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PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(All tables in millions, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
AutoNation, Inc. (the "Company") is the largest
automotive retailer in the United States. As of December 31, 2000,
the Company owned and operated approximately 400 new vehicle franchises
from dealerships in 18 states, predominantly in major metropolitan
markets in the Sunbelt states. The Company's dealerships offer
new and used vehicles for sale. Each dealership also offers financing
for vehicle purchases, extended service contracts and other finance
and insurance products, as well as other aftermarket products
such as vehicle accessories, upgraded sound systems and theft-deterrent
systems. The Company's dealerships also offer service facilities
that provide a wide range of vehicle maintenance and repair services,
and operate collision repair centers in most key markets.
On June 30, 2000, the Company completed the
spin-off of its former automotive rental businesses, organized
under ANC Rental Corporation ("ANC Rental"), by distributing 100%
of ANC Rental's common stock to AutoNation's stockholders as a
tax-free dividend. As a result of the spin-off, AutoNation stockholders
received one share of ANC Rental common stock for every eight
shares of AutoNation common stock owned as of the June 16, 2000
record date. As discussed in Note 11,
Discontinued Operations, the Company's former automotive rental
segment has been accounted for as discontinued operations in the
accompanying Consolidated Financial Statements and accordingly,
the net assets and operating results of ANC Rental for the periods
prior to disposition have been classified as discontinued operations
in the accompanying Consolidated Financial Statements.
In July 1998, the Company's former solid waste
subsidiary, Republic Services, Inc., completed an initial public
offering of 36.1% of its common stock. In May 1999, the Company
sold substantially all of its interest in Republic Services in
a public offering. As discussed in Note 11,
Discontinued Operations, the Company's former solid waste services
segment has been accounted for as discontinued operations in the
accompanying Consolidated Financial Statements and accordingly,
operating results of Republic Services for the periods prior to
disposition have been classified as discontinued operations in
the accompanying Consolidated Financial Statements.
Basis of Presentation
The accompanying Consolidated Financial Statements
include the accounts of AutoNation, Inc. and its subsidiaries.
The Company operates in a single industry segment, automotive
retailing. All intercompany accounts and transactions have been
eliminated. In order to maintain consistency and comparability
between periods presented, floorplan interest expense, depreciation
and amortization and certain other amounts have been reclassified
from the previously reported financial statements to conform to
the financial statement presentation of the current period.
The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States 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.
Receivables
The components of receivables, net of allowance
for doubtful accounts, at December 31 are as follows:
2000 1999
----------- -----------
Contracts in transit and vehicle receivables ......... $ 407.5 $ 391.9
Finance receivables .................................. 350.2 441.5
Trade receivables .................................... 119.6 121.2
Manufacturer receivables ............................. 131.2 134.1
Other ................................................ 135.4 133.3
--------- ---------
1,143.9 1,222.0
Less: allowance for doubtful accounts ................ (35.1) (42.5)
--------- ---------
$ 1,108.8 $ 1,179.5
========= =========
Finance receivables consist of the following
at December 31:
2000 1999
------------ -----------
Finance leases, net ......................................... $ 147.8 $ 196.3
Installment loans ........................................... 50.3 83.8
Retained interests in securitized installment loans ......... 152.1 161.4
--------- --------
$ 350.2 $ 441.5
========= ========
The Company sells installment loan finance receivables
in securitization transactions with unrelated financial institutions.
When the Company sells receivables in securitizations, it retains
interest-only strips, one or more subordinated tranches, servicing
rights, and cash reserve accounts, all of which are retained interests
in the securitized receivables. Gains or losses on the sale of the
receivables depend in part on the previous carrying amount of the
financial assets involved in the transfer, allocated between the
assets sold and the retained interests based on their relative fair
value at the date of transfer. Gains or losses from the sale of
the receivables are recognized in the period in which sales occur.
Interest-only strips are carried at fair value and marked to market
as a component of other comprehensive income unless an other than
temporary impairment occurs in the valuation of the interest-only
strip in which case the impairment is recorded in the Consolidated
Income Statements. Retained interests in the securitized receivables
are carried at allocated carrying amounts and periodically assessed
for impairment. Servicing assets are initially recorded at allocated
carrying amounts and subsequently amortized over the servicing period
and periodically assessed for impairment. The Company generally
estimates fair value utilizing valuation models based on the present
value of future expected cash flows estimated using the Company's
best estimate and historical experience of the key assumptions including
credit losses, voluntary prepayment speeds, forward yield curve,
and discount rates commensurate with the risks involved.
The Company accounts for the sale of receivables
in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." In September 2000, SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities -- a Replacement of FASB No.
125" ("SFAS 140") was issued. SFAS 140 revises the standards for
accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures. SFAS 140
disclosure requirements are effective for fiscal years ending after
December 15, 2000, and have been included in Note 13,
Asset Securitizations. Accounting for transfers and servicing of
financial assets and extinguishment of liabilities under SFAS 140
is effective for transactions occurring after March 31, 2001. Although
additional interpretive guidance is expected from the Financial
Accounting Standards Board ("FASB"), the Company does not expect
the adoption of the accounting requirements of SFAS 140, as currently
interpreted, will have a material impact on its consolidated financial
position, results of operations or cash flows.
As described in Note 10,
Restructuring and Impairment Charges (Recoveries), Net, during 2000,
an impairment charge totaling $16.6 million related to the deterioration
of vehicle residual values associated with finance lease receivables
was recognized. Finance lease originations were discontinued in
mid-1999 and the majority of the remaining leases terminate in late
2001.
In 2000, the Emerging Issues Task Force of the
Financial Accounting Standards Board reached a consensus on EITF
Issue No. 99-20, "Recognition of Interest Income and Impairment
on Purchased and Retained Beneficial Interests in Securitized Financial
Assets" ("EITF 99-20"). EITF 99-20 specifies, among other things,
how a transferor that retains an interest in a securitization transaction
should account for interest income and impairment. EITF 99-20 is
effective for fiscal quarters beginning after March 15, 2001. The
Company plans to adopt EITF 99-20 on April 1, 2001. The Company
does not expect adoption of EITF 99-20 to have a material impact
on its consolidated financial position, results of operations or
cash flows.
Inventory
Inventory consists primarily of retail vehicles
held for sale valued using the specific identification method, net
of reserves. Cost includes acquisition, reconditioning and transportation
expenses. Parts and accessories are valued at the factory list price
which approximates lower of cost (first-in, first-out) or market.
Inventory acquired in business acquisitions is
recorded at fair value. Adjustments to convert from the acquired
entity's accounting method (generally last-in, first-out) to the
Company's accounting method are recorded as an adjustment to the
cost in excess of the fair value of net assets acquired.
A summary of inventory at December 31 is as follows:
2000 1999
------------- -------------
New vehicles ......................... $ 2,295.8 $ 2,085.0
Used vehicles ........................ 317.9 470.1
Parts, accessories and other ......... 155.5 151.7
---------- ----------
$ 2,769.2 $ 2,706.8
========== ==========
Other Current Assets
Other current assets consist primarily of restricted
cash deposits related to insurance programs totaling $160.8 million
and $91.9 million at December 31, 2000 and 1999, respectively.
Investments
Investments consist of marketable securities
and investments in businesses accounted for under the equity-method.
Marketable securities include investments in debt and equity securities
classified as available-for-sale and are stated at fair value with
unrealized gains and losses included in other comprehensive income.
Other-than-temporary declines in investment values are recorded
as a component of Other Income, Net in the Company's Consolidated
Income Statements. Fair value is estimated based on quoted market
prices. Equity-method investments represent investments in 50% or
less owned automotive-related 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, Net in the Company's Consolidated
Income Statements. The Company continually assesses whether equity-method
investments should be evaluated for possible impairment by use of
an estimate of the related undiscounted cash flows. The Company
measures impairment losses based upon the amount by which the carrying
amount of the asset exceeds the fair value.
A summary of investments at December 31 is as
follows:
2000 1999
--------- -----------
Marketable securities ............. $ 5.2 $ 106.2
Equity-method investments ......... 33.6 69.6
------ --------
$ 38.8 $ 175.8
====== ========
Investments in marketable securities at December
31 are as follows:
2000
------------------------------------------------
Gross Gross Fair
Unrealized Unrealized Market
Cost Gains Losses Value
-------- ------------ ------------ -------
Corporate debt securities ......... $ .6 $ -- $-- $ .6
Equity securities ................. 3.1 1.5 -- 4.6
----- ---- -- -----
$ 3.7 $ 1.5 $-- $ 5.2
===== ===== === =====
1999
------------------------------------------------------
Gross Gross Fair
Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------ ----------
U.S. government debt securities ......... $ 37.2 $ -- $ (.6) $ 36.6
Corporate debt securities ............... 21.5 -- (.4) 21.1
Equity securities ....................... 27.4 21.1 -- 48.5
-------- ----- ------- -------
$ 86.1 $ 21.1 $ (1.0) $ 106.2
======== ====== ======= =======
Proceeds from sales of available-for-sale securities
were $91.6 million, $116.7 million and $94.1 million for the years
ended December 31, 2000, 1999 and 1998, respectively. Gross realized
gains and losses of $24.0 million and $.3 million, respectively
were recognized for the year ended December 31, 2000. Gross realized
gains and losses of $5.3 million and $.8 million, respectively were
recognized for the year ended December 31, 1999. Gross realized
gains and losses were not material for the year ended December 31,
1998. In 2000, the Company recognized a pre-tax $30.0 million valuation
write-down to an equity-method investment in a privately-held salvage
and parts recycling business which has been reflected in Other Income,
Net in the accompanying 2000 Consolidated Income Statement.
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 and amortization are removed
from the accounts and any resulting gain or loss is reflected in
the Consolidated Income Statements.
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
and amortization are provided over the estimated useful lives of
the assets involved using the straight-line method. The estimated
useful lives are: twenty to forty years for buildings and improvements,
three to fifteen years for equipment and five to ten years for furniture
and fixtures.
A summary of property and equipment at December
31 is as follows:
2000 1999
----------- -----------
Land .................................................... $ 596.2 $ 529.7
Buildings and improvements .............................. 827.4 670.9
Furniture, fixtures and equipment ....................... 282.3 310.5
--------- ---------
1,705.9 1,511.1
Less: accumulated depreciation and amortization ......... (167.8) (150.7)
--------- ---------
$ 1,538.1 $ 1,360.4
========= =========
The Company continually evaluates whether events
and circumstances have occurred that may warrant revision of the
estimated useful life of property and equipment or whether the remaining
balance of property and equipment should be evaluated for possible
impairment. The Company uses an estimate of the related undiscounted
cash flows over the remaining life of the property and equipment
in assessing whether an asset has been impaired. The Company measures
impairment losses based upon the amount by which the carrying amount
of the asset exceeds the fair value. Fair values generally are estimated
using prices for similar assets and/or discounted cash flows. As
described in Note 10, Restructuring and
Impairment Charges (Recoveries), Net, the Company recognized an
impairment charge in 1999 for the write-down of certain megastore
and other properties held for sale to fair value. Properties held
for sale are included in Other Assets as described below.
Additionally, during 2000, the Company sold an
office building which is occupied by ANC Rental, resulting in proceeds
of approximately $18.7 million and a pre-tax gain of $2.3 million
reflected in Other Income, Net in the accompanying 2000 Consolidated
Income Statement.
Intangible Assets
Intangible assets consist primarily of the cost
of acquired businesses in excess of the fair value of net assets
acquired, including cost in excess of the fair value of net assets
not identified with specific acquired businesses, or enterprise-level
intangible assets. 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 $195.4 million and $122.5
million at December 31, 2000 and 1999, 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 assessing whether
intangible assets have been impaired. The Company measures impairment
losses based upon the amount by which the carrying amount of the
asset exceeds the fair value.
In September 2000, the FASB issued an Exposure
Draft entitled "Business Combinations and Intangible Assets" which
was revised in February 2001. The Exposure Draft, if adopted, would
prohibit the pooling method of accounting for business combination
transactions and would require that intangible assets in excess
of the fair value of net assets, goodwill, not be amortized. Goodwill
would be reduced only if found to be impaired or if associated with
assets to be sold or otherwise disposed. The FASB is expected to
issue a final statement in 2001. During 2000, the Company recorded
amortization expense of approximately $73.7 million relating to
goodwill. This statement, if issued as proposed, would preclude
future amortization of existing and any future goodwill on a prospective
basis from the date of issuance.
Other Assets
Other assets consist primarily of megastore and other properties
held for sale. As described in Note 10,
Restructuring and Impairment Charges (Recoveries), Net, the Company
recognized an impairment charge in 1999 to write-down the carrying
value of properties held for sale to fair value. Assets held for
sale totaled approximately $138.8 million and $212.0 million at
December 31, 2000 and December 31, 1999, respectively.
Insurance
Under self-insurance programs, the Company retains
various levels of aggregate loss limits, per claim deductibles and
claims handling expenses as part of its various insurance programs,
including property and casualty and employee medical benefits. Costs
in excess of this retained risk per claim are insured under various
contracts with third party 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.
Revenue Recognition
Revenue consists of sales of new and used vehicles
and related finance and insurance ("F & I") products, sales from
fixed operations (parts, service and body shop), sales of other
products including wholesale units and retail financing. The Company
recognizes revenue in the period in which products are sold or services
are provided. Revenue on finance products represents fees earned
by the Company for notes placed with financial institutions in connection
with customer vehicle purchases financed and is recognized upon
acceptance of credit by the financial institution. Revenue on insurance
products sold on behalf of third party insurance companies in connection
with vehicle sales is recognized upon sale. An estimated allowance
for chargebacks against revenue recognized from sales of F & I
products is established during the period in which the related revenue
is recognized. Revenue from retail financing and certain loan origination
costs are recognized over the term of the contract using the interest
method until the Company securitizes its installment loans.
In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements" ("SAB 101"). SAB 101 provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements. The Company's revenue recognition policy is in accordance
with the provisions of SAB 101. Adoption of the provisions of SAB
101 did not have a material impact on the Company's consolidated
financial position, results of operations or cash flows as of and
for the year ended December 31, 2000.
A summary of the Company's revenue by major products
and services for the years ended December 31 is as follows:
2000 1999 1998
-------------- -------------- -------------
New vehicles ............. $ 12,489.3 $ 11,481.0 $ 6,775.8
Used vehicles ............ 3,860.2 4,429.7 3,185.2
Fixed operations ......... 2,334.9 2,222.0 1,383.2
F & I, net ................. 431.8 423.4 288.6
Other .................... 1,493.4 1,555.7 1,031.8
----------- ----------- ----------
$ 20,609.6 $ 20,111.8 $ 12,664.6
=========== =========== ==========
Derivative Financial Instruments
The Company utilizes interest rate derivatives
to manage the impact of interest rate changes on securitized installment
loan receivables. To a limited extent, the Company has utilized
interest rate derivatives to manage the impact of interest rate
changes on borrowings under the Company's variable rate vehicle
inventory and revolving credit facilities. The Company does not
use derivative financial instruments for trading purposes.
Derivative financial instruments entered into
concurrently with securitizations are accounted for at fair value
as part of the proceeds received in the determination of the gain
or loss on sale. If a derivative financial instrument entered into
concurrently with a securitization is later terminated, any resulting
gain or loss is recognized in earnings upon termination.
Interest rate swaps are used at times to manage
the impact of interest rate changes on vehicle inventory and revolving
credit facility borrowings. Under interest rate swaps, the Company
agrees with other parties to exchange, at specified intervals, the
difference between fixed-rate and floating-rate interest amounts
calculated by reference to an agreed notional principal amount.
Income or expense under these instruments is recorded on an accrual
basis as an adjustment to the yield of the underlying exposures
over the periods covered by the contracts. If an interest rate swap
is terminated early, any resulting gain or loss is deferred and
amortized as an adjustment of the cost of the underlying exposure
position over the remaining periods originally covered by the terminated
swap. If all or part of an underlying position is terminated, the
related pro-rata portion of any unrecognized gain or loss on the
swap is recognized in income at that time as part of the gain or
loss on the termination. Amounts receivable or payable under the
agreements are included in receivables or accrued liabilities in
the accompanying Consolidated Balance Sheets and were not material
at December 31, 2000 or 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133").
In June 1999, the FASB issued Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133." In June 2000, the FASB
issued Statement 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities, an amendment of FASB Statement No.
133." SFAS 133, as amended, 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
instrument's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative instrument's gains and losses
to offset related results on the hedged item in the income statement,
to the extent effective, and requires that a company must formally
document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
If SFAS 133 had to be applied to all derivative
contracts in place on December 31, 2000, including those embedded
in other contracts, total assets and total liabilities would have
increased by approximately $14.3 million. The Company does not expect
there to be a material cumulative effect in earnings or other comprehensive
income from adoption of SFAS 133 as of January 1, 2001.
By requiring the use of fair value accounting,
adoption of SFAS 133 could cause increased volatility in earnings
of future periods.
Advertising
The Company expenses the cost of advertising as incurred
or when such advertising initially takes place. At December 31,
2000, the Company had approximately $15.0 million of prepaid advertising
costs associated with the sale of the Company's former outdoor media
business as discussed in Note 2, Business
Acquisitions and Divestitures. No advertising costs were capitalized
at December 31, 1999. Advertising expense was $186.5 million, $212.2
million and $158.0 million for the years ended December 31, 2000,
1999 and 1998, 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 Acquisitions and Divestitures, and other non-cash transactions
are excluded from the accompanying Consolidated Statements of Cash
Flows.
The Company made interest payments of approximately
$264.3 million, $175.2 million and $190.2 million for the years
ended December 31, 2000, 1999 and 1998, respectively, including
interest on vehicle inventory financing. The Company made income
tax payments of approximately $49.9 million, $84.2 million and $139.8
million for the years ended December 31, 2000, 1999 and 1998, respectively.
As further discussed in Note 3,
Notes Payable and Long-Term Debt, the Company amended the terms
of an existing lease facility and as a result, the underlying leases
have been accounted for as capital leases in 2000, with the property
and related debt included in the accompanying Consolidated Balance
Sheets.
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Form
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