturer. Therefore, the success of the Company's franchised automotive dealerships is dependent on the financial condition, management, marketing, production and distribution capabilities of the vehicle manufacturers of which the Company holds franchises. Any event that may have a material adverse effect on a vehicle manufacturer, such as labor strikes or adverse publicity, may have a material adverse effect on the Company's business, financial condition and future prospects. Risks of Unfavorable Economic Conditions. The Company's revenue and results from operations may be adversely affected by periods of adverse economic conditions. The Company's new and used vehicle sales and the Company's automotive rental business, particularly in the leisure market, could be significantly affected by unfavorable economic conditions. Risks of Acquisition Strategy and Uncertainties In Integrating Operations and Achieving Cost Savings. The Company has had an aggressive acquisition strategy that has involved, and may continue to involve, the acquisition of a significant number of companies. There can be no assurance, however, that acquisitions will continue to occur at the same pace or be available to the Company on favorable terms, if at all. Many of the companies that the Company recently has acquired and companies that the Company may acquire, are large enterprises with operations in different markets. The success of any business combination is in part dependent 12 15 on management's ability following the transaction to consolidate operations, integrate departments, systems and procedures and thereby obtain business efficiencies, economies of scale and related cost savings. The challenges posed to the Company's management may be particularly significant because integrating the recently acquired companies must be addressed contemporaneously. There can be no assurance that future consolidated results will improve as a result of cost savings and efficiencies from any such acquisitions or proposed acquisitions, or as to the timing or extent to which cost savings and efficiencies will be achieved. Need for Substantial Additional Capital. Additional capital will be necessary to continue the Company's expansion in its capital intensive lines of business and to fully capitalize on acquisition and expansion opportunities that may become available to the Company. There can be no assurance that sufficient financing will be available on a timely basis, if at all, or on terms acceptable to the Company. In the event that financing is not available or is not available in the amounts or on terms acceptable to the Company, the implementation of the Company's business strategy could be impeded and the Company's ability to react to changes in the industries in which it does business could be limited. This could have a material adverse effect on the Company's business, financial condition and future prospects. Interest Rates and Restrictive Covenants. A substantial portion of the Company's outstanding indebtedness is at floating interest rates. At times, the Company uses interest rate swaps to manage the risk of interest rate fluctuations. However, a substantial increase in interest rates could adversely affect the Company's cost of indebtedness for borrowed money. In addition, most of the Company's debt instruments contain covenants establishing certain financial and operating restrictions. A failure to comply with any covenant or any obligation contained in any credit agreement could result in an event of default which could accelerate debt under certain other credit agreements. Competition in the Automotive Rental Industry. The Company's automotive rental businesses operate in a highly competitive environment. Most of the major domestic automotive rental companies were formerly owned and/or operated by domestic vehicle manufacturers, and within the past year or two, all have become independent, in whole or in part, and have publicly owned securities. The recent changes in the ownership of the major competitors in the domestic industry is further intensifying competition, as the companies are being operated with a view toward maximizing market share, revenue and net income, as opposed to providing the manufacturers with a means to absorb excess production capacity. The Company believes that price is one of the primary competitive factors in the automotive rental industry, particularly in the leisure market. From time to time, the Company's competitors, some of which have access to substantial capital, may attempt to compete aggressively by lowering rental prices. To the extent the Company matches competitors' price reductions to retain market share, the Company's results of operations could be adversely effected. To the extent that the Company does not match competitors' price reductions, the Company may lose market share and corporate accounts, which also could adversely affect the Company's results of operations. Cost of Vehicle Rental Fleet. If vehicle manufacturers reduce the number of vehicles available to vehicle rental companies through repurchase programs, eliminate repurchase programs or increase vehicle costs, there can be no assurance that the Company will be able to control its rental fleet costs or selection, or to pass on any increases in vehicle cost to rental customers. This could have a material adverse effect on the Company's business, financial condition and future prospects. Dependence on Vehicle Manufacturer's Credit. The Company's automotive rental business depends upon debt financing for the purchase of revenue earning vehicles for the Company's vehicle rental fleet. Since a substantial portion of such financing is incurred in connection with major vehicle manufacturers' repurchase programs, a significant change in the financial conditions of the vehicle manufacturers, particularly General Motors, impairing their ability to repurchase vehicles or their investment grade rating could significantly affect the Company's ability to obtain such financing on as favorable terms. This could have a material adverse effect on the Company's business, financial condition and future prospects. Dependence on Principal Vehicle Rental Fleet Supplier. Given the volume of vehicles purchased from General Motors, shifting significant portions of the fleet purchases to other manufacturers would require significant lead time. As a result, if General Motors were unable to supply the Company with the planned 13 16 number and type of rental vehicles, it could have a material adverse effect on the Company's business, financial condition and future prospects. Regulation of Collision Damage Waivers and Other Vehicle Rental Related Products. Adoption of national or additional state legislation limiting or eliminating the sale or capping the rates of collision damage waivers could further restrict sales of this product. Also, legislation imposing additional limitations on potential customer liability or regulatory action involving the sale of other rental related products could increase the Company's costs or decrease the Company's revenue in its vehicle rental business. Loss of Airport Concessions. Certain vehicle rental competitors have on occasion made objections to various airport authorities that, because National and Alamo are commonly owned and share a number of back office functions, they should not both be allowed to bid for or maintain airport concession agreements in the same airport. No United States airport has accepted this position. Should an airport take this position, it could prevent either National or Alamo from doing business at that airport. This would most likely result in a decrease in the Company's revenue from its automotive rental operations. Seasonality; Dependence on Travel Industry and Fuel Supply. Any occurrence that disrupts travel patterns during the summer period could have a material adverse effect on the annual performance of the automotive rental segment. There can be no assurance that protracted periods of inclement weather, decrease in air travel or any other occurrences that disrupt travel patterns, disruption of fuel supplies or increases in fuel prices will not have a material adverse effect on the Company's businesses and financial condition. Environmental Regulation. It may be necessary to expend considerable time, effort and money to keep the Company's existing or acquired facilities in compliance with applicable federal, state and local requirements which regulate health, safety, environment, zoning and land use, and as to which there may not be adequate insurance coverages or reserves. If environmental laws become more stringent, the Company's environmental capital expenditures and costs for environmental compliance may increase in the future. In addition, due to the possibility of unanticipated occurrences or regulatory developments, the amounts and timing of future environmental expenditures could vary substantially from those currently anticipated. Risks of Legal Proceedings. The Company generally will continue to be involved in legal proceedings in the ordinary course of business. A significant judgment against the Company, the loss of a significant permit or license or the imposition of a significant fine could have a material adverse effect on the Company's business, financial condition and future prospects. The Company has been engaged in legal and administrative proceedings in several states arising out of certain vehicle manufacturers' attempts to limit the number and timing of the Company's acquisitions of franchised automotive dealerships. The Company is also currently a party to various other administrative and legal proceedings, particularly in its automotive rental business, which have arisen in the ordinary course of its business. See also "ITEM 3. LEGAL AND ADMINISTRATIVE PROCEEDINGS." No assurance can be given with respect to the outcome of these administrative and legal proceedings and the effect such outcomes may have on the Company. Risks Relating to the Year 2000. The Company uses computer software and related technologies throughout our business that are likely to be affected by the date change in the year 2000. The Company may not discover and remediate all potential problems with its systems in a timely manner. In addition, computer software and related technologies used by the Company's customers, service providers, vendors and suppliers are also likely to be affected by the year 2000 date change. Failure of any of these parties to properly process dates for the year 2000 and thereafter could result in customers for services provided and delays in our ability to conduct normal banking operations. See "ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000." Possible Depressing Effect of Future Sales of Common Stock. As of the date hereof, the Company has registered for sale, from time to time on a continuous basis under several shelf registration statements, by certain selling stockholders, an aggregate of approximately 345.2 million shares of Common Stock. Although many of these shares have been sold, future sales of such shares not yet sold, or the perception that such sales could occur, could adversely affect the market price of Common Stock. There can be no assurance as to when, and how many of, such shares will be sold and the effect such sales may have on the market price of Common Stock. In addition, the Company may continue to issue Common Stock in connection with certain of its acquisitions and in other transactions. Such securities may be subject to resale restrictions in accordance with 14 17 the Securities Act and the regulations promulgated thereunder. As such restrictions lapse or if such shares are registered for sale to the public, such securities may be sold to the public. To facilitate the issuance of shares of Common Stock in connection with acquisitions, since December 1996 the Company registered an additional 91 million shares of Common Stock pursuant to two acquisition shelf registration statements, under which an aggregate of approximately 54.7 million shares have been issued as of March 1999. In the event of the issuance and subsequent resale of a substantial number of shares of Common Stock, or a perception that such sales could occur, there could be a material adverse effect on the prevailing market price of Common Stock. ITEM 2. PROPERTIES The Company's corporate headquarters are located in Fort Lauderdale, Florida. The Company believes that its facilities are sufficient for its needs. AUTOMOTIVE RETAIL The Company's automotive retail operations own or lease numerous sites in 23 states, including franchised automotive dealerships and AutoNation USA megastores. The following table lists by state the automotive retail properties owned or operated by the Company or its franchisees as of February 26, 1999. The AutoNation USA megastores which are franchised by the Company to third party franchisees are marked with an asterisk. ALABAMA DEALERSHIPS Hoover Toyota................................ Birmingham, AL Treadwell Ford............................... Mobile, AL Treadwell Honda.............................. Mobile, AL Miller -- Sutherlin Automotive, Chevy, Chry-Ply Pontiac, Jeep, Dodge...... Pell City, AL ARIZONA DEALERSHIPS Brown & Brown Chevrolet...................... Mesa, AZ Brown & Brown Nissan -- Mesa................. Mesa, AZ Bell Dodge................................... Phoenix, AZ Lou Grubb Chevrolet.......................... Phoenix, AZ Pitre Chrysler Plymouth Jeep on Bell......... Phoenix, AZ Pitre Isuzu/Subaru on Bell................... Phoenix, AZ Lou Grubb Ford............................... Scottsdale, AZ Pitre Buick/Pontiac/GMC of Scottsdale........ Scottsdale, AZ Pitre Chrysler-Plymouth Jeep of Scottsdale... Scottsdale, AZ Pitre Isuzu/Subaru/Hyundai of Scottsdale..... Scottsdale, AZ Brown & Brown Nissan......................... Tempe, AZ Tempe Toyota................................. Tempe, AZ Dobbs Honda.................................. Tucson, AZ AUTONATION MEGASTORES AutoNation USA............................... Chandler, AZ AutoNation USA............................... North Phoenix, AZ AutoNation USA*.............................. Tucson, AZ CALIFORNIA DEALERSHIPS Anaheim Mazda/Pontiac/Buick.................. Anaheim, CA Don-A-Vee Jeep Eagle/Kia..................... Bellflower, CA
15 18 Beverly Hills Ford........................... Beverly Hills, CA Infiniti of Beverly Hills.................... Beverly Hills, CA House of Imports, Inc. (Mercedes-Benz)....... Buena Park, CA Lew Webb's Toyota of Buena Park.............. Buena Park, CA Buick Mart................................... Cerritos, CA Toyota of Cerritos........................... Cerritos, CA Corona Chevrolet/Olds........................ Corona, CA Corona VW/Subaru/Isuzu....................... Corona, CA Costa Mesa Honda............................. Costa Mesa, CA Costa Mesa Infiniti.......................... Costa Mesa, CA Anderson Chevrolet, Chry-Ply Cupertino....... Cupertino, CA Gunderson Chevrolet.......................... El Monte, CA Autowest Dodge, Chry-Ply, Isuzu.............. Fremont, CA Autowest Honda Fremont....................... Fremont, CA Ford of Garden Grove......................... Garden Grove, CA Hayward Dodge, Hyundai....................... Hayward, CA Hayward Nissan............................... Hayward, CA Hayward Toyota............................... Hayward, CA Joe MacPherson Chevrolet..................... Irvine, CA Lew Webb Irvine Toyota....................... Irvine, CA Lew Webb's Irvine Nissan..................... Irvine, CA Volvo Irvine................................. Irvine, CA Beach City Chevrolet......................... Long Beach, CA Anderson Chevrolet -- Los Gatos.............. Los Gatos, CA Champion Chevrolet, Oldsmobile............... Manhattan Beach, CA Manhattan Ford............................... Manhattan Beach, CA Manhattan Toyota............................. Manhattan Beach, CA Anderson Cadillac-Oldsmobile................. Menlo Park, CA Anderson Chevrolet -- Menlo Park............. Menlo Park, CA Newport Auto Center -- RR, Porsche, Audi, Chevrolet.................................. Newport Beach, CA Anderson Honda-Isuzu......................... Palo Alto, CA Don-A-Vee of Placentia, Jeep/Kia/Chry-Ply.... Placentia, CA Redlands Ford................................ Redlands, CA Land Rover South Bay......................... Redondo Beach, CA Autowest Dodge, Chry-Ply, Jeep............... Roseville, CA Autowest Honda Roseville..................... Roseville, CA Smythe European Mercedes Benz, Volvo......... San Jose, CA Stevens Creek Acura.......................... Santa Clara, CA Infiniti of Santa Monica..................... Santa Monica, CA Peyton Cramer Ford........................... Torrance, CA Peyton Cramer Infiniti....................... Torrance, CA Peyton Cramer L/M, VW........................ Torrance, CA South Bay Autohaus -- Mercedes Benz.......... Torrance, CA South Bay Volvo.............................. Torrance, CA Torrance Nissan.............................. Torrance, CA Joe MacPherson Ford.......................... Tustin, CA Joe MacPherson Infiniti...................... Tustin, CA Joe MacPherson Mazda......................... Tustin, CA Magic Ford................................... Valencia, CA Magic Lincoln Mercury........................ Valencia, CA
16 19 AUTONATION USA MEGASTORES AutoNation USA............................... Dublin, CA AutoNation USA............................... Irvine, CA AutoNation USA............................... Long Beach, CA AutoNation USA............................... Los Angeles, CA AutoNation USA............................... Oxnard, CA AutoNation USA............................... Rancho Cucamonga, CA COLORADO DEALERSHIPS John Elway Lincoln-Mercury in Aurora......... Aurora, CO John Elway Ford Boulder...................... Boulder, CO John Elway Chevrolet......................... Denver, CO John Elway Collision Center.................. Denver, CO John Elway Dodge Southwest................... Denver, CO John Elway Ford Downtown..................... Denver, CO John Elway Chrysler-Plymouth on Broadway..... Englewood, CO John Elway Nissan Arapahoe................... Englewood, CO John Elway Subaru South...................... Englewood, CO John Elway Toyota............................ Englewood, CO John Elway Nissan 104th...................... Federal Heights, CO John Elway Chrysler-Plymouth Jeep West....... Golden, CO John Elway Lamborghini....................... Golden, CO John Elway Pontiac Buick GMC West............ Golden, CO John Elway Subaru West....................... Golden, CO John Elway Dodge on Broadway................. Littleton, CO John Elway Pontiac Buick GMC South........... Lone Tree, CO John Elway Honda............................. Westminster, CO John Elway Olds Mazda Hyundai North.......... Westminster, CO John Elway Ford West......................... Wheatridge, CO FLORIDA DEALERSHIPS Steve Moore Chev/Cadillac/Buick/Olds/Pont.... Belle Glade, FL Bill Graham Ford............................. Bradenton, FL Jim Quinlan Ford/Lincoln-Mercury............. Brooksville, FL Royal Jeep Eagle Chrysler-Plymouth........... Cassleberry, FL Carlisle Dodge............................... Clearwater, FL Carlisle Lincoln Mercury..................... Clearwater, FL Jim Quinlan Chevrolet........................ Clearwater, FL Jim Quinlan Nissan........................... Clearwater, FL Lexus of Clearwater.......................... Clearwater, FL Lokey Honda/Isuzu............................ Clearwater, FL Sunset Pontiac-GMC Truck South............... Clearwater, FL Maroone Chrysler-Plymouth Jeep Eagle......... Coconut Creek, FL Steve Moore Chevrolet Delray................. Delray Beach, FL Wallace Dodge................................ Delray Beach, FL Wallace Ford................................. Delray Beach, FL Wallace Nissan............................... Delray Beach, FL Ft. Lauderdale Nissan, Inc................... Ft. Lauderdale, FL Maroone Chevrolet-Ft. Lauderdale............. Ft. Lauderdale, FL Maroone Ford................................. Ft. Lauderdale, FL Star Motors (Mercedes)....................... Ft. Lauderdale, FL
17 20 Steve Moore Chevrolet........................ Greenacres, FL Hollywood Honda.............................. Hollywood, FL Hollywood Kia................................ Hollywood, FL Maroone Nissan............................... Hollywood, FL King's Crown Ford............................ Jacksonville, FL Mike Shad Chr-Ply/Jeep....................... Jacksonville, FL Mike Shad Ford............................... Jacksonville, FL Orange Park Toyota........................... Jacksonville, FL Sunrise Nissan of Jacksonville............... Jacksonville, FL Wallace Lincoln-Mercury...................... Lake Park, FL Courtesy Buick............................... Longwood, FL Courtesy Pontiac/GMC......................... Longwood, FL Courtesy's Magic Suzuki, Isuzu............... Longwood, FL Don Mealey Acura............................. Longwood, FL Contemporary Cars -- Mercedes & Porsche...... Maitland, FL Mullinax Ford South.......................... Margate, FL Anthony Abraham Chevrolet -- Miami, Inc...... Miami, FL Central Hyundai/ Kia......................... Miami, FL Kendall Kia.................................. Miami, FL Kendall Toyota............................... Miami, FL L.P. Evans Mercedes-Benz..................... Miami, FL L.P. Evans Motors, Nissan.................... Miami, FL Lexus of Kendall............................. Miami, FL Maroone Dodge, Oldsmobile.................... Miami, FL Miami Honda.................................. Miami, FL Sunshine Ford................................ Miami, FL Sunrise Nissan of Orange Park................ Orange Park, FL Courtesy Acura, Suzuki/South................. Orlando, FL Don Mealey Chevrolet/Oldsmobile.............. Orlando, FL Don Mealey Infiniti.......................... Orlando, FL Don Mealey Mitsubishi........................ Orlando, FL World Chevrolet.............................. Orlando, FL Cook-Whitehead Ford.......................... Panama City, FL Maroone Chevrolet............................ Pembroke Pines, FL Maroone Oldsmobile/Isuzu..................... Pembroke Pines, FL Sutherlin Toyota............................. Pinellas Park, FL Maroone Dodge Pompano........................ Pompano, FL Coastal Cadillac............................. Port Richey, FL Sunset Pontiac-GMC Truck North............... Port Richey, FL Carlisle Ford................................ St. Petersburg, FL Don Mealey Cadillac-Oldsmobile, Saab......... Sanford, FL Don Mealey's Seminole Ford................... Sanford, FL Wallace Stuart Lincoln Mercury/Mitsubishi.... Stuart, FL Tallahassee Mitsubishi....................... Tallahassee, FL Tallahassee Motors (Ford).................... Tallahassee, FL Abraham Chevrolet............................ Tampa, FL Lexus of Tampa Bay........................... Tampa, FL
18 21 AUTONATION USA MEGASTORES AutoNation USA............................... Clearwater, FL AutoNation USA............................... Coconut Creek, FL AutoNation USA............................... Jacksonville, FL AutoNation USA............................... Pembroke Pines, FL AutoNation USA............................... Perrine, FL AutoNation USA............................... Sanford, FL AutoNation USA............................... Tampa, FL AutoNation USA............................... West Palm Beach, FL GEORGIA DEALERSHIPS Sutherlin Chrysler-Ply, Jeep................. Lithia Springs, GA Sutherlin Honda.............................. Lithia Springs, GA Sutherlin Nissan of Lithia Springs........... Lithia Springs, GA Marietta Ford................................ Marietta, GA Sutherlin Nissan of Marietta................. Marietta, GA Northpoint Chevrolet......................... Roswell, GA Northpoint Mitsubishi........................ Roswell, GA Hub Ford..................................... Tucker, GA Gene Evans Ford.............................. Union City, GA Steve Rayman Pontiac -- Buick GMC............ Union City, GA AUTONATION USA MEGASTORES AutoNation USA............................... Alpharetta, GA AutoNation USA............................... Lithia Springs, GA AutoNation USA............................... Morrow, GA AutoNation USA............................... Stone Mountain, GA ILLINOIS DEALERSHIPS Dodge World of Des Plaines................... Des Plaines, IL Elmhurst Dodge............................... Elmhurst, IL Elmhurst Kia................................. Elmhurst, IL Libertyville Toyota.......................... Libertyville, IL Woodfield Ford............................... Schaumburg, IL AUTONATION USA MEGASTORES AutoNation USA............................... Downers Grove, IL INDIANA AUTONATION USA MEGASTORES AutoNation USA............................... Fishers, IN AutoNation USA*.............................. Indianapolis, IN IOWA AUTONATION USA MEGASTORES AutoNation USA*.............................. Davenport, IA
19 22 MARYLAND DEALERSHIPS Fox Chevrolet................................ Baltimore, MD Fox Hyundai, Lincoln-Mercury, Kia............ Baltimore, MD Fox Mitsubishi............................... Baltimore, MD Fox Buick, Pontiac, GMC, Isuzu............... Laurel, MD Fox Chevrolet of Laurel...................... Laurel, MD Fox Chevrolet of Timonium.................... Timonium, MD MICHIGAN DEALERSHIPS Taylor Jeep Eagle............................ Taylor, MI AUTONATION USA MEGASTORES AutoNation USA............................... Canton, MI AutoNation USA*.............................. Flint, MI AutoNation USA............................... Sterling Height, MI MINNESOTA DEALERSHIPS Tousley Ford................................. White Bear Lake, MN NEVADA DEALERSHIPS Chaisson BMW................................. Henderson, NV Desert Valley GMC, Pontiac, Buick............ Henderson, NV Chaisson Motor Cars/BMW, RR, VW, Audi, LR.... Las Vegas, NV Desert Buick GMC............................. Las Vegas, NV Desert Dodge (Wilden's Pride)................ Las Vegas, NV Desert GMC East.............................. Las Vegas, NV Desert Lincoln-Mercury....................... Las Vegas, NV Las Vegas Honda.............................. Las Vegas, NV Nissan West.................................. Las Vegas, NV Toyota West.................................. Las Vegas, NV AUTONATION USA MEGASTORES AutoNation USA............................... Henderson, NV NEW JERSEY DEALERSHIPS Flemington Chr./Ply./Dodge/Jeep /Mazda....... Flemington, NJ Flemington Circle Buick/GMC/Chevy/Pontiac.... Flemington, NJ Flemington (Ditschman) Ford, Linc Merc, Niss....................................... Flemington, NJ Flemington Infiniti.......................... Flemington, NJ Flemington Isuzu/Subaru...................... Flemington, NJ Flemington Mitsubishi........................ Flemington, NJ Flemington Porsche-Audi-VW-BMW............... Flemington, NJ Land Rover Princeton......................... Princeton, NJ Princeton Nassau Ford-Lincoln Mercury-Audi... Princeton, NJ
20 23 NEW YORK DEALERSHIPS Avon Ford.................................... Avon, NY Churchville Ford............................. Churchville, NY Bob Hastings Ford............................ East Rochester, NY Cristo Ford.................................. East Rochester, NY Koerner Ford................................. Rochester, NY Vanderstyne Ford............................. Rochester, NY RAC Ford..................................... Victor, NY Baytowne Lincoln Mercury..................... Webster, NY Empire Ford.................................. Webster, NY Al Maroone Ford.............................. Williamsville, NY NORTH CAROLINA DEALERSHIPS Superior Nissan.............................. Charlotte, NC AUTONATION USA MEGASTORES AutoNation USA*.............................. Fayetteville, NC AutoNation USA*.............................. Greensboro, NC OHIO DEALERSHIPS Ed Mullinax Ford............................. Amherst, OH Mullinax Lincoln Mercury..................... Brunswick, OH Bob Townsend Ford............................ Cincinnati, OH Eastgate Ford................................ Dayton, OH Mullinax Lincoln-Mercury/Jeep of Mayfield.... Mayfield, OH Mullinax Ford North Canton................... North Canton, OH John Lance Ford.............................. Westlake, OH Mullinax Ford East........................... Wickliffe, OH AUTONATION USA MEGASTORES AutoNation USA............................... Beaver Creek, OH AutoNation USA*.............................. Cincinatti, OH AutoNation USA............................... Forest Park, OH OKLAHOMA DEALERSHIPS Lynn Hickey Dodge............................ Oklahoma City, OK SOUTH CAROLINA DEALERSHIPS Northside Nissan............................. Charleston, SC West Ashley Toyota........................... Charleston, SC TENNESSEE DEALERSHIPS West Side Honda.............................. Knoxville, TN Courtesy Honda............................... Memphis, TN Covington Pike Honda......................... Memphis, TN Dobbs Bros. Mazda/Mitsubishi................. Memphis, TN Dobbs Bros. Pontiac-GMC...................... Memphis, TN Dobbs Ford................................... Memphis, TN
21 24 TEXAS DEALERSHIPS Midway Chevrolet............................. Amarillo, TX Plains Chevrolet............................. Amarillo, TX Quality Nissan............................... Amarillo, TX Westgate Chevrolet........................... Amarillo. TX Bledsoe Dodge................................ Arlington, TX Hendrix GMC Truck............................ Austin, TX Red McCombs Chevrolet........................ Austin, TX Red McCombs Pontiac/GMC/Hyundai/JE........... Austin, TX Red McCombs Toyota........................... Austin, TX Padre Ford, Mazda............................ Corpus Christi, TX Port City Imports............................ Corpus Christi, TX Port City Pontiac GMC........................ Corpus Christi, TX Bankston Lincoln Mercury/Saab................ Dallas, TX Bankston Nissan of Dallas.................... Dallas, TX Bledsoe Dodge................................ Dallas, TX Bledsoe Dodge -- Duncanville................. Dallas, TX Charlie Hillard Ford/Buick/Mazda............. Ft. Worth, TX Bankston Ford of Frisco...................... Frisco, TX Barney Garver Motors, VW, Mazda, Land Rvr.... Houston, TX Champion Ford, Inc........................... Houston, TX Charlie Thomas Acura......................... Houston, TX Charlie Thomas Chevrolet, Mitsubishi......... Houston, TX Charlie Thomas Chry-Ply, Jeep, Isuzu, Hyundai.................................... Houston, TX Charlie Thomas Ford.......................... Houston, TX Charlie Thomas' Intercontinental BMW......... Houston, TX Mike Hall Chevrolet.......................... Houston, TX Texan Lincoln-Mercury, Inc................... Houston, TX Charlie Thomas Mazda......................... Humble, TX Bankston Nissan of Irving.................... Irving, TX Texan Ford................................... Katy, TX Bankston Nissan of Lewisville................ Lewisville, TX Jack Sherman Chevrolet/Mazda................. Midland, TX AUTONATION USA MEGASTORES AutoNation USA............................... Almeda, TX AutoNation USA............................... Dallas, TX AutoNation USA............................... Grand Prarie, TX AutoNation USA (2 locations)................. Houston, TX AutoNation USA............................... Irving, TX AutoNation USA............................... Lewisville, TX AutoNation USA............................... Mesquite, TX AutoNation USA............................... San Antonio, TX AutoNation USA............................... Stafford, TX VIRGINIA AUTONATION USA MEGASTORES AutoNation USA*.............................. Virginia Beach, VA
22 25 WASHINGTON DEALERSHIPS BMW of Bellevue.............................. Bellevue, WA Appleway Chevrolet........................... Spokane, WA Appleway Mazda............................... Spokane, WA Appleway Mitsubishi.......................... Spokane, WA Appleway Subaru-VW-Audi...................... Spokane, WA Appleway Toyota.............................. Spokane, WA
AUTOMOTIVE RENTAL The Company owns or leases its vehicle rental facilities. The facilities serving airport locations are located on airport property or near the airport in locations convenient for bus transport of customers to the airport. Almost all of the airport locations are leased from governmental authorities charged with the operation of such airports under arrangements generally providing for either the payment of a fixed rent or the payment of rent based on a percentage of revenues at a location with a guaranteed annual minimum, while most of the Company's other facility leases provide for fixed rental payments. The Company's airport facility in each metropolitan area includes, in addition to concession space, vehicle storage and maintenance areas, as well as rental and return facilities. The typical airport facility leases may not necessarily have the same duration as the Company's local airport concession agreement. Most of the Company's airport facility leases expire at varying times over the next ten years. Certain of such leases also have purchase options at the end of their terms. National has approximately 800 corporate owned and licensed rental locations in the United States and Canada. National also has approximately 160 locations in the Caribbean, Latin America and the Pacific. Alamo has approximately 103 rental locations in the United States and Canada and operates or licenses approximately 275 locations in Europe in addition to locations in Africa and the Middle East. CarTemps USA has approximately 400 leased locations in the United States. National owns its corporate headquarters facility in Minneapolis, Minnesota, and a reservations center in Charleston, SC. Alamo's corporate headquarters is located in and occupies a substantial portion of the Company's headquarters in Fort Lauderdale, Florida. Alamo also currently owns its car rental reservation and data center in Fort Lauderdale, Florida and leases its reservation centers in Charlotte, North Carolina, Boca Raton, Florida and Salt Lake City, Utah. CarTemps USA leases its headquarters facility in Solon, Ohio. DISCONTINUED OPERATIONS Information about RSG's properties is incorporated by reference to Item 2 of RSG's Annual Report on Form 10-K for the year ended December 31, 1998 as filed with the Securities and Exchange Commission. 23 26 ITEM 3. LEGAL AND ADMINISTRATIVE PROCEEDINGS By letter dated January 11, 1996, Acme Commercial Corp. d/b/a CarMax, The Auto Superstore, ("CarMax") accused the Company's wholly-owned subsidiary, AutoNation USA of infringing CarMax's trademark rights by using the marks AutoNation USA and "The Better Way to Buy a Car." AutoNation denied such allegations and on February 5, 1996, filed suit in the U.S. District Court for the Southern District of Florida seeking a declaratory judgment that its use and registration of such marks do not violate any of the rights of CarMax. On or about October 11, 1996, CarMax filed a counterclaim against AutoNation seeking damages and an order enjoining AutoNation from using certain marks, including the marks AutoNation USA and "The Better Way to Buy a Car." On November 5, 1998, following a jury trial, the court entered a judgement in favor of AutoNation USA and against CarMax with respect to the marks in question. On December 2, 1998, CarMax filed a notice of appeal of the trial court's decision with the U.S. Court of Appeals for the Eleventh Circuit. The Company is confident the Appellate Court will affirm the lower court's decision. The Company is also a party to various other general corporate legal proceedings which have arisen in the ordinary course of its business. While the results of these matters, as well as the matter described above, cannot be predicted with certainty, the Company believes that losses, if any, resulting from the ultimate resolution of these matters will not have a material adverse effect on the Company's consolidated results of operations, cash flows or financial position. However, unfavorable resolution of each matter individually or in the aggregate could affect the consolidated results of operations or cash flows for the quarterly periods in which they are resolved. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the stockholders of the Company during the fourth quarter of the fiscal year ended December 31, 1998. 24 27 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION, HOLDERS AND DIVIDENDS Since June 20, 1997, the Company's Common Stock has been traded on the NYSE under the symbol "RII." Prior to that date, the Common Stock was listed on the Nasdaq Stock Market -- National Market ("NASDAQ") and traded under the symbol "RWIN." The following table sets forth, for the periods indicated, the high and low prices per share of the Common Stock as reported by the NYSE or by NASDAQ, whichever is applicable.
HIGH LOW ---- --- 1997 First Quarter............................................... $44 3/8 $25 5/8 Second Quarter.............................................. $34 $19 7/8 Third Quarter............................................... $33 1/8 $21 7/8 Fourth Quarter.............................................. $36 $19 1998 First Quarter............................................... $29 $19 3/16 Second Quarter.............................................. $30 $22 15/16 Third Quarter............................................... $27 $13 3/4 Fourth Quarter.............................................. $18 3/8 $10
On March 24, 1999, the closing price of the Common Stock was $12.938 per share as reported by the NYSE. On March 24, 1999, there were approximately 5,300 holders of record of the Common Stock. Since December 1989, the Company has not declared or paid any cash dividends on the Common Stock. The Company currently intends to retain its earnings for future growth and, therefore, does not anticipate paying cash dividends in the foreseeable future. SALES OF UNREGISTERED SECURITIES DURING THE FOURTH QUARTER OF 1998 From time to time throughout the fourth quarter of 1998, the Company issued, in reliance upon Section 4(2) of the Securities Act of 1933, as amended, an aggregate of 135,000 shares of Common Stock to certain warrant holders in connection with the exercise of warrants to purchase shares of Common Stock at an exercise price of $3.50 per share. 25 28 ITEM 6. SELECTED FINANCIAL DATA The following Selected Financial Data should be read in conjunction with "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," the Company's Consolidated Financial Statements and Notes thereto and other financial information included elsewhere in this Form 10-K.
AS OF AND FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------ 1998 1997 1996 1995 1994 --------- --------- -------- -------- -------- (IN MILLIONS, EXCEPT PER SHARE DATA) Revenue...................................... $16,118.2 $ 9,177.9 $5,633.1 $4,354.5 $3,312.9 Income (loss) from continuing operations before extraordinary charge................ 334.6 64.6 (51.0) .9 29.4 Net income (loss)............................ 499.5 439.7 (6.7) 34.6 57.6 Basic earnings (loss) per share: Continuing operations...................... $ .74 $ .16 $ (.16) $ -- $ .14 Discontinued operations.................... .36 .93 .24 .13 .13 Extraordinary charge....................... -- -- (.10) -- -- --------- --------- -------- -------- -------- Net income (loss).......................... $ 1.10 $ 1.09 $ (.02) $ .13 $ .27 ========= ========= ======== ======== ======== Diluted earnings (loss) per share: Continuing operations...................... $ .71 $ .15 $ (.16) $ -- $ .14 Discontinued operations.................... .35 .87 .24 .13 .13 Extraordinary charge....................... -- -- (.10) -- -- --------- --------- -------- -------- -------- Net income (loss).......................... $ 1.06 $ 1.02 $ (.02) $ .13 $ .27 ========= ========= ======== ======== ======== Total assets................................. $13,925.8 $10,196.2 $6,567.6 $5,208.1 $3,212.6 Revenue earning vehicle debt................. 4,377.9 4,172.1 3,380.4 2,961.2 1,829.2 Long-term debt, net of current maturities.... 555.9 306.6 325.3 251.1 165.1 Shareholders' equity......................... 5,424.2 3,484.3 1,419.9 789.0 427.4
See Notes 2, 4, 7, 11 and 12 of Notes to Consolidated Financial Statements for discussion of business combinations, notes payable and long-term debt, shareholders' equity, restructuring and other charges and discontinued operations and their effect on comparability of year-to-year data. See "ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS" for a discussion of the Company's dividend policy. 26 29 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto of Republic Industries, Inc. (the "Company") which are included elsewhere herein. All references to historical share and per share data of the Company's common stock, par value $.01 per share ("Common Stock"), have been retroactively adjusted to reflect the two-for-one stock split that occurred in June 1996, which is more fully described in Note 7, Shareholders' Equity, of Notes to Consolidated Financial Statements. In May 1998, the Company announced its intention to separate the Company's solid waste subsidiary, Republic Services, Inc. ("RSG"), from the Company. The Company and RSG have entered into certain agreements providing for the separation and governing various interim and ongoing relationships between the companies. The Company also announced its intention to distribute its remaining shares of common stock in RSG as of the distribution date to the Company's stockholders in 1999, subject to certain conditions and consents (the "Distribution"). The Distribution was conditioned, in part, on the Company obtaining a private letter ruling from the Internal Revenue Service ("IRS") to the effect that, among other things, the Distribution would qualify as a tax free distribution for federal income tax purposes under Section 355 of the Internal Revenue Code of 1986, as amended, in form and substance satisfactory to the Company. In July 1998, the Company filed its request for the private letter ruling with the IRS, and continued to process the request through February 1999 with the expectation of completing the Distribution in mid-1999. In March 1999, the IRS advised the Company in writing that the IRS would not rule as requested. In light of the IRS action, the Company's Board of Directors decided not to complete the Distribution. Alternatively, the Company has decided to sell its remaining interest in RSG. Accordingly, as discussed in Note 12, Discontinued Operations, of Notes to Consolidated Financial Statements, the Company's solid waste services segment has been accounted for as discontinued operations and the accompanying Consolidated Financial Statements presented herein have been restated to report separately the net assets and operating results of these discontinued operations. In October 1997, the Company sold its electronic security services division. Accordingly, the operating results and gain on disposition of the electronic security services segment have been classified as discontinued operations for all periods presented in the accompanying Consolidated Financial Statements. BUSINESS COMBINATIONS The Company makes its decisions to acquire or invest in businesses based on financial and strategic considerations. Businesses acquired through December 31, 1998 and accounted for under the purchase method of accounting are included in the Consolidated Financial Statements from the date of acquisition. Businesses acquired and accounted for under the pooling of interests method of accounting have been included retroactively in the Consolidated Financial Statements as if the companies had operated as one entity since inception. During the year ended December 31, 1998, the Company acquired various businesses primarily in the automotive retail and solid waste services industries. The Company issued an aggregate of approximately 21.9 million shares of Common Stock and paid approximately $736.1 million of cash for primarily automotive retail acquisitions accounted for under the purchase method of accounting. The Company issued an aggregate of approximately 3.4 million shares of Common Stock and paid approximately $485.3 million of cash and certain properties for solid waste acquisitions accounted for under the purchase method of accounting. During the year ended December 31, 1997, the Company acquired various businesses in the automotive retail, automotive rental and solid waste services industries. The Company issued an aggregate of approximately 53.7 million shares of Common Stock and paid approximately $248.6 million of cash or notes in such transactions which have been accounted for under the purchase method of accounting, and issued an 27 30 aggregate of approximately 83.5 million shares of Common Stock in such transactions which have been accounted for under the pooling of interests method of accounting. During the year ended December 31, 1996, the Company acquired various businesses in the automotive retail, automotive rental, solid waste services and electronic security services industries. The Company issued an aggregate of approximately 9.1 million shares of Common Stock and paid approximately $51.5 million of cash in such transactions which have been accounted for under the purchase method of accounting, and issued an aggregate of approximately 71.4 million shares of Common Stock in such transactions which have been accounted for under the pooling of interests method of accounting. As discussed in Note 12, Discontinued Operations, of Notes to Consolidated Financial Statements, the Company has decided to sell its remaining interest in RSG. In addition, the Company sold its electronic security services division in October 1997. Accordingly, the financial position and results of operations of businesses acquired in the solid waste services and electronic security services segments have been accounted for as discontinued operations in the accompanying Consolidated Financial Statements. See Note 2, Business Combinations, of Notes to Consolidated Financial Statements, for further discussion of business combinations. CONSOLIDATED RESULTS OF OPERATIONS The following is a summary of the Company's consolidated results of operations both in gross dollars and on a diluted per share basis for the years ended December 31 (in millions, except per share data):
1998 1997 1996 ---------------- ---------------- ---------------- DILUTED DILUTED DILUTED PER PER PER AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE ------ ------- ------ ------- ------ ------- Income (loss) from continuing operations............................ $334.6 $ .71 $ 64.6 $ .15 $(51.0) $(.16) Income from discontinued operations: Solid waste services.................. 153.3 .33 135.6 .31 67.5 .21 Electronic security services.......... -- -- 9.5 .02 8.4 .03 Gain on sale of electronic security services division.................. 11.6 .02 230.0 .54 -- -- ------ ----- ------ ----- ------ ----- 164.9 .35 375.1 .87 75.9 .24 Extraordinary charge.................... -- -- -- -- (31.6) (.10) ------ ----- ------ ----- ------ ----- Net income (loss)....................... $499.5 $1.06 $439.7 $1.02 $ (6.7) $(.02) ====== ===== ====== ===== ====== =====
The 1997 and 1996 results from continuing operations include restructuring and other pre-tax charges. In addition, the 1997 results from continuing operations include a non-recurring gain from the sale of the ADT Limited common stock further described below. The diluted earnings per share effect of restructuring and other pre-tax charges and the 1997 non-recurring gain was to decrease diluted earnings per share from continuing operations by $.21 from $.36 to $.15 in 1997 and by $.23 from $.07 to a loss of $(.16) in 1996. 28 31 BUSINESS SEGMENT INFORMATION The following table sets forth revenue with percentages of total revenue, and sets forth cost of operations, selling, general and administrative expenses, restructuring and other charges and operating income (loss) with percentages of the applicable segment revenue, for the Company's business segments for the years ended December 31 (in millions):
1998 % 1997 % 1996 % --------- ----- -------- ----- -------- ----- Revenue: Automotive retail................. $12,664.6 78.6 $6,122.8 66.7 $2,933.7 52.1 Automotive rental................. 3,453.6 21.4 3,055.1 33.3 2,699.4 47.9 --------- ----- -------- ----- -------- ----- 16,118.2 100.0 9,177.9 100.0 5,633.1 100.0 --------- -------- -------- Cost of Operations: Automotive retail................. 10,909.6 86.2 5,459.0 89.1 2,611.3 89.0 Automotive rental................. 2,622.9 76.0 2,337.5 76.5 2,167.2 80.3 --------- -------- -------- 13,532.5 7,796.5 4,778.5 --------- -------- -------- Selling, General and Administrative: Automotive retail................. 1,359.2 10.7 647.2 10.6 289.1 9.9 Automotive rental................. 637.0 18.4 536.9 17.6 537.1 19.9 Corporate......................... 54.3 -- 30.1 -- 21.7 -- --------- -------- -------- 2,050.5 1,214.2 847.9 --------- -------- -------- Restructuring and Other Charges: Automotive retail................. -- -- 85.0 1.4 -- -- Automotive rental................. -- -- 94.1 3.1 23.5 .9 Corporate......................... -- -- -- -- 6.0 -- --------- -------- -------- -- 179.1 29.5 --------- -------- -------- Operating Income (Loss): Automotive retail................. 395.8 3.1 (68.4) (1.1) 33.3 1.1 Automotive rental................. 193.7 5.6 86.6 2.8 (28.4) (1.1) Corporate......................... (54.3) -- (30.1) -- (27.7) -- --------- -------- -------- $ 535.2 $ (11.9) $ (22.8) ========= ======== ========
AUTOMOTIVE RETAIL The Company's automotive retail business consists primarily of the sale of new and used vehicles and related automotive services and products. The Company owns and operates franchised automotive dealerships and used vehicle megastores under the name AutoNation USA(SM). The Company has aggressively expanded its automotive retail operations through the acquisition of franchised automotive dealerships and currently plans to continue this expansion. The Company has established framework agreements with various manufacturers which allow the Company to acquire franchised automotive dealerships nationwide. Automotive retail revenue was $12.66 billion, $6.12 billion and $2.93 billion for the years ended December 31, 1998, 1997 and 1996, respectively. The increase in 1998 over 1997 of $6.54 billion, or 106.8%, is a result of acquisitions which accounted for 97.5%, new AutoNation USA megastores which accounted for 10.4% and volume declines offset by price increases which accounted for (1.1)%. The increase in 1997 over 1996 of $3.19 billion, or 108.7%, is a result of acquisitions which accounted for 85.4%, new AutoNation USA megastores which accounted for 19.5% and price increases offset by volume declines which accounted for 3.8%. Cost of automotive retail operations was $10.91 billion, $5.46 billion and $2.61 billion or, as percentages of automotive retail revenue, 86.2%, 89.1% and 89.0% for the years ended December 31, 1998, 1997 and 1996, 29 32 respectively. The increases in aggregate dollars are primarily attributed to acquisitions. The 1998 decrease in cost of operations as a percentage of revenue is primarily due to reduced inventory costs and product mix. Selling, general and administrative expenses related to the Company's automotive retail operations were $1.36 billion, $647.2 million and $289.1 million or, as percentages of automotive retail revenue, 10.7%, 10.6% and 9.9% for the years ended December 31, 1998, 1997 and 1996, respectively. The increases in aggregate dollars primarily reflect the expansion of the Company's automotive retail operations. During the year ended December 31, 1997, the Company recorded approximately $150.0 million of pre-tax charges associated with combining the Company's franchised automotive dealerships and used vehicle megastore operations into one automotive retail division. Approximately $85.0 million of these charges appear as restructuring and other charges in the Company's 1997 Consolidated Statement of Operations and consists of: $42.5 million for consolidation of information systems; $25.3 million related primarily to relocating certain operations; and $17.2 million of severance and other costs. The remaining $65.0 million of these charges relates to inventory consolidation and is included in cost of automotive retail sales in the Company's 1997 Consolidated Statement of Operations. During the year ended December 31, 1998, the Company reduced its estimated restructuring reserves for information systems and increased its estimated reserves for the relocation of certain operations by approximately $21.0 million. The decrease in the information systems reserve is a result of the Company's decision to eliminate or delay the conversion of certain systems. The increase in the relocation reserve is due to the Company's decision to close its reconditioning centers and relocate the reconditioning operations to the Company's AutoNation USA megastores. Through December 31, 1998, the Company has spent approximately $30.3 million related to restructuring activities and has recorded $30.6 million of these restructuring charges against certain assets. As of December 31, 1998, approximately $24.1 million remained in accrued liabilities related to these charges. The Company believes the activities associated with these charges will be substantially completed during 1999. Operating income (loss) from the Company's automotive retail operations was $395.8 million, $(68.4) million and $33.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. Excluding restructuring and other pre-tax charges in 1997 as previously discussed, operating income from the Company's automotive retail operations would have been $81.6 million or 1.3% of automotive retail revenue. AUTOMOTIVE RENTAL The Company's automotive rental business primarily rents vehicles on a daily or weekly basis through National Car Rental System, Inc. ("National"), Alamo Rent-A-Car, Inc. ("Alamo") and CarTemps USA ("CarTemps"). Automotive rental revenue was $3.45 billion, $3.06 billion and $2.7 billion for the years ended December 31, 1998, 1997 and 1996, respectively. The increase in 1998 over 1997 of $398.5 million, or 13.0%, is a result of acquisitions which accounted for 10.3% and volume and primarily price which accounted for 2.7%. The increase in 1997 over 1996 of $355.7 million, or 13.2%, is a result of volume which accounted for 4.6%, price which accounted for 4.4% and acquisitions which accounted for 4.2%. Cost of automotive rental operations was $2.62 billion, $2.34 billion and $2.17 billion or, as a percentage of automotive rental revenue, 76.0%, 76.5% and 80.3% for the years ended December 31, 1998, 1997 and 1996, respectively. The increases in aggregate dollars for 1998 and 1997 are primarily attributed to acquisitions, maintaining a larger fleet and, in 1997, higher rental volume. The decreases in such expenses as percentages of revenue are primarily a result of revenue improvement from rental rate increases. Selling, general and administrative expenses related to the Company's automotive rental operations were $637.0 million, $536.9 million and $537.1 million or, as percentages of automotive rental revenue, 18.4%, 17.6% and 19.9% for the years ended December 31, 1998, 1997 and 1996, respectively. The 1998 increase in aggregate dollars over 1997 is primarily due to acquisitions and costs associated with implementing the Company's Global Odyssey operating system ("Global Odyssey"). The 1998 increase in selling, general and administrative expenses as a percentage of revenue versus 1997 is primarily due to costs associated with implementing Global Odyssey and higher selling costs. The 1997 decrease as a percentage of automotive 30 33 rental revenue versus 1996 is primarily due to the reduction of selling and administrative expenses of acquired businesses. During the year ended December 31, 1997, the Company recorded approximately $94.1 million of restructuring and other charges associated with integrating the Company's automotive rental operations. The primary components of this charge were as follows: $32.0 million related to elimination of redundant information systems; $18.0 million related to fleet consolidation; and $44.1 million related to closure or sale of duplicate rental facilities and merger and other non-recurring expenses. Through December 31, 1998, the Company has spent approximately $45.5 million related to restructuring activities and has recorded $26.6 million of these restructuring charges against certain assets. As of December 31, 1998, approximately $22.0 million remained in accrued liabilities related to these charges. The Company believes the activities associated with these charges will be substantially completed during 1999. During the year ended December 31, 1996, the Company recorded pre-tax charges of approximately $75.7 million related to the integration of the operations of Alamo into those of the Company. Approximately $23.5 million of such expenses appear as restructuring and other charges in the Company's Consolidated Statement of Operations for the year ended December 31, 1996 with the remainder of approximately $52.2 million included in cost of automotive rental operations and selling, general and administrative expenses. These costs primarily include asset write-offs, severance benefits, accounting and legal merger costs and changes in various estimated reserve requirements. The activities associated with these charges were substantially completed during 1997. Operating income (loss) from the Company's automotive rental operations was $193.7 million, $86.6 million and $(28.4) million for the years ended December 31, 1998, 1997 and 1996, respectively. Excluding restructuring and other pre-tax charges as previously discussed, operating income from the Company's automotive rental operations would have been $180.7 million and $47.3 million in 1997 and 1996, respectively. CORPORATE Corporate expenses were $54.3 million, $30.1 million and $27.7 million for the years ended December 31, 1998, 1997 and 1996, respectively. Such increases are a result of the overall growth experienced by the Company. INTEREST INCOME Interest income was $10.2 million, $13.3 million and $19.8 million for the years ended December 31, 1998, 1997 and 1996, respectively. The decreases are primarily a result of lower average cash balances on hand during 1998 and 1997. INTEREST EXPENSE Interest expense was incurred primarily on borrowings under the Company's revolving credit facility for acquisitions and debt assumed in acquisitions. Interest expense was $22.0 million, $11.1 million and $37.5 million for the years ended December 31, 1998, 1997 and 1996, respectively. The increase in 1998 over 1997 is primarily due to borrowings for acquisitions. The decrease in 1997 versus 1996 is primarily due to the repayment of debt. Interest expense related to vehicle inventory financing and revenue earning vehicle financing is included in cost of automotive retail sales and cost of automotive rental operations, respectively, in the accompanying Consolidated Statements of Operations. OTHER INCOME (EXPENSE) Other income for the year ended December 31, 1997 consists primarily of a $102.3 million pre-tax gain from the May 1997 sale of the Company's 15.0 million shares of ADT Limited common stock, net of fees and expenses. Such shares of ADT Limited common stock were received in March 1997 upon the Company's exercise of a warrant which became exercisable upon termination of the Company's agreement to acquire ADT Limited by mutual agreement of the parties in September 1996. 31 34 INCOME TAXES The provision for income taxes from continuing operations was $188.1 million, $38.3 million and $15.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. The effective income tax rate was 36.0%, 37.2% and 42.9% for the years ended December 31, 1998, 1997 and 1996, respectively. The 1996 income tax provision is primarily due to the Company providing valuation allowances on certain deferred tax assets and varying higher historical effective income tax rates of acquired businesses. Effective with RSG's initial public offering on July 1, 1998, RSG is no longer included in the Company's consolidated federal income tax return. DISCONTINUED OPERATIONS Solid Waste Services As a result of the Company's decision to sell its remaining interest in RSG, the net assets and operating results of the Company's solid waste services segment have been classified as discontinued operations for all periods presented in the accompanying Consolidated Financial Statements. A summary of the Company's solid waste services operations is as follows for the years ended December 31 (in millions):
1998 1997 1996 -------- -------- ------ Revenue................................................... $1,369.1 $1,127.7 $953.3 Expenses: Cost of operations...................................... 949.0 809.1 703.6 Selling, general and administrative..................... 120.8 107.1 126.9 Restructuring and other charges......................... -- -- 8.8 -------- -------- ------ Operating income.......................................... 299.3 211.5 114.0 Interest expense.......................................... (7.4) (5.7) (10.9) Interest and other income................................. .6 6.7 13.9 -------- -------- ------ Income before income taxes................................ 292.5 212.5 117.0 Provision for income taxes................................ 105.3 76.9 49.5 -------- -------- ------ Net income before minority interest....................... 187.2 135.6 67.5 Minority interest......................................... 33.9 -- -- -------- -------- ------ Net income................................................ $ 153.3 $ 135.6 $ 67.5 ======== ======== ======
Revenue from the Company's solid waste services operations was $1.37 billion, $1.13 billion and $953.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. The increase in 1998 over 1997 of $241.4 million, or 21.4%, is a result of internal growth which accounted for 12.8% of the increase and acquisitions which accounted for 8.6% of the increase. Price and primarily volume contributed 7.0% of the internal growth increase and "tuck-in" acquisitions contributed 5.8% of the increase. The increase in 1997 over 1996 of $174.4 million, or 18.3%, is a result of internal growth which accounted for 10.8% of the increase and acquisitions which accounted for 7.5% of the increase. Price and primarily volume contributed 7.4% of the internal growth increase and "tuck-in" acquisitions contributed 3.4%. Cost of solid waste services operations was $949.0 million, $809.1 million and $703.6 million or, as a percentage of solid waste revenue, 69.3%, 71.7% and 73.8% for the years ended December 31, 1998, 1997 and 1996, respectively. The increases in aggregate dollars are a result of the expansion of the Company's solid waste services operations through acquisitions and internal growth. The decreases in cost of solid waste services operations as a percentage of revenue are primarily a result of improved operating efficiencies. Selling, general and administrative expenses related to the Company's solid waste services operations were $120.8 million, $107.1 million and $126.9 million or, as percentages of solid waste revenue, 8.8%, 9.5% and 13.3% for the years ended December 31, 1998, 1997 and 1996, respectively. The decreases in selling, 32 35 general and administrative expenses as percentages of revenue in each of the years are primarily due to leveraging the existing overhead structure over an expanding revenue base. During the year ended December 31, 1996, the Company recorded restructuring and other charges totaling $8.8 million. These charges consist primarily of the cost of closing certain landfills, asset write-offs and merger expenses. The activities associated with these charges were completed during 1997. Operating income from the Company's solid waste services operations was $299.3 million, $211.5 million and $114.0 million for the years ended December 31, 1998, 1997 and 1996, respectively. Excluding restructuring and other charges as previously discussed, operating income from the Company's solid waste services operations would have been $122.8 million in 1996. Minority interest during the year ended December 31, 1998 represents 36.1% (the percentage of RSG common stock issued in the initial public offering described below under "Financial Condition") of RSG's net income during the period subsequent to the initial public offering. Such amount has been reflected as a reduction of income from discontinued operations in the accompanying Consolidated Statements of Operations. Effective with RSG's initial public offering in July 1998 as further described below, RSG is financed autonomously. Accordingly, RSG's operating cash flow is retained by RSG and is no longer commingled with the Company's cash flow from its automotive operations. In addition, borrowings under the Company's $1.0 billion revolving credit facility are no longer used to finance RSG's working capital requirements or acquisitions. In July 1998, RSG entered into a $1.0 billion unsecured revolving credit facility (the "RSG Credit Facility") with a group of banks to finance its working capital requirements and future acquisitions. The RSG Credit Facility is comprised of a $500.0 million facility with a term of 364 days and a $500.0 million facility with a term of 5 years. Borrowings under the RSG Credit Facility bear interest at LIBOR based interest rates. Electronic Security Services In October 1997, the Company sold its electronic security services division for approximately $610.0 million resulting in an after tax gain of approximately $230.0 million. In 1998, the Company finalized the sale resulting in an additional after tax gain of approximately $11.6 million. The operating results and gain on disposition of the electronic security services segment have been classified as discontinued operations for all periods presented in the accompanying Consolidated Financial Statements. Revenue and net income from the electronic security services segment was $83.8 million and $9.5 million in 1997 for the period prior to disposition, respectively, and $85.3 million and $8.4 million for 1996, respectively. See Note 12, Discontinued Operations, of Notes to Consolidated Financial Statements, for further discussion of these discontinued operations. EXTRAORDINARY CHARGE During the year ended December 31, 1996, in connection with refinancing Alamo's debt at substantially lower interest rates, the Company recorded an extraordinary charge of approximately $31.6 million, net of income taxes. Included in this charge are bond redemption premiums, the write-off of debt issue costs, prepayment penalties and other related fees. See Note 4, Notes Payable and Long-Term Debt, of Notes to Consolidated Financial Statements for further discussion of this charge. FINANCIAL CONDITION At December 31, 1998, the Company had $217.3 million in cash and approximately $426.2 million of availability under its $1.0 billion unsecured revolving credit facility which may be used for general corporate purposes. In March 1999, the Company entered into a $500.0 million 364-day unsecured bank revolving credit facility. This facility will be used for general corporate purposes and complements the $1.0 billion bank revolving credit facility maturing in April 2002. 33 36 On July 1, 1998, the Company's solid waste subsidiary, RSG, completed an initial public offering resulting in net proceeds of approximately $1.43 billion. Proceeds from the offering were used to finance the growth of the Company's automotive operations. The Company intends to sell its remaining interest in RSG. Proceeds from the sale will be used to finance the growth of the Company's automotive operations. The Company finances vehicle purchases for its domestic automotive rental operations primarily through a $3.55 billion program comprised of a $2.3 billion single-seller commercial paper program and three bank-sponsored multi-seller commercial paper conduit facilities totaling $1.25 billion. Borrowings under these programs are secured by eligible vehicle collateral and bear interest at market-based commercial paper rates. As of December 31, 1998, the Company had approximately $202.6 million of availability under these programs. In January 1999, the Company increased the commercial paper program to $3.9 billion through an increase in the conduit facilities from $1.25 billion to $1.6 billion. On February 26, 1999, the Company issued $1.8 billion of rental vehicle asset-backed notes consisting of $550.0 million floating rate notes; $750.0 million 5.88% fixed rate notes; and $500.0 million 6.02% fixed rate notes (collectively, the "Notes"). The Company fixed the effective interest rate on the $550.0 million floating rate notes at 5.73% through the use of certain derivative transactions. Letters of credit totaling $150.0 million provide credit enhancement for the Notes. Proceeds from the Notes were used to refinance amounts outstanding under the Company's commercial paper programs. As a result of the refinancing, the Company has reduced its commercial paper program from $3.9 billion to $3.24 billion, comprised of a $1.99 billion single-seller program and three bank-sponsored multi-seller commercial paper conduit facilities totaling $1.25 billion. As of December 31, 1998, approximately 90% of the revenue earning vehicles financed under these programs were acquired under programs that allow the Company to require counterparties to repurchase vehicles held for periods up to 24 months. The Company expects to continue to fund its revenue earning vehicle purchases with secured vehicle financings. The Company has vehicle inventory financing and other credit facilities to fund its automotive retail operations. In November 1998, the Company entered into a $500.0 million bank-sponsored multi-seller commercial paper conduit facility to finance new and used vehicle inventory for the Company's automotive retail operations. This facility supplements the new and used vehicle inventory finance facilities provided by vehicle manufacturer captive finance companies. As of December 31, 1998, approximately $7.5 million was financed under this facility. In connection with the development of the AutoNation USA megastores, the Company is the lessee under a $500.0 million operating lease facility established to acquire and develop properties used in its business. The Company has guaranteed the residual value of the properties under this facility which guarantee totaled approximately $418.6 million at December 31, 1998. In September 1998, the Company entered into a $1.0 billion commercial paper warehouse facility with unrelated financial institutions for the securitization of installment loan receivables generated by the Company's automotive finance subsidiary. Through December 31, 1998, the Company has securitized approximately $698.8 million of loan receivables under this program, net of retained interests. Installment loans sold under this program are nonrecourse beyond the Company's retained interests. Proceeds from the securitization were primarily used to repay borrowings under the Company's revolving credit facility. The Company expects to continue to securitize receivables under this facility and/or other programs. The Company has entered into certain interest rate derivative transactions with certain financial institutions to manage the impact of interest rate changes on securitized installment loan receivables. These derivative transactions consist of a series of interest rate caps and floors which effectuate a variable to fixed rate swap at a weighted average rate of 5.18% at December 31, 1998. Variable rates on the underlying portfolio are indexed to the Commercial Paper Nonfinancial Rate. The Company uses interest rate swap agreements to manage the impact of interest rate changes on the Company's variable rate debt. The amounts exchanged by the counterparties to interest rate swap agreements are based upon the notional amounts and other terms, generally related to interest rates, of the derivatives. While notional amounts of interest rate swaps form part of the basis for the amounts exchanged by the counterparties, the notional amounts are not themselves exchanged, and therefore, do not represent a measure of the Company's exposure as an end user of derivative financial instruments. At December 31, 1998, notional principal amounts related to interest rate swaps (variable to fixed rate) were $2.55 billion. As of December 31, 1998, the weighted average fixed rate payment on variable to fixed rate swaps was 5.87%. Variable rates 34 37 received are indexed to the Commercial Paper Nonfinancial Rate ($2.45 billion notional principal amount) and LIBOR ($.10 billion notional principal amount). Including the Company's variable to fixed interest rate swaps, the Company's ratio of fixed interest rate debt to total debt outstanding was 50% as of December 31, 1998. In August 1998, the Company's Board of Directors authorized the repurchase of up to $500.0 million of Common Stock over the following 12 months. Repurchases are made either pursuant to Rule 10b-18 of the Securities Exchange Act of 1934, as amended, or in privately negotiated transactions. As of December 31, 1998, the Company had repurchased 9.1 million shares of Common Stock for an aggregate price of approximately $136.0 million. The Company believes that it has sufficient operating cash flow and other financial resources necessary to meet its anticipated capital requirements and obligations as they come due. CASH FLOWS Cash and cash equivalents increased $644.7 million and decreased by $191.3 million and $13.1 million during the years ended December 31, 1998, 1997 and 1996, respectively. The major components of these changes are discussed below. Cash Flows from Operating Activities Cash used in operating activities of continuing operations was $368.8 million, $847.5 million and $459.6 million for the years ended December 31, 1998, 1997 and 1996, respectively. As previously discussed, the Company finances its revenue earning vehicle purchases with secured vehicle financings. Cash (used in) provided by operating activities of continuing operations was $(79.9) million, $(344.4) million and $131.4 million for the years ended December 31, 1998, 1997 and 1996, respectively, excluding revenue earning vehicle depreciation and purchases of revenue earning vehicles (net of sales) totaling $288.9 million, $503.1 million and $591.0 million for the years ended December 31, 1998, 1997 and 1996, respectively. Cash provided by operating activities of discontinued operations was $297.1 million, $275.0 million and $154.0 million for the years ended December 31, 1998, 1997 and 1996, respectively. The increases are primarily a result of the expansion of the Company's solid waste operations during the periods. Cash Flows from Investing Activities Cash flows from investing activities consist primarily of cash used for business acquisitions and capital additions and other transactions as further described below. Cash used in business acquisitions was $1.22 billion, $216.6 million and $51.5 million for the years ended December 31, 1998, 1997 and 1996, respectively. See "Business Combinations" of Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 2, Business Combinations, of Notes to Consolidated Financial Statements for a further discussion of business combinations. Capital additions were $437.9 million, $294.5 million and $105.9 million during the years ended December 31, 1998, 1997 and 1996, respectively. The increases are primarily a result of expansion of the Company's automotive retail and rental businesses. In July 1998, the Company's solid waste subsidiary, RSG, completed an initial public offering resulting in net proceeds of approximately $1.43 billion. In October 1997, the Company sold its electronic security services division for approximately $610.0 million. In March 1997, the Company exercised its warrant to acquire 15.0 million common shares of ADT Limited for $20 per share. In May 1997, the Company sold the 15.0 million ADT Limited common shares for $27.50 per share to certain institutional investors. 35 38 Cash used in investing activities of discontinued operations was $182.2 million, $170.8 million and $176.9 million during the years ended December 31, 1998, 1997 and 1996, respectively, and consists primarily of capital additions. The Company intends to finance capital expenditures and cash used in business acquisitions through cash on hand, the Company's revolving credit facility and other financings. Cash Flows from Financing Activities Cash flows from financing activities during the years ended December 31, 1998, 1997 and 1996 included revenue earning vehicle financing, commercial bank borrowings, repayments of debt, and other transactions as further described below. During the year ended December 31, 1998, the Company repurchased approximately 9.1 million shares of Common Stock for an aggregate price of approximately $136.0 million under its $500.0 million share repurchase program. During the year ended December 31, 1997, the Company sold 15.8 million shares of Common Stock in a private placement transaction resulting in net proceeds of approximately $552.7 million. During the year ended December 31, 1996, the Company sold an aggregate of 22.0 million shares of Common Stock in private placement transactions resulting in net proceeds of approximately $550.9 million. Cash provided by (used in) financing activities of discontinued operations was $928.8 million, $(88.2) million and $(146.6) million during the years ended December 31, 1998, 1997 and 1996, respectively, and consists primarily of bank borrowings and/or repayments. These financing activities were used to fund revenue earning vehicle purchases, capital additions and acquisitions as well as to repay debt assumed in acquisitions and expand the Company's business during these years. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The tables below provide information about the Company's market sensitive financial instruments and constitute "forward-looking statements". All items described are non-trading. The Company's 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 the use of a combination of fixed and floating rate debt. Interest rate derivatives may be used to adjust interest rate exposures when appropriate, based upon market conditions. These derivatives consist of interest rate swaps, caps and floors which are entered into with a group of financial institutions with investment grade credit ratings, thereby minimizing the risk of credit loss. The Company uses variable to fixed interest rate swap agreements to manage the impact of interest rate changes on the Company's variable rate debt. Expected maturity dates for variable rate debt and interest rate swaps are based upon contractual maturity dates. Average pay rates under interest rate swaps are based upon contractual fixed rates. Average variable receive rates under interest rate swaps are based on implied forward rates in the yield curve at the reporting date. The Company has entered into a series of interest rate caps and floors contractually maturing in 2004 to manage the impact of interest rate changes on securitized installment loan receivables. Expected maturity dates are based upon the estimated repayment of the underlying receivables after considering estimated prepayments and credit losses. Average rates on interest rate caps and floors are based upon contractual rates. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgement. The fair value of variable rate debt approximates the carrying value since interest rates are variable and, thus, approximate current market rates. The fair value of interest rate swaps, caps and floors is determined from dealer quotations and represents the discounted future cash flows through maturity or 36 39 expiration using current rates, and is effectively the amount the Company would pay or receive to terminate the agreements.
EXPECTED MATURITY DATE ------------------------------------------------------------------------ FAIR VALUE DECEMBER 31, 1998 1999 2000 2001 2002 2003 THEREAFTER TOTAL DECEMBER 31, 1998 - ----------------- -------- -------- -------- ------ ------ ---------- -------- ----------------- (IN MILLIONS) (Asset)/Liability CONTINUING OPERATIONS: Variable rate debt................. $3,887.8 $1,259.9 $ -- $535.0 $ -- $ -- $5,682.7 $5,682.7 Average interest rates........... 5.68% 5.55% -- 6.52% -- -- Interest rate swaps................ 650.0 1,000.0 250.0 150.0 500.0 -- 2,550.0 47.0 Average pay rate................. 5.83% 5.94% 6.15% 5.88% 5.63% -- Average receive rate............. 5.19% 5.41% 5.53% 5.53% 5.53% -- Interest rate caps................. 287.2 192.6 146.1 90.3 20.9 -- 737.1 (8.9) Average rate..................... 5.47% 5.47% 5.47% 5.47% 5.47% -- Interest rate floors............... 287.2 192.6 146.1 90.3 20.9 -- 737.1 7.1 Average rate..................... 4.61% 4.61% 4.61% 4.61% 4.61% -- DISCONTINUED OPERATIONS: Variable rate debt................. $ 495.2 $ 3.4 $ 3.2 $ 3.0 $503.1 $35.9 $1,043.8 $1,043.8 Average interest rates........... 6.40% 5.06% 5.31% 5.19% 6.42% 5.21%
EXPECTED MATURITY DATE ------------------------------------------------------------------------ FAIR VALUE DECEMBER 31, 1997 1998 1999 2000 2001 2002 THEREAFTER TOTAL DECEMBER 31, 1997 - ----------------- -------- -------- -------- ------ ------ ---------- -------- ----------------- (IN MILLIONS) (Asset)/Liability CONTINUING OPERATIONS: Variable rate debt................. $2,713.9 $ 153.7 $1,072.7 $ -- $285.0 $ -- $4,225.3 $4,225.3 Average interest rates........... 6.17% 6.20% 5.86% -- 5.97% -- Interest rate swaps................ 300.0 650.0 1,000.0 150.0 150.0 -- 2,250.0 8.0 Average pay rate................. 5.85% 5.81% 5.95% 6.50% 5.88% -- Average receive rate............. 5.50% 5.50% 5.50% 5.50% 5.50% -- DISCONTINUED OPERATIONS: Variable rate debt................. $ 1.1 $ 1.5 $ 1.7 $ 1.8 $ 1.9 $35.1 $ 43.1 $ 43.1 Average interest rates........... 4.75% 4.75% 4.75% 4.75% 4.75% 4.75%
SEASONALITY The Company's automotive retail operations generally experience higher volumes of vehicle sales in the second and third quarters of each year in part due to consumer buying trends and the introduction of new vehicle models. The Company's automotive rental operations and particularly the leisure travel segment is highly seasonal. In these operations, the third quarter, which includes the peak summer travel months, has historically been the strongest quarter of the year. During the peak season, the Company increases its rental fleet and workforce to accommodate increased rental activity. As a result, any occurrence that disrupts travel patterns during the summer period could have a material adverse effect. The first and fourth quarters for the Company's automotive rental operations are generally the weakest, when there is limited leisure travel and a greater potential for adverse weather conditions. Many of the operating expenses such as rent, general insurance and administrative personnel are fixed and cannot be reduced during periods of decreased rental demand. YEAR 2000 The Company utilizes software and related technologies throughout its businesses that will be affected by the date change in the year 2000 ("Y2K"). The Company is addressing the issue of computer programs, embedded chips and third party suppliers that may be impacted by Y2K. The Company has developed a dedicated Y2K Project Office to coordinate compliance efforts and ensure that the project status is monitored and reported throughout the organization. 37 40 The Company has identified four core phases in preparing for Y2K: Assessment -- In the assessment phase, an inventory is performed of software, hardware, telecommunications equipment and embedded chip technology. Also, critical systems and vendors are identified and prioritized. Analysis -- In the analysis phase, each system or item assessed as critical is reviewed to determine Y2K compliance. Key vendors are also evaluated at this time to determine their compliance status. Remediation -- In the remediation phase, modifications or replacements are made to critical systems and equipment to make them Y2K-compliant or the systems and/or vendors are replaced with compliant systems or vendors. Decisions are also made as to whether changes are necessary or feasible for key third-party suppliers. Testing and Validation -- In this phase, the Company prepares, executes and verifies the testing of critical systems. Each division of the Company has developed plans to correct Y2K issues and, to date, has made progress as follows: Automotive Retail Division: The Company's franchised automotive dealerships and AutoNation USA megastores use one of six Dealer Management Systems ("DMS"), which perform the core functions of a dealership's operations. The Company has determined, subject to verification and testing, that the DMS systems provided by these vendors are Y2K compliant or will be Y2K compliant with an upgrade. Approximately 60% of the Company's franchised automotive dealerships using these DMS systems have been upgraded to a compliant version with the remaining 40% scheduled to complete such upgrades by the end of the second quarter of 1999. The Company intends to obtain further documentation to support such compliance, as well as conduct testing to verify compliance. The Company has developed other software applications that are in use at its AutoNation USA megastores as well as some of its franchised automotive dealerships. Although none of these systems are considered mission critical, after an initial pilot to assess these systems, the Company has proceeded with an effort to assess, analyze, remediate and test this code. This effort is 65% complete with completion scheduled for the end of the second quarter of 1999. The Company has completed an inventory of its franchised automotive dealerships and megastores to identify other business systems, products, suppliers and embedded chips. Those issues identified are expected to be remediated or replaced by the end of the second quarter of 1999. Automotive Rental Division: For over a year, the Company, in conjunction with external consultants, has been developing the Global Odyssey system, which will replace substantially all rental systems, as well as the applicable hardware and operating systems. This system was designed to be Y2K compliant and Y2K testing was completed prior to the recent implementation of the Global Odyssey reservation, operations and financial systems at National's North American locations prior to the end of 1998. The Global Odyssey fleet system was implemented at National's North American locations during the first quarter of 1999. Alamo's existing systems have been undergoing remediation as a contingency to Global Odyssey not being fully deployed in 1999. That process, which began in 1997, has remediated 100% of the systems and 80% has been tested and put into production. A full integration test is expected to be completed during the third quarter of 1999. The Rental Division has surveyed the majority of its North American rental locations to identify other critical business systems, products and vendors, including embedded chip issues. Work is ongoing to remediate or replace business systems, products and vendors that are not Y2K compliant. Completion of remediation or replacement is expected by the end of the second quarter of 1999. The Company has also developed a plan for its European locations, some of which are supported by the Alamo mainframe, which is discussed above. The remaining European locations are supported by systems developed and 38 41 supported by the United Kingdom headquarters which are currently scheduled to be Y2K compliant by the end of the third quarter of 1999. Solid Waste Division: RSG has identified six critical systems or processes related to Y2K compliance. These are hauling and disposal fleet operations, electrical systems, telecommunications, payroll processing, billing systems and payments to critical third parties. RSG primarily uses industry standard automated applications in most of its locations which are provided by third parties. The majority of these applications are believed to be Y2K compliant, but RSG is currently testing compliance in coordination with the vendors. The three locations with proprietary software are currently in the remediation phase and expect to be completed by the end of the second quarter of 1999. RSG is currently finalizing its assessment of embedded chips and third party suppliers. RSG expects to complete the inventory and assessment of this information during the second quarter of 1999. As information is received related to these areas, RSG analyzes the compliance of products and develops a strategy for repair or replacement of non-compliant systems as well as testing and validation of such items. RSG expects to be substantially complete with the analysis of this information by the end of the third quarter of 1999. The remediation phase is expected to be complete by the end of the third quarter of 1999. Costs To Address Y2K To date, the Company's automotive retail and rental divisions have spent approximately $7.1 million on Y2K efforts across all areas and expect to spend a total of approximately $27.9 million when complete; of which $9.1 million is scheduled to be incurred as capital expenditures and depreciated accordingly. Such amounts exclude costs associated with replacing the Company's automotive rental systems with Global Odyssey since the Global Odyssey implementation was planned in advance and not accelerated as a result of Y2K. The Company expects to fund Y2K costs through operating cash flow. All system modification costs associated with Y2K will be expensed as incurred. Y2K expenditures vary significantly in project phases and vary depending on remedial methods used. Past expenditures in relation to total estimated costs should not be considered or relied on as a basis for estimating progress to completion for any element of the Y2K project. RSG has spent approximately $1.2 million to date on Y2K efforts across all areas and expects to spend a total of approximately $4.0 million when complete; of which $1.3 million is scheduled to be incurred as capital expenditures and depreciated accordingly. Risks and Contingency Plans The Company presently believes, that upon remediation of its business software applications, as well as other equipment with embedded technology, the Y2K issue will not present a materially adverse risk to the Company's future consolidated results of operations, liquidity and capital resources. However, if such remediation is not completed in a timely manner or the level of timely compliance by key suppliers or vendors is not sufficient, the Company believes that the most likely worst case scenario would be the delay or disruption in the delivery of products which could have a material adverse impact on the Company's operations including, but not limited to, loss of revenue, increased operating costs, loss of customers or suppliers, or other significant disruptions to the Company's business. The Company has initiated comprehensive contingency and business continuation plans, which are expected to be in place in the second quarter of 1999 in order to ensure enough time for implementation of such plans, if necessary and thus possibly avoid such risks. Determining the Y2K readiness of third party products and business dependencies requires pursuit, collection and appraisal of voluntary statements made or provided by those parties, if available, together with independent factual research. The Company has identified its material third-party relationships and has 39 42 surveyed these parties. The results are being analyzed as surveys are received. Although the Company has taken, and will continue to take, reasonable efforts to gather information to determine and verify the readiness of products and dependencies, there can be no assurances that reliable information will be offered or otherwise available. In addition, verification methods (including testing methods) may not be reliable or fully implemented. Accordingly, notwithstanding the foregoing efforts, there are no assurances that the Company is correct in its determination or belief that a product (information technology and other computerized equipment) or a business dependency (including a supplier, distributor or ancillary industry group) is Y2K ready. NEW ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires computer software costs associated with internal use software to be expensed as incurred until certain capitalization criteria are met. The Company will adopt SOP 98-1 prospectively beginning January 1, 1999. Adoption of this Statement will not have a material impact on the Company's consolidated financial position or results of operations. In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires all costs associated with pre-opening, pre-operating and organization activities to be expensed as incurred. The Company's accounting policies conform with the requirements of SOP 98-5; therefore adoption of this Statement will not impact the Company's consolidated financial position or results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS 133 is effective for fiscal years beginning after June 15, 1999. SFAS 133 cannot be applied retroactively. The Company will adopt SFAS 133 beginning January 1, 2000. The Company has not yet quantified the impact of adopting SFAS 133 on the Company's consolidated financial statements. However, SFAS 133 could increase volatility in earnings and other comprehensive income. FORWARD-LOOKING STATEMENTS Certain statements and information included herein constitute "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, competition in the Company's lines of business; the ability to integrate and successfully operate acquired businesses and the risks associated with such businesses; the dependence on vehicle manufacturers to approve franchised automotive dealership acquisitions and the restrictions imposed by vehicle manufacturers on franchised automotive dealership acquisitions and operations; the risk of unfavorable economic conditions on the Company's operations; the Company's dependence on key personnel; the ability to obtain financing on acceptable terms to finance the Company's operations and growth strategy and for the Company to operate within the limitations imposed by financing arrangements; the risks and costs associated with complying with the date change in the year 2000; the ability to develop and implement operational and financial systems to manage rapidly growing operations; and other factors contained in the Company's filings with the Securities and Exchange Commission. 40 43 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Certified Public Accountants.......... 42 Consolidated Balance Sheets as of December 31, 1998 and 1997...................................................... 43 Consolidated Statements of Operations for Each of the Three Years Ended December 31, 1998............................. 44 Consolidated Statements of Shareholders' Equity for Each of the Three Years Ended December 31, 1998......................................... 45 Consolidated Statements of Cash Flows for Each of the Three Years Ended December 31, 1998............................. 46 Notes to Consolidated Financial Statements.................. 47 Financial Statement Schedule II, Valuation and Qualifying Accounts and Reserves, for Each of the Three Years Ended December 31, 1998......................................... 69
41 44 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Republic Industries, Inc.: We have audited the accompanying consolidated balance sheets of Republic Industries, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Republic Industries, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to consolidated financial statements is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Fort Lauderdale, Florida, March 3, 1999. 42 45 REPUBLIC INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, (IN MILLIONS, EXCEPT SHARE DATA)
1998 1997 --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 217.3 $ 129.2 Receivables, net.......................................... 1,605.3 846.3 Revenue earning vehicles, net............................. 4,588.7 4,466.5 Inventory................................................. 1,853.5 1,083.1 Other current assets...................................... 141.5 120.1 --------- --------- Total Current Assets.............................. 8,406.3 6,645.2 INVESTMENTS................................................. 172.3 13.4 PROPERTY AND EQUIPMENT, NET................................. 2,043.6 1,295.1 INTANGIBLE AND OTHER ASSETS, NET............................ 2,473.4 1,225.6 NET ASSETS OF DISCONTINUED OPERATIONS....................... 830.2 1,016.9 --------- --------- $13,925.8 $10,196.2 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $ 307.4 $ 220.6 Accrued liabilities....................................... 697.9 500.3 Insurance reserves........................................ 128.3 102.1 Revenue earning vehicle debt.............................. 2,618.2 2,209.4 Notes payable and current maturities of long-term debt.... 1,441.8 521.2 Other current liabilities................................. 346.8 263.4 --------- --------- Total Current Liabilities......................... 5,540.4 3,817.0 LONG-TERM DEBT, NET OF CURRENT MATURITIES................... 555.9 306.6 LONG-TERM REVENUE EARNING VEHICLE DEBT...................... 1,759.7 1,962.7 DEFERRED INCOME TAXES....................................... 227.1 196.9 OTHER LIABILITIES........................................... 418.5 428.7 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, par value $.01 per share; 5,000,000 shares authorized; none issued......................... -- -- Common stock, par value $.01 per share; 1,500,000,000 shares authorized; 467,240,307 and 432,705,796 shares issued and outstanding including shares held in treasury, respectively................................. 4.7 4.3 Additional paid-in capital................................ 4,628.9 3,051.5 Retained earnings......................................... 930.9 431.4 Accumulated other comprehensive loss...................... (4.3) (2.9) Treasury stock, at cost; 9,110,400 shares held at December 31, 1998............................................... (136.0) -- --------- --------- Total Shareholders' Equity........................ 5,424.2 3,484.3 --------- --------- $13,925.8 $10,196.2 ========= =========
The accompanying notes are an integral part of these statements. 43 46 REPUBLIC INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, (IN MILLIONS, EXCEPT PER SHARE DATA)
1998 1997 1996 --------- -------- -------- REVENUE: Automotive retail sales................................... $12,664.6 $6,122.8 $2,933.7 Automotive rental revenue................................. 3,453.6 3,055.1 2,699.4 --------- -------- -------- 16,118.2 9,177.9 5,633.1 EXPENSES: Cost of automotive retail sales........................... 10,909.6 5,459.0 2,611.3 Cost of automotive rental operations...................... 2,622.9 2,337.5 2,167.2 Selling, general and administrative....................... 2,050.5 1,214.2 847.9 Restructuring and other charges........................... -- 179.1 29.5 --------- -------- -------- OPERATING INCOME (LOSS)..................................... 535.2 (11.9) (22.8) INTEREST INCOME............................................. 10.2 13.3 19.8 INTEREST EXPENSE............................................ (22.0) (11.1) (37.5) OTHER INCOME (EXPENSE), NET................................. (.7) 112.6 4.8 --------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES..................................................... 522.7 102.9 (35.7) PROVISION FOR INCOME TAXES.................................. 188.1 38.3 15.3 --------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY CHARGE...................................... 334.6 64.6 (51.0) --------- -------- -------- DISCONTINUED OPERATIONS: Income from discontinued operations, net of minority interest and income taxes.............................. 153.3 145.1 75.9 Gain on disposal of segment, net of income tax provision of $8.4 in 1998 and $233.7 in 1997..................... 11.6 230.0 -- --------- -------- -------- Income from discontinued operations....................... 164.9 375.1 75.9 --------- -------- -------- INCOME BEFORE EXTRAORDINARY CHARGE.......................... 499.5 439.7 24.9 EXTRAORDINARY CHARGE RELATED TO EARLY EXTINGUISHMENT OF DEBT, NET OF BENEFIT FOR INCOME TAXES OF $15.0............ -- -- (31.6) --------- -------- -------- NET INCOME (LOSS)........................................... $ 499.5 $ 439.7 $ (6.7) ========= ======== ======== BASIC EARNINGS (LOSS) PER SHARE: Continuing operations..................................... $ .74 $ .16 $ (.16) Discontinued operations................................... .36 .93 .24 Extraordinary charge...................................... -- -- (.10) --------- -------- -------- Net income (loss)......................................... $ 1.10 $ 1.09 $ (.02) ========= ======== ======== DILUTED EARNINGS (LOSS) PER SHARE: Continuing operations..................................... $ .71 $ .15 $ (.16) Discontinued operations................................... .35 .87 .24 Extraordinary charge...................................... -- -- (.10) --------- -------- -------- Net income (loss)......................................... $ 1.06 $ 1.02 $ (.02) ========= ======== ========
The accompanying notes are an integral part of these statements. 44 47 REPUBLIC INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
ACCUMULATED OTHER COMPRE- COMPRE- ADDITIONAL HENSIVE HENSIVE COMMON PAID-IN RETAINED INCOME TREASURY INCOME STOCK CAPITAL EARNINGS (LOSS) STOCK (LOSS) ------ ---------- -------- ----------- -------- ------- BALANCE AT DECEMBER 31, 1995................. $3.0 $ 675.6 $107.8 $ 2.6 $ -- Comprehensive loss: Net loss................................. -- -- (6.7) -- -- $ (6.7) Other comprehensive loss -- foreign currency translation adjustments....... -- -- -- (.8) -- (.8) ------ Comprehensive loss..................... -- -- -- -- -- $ (7.5) ====== Sales of common stock...................... .2 550.7 -- -- -- Stock issued in acquisitions............... .1 86.5 -- -- -- Exercise of stock options and warrants, including income tax benefit of $20.3 million.................................. -- 43.7 -- -- -- Distributions to former owners of pooled companies................................ -- -- (78.4) -- -- Other...................................... .1 31.1 4.4 -- -- ---- -------- ------ ----- ------- BALANCE AT DECEMBER 31, 1996................. 3.4 1,387.6 27.1 1.8 -- Comprehensive income (loss): Net income............................... -- -- 439.7 -- -- $439.7 Other comprehensive loss -- foreign currency translation adjustments....... -- -- -- (4.7) -- (4.7) ------ Comprehensive income................... -- -- -- -- -- $435.0 ====== Sales of common stock...................... .2 552.5 -- -- -- Stock issued in acquisitions............... .6 942.5 -- -- -- Exercise of stock options and warrants, including income tax benefit of $32.7 million.................................. .1 92.0 -- -- -- Distributions to former owners of pooled companies................................ -- -- (31.4) -- -- Other...................................... -- 76.9 (4.0) -- -- ---- -------- ------ ----- ------- BALANCE AT DECEMBER 31, 1997................. 4.3 3,051.5 431.4 (2.9) -- Comprehensive income (loss): Net income............................... -- -- 499.5 -- -- $499.5 ------ Other comprehensive income (loss): Foreign currency translation adjustments......................... -- -- -- -- -- (1.6) Unrealized loss on marketable securities.......................... -- -- -- -- -- (.4) Unrealized gain on interest-only strip receivables......................... -- -- -- -- -- .6 ------ Other comprehensive loss............... -- -- -- (1.4) -- (1.4) ------ Comprehensive income................ -- -- -- -- -- $498.1 ====== Stock issued in acquisitions............... .3 540.9 -- -- -- Sale of common stock of RSG................ -- 998.5 -- -- -- Purchases of treasury stock................ -- -- -- -- (136.0) Exercise of stock options and warrants, including income tax benefit of $4.8 million.................................. .1 38.0 -- -- -- ---- -------- ------ ----- ------- BALANCE AT DECEMBER 31, 1998................. $4.7 $4,628.9 $930.9 $(4.3) $(136.0) ==== ======== ====== ===== =======
The accompanying notes are an integral part of these statements. 45 48 REPUBLIC INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (IN MILLIONS)
1998 1997 1996 ---------- ---------- ---------- CASH USED IN OPERATING ACTIVITIES: Net income (loss)......................................... $ 499.5 $ 439.7 $ (6.7) Adjustments to reconcile net income (loss) to net cash used in operating activities: Purchases of revenue earning vehicles................... (6,974.6) (5,227.3) (4,695.3) Sales of revenue earning vehicles....................... 5,780.1 3,892.3 3,356.4 Depreciation of revenue earning vehicles................ 905.6 831.9 747.9 Depreciation and amortization of property and equipment............................................. 92.4 62.7 47.6 Amortization of intangible assets....................... 53.6 22.9 5.1 Non-cash restructuring and other charges................ -- 186.0 86.7 Loss on extinguishment of debt, net of income taxes..... -- -- 31.6 Gain on sale of marketable securities................... -- (102.3) -- Income from discontinued operations..................... (164.9) (375.1) (75.9) Changes in assets and liabilities, net of effects from business acquisitions: Receivables........................................... (504.6) (193.7) (94.5) Inventory............................................. 66.5 (205.9) (21.4) Other assets.......................................... (26.9) 76.1 (58.0) Accounts payable and accrued liabilities.............. (101.2) (264.3) 108.3 Other liabilities..................................... 5.7 9.5 108.6 ---------- ---------- ---------- (368.8) (847.5) (459.6) ---------- ---------- ---------- CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES: Cash used in business acquisitions, net of cash acquired................................................ (1,221.4) (216.6) (51.5) Purchases of property and equipment....................... (437.9) (294.5) (105.9) Purchases of marketable securities........................ (195.5) (300.0) -- Sales of marketable securities............................ 94.1 402.3 42.3 Proceeds from sale of common stock of RSG................. 1,433.6 -- -- Cash received on disposal of electronic security division................................................ -- 610.0 -- Other..................................................... (64.7) (49.1) (239.3) ---------- ---------- ---------- (391.8) 152.1 (354.4) ---------- ---------- ---------- CASH PROVIDED BY FINANCING ACTIVITIES: Proceeds from revenue earning vehicle financing........... 46,950.4 29,103.7 17,802.7 Payments on revenue earning vehicle financing............. (46,578.3) (28,688.7) (17,452.0) Proceeds from long-term debt and notes payable............ 17.1 373.2 227.0 Payments of long-term debt and notes payable.............. (294.2) (732.1) (350.6) Net proceeds (payments) from revolving credit and vehicle inventory financing facilities.......................... 373.8 (139.7) 158.6 Sales of common stock..................................... -- 552.7 550.9 Purchases of treasury stock............................... (136.0) -- -- Other..................................................... 28.8 19.0 33.8 ---------- ---------- ---------- 361.6 488.1 970.4 ---------- ---------- ---------- CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS: Operating activities...................................... 297.1 275.0 154.0 Investing activities...................................... (182.2) (170.8) (176.9) Financing activities...................................... 928.8 (88.2) (146.6) ---------- ---------- ---------- 1,043.7 16.0 (169.5) ---------- ---------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 644.7 (191.3) (13.1) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 129.2 320.5 357.8 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. 773.9 129.2 344.7 LESS: CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS AT END OF PERIOD.......................................... (556.6) -- (24.2) ---------- ---------- ---------- CASH AND CASH EQUIVALENTS OF CONTINUING OPERATIONS AT END OF PERIOD.................................................... $ 217.3 $ 129.2 $ 320.5 ========== ========== ==========
The accompanying notes are an integral part of these statements. 46 49 REPUBLIC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ALL TABLES IN MILLIONS, EXCEPT PER SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying Consolidated Financial Statements include the accounts of Republic Industries, Inc. and its subsidiaries (the "Company"). All intercompany accounts and transactions have been eliminated. In May 1998, the Company announced its intention to separate the Company's solid waste subsidiary, Republic Services, Inc. ("RSG"), from the Company. The Company and RSG have entered into certain agreements providing for the separation and governing various interim and ongoing relationships between the companies. The Company also announced its intention to distribute its remaining shares of common stock in RSG as of the distribution date to the Company's stockholders in 1999, subject to certain conditions and consents (the "Distribution"). The Distribution was conditioned, in part, on the Company obtaining a private letter ruling from the Internal Revenue Service ("IRS") to the effect that, among other things, the Distribution would qualify as a tax free distribution for federal income tax purposes under Section 355 of the Internal Revenue Code of 1986, as amended, in form and substance satisfactory to the Company. In July 1998, the Company filed its request for the private letter ruling with the IRS, and continued to process the request through February 1999 with the expectation of completing the Distribution in mid-1999. In March 1999, the IRS advised the Company in writing that the IRS would not rule as requested. In light of the IRS action, the Company's Board of Directors decided not to complete the Distribution. Alternatively, the Company has decided to sell its remaining interest in RSG. Accordingly, as discussed in Note 12, Discontinued Operations, the Company's solid waste services segment has been accounted for as discontinued operations and the accompanying Consolidated Financial Statements presented herein have been restated to report separately the net assets and operating results of these discontinued operations. In October 1997, the Company sold its electronic security services division. Accordingly, as discussed in Note 12, Discontinued Operations, these operations have been accounted for as discontinued operations and the accompanying Consolidated Financial Statements presented herein have been restated to report separately the operating results of these discontinued operations. In order to maintain consistency and comparability between periods presented, certain amounts have been reclassified from the previously reported financial statements to conform with the financial statement presentation of the current period. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. All per share data and numbers of shares of the Company's common stock, par value $.01 per share ("Common Stock") for all periods included in the consolidated financial statements and notes thereto have been adjusted to reflect a two-for-one stock split in the form of a 100% stock dividend that occurred in June 1996, as is more fully described in Note 7, Shareholders' Equity. 47 50 REPUBLIC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RECEIVABLES The components of receivables, net of allowance for doubtful accounts at December 31 are as follows:
1998 1997 -------- ------ Automotive retail trade receivables......................... $ 493.6 $198.7 Automotive rental trade receivables......................... 264.7 207.1 Vehicle manufacturer receivables............................ 458.2 366.4 Automotive finance receivables.............................. 354.0 38.1 Other....................................................... 97.1 73.3 -------- ------ 1,667.6 883.6 Less: allowance for doubtful accounts....................... (62.3) (37.3) -------- ------ $1,605.3 $846.3 ======== ======
Automotive finance receivables are generated by the Company's automotive retail finance subsidiary and include finance lease receivables, installment loan receivables and retained interests in securitized installment loan receivables. In 1998, the Company entered into a $1.0 billion commercial paper warehouse facility with certain financial institutions for the securitization of installment loan receivables. Through December 31, 1998, the Company has securitized approximately $698.8 million of loan receivables under this program. Installment loans sold under this program are nonrecourse beyond the Company's retained interests. The Company sells its receivables to a commercial paper conduit, but retains responsibility for servicing the loans for which it is paid a servicing fee. The Company retains a subordinated interest in the sold receivables and the future excess cash flow from the loan portfolio after required interest payments, servicing and other fees and expenses. The Company provides additional credit enhancement in the form of restricted cash deposits. As further discussed in Note 13, Derivative Financial Instruments, the Company enters into interest rate protection agreements to manage the impact of interest rate changes on amounts securitized. The Company accounts for the sale of receivables in accordance with Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". Gains or losses from the sales of automotive finance receivables are recognized in the period in which sales occur. In determining the gain or loss for each sale, the Company allocates the book value of the loan portfolio between amounts sold and retained interests based upon relative fair values. The Company's retained interests in securitized installment loan receivables consist of retained interests in sold principal, interest-only strip receivables representing the present value of future excess cash flow and servicing assets. Retained interests in the sold principal are carried at allocated carrying amounts and subsequently assessed for impairment. Interest-only strip receivables are carried at fair value and marked to market as a component of other comprehensive income. Servicing assets are initially recorded at allocated carrying amounts and subsequently amortized over the servicing period and assessed for impairment. 48 51 REPUBLIC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) REVENUE EARNING VEHICLES Revenue earning vehicles are stated at cost less accumulated depreciation. The straight-line method is used to depreciate revenue earning vehicles to their estimated residual values over periods typically ranging from three to twelve months. Depreciation expense includes costs relating to damaged vehicles and gains and losses on revenue earning vehicle sales in the ordinary course of business and is included as a component of cost of automotive rental operations in the accompanying Consolidated Statements of Operations. A summary of revenue earning vehicles at December 31 is as follows:
1998 1997 -------- -------- Revenue earning vehicles.................................... $5,062.8 $4,980.1 Less: accumulated depreciation.............................. (474.1) (513.6) -------- -------- $4,588.7 $4,466.5 ======== ========
Revenue earning vehicles with a net book value of approximately $3.73 billion at December 31, 1998 were acquired under programs that allow the Company to require counterparties to repurchase vehicles held for periods of up to twenty-four months. The agreements contain varying mileage and damage limitations. The Company also leases vehicles under operating lease agreements which require the Company to provide normal maintenance and liability coverage. The agreements generally have terms of four to thirteen months. Many agreements provide for an option to terminate the leases early and allow for the purchase of leased vehicles subject to certain restrictions. INVENTORY Inventory consists primarily of retail vehicles held for sale valued using the specific identification method, net of reserves. Cost includes acquisition expenses, including reconditioning and transportation costs. Parts and accessories are valued at the factory list price which approximates lower of cost (first-in, first-out) or market. A summary of inventory at December 31 is as follows:
1998 1997 -------- -------- New vehicles................................................ $1,274.3 $ 642.7 Used vehicles............................................... 457.3 377.4 Parts and accessories....................................... 119.3 55.2 Other....................................................... 2.6 7.8 -------- -------- $1,853.5 $1,083.1 ======== ========
INVESTMENTS Investments consist of marketable securities and investments in businesses accounted for under the equity method. Marketable securities include investments in debt securities classified as available for sale and are stated at fair value with unrealized gains and losses included in other comprehensive income. Fair value is estimated based on quoted market prices. Equity method investments represent investments in 50% or less owned automotive businesses over which the Company has the ability to exercise significant influence. The Company records its initial equity method investments at cost and subsequently adjusts the carrying amounts of the investments for the Company's share of the earnings or losses of the investee after the acquisition date as a component of other income (loss) in the Company's Consolidated Statements of Operations. 49 52 REPUBLIC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of investments at December 31 is as follows:
1998 1997 ------ ------ Marketable securities....................................... $101.4 $ 4.7 Equity method investments................................... 70.9 8.7 ------ ------ $172.3 $ 13.4 ====== ======
Investments in marketable securities at December 31 are as follows:
1998 1997 ------ ------ U.S. government debt securities............................. $ 70.0 $ -- Corporate debt securities................................... 31.4 4.7 ------ ------ $101.4 $ 4.7 ====== ======
At December 31, 1998, aggregate maturities of marketable securities are as follows:
FAIR COST VALUE ------ ------ Due in 2 - 5 years.......................................... $ 91.9 $ 91.3 Due in 6 - 10 years......................................... 3.0 3.0 Due after 10 years.......................................... 7.1 7.1 ------ ------ $102.0 $101.4 ====== ======
Gross unrealized losses on U.S. government debt securities were $.6 million at December 31, 1998. There were no gross unrealized losses on corporate debt securities at December 31, 1998 or 1997. There were no gross unrealized gains on U.S. government or corporate debt securities at December 31, 1998 or 1997. Proceeds from sales of available for sale securities were $94.1 million, $402.3 million and $42.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. Gross realized gains and losses were not material for the years ended December 31, 1998 and 1996. During the year ended December 31, 1997, realized gains of $102.3 million were recognized on the sale of 15.0 million common shares of ADT Limited. Such shares of ADT Limited common stock were received in March 1997 upon the Company's exercise of a warrant which became exercisable upon termination of the Company's agreement to acquire ADT Limited by mutual agreement of the parties in September 1996. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized, while minor replacements, maintenance and repairs are charged to expense as incurred. When property is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the Consolidated Statements of Operations. The Company revises the estimated useful lives of property and equipment acquired through its business acquisitions to conform with its policies regarding property and equipment. Depreciation is provided over the estimated useful lives of the assets involved using the straight-line method. The estimated useful lives are: twenty to forty years for buildings and improvements, three to fifteen years for equipment and five to ten years for furniture and fixtures. 50 53 REPUBLIC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of property and equipment at December 31 is as follows:
1998 1997 -------- -------- Land........................................................ $ 687.0 $ 474.9 Furniture, fixtures and equipment........................... 530.6 299.8 Buildings and improvements.................................. 1,116.9 752.0 -------- -------- 2,334.5 1,526.7 Less: accumulated depreciation and amortization............. (290.9) (231.6) -------- -------- $2,043.6 $1,295.1 ======== ========
INTANGIBLE AND OTHER ASSETS Intangible and other assets consist primarily of the cost of acquired businesses in excess of the fair value of net assets acquired. The cost in excess of the fair value of net assets is amortized over forty years on a straight-line basis. Accumulated amortization of intangible assets was $85.6 million and $31.7 million at December 31, 1998 and 1997, respectively. The Company continually evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful life of intangible assets or whether the remaining balance of intangible assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the intangible assets in measuring their recoverability. LIABILITY INSURANCE The Company retains up to $1.0 million of risk per claim plus claims handling expense under its various liability insurance programs for third party property damage and bodily injury claims, primarily relating to claims arising from the Company's automotive rental operations. Costs in excess of this retained risk per claim are insured under various contracts with insurance carriers. The ultimate costs of these retained insurance risks are estimated by management and by actuarial evaluation based on historical claims experience, adjusted for current trends and changes in claims-handling procedures. In 1996, the Company changed its method of accounting for estimated auto rental liability insurance claims by no longer discounting such liability. The effect of this change was not material to the Company's consolidated financial position or results of operations. REVENUE RECOGNITION Revenue from the Company's automotive retail operations consists of sales of new and used vehicles, parts and service and finance and insurance products. An estimated allowance for chargebacks against revenue recognized from sales of finance and insurance products is established during the period in which related revenue is recognized. Revenue from the Company's automotive rental operations consists primarily of fees from rentals and the sale of related rental products. The Company recognizes revenue over the period in which products are sold, vehicles are rented or services are provided. DERIVATIVE FINANCIAL INSTRUMENTS The Company utilizes interest rate protection agreements with several counterparties to manage the impact of interest rate changes on the Company's debt obligations. The Company does not use derivative financial instruments for trading purposes. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed notional principal amount. Income or expense on derivative financial instruments used to manage interest rate exposure is recorded on an accrual basis, as an adjustment to the yield of the underlying exposures over the periods covered by the contracts. If an interest rate swap is terminated early, 51 54 REPUBLIC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) any resulting gain or loss is deferred and amortized as an adjustment of the cost of the underlying exposure position over the remaining periods originally covered by the terminated swap. If all or part of an underlying position is terminated, the related pro-rata portion of any unrecognized gain or loss on the swap is recognized in income at that time as part of the gain or loss on the termination. Amounts receivable or payable under the agreements are included in receivables or accrued liabilities in the accompanying Consolidated Balance Sheets and were not material at December 31, 1998 or 1997. ADVERTISING The Company expenses the cost of advertising as incurred or when such advertising initially takes place. No advertising costs were capitalized at December 31, 1998 or 1997. Advertising expense was $283.1 million, $229.1 million and $148.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. STATEMENTS OF CASH FLOWS The Company considers all highly liquid investments with purchased maturities of three months or less to be cash equivalents unless the investments are legally or contractually restricted for more than three months. The effect of non-cash transactions related to business combinations, as discussed in Note 2, Business Combinations, and other non-cash transactions are excluded from the accompanying Consolidated Statements of Cash Flows. The Company made interest payments of approximately $382.5 million, $286.4 million and $285.1 million for the years ended December 31, 1998, 1997 and 1996, respectively, including interest on vehicle inventory and revenue earning vehicle financing. The Company made income tax payments of approximately $139.8 million, $72.1 million and $20.4 million for the years ended December 31, 1998, 1997 and 1996, respectively. NEW ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires computer software costs associated with internal use software to be expensed as incurred until certain capitalization criteria are met. The Company will adopt SOP 98-1 prospectively beginning January 1, 1999. Adoption of this Statement will not have a material impact on the Company's consolidated financial position or results of operations. In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires all costs associated with pre-opening, pre-operating and organization activities to be expensed as incurred. The Company's accounting policies conform with the requirements of SOP 98-5, therefore adoption of this Statement will not impact the Company's consolidated financial position or results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS 133 is effective for fiscal years beginning after June 15, 1999. SFAS 133 cannot be applied retroactively. The Company will adopt SFAS 133 beginning January 1, 2000. The Company has not yet quantified the impact of adopting SFAS 133 on the Company's consolidated financial statements. However, SFAS 133 could increase volatility in earnings and other comprehensive income. 52 55 REPUBLIC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. BUSINESS COMBINATIONS Businesses acquired through December 31, 1998 and accounted for under the purchase method of accounting are included in the Consolidated Financial Statements from the date of acquisition. Businesses acquired and accounted for under the pooling of interests method of accounting have been included retroactively in the Consolidated Financial Statements as if the companies had operated as one entity since inception. During the year ended December 31, 1998, the Company acquired various businesses primarily in the automotive retail and solid waste services industries. The Company issued an aggregate of approximately 21.9 million shares of Common Stock and paid approximately $736.1 million of cash for primarily automotive retail acquisitions accounted for under the purchase method of accounting. The Company issued an aggregate of 3.4 million shares of Common Stock and paid approximately $485.3 million of cash and certain properties for solid waste acquisitions accounted for under the purchase method of accounting. During the year ended December 31, 1997, the Company acquired various businesses in the automotive retail, automotive rental and solid waste services industries. The Company issued an aggregate of approximately 53.7 million shares of Common Stock and paid approximately $248.6 million of cash or notes in such transactions which have been accounted for under the purchase method of accounting, and issued an aggregate of approximately 83.5 million shares of Common Stock in such transactions which have been accounted for under the pooling of interests method of accounting. During the year ended December 31, 1996, the Company acquired various businesses in the automotive retail, automotive rental, solid waste services and electronic security services industries. The Company issued an aggregate of approximately 9.1 million shares of Common Stock and paid approximately $51.5 million of cash in such transactions which have been accounted for under the purchase method of accounting, and issued an aggregate of approximately 71.4 million shares of Common Stock in such transactions which have been accounted for under the pooling of interests method of accounting. The preliminary purchase price allocations for business combinations accounted for under the purchase method of accounting for the years ended December 31 were as follows:
1998 1997 1996 --------- --------- ------ Revenue earning vehicles................................ $ 26.8 $ 415.3 $ 79.4 Property and equipment.................................. 372.6 517.8 3.4 Intangible and other assets............................. 1,252.7 1,138.7 57.8 Net assets of discontinued operations................... 553.5 140.9 71.1 Working capital (deficiency)............................ 733.7 61.6 (8.9) Debt assumed............................................ (1,102.3) (1,095.9) (59.2) Other liabilities....................................... (74.4) (18.7) (5.5) Common stock issued..................................... (541.2) (943.1) (86.6) --------- --------- ------ Cash used in business acquisitions, net of cash acquired.............................................. $ 1,221.4 $ 216.6 $ 51.5 ========= ========= ======
As discussed in Note 12, Discontinued Operations, the Company has decided to sell its remaining interest in RSG. In addition, the Company sold its electronic security services division in October 1997. Accordingly, the financial position and results of operations of businesses acquired in the solid waste services and electronic security services segments have been accounted for as discontinued operations in the accompanying Consolidated Financial Statements. 53 56 REPUBLIC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's unaudited pro forma consolidated results of continuing operations assuming automotive retail and rental acquisitions accounted for under the purchase method of accounting had occurred at the beginning of each period presented are as follows for the years ended December 31:
1998 1997 --------- --------- Revenue..................................................... $18,604.1 $16,673.0 Income from continuing operations........................... 360.9 122.8 Diluted earnings per share from continuing operations....... .76 .27
The unaudited pro forma results of continuing operations are presented for informational purposes only and may not necessarily reflect the future results of operations of the Company or what the results of operations would have been had the Company owned and operated these businesses as of the beginning of each period presented. 3. REVENUE EARNING VEHICLE DEBT Revenue earning vehicle debt at December 31 is as follows:
1998 1997 -------- -------- Amounts under various commercial paper programs secured by eligible vehicle collateral; interest based on market-dictated commercial paper rates; weighted average interest rates of 5.54% and 5.85% at December 31, 1998 and 1997, respectively........................................ $3,363.2 $2,919.4 Amounts under various medium-term note programs secured by eligible vehicle collateral: Fixed rate component; weighted average interest rates of 7.12% and 7.09% at December 31, 1998 and 1997, respectively; maturities through 2003.................. 655.9 736.3 Floating rate component based on a spread over 3 month LIBOR; weighted average interest rates of 5.80% and 6.28% at December 31, 1998 and 1997, respectively; maturities through 2001................................ 143.7 166.5 Other uncommitted secured vehicle financings primarily with financing institutions in the United Kingdom; LIBOR based interest rates; weighted average interest rates of 6.16% and 6.99% at December 31, 1998 and 1997, respectively..... 215.1 349.9 -------- -------- 4,377.9 4,172.1 Less: long-term portion..................................... (1,759.7) (1,962.7) -------- -------- $2,618.2 $2,209.4 ======== ========
The Company's $3.55 billion commercial paper programs are comprised of a $2.3 billion single-seller commercial paper program and three bank-sponsored multi-seller commercial paper conduit facilities totaling $1.25 billion. Bank lines of credit of $2.07 billion terminating March 1999 provide liquidity backup for the facilities. Letters of credit totaling $335.0 million provide credit enhancement and additional liquidity backup for the facilities. The weighted average interest rate on total revenue earning vehicle debt was 5.82% and 6.17% at December 31, 1998 and 1997, respectively. Interest expense on revenue earning vehicle debt is included as a component of cost of automotive rental operations in the accompanying Consolidated Statements of Operations. In January 1999, the Company increased the commercial paper programs to $3.9 billion through an increase in the conduit facilities from $1.25 billion to $1.6 billion. On February 26, 1999, the Company issued $1.8 billion of rental vehicle asset backed notes consisting of $550.0 million floating rate notes; $750.0 million 5.88% fixed rate notes; and $500.0 million 6.02% fixed rate notes (collectively, the "Notes"). The Company 54 57 REPUBLIC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) fixed the effective interest rate on the $550.0 million floating rate notes at 5.73% through the use of certain derivative transactions. Letters of credit totaling $150.0 million provide credit enhancement for the Notes. Proceeds from the Notes were used to refinance amounts outstanding under the Company's commercial paper programs. As a result of the refinancing, the Company has reduced its commercial paper programs from $3.9 billion to $3.24 billion comprised of a $1.99 billion single-seller program and three bank-sponsored multi-seller commercial paper conduit facilities totaling $1.25 billion. Bank lines of credit of $1.79 billion terminating February 2000 provide liquidity backup for these facilities. Letters of credit totaling $310.0 million provide credit enhancement and additional liquidity backup for the facilities. At December 31, 1998, aggregate maturities of revenue earning vehicle debt were as follows: 1999........................................................ $2,618.2 2000........................................................ 1,259.9 2001........................................................ 325.0 2002........................................................ -- 2003........................................................ 174.8 -------- $4,377.9 ========
4. NOTES PAYABLE AND LONG-TERM DEBT Notes payable and long-term debt at December 31 is as follows:
1998 1997 -------- ------ Vehicle inventory credit facilities; secured by the Company's vehicle inventory; weighted average interest rates of 5.81% and 6.36% at December 31, 1998 and 1997, respectively.............................................. $1,339.2 $472.5 $1.0 billion unsecured revolving credit facility; interest payable using LIBOR based rates; weighted average interest rates of 6.57% and 5.93% at December 31, 1998 and 1997, respectively; matures 2002................................ 500.0 250.0 Other notes; secured by real property, equipment and other assets; interest ranging from 6% to 10%; maturing through 2009...................................................... 158.5 105.3 -------- ------ 1,997.7 827.8 Less: current portion....................................... (1,441.8) (521.2) -------- ------ $ 555.9 $306.6 ======== ======
The Company's revolving credit facility requires, among other items, that the Company maintain certain financial ratios and comply with certain financial covenants. The Company was in compliance with these ratios and covenants at December 31, 1998. In March 1999, the Company entered into a $500.0 million 364-day unsecured bank revolving credit facility. This facility will be used for general corporate purposes and complements the $1.0 billion bank revolving credit facility maturing 2002. In November 1998, the Company entered into a $500.0 million bank-sponsored multi-seller commercial paper conduit facility to finance new and used vehicle inventory for the Company's automotive retail operations. The facility supplements the new and used vehicle inventory finance facilities provided by vehicle manufacturer captive finance companies. At December 31, 1998, approximately $7.5 million was financed under this facility. In December 1996, the Company completed a tender offer and consent solicitation resulting in the repurchase of approximately $100.0 million aggregate principal amount 11.75% senior notes due 2006 55 58 REPUBLIC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ("Senior Notes"), which were issued in February 1996. The Company recorded an extraordinary charge of $31.6 million, net of income taxes, during 1996 related to the early extinguishment of the Senior Notes and certain other debt. Included in this charge are bond redemption premiums, the write-off of debt issue costs, prepayment penalties and other fees related to the tender offer and the repayment of other debt. Interest expense on vehicle inventory credit facilities is included as a component of cost of automotive retail sales in the accompanying Consolidated Statements of Operations. At December 31, 1998, aggregate maturities of notes payable and long-term debt were as follows: 1999........................................................ $1,441.8 2000........................................................ 10.1 2001........................................................ 2.3 2002........................................................ 537.2 2003........................................................ 1.2 Thereafter.................................................. 5.1 -------- $1,997.7 ========
5. INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". Accordingly, deferred income taxes have been provided to show the effect of temporary differences between the recognition of revenue and expenses for financial and income tax reporting purposes and between the tax basis of assets and liabilities and their reported amounts in the financial statements. Certain businesses acquired in 1997 and 1996 and accounted for under the pooling of interests method of accounting were subchapter S corporations for income tax purposes. The subchapter S corporation status of these companies was terminated effective with the closing date of the acquisitions. For purposes of these Consolidated Financial Statements, federal and state income taxes have been recorded as if these companies had filed subchapter C corporation tax returns for the pre-acquisition periods, and the current income tax expense is reflected as an increase to additional paid-in capital. Effective with the RSG initial public offering on July 1, 1998 as further described in Note 7, Shareholders' Equity, RSG is no longer included in the Company's consolidated federal income tax return. The components of the provision for income taxes related to continuing operations for the years ended December 31 are as follows:
1998 1997 1996 ------ ----- ----- Current: Federal................................................... $140.1 $10.2 $15.1 State..................................................... 12.3 .2 (2.1) Federal and state deferred.................................. 60.1 32.3 (9.6) Foreign deferred............................................ (9.9) (4.4) (8.8) Change in valuation allowance............................... (14.5) -- 20.7 ------ ----- ----- Provision for income taxes.................................. $188.1 $38.3 $15.3 ====== ===== =====
56 59 REPUBLIC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation of the statutory federal income tax rate to the Company's effective tax rate for continuing operations for the years ended December 31 is as follows:
1998 1997 1996 ---- ---- ----- Statutory federal income tax rate........................... 35.0% 35.0% (35.0)% Non-deductible expenses..................................... 2.4 3.9 10.9 State income taxes, net of federal benefit.................. 2.2 2.5 (1.9) Change in valuation allowance............................... (2.8) -- 57.4 Other, net.................................................. (.8) (4.2) 11.5 ---- ---- ----- Effective tax rate.......................................... 36.0% 37.2% 42.9% ==== ==== =====
Components of the net deferred income tax liability at December 31 are as follows:
1998 1997 ------ ------ Deferred income tax liabilities: Book basis in property over tax basis..................... $532.0 $385.4 Deferred income tax assets: Net operating losses...................................... (98.5) (55.0) Accruals not currently deductible......................... (378.6) (270.0) Valuation allowance......................................... 172.2 136.5 ------ ------ Net deferred income tax liability........................... $227.1 $196.9 ====== ======
At December 31, 1998, the Company had available domestic net operating loss carryforwards of approximately $134.9 million which begin to expire in the year 2011 and foreign net operating loss carryforwards of approximately $89.4 million, the majority of which have an indefinite carryforward. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company provides valuation allowances to offset portions of deferred tax assets due to uncertainty surrounding the future realization of such deferred tax assets. The Company adjusts the valuation allowance in the period management determines it is more likely than not that deferred tax assets will or will not be realized. The foreign losses included in income from continuing operations before income taxes and extraordinary charge for the years ended December 31, 1998, 1997 and 1996 were $(28.8) million, $(11.5) million and $(22.0) million, respectively. 6. OTHER COMPREHENSIVE INCOME During the year ended December 31, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. The changes in the components of other comprehensive income (loss), net of income taxes, are as follows for the years ended December 31:
1998 1997 1996 ------------------------- ------------------------- ------------------------- PRE-TAX TAX NET PRE-TAX TAX NET PRE-TAX TAX NET AMOUNT EFFECT AMOUNT AMOUNT EFFECT AMOUNT AMOUNT EFFECT AMOUNT ------- ------ ------ ------- ------ ------ ------- ------ ------ Foreign currency translation adjustments...... $(1.6) $ -- $(1.6) $(4.7) $ -- $(4.7) $(.8) $ -- $(.8) Unrealized loss on marketable securities...... (.6) .2 (.4) -- -- -- -- -- -- Unrealized gain on interest-only strip receivables................................. .9 (.3) .6 -- -- -- -- -- -- ----- ---- ----- ----- ----- ----- ---- ----- ---- Other comprehensive loss...................... $(1.3) $(.1) $(1.4) $(4.7) $ -- $(4.7) $(.8) $ -- $(.8) ===== ==== ===== ===== ===== ===== ==== ===== ====
57 60 REPUBLIC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Accumulated other comprehensive loss consists of the following at December 31:
1998 1997 ----- ----- Foreign currency translation adjustments.................... $(4.5) $(2.9) Unrealized loss on marketable securities.................... (.4) -- Unrealized gain on interest-only strip receivables.......... .6 -- ----- ----- $(4.3) $(2.9) ===== =====
No material reclassification adjustments were recorded in 1998 or 1996. During the year ended December 31, 1997, the Company reclassified unrealized holding gains totaling approximately $65.0 million, net of income taxes of approximately $37.3 million, to realized gains in connection with the sale of the shares of ADT Limited common stock in May 1997. 7. SHAREHOLDERS' EQUITY During the year ended December 31, 1998, the Company's solid waste subsidiary, RSG, completed an initial public offering of approximately 36.1% of its outstanding common stock, resulting in net proceeds of approximately $1.43 billion. In addition, in August 1998, the Company's Board of Directors authorized the repurchase of up to $500.0 million of Common Stock over the following 12 months. Repurchases are made either pursuant to Rule 10b-18 of the Securities Exchange Act of 1934, as amended, or in privately negotiated transactions. As of December 31, 1998, the Company had repurchased an aggregate of 9.1 million shares of Common Stock for an aggregate purchase price of approximately $136.0 million. During the year ended December 31, 1997, the Company sold 15.8 million shares of Common Stock in a private placement transaction resulting in net proceeds of approximately $552.7 million. In addition, in May 1997, the Company's Certificate of Incorporation was amended to increase the number of authorized shares of Common Stock from 500.0 million to 1.5 billion shares. During the year ended December 31, 1996, the Company sold an aggregate of 22.0 million shares of Common Stock in private placement transactions resulting in net proceeds of approximately $550.9 million. In May 1996, the Board of Directors declared a two-for-one split of the Company's Common Stock in the form of a 100% stock dividend, payable June 8, 1996, to holders of record on May 28, 1996. In addition, in May 1996 the Company's Certificate of Incorporation was amended to increase the number of authorized shares of Common Stock from 350.0 million shares to 500.0 million shares. The Company has 5.0 million authorized shares of preferred stock, par value $.01 per share, none of which are issued or outstanding. The Board of Directors has the authority to issue the preferred stock in one or more series and to establish the rights, preferences and dividends. 8. STOCK OPTIONS AND WARRANTS The Company has various stock option plans under which shares of Common Stock may be granted to key employees and directors of the Company. Options granted under the plans are non-qualified and are granted at a price equal to the fair market value of the Common Stock at the date of grant. Generally, options granted will have a term of 10 years from the date of grant, and will vest in increments of 25% per year over a four-year period on the yearly anniversary of the grant date. In October 1998, the Company's Board of Directors approved the repricing of approximately 32.1 million employee stock options at $12.75 per share, equal to the closing price of the Company's Common Stock on the last business day prior to the date of the repricing. Option holders will be precluded from exercising any of their repriced options prior to January 2, 2000. All other terms of the existing options, including the vesting schedules, remain unchanged. 58 61 REPUBLIC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) \A summary of stock option and warrant transactions is as follows for the years ended December 31:
1998 1997 1996 ------------------ ------------------ ------------------ WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ --------- ------ --------- ------ --------- Options and warrants outstanding at beginning of period............... 48.1 $15.67 52.5 $7.63 49.6 $4.87 Granted............................. 16.9 21.89 15.2 28.52 8.7 21.86 Exercised........................... (9.3) 3.62 (18.7) 3.24 (5.6) 4.03 Canceled............................ (1.1) 25.34 (.9) 24.59 (.2) 9.44 ---- ----- ---- Options and warrants outstanding at end of period..................... 54.6 12.52 48.1 15.67 52.5 7.63 ==== ===== ==== Options and warrants exercisable at end of period..................... 18.8 11.27 26.8 8.71 38.5 4.12 Options available for future grants............................ 28.2 14.0 7.9
The following table summarizes information about outstanding and exercisable stock options and warrants at December 31, 1998:
OUTSTANDING EXERCISABLE ----------------------------------- -------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- REMAINING AVERAGE AVERAGE EXERCISE PRICE OR CONTRACTUAL EXERCISE EXERCISE RANGE OF EXERCISE PRICES SHARES LIFE(YRS.) PRICE SHARES PRICE - --------------------------------------- ------- ------------ ---------- ------- ---------- $ 1.13 - $12.38........................ 15.3 3.10 $ 7.29 14.1 $ 6.96 12.75................................. 32.1 7.98 12.75 -- -- 13.38 - 31.19........................ 7.2 8.33 23.24 4.7 24.19 ---- ---- 54.6 6.66 12.52 18.8 11.27 ==== ====
In March 1999, approximately 8.5 million options held by employees of RSG were cancelled and replaced with options to acquire common shares of RSG. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" in accounting for stock-based employee compensation arrangements whereby no compensation cost related to stock options is deducted in determining net income (loss). Had compensation cost for the Company's stock option plans been determined pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's net income (loss) and earnings (loss) per share would have decreased (increased) accordingly. Using the Black-Scholes option pricing model for all options granted after December 31, 1994, the Company's pro forma net income (loss), pro forma earnings (loss) per share and pro forma weighted average fair value of options granted, with related assumptions, are as follows for the years ended December 31:
1998 1997 1996 ------------- ------------- ------------- Pro forma net income (loss)............... $368.5 $375.3 $(25.4) Pro forma diluted earnings (loss) per share................................... .81 .88 (.08) Pro forma weighted average fair value of options granted......................... 13.87 10.03 9.80 Risk free interest rates.................. 4.76 - 4.82% 5.74 - 5.78% 5.98 - 6.17% Expected lives............................ 5-7 years 5-7 years 5-7 years Expected volatility....................... 40% 40% 40%
59 62 REPUBLIC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS By letter dated January 11, 1996, Acme Commercial Corp. d/b/a CarMax, The Auto Superstore, ("CarMax") accused the Company's wholly-owned subsidiary, AutoNation USA, of infringing CarMax's trademark rights by using the marks AutoNation USA(SM) and "The Better Way to Buy a Car(SM)." AutoNation USA denied such allegations and on February 5, 1996, filed suit in the U.S. District Court for the Southern District of Florida seeking a declaratory judgment that its use and registration of such marks do not violate any of the rights of CarMax. On or about October 11, 1996, CarMax filed a counterclaim against AutoNation USA seeking damages and an order enjoining AutoNation USA from using certain marks, including the marks AutoNation USA and "The Better Way to Buy a Car." On November 5, 1998, following a jury trial, the court entered a judgement in favor of AutoNation USA and against CarMax with respect to the marks in question. On December 2, 1998, CarMax filed a notice of appeal of the trial court's decision with the U.S. Court of Appeals for the Eleventh Circuit. The Company is confident the appellate court will affirm the lower court's decision. The Company is also a party to various other general corporate legal proceedings which have arisen in the ordinary course of business. While the results of these matters, as well as the matter described above, cannot be predicted with certainty, the Company believes that losses, if any, resulting from the ultimate resolution of these matters will not have a material adverse effect on the Company's consolidated results of operations, cash flows or financial position. However, unfavorable resolution could affect the consolidated results of operations or cash flows for the quarterly periods in which they are resolved. LEASE COMMITMENTS The Company and its subsidiaries lease real property, equipment and software under various operating leases with terms from 1 to 25 years. The Company has also entered into various airport concession and permit agreements which generally provide for payment of a percentage of revenue from vehicle rentals with a guaranteed minimum lease obligation. Expenses under real property, equipment and software leases and airport concession and permit agreements (excluding amounts charged through to customers) for the years ended December 31 are as follows:
1998 1997 1996 ------ ------ ------ Real property............................................... $ 97.5 $ 59.5 $ 47.2 Equipment and software...................................... 29.8 42.5 23.8 Airport concession and permit fees: Minimum fixed obligations................................. 79.3 86.3 89.6 Additional amounts, based on revenue from vehicle rentals................................................ 96.4 110.0 94.5 ------ ------ ------ Total............................................. $303.0 $298.3 $255.1 ====== ====== ======
60 63 REPUBLIC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Future minimum lease obligations under noncancelable real property, equipment and software leases and airport agreements with initial terms in excess of one year at December 31, 1998 are as follows: Year Ending December 31: 1999...................................................... $181.2 2000...................................................... 134.9 2001...................................................... 110.6 2002...................................................... 78.6 2003...................................................... 56.4 Thereafter................................................ 218.9 ------ $780.6 ======
In connection with the development of the AutoNation USA megastores, the Company is the lessee under a $500.0 million operating lease facility established to acquire and develop properties used in its business. The Company has guaranteed the residual value of the properties under this facility which guarantee totaled approximately $418.6 million at December 31, 1998. OTHER MATTERS In the normal course of business, the Company is required to post performance and surety bonds, letters of credit, and/or cash deposits as financial guarantees of the Company's performance. To date, the Company has satisfied financial responsibility requirements for regulatory agencies by making cash deposits, obtaining surety bonds or by obtaining bank letters of credit. At December 31, 1998, surety bonds and letters of credit totaling $279.1 million expire through 2012. 10. EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the year. Diluted earnings (loss) per share is based on the combined weighted average number of common shares and common share equivalents outstanding which include, where appropriate, the assumed exercise or conversion of warrants and options. In computing diluted earnings (loss) per share, the Company has utilized the treasury stock method. The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted earnings (loss) per share is as follows for the years ended December 31:
1998 1997 1996 ----- ----- ----- Weighted average shares outstanding used in calculating basic earnings per share.................................. 455.1 403.1 320.9 Gross common equivalent shares.............................. 62.5 63.6 -- Weighted average treasury shares purchased.................. (13.6) (24.3) -- Effect of using weighted average common equivalent shares outstanding............................................... (33.1) (11.5) -- ----- ----- ----- Weighted average common and common equivalent shares used in calculating diluted earnings per share.................... 470.9 430.9 320.9 ===== ===== =====
At December 31, 1998 and 1997, the Company had approximately 4.8 million and 5.4 million stock options outstanding, respectively, which have been excluded from the computation of diluted earnings per share since they are anti-dilutive. For the year ended December 31, 1996, weighted average common equivalent shares of approximately 34.6 million shares have been excluded from the computation of diluted earnings per share since they are anti-dilutive. 61 64 REPUBLIC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. RESTRUCTURING AND OTHER CHARGES During the year ended December 31, 1997, the Company recorded pre-tax charges of approximately $244.1 million. These charges consisted of $150.0 million associated with combining the Company's franchised automotive dealerships and used vehicle megastore operations into one automotive retail division and $94.1 million associated with integrating the Company's automotive rental operations. Approximately $85.0 million of the $150.0 million automotive retail charge appears as restructuring and other charges in the Company's 1997 Consolidated Statement of Operations and consists of: $42.5 million for consolidation of information systems; $25.3 million related primarily to relocating certain operations; and $17.2 million of severance and other costs. The remaining $65.0 million of the $150.0 million automotive retail charge relates to inventory consolidation and is included in cost of automotive retail sales in the Company's 1997 Consolidated Statement of Operations. During the year ended December 31, 1998, the Company reduced its estimated restructuring reserves for information systems and increased its estimated reserves for the relocation of certain operations by approximately $21.0 million. The decrease in the information systems reserve is a result of the Company's decision to eliminate or delay the conversion of certain systems. The increase in the relocation reserve is due to the Company's decision to close its reconditioning centers and relocate the reconditioning operations to the Company's AutoNation USA megastores. Through December 31, 1998, the Company has spent approximately $30.3 million related to restructuring activities and has recorded $30.6 million of these restructuring charges against certain assets. As of December 31, 1998, approximately $24.1 million remained in accrued liabilities related to these charges. The Company believes the activities associated with these charges will be substantially completed during 1999. The primary components of the $94.1 million automotive rental charge in 1997 are as follows: $32.0 million related to elimination of redundant information systems; $18.0 million related to fleet consolidation; and $44.1 million related to closure or sale of duplicate rental facilities and merger and other non-recurring expenses. Through December 31, 1998, the Company has spent approximately $45.5 million related to restructuring activities and has recorded $26.6 million of these restructuring charges against certain assets. As of December 31, 1998, approximately $22.0 million remained in accrued liabilities related to these charges. The Company believes the activities associated with these charges will be substantially completed during 1999. During the year ended December 31, 1996, the Company recorded pre-tax charges of approximately $86.7 million related primarily to the integration of the operations of Alamo Rent-A-Car, Inc. into those of the Company. Also included in these charges are merger expenses associated with an acquisition accounted for under the pooling of interests method of accounting. Approximately $29.5 million of such expenses appear as restructuring and other charges in the Company's Consolidated Statement of Operations for the year ended December 31, 1996 with the remainder of approximately $57.2 million included in cost of automotive rental operations and selling, general and administrative expenses. These costs primarily include asset write-offs, severance benefits, accounting and legal merger costs and changes in various estimated reserve requirements. The activities associated with these charges were substantially completed during 1997. 12. DISCONTINUED OPERATIONS As a result of the Company's decision to sell its remaining interest in RSG, the net assets and operating results of the Company's solid waste services segment have been classified as discontinued operations for all periods presented in the accompanying Consolidated Financial Statements. The minority shareholders' interest in the equity of RSG as of December 31, 1998 and the net earnings of RSG for the period subsequent to the July 1, 1998 initial public offering have been included as a reduction of the net assets and income from discontinued operations, respectively. 62 65 REPUBLIC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In October 1997, the Company sold its electronic security services division for approximately $610.0 million resulting in an after tax gain of approximately $230.0 million. In 1998, the Company finalized the sale resulting in an additional after tax gain of approximately $11.6 million. The operating results and gain on disposition of the electronic security services segment have been classified as discontinued operations in the accompanying Consolidated Financial Statements. A summary of the net assets of discontinued operations for the Company's solid waste services segment is as follows as of December 31:
1998 1997 -------- -------- Current assets.............................................. $ 784.0 $ 175.9 Non-current assets.......................................... 2,028.1 1,172.1 -------- -------- Total assets........................................... 2,812.1 1,348.0 -------- -------- Current liabilities......................................... 783.8 158.0 Non-current liabilities..................................... 729.2 173.1 -------- -------- Total liabilities...................................... 1,513.0 331.1 -------- -------- Minority interest........................................... 468.9 -- -------- -------- Net assets of discontinued operations....................... $ 830.2 $1,016.9 ======== ========
A summary of the results of operations of the Company's solid waste services and electronic security services segments is as follows for the years ended December 31:
1998 1997 1996 -------- -------------------------------- ------------------------------ SOLID SOLID ELECTRONIC SOLID ELECTRONIC WASTE WASTE SECURITY TOTAL WASTE SECURITY TOTAL -------- -------- ---------- -------- ------ ---------- -------- Revenue.................................. $1,369.1 $1,127.7 $83.8 $1,211.5 $953.3 $85.3 $1,038.6 Expenses: Cost of operations..................... 949.0 809.1 38.4 847.5 703.6 37.3 740.9 Selling, general and administrative.... 120.8 107.1 30.7 137.8 126.9 33.5 160.4 Restructuring and other charges........ -- -- -- -- 8.8 -- 8.8 -------- -------- ----- -------- ------ ----- -------- Operating income......................... 299.3 211.5 14.7 226.2 114.0 14.5 128.5 Interest expense......................... (7.4) (5.7) -- (5.7) (10.9) (.5) (11.4) Interest and other income................ .6 6.7 -- 6.7 13.9 .5 14.4 -------- -------- ----- -------- ------ ----- -------- Income before income taxes............... 292.5 212.5 14.7 227.2 117.0 14.5 131.5 Provision for income taxes............... 105.3 76.9 5.2 82.1 49.5 6.1 55.6 -------- -------- ----- -------- ------ ----- -------- Net income before minority interest...... 187.2 135.6 9.5 145.1 67.5 8.4 75.9 Minority interest........................ 33.9 -- -- -- -- -- -- -------- -------- ----- -------- ------ ----- -------- Net income............................... $ 153.3 $ 135.6 $ 9.5 $ 145.1 $ 67.5 $ 8.4 $ 75.9 ======== ======== ===== ======== ====== ===== ========
13. DERIVATIVE FINANCIAL INSTRUMENTS The Company is exposed to market risks arising from changes in interest rates. Due to its limited foreign operations, the Company does not have material market risk exposures relative to changes in foreign exchange rates. CREDIT EXPOSURE The Company is exposed to credit related losses in the event of non-performance by counterparties to certain derivative financial instruments. The Company monitors the credit worthiness of the counterparties 63 66 REPUBLIC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and presently does not expect default by any of the counterparties. The Company does not obtain collateral in connection with its derivative financial instruments. The credit exposure that results from interest rate contracts is represented by the fair value of contracts with a positive fair value as of the reporting date. See Note 14, Fair Value of Financial Instruments, for the fair value of derivatives. The Company's credit exposure on its interest rate derivatives was not material at December 31, 1998 or 1997. INTEREST RATE RISK MANAGEMENT The Company uses interest rate swap agreements to manage the impact of interest rate changes on the Company's variable rate debt. The amounts exchanged by the counterparties to interest rate swap agreements are based upon the notional amounts and other terms, generally related to interest rates, of the derivatives. While notional amounts of interest rate swaps form part of the basis for the amounts exchanged by the counterparties, the notional amounts are not themselves exchanged and, therefore, do not represent a measure of the Company's exposure as an end user of derivative financial instruments. At December 31, 1998 and 1997, notional principal amounts related to interest rate swaps (variable to fixed rate) were $2.55 billion and $2.25 billion, respectively. The swap portfolio maturities are as follows at December 31, 1998: $650.0 million in 1999; $1.0 billion in 2000; $250.0 million in 2001; $150.0 million in 2002; and $500.0 million in 2003. At December 31, 1998, the weighted average fixed rate payment on variable to fixed rate swaps was 5.87%. Variable rates received are indexed to the Commercial Paper Nonfinancial Rate ($2.45 billion notional principal amount) and LIBOR ($.10 billion notional principal amount). In 1998, the Company entered into interest rate derivative transactions with certain financial institutions to manage the impact of interest rate changes on securitized installment loan receivables. These derivative transactions consist of a series of interest rate caps and floors with an aggregate notional amount of $737.1 million contractually maturing in 2004 which effectuate a variable to fixed rate swap at a weighted average rate of 5.18% at December 31, 1998. Variable rates on the underlying portfolio are indexed to the Commercial Paper Nonfinancial Rate. 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. The assumptions used have a significant effect on the estimated amounts reported. The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments: - Cash and cash equivalents, trade and manufacturer receivables, other current assets, accounts payable, accrued liabilities, other current liabilities and variable rate debt: The amounts reported in the accompanying Consolidated Balance Sheets approximate fair value. - Automotive finance installment loans receivable and retained interests in securitized receivables: The fair value of installment loans receivable and retained interests in securitized receivables are estimated based upon the discounted value of the future cash flows expected to be received. Significant assumptions used to estimate the fair value at December 31, 1998 are as follows: discount rate -- 8.13%; default rate -- 1.0% per year; and prepayment rate -- 1.5% per month. 64 67 REPUBLIC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - Medium-term notes payable: The fair value of medium-term notes payable is estimated based on the quoted market prices for the same or similar issues. - Other fixed rate debt: The fair value of other fixed rate debt is based upon the discounted expected cash flows at rates then offered to the Company for debt of similar terms. - Interest rate swaps, caps and floors: The fair value of interest rate swaps, caps and floors is determined from dealer quotations and represents the discounted future cash flows through maturity or expiration using current rates, and is effectively the amount the Company would pay or receive to terminate the agreements. The following table sets forth the carrying amounts and fair values of the Company's financial instruments, except for those noted above for which carrying amounts approximate fair value, as of December 31:
1998 1997 ------------------ ------------------ CARRYING FAIR CARRYING FAIR ASSETS (LIABILITIES) AMOUNT VALUE AMOUNT VALUE - -------------------- -------- ------- -------- ------- Installment loans receivable...................... $ 95.6 $ 99.2 $ 36.8 $ 36.5 Retained interests in securitized receivables: Principal....................................... 44.2 44.6 -- -- Interest-only strips............................ 38.2 38.2 -- -- Servicing assets................................ 3.1 3.1 -- -- Medium-term notes payable......................... (799.6) (813.6) (902.8) (917.7) Other fixed rate debt............................. (37.0) (37.5) (38.3) (38.3) Interest rate swaps............................... -- (47.0) -- (8.0) Interest rate caps................................ -- 8.9 -- -- Interest rate floors.............................. -- (7.1) -- --
15. BUSINESS AND CREDIT CONCENTRATIONS AUTOMOTIVE RETAIL INDUSTRY The Company owns and operates franchised automotive dealerships and used vehicle megastores in the United States. Automotive dealerships operate pursuant to franchise agreements with vehicle manufacturers. Franchise agreements generally provide the manufacturers with considerable influence over the operations of the dealership and generally provide for termination of the franchise agreement for a variety of causes. The success of any franchised automotive dealership is dependent, to a large extent, on the financial condition, management, marketing, production and distribution capabilities of the vehicle manufacturers of which the Company holds franchises. At December 31, 1998 and 1997, the Company had receivables from manufacturers of $86.1 million and $39.6 million, respectively. The Company purchases substantially all of its new vehicles from various manufacturers at the prevailing prices charged by the manufacturers to all franchised dealers. The Company's sales volume could be adversely impacted by the manufacturers' inability to supply the dealerships with an adequate supply of vehicles. Concentrations of credit risk with respect to non-manufacturer trade receivables related to the Company's automotive retail operations are limited due to the wide variety of customers and markets in which the Company's products are sold as well as their dispersion across many different geographic areas in the United States. Consequently, at December 31, 1998, the Company does not consider itself to have any significant non-manufacturer concentrations of credit risk in the automotive retail segment. 65 68 REPUBLIC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AUTOMOTIVE RENTAL INDUSTRY The Company owns and operates vehicle rental facilities primarily in the United States. The automotive rental industry in which the Company operates is highly seasonal. The Company enters into vehicle repurchase programs with one principal vehicle manufacturer, as well as other vehicle manufacturers. At December 31, 1998 and 1997, the Company had vehicle receivables from manufacturers of $372.1 million and $326.8 million, respectively. During model year 1998, the Company purchased approximately 57% of its vehicle fleet under repurchase programs with one vehicle manufacturer. Concentrations of credit risk with respect to non-vehicle manufacturer receivables related to the Company's automotive rental operations are limited due to the wide variety of customers and markets in which services are provided as well as their dispersion across many different geographic areas primarily in the United States. Consequently, at December 31, 1998, the Company does not consider itself to have any significant non-vehicle manufacturer receivable concentrations of credit risk in the automotive rental segment. 16. OPERATIONS BY INDUSTRY SEGMENT The Company operates subsidiaries in the automotive retail and automotive rental industries. The Company's reportable segments are strategic business units that offer different products and services. The Company evaluates the performance of its segments based on revenue and operating income. The Company's automotive retail business consists primarily of the sale of new and used vehicles and related automotive services and products. The Company's automotive rental business primarily rents vehicles on a daily or weekly basis through National Car Rental, Inc., Alamo Rent-A-Car, Inc. and CarTemps USA. There is no material intersegment revenue. Interest expense related to vehicle inventory and revenue earning vehicle financing is included in cost of automotive retail sales and cost of automotive rental operations, respectively, in the Company's Consolidated Statements of Operations. The following table presents financial information regarding the Company's different industry segments as of and for the years ended December 31:
1998 ------------------------------------------------------------------------------- TOTAL -- NET ASSETS -- AUTOMOTIVE AUTOMOTIVE REPORTABLE DISCONTINUED RETAIL RENTAL SEGMENTS CORPORATE OPERATIONS CONSOLIDATED ---------- ---------- ---------- --------- ------------- ------------ Domestic revenue....... $12,664.6 $3,015.6 $15,680.2 $ -- $ -- $15,680.2 Foreign revenue........ -- 438.0 438.0 -- -- 438.0 --------- -------- --------- ------ ------ --------- Total revenue.... $12,664.6 $3,453.6 $16,118.2 $ -- $ -- $16,118.2 ========= ======== ========= ====== ====== ========= Operating income (loss)............... $ 395.8 $ 193.7 $ 589.5 $(54.3) $ -- $ 535.2 Vehicle interest expense.............. 106.9 321.3 428.2 -- -- 428.2 Depreciation and amortization......... 72.3 971.9 1,044.2 7.4 -- 1,051.6 Capital expenditures... 201.8 193.6 395.4 42.5 -- 437.9 Total assets........... 6,285.8 6,282.1 12,567.9 527.7 830.2 13,925.8 Total foreign non-current assets... -- 63.6 63.6 -- -- 63.6
66 69 REPUBLIC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997 ------------------------------------------------------------------------------- TOTAL -- NET ASSETS -- AUTOMOTIVE AUTOMOTIVE REPORTABLE DISCONTINUED RETAIL RENTAL SEGMENTS CORPORATE OPERATIONS CONSOLIDATED ---------- ---------- ---------- --------- ------------- ------------ Domestic revenue........ $6,122.8 $2,767.0 $8,889.8 $ -- $ -- $ 8,889.8 Foreign revenue......... -- 288.1 288.1 -- -- 288.1 -------- -------- -------- ------ -------- --------- Total revenue..... $6,122.8 $3,055.1 $9,177.9 $ -- $ -- $ 9,177.9 ======== ======== ======== ====== ======== ========= Operating income (loss)................ $ (68.4) $ 86.6 $ 18.2 $(30.1) $ -- $ (11.9) Vehicle interest expense............... 55.3 258.0 313.3 -- -- 313.3 Depreciation and amortization.......... 32.6 878.6 911.2 6.3 -- 917.5 Non-cash restructuring and other charges..... 115.4 70.6 186.0 -- -- 186.0 Capital expenditures.... 168.9 84.5 253.4 41.1 -- 294.5 Total assets............ 3,078.8 5,899.1 8,977.9 201.4 1,016.9 10,196.2 Total foreign non-current assets.... -- 52.6 52.6 -- -- 52.6
1996 ------------------------------------------------------------------------------- TOTAL -- NET ASSETS -- AUTOMOTIVE AUTOMOTIVE REPORTABLE DISCONTINUED RETAIL RENTAL SEGMENTS CORPORATE OPERATIONS CONSOLIDATED ---------- ---------- ---------- --------- ------------- ------------ Domestic revenue........ $2,933.7 $2,500.5 $5,434.2 $ -- $ -- $5,434.2 Foreign revenue......... -- 198.9 198.9 -- -- 198.9 -------- -------- -------- ------ ------ -------- Total revenue..... $2,933.7 $2,699.4 $5,633.1 $ -- $ -- $5,633.1 ======== ======== ======== ====== ====== ======== Operating income (loss)................ $ 33.3 $ (28.4) $ 4.9 $(27.7) $ -- $ (22.8) Vehicle interest expense............... 20.4 233.6 254.0 -- -- 254.0 Depreciation and amortization.......... 9.3 789.3 798.6 2.0 -- 800.6 Non-cash restructuring and other charges..... -- 75.7 75.7 11.0 -- 86.7 Capital expenditures.... 57.6 45.1 102.7 3.2 -- 105.9 Total assets............ 995.6 4,691.7 5,687.3 83.1 797.2 6,567.6 Total foreign non-current assets.... -- 27.7 27.7 -- -- 27.7
Revenue from the Company's automotive retail segment was derived from the sale of the following major products and services for the years ended December 31:
1998 1997 1996 --------- -------- -------- New vehicles............................................ $ 6,792.1 $3,599.7 $1,909.6 Used vehicles........................................... 4,129.6 1,883.6 658.3 Parts, service and other................................ 1,742.9 639.5 365.8 --------- -------- -------- $12,664.6 $6,122.8 $2,933.7 ========= ======== ========
67 70 REPUBLIC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The Company's automotive retail operations generally experience higher volumes of vehicle sales in the second and third quarters of each year in part due to consumer buying trends and the introduction of new vehicle models. The Company's automotive rental operations and particularly the leisure travel segment is highly seasonal. In these operations, the third quarter which includes the peak summer travel months has historically been the strongest quarter of the year. During the peak season the Company increases its rental fleet and workforce to accommodate increased rental activity. As a result, any occurrence that disrupts travel patterns during the summer period could have a material adverse effect. The first and fourth quarters for the Company's automotive rental operations are generally the weakest, when there is limited leisure travel and a greater potential for adverse weather conditions. Many of the operating expenses such as rent, general insurance and administrative personnel are fixed and cannot be reduced during periods of decreased rental demand. The fourth quarters of 1998 and 1997 include after tax gains of approximately $11.6 million and $230.0 million, respectively, from the sale of the Company's electronic security services division, as described in Note 12, Discontinued Operations. The second and fourth quarters of 1997 include restructuring and other pre-tax charges of approximately $94.1 million and $150.0 million, respectively, as described in Note 11, Restructuring and Other Charges. The second quarter of 1997 also contained a pre-tax gain on the sale of ADT Limited common shares of approximately $102.3 million as described in Note 1, Summary of Significant Accounting Policies, Investments. The following is an analysis of certain items in the Consolidated Statements of Operations by quarter for 1998 and 1997.
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- Revenue................................... 1998 $3,119.1 $4,037.4 $4,513.6 $4,448.1 1997 1,679.0 2,230.2 2,633.7 2,635.0 Operating income (loss)................... 1998 61.3 136.3 225.5 112.1 1997 6.7 (37.4) 131.4 (112.6) Income (loss) from continuing operations.............................. 1998 36.8 80.0 146.9 70.9 1997 7.4 40.6 84.8 (68.2) Basic earnings (loss) per share from continuing operations................... 1998 .08 .18 .32 .15 1997 .02 .10 .20 (.16) Diluted earnings (loss) per share from continuing operations................... 1998 .08 .17 .31 .15 1997 .02 .10 .20 (.16) Net income................................ 1998 77.1 127.4 179.7 115.3 1997 38.7 74.5 125.3 201.2
68 71 REPUBLIC INDUSTRIES, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES SCHEDULE II (IN MILLIONS)
BALANCE AT ADDITIONS BALANCE BEGINNING CHARGED TO AT END CLASSIFICATIONS OF YEAR INCOME DEDUCTIONS OTHER OF YEAR - --------------- --------- ---------- ---------- ------ ------- Allowance for doubtful accounts: 1998.................................... $37.3 $16.8 $(19.1)(2) $ 27.3(1) $62.3 1997.................................... 11.6 8.4 (4.9)(2) 22.2(1) 37.3 1996.................................... 7.5 7.5 (4.3)(2) .9(1) 11.6 Restructuring reserves(3): 1998.................................... 93.7 --(6) (37.5)(5) (10.1)(4) 46.1 1997.................................... 25.5 179.1 (63.8)(5) (47.1)(4) 93.7 1996.................................... -- 29.5 -- (4.0)(4) 25.5
- --------------- (1) Allowance of acquired businesses. (2) Accounts written off. (3) Included under the caption "Accrued Liabilities" in the accompanying Consolidated Balance Sheets. (4) Primarily asset write-offs. (5) Primarily cash payments of costs associated with restructuring activities. (6) During the year ended December 31, 1998, the Company reduced its estimated restructuring reserves for information systems and increased its estimated reserves for the relocation of certain operations by approximately $21.0 million. 69 72 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 70 73 PART III The information required by Items 10, 11, 12 and 13 of Part III of Form 10-K will be set forth in the Proxy Statement of the Company relating to the 1999 Annual Meeting of Stockholders and is incorporated herein by reference. 71 74 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements of the Company are set forth in Part II, Item 8. (2) Financial Statement Schedule II, Valuation and Qualifying Accounts and Reserves, for each of the three years ended December 31, 1998 is submitted herewith. (3) Exhibits -- (See Index to Exhibits included elsewhere herein.) (b) Reports on Form 8-K. None 72 75 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REGISTRANT: Republic Industries, Inc. By: /s/ H. WAYNE HUIZENGA ------------------------------------ H. Wayne Huizenga Chairman of the Board and Co-Chief Executive Officer March 31, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ H. WAYNE HUIZENGA Chairman of the Board and March 31, 1999 - ----------------------------------------------------- Co-Chief Executive H. Wayne Huizenga Officer (Principal Executive Officer) /s/ STEVEN R. BERRARD Co-Chief Executive March 31, 1999 - ----------------------------------------------------- Officer and Director Steven R. Berrard /s/ MICHAEL S. KARSNER Senior Vice President and March 31, 1999 - ----------------------------------------------------- Chief Financial Officer Michael S. Karsner (Principal Financial Officer) /s/ HARRIS W. HUDSON Vice Chairman and March 31, 1999 - ----------------------------------------------------- Director Harris W. Hudson /s/ MARY E. WOOD Vice President and March 31, 1999 - ----------------------------------------------------- Corporate Controller Mary E. Wood (Principal Accounting Officer) /s/ ROBERT J. BROWN Director March 31, 1999 - ----------------------------------------------------- Robert J. Brown /s/ J.P. BRYAN Director March 31, 1999 - ----------------------------------------------------- J.P. Bryan /s/ RICK L. BURDICK Director March 31, 1999 - ----------------------------------------------------- Rick L. Burdick /s/ MICHAEL G. DEGROOTE Director March 31, 1999 - ----------------------------------------------------- Michael G. DeGroote
73 76
SIGNATURE TITLE DATE --------- ----- ---- /s/ GEORGE D. JOHNSON, JR. Director March 31, 1999 - ----------------------------------------------------- George D. Johnson, Jr. /s/ JOHN J. MELK Director March 31, 1999 - ----------------------------------------------------- John J. Melk /s/ IRENE B. ROSENFELD Director March 31, 1999 - ----------------------------------------------------- Irene B. Rosenfeld
74 77 EXHIBIT INDEX
EXHIBITS DESCRIPTION OF EXHIBIT -------- ---------------------- 2.1 -- Agreement and Plan of Merger and Reorganization, dated May 30, 1991, by and between Republic Waste Industries, Inc., an Oklahoma corporation, and Republic Waste Industries, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). 3.1 -- Third Amended and Restated Certificate of Incorporation of Republic Industries, Inc. (incorporated by reference to Exhibit 99 to the Registrant's Current Report on Form 8-K Dated May 14, 1997). 3.2 -- Bylaws of Republic Industries, Inc., as amended to date (incorporated by reference to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995). 4.1 -- Credit Facilities and Reimbursement Agreement dated as of April 23, 1997, by and among Republic Industries, Inc., and Republic Resources Company, as Borrowers, NationsBank, National Association (South), as Arranger and Administrative Agent, Various Co-Agents Listed Therein and Various Lenders Listed Therein (incorporated by reference to Exhibit 4.22 to the Registrant's Current Report on Form 8-K, dated June 13, 1997). 4.2 -- Base Indenture dated as of April 30, 1996, between National Car Rental Financing L.P. as Issuer and The Bank of New York as Trustee (incorporated by reference to Exhibit 4.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997). 4.3 -- Master Motor Vehicle Lease and Servicing Agreement dated as of October 29, 1997, among National Car Rental Financing Limited Partnership; National Car Rental System, Inc.; Alamo Rent-A-Car, Inc.; Spirit Rent-A-Car, Inc.; and those subsidiaries and affiliates of Republic Industries from time to time becoming Lessees and Servicers thereunder; and Republic Industries, Inc. (incorporated by reference to Exhibit 4.3 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997). 4.4 -- Second Amended and Restated Master Collateral Agency Agreement among Republic Industries, Inc.; National Car Rental Financing Limited Partnership; Alamo Rent-A-Car, Inc.; National Car Rental System, Inc.; Spirit Rent-A-Car, Inc.; Value Rent-A-Car, Inc.; Citibank, N.A.; Various Financing Sources Parties Thereto; and Various Beneficiaries Parties Thereto (incorporated by reference to Exhibit 4.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997). 4.5 -- Series 1997-1 Supplement to the Base Indenture between National Car Rental Financing Limited Partnership and The Bank of New York (incorporated by reference to Exhibit 4.5 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997). 4.6 -- Series 1997-1 Support Reimbursement Agreement among Republic Industries Funding Corp.; Alamo Rent-A-Car, Inc.; National Car Rental System, Inc.; Spirit Rent-A-Car, Inc.; Value Rent-A-Car, Inc.; those additional Subsidiaries and Affiliates of Republic Industries, Inc. from time to time becoming Additional Lessees thereunder; National Car Rental Financing Limited Partnership; Republic Industries, Inc.; and those financial institutions identified on the signature pages thereto as the Series 1997-1 Support Letter of Credit Providers (incorporated by reference to Exhibit 4.6 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997). 4.7 -- Series 1997-1 Letter of Credit Agreement among Republic Industries Funding Corp.; Alamo Rent-A-Car, Inc.; National Car Rental System, Inc.; Spirit Rent-A-Car, Inc.; Value Rent-A-Car, Inc.; those additional Subsidiaries and Affiliates of Republic Industries, Inc. from time to time becoming Additional lessees thereunder; Republic Industries, Inc.; and Westdeutsche Landesbank Girozentrale, New York Branch (incorporated by reference to Exhibit 4.7 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997).
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EXHIBITS DESCRIPTION OF EXHIBIT -------- ---------------------- 4.8 -- Series 1997-1 Note Purchase Agreement Variable Funding Rental Car Asset Backed Notes, Series 1997-1) among National Car Rental Financing Limited Partnership; Republic Industries Funding Corp.; and Credit Suisse First Boston (incorporated by reference to Exhibit 4.8 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997). 4.9 -- Series 1997-1 Liquidity Agreement among Republic Industries Funding Corp.; Certain Financial Institutions; and Credit Suisse First Boston (incorporated by reference to Exhibit 4.9 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997). 4.10 -- Series 1997-1 Collateral Agreement among Republic Industries Funding Corp.; General Motors Corporation; Certain Financing Institutions identified therein as the Series 1997-1 Support Letter of Credit Providers; Westdeutsche Landesbank Girozentrale, New Nork Branch; Credit Suisse First Boston; Credit Suisse First Boston Corporation; Bancamerica Robertson Stephens; Chase Securities, Inc.; Citicorp Securities, Inc.; and Merrill Lynch Money Markets, Inc.; and Citibank, N.A. Note: Pursuant to the provisions of Item 601(b)(4)(iii) of Regulation S-K, the registrant hereby undertakes to furnish to the Commission upon request copies of any instruments governing long-term debt of Republic and its consolidated subsidiaries that does not exceed 10% of the total assets of Republic and its subsidiaries on a consolidated basis (incorporated by reference to Exhibit 4.10 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997). 10.1 -- Republic Waste Industries, Inc. 1990 Stock Option and Stock Purchase Plan (incorporated by reference to Exhibit 10.1(a) to the Registrant's Registration Statement on Form S-1 Commission File No. 33-37191). 10.2 -- Warrant to Purchase 1,150,000 Shares of Republic Waste Industries, Inc. Common Stock issued to MGD Holdings Ltd. (incorporated by reference to Exhibit 10.18 to the Registrant's Registration Statement on Form S-1 Commission File No. 33-42530). 10.3 -- Republic Waste Industries, Inc. 1991 Stock Option Plan (incorporated by reference to Exhibit 10.42 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). 10.4 -- Form of Warrant to purchase 50,000 shares of Republic Waste Industries, Inc. Common Stock issued to Rick L. Burdick (incorporated by reference to Exhibit 10.35 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 10.5 -- Stock Purchase Agreement, dated May 21, 1995, by and between H. Wayne Huizenga and Republic Waste Industries, Inc. (incorporated by reference to Exhibit (c)(1) to the Registrant's Current Report on Form 8-K/A, dated July 17, 1995). 10.6 -- Stock Purchase Agreement, dated May 21, 1995, by and between Harris W. Hudson and Republic Waste Industries, Inc. (incorporated by reference to Exhibit (c)(4) to the Registrant's Current Report on Form 8-K/A, dated July 17, 1995). 10.7 -- Stock Purchase Agreement, dated May 21, 1995, by and between Westbury (Bermuda) Ltd. and Republic Waste Industries, Inc. (incorporated by reference to Exhibit (c)(5) to the Registrant's Current Report on Form 8-K/A, dated July 17, 1995). 10.8 -- First Amendment to Stock Purchase Agreement, dated July 17, 1995, by and between Republic Waste Industries, Inc. and H. Wayne Huizenga (incorporated by reference to Exhibit (c)(8) to the Registrant's Current Report on Form 8-K/A, dated July 17, 1995). 10.9* -- Republic Industries, Inc. 1995 Amended and Restated Employee Stock Option Plan. 10.10* -- Republic Industries, Inc. Amended and Restated 1995 Non-Employee Director Stock Option Plan. 10.11** -- Letter Agreement between National Car Rental System, Inc. and General Motors Corporation dated September 23, 1996 (incorporated by reference to Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997).
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EXHIBITS DESCRIPTION OF EXHIBIT -------- ---------------------- 10.12** -- Letter Agreement between Alamo Rent-A-Car, Inc. and General Motors Corporation dated October 8, 1996. (incorporated by reference to Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997). 10.13 -- Agreement and Plan of Reorganization, dated November 6, 1996, among Republic Industries, Inc., certain acquisition subsidiaries of Republic Industries, Inc., Michael S. Egan, Norman D. Tripp, William H. Kelly, Michael S. Egan as trustee of certain trusts, Alamo Rent-A-Car, Inc., and certain affiliated entities of Alamo Rent-A-Car, Inc. (incorporated by reference to Exhibit 2 to the Registrant's Current Report on Form 8-K dated November 25, 1996). 10.14 -- Letter Agreement between Alamo Rent-A-Car, Inc. and General Motors Corporation (incorporated by reference to Exhibit 10.16 to the Registration Statement on Form S-1 of Alamo Rent-A-Car, Inc. Commission File No. 33-80271). 10.15 -- Share Exchange Agreement, dated as of January 5, 1997, among Republic Industries, Inc., National Car Rental Systems, Inc. ("National") and the stockholders of National (incorporated by reference to Exhibit 2 to the Registrant's Current Report on Form 8-K dated January 5, 1997). 10.16 -- Asset Purchase Agreement, dated as of September 26, 1997 among Republic Industries, Inc., Republic Security Companies Holding Co. II, Inc., Ameritech Corporation and Ameritech Monitoring Services, Inc. (incorporated by reference from Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated October 3, 1997). 10.17** -- Letter Agreement between Alamo Rent-A-Car, Inc. and General Motors Corporation dated November 18, 1997 (incorporated by reference to Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997). 10.18** -- Letter Agreement between National Car Rental System, Inc. and General Motors Corporation dated November 18, 1997 (incorporated by reference to Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997). 10.19* -- Republic Industries, Inc. Amended and Restated 1997 Employee Stock Option Plan. 10.20* -- Republic Industries, Inc. Amended and Restated 1998 Employee Stock Option Plan. 10.21 -- Separation and Distribution Agreement (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 1998). 10.22*** -- Letter Agreement between National Car Rental System, Inc. and General Motors Corporation dated December 16, 1998. 10.23*** -- Letter Agreement between Alamo Rent-A-Car, Inc. and General Motors Corporation dated December 16, 1998. 21.1* -- Subsidiaries of Republic Industries, Inc. 23.1* -- Consent of Arthur Andersen LLP. 27.1* -- 1998 Financial Data Schedule (for SEC use only). 27.2* -- 1997 Financial Data Schedule (restated for discontinued operations) (for SEC use only). 27.3* -- 1996 Financial Data Schedule (restated for discontinued operations) (for SEC use only). 99.1* -- Item 1 and Item 2 of the Annual Report on Form 10-K for the year ended December 31, 1998 for Republic Services, Inc. as filed with the Securities and Exchange Commission (Commission File No. 1-14267), which are expressly incorporated by reference in Item 1 and Item 2 of this Report by Republic Industries, Inc.
- ------------------------- * Filed herewith. ** Portions of this agreement have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. *** Filed herewith; portions of this agreement have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. 77 EX-10.9 2 1995 AMENDED EMPLOYEE STOCK OPTION PLAN 1 REPUBLIC INDUSTRIES, INC. 1995 AMENDED AND RESTATED EMPLOYEE STOCK OPTION PLAN 1. STATEMENT OF PURPOSE. This Amended and Restated 1995 Employee Stock Option Plan (the "Plan") is to benefit Republic Industries, Inc., a Delaware corporation (the "Company"), and its subsidiaries through the maintenance and development of their respective businesses by offering certain present and future key employees and officers, and independent contractors providing services to the Company, a favorable opportunity to become holders of stock in the Company over a period of years, thereby giving them a permanent stake in the growth and prosperity of the Company and encouraging the continuance of their involvement with the Company or its subsidiaries. 2. ADMINISTRATION. The Plan shall be administered by a committee (the "Committee"), consisting of two or more outside directors (as defined under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), appointed by the Board of Directors, whose interpretation of the terms and provisions of the Plan shall be final and conclusive. The selection of employees, officers and consultants for participation in the Plan and all decisions concerning the timing, pricing and amount of any grant or award under the Plan shall be made solely by the Committee. 3. ELIGIBILITY. Options shall be granted only to key employees of the Company and its subsidiaries (including officers of the Company and its subsidiaries but excluding non-employee directors of the Company and its subsidiaries) and independent contractors performing services for the Company and its subsidiaries selected initially and from time to time by the Committee on the basis of their importance to the business of the Company and its subsidiaries. 4. GRANTING OF OPTIONS. The Committee may grant options under which a total of not in excess of 20,000,000 shares of the $.01 par value common stock of the Company ("Common Stock") may be purchased from the Company, subject to adjustment as provided in Section 10. In the event that an option expires or is terminated or canceled unexercised as to any shares, such released shares may again be optioned (including a grant in substitution for a canceled option). Shares subject to options may be made available from unissued or reacquired shares of Common Stock. Nothing contained in the Plan or in any option granted pursuant thereto shall confer upon any optionee any right to be continued in the employment of the Company or any subsidiary of the Company or as a consultant to the Company or any subsidiary of the Company, or interfere in any way with the right of the Company or its subsidiaries to terminate his employment or consulting relationship at any time. The maximum number of shares of Common Stock subject to options that may be granted during any calendar year under the Plan to any executive officer or other employee of the Company or any subsidiary whose compensation is or may be subject to Section 162(m) of the Code is 2,000,000 shares (subject to adjustment as provided in Section 10 hereof). 1 2 5. OPTION PRICE. The option price shall be determined by the Committee and, subject to the provisions of Section 10 hereof, shall be not less than the fair market value, at the time the option is granted, of the shares of Common Stock subject to the option. 6. DURATION OF OPTIONS, INCREMENTS AND EXTENSIONS. Subject to the provisions of Section 8 hereof, each option shall be for such a term of not less than five years nor more than ten years, as shall be determined by the Committee at the time the option is granted. Each option shall become exercisable with respect to 25% of the total number of shares subject to the option twelve months after the date of its grant and with respect to each additional 25% at the end of each twelve-month period thereafter during the succeeding three years. Notwithstanding the foregoing, the Committee may in its discretion (i) specifically provide for another time or times of exercise at the time the option is granted; (ii) accelerate the exercisability of any option subject to such terms and conditions as the Committee deems necessary and appropriate; or (iii) at any time prior to the expiration or termination of any option previously granted, extend the term of any option (including such options held by officers) for such additional period as the Committee in its discretion shall determine. In no event, however, shall the aggregate option period with respect to any option, including the original term of the option and any extensions thereof, exceed ten years. Subject to the foregoing, all or any part of the shares to which the right to purchase has accrued may be purchased at the time of such accrual or at any time or times thereafter during the option period. In the event of a Change of Control (as defined below), all outstanding options shall become immediately exercisable. Notwithstanding any other provision in the Plan during the period of thirty (30) days after such Change of Control, each optionee who is any officer or a director (and also an employee or consultant) of the Company shall have the right to require the Company to purchase for him any option granted under the Plan at a purchase price equal to (i) the excess of fair market value per share over the option price (ii) multiplied by the number of option shares specified by such individual for purchase in a written notice to the Company, attention of the Secretary. For purposes of this Plan, a "Change in Control" shall be deemed to occur if any person shall (a) acquire direct or indirect beneficial ownership of at least 50% of the issued and outstanding Common Stock of the Company, or (b) has the power (whether such power arises as a result of the ownership of capital stock, by contract or otherwise), or ability to elect or cause the election of directors consisting at the time of such election of a majority of the board of directors of the Company. As used herein, "person" shall mean any person, corporation, partnership, joint venture or other entity or any group (as such term is defined in Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules promulgated thereunder). For purposes of this paragraph, "fair market value per share" shall mean the average of the highest sales price per share of the Company's Common Stock as quoted on The Nasdaq Stock Market or by the principal exchange upon which the Company's Common Stock is listed on each of the five trading days immediately preceding the date on which such individual so notifies the Company. The amount payable to each such individual by the Company shall be in cash or by certified check and shall be reduced by any taxes required to be withheld. 2 3 7. EXERCISE OF OPTION. As a condition to the exercise of any option, the "Quoted Price" (as defined below) per share of Common Stock on the date of exercise must be equal or exceed the option price referred to in Section 5 hereof. An option may be exercised by giving written notice to the Company, attention of the Secretary, specifying the number of shares to be purchased, accompanied by the full purchase price for the shares to be purchased either (i) in cash, (ii) by check, (iii) by a promissory note in a form specified by the Company and payable to the Company no later than fifteen business days after the date of exercise of the option, (iv) if so approved by the Committee, by shares of the Common Stock of the Company or (v) by a combination of these methods of payment. The "Quoted Price" and the per share value of Common Stock for purposes of paying the option price in accordance with the immediately preceding sentence shall equal the closing selling price per share of Common Stock on the date in question on The Nasdaq Stock Market or the principal stock exchange upon which the Company's Common Stock is listed (the "Exchange"). The right to pay the purchase price of shares by delivery of a promissory note shall not be available to any optionee who is a person described in Section 16(a) of the Securities Exchange Act of 1934, as amended (the "1934 Act"). At any time of any exercise of an option, the Company may, if it shall determine it necessary or desirable for any reason, require the optionee (or his or her heirs, legatees, or legal representatives, as the case may be), as a condition upon the exercise thereof, to deliver to the Company a written representation of present intention to purchase the shares for investment and not for distribution. In the event such representation is required to be delivered, an appropriate legend may be placed upon each certificate delivered to the optionee upon his or her exercise of part or all of the option and a stop transfer order may be placed with the transfer agent. Each option shall also be subject to the requirement that, if at any time the Company determines, in its discretion, that the listing, registration or qualification of the shares subject to the option upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of or in connection with, the issue or purchase of shares thereunder, the option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. At the time of the exercise of any option the Committee may require, as a condition of the exercise of such option, the optionee to (x) pay the Company an amount equal to the amount of tax the Company may be required to withhold to obtain a deduction for federal income tax purposes as a result of the exercise of such option by the optionee or (y) make such other arrangements with the Company which would enable the Company to pay such withholding tax, including, without limitation, holding back a number of shares issuable upon exercise of the option equal to the amount of such withholding tax, or permitting the optionee to deliver a promissory note in a form specified by the Committee or withhold taxes from other compensation payable to the optionee by the Company, or (z) a combination of the foregoing. 3 4 8. TERMINATION OF RELATIONSHIP - EXERCISE THEREAFTER. In the event the relationship between the Company and an optionholder is terminated for any reason other than death, permanent disability or retirement, such optionholder's options shall expire and all rights to purchase shares pursuant thereto shall terminate immediately. The Committee may, in its sole discretion, permit any option to remain exercisable for such period after such termination as the Committee may prescribe, but in no event after the expiration date of the option. Temporary absence from employment or as a consultant because of illness, vacation, approved leaves of absence, and transfers of employment among the Company and its subsidiaries shall not be considered to terminate employment or consulting relationship or to interrupt continuous employment or consulting relationship. In the event of termination of said relationship because of death, permanent disability (as that term is defined in Section 22 (e) (3) of the Code, as now in effect or as subsequently amended), or retirement, the option may be exercised in full, without regard to any installments established under Section 6 hereof, by the optionee or, if he is not living, by his heirs, legatees or legal representative (as the case may be) during its specified term prior to three years after the date of death, permanent disability or retirement, or such longer period as the Committee may prescribe, but in no event after the expiration of the date of the option. 9. TRANSFERABILITY OF OPTIONS. No option shall be assignable or transferable by the optionee to whom it is granted, other than by will or the laws of descent and distribution, except that, upon approval by the Board, the optionee may transfer an option that is not intended to constitute an Incentive Stock Option (a) pursuant to a qualified domestic relations order as defined for purposes of the Employee Retirement Income Security Act of 1974, as amended, or (b) by gift: to a member of the "Family" (as defined below) of the optionee, to or for the benefit of one or more organizations qualifying under Code Sections 501(c) (3) and 170(c) (2) (a "Charitable Organization") or to a trust for the exclusive benefit of the optionee, one or more members of the optionee's Family, one or more Charitable Organizations, or any combination of the foregoing, provided that any such transferee shall enter into a written agreement to be bound by the terms of this Plan. For this purpose, "Family" shall mean the ancestors, spouse, siblings, spouses of siblings, lineal descendants and spouses of lineal descendants of the optionee. During the lifetime of an optionee to whom an Incentive Stock Option is granted, only such optionee (or, in the event of legal incapacity of incompetence, the optionee's guardian or legal representative) may exercise the Incentive Stock Option. 10. ADJUSTMENTS. The number of shares subject to this Plan and to options granted under this Plan shall be adjusted as follows: (a) in the event that the outstanding shares of Common Stock of the Company is changed by any stock dividend, stock split or combination of shares, the number of shares subject to the Plan and to options granted hereunder shall be proportionately adjusted; (b) in the event of any merger, consolidation or reorganization of the Company with any other corporation or corporations, these shall be substituted, on an equitable basis as determined by the Committee, for each share of Common Stock then subject to the Plan whether or not at the time subject to outstanding options, the number and kind of shares of stock or other securities to which the holders of shares of Common Stock of the Company will be entitled pursuant to the transaction; and (c) in the event of any other relevant change in the capitalization of the Company, the Committee shall provide for an equitable adjustment in the number of shares of Common Stock then subject to the Plan, whether or not then subject to outstanding options. In the event of any such adjustment, the purchase price per share shall be proportionately adjusted. 4 5 11. NO IMPAIRMENT OF RIGHTS. Nothing contained in the Plan or any option granted pursuant to the Plan shall confer upon any optionee any right to be continued in the employment of the Company or any subsidiary of the Company or to be continued as a consultant to the Company or any subsidiary of the Company to interfere in any way with the right of the Company and its subsidiaries to terminate such employment or consulting relationship and/or to remove any optionee who is a director from service on the Board of Directors of the Company at any time in accordance with the provisions of applicable law. 12. AMENDMENT OF PLAN. The Board of Directors of the Company may amend or discontinue the Plan at any time. However, no such amendments or discontinuance shall be made without the requisite stockholder approval of the stockholders of the Company if stockholder approval is required as a condition to the Plan continuing to comply with the provisions of Rule 16b-3 of the 1934 Act or Section 162(m) of the Code. 13. GOVERNANCE BY RULE 16b-3. The Plan is intended to and shall be governed by Rule 16b-3 promulgated under the 1934 Act. 14. EFFECTIVE DATE. This Plan is effective as of February 12, 1996. This Plan was duly approved and adopted by the stockholders of Republic at a meeting held the 10th day of May, 1996. This Plan was duly amended by the Board of Directors of Republic on the 3rd day of February, 1998, which amendment was duly approved and adopted by the stockholders of Republic at a meeting held the 20th day of May, 1998. /s/ James O. Cole ------------------------------- Secretary of Republic This Plan was duly amended by the Board of Directors of Republic effective as of the 20th day of May, 1998. /s/ James O. Cole ------------------------------- Secretary of Republic 5 EX-10.10 3 1995 AMENDED NON-EMPLOYEE STOCK OPTION PLAN 1 1995 AMENDED AND RESTATED NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN (Effective August 3, 1998) 1. STATEMENT OF PURPOSE. This 1995 Non-Employee Director Stock Option Plan (this "Plan") (which was originally effective August 3, 1995 which is again amended and restated effective May 20, 1998) is intended to promote the interests of Republic Industries, Inc., a Delaware corporation (the "Company"), by offering non-employee members of the Board of Directors of the Company (individually, a "Non-Employee Director," and collectively, "Non-Employee Directors") the opportunity to participate in a special stock option program designed to provide them with significant incentives to remain in the service of the Company. 2. ELIGIBILITY. Each Non-Employee Director shall be eligible to receive grants of nonstatutory options under this Plan (individually, an "Option," collectively, "Options") pursuant to the provisions of Section 4 hereof. Except for the automatic grants of Options to be made pursuant to the provisions of Section 4 hereof, Non-Employee Directors shall not be eligible to receive any additional Option grants or stock issuance under this Plan or any other stock plan of the Company or any of its affiliates. 3. STOCK SUBJECT TO PLAN. The stock issuable under this Plan shall be the shares of the Company's common stock, par value of $.01 per share ("Common Stock"). Such shares may be made available from authorized but unissued shares of Common Stock or shares of Common Stock reacquired by the Company. The aggregate number of shares of Common Stock issuable under exercise of Options upon this Plan shall not exceed 2,000,000 shares, subject to adjustment from time to time in accordance with Section 10 hereof. 4. AUTOMATIC GRANTING OF OPTIONS. Each individual who is initially elected or appointed as a Non-Employee Director on or after August 3, 1995 shall be automatically granted, on such date, an Option to purchase 50,000 shares of Common Stock. Commencing with the first business day of calendar year 1996 and continuing in effect for the first business day of each subsequent calendar year, each individual who is at the time serving as a Non-Employee Director shall receive an additional automatic grant of an Option to purchase 20,000 shares of Common Stock. The foregoing dates are herein referred to individually as an "Automatic Grant Date" and collectively as "Automatic Grant Dates" and the Non-Employee Directors receiving Options are herein referred to individually as an "Optionee" and collectively as "Optionees." Options granted under the Plan are not intended to be treated as incentive stock options as defined Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). In the event that an Option expires or is terminated or canceled and is unexercised as to any shares of Common Stock, the shares subject to the Option, or a portion thereof not so exercised, shall be made available for subsequent automatic Option grants under this Plan. 1 2 Should the total number of shares of Common Stock at the time available under this Plan not be sufficient for the automatic grants to be made at that particular time, the available shares shall be allocated proportionately among all the automatic grants to be made at that time. 5. EXERCISE PRICE. The price per share payable upon exercise of an Option ("Exercise Price") shall be the "Closing Selling Price" per share of Common Stock as of the Automatic Grant Date. For purposes of establishing the Exercise Price, the "Closing Selling Price" per share of the Common Stock on any relevant date shall be the closing selling price per share of Common Stock on the date immediately prior to the automatic grant date as quoted on the Nasdaq Stock Market or by the principal U.S. stock exchange upon which the Company's Common Stock is listed (the "Exchange"), or if there is no reported closing selling price of Common Stock on the Exchange on the date in question, the closing selling price on the Exchange on the last preceding date for which such quotation exists. 6. DURATION OF OPTIONS AND EXERCISABILITY. Subject to the provisions of Section 8 hereof, each Option shall have a term of ten years measured from the Automatic Grant Date. Each Option shall become exercisable for any or all of the shares covered by such Option immediately upon the Automatic Grant Date. The Option shall thereafter remain so exercisable until the expiration or sooner termination of the Option term. Notwithstanding any such provision in this Plan, during the period of thirty (30) days after a Change of Control (as defined below), each Optionee shall have the right to require the Company to purchase from Optionee any Option granted under this Plan at a purchase price equal to (i) the excess of fair market value per share over the Exercise Price (both of which as existing on the date of such Change of Control), multiplied by (ii) the number of Option shares specified by such individual for purchase by the Company, in a written notice to the Company, attention of the Secretary. A "Change of Control" shall be deemed to occur if any person shall (a) acquire direct or indirect beneficial ownership of at least 50% of the issued and outstanding Common Stock of the Company, or (b) has the power (whether such power arises as a result of the ownership of capital stock, by contract or otherwise), or the ability to elect or cause the election of directors consisting at the time of such election of a majority of the Board of Directors of the Company. As used herein, "person" shall mean any person, corporation, partnership, joint venture or other entity or any group (as such term is defined in Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules promulgated thereunder). For purposes of this paragraph, "fair market value per share" shall mean the average of the highest sales price per share of the Company's Common Stock as quoted on the Nasdaq Stock Market, or by the principal exchange upon which the Company's Common Stock is listed, on each of the five trading days immediately preceding the date on which such individual so notifies the Company. The amount payable to each such individual by the Company shall be in cash or by certified check and shall be reduced by any taxes required to be withheld. 2 3 7. EXERCISE OF OPTION. As a condition to the exercise of any Option, the "Quoted Price" (as defined below) per share of Common Stock on the date of exercise must equal or exceed the Exercise Price. An Option may be exercised by giving written notice to the Company, attention of the Secretary, specifying the number of shares to be purchased, accompanied by the full purchase price for the shares to be purchased either (i) in cash, (ii) by check, (iii) by shares of the Common Stock, (iv) by a combination of these methods of payment. The "Quoted Price" and the per share value of Common Stock for purposes of paying the Exercise Price in accordance with the immediately preceding sentence shall be determined pursuant to the definition of Closing Selling Price under Section 5 hereof, but determined with respect to the date of exercise. The Company may in its discretion permit an Optionee to deliver a promissory note in a form specified by the Company, and payable to the Company no later than the fifteenth day of April in the year following the year of exercise of any Option, in payment of any withholding tax requirements of the Company with respect to such exercise. At any time of any exercise of any Option, the Company may, if it shall determine it necessary or desirable for any reason, require the Optionee (or his or her heirs, legatees, or legal representative, as the case may be), as a condition upon the exercise thereof, to deliver to the Company a written representation of present intention to purchase the shares for investment and not for distribution. In the event such representation is required to be delivered, an appropriate legend may be placed upon each certificate delivered to the Optionee (or his or her heirs, legatees or legal representative, as the case may be) upon his or her exercise of part or all of the Option and a stop transfer order may be placed with the transfer agent. Each Option shall also be subject to the requirement that, if at any time the Company determines, in its discretion, that the listing, registration or qualification of the shares subject to the Option upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition or in connection with, the issue or purchase of shares thereunder, the Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. At the time of the exercise of any Option the Company may require, as a condition of the exercise of such Option, the Optionee to pay the Company an amount equal to the amount of tax the Company may be required to withhold to obtain a deduction for federal income tax purposes as a result of the exercise of such Option by the Optionee. 8. TERMINATION OF BOARD MEMBERSHIP -- EXERCISE THEREAFTER. Should an Optionee cease to be an outside member of the Board of Directors of the Company for any reason other than death or permanent disability, such Optionees' Options shall expire and all rights to purchase shares pursuant thereto shall terminate thirty (30) days after the date the Optionee ceases to be an outside member of the Board of Directors of the Company. The Company may, in its sole discretion, permit such Options to remain exercisable for a reasonable period after such cessation of Board membership. 3 4 Should an Optionee cease to be an outside member of the Board of Directors of the Company because of death or permanent disability (as that term is defined in Section 22(e) (3) of the Code, as now in effect or as subsequently amended), the Option may be exercised in full by the Optionee or, if he or she is not living, by his or her heirs, legatees, or legal representative, as the case may be, during its specified term prior to three years after the date of death or permanent disability, but in no event after the expiration date of the Option. 9. TRANSFERABILITY OF OPTIONS. No Option shall be assignable or transferable by the Optionee to whom it is granted, other than by will or the laws of descent and distribution, except that, upon approval by the Board, the Optionee may transfer an Option that is not intended to constitute an Incentive Stock Option (a) pursuant to a qualified domestic relations order as defined for purposes of the Employee Retirement Income Security Act of 1974, as amended, or (b) by gift: to a member of the "Family" (as defined below) of the Optionee, to or for the benefit of one or more organizations qualifying under Code Sections 501(c) (3) and 170(c) (2) (a "Charitable Organization") or to a trust for the exclusive benefit of the Optionee, one or more members of the Optionee's Family, one or more Charitable Organizations, or any combination of the foregoing, provided that any such transferee shall enter into a written agreement to be bound by the terms of this Plan. For this purpose, "Family" shall mean the ancestors, spouse, siblings, spouses of siblings, lineal descendants and spouses of lineal descendants of the Optionee. During the lifetime of an Optionee to whom an Incentive Stock Option is granted, only such Optionee (or, in the event of legal incapacity of incompetence, the Optionee's guardian or legal representative) may exercise the Incentive Stock Option. 10. ADJUSTMENTS. The number of shares subject to this Plan and to Options granted under this Plan shall be adjusted as follows: (a) in the event that the number of outstanding shares of Common Stock is changed by any stock dividend, stock split or combination of shares, the number of shares subject to this Plan and to Options granted hereunder shall be proportionately adjusted; (b) in the event of any merger, consolidation or reorganization of the Company with any other corporation or corporations, there shall be substituted, on an equitable basis, for each share of Common Stock then subject to this Plan, whether or not at the time subject to outstanding Options, the number and kind of shares of stock or other securities to which the holders of shares of Common Stock will be entitled pursuant to the transaction; and (c) in the event of any other relevant change in the capitalization of the Company, an equitable adjustment shall be made in the number of shares of Common Stock then subject to this Plan, whether or not then subject to outstanding Options. In the event of any such adjustment, the Exercise Price per share shall be proportionately adjusted. 11. AMENDMENT OF PLAN. This Plan may from time to time be amended or discontinued by action of the Board of Directors of the Company, provided that (i) no such amendment or discontinuance shall change or impair any Options previously granted without the consent of the Optionee, (ii) the provisions of this Plan relating to the amount of shares which may be subject to Options, the Automatic Grant Dates and/or the Exercise Price shall not be amended more than once every six months, other than to comply with Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or the Code, and or the rules thereunder and (iii) any amendment which would (A) materially increase the benefits accruing to the participants under this Plan, (B) materially increase the number of securities which may be issued under this Plan, and/or (C) materially modify the requirements as to the eligibility for participation in this Plan shall require the approval of the stockholders of the Company, unless such approval is not required by Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "1934 Act"), or any other federal regulations. 4 5 12. CASH PROCEEDS. Any cash proceeds received by the Company from the sale of shares pursuant to the Options granted under this Plan shall be used for general corporate purposes. 13. NO IMPAIRMENT OF RIGHTS. Nothing in this Plan or any automatic grant made pursuant to this Plan shall be construed or interpreted so as to affect adversely or otherwise impair the Company's right to remove any Optionee from service on the Board of Directors of the Company at any time in accordance with the Company's Bylaws or any provisions of applicable law. 14. HOLDING PERIOD. Anything contained in this Plan to the contrary notwithstanding, any disposition of an Option otherwise permitted by the terms of this Plan, or of the Common Stock acquired upon exercise of an Option, shall be subject to compliance with the requirements of paragraph (c) (1) of Rule 16b-3 or its successors promulgated under the 1934 Act, applicable to such disposition, and any date, period or procedure specified or referred to in this Plan with respect to any such disposition shall be adjusted, if necessary, so as to give effect to this Section 14. 15. COMPLIANCE WITH RULE 16b-3. This Plan is intended to comply with all applicable conditions of Rule 16b-3 or its successors promulgated under the 1934 Act, regardless of whether such conditions are set forth in this Plan. To the extent any provision of this Plan or action of this Plan administrators fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by this Plan administrators. 16. EFFECTIVE DATE. This Plan became effective as of August 3, 1995. 5 EX-10.19 4 AMENDED 1997 EMPLOYEE STOCK OPTION PLAN 1 REPUBLIC INDUSTRIES, INC. AMENDED AND RESTATED 1997 EMPLOYEE STOCK OPTION PLAN Republic Industries, Inc. ("Republic") hereby adopts this Republic Industries, Inc. 1997 Employee Stock Option Plan (the "Plan"), amended and restated as of November 2, 1998, the terms of which shall be as follows: 1. PURPOSE The Plan is intended to advance the interests of Republic by providing eligible individuals (as designated pursuant to Section 4 below) with an opportunity to acquire or increase a proprietary interest in Republic, which thereby will create a stronger incentive to expend maximum effort for the growth and success of Republic and its subsidiaries, and will encourage such eligible individuals to remain in the employ of Republic or one or more of its subsidiaries. Each stock option granted under the Plan (an "Option") shall be an option that is not intended to constitute an "incentive stock option" ("Incentive Stock Option") within the meaning of Section 422 of the Internal Revenue Code of 1986, or the corresponding provision of any subsequently-enacted tax statute, as amended from time to time (the "Code") unless such Option is granted to an employee of Republic or a "subsidiary corporation" (a "Subsidiary") thereof within the meaning of Section 424(f) of the Code and is specifically designated at the time of grant as being an Incentive Stock Option. Any Option so designated shall constitute an Incentive Stock Option only to the extent that it does not exceed the limitations set forth in Section 7 below. 2. ADMINISTRATION (a) BOARD. The Plan shall be administered by the Board of Directors of Republic (the "Board"), which shall have the full power and authority to take all actions, and to make all determinations required or provided for under the Plan or any Option granted or Option Agreement (as defined in Section 8 below) entered into under the Plan and all such other actions and determinations not inconsistent with the specific terms and provisions of the Plan deemed by the Board to be necessary or appropriate to the administration of the Plan or any Option granted or Option Agreement entered into hereunder. All such actions and determinations shall be by the affirmative vote of a majority of the members of the Board present at a meeting at which any issue relating to the Plan is properly raised for consideration or without a meeting by written consent of the Board executed in accordance with Republic's Certificate of Incorporation and Bylaws, and with applicable law. The interpretation and construction by the Board of any provision of the Plan or of any Option granted or Option Agreement entered into hereunder shall be final and conclusive. (b) COMMITTEE. The Board may from time to time appoint a Stock Option Committee (the "Committee") consisting of not less than two members of the Board, none of whom shall be an officer or other salaried employee of Republic or any Subsidiary, and each of whom shall qualify in all respects as a "non-employee director" as defined in Rule 16b-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Exchange Act") and an "outside director" for purposes of Section 162(m) of the Code. The Board, in its sole discretion, may provide that the role of the Committee shall be limited to making recommendations to the Board concerning any determinations to be made and actions to be taken by the Board pursuant to or with respect to the Plan, or the Board may delegate to the Committee such powers and authorities related to the administration of the Plan, as set forth in Section 2(a) above, as the Board shall determine, consistent with the Certificate of Incorporation and Bylaws of Republic and applicable law. The Board may remove members, add members, and fill vacancies on the Committee from time to time, all in accordance with Republic's Certificate of Incorporation and Bylaws, and with applicable law. The 1 2 majority vote of the Committee, or acts reduced to or approved in writing by a majority of the members of the Committee, shall be the valid acts of the Committee. (c) NO LIABILITY. No member of the Board or of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted or Option Agreement entered into hereunder. (d) DELEGATION TO THE COMMITTEE. In the event that the Plan or any Option granted or Option Agreement entered into hereunder provides for any action to be taken by or determination to be made by the Board, such action may be taken by or such determination may be made by the Committee if the power and authority to do so has been delegated to the Committee by the Board as provided for in Section 2(b) above. Unless otherwise expressly determined by the Board, any such action or determination by the Committee shall be final and conclusive. 3. STOCK The stock that may be issued pursuant to Options granted under the Plan shall be shares of common stock, $.01 par value, of Republic (the "Stock"), which shares may be treasury shares or authorized but unissued shares. The number of shares of Stock that may be issued pursuant to Options granted under the Plan shall not exceed in the aggregate 20,000,000 shares, subject to adjustment as provided in Section 17 below. If any Option expires, terminates, or is terminated or canceled for any reason prior to exercise in full, the shares of Stock that were subject to the unexercised portion of such Option shall be available for future Options granted under the Plan. Any Stock covered by an award (or portion of an award) granted under the Plan, which is forfeited or canceled, expires or is settled in cash, including the settlement of tax withholding obligations using Stock, shall be deemed not to have been delivered for purposes of determining the maximum number of shares of Stock available for delivery under the Plan. Likewise, if any Option is exercised by tendering shares of Stock, either actually or by attestation, to Republic as full or partial payment for such exercise under this Plan or any prior plan of Republic, only the number of shares issued net of the shares tendered shall be deemed delivered for purposes of determining the maximum number of shares of Stock available for delivery under the Plan. Further, Stock issued under the Plan through the settlement, assumption or substitution of outstanding awards or obligations to grant future awards as a condition of Republic acquiring another entity shall not reduce the maximum number of shares of Stock available for delivery. 4. ELIGIBILITY (a) EMPLOYEES. Options may be granted under the Plan to any employee of Republic, a Subsidiary or any other entity of which on the relevant date at least a majority of the securities or other ownership interest having ordinary voting power (absolutely or contingently) for the election of directors or other persons performing similar functions ("Voting Securities") are at the time owned directly or indirectly by Republic or any Subsidiary (an "Affiliate"), including any such employee who is an officer or director of Republic, a Subsidiary or an Affiliate, as the Board shall determine and designate from time to time prior to expiration or termination of the Plan. The maximum number of shares of Stock subject to Options that may be granted during any calendar year under the Plan to any executive officer or other employee of Republic or any Subsidiary or Affiliate whose compensation is or may be subject to Code ?162(m) is 5,000,000 shares (subject to adjustment as provided in Section 17 hereof). (b) INDEPENDENT CONTRACTORS. Options may be granted to independent contractors performing services for Republic or any Subsidiary or Affiliate as determined by the Board from time to time on the basis of their importance to the business of Republic or such Subsidiary or Affiliate. Independent contractors shall not be eligible to receive options intended to constitute Incentive Stock Options. Non-employee directors of Republic shall not be eligible to receive options under the Plan. 2 3 (c) MULTIPLE GRANTS. An individual may hold more than one Option, subject to such restrictions as are provided herein. 5. EFFECTIVE DATE AND TERM OF THE PLAN (a) EFFECTIVE DATE. The Plan shall be effective as of the date of adoption by the Board, which date is set forth below, subject to approval of the Plan, within one year of such effective date, by the stockholders of Republic by a majority of the votes present and entitled to vote at a duly held meeting of the stockholders at which a quorum representing a majority of all outstanding voting stock is present, either in person or by proxy or by written consent in accordance with Republic's Certificate of Incorporation and Bylaws; provided, however, that upon approval of the Plan by the stockholders of Republic as set forth above, all Options granted under the Plan on or after the effective date shall be fully effective as if the stockholders of Republic had approved the Plan on the effective date. If the stockholders fail to approve the Plan within one year of such effective date, any options granted hereunder shall be null and void and of no effect. (b) TERM. The Plan shall terminate on the date 10 years from the effective date. 6. GRANT OF OPTIONS Subject to the terms and conditions of the Plan, the Board may, at any time and from time to time, prior to the date of termination of the Plan, grant to such eligible individuals as the Board may determine ("Optionees"), Options to purchase such number of shares of the Stock on such terms and conditions as the Board may determine. The date on which the Board approves the grant of an Option (or such later date as is specified by the Board) shall be considered the date on which such Option is granted. 7. LIMITATION ON INCENTIVE STOCK OPTIONS An Option intended to constitute an Incentive Stock Option (and so designated at the time of grant) shall qualify as an Incentive Stock Option only to the extent that the aggregate fair market value (determined at the time the Option is granted) of the stock with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under the Plan and all other plans of the Optionee's employer corporation and its parent and subsidiary corporations within the meaning of Section 422(d) of the Code) does not exceed $100,000. This limitation shall be applied by taking Options into account in the order in which they were granted. 8. OPTION AGREEMENTS All Options granted pursuant to the Plan shall be evidenced by written agreements ("Option Agreements"), to be executed by Republic and by the Optionee, in such form or forms as the Board shall from time to time determine. Option Agreements covering Options granted from time to time or at the same time need not contain similar provisions; provided, however, that all such Option Agreements shall comply with all terms of the Plan. 9. OPTION PRICE The purchase price of each share of the Stock subject to an Option shall be not less than 100 percent of the fair market value of a share of the Stock which shall mean either the closing price of a share of the Stock on the business day prior to the date the option is granted or,with respect to annual grants of stock options commencing with the year 2000, the average of the closing price of a share of the Stock on the first three business days of the year as reported on The New York Stock Exchange, absent manifest error, or at a price otherwise fixed by the Board or by the Committee in good faith as the fair market value and stated in an option agreement with the Optionee (the "Option Price") PROVIDED, HOWEVER, that in the event the Optionee would otherwise be ineligible to receive an Incentive Stock Option by reason of the provisions of Sections 422(b)(6) and 424(d) of the Code (relating to stock ownership of more than 10 percent), the Option Price of an Option that is intended to be an Incentive Stock Option shall be not less than 110 percent of the fair market value of a share of Stock at the time such Option is granted. 3 4 10. TERM AND EXERCISE OF OPTIONS (a) OPTION PERIOD. Each Option granted under the Plan shall terminate and all rights to purchase shares thereunder shall cease upon the expiration of ten years from the date such Option is granted, or on such date prior thereto as may be fixed by the Board and stated in the Option Agreement relating to such Option; PROVIDED, HOWEVER, that in the event the Optionee would otherwise be ineligible to receive an Incentive Stock Option by reason of the provisions of Sections 422(b)(6) and 424(d) of the Code (relating to stock ownership of more than 10 percent), an Option granted to such Optionee that is intended to be an Incentive Stock Option shall in no event be exercisable after the expiration of five years from the date it is granted. (b) VESTING AND LIMITATIONS ON EXERCISE. Except as otherwise provided herein, each Option shall become exercisable with respect to 25% of the total number of shares subject to the Option on the date that is 12 months after the date of its grant (the "Vesting Date") and with respect to an additional 25% of the number of such shares on each of the next three succeeding anniversaries of the Vesting Date; provided, however, that the Board may in its discretion provide that an Option may be exercised, in whole or in part, at any time and from time to time, over a period commencing on or after the date of grant and ending upon the expiration or termination of the Option, as the Board shall determine and set forth in the Option Agreement relating to such Option. Without limiting the foregoing, the Board, subject to the terms and conditions of the Plan, may in its sole discretion provide that an Option may be exercised immediately upon grant or that it may not be exercised in whole or in part for any period or periods of time during which such Option is outstanding; pROVIDED, HOWEVER, that any vesting requirement or other such limitation on the exercise of an Option may be rescinded, modified or waived by the Board, in its sole discretion, at any time and from time to time after the date of grant of such Option, so as to accelerate the time at which the Option may be exercised. (c) METHOD OF EXERCISE. An Option that is exercisable hereunder may be exercised by delivery to Republic on any business day, at its principal office, addressed to the attention of the Stock Option Administrator, of written notice of exercise, which notice shall specify the number of shares with respect to which the Option is being exercised, and shall be accompanied by payment in full of the Option Price of the shares for which the Option is being exercised, except as provided below. The minimum number of shares of Stock with respect to which an Option may be exercised, in whole or in part, at any time shall be the lesser of 100 shares or the maximum number of shares available for purchase under the Option at the time of exercise. Payment of the Option Price for the shares of Stock purchased pursuant to the exercise of an Option shall be made (i) in cash or in cash equivalents; (ii) through the tender to Republic of shares of Stock, which shares shall be valued, for purposes of determining the extent to which the Option Price has been paid thereby, at their fair market value (determined in the manner described in Section 9 above) on the date of exercise; (iii) by delivering a written direction to Republic that the Option be exercised pursuant to a "cashless" exercise/sale procedure (pursuant to which funds to pay for exercise of the Option are delivered to Republic by a broker upon receipt of stock certificates from Republic) or a cashless exercise/loan procedure (pursuant to which the optionees would obtain a margin loan from a broker to fund the exercise) through a licensed broker acceptable to Republic whereby the stock certificate or certificates for the shares of Stock for which the Option is exercised will be delivered to such broker as the agent for the individual exercising the Option and the broker will deliver to Republic cash (or cash equivalents acceptable to Republic) equal to the Option Price for the shares of Stock purchased pursuant to the exercise of the Option plus the amount (if any) of federal and other taxes that Republic, may, in its judgment, be required to withhold with respect to the exercise 4 5 of the Option; (iv) to the extent permitted by applicable law and under the terms of the Option Agreement with respect to such Option, by the delivery of a promissory note of the Optionee to Republic on such terms as shall be set out in such Option Agreement; or (v) by a combination of the methods described in (i), (ii), (iii) and (iv). The Optionee must also satisfy any tax obligations through delivery of cash, Stock or withholding of shares of Stock by the Company. Payment in full of the Option Price need not accompany the written notice of exercise if the Option is exercised pursuant to the cashless exercise/sale procedure described above. An attempt to exercise any Option granted hereunder other than as set forth above shall be invalid and of no force and effect. Promptly after the exercise of an Option, the individual exercising the Option shall be entitled to the issuance of a Stock certificate or certificates evidencing his ownership of such shares. A separate Stock certificate or certificates shall be issued for any shares purchased pursuant to the exercise of an Option that is intended to be an Incentive Stock Option, which certificate or certificates shall not include any shares that were purchased pursuant to the exercise of an Option that is not an Incentive Stock Option. An individual holding or exercising an Option shall have none of the rights of a shareholder until the shares of Stock covered thereby are fully paid and issued to him and, except as provided in Section 18 below, no adjustment shall be made for dividends or other rights for which the record date is prior to the date of such issuance. (d) RESTRICTIONS ON TRANSFER OF STOCK. If an Option is exercised before the date that is six months from the later of (i) the date of grant of the Option or (ii) the date of shareholder approval of the Plan and the sale of stock acquired pursuant to such exercise would subject the individual exercising the Option to liability under Section 16 of the Exchange Act, then such certificate or certificates shall bear a legend restricting the transfer of the Stock covered thereby until the expiration of six months from the later of the date specified in clause (i) above or the date specified in clause (ii) above. (e) CHANGE IN CONTROL. In the event of a Change in Control (as defined below), except as the Board shall otherwise provide in an Option Agreement with respect to an Option granted under the Plan, all outstanding Options shall become immediately exercisable in full, without regard to any limitation on exercise imposed pursuant to Section 10(b) above, and, unless waived in advance of such Change in Control by the Board, each Optionee who is a director, an employee or a consultant of Republic or a Subsidiary or Affiliate at the time of such Change in Control shall have the right to require Republic to pay, in cancellation of such Option, an amount equal to the product of (i) the excess of (x) the fair market value per share of the Stock over (y) the Option Price times (ii) the number of shares of Stock specified by the Optionee in a written notice to Republic (up to the full number of shares of Stock then subject to such Option). For purposes of the Plan, a "Change in Control" shall be deemed to occur if any person shall (a) acquire direct or indirect beneficial ownership of more than 50% of the total combined voting power with respect to the election of directors of the issued and outstanding stock of Republic (except that no Change in Control shall be deemed to have occurred if the persons who were stockholders of Republic immediately before such acquisition own all or substantially all of the voting stock or other interests of such person immediately after such transaction), or (b) have the power (whether as a result of stock ownership, revocable or irrevocable proxies, contract or otherwise) or ability to elect or cause the election of directors consisting at the time of such election of a majority of the Board. A "person" for this purpose shall mean any person, corporation, partnership, joint venture or other entity or any group (as such term is defined for purposes of Section 13(d) of the Exchange Act) and a person shall be deemed to be a beneficial owner as that term is used in Rule 13d-3 under the Exchange Act. The amount payable under this Section 10(e) shall be remitted by Republic in cash or by certified or bank check, reduced by applicable tax withholding. (f) Notwithstanding any other provision of the Plan, no Option granted to an Optionee under the Plan shall be exercisable in whole or in part prior to the date the Plan is approved by the stockholders of Republic as provided in Section 5 above. 5 6 11. TRANSFERABILITY OF OPTIONS No Option shall be assignable or transferable by the Optionee to whom it is granted, other than by will or the laws of descent and distribution, except that, upon approval by the Board, the Optionee may transfer an Option that is not intended to constitute an Incentive Stock Option (a) pursuant to a qualified domestic relations order as defined for purposes of the Employee Retirement Income Security Act of 1974, as amended, or (b) by gift: to a member of the "Family" (as defined below) of the Optionee, to or for the benefit of one or more organizations qualifying under Code ??501(c)(3) and 170(c)(2) (a "Charitable Organization") or to a trust for the exclusive benefit of the Optionee, one or more members of the Optionee's Family, one or more Charitable Organizations, or any combination of the foregoing, provided that any such transferee shall enter into a written agreement to be bound by the terms of this Agreement. For this purpose, "Family" shall mean the ancestors, spouse, siblings, spouses of siblings, lineal descendants and spouses of lineal descendants of the Optionee. During the lifetime of an Optionee to whom an Incentive Stock Option is granted, only such Optionee (or, in the event of legal incapacity or incompetence, the Optionee's guardian or legal representative) may exercise the Incentive Stock Option. 12. TERMINATION OF EMPLOYMENT OR SERVICE (a) GENERAL. Except as otherwise provided herein, upon the termination of the employment or other service of an Optionee with Republic, a Subsidiary, a spin-off corporation or an Affiliate, other than by reason of a "Change in Ownership" (as defined below) or the death or "permanent and total disability" (within the meaning of Section 22(e)(3) of the Code) of such Optionee, any Option granted to an Optionee pursuant to the Plan shall terminate upon the date of such termination of employment or service and such Optionee shall have no further right to purchase shares of Stock pursuant to such Option. Notwithstanding the foregoing provisions of this Section 12, the Board may provide, in its discretion, that following the termination of employment or service of an Optionee with Republic, a Subsidiary, a spin-off corporation or Affiliate, an Optionee may exercise an Option, in whole or in part, at any time subsequent to such termination of employment or service and prior to termination of the Option pursuant to Section 10(a) above, either subject to or without regard to any vesting or other limitation on exercise imposed pursuant to Section 10(b) above. (b) CHANGE IN OWNERSHIP OF SUBSIDIARY OR AFFILIATE. If an Optionee ceases to be an employee or an independent contractor of Republic or any Subsidiary following a "Change in Ownership" (as defined below) (whether because of the termination of employment or service of the Optionee, because the corporation or other entity by which the Optionee was employed or for which the Optionee was providing services as an independent contractor, ceases to be a Subsidiary of Affiliate or otherwise) then such options shall continue to vest according to the vesting schedule unless the Board determines otherwise. A "Change in Ownership" shall be deemed to have occurred with respect to an Optionee if (i) as a result of a merger, consolidation, reorganization, business combination, sale, exchange or other disposition of Voting Securities (as defined in Section 4(a)) or other transaction, the corporation or other entity by which the Optionee is employed or for which the Optionee is providing services as an independent contractor ceases to be a Subsidiary or Affiliate of Republic and, immediately after such transaction, the persons who were stockholders of Republic immediately before such transaction (the "Republic Stockholders") do not own at least a majority of the Voting Securities of such corporation or other entity or (ii) there is a sale or other disposition of all or substantially all of the assets of the trade or business by which the Optionee is employed or for which the Optionee is providing services as an independent contractor and, immediately after such transaction, Republic or the Republic Stockholders do not own at least a majority of the Voting Securities of a corporation or other entity that acquires such assets and engages in such trade or business. (c) Whether a leave of absence or leave on military or government service shall constitute a termination of employment of service for purposes of the Plan shall be determined by the Board, which determination shall be final and conclusive. 6 7 For purposes of the Plan, a termination of employment or service with Republic, a Subsidiary, a spin-off corporation or Affiliate shall not be deemed to occur if the Optionee is immediately thereafter employed by or otherwise providing services to Republic, any Subsidiary, any spin-off corporation or Affiliate. 13. RIGHTS IN THE EVENT OF DEATH OR DISABILITY (a) DEATH. If an Optionee dies while in the employ or service of Republic, a Subsidiary, a spin-off corporation or Affiliate or within the period following the termination of employment or service during which the Option is exercisable under Section 12 above or Section 13(b) below, all Options held by such Optionee prior to death shall become immediately exercisable in full and the executors or administrators or legatees or distributees of such Optionee's estate shall have the right, at any time within three years after the date of such Optionee's death and prior to termination of the Option pursuant to Section 10(a) above, to exercise any Option held by such Optionee at the date of such Optionee's death; PROVIDED, HOWEVER, that the Board may provide, in its discretion, that following the death of an Optionee, the executors or administrators or legatees or distributees of such Optionee's estate may exercise an Option, in whole or in part, at any time subsequent to such Optionee's death and prior to termination of the Option pursuant to Section 10(a) above, either subject to or without regard to any vesting or other limitation on exercise imposed pursuant to Section 10(b) above. (b) DISABILITY. If an Optionee terminates employment or service with Republic, a Subsidiary, a spin-off corporation or Affiliate by reason of the "permanent and total disability" (within the meaning of Section 22(e)(3) of the Code) of such Optionee, then all Options held by such Optionee shall become immediately exercisable in full and the Optionee shall have the right, at any time within three years after such termination of employment or service and prior to termination of the Option pursuant to Section 10(a) above, to exercise, in whole or in part, any Option held by such Optionee at the date of such termination of employment or service; PROVIDED, HOWEVER,that the Board may provide, in its discretion, that an Optionee may, in the event of the termination of employment or service of the Optionee with Republic, a Subsidiary, a spin-off corporation or Affiliate by reason of the "permanent and total disability" (within the meaning of Section 22(e)(3) of the Code) of such Optionee, exercise an Option in whole or in part, at any time subsequent to such termination of employment or service and prior to termination of the Option pursuant to Section 10(a) above, either subject to or without regard to any vesting or other limitation on exercise imposed pursuant to Section 10(b) above. Whether a termination of employment or service is to be considered by reason of "permanent and total disability" for purposes of this Plan shall be determined by the Board, which determination shall be final and conclusive. 14. USE OF PROCEEDS The proceeds received by Republic from the sale of Stock pursuant to Options granted under the Plan shall constitute general funds of Republic. 15. REQUIREMENTS OF LAW (a) VIOLATIONS OF LAW. Republic shall not be required to sell or issue any shares of Stock under any Option if the sale or issuance of such shares would constitute a violation by the individual exercising the Option or Republic of any provisions of any law or regulation of any governmental authority, including without limitation any federal or state securities laws or regulations. Any determination in this connection by the Board shall be final, binding, and conclusive. Republic shall not be obligated to take any affirmative action in order to cause the exercise of an Option or the issuance of shares pursuant thereto to comply with any law or regulation of any governmental authority. As to any jurisdiction that expressly imposes the requirement that an Option shall not be exercisable unless and until the shares of Stock covered by such Option are registered or are subject to an available exemption from registration, the exercise of such Option (under circumstances in which the laws of such jurisdiction apply) shall be deemed conditioned upon the effectiveness of such registration or the availability of such an exemption. 7 8 (b) COMPLIANCE WITH RULE 16b-3. The intent of this Plan is to qualify for the exemption provided by Rule 16b-3 under the Exchange Act. To the extent any provision of the Plan does not comply with the requirements of Rule 16b-3, it shall be deemed inoperative to the extent permitted by law and deemed advisable by the Board and shall not affect the validity of the Plan. In the event Rule 16b-3 is revised or replaced, the Board, or the Committee acting on behalf of the Board, may exercise discretion to modify this Plan in any respect necessary to satisfy the requirements of the revised exemption or its replacement. 16. AMENDMENT AND TERMINATION OF THE PLAN The Board may,at any time and from time to time, amend, suspend or terminate the Plan as to any shares of Stock as to which Options have not been granted; PROVIDED, HOWEVER, that no amendment by the Board shall, without approval by a majority of the votes present and entitled to vote at a duly held meeting of the stockholders of Republic at which a quorum representing a majority of all outstanding voting stock is, either in person or by proxy, present and voting on the amendment, or by written consent in accordance with applicable state law and the Certificate of Incorporation and Bylaws of Republic, change the requirements as to eligibility to receive Options that are intended to qualify as Incentive Stock Options, increase the maximum number of shares of Stock in the aggregate that may be sold pursuant to Options that are intended to qualify as Incentive Stock Options granted under the Plan (except as permitted under Section 17 hereof) or modify the Plan so that Options granted under the Plan could not satisfy the applicable requirements of Code ?162(m). Except as permitted under Section 17 hereof, no amendment, suspension or termination of the Plan shall, without the consent of the holder of the Option, alter or impair rights or obligations under any Option theretofore granted under the Plan. 17. EFFECT OF CHANGES IN CAPITALIZATION (a) ADJUSTMENT FOR CORPORATE TRANSACTIONS. The Board may determine that a corporate transaction has affected the price of the Stock such than an adjustment or adjustments to outstanding awards are required to preserve (or prevent enlargement of) the benefits or potential benefits intended at time of grant. For this purpose a corporate transaction may include, but is not limited to, any stock dividend, stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination or exchange of shares of Stock, or other similar occurrence. In the event of such a corporate transaction, the Board may, in such manner as the Board deems equitable, adjust (i) the number and kind shares of Stock which may be delivered under the Plan pursuant to Section 3; (ii) the number and kind of shares of Stock subject to outstanding awards; and (iii) the exercise price of outstanding stock options. (b) DISSOLUTION OR LIQUIDATION; REORGANIZATION IN WHICH REPUBLIC IS NOT THE SURVIVING CORPORATION OR SALE OF ASSETS OR STOCK. Upon the dissolution or liquidation of Republic the Plan and all Options outstanding hereunder shall terminate. In the event of any termination of the Plan under this Section 17(b), each individual holding an Option shall have the right, immediately prior to the occurrence of such termination and during such reasonable period as the Board in its sole discretion shall determine and designate, to exercise such Option in whole or in part, whether or not such Option was otherwise exercisable at the time such termination occurs and without regard to any vesting or other limitation on exercise imposed pursuant to Section 10(b) above. In connection with a merger, consolidation, reorganization or other business combination of Republic with one or more other entities in which Republic is not the surviving entity, or upon a sale of all or substantially all of the assets of Republic to another entity, or upon any transaction (including, without limitation, a merger or reorganization in which Republic is the surviving corporation) that results in any person or entity (or persons or entities acting as a group or otherwise in concert) owning more than 50 percent of the combined voting power of all classes of stock of 8 9 Republic, Republic and the acquiring or surviving entity shall provide for the continuation of the Plan and the assumption of the Options theretofore granted, or for the substitution for such Options of new options covering the stock of a successor entity, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kinds of shares and exercise prices. The Board shall send prior written notice of the occurrence of an event described in this Section 17(b) to all individuals who hold Options not later than the time at which Republic gives notice to its stockholders that such event is proposed. (c) NO LIMITATIONS ON CORPORATION. The grant of an Option pursuant to the Plan shall not affect or limit in any way the right or power of Republic to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge, consolidate, dissolve or liquidate, or to sell or transfer all or any part of its business or assets. 18. DISCLAIMER OF RIGHTS No provision in the Plan or in any Option granted or Option Agreement entered into pursuant to the Plan shall be construed to confer upon any individual the right to remain in the employ of Republic, any Subsidiary, any spin-off corporation or Affiliate, or to interfere in any way with the right and authority of Republic, any Subsidiary, any spinoff corporation or Affiliate either to increase or decrease the compensation of any individual at any time, or to terminate any employment or other relationship between any individual and Republic, any Subsidiary, any spin-off corporation or Affiliate. 19. NON-EXCLUSIVITY OF THE PLAN Neither the adoption of the Plan nor the submission of the Plan to the stockholders of Republic for approval shall be construed as creating any limitations upon the right and authority of the Board to adopt such other incentive compensation arrangements (which arrangements may be applicable either generally to a class or classes of individuals or specifically to a particular individual or individuals) as the Board in its discretion determines desirable, including, without limitation, the granting of stock options or stock appreciation rights otherwise than under the Plan. This Plan was duly adopted and approved by the Board of Directors of Republic effective as of the 2nd day of January, 1997, subject to approval and adoption by the stockholders of Republic. /s/ Richard L. Handley -------------------------------- Secretary of Republic This Plan was duly approved and adopted by the stockholders of Republic at a meeting held the 13th day of May, 1997. /s/ Richard L. Handley -------------------------------- Secretary of Republic This Plan was duly amended by the Board of Directors of Republic effective as of the 2nd day of November, 1998. /s/ James O. Cole -------------------------------- Secretary of Republic This Plan was duly amended by the Board of Directors of Republic effective as of the 6th day of January, 1999. /s/ James O. Cole -------------------------------- Secretary of Republic 9 EX-10.20 5 AMENDED 1998 EMPLOYEE STOCK OPTION PLAN 1 REPUBLIC INDUSTRIES, INC. AMENDED AND RESTATED 1998 EMPLOYEE STOCK OPTION PLAN Republic Industries, Inc. ("Republic") hereby adopts this Republic Industries, Inc. 1998 Employee Stock Option Plan (the "Plan"), the terms of which shall be as follows: 1. PURPOSE The Plan is intended to advance the interests of Republic by providing eligible individuals (as designated pursuant to Section 4 below) with an opportunity to acquire or increase a proprietary interest in Republic, which thereby will create a stronger incentive to expend maximum effort for the growth and success of Republic and its subsidiaries, and will encourage such eligible individuals to remain in the employ of Republic or one or more of its subsidiaries. Each stock option granted under the Plan (an "Option") shall be an option that is not intended to constitute an "incentive stock option" ("Incentive Stock Option") within the meaning of Section 422 of the Internal Revenue Code of 1986, or the corresponding provision of any subsequently-enacted tax statute, as amended from time to time (the "Code") unless such Option is granted to an employee of Republic or a "subsidiary corporation" (a "Subsidiary") thereof within the meaning of Section 424(f) of the Code and is specifically designated at the time of grant as being an Incentive Stock Option. Any Option so designated shall constitute an Incentive Stock Option only to the extent that it does not exceed the limitations set forth in Section 7 below. 2. ADMINISTRATION (a) BOARD. The Plan shall be administered by the Board of Directors of Republic (the "Board"), which shall have the full power and authority to take all actions, and to make all determinations required or provided for under the Plan or any Option granted or Option Agreement (as defined in Section 8 below) entered into under the Plan and all such other actions and determinations not inconsistent with the specific terms and provisions of the Plan deemed by the Board to be necessary or appropriate to the administration of the Plan or any Option granted or Option Agreement entered into hereunder. All such actions and determinations shall be by the affirmative vote of a majority of the members of the Board present at a meeting at which any issue relating to the Plan is properly raised for consideration or without a meeting by written consent of the Board executed in accordance with Republic's Certificate of Incorporation and Bylaws, and with applicable law. The interpretation and construction by the Board of any provision of the Plan or of any Option granted or Option Agreement entered into hereunder shall be final and conclusive. (b) COMMITTEE. The Board may from time to time appoint a Stock Option Committee (the "Committee") consisting of not less than two members of the Board, none of whom shall be an officer or other salaried employee of Republic or any Subsidiary, and each of whom shall qualify in all respects as an "outside director" for purposes of Section 162(m) of the Code. The Board, in its sole discretion, may provide that the role of the Committee shall be limited to making recommendations to the Board concerning any determinations to be made and actions to be taken by the Board pursuant to or with respect to the Plan, or the Board may delegate to the Committee such powers and authorities related to the administration of the Plan, as set forth in Section 2(a) above, as the Board shall determine, consistent with the Certificate of Incorporation and Bylaws of Republic and applicable law. The Board may remove members, add members, and fill vacancies on the Committee from time to time, all in accordance with Republic's Certificate of Incorporation and Bylaws, and with applicable law. The majority vote of the Committee, or acts reduced to or approved in writing by a majority of the members of the Committee, shall be the valid acts of the Committee. 1 2 (c) NO LIABILITY. No member of the Board or of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted or Option Agreement entered into hereunder. (d) DELEGATION TO THE COMMITTEE. In the event that the Plan or any Option granted or Option Agreement entered into hereunder provides for any action to be taken by or determination to be made by the Board, such action may be taken by or such determination may be made by the Committee if the power and authority to do so has been delegated to the Committee by the Board as provided for in Section 2(b) above. Unless otherwise expressly determined by the Board, any such action or determination by the Committee shall be final and conclusive. 3. STOCK The stock that may be issued pursuant to Options granted under the Plan shall be shares of common stock, $.01 par value, of Republic (the "Stock"), which shares may be treasury shares or authorized but unissued shares. The number of shares of Stock that may be issued pursuant to Options granted under the Plan shall not exceed in the aggregate 30,000,000 shares, subject to adjustment as provided in Section 17 below. If any Option expires, terminates, or is terminated or canceled for any reason prior to exercise in full, the shares of Stock that were subject to the unexercised portion of such Option shall be available for future Options granted under the Plan. Any Stock covered by an award (or portion of an award) granted under the Plan, which is forfeited or canceled, expires or is settled in cash, including the settlement of tax withholding obligations using Stock, shall be deemed not to have been delivered for purposes of determining the maximum number of shares of Stock available for delivery under the Plan. Likewise, if any Option is exercised by tendering shares of Stock, either actually or by attestation, to Republic as full or partial payment for such exercise under this Plan or any prior plan of Republic, only the number of shares issued net of the shares tendered shall be deemed delivered for purposes of determining the maximum number of shares of Stock available for delivery under the Plan. Further, Stock issued under the Plan through the settlement, assumption or substitution of outstanding awards or obligations to grant future awards as a condition of Republic acquiring another entity shall not reduce the maximum number of shares of Stock available for delivery. 4. ELIGIBILITY (a) EMPLOYEES. Options may be granted under the Plan to any employee of Republic, a Subsidiary or any other entity of which on the relevant date at least a majority of the securities or other ownership interest having ordinary voting power (absolutely or contingently) for the election of directors or other persons performing similar functions ("Voting Securities") are at the time owned directly or indirectly by Republic or any Subsidiary (an "Affiliate"), including any such employee who is an officer or director of Republic, a Subsidiary or an Affiliate, as the Board shall determine and designate from time to time prior to expiration or termination of the Plan. The maximum number of shares of Stock subject to Options that may be granted during any calendar year under the Plan to any executive officer or other employee of Republic or any Subsidiary or Affiliate whose compensation is or may be subject to Code ?162(m) is 5,000,000 shares (subject to adjustment as provided in Section 17 hereof). (b) INDEPENDENT CONTRACTORS. Options may be granted to independent contractors performing services for Republic or any Subsidiary or Affiliate as determined by the Board from time to time on the basis of their importance to the business of Republic or such Subsidiary or Affiliate. Independent contractors shall not be eligible to receive options intended to constitute Incentive Stock Options. Non-employee directors of Republic shall not be eligible to receive options under the Plan. (c) MULTIPLE GRANTS. An individual may hold more than one Option, subject to such restrictions as are provided herein. 2 3 5. EFFECTIVE DATE AND TERM OF THE PLAN (a) EFFECTIVE DATE. The Plan shall be effective as of the date of adoption by the Board, which date is set forth below, subject to approval of the Plan, within one year of such effective date, by the stockholders of Republic by a majority of the votes present and entitled to vote at a duly held meeting of the stockholders at which a quorum representing a majority of all outstanding voting stock is present, either in person or by proxy or by written consent in accordance with Republic's Certificate of Incorporation and Bylaws; provided, however, that upon approval of the Plan by the stockholders of Republic as set forth above, all Options granted under the Plan on or after the effective date shall be fully effective as if the stockholders of Republic had approved the Plan on the effective date. If the stockholders fail to approve the Plan within one year of such effective date, any options granted hereunder shall be null and void and of no effect. (b) TERM. The Plan shall terminate on the date 10 years from the effective date. 6. GRANT OF OPTIONS Subject to the terms and conditions of the Plan, the Board may, at any time and from time to time, prior to the date of termination of the Plan, grant to such eligible individuals as the Board may determine ("Optionees"), Options to purchase such number of shares of the Stock on such terms and conditions as the Board may determine. The date on which the Board approves or ratifies the grant of an Option (or if the grant is ratified by the Board or Committee such earlier date as is specified by the Board or Committee) shall be considered the date on which such Option is granted. 7. LIMITATION ON INCENTIVE STOCK OPTIONS An Option intended to constitute an Incentive Stock Option (and so designated at the time of grant) shall qualify as an Incentive Stock Option only to the extent that the aggregate fair market value (determined at the time the Option is granted) of the stock with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under the Plan and all other plans of the Optionee's employer corporation and its parent and subsidiary corporations within the meaning of Section 422(d) of the Code) does not exceed $100,000. This limitation shall be applied by taking Options into account in the order in which they were granted. 8. OPTION AGREEMENTS All Options granted pursuant to the Plan shall be evidenced by written agreements ("Option Agreements"), to be executed by Republic and by the Optionee, in such form or forms as the Board shall from time to time determine. Option Agreements covering Options granted from time to time or at the same time need not contain similar provisions; provided, however, that all such Option Agreements shall comply with all terms of the Plan. 9. OPTION PRICE The purchase price of each share of the Stock subject to an Option shall be not less than 100 percent of the fair market value of a share of the Stock which shall mean either the closing price of a share of the Stock on the business day prior to the date the Option is granted with respect to annual grants of stock options commencing with the year 2000, the average of the closing price of a share of the Stock on the first three business days of the year as reported on the New York Stock Exchange, absent manifest error, or a price otherwise fixed by the Board or the Committee in good faith as the fair market value and stated in an Option Agreement with the Optionee (the ?Option Price?); PROVIDED HOWEVER, that in the event that the Optionee would otherwise be ineligible to receive an Incentive Stock Option by reason of the provisions of Section 422(b)(6) and 424 (d) of the Code (relating to stock ownership of more than 10 percent), the Option Price of an Option that is intended to be an Incentive Stock Option shall be not less than 110 percent of the fair market value of a share of Stock at the time such Option is granted. 3 4 10. TERM AND EXERCISE OF OPTIONS (a) OPTION PERIOD. Each Option granted under the Plan shall terminate and all rights to purchase shares thereunder shall cease upon the expiration of ten years from the date such Option is granted, or on such date prior thereto as may be fixed by the Board and stated in the Option Agreement relating to such Option; PROVIDED, HOWEVER, that in the event the Optionee would otherwise be ineligible to receive an Incentive Stock Option by reason of the provisions of Sections 422(b)(6) and 424(d) of the Code (relating to stock ownership of more than 10 percent), an Option granted to such Optionee that is intended to be an Incentive Stock Option shall in no event be exercisable after the expiration of five years from the date it is granted. (b) VESTING AND LIMITATIONS ON EXERCISE. Except as otherwise provided herein, each Option shall become exercisable with respect to 25% of the total number of shares subject to the Option on the date that is 12 months after the date of its grant (the "Vesting Date") and with respect to an additional 25% of the number of such shares on each of the next three succeeding anniversaries of the Vesting Date; provided, however, that the Board may in its discretion provide that an Option may be exercised, in whole or in part, at any time and from time to time, over a period commencing on or after the date of grant and ending upon the expiration or termination of the Option, as the Board shall determine and set forth in the Option Agreement relating to such Option. Without limiting the foregoing, the Board, subject to the terms and conditions of the Plan, may in its sole discretion provide that an Option may be exercised immediately upon grant or that it may not be exercised in whole or in part for any period or periods of time during which such Option is outstanding; pROVIDED, HOWEVER, that any vesting requirement or other such limitation on the exercise of an Option may be rescinded, modified or waived by the Board, in its sole discretion, at any time and from time to time after the date of grant of such Option, so as to accelerate the time at which the Option may be exercised. (c) METHOD OF EXERCISE. An Option that is exercisable hereunder may be exercised by delivery to Republic on any business day, at its principal office, addressed to the attention of the Stock Option Administrator, of written notice of exercise, which notice shall specify the number of shares with respect to which the Option is being exercised, and shall be accompanied by payment in full of the Option Price of the shares for which the Option is being exercised, except as provided below. The minimum number of shares of Stock with respect to which an Option may be exercised, in whole or in part, at any time shall be the lesser of 100 shares or the maximum number of shares available for purchase under the Option at the time of exercise. Payment of the Option Price for the shares of Stock purchased pursuant to the exercise of an Option shall be made (i) in cash or in cash equivalents; (ii) through the tender to Republic of shares of Stock, which shares shall be valued, for purposes of determining the extent to which the Option Price has been paid thereby, at their fair market value (determined in the manner described in Section 9 above) on the date of exercise; (iii) by delivering a written direction to Republic that the Option be exercised pursuant to a "cashless" exercise/sale procedure (pursuant to which funds to pay for exercise of the Option are delivered to Republic by a broker upon receipt of stock certificates from Republic) or a cashless exercise/loan procedure (pursuant to which the optionees would obtain a margin loan from a broker to fund the exercise) through a licensed broker acceptable to Republic whereby the stock certificate or certificates for the shares of Stock for which the Option is exercised will be delivered to such broker as the agent for the individual exercising the Option and the broker will deliver to Republic cash (or cash equivalents acceptable to Republic) equal to the Option Price for the shares of Stock purchased pursuant to the exercise of the Option plus the amount (if any) of federal and other taxes that Republic, may, in its judgment, be required to withhold with respect to the exercise of the Option; (iv) to the extent permitted by applicable law and under the terms of the Option Agreement with respect to such Option, by the delivery of a promissory note of the Optionee to Republic on such terms as shall be set out in such Option Agreement; 4 5 or (v) by a combination of the methods described in (i), (ii), (iii) and (iv). The Optionee must also satisfy any tax obligations through delivery of cash, Stock or withholding of shares of Stock by the Company. Payment in full of the Option Price need not accompany the written notice of exercise if the Option is exercised pursuant to the cashless exercise/sale procedure described above. An attempt to exercise any Option granted hereunder other than as set forth above shall be invalid and of no force and effect. Promptly after the exercise of an Option, the individual exercising the Option shall be entitled to the issuance of a Stock certificate or certificates evidencing his ownership of such shares. A separate Stock certificate or certificates shall be issued for any shares purchased pursuant to the exercise of an Option that is intended to be an Incentive Stock Option, which certificate or certificates shall not include any shares that were purchased pursuant to the exercise of an Option that is not an Incentive Stock Option. An individual holding or exercising an Option shall have none of the rights of a shareholder until the shares of Stock covered thereby are fully paid and issued to him and, except as provided in Section 18 below, no adjustment shall be made for dividends or other rights for which the record date is prior to the date of such issuance. (d) RESTRICTIONS ON TRANSFER OF STOCK. If an Option is exercised before the date that is six months from the later of (i) the date of grant of the Option or (ii) the date of shareholder approval of the Plan and the sale of stock acquired pursuant to such exercise would subject the individual exercising the Option to liability under Section 16 of the Exchange Act, then such certificate or certificates shall bear a legend restricting the transfer of the Stock covered thereby until the expiration of six months from the later of the date specified in clause (i) above or the date specified in clause (ii) above. (e) CHANGE IN CONTROL. In the event of a Change in Control (as defined below), except as the Board shall otherwise provide in an Option Agreement with respect to an Option granted under the Plan, all outstanding Options shall become immediately exercisable in full, without regard to any limitation on exercise imposed pursuant to Section 10(b) above, and, unless waived in advance of such Change in Control by the Board, each Optionee who is a director, an employee or a consultant of Republic or a Subsidiary or Affiliate at the time of such Change in Control shall have the right to require Republic to pay, in cancellation of such Option, an amount equal to the product of (i) the excess of (x) the fair market value per share of the Stock over (y) the Option Price times (ii) the number of shares of Stock specified by the Optionee in a written notice to Republic (up to the full number of shares of Stock then subject to such Option). For purposes of the Plan, a "Change in Control" shall be deemed to occur if any person shall (a) acquire direct or indirect beneficial ownership of more than 50% of the total combined voting power with respect to the election of directors of the issued and outstanding stock of Republic (except that no Change in Control shall be deemed to have occurred if the persons who were stockholders of Republic immediately before such acquisition own all or substantially all of the voting stock or other interests of such person immediately after such transaction), or (b) have the power (whether as a result of stock ownership, revocable or irrevocable proxies, contract or otherwise) or ability to elect or cause the election of directors consisting at the time of such election of a majority of the Board. A "person" for this purpose shall mean any person, corporation, partnership, joint venture or other entity or any group (as such term is defined for purposes of Section 13(d) of the Exchange Act) and a person shall be deemed to be a beneficial owner as that term is used in Rule 13d-3 under the Exchange Act. The amount payable under this Section 10(e) shall be remitted by Republic in cash or by certified or bank check, reduced by applicable tax withholding. (f) Notwithstanding any other provision of the Plan, no Option granted to an Optionee under the Plan shall be exercisable in whole or in part prior to the date the Plan is approved by the stockholders of Republic as provided in Section 5 above. 5 6 11. TRANSFERABILITY OF OPTIONS No Option shall be assignable or transferable by the Optionee to whom it is granted, other than by will or the laws of descent and distribution, except that, upon approval by the Board, the Optionee may transfer an Option that is not intended to constitute an Incentive Stock Option (a) pursuant to a qualified domestic relations order as defined for purposes of the Employee Retirement Income Security Act of 1974, as amended, or (b) by gift: to a member of the "Family" (as defined below) of the Optionee, to or for the benefit of one or more organizations qualifying under Code ??501(c)(3) and 170(c)(2) (a "Charitable Organization") or to a trust for the exclusive benefit of the Optionee, one or more members of the Optionee's Family, one or more Charitable Organizations, or any combination of the foregoing, provided that any such transferee shall enter into a written agreement to be bound by the terms of this Agreement. For this purpose, "Family" shall mean the ancestors, spouse, siblings, spouses of siblings, lineal descendants and spouses of lineal descendants of the Optionee. During the lifetime of an Optionee to whom an Incentive Stock Option is granted, only such Optionee (or, in the event of legal incapacity or incompetence, the Optionee's guardian or legal representative) may exercise the Incentive Stock Option. 12. TERMINATION OF EMPLOYMENT OR SERVICE (a) GENERAL. Except as otherwise provided herein, upon the termination of the employment or other service of an Optionee with Republic, a Subsidiary, a spin-off corporation or an Affiliate, other than by reason of a "Change in Ownership" (as defined below) or the death or "permanent and total disability" (within the meaning of Section 22(e)(3) of the Code) of such Optionee, any Option granted to an Optionee pursuant to the Plan shall, unless agreed in writing with the Optionee, terminate sixty days after the date of such termination of employment or service and such Optionee shall have no further right to purchase shares of Stock pursuant to such Option. Notwithstanding the foregoing provisions of this Section 12, the Board may provide, in its discretion, that following the termination of employment or service of an Optionee with Republic, a Subsidiary, a spin-off corporation or Affiliate, an Optionee may exercise an Option, in whole or in part, at any time subsequent to such termination of employment or service and prior to termination of the Option pursuant to Section 10(a) above, either subject to or without regard to any vesting or other limitation on exercise imposed pursuant to Section 10(b) above. (b) CHANGE IN OWNERSHIP OF SUBSIDIARY OR AFFILIATE. If an Optionee ceases to be an employee or an independent contractor of Republic or any Subsidiary, spin-off corporation or Affiliate following a ?Change in Ownership? (as defined below)(whether because of the termination of employment or service of the Optionee, because the corporation or other entity by which the Optionee was employed or for which the Optionee was providing services as an independent contractor, ceases to be a Subsidiary of Affiliate or otherwise) then such options shall continue to vest according to the vesting schedule unless the Board determines otherwise. A "Change in Ownership" shall be deemed to have occurred with respect to an Optionee if (i) as a result of a merger, consolidation, reorganization, business combination, sale, exchange or other disposition of Voting Securities (as defined in Section 4(a)) or other transaction, the corporation or other entity by which the Optionee is employed or for which the Optionee is providing services as an independent contractor ceases to be a Subsidiary or Affiliate of Republic and, immediately after such transaction, the persons who were stockholders of Republic immediately before such transaction (the "Republic Stockholders") do not own at least a majority of the Voting Securities of such corporation or other entity or (ii) there is a sale or other disposition of all or substantially all of the assets of the trade or business by which the Optionee is employed or for which the Optionee is providing services as an independent contractor and, immediately after such transaction, Republic or the Republic Stockholders do not own at least a majority of the Voting Securities of a corporation or other entity that acquires such assets and engages in such trade or business. (c) Whether a leave of absence or leave on military or government service shall constitute a termination of employment of service for purposes of the Plan shall be determined by the Board, which determination shall be final and conclusive. For purposes of the Plan, a termination of employment or service with Republic, a Subsidiary, a spin-off corporation or Affiliate shall not be deemed to occur if the Optionee is immediately thereafter employed by or otherwise providing services to Republic, any Subsidiary, any spin-off corporation or Affiliate. 6 7 13. RIGHTS IN THE EVENT OF DEATH OR DISABILITY (a) DEATH. If an Optionee dies while in the employ or service of Republic, a Subsidiary, a spin-off corporation or Affiliate or within the period following the termination of employment or service during which the Option is exercisable under Section 13(b) below, all Options held by such Optionee prior to death shall become immediately vested and exercisable in full and the executors or administrators or legatees or distributees of such Optionee's estate shall have the right, at any time within three years after the date of such Optionee's death and prior to termination of the Option pursuant to Section 10(a) above, to exercise any Option held by such Optionee at the date of such Optionee's death; PROVIDED, HOWEVER, that the Board may provide, in its discretion, that following the death of an Optionee, the executors or administrators or legatees or distributees of such Optionee's estate may exercise an Option, in whole or in part, at any time subsequent to such Optionee's death and prior to termination of the Option pursuant to Section 10(a) above, either subject to or without regard to any vesting or other limitation on exercise imposed pursuant to Section 10(b) above. (b) DISABILITY. If an Optionee terminates employment or service with Republic, a Subsidiary, a spin-off corporation or Affiliate by reason of the "permanent and total disability" (within the meaning of Section 22(e)(3) of the Code) of such Optionee, then all Options held by such Optionee shall become immediately exercisable in full and the Optionee shall have the right, at any time within three years after such termination of employment or service and prior to termination of the Option pursuant to Section 10(a) above, to exercise, in whole or in part, any Option held by such Optionee at the date of such termination of employment or service; PROVIDED, HOWEVER,that the Board may provide, in its discretion, that an Optionee may, in the event of the termination of employment or service of the Optionee with Republic, a Subsidiary, a spin-off corporation or Affiliate by reason of the "permanent and total disability" (within the meaning of Section 22(e)(3) of the Code) of such Optionee, exercise an Option in whole or in part, at any time subsequent to such termination of employment or service and prior to termination of the Option pursuant to Section 10(a) above, either subject to or without regard to any vesting or other limitation on exercise imposed pursuant to Section 10(b) above. Whether a termination of employment or service is to be considered by reason of "permanent and total disability" for purposes of this Plan shall be determined by the Board, which determination shall be final and conclusive. 14. USE OF PROCEEDS The proceeds received by Republic from the sale of Stock pursuant to Options granted under the Plan shall constitute general funds of Republic. 7 8 15. REQUIREMENTS OF LAW (a) VIOLATIONS OF LAW. Republic shall not be required to sell or issue any shares of Stock under any Option if the sale or issuance of such shares would constitute a violation by the individual exercising the Option or Republic of any provisions of any law or regulation of any governmental authority, including without limitation any federal or state securities laws or regulations. Any determination in this connection by the Board shall be final, binding, and conclusive. Republic shall not be obligated to take any affirmative action in order to cause the exercise of an Option or the issuance of shares pursuant thereto to comply with any law or regulation of any governmental authority. As to any jurisdiction that expressly imposes the requirement that an Option shall not be exercisable unless and until the shares of Stock covered by such Option are registered or are subject to an available exemption from registration, the exercise of such Option (under circumstances in which the laws of such jurisdiction apply) shall be deemed conditioned upon the effectiveness of such registration or the availability of such an exemption. (b) COMPLIANCE WITH RULE 16b-3. The intent of this Plan is to qualify for the exemption provided by Rule 16b-3 under the Exchange Act. To the extent any provision of the Plan does not comply with the requirements of Rule 16b-3, it shall be deemed inoperative to the extent permitted by law and deemed advisable by the Board and shall not affect the validity of the Plan. In the event Rule 16b-3 is revised or replaced, the Board, or the Committee acting on behalf of the Board, may exercise discretion to modify this Plan in any respect necessary to satisfy the requirements of the revised exemption or its replacement. 16. AMENDMENT AND TERMINATION OF THE PLAN The Board may, at any time and from time to time, amend, suspend or terminate the Plan as to any shares of Stock as to which Options have not been granted; PROVIDED, HOWEVER, that no amendment by the Board shall, without approval by a majority of the votes present and entitled to vote at a duly held meeting of the stockholders of Republic at which a quorum representing a majority of all outstanding voting stock is, either in person or by proxy, present and voting on the amendment, or by written consent in accordance with applicable state law and the Certificate of Incorporation and Bylaws of Republic, change the requirements as to eligibility to receive Options that are intended to qualify as Incentive Stock Options, increase the maximum number of shares of Stock in the aggregate that may be sold pursuant to Options that are intended to qualify as Incentive Stock Options granted under the Plan (except as permitted under Section 17 hereof) or modify the Plan so that Options granted under the Plan could not satisfy the applicable requirements of Code ?162(m). Except as permitted under Section 17 hereof, no amendment, suspension or termination of the Plan shall, without the consent of the holder of the Option, alter or impair rights or obligations under any Option theretofore granted under the Plan. 17. EFFECT OF CHANGES IN CAPITALIZATION (a) ADJUSTMENT FOR CORPORATE TRANSACTIONS. The Board may determine that a corporate transaction has affected the price of the Stock such than an adjustment or adjustments to outstanding awards are required to preserve (or prevent enlargement of) the benefits or potential benefits intended at time of grant. For this purpose a corporate transaction may include, but is not limited to, any stock dividend, stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination or exchange of shares of Stock, or other similar occurrence. In the event of such a corporate transaction, the Board may, in such manner as the Board deems equitable, adjust (i) the number and kind shares of Stock which may be delivered under the Plan pursuant to Section 3; (ii) the number and kind of shares of Stock subject to outstanding awards; and (iii) the exercise price of outstanding stock options. 8 9 (b) DISSOLUTION OR LIQUIDATION; REORGANIZATION IN WHICH REPUBLIC IS NOT THE SURVIVING CORPORATION OR SALE OF ASSETS OR STOCK. Upon the dissolution or liquidation of Republic the Plan and all Options outstanding hereunder shall terminate. In the event of any termination of the Plan under this Section 17(b), each individual holding an Option shall have the right, immediately prior to the occurrence of such termination and during such reasonable period as the Board in its sole discretion shall determine and designate, to exercise such Option in whole or in part, whether or not such Option was otherwise exercisable at the time such termination occurs and without regard to any vesting or other limitation on exercise imposed pursuant to Section 10(b) above. In connection with a merger, consolidation, reorganization or other business combination of Republic with one or more other entities in which Republic is not the surviving entity, or upon a sale of all or substantially all of the assets of Republic to another entity, or upon any transaction (including, without limitation, a merger or reorganization in which Republic is the surviving corporation) that results in any person or entity (or persons or entities acting as a group or otherwise in concert) owning more than 50 percent of the combined voting power of all classes of stock of Republic, Republic and the acquiring or surviving entity shall provide for the continuation of the Plan and the assumption of the Options theretofore granted, or for the substitution for such Options of new options covering the stock of a successor entity, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kinds of shares and exercise prices. The Board shall send prior written notice of the occurrence of an event described in this Section 17(b) to all individuals who hold Options not later than the time at which Republic gives notice to its stockholders that such event is proposed. (c) NO LIMITATIONS ON CORPORATION. The grant of an Option pursuant to the Plan shall not affect or limit in any way the right or power of Republic to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge, consolidate, dissolve or liquidate, or to sell or transfer all or any part of its business or assets. 18. DISCLAIMER OF RIGHTS No provision in the Plan or in any Option granted or Option Agreement entered into pursuant to the Plan shall be construed to confer upon any individual the right to remain in the employ of Republic, any Subsidiary, any spin-off corporation or Affiliate, or to interfere in any way with the right and authority of Republic, any Subsidiary, any spin-off corporation or Affiliate either to increase or decrease the compensation of any individual at any time, or to terminate any employment or other relationship between any individual and Republic, any Subsidiary, any spin-off corporation or Affiliate. 19. NON-EXCLUSIVITY OF THE PLAN Neither the adoption of the Plan nor the submission of the Plan to the stockholders of Republic for approval shall be construed as creating any limitations upon the right and authority of the Board to adopt such other incentive compensation arrangements (which arrangements may be applicable either generally to a class or classes of individuals or specifically to a particular individual or individuals) as the Board in its discretion determines desirable, including, without limitation, the granting of stock options or stock appreciation rights otherwise than under the Plan. 9 10 This Plan was duly adopted and approved by the Board of Directors of Republic effective as of the 3rd day of February, 1998, subject to approval and adoption by the stockholders of Republic. /s/ James O. Cole -------------------------------- Secretary of Republic This Plan was duly approved and adopted by the stockholders of Republic at a meeting held the 20th day of May, 1998. /s/ James O. Cole -------------------------------- Secretary of Republic This Plan was duly amended by the Board of Directors of Republic effective as of the 2nd day of November, 1998. /s/ James O. Cole -------------------------------- Secretary of Republic This Plan was duly amended by the Board of Directors of Republic effective as of the 6th day of January, 1999. /s/ James O. Cole -------------------------------- Secretary of Republic 10 EX-10.22 6 LETTER AGREEMENT-NATIONAL CAR RENTAL 1 [Certain portions of this Exhibit have been omitted pursuant to a request for confidential treatment as indicated by an * and separately filed with the Commission] GENERAL MOTORS NAO FLEET OPERATIONS December 16, 1998 Mr. Barry Benoit Vice President--Fleet Operations Automotive Rental Group Republic Industries, Inc. 110 S.E. 6th Street Ft. Lauderdale, FL 33301 Dear Mr. Benoit: This letter will confirm the agreement ("Agreement") reached between National Car Rental System, Inc. ("National") and General Motors ("GM") regarding National's purchase or lease of GM vehicles for model year 1999. The details of the Agreement are as follows: 1999 MODEL YEAR - --------------- 1. National will purchase or lease from GM dealers of their choice a * 1999 model GM vehicles under the terms and conditions of GM's 1999 Model Year Daily Rental Purchase Program (refer Attachment 1). National has agreed to purchase these GM vehicles in a mix which includes a considerable number of GM's higher priced models and which represents a higher percentage of these units than National otherwise would purchase. The agreed mix of units is as follows: Cavalier * DeVille * Sunfire * Camaro * Grand Am * Firebird * Alero * Venture * Malibu * Trans Sport * Cutlass * Silhouette * Century * Astro van * Lumina * Safari van * Monte Carlo * Blazer * Grand Prix * Jimmy * Regal * Bravada * Intrigue * Full Size Van * Bonneville * C/K Truck * LeSabre * Yukon * Eighty Eight * Suburban * Total Units * 2. a. National agrees*. b. *. 2 Page 2 3. GM agrees to offer National the availability of the YT1/YT2 short term programs for vehicles described in Paragraph 1. Refer to ATTACHMENT 4 AND 5 for program parameters. 4. National agrees that in all advertising and promotional materials which National undertakes for the 1999 Model Year (September 1, 1998 through August 31, 1999), National will feature only General Motors products where any vehicle is featured or promoted. During the term of this Agreement, National agrees to allow such space and include such tag lines as is in accordance with the customer of the trade industry. 5. In exchange for this Agreement to purchase, promote and service the number of 1999 models and in a vehicle mix satisfactory to GM, as described in Paragraph 1, GM will provide National with * in addition to any incentives due under the terms and conditions of GM's 1999 Model Year Daily Rental Purchase Program. 6. The * 25th day of the month following vehicle delivery and receipt of a diskette/electronic media transmission by GM provided GM receives National's diskette/electronic media transmission by the last business day of the month. A diskette/electronic media transmission received after the last business day of the month * the 25th of the following month. This diskette/electronic media transmission must include VIN numbers on the portion of the * in the preceding month and not covered *. ATTACHMENT 2 details data transmission and record format requirements and should be used when reporting vehicle acquisitions. The report of vehicle acquisitions should be transmitted by EDS Elite to the GM Auction Sales and Remarketing Department or diskettes sent to the following address: Attention: J.P. Larson, Director - Finance NAO Fleet Operations Renaissance Center Tower 100, 11th Floor MC 482-A11-B96 Detroit, Michigan 48265-1000 In the event that National does not purchase or lease the agreed number of vehicles at the agreed mix, * National as described in Paragraph 6 by General Motors * to GM on demand subject to Paragraph 7. 7. All volume and mix requirements are subject to reasonable minor adjustments based upon mutual agreement between the parties when the exact circumstances faced by both parties are known at the time of vehicle delivery. It is understood that these adjustments may require National to purchase a comparably priced mix of product. In the event that either party cannot fulfill any terms of this Agreement due to events beyond its control, such as acts of God, labor disputes, and severe economic downturns, the parties will enter negotiations with the intent of allowing both to continue business without substantial penalty. 3 Page 3 8. National agrees to provide to GM, at the beginning of each month, a schedule of anticipated purchases of 1999 model year vehicles (model year fleet plan) by division and car line, by month and model year. National also agrees to provide to GM, at the end of each month, a schedule of 1998 and 1999 model vehicle returns by vehicle size (e.g., economy, midsize, etc.) by month of the 1998 and 1999 calendar years. * 9. National agrees to retain any documents or records relevant to vehicles purchased under this Agreement or any GM program and/or * this Agreement or any other GM program for two years after the close of the program. National agrees to permit any designated representative of GM to examine, audit and take copies of any accounts and records National is to maintain under this Agreement. National agrees to make such accounts and records readily available at its facilities during regular business hours. GM agrees to furnish National with a list of any reproduced records. 10. This agreement is confidential and proprietary information of General Motors and is intended for the sole use by GM and National. Failure to maintain confidentiality of the terms of this agreement may result in loss of Fleet Authorization privileges with regard to future purchases. On behalf of the General Motors' Car and Truck Divisions, I would like to express my appreciation for your business and hope this Agreement will continue to strengthen our business relationship. Please return a copy of this letter acknowledging your agreement to the above. Very truly yours, /s/ Richard M. Lee Richard M. Lee Executive Director Fleet Operations /s/ Barry Benoit - ----------------------------- Acknowledged and Agreed Republic Industries, Inc. Date: December 18, 1998 ------------------------ EX-10.23 7 LETTER AGREEMENT- ALAMO RENT A CAR 1 [Certain portions of this Exhibit have been omitted pursuant to a request for confidential treatment as indicated by an * and separately filed with the Commission] General Motors Corporation [LOGO] NAO Fleet Operations December 16, 1998 Mr. Barry Benoit Vice President - Fleet Operations Automotive Rental Group Republic Industries, Inc. 110 S. E. 6th Street Ft. Lauderdale, FL 33301 Dear Mr. Benoit: This letter will confirm the agreement ("Agreement") reached between Alamo Rent A Car, Inc. ("Alamo") and General Motors ("GM") regarding Alamo's purchase or lease of GM vehicles for model year 1999 through model year 2002. The details of this Agreement are as follows: 1999 MODEL YEAR - --------------- 1. Alamo will purchase or lease from GM dealers of their choice a * 1999 model GM vehicles under the terms and conditions of GM's 1999 Model Year Daily Rental Purchase Program (refer ATTACHMENT 1). Alamo has agreed to purchase these GM vehicles in a mix which includes a considerable number of GM's higher priced models and which represents a higher percentage of these units than Alamo otherwise would purchase. The agreed mix of units is as follows: Metro * Eighty Eight * Cavalier * Park Avenue * Cavalier Cvt. * DeVille * Sunfire * Camaro * Sunfire Cvt. * Venture * Grand Am * Trans Sport * Alero * Silhouette * Malibu * Astro van * Cutlass * Safari van * Century * Blazer * Lumina * Jimmy * Monte Carlo * Bravada * Grand Prix * Full Size Van * Bonneville * Tahoe/Yukon * LeSabre * Suburban * Intrigue * Total Units * General Motors Corporation [LOGO] RENAISSANCE CENTER TOWER 100, 11TH FLOOR 313-667-9452 MAIL CODE 482-A11-B96 DETROIT, MI 48265-1000 FAX 313-667-9827 2 Page 2 2. a. Alamo agrees * the following 1999MY units from the 1999 CY into the 1998 CY: * b. * 3. GM agrees to offer Alamo the availability of the YT1/YT2 short term programs for vehicles described in Paragraph 1. Refer to ATTACHMENT 4 AND 5 for program parameters. 4. Alamo agrees that in all advertising and promotional materials which Alamo undertakes for the 1999 Model Year (September 1, 1998 through August 31, 1999), Alamo will feature only General Motors products where any vehicle is featured or promoted. During the term of this Agreement, Alamo agrees to allow such space and include such tag lines as is in accordance with the customer of the trade and industry. 5. In exchange for this Agreement to purchase, promote and service the number of 1999 models and in a vehicle mix satisfactory to GM, as described in Paragraph 1, GM will provide Alamo * in addition to any incentives due under the terms and conditions of GM's 1999 Model Year Daily Rental Purchase Program. 6. The * by the 25th day of the month following vehicle delivery and receipt of a diskette/electronic media transmission by GM provided GM receives Alamo's diskette/electronic media transmission by the last business day of the month. A diskette/electronic media transmission received after the last business day of the month * by the 25th of the following month. This diskette/electronic media transmission must include VIN numbers on the portion of * in the preceding month and not covered in *. ATTACHMENT 2 details data transmission and record format requirements and should be used when reporting vehicle acquisitions. The report of vehicle acquisitions should be transmitted by EDS Elite to the GM Auction Sales and Remarketing Department or diskettes sent to the following address: Attention: J. P. Larson, Director - Finance NAO Fleet Operations Renaissance Center Tower 100, 11th floor MC 482-A11-B96 Detroit, Michigan 48265-1000 In the event that Alamo does not purchase or lease the agreed number of vehicles at the agreed mix, * Alamo as described in Paragraph 6 by General Motors * GM on demand subject to Paragraph 8. 7. GM agrees to make the *, as described in Paragraph 5, available to Alamo through GM's *; otherwise GM will mail * to Alamo on the due date stated in Paragraph 6. The provisions of GM's * to be available to Alamo three (3) calendar days from the time period specified in Paragraph 6. * For example, if * is Wednesday, the 25th of the month, * would normally be scheduled for Saturday, the 28th. * 3 Page 3 8. All volume and mix requirements are subject to reasonable minor adjustments based upon mutual agreement between the parties when the exact circumstances faced by both parties are known at the time of vehicle delivery. It is understood that these adjustments may require Alamo to purchase a comparably priced mix of product. In the event that either party cannot fulfill any terms of this Agreement due to events beyond its control, such as acts of God, labor disputes, and severe economic downturns, the parties will enter negotiations with the intent of allowing both to continue business without substantial penalty. 9. Alamo agrees to provide to GM, at the beginning of each month, a schedule of anticipated purchases of 1999 model year vehicles (model year fleet plan) by division and car line, by month and model year. Alamo also agrees to provide to GM, at the end of each month, a schedule of 1998 and 1999 model vehicle returns by vehicle size (e.g., economy, midsize, etc.) by month of the 1998 and 1999 calendar years. * 10. Alamo agrees to retain any documents or records relevant to vehicles purchased under this Agreement or any GM program and/or claims * or any other GM program for two years after the close of the program. Alamo agrees to permit any designated representative of GM to examine, audit and take copies of any accounts and records Alamo is to maintain under this Agreement. Alamo agrees to make such accounts and records readily available at its facilities during regular business hours. GM agrees to furnish Alamo with a list of any reproduced records. GM agrees to assist Alamo in vehicle financing by providing the following at the request of Alamo: a. * b. GM agrees to execute an amendment to the General Motors Corporation Repurchase Agreement dated August 22, 1994, as amended from time to time, in order to clarify that GM's obligations thereunder will be applicable to 1999 through 2000 model year vehicles. The terms of the GM Daily Rental Purchase Guidelines and the GM National Fleet Purchase Program Guidelines for the 1999 model year will be incorporated into the amendment. MODEL YEARS 1999 THROUGH 2002 This letter will also confirm the Agreement reached between Alamo and GM regarding Alamo's purchase or lease GM vehicles for model year 1999 through model year 2002. The details of this Agreement are as follows: 11. GM agrees to extend the terms and conditions of GM's 1999 Model Year Daily Rental Fleet Program (refer ATTACHMENT 1) for model year 1999 through model year 2000. 4 Page 4 GM reserves the right to place "new" models (as defined by GM) on any of the four (4) 1998 MY repurchase percentage tiers or create a new tier. Additionally, GM also reserves the right to shift vehicles only to higher percentage tiers, (e.g. shift from repurchase tier 1 to tier 2, thus lowering Alamo's vehicle depreciation cost). Notwithstanding the above items, should GM alter the terms and conditions of its vehicle purchase program, then Alamo would be granted the option of choosing which program is more beneficial to its business. 12. GM agrees to commit to Alamo the availability of the 100% Vehicle Purchase Program through model year 2002. 13. GM agrees that Alamo may purchase or lease from GM dealers of its choice a * during each model year of this Agreement. GM and Alamo agree that the vehicle mix and production timing provided in future model years must be mutually satisfactory to both parties. 14. Alamo agrees to maintain a minimum GM share penetration of 51%. The 51% GM share penetration can be measured as a percent of acquisitions or as a percent of fleet months. Further, during the term of this Agreement, Alamo agrees that all advertising and promotional materials which Alamo undertakes for future model years, Alamo will feature only General Motors products where any vehicle is featured or promoted. Accordingly, Alamo agrees to allow such space and include such tag lines as in accordance with the custom of the trade and industry. In exchange, GM will provide Alamo with * during each year of this Agreement. These sums are in addition to any Incentives due under the terms and conditions of GM's Model Year Daily Rental Fleet Programs, if any are available. 15. This agreement is confidential and proprietary of General Motors and is intended for the sole use by GM and Alamo. Failure to maintain confidentiality of the terms of this a agreement may result in loss of Fleet Authorization privileges with regard to future purchases. 5 Page 5 On behalf of the General Motors' Car and Truck Divisions, I would like to express my appreciation for your business and hope this Agreement will continue to strengthen our business relationship. Very truly yours, /s/ Richard M. Lee --------------------------------- R. M. Lee Executive Director Fleet Operations /s/ Barry Benoit - -------------------------------- Acknowledged and Agreed Republic Industries, Inc. Date: December 18, 1998 ------------------- EX-21.1 8 SUBSIDIARIES 1 Exhibit 21.1 SUBSIDIARIES Set forth below are certain subsidiaries of the continuing operations of Republic Industries, Inc. Republic Services, Inc., 63.9 percent owned by Republic Industries, Inc., is a public company traded on the New York Stock Exchange. Republic Services, Inc. and its consolidated subsidiaries are not presented.
Legal Entity State of Organization - ------------ --------------------- 7 Rod Real Estate North, A Limited Liability Company WY 7 Rod Real Estate South, A Limited Liability Company WY A&R Insurance Enterprises, Inc. FL Allstate Rent-A-Car, Inc. NV Anderson Dealership Group CA Anderson Dealership Realty Corp. DE ANFS Texas Insurance Services Corp. TX Auto By Internet, Inc. FL Auto Holding Corp. DE Automart Superstore, Inc. AZ Autonation DS Investments, Inc. TX Autonation Financial Services Corp. DE Autonation Floor Plan Funding Corp. DE Autonation GM Holding Corporation DE Autonation Holding Corp. DE Autonation Incorporated FL Autonation Realty Corporation DE Autonation Receivables Funding Corp. DE B-S-P Automotive, Inc. TX Bankston Auto, Inc. TX Batfish LLC CO BBCSS, Inc. AZ Bengal Motors, Inc. FL Buick Mart Limited Partnership GA C. Garrett, Inc. CO Central Motors, Inc. FL Champion Planning, Inc. TX Charlie Thomas Auto Sales, Inc. TX Charlie Thomas Courtesy Leasing, Inc. TX Chesrown Automotive Group, Inc. CO Chesrown Collision Center, Inc. CO Colonial Imports, Inc. FL Consumer Car Care Corporation TN Courtesy Wholesale Corporation FL Credit Management Acceptance Corporation FL Dealership Accounting Services, Inc. FL Dealership Realty Corporation TX Desert Buick-GMC Management Group, Inc. NV Ditschman/Flemington Property Rentals, Inc. NJ Driver's Mart Worldwide, Inc. VA Ed Mullinax, Inc. DE Empire Services Agency, Inc. FL Empire Warranty Corporation FL Empire Warranty Holding Company FL EMX Leasing, Inc OH
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Legal Entity State of Organization - ------------ --------------------- Financial Services, Inc. TX First Team Automotive Corp. DE First Team Imports, Ltd. FL First Team Infiniti, Ltd. FL First Team Management, Inc. FL First Team Premier, Ltd. FL Flemington Equities, Inc. NJ Florida Auto Corp. DE Ford of Garden Grove Limited Partnership GA General Providers Reinsurance Company, Ltd. Turks & Caicos Islands George Sutherlin Chevrolet of Georgia, Inc. GA Hillard Auto Group, Inc. TX Irvine Toyota/Nissan/Volvo Limited Partnership GA J-R Advertising Company CO Jemautco, Inc. OH Kelnat Advertising, Ltd. Co. FL KLJ of Nevada, Inc. NV Lance Children, Inc. OH Lexus of Cerritos Limited Partnership GA LGS Holding Company DE Libertyville Enterprises, Inc. IL Lovern, Inc. FL M.L.F. Insurance Agency OH Maronie Information Services, LLC DE Maroone Car and Truck Rental Company FL Maroone Management Services, Inc FL Mealey Holdings, Inc. FL Mechanical Warranty Protection, Inc. FL Mullinax Insurance Agency OH Mullinax Management, Inc. DE Mullinax Used Cars, Inc. OH Pierce Automotive Corporation AZ Prime Auto Resources, Inc. CA Quantum Premium Finance Corporation FL R. Coop Limited CO R.L. Buscher II, Inc. CO R.L. Buscher III, Inc. CO Real Estate Holdings, Inc. FL Republic Anderson Investment Group, Inc. CA Republic DM Property Acquisition Corp. DE Republic of Rochester, Inc. DE Republic Resources Company DE Resources Aviation, Inc. FL RI Merger Corp. CO RI Shelf Corp. DE RI/BBNM Acquisition Corp DE
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Legal Entity State of Organization - ------------ --------------------- RI/BRC Real Estate Corp. CA RI/CC Acquisition Corp. DE RI/DM Acquisition Corp. DE RII Management Company DE RIVT (a Delaware Business Trust) DE RIVT I LLC DE RIVT I LP DE RIVT II LLC DE RIVT II LP DE RIVT Management, Inc. DE SCM Enterprises, Inc. FL SCM Realty II, Inc. FL SCM Realty, Inc. FL Seven Rod Life Insurance Company AZ SGSCP Limited Partnership FL Six Jays LLC CO Southeast Lease Car, Inc. FL Steve Moore's Buy-Right Auto Center, Inc. FL T-Five, Inc. MI Tallahassee Automotive Group, Inc. FL Tennco Life Insurance Company AZ The Consulting Source, Inc. FL The Pierce Corporation II, Inc. AZ Total Care, Inc. CO Toyota Cerritos Limited Partnership GA W.O. Bankston Enterprises, Inc. DE Wallace Imports, Inc. FL Webb Automotive Group, Inc. CA Woody Capital Investment Company II CO Woody Capital Investment Company III CO World Wide Warranty Co. FL BOSC Automotive Realty, Inc. DE RI/LLC Acquisition Corp. CO RI/LLC-2 Acquisition Corp. CO
4
NAME OF CORPORATION STATE OF INCORPORATION d/b/a NAME - ------------------- ---------------------- ---------- AFL Fleet Funding, Inc. NY Alamo Financing LLC DE Alamo Financing of Delaware LLC Alamo Financing L.P. DE Alamo Financing Limited Partnership Alamo Funding, LP NY Alamo Fuhrpark Leasing GmbH Germany (LLC) Alamo International Sales, Inc. FL Alamo Rent-A-Car, Inc. FL Alamo Rent-A-Car (Canada), Inc. FL Alamo Rent A Car Locadora de Automovels, Ltda. Brazil Alamo Rent-A-Car (UK) Limited (LLC) UK Alamo Rent-A-Car (Vienna) GmbH Austria (LLC) Anastasia Advertising Art, Inc. FL ARG Funding Corp. DE ARC-TM, Inc. DE ARI Fleet Services, Inc. MO Atrium Restaurants, Inc. FL AutoNation Insurance Company, Inc. VT
5
NAME OF CORPORATION STATE OF INCORPORATION d/b/a NAME - ------------------- ---------------------- ---------- Auto Rental, Inc. MO CC-Autohansa GmbH & CO.KG Germany (LLC) Car Rental Claims, Inc. DE CarTemps Financing L.P. DE CarTemps Financing Limited Partnership CarTemps Financing LLC DE CarTemps Financing LLC CarTemps Financing of Delaware LLC Claims Management Center, Inc. FL Design-Graphic, Inc. FL Golden Communications, Inc. MI Guy Salmon USA, Inc. FL Jerry's Outdoor Advertising, Inc. FL Jiffy Billboards, Inc. FL Maxmedia, Inc. FL NCR Affiliate Servicer, Inc. DE NCRS Insurance Agency, Inc. DE NCRS NR, Inc. DE National Car Rental Asia-Pacific Pty. Limited Australia National Car Rental (Australia) Pty Ltd (Joint Venture) Australian National Car Rental de Brasil Empreedimentos Ltda. Brazil
6
NAME OF CORPORATION STATE OF INCORPORATION d/b/a NAME - ------------------- ---------------------- ---------- National Car Rental System (New Zealand) Limited New Zealand National Car Rental (Germany) GmbH Germany National Car Rental Hong Kong Limited Hong Kong National Car Rental Financing Corporation DE NCRS Financing Corporation National Car Rental Financing Limited Partnership DE NCRS Financing Limited Partnership National Car Rental Financing Limited Partnership National Car Rental Holdings (Australia) Pty Ltd. New South Wales National Car Rental Licensing, Inc. DE NCRS Arizona Licensing, Inc. National Car Rental System, Inc. DE National Tilden Operations, Inc. Ontario National Tilden System, Inc. Ontario Outdoor Communication, Inc. FL Post Retirement Liability Management, Inc. FL RRM Corporation DE Rental Liability Management, Inc. FL Rental Liability Management Holdings, LLC DE Republic Corporate Management Co. FL Republic Fiduciary, Inc. DE Republic Guy Salmon Partner, Inc. FL
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NAME OF CORPORATION STATE OF INCORPORATION d/b/a NAME - ------------------- ---------------------- ---------- Republic Industries Automotive Group (Belgium), Inc. FL Republic Industries Automotive Rental Group (Holland) B.V. Netherlands (LLC) Republic Industries Automotive Rental Group Switzerland (LLC) (Switzerland) AG Republic Industries Autovermietung GmbH Germany (LLC) Republic Industries Europe UK UK (UKC) Republic Industries Funding Corp. DE Republic Industries (German Holding)GmbH Germany (LLC) Republic Industries, Inc. DE Republic Tower Republic Industries (UK) PLC UK Republic Media, Inc. FL Republic Media Companies Holding Co. DE Republic Risk Management Services, Inc. FL R.I./Triangle, Ltd. Bermuda SRAC-TM, Inc. FL Snappy Fleet Finance Corporation DE Snappy Funding Corporation DE Snappy Funding Limited Partnership DE
8
NAME OF CORPORATION STATE OF INCORPORATION d/b/a NAME - ------------------- ---------------------- ---------- Spitfire Properties, Inc. FL Spirit Leasing, Inc. OH Spirit Rent-A-Car, Inc. OH CarTemps USA Tower Food & Beverage, Inc. FL Triangle Corporation DE Tripperoo Wings, Inc. FL
9
Legal Entity d/b/a Name State of Organization - ------------ ---------- --------------------- Abraham Chevrolet-Miami, Inc. Abraham Chevrolet (Miami) DE Abraham Chevrolet-Tampa, Inc. Abraham Chevrolet (Tampa) DE Al Maroone Ford, Inc. Al Maroone Ford NY Albert Berry Motors, Inc. Barney Garver VW/Mazda/Land Rover TX American Way Motors, Inc. Courtesy Honda TN Anderson Cadillac, Inc. Anderson Cadillac - Oldsmobile CA Anderson Chevrolet Anderson Chevrolet - Menlo Park CA Anderson Chevrolet - Los Gatos, Inc. Anderson Chevrolet - Los Gatos CA Anderson Cupertino, Inc. Anderson Chevrolet - Cupertino CA Anderson Chrysler-Plymouth CA Anderson Isuzu Anderson Honda - Isuzu CA Appleway Chevrolet, Inc. Appleway Toyota WA Appleway Mitsubishi WA Appleway Chevrolet - Geo WA Lexus of Spokane WA Appleway Mazda-Subaru-VW-Audi WA Autonation USA Corporation Autonation USA of Virginia Beach, LLC AutoNation USA of Virginia Beach DE Bankston Ford of Frisco, Ltd. Co Bankston Ford of Frisco TX Bankston Nissan in Irving, Inc. Bankston Nissan-Irving TX Bankston Nissan Lewisville, Inc. Bankston Nissan Lewisville DE Batfish Auto, LLC John Elway Nissan South CO Beach City Chevrolet Company, Inc. Beach City Chevrolet CA
10 Beacon Motors, Inc. Chevrolet Add Point (De La Cruz) FL Bell Dodge, LLC Bell Dodge DE Bengal Motor Company, Ltd Miami Honda FL BH Cars, Inc. Beverly Hills Ford CA Bill Ayares Chevrolet, Inc. Fox Chevrolet of Laurel MD Bill Wallace Enterprises, Inc. Wallace Stuart Mitsubishi FL Bledsoe Dodge, Inc. Bledsoe Dodge (Marvin) DE Bledsoe Dodge (Arlington) DE Bledsoe Dodge (Dallas) DE Bob Townsend Ford, Inc. Bob Townsend Ford DE Brown & Brown Chevrolet, Inc. Brown & Brown Chevrolet AZ Brown & Brown Nissan Mesa, LLC Brown & Brown Nissan Mesa AZ Brown & Brown Nissan, Inc. Brown & Brown Nissan AZ Buick Mart, Inc. Buick Mart CA Bull Motors, Inc. Sunshine Ford FL Carlisle Motors, Inc. Carlisle Ford FL Carlisle Lincoln-Mercury FL Carwell Corporation South Bay Autohaus (Mercedes) CA Land Rover South Bay CA Central Motor Company, Ltd Central Hyundai FL Central Kia FL Cerritos Body Works, Inc. Irvine Volvo CA Cerritos Imports, Inc. Volvo of Cerritos DE
11 Champion Chevrolet, Inc. Champion Chevrolet/Oldsmobile DE Champion Ford, Inc. Champion Ford TX Charlie Hillard, Inc. Charlie Hillard Ford TX Charlie Hillard Mazda Buick TX Charlie Thomas Chevrolet, Inc. Charlie Thomas Chevrolet/Mitsubishi TX Charlie Thomas Chrysler-Plymouth, Inc. Charlie Thomas Chrysler-Plymouth- Jeep-Eagle-Hyundai-Isuzu TX Charlie Thomas Ford, Inc. Charlie Thomas Ford TX Charlie Thomas' Courtesy Ford, Inc. Padre Ford/Mazda TX Chesrown Auto, Inc. John Elway Ford Boulder CO Chesrown Chevrolet, Inc. John Elway Chevrolet CO Chesrown Ford, Inc. John Elway Ford West CO Chevrolet World, Inc. World Chevrolet FL Chuck Clancy Ford of Marietta, Inc. Marietta Ford (fka Chuck Clancy Ford of Marietta) GA Circle Buick/GMC, Inc. Flemington Circle Chevrolet Buick GMC Isuzu NJ Coastal Cadillac, Inc. Coastal Cadillac FL Colonial Imports, Ltd. Don Mealey Mitsubishi FL Cook-Whitehead Ford, Inc. Cook-Whitehead Ford FL Costa Mesa Cars, Inc. Costa Mesa Honda CA Courtesy Auto Group, Inc. Courtesy Magic Isuzu/Suzuki/Kia FL Courtesy Pontiac/GMC FL Courtesy Acura/Suzuki FL Courtesy Buick FL Covington Pike Motors, Inc. Covington Pike Honda TN
12 CT Intercontinental, Inc. Charlie Thomas Intercontinental BMW TX CT Motors, Inc. Charlie Thomas Acura TX D/L Motor Company Lokey Honda/Isuzu FL Deal Dodge of Des Plains, Inc. Dodge World of Des Plains IL Desert Buick-GMC Trucks, LLC Desert Buick GMC Trucks DE Desert Dodge, Inc. Desert Dodge NV Desert GMC, LLC Desert Pontiac GMC Buick DE Desert GMC-East, Inc. Desert GMC East Volvo Truck NV Desert Lincoln-Mercury, Inc. Desert Lincoln-Mercury NV Ditschman/Flemington Ford-Lincoln-Mercury, Inc. Ditschman/Flemington Ford Lincoln-Mercury NJ Ditschman/Flemington Pontiac, Inc. Flemington Pontiac/Subaru NJ Dobbs Brothers Buick-Pontiac, Inc. Dobbs Bros. Buick (franchise sold??) TN Dobbs Bros. Mazda TN Dobbs Bros. Mitsubishi TN Dobbs Bros. Pontiac-GMC TN Dobbs Ford, Inc. Dobbs Ford FL Dobbs Mobile Bay, Inc. Treadwell Ford AL Dobbs Motors of Arizona, Inc. Dobbs Honda AZ Don Mealey Chevrolet, Inc. Don Mealey Chevrolet-Oldsmobile FL Don Mealey Imports, Inc. Don Mealey Acura FL Don Mealey Infiniti, Inc. Don Mealey Infiniti FL Don Mealey Oldsmobile, Inc. Don Mealey Chevrolet/Oldsmobile FL Don-A-Vee Jeep Eagle, Inc. Don-A-Vee Jeep Eagle Chrysler Plymouth Kia CA Don-A-Vee Jeep/Eagle-Kia
13 Eastgate Ford, Inc. Eastgate Ford OH Ed Mullinax Ford, Inc. Ed Mullinax Ford DE El Monte Imports, Inc. Gunderson Nissan DE El Monte Motors, Inc. Gunderson Chevrolet DE Elmhurst Auto Mall, Inc. Elmhurst Kia IL Elmhurst Dodge, Inc. Elmhurst Dodge IL Emich Chrysler Plymouth, Inc. John Elway Chrysler-Plymouth on Broadway CO Emich Dodge, Inc. John Elway Dodge on Broadway CO Emich Lincoln-Mercury, Inc. John Elway Lincoln-Mercury in Aurora DE Emich Oldsmobile, Inc. John Elway Lamborghini CO John Elway Pontiac Buick GMC South CO John Elway Pontiac Buick GMC West (Oldsmobile will be dropped) CO John Elway Subaru South CO John Elway Chrysler-Plymouth Jeep West CO Emich Subaru West, Inc. John Elway Subaru West CO First Team Cadillac-Oldsmobile, Ltd Don Mealey Cadillac-Oldsmobile FL First Team Ford of Manatee, Ltd Bill Graham Ford FL First Team Ford, Ltd Don Mealey Seminole Ford FL First Team Jeep Eagle, Chrysler Plymouth, Ltd. Royal Jeep Eagle Chrysler Plymouth FL Fit Kit, Inc. Lew Webb's Toyota of Buena Park CA Flemington Chrysler-Plymouth-Dodge- Jeep-Eagle, Inc. Flemington Chrysler Plymouth Dodge Jeep Eagle NJ Flemington Infiniti, Inc. Flemington Infiniti NJ
14 Flemington Land Rover, Inc. Land Rover Princeton NJ Flemington Nissan/BMW, Inc. Flemington Nissan NJ Flemington Subaru, Inc. Flemington Subaru NJ Fox Buick Isuzu, Inc. Fox Buick Pontiac GMC Isuzu MD Fox Chevrolet, Inc. Fox Chevrolet MD Fox Hyundai, Inc. Fox Lincoln-Mercury/Fox Kia MD Fox, Inc. Fox Mitsubishi MD Ft. Lauderdale Nissan, Inc. L.P. Evans Ft. Lauderdale Nissan FL G.B. Import Sales & Service, Inc. South Bay Volvo CA G.F.B. Enterprises, LLC Lexus of Kendall DE Gene Evans Ford, Inc. Gene Evans Ford DE George Sutherlin Nissan, Inc George Sutherlin Nissan of Marietta GA Government Blvd. Motors, Inc. Treadwell Honda AL Gulf Management, Inc. Lexus of Tampa Bay FL Lexus of Clearwater FL Henry Brown Chevrolet, LLC Chevrolet Add Point AZ Hollywood Imports Limited, Inc. Hollywood Honda FL Hollywood Kia, Inc. Hollywood Kia FL Hoover Toyota, Inc. Hoover Toyota AL House of Imports, Inc. House of Imports (Mercedes) CA Hub Motor Co. Hub Ford GA J-R Motors Company Central, LLC John Elway Ford Downtown CO J-R Motors Company North John Elway Olds Mazda Hyundai North CO John Elway Honda CO J-R Motors Company South John Elway Toyota CO
15 J-R-M Motors Company Northwest, LLC John Elway Nissan North CO Jack Sherman Chevrolet, Inc. Jack Sherman Chevrolet Buick Mazda TX Jim Quinlan Chevrolet Co. Jim Quinlan Chevrolet FL Jim Quinlan, Ford Lincoln-Mercury, Inc. Jim Quinlan Ford Lincoln-Mercury FL JJSS, Inc. Flemington Mazda NJ John M. Lance Ford, Inc. John Lance Ford OH Kendall Imports, LLC Kendall Toyota DE Kendall Kia DE Kenyon Dodge, Inc. Carlisle Dodge (Kenyon) FL King's Crown Ford, Inc. King's Crown Ford DE L.P. Evans Motors WPB, Inc. L.P. Evans Motors FL L.P. Evans Motors, Inc. L.P. Evans Miami Nissan FL Lew Webb's Ford, Inc. Lew Webb's Ford of Garden Grove CA Lew Webb's Irvine Nissan, Inc. Lew Webb's Irvine Nissan CA Lew Webb's Irvine Toyota, Inc. Lew Webb's Irvine Toyota CA Lou Grubb Chevrolet, LLC Lou Grubb Chevrolet DE Lou Grubb Chevrolet-Arrowhead, Inc. New Chevrolet Add Point DE Lou Grubb Ford, LLC Lou Grubb Ford DE Magic Acquisition Corp. Magic Ford DE
16 Manhattan Beach Motors, Inc. Manhattan Toyota CA Manhattan Motors, Inc. Manhattan Ford CA Marlin Imports, Inc. Star Motors (Mercedes) FL Maroone Chevrolet Fort Lauderdale, Inc. Maroone Chevrolet Fort Lauderdale FL Maroone Chevrolet, Inc. Maroone Chevrolet FL Maroone Dodge Pompano, Inc. Maroone Dodge Pompano FL Maroone Dodge, Inc. Maroone Dodge FL Maroone Ford, Inc. Maroone Ford FL Maroone Isuzu, Inc. Maroone Isuzu FL Maroone Jeep Eagle, Inc. Maroone Chrysler Plymouth Jeep Eagle DE Maroone Oldsmobile II, Inc. Maroone Oldsmobile (Miami) DE Maroone Oldsmobile, LLC Maroone Oldsmobile DE Marshall Lincoln-Mercury, Inc. Marshall Lincoln-Mercury Mazda (did not change to Elway) CO Mike Hall Chevrolet, Inc. Mike Hall Chevrolet DE Mike Shad Chrysler Plymouth Jeep Eagle, Inc. Mike Shad Chrysler Plymouth Jeep FL Mike Shad Ford, Inc. Mike Shad Ford FL Miller-Sutherlin Automotive, Inc. Miller - Sutherlin Che/Pon/Chr-Ply/J-E/Dod AL Mr. Wheels, Inc. Toyota of Cerritos CA Mullinax East, Inc. Mullinax Ford East DE Mullinax Ford North Canton, Inc. Mullinax Ford North Canton OH Mullinax Ford South, Inc. Mullinax Ford South FL
17 Mullinax Lincoln-Mercury, Inc. Mullinax Lincoln-Mercury DE Mullinax of Mayfield, Inc. Mullinax Jeep Eagle of Mayfield OH Mullinax Lincoln-Mercury of Mayfield OH Newport Beach Cars, Inc. Newport Auto Center CA Northpoint Chevrolet, Inc. (fka, RI/PCR Acquisition Corp.) Northpoint Chevrolet DE Northside Nissan, Inc. Northside Nissan SC Northwest Financial Group, Inc. BMW of Bellevue WA Orange County Automotive Imports, Inc. Anaheim Mazda Pontiac Buick CA Orange Park Toyota, LLC Orange Park Toyota DE Orlando Imports, Inc. Saab of Orlando DE Peyton Cramer Automotive, Inc. Peyton Cramer Acura/Isuzu CA Peyton Cramer Ford Peyton Cramer Ford CA Peyton Cramer Infiniti Peyton Cramer Infiniti CA Peyton Cramer Jaguar Peyton Cramer Jaguar CA Peyton Cramer Lincoln-Mercury Peyton Cramer Lincoln-Mercury-VW CA Pitre Buick-Pontiac-GMC of Scottsdale, Inc. Pitre Buick-Pontiac-GMC of Scottsdale DE Pitre Chrysler-Plymouth-Jeep of Scottsdale, Inc. Pitre Chrysler-Plymouth-Jeep of Scottsdale DE Pitre Chrysler-Plymouth-Jeep on Bell, Inc. Pitre Chrysler-Plymouth-Jeep on Bell DE Pitre Isuzu-Subaru-Hyundai of Scottsdale, Inc. Pitre Isuzu-Subaru-Hyundai of Scottsdale DE Pitre Isuzu-Subaru-Kia on Bell, Inc. Pitre Isuzu-Subaru-Kia on Bell DE
18 Pitre Kia of Scottsdale, Inc. Pitre Kia Scottsdale DE Port City Imports, Inc. Port City Imports (Honda/Hyundai/Volvo) TX Port City Pontiac-GMC Trucks, Inc. Port City Pontiac/GMC TX Princeton's Nassau/Conover Ford Lincoln-Mercury, Inc. Princeton's Nassau Ford Lincoln Mercury Audi NJ Prinu, Inc. Princeton Audi DE Quinlan Motors, Inc. Jim Quinlan Nissan FL RI/HGMC Acquisition Corp. Hendrix GMC Truck DE RI/Hollywood Nissan Acquisition Corp. Maroone Nissan DE RI/PII Acquisition Corp. Northpoint Mitsubishi DE RI/RMC Acquisition Corp Red McCombs Chevrolet-Austin DE RI/RMP Acquisition Corp Red McCombs Pontiac/GMC/Hyundai/Jeep DE RI/RMT Acquisition Corp. Red McCombs Toyota of Austin DE RI/WFI Acquisition Corporation Woodfield Ford DE SaBeK, Inc. Flemington Mitsubishi NJ Sahara Imports, Inc. Las Vegas Honda NV Saul Chevrolet, Inc. Corona Chevrolet-Oldsmobile CA Corona Motors (aka Corona Volkswagen, Subaru and Isuzu) CA SMI Motors, Inc. Costa Mesa Infiniti CA Infiniti of Santa Monica CA Infiniti of Beverly Hills CA Smythe Europen, Inc. Smythe European Mercedes Benz/Volvo CA SNDK, Inc. Flemington Porsche/Audi/BMW/VW NJ
19 Southwest Dodge, Inc. John Elway Dodge Southwest CO Steeplechase Motor Company Charlie Thomas Mazda/Hyundai TX Steve Moore Chevrolet Delray, Inc. Steve Moore Chevrolet Delray FL Steve Moore Chevrolet, Inc. Steve Moore Chevrolet FL Steve Moore, LLC Steve Moore Chevrolet/Cadillac/Buick/Oldsmobile/Pontiac DE Steve Rayman Buick/GMC/Pontiac, Inc. Steve Rayman Buick/GMC/Pontiac NC Stuart Lincoln-Mercury, Inc. Wallace Stuart Lincoln Mercury FL Sunrise Nissan of Jacksonville, Inc. Sunrise Nissan of Jacksonville FL Sunrise Nissan of Orange Park, Inc. Sunrise Nissan of Orange Park FL Sunset Pontiac-GMC, Inc. Sunset Pontiac-GMC Truck North MI Sunset Pontiac-GMC Truck South FL Superior Nissan, Inc. Superior Nissan NC Sutherlin Chrysler-Plymouth Jeep-Eagle, Inc. Sutherlin Chrysler-Plymouth Jeep-Eagle GA Sutherlin Imports, Inc. Sutherlin Honda GA Sutherlin Nissan of Town Center, Inc. Nissan Add Point GA Sutherlin Nissan, Inc. Sutherlin Nissan of Lithia Springs GA Sutherlin Toyota, Inc. Sutherlin Toyota FL Tallahassee Imports, Inc. Tallahassee Mitsubishi FL Tallahassee Motors, Inc. Tallahassee Ford FL Taylor Jeep Eagle, Inc. Taylor Jeep Eagle DE Texan Ford, Inc. Texan Ford TX Texan Lincoln-Mercury, Inc. Texan Lincoln-Mercury/Isuzu DE
20 The Pierce Corporation, Inc. Tempe Toyota AZ Torrance Nissan, Inc. Torrance Nissan CA Tousley Ford, Inc. Tousley Ford MN Valencia Lincoln-Mercury, Inc. Magic Lincoln-Mercury DE Valley Chevrolet, Inc. Fox of Timonium MD Village Motors, Inc. Libertyville Toyota IL W.O. Bankston Lincoln-Mercury, Inc. Bankston Lincoln-Mercury/Saab DE W.O. Bankston Nissan, Inc. Bankston Nissan of Dallas TX W.O. Bankston Paint & Body, Inc. Bankston Paint & Body, Inc. TX Wallace Dodge, Inc. Wallace Dodge FL Wallace Ford, Inc. Wallace Ford FL Wallace Lincoln-Mercury, Inc. Wallace Lincoln-Mercury FL Wallace Nissan, Inc. Wallace Nissan FL West Ashley Toyota, Inc. West Ashley Toyota SC West Colton Cars, Inc. Redlands Ford CA West Side Motors, Inc. West Side Honda TN
EX-23.1 9 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS As independent certified public accountants, we hereby consent to the incorporation of our report in this Form 10-K, into the previously filed Registration Statements of Republic Industries, Inc. on Forms S-3 (Registration Nos. 33-61649, 33-62489, 33-63735, 33-65289, 333-01757, 333-04269, 333-08479, 333-18009, 333-20667, 333-23415, 333-29217, 333-35749 and 333-44611), Forms S-4 (Registration Nos. 333-17915 and 333-41505) and Forms S-8 (Registration Nos. 33-93742, 333-07623, 333-19453, 333-20669, 333-29265, 333-42891 and 333-56967). Fort Lauderdale, Florida, March 31, 1999. EX-27.1 10 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 217,300 0 1,667,600 (62,300) 1,853,500 8,406,300 2,334,500 290,900 13,925,800 5,540,400 2,315,600 0 0 4,700 5,419,500 13,925,800 12,664,600 16,118,200 10,909,600 13,532,500 0 0 22,000 522,700 188,100 334,600 164,900 0 0 499,500 1.10 1.06
EX-27.2 11 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 129,200 0 883,600 (37,300) 1,083,100 6,645,200 1,526,700 (231,600) 10,196,200 3,817,000 2,269,300 0 0 4,300 3,480,000 10,196,200 6,122,800 9,177,900 5,459,000 7,796,500 0 0 11,100 102,900 38,300 64,600 375,100 0 0 439,700 1.09 1.02
EX-27.3 12 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2,933,700 5,633,100 2,611,300 4,778,500 0 0 37,500 (35,700) 15,300 (51,000) 75,900 (31,600) 0 (6,700) (.02) (.02)
EX-99.1 13 ITEM 1 & 2 OF THE ANNUAL REPORT ON FORM 10-K 1 EXHIBIT 99.1 PART I ITEM 1. BUSINESS BACKGROUND In July 1998, Republic Services, Inc. (the "Company") completed the initial public offering (the "Initial Public Offering") of its Class A common stock, par value $.01 per share (the "Class A Common Stock"), resulting in net proceeds of $1.4 billion. All of the proceeds were used to repay debt owed to Republic Industries, Inc. ("Republic Industries"). As of December 31, 1998, approximately 63.9% of the Company's common stock (including its Class B common stock, par value $.01 per share (the "Class B Common Stock" and together with the Class A Common Stock, the "Common Stock") was owned by Republic Industries. COMPANY OVERVIEW The Company is a leading provider of services in the domestic non-hazardous solid waste industry. The Company provides solid waste collection services for commercial, industrial, municipal and residential customers through 131 collection companies in 26 states. The Company also owns or operates 70 transfer stations and 48 solid waste landfills. The Company had revenue of $1,369.1 million and $1,127.7 million and operating income of $284.3 million and $201.3 million for the years ended December 31, 1998 and 1997, respectively. The $241.4 million (or 21.4%) increase in revenue and the $83.0 million (or 41.2%) increase in operating income are primarily attributable to the successful execution of the Company's growth and operating strategies described below. The Company's internal growth strategy is supported by its presence in high growth markets throughout the Sunbelt, including Florida, Georgia, Nevada, Southern California and Texas, and other domestic markets that have experienced higher than average population growth during the past several years. The Company believes that its presence in such markets positions it to experience growth at rates that are generally higher than the industry's overall growth rate. Since 1995, the Company has acquired numerous solid waste companies with an aggregate of over $1.4 billion in annual revenue. In September 1998, the Company agreed to purchase certain assets, including landfills, transfer stations, routes and other items, from Waste Management, Inc. ("Waste Management"), and to convey to Waste Management certain of the Company's assets for a net purchase price of approximately $490 million in cash plus certain properties. By December 31, 1998, closings with Waste Management had been completed with respect to 6 landfills, 7 transfer stations and 136 commercial collection routes. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Business Combinations." The Company believes that it is well positioned to continue to increase its revenue and operating income in order to enhance stockholder value. INDUSTRY OVERVIEW Based on analyst reports and industry trade publications, the Company believes that the United States non-hazardous solid waste services industry generated revenue of approximately $35.0 billion in 1997, of which approximately 44% was generated by publicly-owned waste companies, 23% was generated by privately-held waste companies and 33% was generated by municipal and other local governmental authorities. The substantial majority of the publicly-owned companies' total revenue of approximately $15.4 billion was generated by only five companies in 1997. However, according to industry data, the domestic non-hazardous waste industry remains highly fragmented as the privately-held companies' total revenue of approximately $8.0 billion was generated by more than 5,000 companies. 1 2 The Company believes that in recent years there has been a trend toward rapid consolidation in the solid waste collection industry, which has historically been characterized by numerous small companies. The Company believes that this trend will continue as a result of the following factors: Subtitle D Regulation. Subtitle D ("Subtitle D") of the Resource Conservation and Recovery Act of 1976, as amended ("RCRA"), and similar state regulations have significantly increased the amount of capital, technical expertise, operating costs and financial assurance obligations required to own and operate a landfill and other solid waste facilities. Many of the smaller industry participants have found these costs difficult, if not impossible, to bear. Large publicly-owned companies, such as the Company, have greater access to capital, and a lower cost of capital, available to finance such increased capital expenditures and costs, relative to many of the privately owned companies in the industry. Additionally, the required permits for landfill development, expansion or construction have become more difficult to acquire. Consequently, many smaller, independent operators have decided to either close their operations or sell them to larger operators with greater access to capital. Integration of Solid Waste Businesses. Vertically integrated solid waste companies gain further competitive advantage over non-integrated operators by being able to control the waste stream in a market through the collection, transfer and disposal process. The ability of the integrated companies to internalize the disposal of collected solid waste, coupled with access to significant capital resources to make acquisitions, has created an environment in which large publicly-owned integrated companies can operate more cost effectively and competitively than non-integrated operators. Municipal Privatization. The trend toward consolidation in the solid waste services industry is further supported by the increasing tendency of a number of municipalities to privatize their waste disposal operations. Privatization of municipal waste operations is often an attractive alternative to funding the changes required by Subtitle D. These developments, as well as the fact that there are a limited number of viable exit strategies for many of the owners and principals of numerous privately-held companies in the industry, have contributed to the overall consolidation trend in the solid waste industry. GROWTH STRATEGY The Company's growth strategy is to increase revenue, gain market share and enhance stockholder value through internal growth and acquisitions. For certain risks related to the Company's growth strategy, see "-- Risk Factors." - - INTERNAL GROWTH. The Company's internal growth strategy focuses on retaining existing customers and obtaining commercial, municipal and industrial customers through its well-managed sales and marketing activities. Long-Term Contracts. The Company seeks to obtain long-term contracts for the collection of solid waste in the high-growth markets in which it operates. These include exclusive franchise agreements with municipalities as well as commercial and industrial contracts. By obtaining such long-term agreements, the Company has the opportunity to grow its contracted revenue base at the same rate as the underlying population growth in such markets. For example, the Company has secured exclusive, long-term franchise agreements in high-growth markets such as Los Angeles and Orange Counties, California, Las Vegas, Nevada, Arlington, Texas and many areas of Florida. The Company believes that this positions it to experience internal growth rates that are generally higher than the overall industry's growth rate. In addition, the Company believes that by securing a base of long-term recurring revenue in growth markets, the Company is better able to protect its market position from competition and is less susceptible to downturns in economic conditions. Sales and Marketing Activities. The Company's well-managed sales and marketing activities enable it to capitalize on its leading positions in many of the markets in which it operates. The Company currently has over 350 sales and marketing employees in the field, who are incentivized by a commission structure to generate high levels of revenue. For the most part, such employees directly solicit business 2 3 from existing and prospective commercial, industrial and municipal customers. The Company trains new and existing sales personnel with an emphasis on teaching sales personnel to understand the Company's rate and cost structures. - - ACQUISITION GROWTH. As a result of the highly fragmented nature of the solid waste industry, the Company has been able to grow significantly through acquisitions. The Company's acquisition growth strategy is focused on the approximately $8.0 billion of revenue that was generated by over 5,000 privately-held solid waste companies in 1997. The Company believes that its ability to acquire many of these privately-held companies is enhanced by increasing competition in the solid waste industry, increasing capital requirements as a result of changes in solid waste regulatory requirements and the limited number of exit strategies for such companies' owners and principals. The Company's acquisition growth strategy is to (i) acquire businesses that position the Company for growth in existing and new markets, (ii) acquire well-managed companies and retain local management, (iii) integrate business in existing markets and (iv) acquire operations and facilities from municipalities that are privatizing. For certain risks involved with the Company's growth strategy, see "-- Risk Factors." Acquire Businesses Positioning the Company for Growth. In making acquisitions, the Company principally targets high quality businesses that will allow it to be, or provide it favorable prospects of becoming, a leading provider of integrated solid waste services in markets with favorable demographic growth. The Company generally has acquired, and will continue to seek to acquire, solid waste collection, transfer and disposal companies that (i) have strong operating margins, (ii) are in growth markets, (iii) are among the largest or have a significant presence in their local markets and (iv) have long-term contracts or franchises with municipalities and other customers. Although the Company seeks to expand its operations to selected new markets where the potential for growth and further integration of operations exists, the Company's primary focus is to concentrate its acquisition efforts in its existing markets in the Sunbelt, including Florida, Georgia, Nevada, Southern California and Texas and other domestic markets that have experienced higher than average population growth during the past several years. The Company is not limited to the foregoing target criteria for acquisitions, and may also acquire additional non-hazardous solid waste operations as opportunities arise. The Company continuously reviews possible acquisition candidates and is in discussions from time to time with one or more of such candidates. In September 1998, the Company entered into an agreement with Waste Management to purchase 16 landfills, 11 transfer stations and 136 commercial collection routes across the United States as well as to obtain disposal agreements at various Waste Management disposal sites. With these acquisitions, the Company will have expanded its presence in four existing markets and will enter 16 new markets. At December 31, 1998, closings had been completed for 6 landfills, 7 transfer stations and all of the collection routes. Management believes that the closing of the remaining Waste Management assets will be completed in the first quarter of 1999. See also "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Business Combinations." Acquire Well-Managed Companies. The Company also seeks to acquire businesses that have experienced management teams that are willing to work for the Company. The Company generally retains the local management of the larger acquired companies in order to capitalize on their local market knowledge, community relations and name recognition, and to instill their entrepreneurial drive at all levels of operations. By furnishing the local management of such acquired companies with the Company's financial and marketing resources and technical expertise, it is the Company's belief that such acquired companies are better able to secure additional municipal franchises and other contracts. This enables the Company to grow internally such acquired businesses at faster rates than the industry average. Integrate Business in Existing Markets. Once it has a base of operations in a particular market, the Company focuses on acquiring trucks and routes of smaller businesses that also operate in that market and surrounding markets, which are typically referred to as "tuck-in" acquisitions. The operations of such "tuck-in" businesses, upon being acquired by the Company, are integrated into the Company's existing operations in that market. In addition, the Company seeks to acquire landfills, transfer stations, and collection companies that operate in markets already serviced by the Company. By doing so, the 3 4 Company not only is able to grow its revenue and increase its market share, but also is able to integrate operations and consolidate duplicative facilities and functions to maximize cost efficiencies and economies of scale. Privatize Municipal Operations. The Company also seeks to acquire solid waste collection operations, transfer stations and landfills that are being privatized by municipalities and other governmental authorities. Many municipalities are seeking to outsource or sell these types of solid waste operations, as they lack the capital, technical expertise and/or operational resources necessary to comply with increasingly stringent regulatory standards and/or to compete effectively with private-sector companies. OPERATING STRATEGY The Company seeks to leverage existing assets and revenue growth to increase operating margins and enhance stockholder value. The Company's operating strategy to accomplish this goal is to (i) utilize the extensive industry knowledge and experience of the Company's executive management, (ii) utilize a decentralized management structure in overseeing day-to-day operations, (iii) integrate waste operations, (iv) improve operating margins through economies of scale, cost efficiencies and asset utilization and (v) achieve high levels of customer satisfaction. For certain risks related to the Company's operating strategy, see "-- Risk Factors." - - EXPERIENCED EXECUTIVE MANAGEMENT TEAM. The Company believes that it has one of the most experienced executive management teams among publicly-traded companies in the solid waste industry. H. Wayne Huizenga, the Company's Chairman, after several years of owning and operating private waste hauling companies in Florida, co-founded Waste Management in 1971. From 1971 to 1984 he served in various executive capacities with Waste Management, including President and Chief Operating Officer. By then, Waste Management had become the world's largest integrated solid waste services company. From 1987 to 1994, Mr. Huizenga served as Chairman and Chief Executive Officer of Blockbuster Entertainment Corporation, leading its growth from 19 stores to the world's largest video rental company. In August 1995, he became Chairman and Chief Executive Officer of Republic Industries. Harris W. Hudson, the Company's Vice Chairman, worked closely with Mr. Huizenga, from 1964 until 1982, at Waste Management and at the private waste hauling firms they operated prior to the formation of Waste Management. In 1982, Mr. Hudson retired as Vice President of Waste Management of Florida, Inc., a subsidiary of Waste Management. In 1983, Mr. Hudson founded Hudson Management Corporation ("Hudson Management"), a solid waste collection company in Florida, and served as its Chairman and Chief Executive Officer until it merged with Republic Industries in August 1995. By that time, Hudson Management had grown to over $50.0 million in annual revenue, becoming one of Florida's largest privately-held solid waste collection companies based on revenue. Since August 1995, Mr. Hudson has served as an executive officer of Republic Industries, including as President and Vice Chairman. James E. O'Connor, the Company's Chief Executive Officer since December 1998, also worked at Waste Management from 1972 to 1978 and from 1982 to 1998. During that time, he served in various management positions, including Senior Vice President in 1997 and 1998 and Area President of Waste Management of Florida, Inc. for five years, from 1992 to 1997. James H. Cosman, the Company's President and Chief Operating Officer, has served as President of Republic Industries' Solid Waste Group since January 1997. Prior to joining Republic Industries, Mr. Cosman was employed by Browning-Ferris Industries, Inc. for over 24 years. During that time, he served in various management positions, including Regional Vice President -- Northern Region. The other officers with responsibility for operational affairs of the Company have an average of over 16 years of management experience in the solid waste industry. - - DECENTRALIZED MANAGEMENT STRUCTURE. The Company maintains a relatively small corporate headquarters staff, relying on a decentralized management structure to minimize administrative overhead costs and to manage its day-to-day operations more efficiently. The Company's local management has extensive industry 4 5 experience in growing, operating and managing solid waste companies, and substantial experience in their local geographic markets. The Company's four Regional Vice Presidents have an average of 22 years of experience in the industry, and the Company's 23 Area Presidents have an average of 20 years of experience in the industry. The Regional Vice Presidents and Area Presidents have extensive authority, responsibility and autonomy for operations within their geographic markets. Compensation for management within regions and areas is in large part based on the improvement in operating income produced in each manager's geographic area of responsibility. In addition, through long-term incentive programs, including stock options, the Company believes that it has one of the lowest turnover levels in the industry for its local management teams. As a result of retaining experienced managers with extensive local knowledge, community relations and name recognition, the Company is able to react rapidly to changes in its markets. The Company also seeks to implement the best practices of its various regions and areas throughout its operations to improve operating margins. - - INTEGRATE OPERATIONS. The Company seeks to achieve a high rate of waste integration by controlling waste streams from the point of collection through disposal. Through acquisitions and other market development activities, the Company creates market specific, vertically integrated operations typically consisting of one or more collection companies, transfer stations and landfills. The Company considers acquiring companies which own or operate landfills with significant permitted disposal capacity and appropriate levels of waste volume. The Company also seeks to acquire solid waste collection companies in markets in which its owns or operates landfills. In addition, the Company generates internal growth in its disposal operations by constructing new landfills and expanding its existing landfills from time to time in markets in which it has significant collection operations or in markets that it determines lack sufficient disposal capacity. During the year ended December 31, 1998, approximately 40% of the total volume of waste collected by the Company was disposed of at the Company's landfills. Because the Company does not have landfill facilities for all markets in which it provides collection services, the Company believes that through landfill and transfer station acquisitions and development it has the opportunity to increase its waste internalization rate and further integrate its operations. By further integrating operations in existing markets through acquisitions and developments of landfills and transfer stations, the Company is able to reduce its disposal costs. - - ECONOMIES OF SCALE AND COST EFFICIENCIES. To improve operating margins, the Company's management is focused on achieving economies of scale and cost efficiencies. The consolidation of acquired businesses into existing operations reduces costs by decreasing capital and expenses used in routing, personnel, equipment and vehicle maintenance, inventories and back-office administration. The Company is generally consolidating its administrative centers to reduce its general and administrative costs. The Company reduced its selling, general and administrative expenses from 14.2% of consolidated revenue in 1996 to 9.9% of consolidated revenue in 1998. In addition, the Company's size allows it to negotiate volume discounts for certain purchases, including waste disposal rates at landfills operated by third parties. Furthermore, the Company has taken steps to increase its utilization of assets. For example, to reduce the number of collection vehicles, drivers are paid incentive wages based upon the number of customers they service on each route. In addition, routes are frequently analyzed and rerouted to ensure that the highest number of customers are efficiently serviced over the fewest possible miles. By using assets more efficiently, operating expenses are lowered significantly. - - HIGH LEVELS OF CUSTOMER SATISFACTION. The Company complements its operating strategy with a goal of maintaining high levels of customer satisfaction. The Company's personalized sales process of periodically contacting commercial, industrial and municipal customers is intended to maintain relationships and ensure service is being properly provided. OPERATIONS The Company's operations primarily consist of the collection and disposal of non-hazardous solid waste. Collection Services. The Company provides solid waste collection services to commercial, industrial, municipal and residential customers in 26 states through 131 collection companies. In 1998, the Company's revenue from collection services was derived approximately one third from services provided to commercial 5 6 customers, one third from services provided to industrial customers, and one third from services provided to municipal and residential customers. The Company's commercial and residential collection operations involve the curbside collection of refuse from small containers into collection vehicles for transport to transfer stations or directly to landfills. Commercial collection services are generally performed under one-year to three-year service agreements, and fees are determined by such considerations as market factors, collection frequency, type of equipment furnished, the type and volume or weight of the waste collected, the distance to the disposal facility and the cost of disposal. Residential solid waste collection services are typically performed under contracts with municipalities, which are generally secured by competitive bid and which give the Company exclusive rights to service all or a portion of the homes in their respective jurisdictions. Such contracts or franchises usually range in duration from one to five years, although some of the Company's exclusive franchises are for as long as 20 years. Residential solid waste collection services may also be performed on a subscription basis, in which individual households contract directly with the Company. The fees received for subscription residential collection are based primarily on market factors, frequency and type of service, the distance to the disposal facility and cost of disposal. In general, subscription residential collection fees are paid quarterly in advance by the residential customers receiving the service. In its commercial and industrial collection operations, the Company supplies its customers with waste containers commonly known as "roll-off" containers. The Company also rents compactors to large waste generators. Waste collection services are provided to individual commercial, industrial and construction facilities on a contractual basis with terms generally ranging from a single pickup to one year. The Company also rents waste roll-off containers to construction sites and provides hauling services. The Company collects the roll-off containers or compacted waste and transports them either to a landfill, where the waste is disposed of, or to a transfer station. The Company owns or operates 70 transfer stations. Waste is deposited at these stations by the Company, other private haulers and municipal haulers for compaction and transfer to trailers for transport to landfills, incinerators, recycling facilities or other disposal sites. The Company also currently provides recycling services in certain markets primarily to comply with local laws or obligations under its franchise agreements. These services include the curbside collection of residential recyclable waste and the provision of a variety of recycling services to commercial and industrial customers. Disposal Services. The Company owns or operates 48 solid waste landfills with approximately 6,200 permitted acres and total available permitted disposal capacity of approximately 1.2 billion in-place cubic yards as of December 31, 1998. See "ITEM 2. PROPERTIES." The in-place capacity of the Company's landfills is subject to change based on engineering factors, requirements of regulatory authorities and successful site expansions. Certain of the landfills accept non-hazardous special waste, including utility ash, asbestos and contaminated soils. Most of the Company's existing landfill sites have the potential for expanded disposal capacity beyond the currently permitted acreage. The Company monitors the availability of permitted disposal capacity at each of its landfills and evaluates whether to pursue expansion at a given landfill based on estimated future waste volumes and prices, remaining capacity and likelihood of obtaining expansion. As of December 31, 1998, the Company believes that each of its landfills has adequate permitted capacity. To satisfy future disposal demand, the Company is currently seeking to expand permitted capacity at certain of its landfills. Other Services. The Company has materials recovery facilities and other recycling operations, which are generally required to fulfill its obligations under long-term municipal contracts for residential collection services. These facilities primarily sort recyclable paper, aluminum, glass and other materials. Most of these recyclable materials are internally collected by the Company's residential collection operations. In certain areas, the Company receives certain types of commercial and industrial solid waste that is sorted at its facilities into recyclable materials and non-recyclable waste. The recyclable materials are salvaged, repackaged and sold to third parties and the non-recyclable waste is disposed of at landfills or incinerators. The Company's strategy, wherever possible, is to reduce its exposure to fluctuations in recyclable commodity prices 6 7 by utilizing third parties' facilities, thereby minimizing its recycling investment. Long-term contracts for the sale of recycling materials are also used to mitigate the impact of commodity price fluctuations. The Company also has composting operations at which yard waste is composted, packaged and sold as mulch. SALES AND MARKETING The Company seeks to provide quality services that will enable it to maintain high levels of customer satisfaction. The Company derives its business from a broad customer base which the Company believes will enable it to experience stable growth. Marketing efforts focus on continuing and expanding business with existing customers as well as attracting new customers. The Company has more than 350 sales and marketing employees. The Company's sales and marketing strategy is to provide high-quality comprehensive solid waste collection, recycling, transfer and disposal services to its customers at competitive prices. The Company targets potential customers of all sizes, from small quantity generators to large "Fortune 500" companies and municipalities. All marketing activity by the Company is local in nature. The Company generally does not change the tradenames of the local businesses that it acquires, and therefore it does not operate nationally under any one mark or tradename. Rather, the Company relies on the goodwill associated with the acquired companies' local tradenames as used in each geographic market in which it operates. CUSTOMERS The Company provides services to commercial, industrial, municipal and residential customers. No one customer has individually accounted for more than 10.0% of the consolidated revenue of the Company in any of the last three years. REGULATION The Company's facilities and operations are subject to a variety of federal, state and local requirements which regulate health, safety, the environment, zoning and land use. Operating and other permits are generally required for landfills, certain waste collection vehicles, fuel storage tanks and other facilities owned or operated by the Company, and these permits are subject to revocation, modification and renewal. Federal, state and local regulations vary, but generally govern wastewater or stormwater discharges, air emissions, the treatment, storage, transportation and disposal of hazardous and non-hazardous wastes and the remediation of contamination associated with the release of hazardous substances. Such regulations provide governmental authorities with strict powers of enforcement, which include the ability to obtain injunctions and/or impose fines or penalties in the case of violations, including criminal penalties. These regulations are administered by the U.S. Environmental Protection Agency ("EPA") and various other federal, state and local environmental, health and safety agencies and authorities, including the Occupational Safety and Health Administration of the U.S. Department of Labor ("OSHA"). The Company strives to conduct its operations in compliance with applicable laws and regulations. However, in the existing climate of heightened environmental concerns, the Company, from time to time, has been issued citations or notices from governmental authorities which have resulted in the need to expend funds for remedial work and related activities at various of the Company's landfills and other facilities. The Company has established a reserve which it believes, based on currently available information, will be adequate to cover any potential regulatory costs. However, there can be no assurance that actual costs will not exceed the Company's reserve. Federal Regulation. The following summarizes the primary environmental and safety-related federal statutes of the United States affecting the facilities and operations of the Company: (1) The Solid Waste Disposal Act, as amended by RCRA ("SWDA"). SWDA and its implementing regulations establish a framework for regulating the handling, transportation, treatment, storage and disposal of hazardous and non-hazardous solid wastes, and require states to develop programs to ensure the safe disposal of solid wastes in sanitary landfills. 7 8 Subtitle D of RCRA establishes a framework for regulating the disposal of municipal solid wastes. Regulations under Subtitle D currently include minimum comprehensive solid waste management criteria and guidelines, including location restrictions, facility design and operating criteria, closure and post-closure requirements, financial assurance standards, groundwater monitoring requirements and corrective action standards, many of which have not commonly been in effect or enforced in the past in connection with municipal solid waste landfills. Each state was required to submit a permit program designed to implement Subtitle D regulations to the EPA by April 9, 1993. These state permit programs may include landfill requirements which are more stringent than those of Subtitle D. Some states have not yet fully implemented permit programs pursuant to RCRA and Subtitle D. Once a state has an approved permit program it is required to review all existing landfill permits to ensure compliance with the new regulations. All of the Company's planned landfill expansions or new landfill development projects have been engineered to meet or exceed Subtitle D requirements. Operating and design criteria for existing operations have been modified to comply with these new regulations. Compliance with the Subtitle D regulations has resulted in increased costs and may in the future require substantial additional expenditures in addition to other costs normally associated with the Company's waste management activities. (2) The Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA"). CERCLA, among other things, provides for the cleanup of sites from which there is a release or threatened release of a hazardous substance into the environment. CERCLA may impose strict, joint and several liability for the costs of cleanup and for damages to natural resources upon current owners and operators of the site, parties who were owners or operators of the site at the time the hazardous substances were released, parties who transported hazardous substances to the site and parties who arranged for disposal at the site. Under the authority of CERCLA and its implementing regulations, detailed requirements apply to the manner and degree of investigation and remediation of facilities and sites where hazardous substances have been or are threatened to be released into the environment. CERCLA liability is not dependent upon the existence or disposal of "hazardous wastes" but can also be based upon the existence of small quantities of more than 700 "substances" characterized by the EPA as "hazardous," many of which may be found in common household waste. Among other things, CERCLA authorizes the federal government to investigate and remediate sites at which hazardous substances have been or are threatened to be released into the environment, or to order (or offer an opportunity to) persons potentially liable for the cleanup of the hazardous substances to do so. In addition, CERCLA requires the EPA to establish a National Priorities List of sites at which hazardous substances have been or are threatened to be released and which require investigation or cleanup. Liability under CERCLA is not dependent upon the intentional disposal of hazardous wastes. It can be founded upon the release or threatened release, even as a result of unintentional, non-negligent or lawful action, of thousands of hazardous substances, including very small quantities of such substances. Thus, even if the Company's landfills have never knowingly received hazardous wastes as such, it is possible that one or more hazardous substances may have come to be located or "released" at its landfills or at other properties which the Company may have owned or operated. The Company could thus be liable under CERCLA for the cost of cleaning up such hazardous substances at such sites and for damages to natural resources, even if those substances were deposited at the Company's facilities before the Company acquired or operated them. The costs of a CERCLA cleanup can be very expensive. Given the difficulty of obtaining insurance for environmental impairment liability, such liability could have a material impact on the Company's business and financial condition. For a further discussion, see "-- Liability Insurance and Bonding." (3) The Federal Water Pollution Control Act of 1972 (the "Clean Water Act"). The Clean Water Act regulates the discharge of pollutants from a variety of sources, including solid waste disposal sites, into streams, rivers and other waters. Point source runoff from the Company's landfills and transfer 8 9 stations that is discharged into surface waters must be covered by discharge permits that generally require the Company to conduct sampling and monitoring and, under certain circumstances, reduce the quantity of pollutants in those discharges. Storm water discharge regulations under the Clean Water Act require a permit for certain construction activities, which may affect the Company's operations. If a landfill or transfer station discharges wastewater through a sewage system to a publicly-owned treatment works ("POTW"), the facility must comply with discharge limits imposed by the POTW. In addition, states may adopt groundwater protection programs under the Clean Water Act or Safe Drinking Water Act that could affect solid waste landfills. Furthermore, development which alters or affects "wetlands" must generally be permitted prior to such development commencing, and certain mitigation requirements may be required by the permitting agencies. (4) The Clean Air Act. The Clean Air Act imposes limitations on emissions from various sources, including landfills. On March 12, 1996, the EPA enacted rules that require large municipal solid waste landfills to install landfill gas monitoring systems. These EPA regulations apply to landfills that have been operating since November 8, 1987, and that can accommodate 2.5 million cubic meters or more of municipal solid waste. The regulations apply whether the landfill is active or closed. The date by which each affected landfill must have the required gas collection and control system is dependent upon the adoption of state regulations and the date the EPA approves the state program. Many state regulatory agencies currently require monitoring systems for the collection and control of landfill gas. Compliance with the new EPA regulations is not expected to have a material effect on the Company. (5) The Occupational Safety and Health Act of 1970 (the "OSH Act"). The OSH Act authorizes OSHA to promulgate occupational safety and health standards. Various of these standards, including standards for notices of hazardous chemicals and the handling of asbestos, apply to the Company's facilities and operations. State Regulation. Each state in which the Company operates has its own laws and regulations governing solid waste disposal, water and air pollution and, in most cases, releases and cleanup of hazardous substances and liability for such matters. States also have adopted regulations governing the design, operation, maintenance and closure of landfills and transfer stations. The Company's facilities and operations are likely to be subject to these types of requirements. In addition, the Company's solid waste collection and landfill operations may be affected by the trend in many states toward requiring the development of waste reduction and recycling programs. For example, several states have enacted laws that require counties or municipalities to adopt comprehensive plans to reduce, through waste planning, composting, recycling or other programs, the volume of solid waste deposited in landfills. Additionally, laws and regulations restricting the disposal of certain wastes, including yard waste, newspapers, beverage containers, unshredded tires, lead-acid batteries and household appliances in solid waste landfills have been promulgated in several states and are being considered in others. Legislative and regulatory measures to mandate or encourage waste reduction at the source and waste recycling also are under consideration by Congress and the EPA. In order to construct, expand and operate a landfill, one or more construction or operating permits, as well as zoning approvals, must be obtained. These are difficult and time-consuming to obtain, are often opposed by neighboring landowners and citizens' groups, may be subject to periodic renewal and are subject to modification and revocation by the issuing agency. In connection with the Company's acquisition of existing landfills, it may be necessary to expend considerable time, effort and money to bring the acquired facilities into compliance with applicable requirements and to obtain the permits and approvals necessary to increase their capacity. Many of the Company's facilities own and operate underground storage tanks ("USTs") which are generally used to store petroleum-based products. USTs are generally subject to federal, state and local laws and regulations that mandate periodic testing, upgrading, closure and removal of USTs and that, in the event of leaks from USTs, require that polluted groundwater and soils be remediated. The Company believes that all the Company's USTs currently meet federal regulations. If USTs owned or operated by the Company leak, and such leakage migrates onto the property of others, the Company could be liable for response costs and other damages to third parties. Compliance with regulations related to USTs is not expected to have a material adverse effect on the Company. 9 10 Finally, with regard to its solid waste transportation operations, the Company is subject to the jurisdiction of the Interstate Commerce Commission and is regulated by the Federal Highway Administration, Office of Motor Carriers and by regulatory agencies in each state. Various states have enacted, or are considering enacting, laws and regulations that would restrict the interstate transportation and processing of solid waste. In 1978, the United States Supreme Court held similar laws and regulations unconstitutional; however, states have attempted to distinguish proposed laws and regulations from the laws and regulations involved in that ruling. In May 1994, the Supreme Court ruled that state and local flow control laws and ordinances (which attempt to restrict waste from leaving its place of generation) were an impermissible burden on interstate commerce, and therefore, were unconstitutional. In response to these Supreme Court rulings, Congress has considered passing legislation authorizing states and local governments to restrict the free movement of solid waste in interstate commerce. If federal legislation authorizing state and local governments to restrict the free movement of solid waste in interstate commerce is enacted, such legislation could adversely affect the Company's operations. The Company has a reserve for environmental and landfill costs, which includes landfill site closure and post-closure costs. The Company periodically reassesses such costs based on various methods and assumptions regarding landfill airspace and the technical requirements of Subtitle D of RCRA and adjusts its accruals accordingly. Based on current information and regulatory requirements, the Company believes that its reserve for such environmental expenditures is adequate. However, environmental laws may change, and there can be no assurance that the Company's reserves will be adequate to cover requirements under existing or new environmental regulations, future changes or interpretations of existing regulations or the identification of adverse environmental conditions previously unknown to the Company. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Environmental and Landfill Matters" and "-- Risk Factors -- Risks relating to environmental regulation." COMPETITION The Company operates in a highly competitive industry, which is changing as a result of rapid consolidation. Entry into the Company's business and the ability to operate profitably in such industry requires substantial amounts of capital and managerial experience. Competition in the non-hazardous solid waste industry comes from a number of large, national publicly-owned companies, including Waste Management, Browning-Ferris Industries, Inc. and Allied Waste Industries, Inc., numerous regional publicly- and privately-owned solid waste companies, and from thousands of small privately-owned companies in their respective markets. Some of the Company's publicly-owned competitors also are engaging in aggressive acquisition strategies. Certain of the Company's competitors have significantly larger operations, and may have significantly greater financial resources, than the Company. In addition to national and regional firms and numerous local companies, the Company competes with those municipalities that maintain waste collection or disposal operations. These municipalities may have financial advantages due to the availability of tax revenues and tax-exempt financing. The Company competes for collection accounts primarily on the basis of price and the quality of its services. From time to time, competitors may reduce the price of their services in an effort to expand market share or to win a competitively bid municipal contract. In each market in which it owns or operates a landfill, the Company competes for landfill business on the basis of disposal costs, geographical location and quality of operations. The Company's ability to obtain landfill business may be limited by the fact that some major collection companies also own or operate landfills to which they send their waste. There also has been an increasing trend at the state and local levels to mandate waste reduction at the source and to prohibit the disposal of certain types of wastes, such as yard wastes, at landfills. This may result in the volume of waste going to landfills being reduced in certain areas, which may affect the Company's ability to operate its landfills at their full capacity and/or affect the prices that can be charged for landfill disposal services. In addition, most of the states in which the Company operates landfills 10 11 have adopted plans or requirements that set goals for specified percentages of certain solid waste items to be recycled. LIABILITY INSURANCE AND BONDING The nature of the Company's business exposes it to the risk of liabilities arising out of its operations, including possible damages to the environment. Such potential liabilities could involve, for example, claims for remediation costs, personal injury, property damage, and damage to the environment in cases where the Company may be held responsible for the escape of harmful materials; claims of employees, customers or third parties for personal injury or property damage occurring in the course of the Company's operations; or claims alleging negligence or professional errors and omissions in the planning or performance of work. The Company could also be subject to fines and civil and criminal penalties in connection with alleged violations of regulatory requirements. Because of the nature and scope of the possible environmental damages, liabilities imposed in environmental litigation can be significant. The majority of the Company's solid waste operations have third party environmental liability insurance with limits in excess of those required by permit regulations, subject to certain limitations and exclusions. However, there is no assurance that the limits of such environmental liability insurance would be adequate in the event of a major loss, nor is there assurance that the Company would continue to carry environmental liability insurance should market conditions in the insurance industry make such coverage costs prohibitive. The Company carries general liability, vehicle liability, workers compensation and employer's liability coverage, as well as umbrella liability policies to provide excess coverage over the underlying limits contained in these primary policies. The Company also carries property insurance. Although the Company strives to operate safely and prudently and has, subject to certain limitations and exclusions, substantial liability insurance, no assurance can be given that the Company will not be exposed to uninsured liabilities which could have a material adverse effect on its financial condition. In the normal course of business, the Company may be required to post a performance bond or a bank letter of credit in connection with municipal residential collection contracts, the operation, closure or post-closure of landfills, certain remediation contracts, certain environmental permits and certain business licenses and permits. Bonds issued by surety companies operate as a financial guarantee of the Company's performance. To date, the Company has satisfied financial responsibility requirements by making cash deposits, obtaining bank letters of credit or by obtaining surety bonds. EMPLOYEES As of December 31, 1998, the Company employed approximately 10,000 full time employees, approximately 2,400 of whom were covered by collective bargaining agreements. The management of the Company believes that it has good relations with its employees. RISK FACTORS This Risk Factors section of our Annual Report on Form 10-K includes "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including, in particular, certain statements about our plans, strategies and prospects. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that such plans, intentions or expectations will be achieved. Important factors that could cause our actual results of differ materially from our forward-looking statements are set forth in this Risk Factors section. All forward-looking statements attributable to us or any persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth below. Unless the context requires otherwise, all references to the "Company," "we," "us,' or "our" include Republic Services, Inc. and its subsidiaries. 11 12 RISK THAT REPUBLIC INDUSTRIES WILL FAIL TO COMPLETE ITS DISTRIBUTION OF REPUBLIC SERVICES COMMON STOCK OR WILL FAIL TO OBTAIN FAVORABLE LETTER RULING FROM THE IRS. Assuming that certain conditions are met, Republic Industries intends to distribute to its stockholders in 1999 all of the shares of our common stock which it then owns. In this Annual Report, we will refer to Republic Industries' distribution of our common stock as the "Distribution." One condition to the Distribution is that Republic Industries must obtain a private letter ruling from the Internal Revenue Service stating, to Republic Industries' satisfaction, that the Distribution of its shares of our common stock will not be taxable to Republic Industries or to its stockholders for federal income tax purposes. Republic Industries has applied for this letter ruling from the IRS and intends promptly to take all necessary steps to complete a tax-free distribution within three months after all of the conditions to the Distribution, including obtaining the letter ruling, have been met or waived. Republic Industries does not plan to distribute its shares of our common stock to its stockholders without a satisfactory letter ruling from the IRS. Due to recent changes in the tax laws, we cannot assure you that Republic Industries will receive a satisfactory letter ruling within the time frame it contemplates, or at all. Republic Industries filed its request for the letter ruling with the IRS in July 1998, and in recent weeks has had several meetings with the IRS to attempt to resolve certain issues relating to the request. Consequently, we cannot assure you that Republic Industries will complete the Distribution of its shares of our common stock within the time frame it contemplates, or at all. Republic Industries' Distribution of its shares of our common stock also is subject to the condition that no events or developments occur prior to the Distribution that, in the sole judgment of the Board of Directors of Republic Industries, would or could result in the Distribution having a material adverse effect on Republic Industries or its stockholders. In addition, prior to the Distribution, Republic Industries must obtain certain consents from governmental authorities and other third parties. We cannot assure you that any of the conditions just described, or any other conditions necessary to the Distribution, will be satisfied. If the Distribution does not occur in the time frame contemplated, or does not occur at all, then the market price of the Class A common stock could be materially adversely affected. RISKS RELATING TO REPUBLIC INDUSTRIES' VOTING CONTROL OF REPUBLIC SERVICES. Republic Industries currently owns approximately 63.9% of our outstanding shares of common stock, which represents approximately 88.7% of the combined voting power of the outstanding shares of our Class A and Class B common stock. As a result of its voting power, Republic Industries can determine virtually all matters requiring a vote of the stockholders, including the election of all of our directors. Our Board of Directors currently consists of five members, two of whom also currently serve as members of Republic Industries' Board of Directors. Republic Industries intends to maintain ownership of at least 80% of the combined voting power of the outstanding shares of our common stock until the Distribution of its shares of our common stock can be completed. If Republic Industries does not complete the Distribution, it may elect to maintain its controlling interest in our common stock indefinitely. As long as Republic Industries maintains a controlling interest in our common stock, the market price of our Class A common stock may be adversely affected by events which are unrelated to our business or operations. RISKS RESULTING FROM THE DISPARATE VOTING RIGHTS OF THE CLASS A AND CLASS B COMMON STOCK. The holders of Class A common stock have different voting rights from the holders of Class B common stock. On all matters submitted to a vote of the stockholders, holders of Class A common stock are entitled to one vote per share while holders of Class B common stock are entitled to five votes per share. As a result of this disparity in voting rights, potential investors and potential future purchasers of our Class A common stock may not be willing to pay as much for shares of Class A common stock and the shares of Class A common stock may be less easily sold for cash. 12 13 RISKS RELATING TO AGREEMENTS WHICH WERE NOT SUBJECT TO ARM'S LENGTH NEGOTIATIONS. We entered into certain agreements with Republic Industries while we were its wholly owned subsidiary. None of these agreements were the result of arm's-length negotiations. As a result, we cannot assure you that these agreements were made on terms as favorable as could have been obtained from parties with whom we were not related. RISKS RELATING TO CONFLICTS OF INTEREST OF CERTAIN EXECUTIVE OFFICERS AND DIRECTORS. Two of our executive officers also serve as executive officers of Republic Industries. Two members of our Board of Directors also serve as members of Republic Industries' Board of Directors. Some of our executive officers and directors hold shares of Republic Industries common stock or hold options or warrants to acquire shares of Republic Industries' common stock. As a result of these relationships, there is a potential for conflicts of interest with respect to decisions which may arise in the ordinary course of business. Conflicts which concern whether or not Republic Industries will complete the Distribution of its shares of our common stock may also arise. We have not established formal procedures to resolve any conflicts that arise. Consequently, we intend to resolve any conflicts on a case-by-case basis. RISKS RELATING TO OUR LIMITED ABILITY TO ISSUE COMMON STOCK IN CONNECTION WITH REPUBLIC INDUSTRIES' DISTRIBUTION OF ITS SHARES OF OUR COMMON STOCK. In order for Republic Industries' Distribution of its shares of our common stock to be tax-free to it and its stockholders, among other requirements, Republic Industries must distribute shares of our common stock representing at least 80% of the total combined voting power of all classes of our voting stock. If Republic Industries cannot meet this percentage requirement when it distributes its shares of our common stock to its stockholders, then the Distribution will not be tax-free and will not occur. In order to allow Republic Industries to meet the percentage requirements of a tax-free Distribution, we have agreed not to issue additional shares of our capital stock without the consent of Republic Industries if the issuance of additional shares of our capital stock would, or could, prevent the Distribution from being tax-free. In addition, in connection with the Distribution proposed by Republic Industries, we may be required to refrain, prior to and after completion of the Distribution, from issuing additional capital stock in a single transaction or series of transactions which, when added to the shares of our common stock which we issued in our initial public offering and any shares of our common stock which may be sold by Republic Industries prior to the Distribution, could result in a 50% or greater change in the vote or value of our outstanding capital stock. Meeting the requirements of a tax-free Distribution may make it difficult for us to raise cash by issuing equity securities, including shares of our common stock. Meeting these requirements may also make it difficult for us to complete acquisitions of businesses by issuing equity securities, including shares of our common stock, to pay for the acquisition. RISKS RELATING TO OUR OBLIGATION TO INDEMNIFY REPUBLIC INDUSTRIES FROM CERTAIN TAX LIABILITIES ASSOCIATED WITH THE DISTRIBUTION. We will indemnify Republic Industries for any tax liability it may incur as a result of actions by us after the Distribution which cause the Distribution to lose its tax-free status. Any indemnification which we are required to provide to Republic Industries as a result of tax liability related to the Distribution would have a material adverse effect on our business, financial condition and results of operations. RISKS RELATING TO OUR FUTURE CAPITAL REQUIREMENTS AND THE ABSENCE OF FUNDING FROM REPUBLIC INDUSTRIES. Our working capital requirements and cash flow from operating activities can vary from quarter to quarter, depending on the timing of capital expenditures, acquisitions and other factors. Prior to our initial public offering, Republic Industries satisfied our working capital needs pursuant to its corporate-wide cash management policies. Following our initial public offering, Republic Industries has no longer been required to 13 14 provide funds to finance our operations or acquisitions. As a result, we have incurred and expect to continue to incur both long-term debt and short-term debt having interest rates and/or repayment terms less favorable than those which were historically enjoyed with Republic Industries. Additionally, as long as we remain a subsidiary of Republic Industries, certain restrictive covenants in Republic Industries' bank credit facilities could adversely affect our ability to borrow money. Republic Industries amended its credit facilities to permit us to incur unsecured indebtedness in excess of $1.0 billion. We have a $1.0 billion unsecured revolving credit facility with a group of banks. The credit facility consists of a $500.0 million facility expiring July 1999 and a $500.0 million facility expiring July 2003. Borrowings under our credit facility bear interest at LIBOR based rates. When the existing credit facility expires, we cannot assure you that we will be able to refinance borrowings under that facility on terms that are as favorable. If we are unable to obtain additional needed financing on acceptable terms, we may need to reduce the scope of our acquisition growth strategy, which could have a material adverse effect on our growth prospects and the market price of our common stock. RISKS RELATING TO THE COMPETITIVE ENVIRONMENT IN WHICH WE OPERATE. We operate in a highly competitive business environment. Some of our competitors have significantly larger operations and may have significantly greater financial resources than we do. In addition, the solid waste industry is constantly changing as a result of rapid consolidation which may create additional competitive pressures in our business environment. We also compete with municipalities that maintain their own waste collection or disposal operations. These municipalities may have a financial advantage over us due to the availability of tax revenue and tax-exempt financing. In each market in which we own or operate a landfill, we compete for solid waste volume on the basis of disposal or "tipping" fees, geographical location and quality of operations. Our ability to obtain solid waste volume for our landfills may be limited by the fact that some major collection companies also own or operate landfills to which they send their waste. We compete for collection accounts primarily on the basis of price and the quality of services. From time to time our competitors may reduce the price of their services in an effort to expand their market share or to win a competitively bid municipal contract. As a result, we may have difficulty competing effectively from time to time. RISKS RELATING TO OUR DEPENDENCE ON ACQUISITIONS FOR GROWTH. Our ability to execute our growth strategy depends in part on our ability to identify and acquire desirable acquisition candidates as well as our ability to successfully integrate the acquired companies' operations into our business and then increase the market share of these acquired companies. The consolidation of our operations with the operations of acquired companies, including the integration of systems, procedures, personnel and facilities, the relocation of staff, and the achievement of anticipated cost savings, economies of scale and other business efficiencies, presents significant challenges to our management, particularly if several acquisitions occur at the same time. We cannot assure you that we will be able to identify desirable acquisition candidates, that we will be able to acquire any of the identified candidates, that we will effectively integrate companies which are acquired and fully realize the expected cost savings, economies of scale or business efficiencies, or that any acquisitions will be profitable or accretive to our earnings. Additional factors may negatively impact our acquisition growth strategy. Our acquisition strategy requires the expenditure of significant amounts of capital. The intense competition among our competitors pursuing the same acquisition candidates may further increase such capital requirements. In addition, our inability to account for acquisitions under the pooling of interests method of accounting for a period ending two years following the Distribution may limit our ability to complete certain transactions. Furthermore, in order not to adversely impact the tax-free status of the Distribution, following the Distribution, we may need to refrain from issuing additional shares of capital stock in a single transaction or series of transactions related 14 15 to the Distribution which, when combined with the Class A common stock issued in the initial public offering along with any shares of common stock sold by Republic Industries prior to the Distribution, could cause a 50% or greater change in the vote or value of our outstanding capital stock. If any of the aforementioned factors force us to alter our growth strategy, our financial condition, results of operations and growth prospects could be adversely affected. RISKS RELATING TO UNDISCLOSED LIABILITIES OF BUSINESSES WE ACQUIRE. In pursuing our acquisition strategy our investigations of the acquisition candidates may fail to discover certain undisclosed liabilities of the acquisition candidates. If we acquire a candidate having undisclosed liabilities, as a successor owner we may be responsible for such undisclosed liabilities. We typically try to minimize our exposure to such liabilities by obtaining indemnification from each seller of the acquired companies, and by deferring payment of a portion of the purchase price as a security for the indemnification. However, we cannot assure you that such indemnifications will be obtainable, enforceable, collectible or sufficient in amount, scope or duration to fully offset any undisclosed liabilities arising from our acquisitions. RISKS RELATING TO MANAGEMENT OF OUR GROWTH. Our growth strategy places significant demands on our financial, operational and management resources. In order to continue our growth and operate independently of Republic Industries, we will need to add administrative and other personnel, and make additional investments in operations and systems. We cannot assure you that we will be able to find and train qualified personnel, or do so on a timely basis, or expand our operations and systems to the extent, and in the time, required. RISKS RELATING TO OUR DEPENDENCE ON KEY PERSONNEL. Our future success depends on the continued contributions of certain key executive officers. Most of our executive officers do not have employment agreements and we do not maintain key man life insurance policies on any of our executive officers. In addition, as a result of our separation from Republic Industries we will need to employ additional personnel for certain functions which were previously performed by employees of Republic Industries. The loss of the services of key employees and officers, whether such loss is through resignation or other causes, or our inability to attract additional qualified personnel, could have a material adverse effect on our financial condition, results of operations and growth prospects. RISKS RELATING TO ENVIRONMENTAL REGULATION. We may need to spend considerable time, effort and capital to keep our facilities in compliance with federal, state and local requirements regulating health, safety, environment, zoning and land use. In addition, certain of our waste operations that cross state boundaries could be adversely affected if the federal government, or the state or locality in which these waste operations are located, imposes discriminatory fees on, or otherwise limits or prohibits, the transportation or disposal of solid waste. If environmental laws become more stringent, our environmental capital expenditures and costs for environmental compliance may increase in the future. In addition, due to the possibility of unanticipated events or regulatory developments, the amounts and timing of future environmental expenditures could vary substantially from those we currently anticipate. Because of the nature of our operations, we have in the past and may in the future be named as a potentially responsible party in connection with the investigation or remediation of environmental conditions. We cannot assure you that the resolution of these investigations will not have a material adverse effect on our financial condition or results of operations. Citizens' groups have become increasingly active in challenging the grant of renewal permits and licenses for landfills and other waste facilities. Responding to the challenges presented by these citizens' groups has further increased our costs and extended the time associated with establishing new facilities and expanding existing facilities. We currently accrue for landfill costs, which include expected landfill site closure and post-closure costs, based on consumption of landfill airspace. At December 31, 1998, assuming that all available landfill capacity is used, we expect to expense approximately $370.5 million of landfill costs over the remaining lives of these facilities. We cannot assure you that our reserves for landfill and environmental costs will be adequate to cover 15 16 the requirements of existing environmental regulations, future changes or interpretations of existing regulations or the identification of adverse environmental conditions previously unknown to us. RISKS RELATING TO LEGAL PROCEEDINGS. We are involved in various administrative and legal proceedings in the ordinary course of business. We cannot give you any assurance with respect to the outcome of these proceedings or the effect which the outcomes may have on our insurance coverages or otherwise, or that our reserves are adequate to meet the requirements of any adverse outcomes. A significant judgment against us, the loss of significant permits or licenses, or the imposition of a significant fine could have a material adverse effect on our financial condition or results of operations. Citizens' groups have become increasingly active in challenging the grant or renewal of permits and licenses for landfills and other waste facilities. Responding to the challenges presented by those citizens' groups has further increased our costs and extended the time associated with establishing new facilities and expanding existing facilities. Except for routine litigation incidental to our business, presently there are no pending material legal proceedings to which we are a party or to which any of our property is subject. RISKS RELATING TO THE YEAR 2000. We use computer software and related technologies throughout our business that are likely to be affected by the date change in the year 2000. We may not discover and remediate all potential problems with our systems in a timely manner. In addition, computer software and related technologies used by our customers, service providers, vendors and suppliers are also likely to be affected by the year 2000 date change. Failure of any of these parties to properly process dates for the year 2000 and thereafter could result in unanticipated expenses and delays to us, including delays in the payment by our customers for services provided and delays in our ability to conduct normal banking operations. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Year 2000." RISKS RELATING TO THE SEASONALITY OF OUR BUSINESS AND OPERATIONS. Our operations can be adversely affected by periods of inclement weather which could delay the collection and disposal of waste, reduce the volume of waste generated or delay the construction or expansion of our landfill sites and other facilities. RISKS RELATING TO SHARES ELIGIBLE FOR FUTURE SALE. Subject to applicable law, Republic Industries may sell any and all of the shares of our common stock that it owns. The Separation and Distribution Agreement gives Republic Industries the right in certain circumstances to require us to use our best efforts to register for resale shares of our common stock held by Republic Industries and its wholly owned subsidiaries. In addition, prior to the Distribution, Republic Industries may acquire additional solid waste companies and contribute them to us in exchange for additional shares of our common stock. Republic Industries may also make additional investments in our capital securities, or otherwise, prior to the Distribution. The planned Distribution would involve the distribution of an aggregate of 95,688,083 shares of Class B common stock and 16,474,417 shares of Class A common stock to Republic Industries' stockholders in 1999 (assuming that no additional shares of common stock are disposed of or acquired by Republic Industries between the date hereof and the date of the Distribution). Shares of Class B common stock may be converted into shares of Class A common stock in certain circumstances. Substantially all of the shares of common stock to be distributed to Republic Industries' stockholders in the Distribution will be eligible for immediate resale in the public market. We cannot predict whether substantial amounts of shares of our common stock will be sold in the open market in anticipation of, or following, the Distribution. Any sales of substantial amounts of shares of our common stock in the public market, or the perception that such sales might occur, could materially adversely affect the market price of the Class A common stock. Any issuance by us of any additional shares of our capital stock is subject to our agreement with Republic Industries not to issue any shares of capital stock that would reduce Republic Industries' ownership below the required distribution percentage described earlier in this Risk Factors section. Subject to these contractual 16 17 limitations with Republic Industries, we may file registration statements covering the issuance and/or resale of shares of Class A common stock which may be issued in potential future acquisitions by us of non-hazardous solid waste businesses. WE DO NOT PRESENTLY ANTICIPATE PAYING CASH DIVIDENDS ON OUR COMMON STOCK. We intend to retain all earnings for the foreseeable future for use in the operation and expansion of our business. In addition, our credit facility contains restrictions on our ability to declare and pay dividends. Consequently, we do not anticipate paying any cash dividends on our common stock to our stockholders for the foreseeable future. 17 18 ITEM 2. PROPERTIES The Company's corporate headquarters are located in Ft. Lauderdale, Florida in premises leased from a subsidiary of Republic Industries. As of December 31, 1998, the Company owned approximately 4,900 collection vehicles. Certain of the property and equipment of the Company are subject to liens securing payment of portions of the Company's indebtedness. The Company also leases certain of its offices and equipment. The Company believes that all of its facilities are sufficient for its current needs. The following table provides certain information regarding the 48 landfills owned or operated by the Company as of December 31, 1998.
UNUSED TOTAL PERMITTED PERMITTED LANDFILL NAME LOCATION ACREAGE ACREAGE ACREAGE ------------- -------- ------- --------- --------- Anderson(1).......................... Anderson, California 1,200 150 101 Apex................................. Clark County, Nevada 2,340 1,233 1,153 Brazoria............................. Clute, Texas 1,000 246 176 Broadhurst Landfill(2)............... Jesup, Georgia 900 90 64 C&T Regional......................... Linn, Texas 200 77 19 Capital Waste & Recycling Disposal........................... Rotterdam, New York 33 5 -- Charter Waste........................ Abilene, Texas 396 300 283 Cleveland Container.................. Shelby, North Carolina 174 77 40 CWI Florida.......................... Winter Haven, Florida 80 58 14 Dozit Landfill....................... Morganfield, Kentucky 232 47 33 East Carolina Landfill............... Aulander, North Carolina 729 108 71 Epperson Landfill.................... Williamstown, Kentucky 861 100 58 Foothills Landfill(2)................ Lenior, North Carolina 231 78 72 Forest Lawn.......................... Three Oaks, Michigan 387 126 73 Front Range.......................... Denver, Colorado 602 195 162 Green Ridge.......................... Scottdale, Pennsylvania 580 87 54 Green Valley Landfill................ Ashland, Kentucky 263 37 -- Kestral Hawk......................... Racine, Wisconsin 210 125 37 Laughlin(2).......................... Laughlin, Nevada 40 40 -- Los Mangos........................... Alajuela, Costa Rica 41 24 8 Mallard Ridge........................ Delavan, Wisconsin 659 40 14 National Serv-All.................... Fort Wayne, Indiana 265 204 41 Nine Mile Road....................... St. Augustine, Florida 154 28 9 North County......................... Houston, Texas 46 40 20 Northwest Tennessee.................. Union City, Tennessee 600 120 99 Oak Grove............................ Winder, Georgia 301 60 32 Ohio County Balefill(2).............. Beaver Dam, Kentucky 908 179 143 Pepperhill........................... North Charleston, South Carolina 37 22 13 Pine Ridge........................... Griffin, Georgia 850 101 81 Pinellas(2).......................... St. Petersburg, Florida 750 478 200 Presidio(2).......................... Presidio, Texas 10 10 6 Republic/Alpine(2)................... Alpine, Texas 80 74 63 Republic/CSC......................... Avalon, Texas 298 205 133 Republic/Imperial.................... Imperial, California 250 73 37 Republic/Maloy....................... Campbell, Texas 388 195 130 Safety Lights........................ Memphis, Tennessee 49 21 6 San Angelo(2)........................ San Angelo, Texas 257 232 109 Savannah Regional.................... Savannah, Georgia 132 59 52 Southern Illinois Regional........... DeSoto, Illinois 249 113 47 Springfield Environmental............ Mt. Vernon, Indiana 55 25 -- Swiftcreek Landfill.................. Macon, Georgia 792 81 33 Tay-Ban.............................. Birch Run, Michigan 90 25 6 Tri-K Landfill....................... Stanford, Kentucky 572 64 49 United Refuse........................ Fort Wayne, Indiana 305 77 16 Upper Piedmont Environmental......... Roxboro, North Carolina 614 70 54 Uwharrie Landfill(2)................. Mt. Gilead, North Carolina 905 90 31 Victory Environmental................ Terre Haute, Indiana 461 260 138 Wabash Valley........................ Wabash, Indiana 284 69 12 ------ ----- ----- Total................................ 20,860 6,218 3,992 ====== ===== =====
- --------------- (1) The Company has entered into a contract to sell this landfill to Waste Management. (2) Operated but not owned by the Company. 18 -----END PRIVACY-ENHANCED MESSAGE-----