<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 No.: 0-23962
BUDGET GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-3227576
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
125 Basin Street, Suite 210, Daytona Beach, FL 32114
(Address of principal executive offices)
(904) 238-7035
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(Registrant's telephone number, including area code)
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 and 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 [ ]
35,963,045 shares of common stock were outstanding as of November 9, 1998,
comprised of 34,026,445 shares of the registrant's Class A common stock, par
value $0.01, and 1,936,600 shares of the registrant's Class B common stock, par
value $0.01.
The Exhibit Index, filed as a part of this report, appears on page 17.
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<PAGE> 2
INDEX
<TABLE>
<S> <C> <C>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998 (unaudited)
and December 31, 1997 3
Consolidated Statements of Operations for the Three and Nine-Month
Periods Ended September 30, 1998 and 1997 (unaudited) 4
Consolidated Statement of Changes in Stockholders' Equity
for the Nine-Month Period Ended September 30, 1998 (unaudited) 5
Consolidated Statements of Cash Flows for the Nine-Month
Periods Ended September 30, 1998 and 1997 (unaudited) 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II. Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Default Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature Page 18
</TABLE>
2
<PAGE> 3
BUDGET GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
September 30,
ASSETS 1998 December 31,
(UNAUDITED) 1997
----------- ------------
<S> <C> <C>
Cash and cash equivalents $ 118,512 $ 161,455
Restricted cash 368,610 282,731
Trade and vehicle receivables, net 344,818 334,018
Vehicle inventory 82,544 46,944
Revenue earning vehicles, net 3,046,074 2,093,304
Property and equipment, net 212,650 147,547
Prepaid expenses and other assets 163,303 91,681
Intangibles, including goodwill, net 842,633 532,228
----------- -----------
Total assets $ 5,179,144 $ 3,689,908
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Notes payable $ 3,515,337 $ 2,686,199
Accounts payable, accrued and other liabilities 533,764 434,291
Deferred income taxes 120,025 110,479
----------- -----------
Total liabilities 4,169,126 3,230,969
----------- -----------
COMPANY OBLIGATED MANDATORILY REDEEMABLE SECURITIES
OF SUBSIDIARY 291,085 --
STOCKHOLDERS' EQUITY
Common stock 360 274
Additional paid-in-capital 670,014 425,222
Foreign currency translation adjustment (4,671) (2,477)
Retained earnings 53,560 36,250
Treasury stock (330) (330)
----------- -----------
Total stockholders' equity 718,933 458,939
----------- -----------
Total liabilities and stockholders' equity $ 5,179,144 $ 3,689,908
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
BUDGET GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands except per share data)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
1998 1997 1998 1997
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUE:
Vehicle rental $644,666 $423,365 $ 1,434,762 $737,065
Retail vehicle sales 183,320 80,871 421,357 201,898
Royalty fees and other 28,583 20,616 70,787 34,371
-------- -------- ----------- --------
Total operating revenue 856,569 524,852 1,926,906 973,334
OPERATING EXPENSES:
Direct vehicle and operating 245,227 166,525 573,320 307,100
Depreciation - vehicle 144,151 107,728 356,341 198,411
Cost of retail vehicle sales 165,993 70,398 377,188 173,668
Selling, general and administrative 127,970 74,779 329,465 142,113
Amortization and non-vehicle depreciation 16,189 8,924 36,929 17,704
Merger expenses - pooling -- -- 1,595 --
-------- -------- ----------- --------
Total operating expenses 699,530 428,354 1,674,838 838,996
-------- -------- ----------- --------
Operating income 157,039 96,498 252,068 134,338
-------- -------- ----------- --------
Other (income) expense:
Interest, net 53,414 42,742 137,455 77,610
Debt extinguishment costs -- -- 9,454 --
-------- -------- ----------- --------
Total other expense 53,414 42,742 146,909 77,610
INCOME BEFORE INCOME TAXES 103,625 53,756 105,159 56,728
Provision for income taxes 37,658 22,862 37,211 24,572
Distributions on Trust preferred securities 4,691 -- 5,342 --
-------- -------- ----------- --------
INCOME BEFORE EXTRAORDINARY ITEM 61,276 30,894 62,606 32,156
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT (Net of income taxes of $26,602) -- -- (45,296) --
-------- -------- ----------- --------
NET INCOME $ 61,276 $ 30,894 $ 17,310 $ 32,156
======== ======== =========== ========
NET INCOME (LOSS) PER SHARE:
BASIC: Income before extraordinary item $ 1.70 $ 1.43 $ 2.03 $ 1.81
======== ======== =========== ========
Extraordinary item $ -- $ -- $ (1.47) $ --
======== ======== =========== ========
Net income $ 1.70 $ 1.43 $ .56 $ 1.81
======== ======== =========== ========
DILUTED:Income before extraordinary item $ 1.38 $ 0.99 $ 1.78 $ 1.38
======== ======== =========== ========
Extraordinary item $ -- $ -- $ (1.16) $ --
======== ======== =========== ========
Net income $ 1.38 $ 0.99 $ .62 $ 1.38
======== ======== =========== ========
Weighted average number of shares outstanding:
Basic 35,942 21,579 30,765 17,803
Diluted 47,016 32,554 38,946 25,842
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
BUDGET GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Foreign
Additional Currency Total
Common Paid-In Translation Retained Treasury Stockholders'
(Dollar amounts in thousands) Stock Capital Adjustment Earnings Stock Equity
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $274 $425,222 $(2,477) $36,250 $(330) $458,939
Net proceeds from stock options 3 1,661 1,664
Foreign currency translation (2,194) (2,194)
Conversion of subordinated notes 43 88,811 88,854
Shares issued in acquisition of businesses 40 154,320 154,360
Net income 17,310 17,310
---- -------- ------- ------- ----- --------
Balance at September 30, 1998 $360 $670,014 $(4,671) $53,560 $(330) $718,933
==== ======== ======= ======= ===== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
BUDGET GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollar amounts in thousands) For the nine-month periods ended September 30,
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,310 $ 32,156
Adjustments to reconcile net income ---------- ----------
to net cash provided by operating activities:
Extraordinary item 71,898 --
Depreciation and amortization 393,269 216,115
Deferred income taxes 7,779 26,315
Non-cash debt extinguishment costs 8,854 --
Changes in operating assets and liabilities,
net of effects from acquisitions:
Trade and vehicle receivables, net 20,472 (48,951)
Vehicle inventory (15,041) (2,555)
Prepaid expenses and other assets (55,272) (12,550)
Accounts payable, accrued and other liabilities (10,632) 32,694
---------- ----------
Total adjustments 421,327 211,068
---------- ----------
Net cash provided by operating activities 438,637 243,224
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in restricted cash balance (77,229) 309,469
Proceeds from sale of revenue earning vehicles 1,832,848 1,091,800
Purchases of revenue earning vehicles (2,584,297) (1,844,354)
Proceeds from the sale of property and equipment 14,122 11,992
Purchases of property and equipment (74,879) (8,250)
Payment for acquisitions, net of cash acquired (179,977) (143,164)
---------- ----------
Net cash used in investing activities (1,069,412) (582,507)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from equity transactions, net 1,664 174,793
Net increase in vehicle obligations 813,638 35,213
Net increase (decrease) in commercial paper (99,193) 292,287
Proceeds from other notes payable 2,726 122,207
Principal payments on other notes payable (28,459) (185,010)
Proceeds from issuance of mandatorily redeemable
securities of subsidiary, net 291,000 --
Early redemption of notes payable (393,634) --
---------- ----------
Net cash provided by financing activities 587,742 439,490
---------- ----------
Effect of exchange rate changes on cash 90 (57)
Net increase (decrease) in cash and cash equivalents (42,943) 100,150
Cash and cash equivalents, beginning of period 161,455 54,009
---------- ----------
Cash and cash equivalents, end of period $ 118,512 $ 154,159
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
BUDGET GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In millions except share and per share data unless otherwise noted)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Budget Group,
Inc., (the "Company"), have been prepared by the Company pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The Company believes that the
accompanying consolidated financial statements contain all adjustments
(consisting of normal, recurring adjustments other than as noted in Note 4 to
the unaudited consolidated financial statements) that, in the opinion of
management, are necessary to present fairly the Company's consolidated financial
condition, results of operations and cash flows for the periods presented.
It is suggested that these consolidated financial statements be read in
conjunction with the financial statements and the notes thereto contained in the
Company's Current Report on Form 8-K filed on and dated July 2, 1998. Operating
results for the interim periods are not necessarily indicative of the results
that may be expected for the full year ending December 31, 1998. Certain amounts
in the 1997 financial statements have been reclassified to conform with the
current year presentation.
The Company is engaged in the business of the daily rental of vehicles,
including cars, trucks, passenger vans and recreational vehicles (through both
owned and franchised operations) and the sale of new and late model used
vehicles, including recreational vehicles. On April 29, 1997, the Company
acquired Budget Rent a Car Corporation ("BRACC") in a purchase transaction and
changed its name (formerly Team Rental Group, Inc.) to Budget Group, Inc. Prior
to the acquisition (the "BRACC Acquisition"), the Company was the largest United
States franchisee of BRACC. On January 28, 1998, the Company acquired Cruise
America, Inc. ("Cruise") in a stock-for-stock merger accounted for as a pooling
of interests. In connection with the merger, the Company issued 1,623,462 shares
of Class A common stock in exchange for all the outstanding common stock of
Cruise. In addition, the Company issued 111,478 options to purchase Class A
common stock in exchange for all of the outstanding options to purchase stock of
Cruise.
The accompanying consolidated financial statements have been restated to include
the accounts of Cruise as if the companies had combined at the beginning of the
first period presented. Prior to the merger, Cruise's fiscal year ended on April
30. In recording the business combination, Cruise's prior year financial
statements have been restated to conform with the Company's fiscal year end.
There were no significant transactions between the Company and Cruise prior to
the combination and immaterial adjustments were recorded to conform Cruise's
accounting policies. The results of Cruise included in the consolidated
statements of operations are revenues of $3.7 and $82.1 for January 1998 and the
nine months ended September 30, 1997, respectively and net losses of $1.8 and
$.3 for January 1998 and the nine months ended September 30, 1997, respectively.
2. ACQUISITIONS
BRACC Acquisition - The Company acquired all of the outstanding shares of BRACC
on April 29, 1997, pursuant to an agreement entered into on January 13, 1997.
The cash portion of the purchase price (approximately $275.0) was partially
funded through a stock offering. The Company also issued to Ford Motor Company,
4,500 shares of Series A convertible, non-voting preferred stock, each share of
which was converted into 1,000 shares of the Company's Class A common stock and
sold by Ford Motor Company in a public offering in October 1997. The common
shares underlying the preferred stock had a value of approximately $105.8 for
purposes of determining the purchase price (based on the three day period
beginning on January 12) and $95.2 at the time of issuance. The Company also
entered into the following debt financing transactions concurrently with the
BRACC Acquisition: (i) $165.0 of guaranteed senior notes at a rate of 9.57%
maturing in 2007 (the "guaranteed senior notes"); (ii) $45.0 of convertible
subordinated notes at a rate of 6.85% maturing in 2007; (iii) a variable-rate
commercial paper vehicle financing facility in the amount of $900.0; (iv) a
$500.0 asset-backed note vehicle financing facility maturing in 2001 and 2002,
composed of a senior note in the amount of $472.5 bearing interest at a rate of
7.35% and a subordinated note in the amount of $27.5 bearing interest at a rate
of 7.80%; and (v) a $300.0 five-year secured working capital facility bearing
interest at an initial rate of 1.75% over LIBOR and secured primarily by
accounts receivable, cash and unencumbered vehicles.
7
<PAGE> 8
Acquisition of Premier Car Rental - On July 31, 1997, the Company acquired,
through its wholly owned subsidiary, Premier Car Rental LLC ("Premier"), the
fleet and certain other assets and assumed certain liabilities of Premier Car
Rental, Inc. for approximately $87.2 consisting of $2.0 in cash and the
refinancing of approximately $85.2 of outstanding indebtedness. Premier operates
as its own brand and serves the insurance replacement market.
Acquisition of St. Louis Franchise - In October 1997, the Company purchased the
St. Louis, Missouri Budget franchisee for approximately $9.0, consisting of $1.0
in cash and $8.0 in Class A Common Stock. This franchisee had six locations and
a peak fleet of approximately 1,100 vehicles with revenue of approximately $16.0
in 1996.
Acquisition of Ryder TRS, Inc. - On June 19, 1998, pursuant to the Agreement and
Plan of Merger, as amended, entered into on March 4, 1998, the Company acquired
all of the outstanding stock of Ryder TRS, Inc. ("Ryder TRS"), based in Denver,
Colorado. As consideration for the Ryder TRS acquisition, the Company issued
3,455,206 shares of Class A common stock, paid $125.0 in cash and issued
warrants to purchase Class A common stock, the value of which is capped at
$19.0. In addition, the Company agreed to pay Ryder TRS stockholders a
make-whole payment, the amount of which will depend on the performance of the
Class A common stock following the acquisition, and which the Company expects to
settle in cash (rather than through the issuance of additional stock). The
Company also assumed approximately $522.0 of Ryder TRS's debt. The results of
Ryder TRS are included in the Company's results of operations from June 1, 1998,
at which time the Company effectively took control of Ryder TRS.
Acquisition of Car Dealerships - Effective in June 1998, the Company purchased
three new car dealerships, two located in Florida and one in Indiana. The
dealerships were acquired for cash or a combination of cash and stock
aggregating $16.0 in cash and the issuance of 445,854 shares of Class A common
stock.
If the acquisitions had occurred at the beginning of the periods presented, the
Company's results of operations would be as shown in the following table. These
unaudited pro forma results are not necessarily indicative of the actual results
of operations that would have occurred had the acquisitions actually been made
at the beginning of the respective periods.
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998 1997
---- ----
<S> <C> <C>
(In thousands except per share data)
Operating revenue $2,193,845 $1,888,478
Income before extraordinary item $ 47,820 $ 8,054
EPS - Basic $ 1.41 $ .29
EPS - Diluted $ 1.13 $ .28
</TABLE>
Other 1998 Acquisitions - The Company completed several acquisitions of small
Budget franchises and other related businesses through November 13, 1998. The
franchises were located primarily in Puerto Rico, Canada, Austria, Spain, New
Zealand, Arkansas, Ohio and California. In addition the Company acquired two
small rental car company operations to be operated by Premier. These
acquisitions are not material either individually or in the aggregate and the
Company does not expect them to have a significant impact on its financial
position or full year results of operations.
8
<PAGE> 9
3. CHANGES IN CAPITAL STRUCTURE AND EARLY EXTINGUISHMENT OF DEBT
At a Special Meeting of Stockholders held on May 28, 1998, the stockholders
agreed to increase the authorized number of shares of Class A common stock to
70,000,000, agreed to increase the number of shares available for grant under
the 1994 Incentive Stock Option Plan to 4,500,000 and agreed to increase the
number of shares available under the 1994 Director's Stock Option Plan to
300,000.
Concurrent with the closing of the Ryder TRS acquisition, the Company
implemented a number of changes to its capital structure. These changes included
(i) the amendment and restatement of its existing $300.0 secured revolving
credit facility to increase such facility to $550.0, (ii) the conversion of
$80.0 of convertible subordinated notes into 4,305,814 shares of Class A common
stock, including 319,768 shares issued in lieu of interest payments which the
holders of the convertible subordinated notes will forego as a result of early
conversion, (iii) the redemption of $165.0 of guaranteed senior notes, (iv) the
issuance, by a subsidiary of the Company, of 6,000,000 shares of remarketable
term income deferrable equity securities ("High Tides") which raised
approximately $290.3, net of related fees, (v) the private placement of $1,100.0
of medium term notes (the "TFFC-98 notes"), (vi) tendered for the redemption of
$175.0 of Ryder TRS's outstanding 10% senior subordinated notes and (vii) repaid
approximately $340.0 of Ryder TRS's outstanding commercial paper.
The early extinguishment of the guaranteed senior notes and the Ryder TRS 10%
senior subordinated notes resulted in $53.6 of prepayment premiums and the
write-off of deferred financing fees of $18.3. This has been reflected as an
extraordinary item, net of tax benefits, in the accompanying income statement.
The 319,768 shares issued to induce conversion of the convertible subordinated
notes were recorded at their fair value of $8.9 and reflected in debt
extinguishment costs in the accompanying income statement.
Proceeds from the High Tides were used by the Company's subsidiary to invest in
subordinated debentures of the Company which represents substantially all of the
subsidiary's assets. The Company ultimately used the proceeds to fund the
redemption of the guaranteed senior notes and to partially fund the redemption
of Ryder TRS's 10% senior subordinated notes. The Company has issued a
subordinated guarantee of the subsidiary's obligations under the High Tides. The
High Tides are reflected in the balance sheet as "Company Obligated Mandatorily
Redeemable Securities of Subsidiary" while dividends are reflected in the income
statement as a minority interest captioned as "Distributions on Trust preferred
securities". The High Tides accrue distributions at a rate of 6.25% per annum,
have a liquidation value of $50 per share, are convertible into the Company's
Class A common stock at the rate of 1.5179 shares of Class A common stock for
each High Tide and are subject to mandatory redemption upon the redemption of
the underlying debentures due on June 15, 2028. The Company has the right to
defer interest payments due on the subordinated debentures for up to 20
consecutive quarters which will also cause a deferral of distributions under the
High Tides. During a deferral period, the distributions will accumulate and the
Company has agreed, among other things, not to declare any dividends on its
capital stock (subject to certain exceptions).
The TFFC-98 notes bear interest, payable monthly, at rates ranging from 6.07% to
6.84% and mature at various dates and amounts ranging from January 2001 through
October 2006. The TFFC-98 notes consist of $935.0 in senior notes and $165.0 in
subordinated notes.
4. CHANGES IN ACCOUNTING ESTIMATES
During 1998 the Company recorded changes related to actuarial estimates of its
self-insurance liability. The effect of these adjustments was to increase income
before income taxes by approximately $17.8 and $22.0 in the third quarter and
first nine months of 1998, respectively.
5. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". SFAS No. 130 established new standards for reporting and presenting
comprehensive income and its components in a full set of general purpose
financial statements. The statement is effective for fiscal years beginning
after December 15, 1997. The Company's only adjustment to arrive at
comprehensive income is the foreign currency translation adjustment. Total
comprehensive income was $62.1 and $30.7 for the third quarter of 1998 and 1997,
respectively and $15.1 and $31.8 for the nine-month periods ended September 30,
1998 and 1997, respectively.
9
<PAGE> 10
6. EARNINGS PER SHARE
Basic EPS is calculated by dividing net income by the weighted average number of
common shares outstanding during the period. Diluted EPS was calculated by
dividing net income available to common stockholders after assumed conversion of
dilutive securities by the sum of the weighted average number of common shares
outstanding plus all additional common shares that would have been outstanding
if potentially dilutive common shares had been issued. The following table
reconciles the income before extraordinary item and number of shares utilized in
the EPS calculations.
<TABLE>
<CAPTION>
Three-months ended September 30, Nine-months ended September 30,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
(In thousands)
Income before extraordinary item for basic
EPS $61,276 $30,894 $62,606 $32,156
Effect of interest and distributions on
Trust preferred securities, net of
income taxes 3,586 -- 6,673 --
------- ------- ------- -------
Income before extraordinary item for
diluted EPS $64,862 $30,894 $69,279 $32,156
======= ======= ======= =======
Weighted average number of common shares
used in basic EPS 35,942 21,579 30,765 17,803
Effect of dilutive securities:
Stock options 357 879 634 584
Convertible securities 10,717 10,096 7,547 7,455
------- ------- ------- -------
Weighted average number of common shares
and dilutive potential common shares used
in diluted EPS 47,016 32,554 38,946 25,842
======= ======= ======= =======
</TABLE>
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Prior to the BRACC Acquisition, the Company was the largest BRACC franchisee in
the United States and was one of the largest independent retailers of late model
automobiles in the United States. In 1994, the Company embarked on a strategy to
significantly expand its Budget franchise base and to develop a branded retail
car sales operation within its Budget franchise territories. This strategy both
leveraged management's experience and created certain operating efficiencies
between these complementary businesses.
In connection with the BRACC Acquisition, the Company changed its name to Budget
Group, Inc. In June 1998 the Company acquired Ryder TRS. The accompanying
consolidated financial statements have been restated to reflect the pooling of
interests with Cruise America, Inc. as if the companies had combined at the
beginning of the first period presented. For a further discussion of these
transactions, see Notes 1,2 and 3 to the Company's unaudited consolidated
financial statements herein.
The Company is engaged in the business of the daily rental of vehicles,
including cars, trucks, passenger vans and recreational vehicles (through both
owned and franchised operations) and the sale of new and late model used
vehicles including recreational vehicles.
Revenues primarily consist of:
Vehicle rental - revenue generated from renting vehicles to customers including
revenue from loss or collision damage waivers, insurance sales and other
products provided at rental locations. Retail vehicle sales - revenue generated
from the sales of new and late model used vehicles including recreational
vehicles. Royalty fees and other - fees generated from the Company's licensees
and other non-vehicle rental or sales items.
Expenses primarily consist of:
Direct vehicle and operating - includes wages and related benefits, rent and
concessions paid to airport authorities and costs relating to the operation and
rental of revenue earning vehicles including insurance. Depreciation, vehicle -
depreciation expenses relating to revenue earning vehicles including net gains
or losses on the disposal of such equipment. Cost of retail vehicle sales - cost
of new and late model used vehicles sold at retail or from retail lots including
recreational vehicles. Selling, general and administrative - includes
reservation, advertising, marketing and other related expenses, net of third
party reimbursements, and commissions to travel agents and other third parties.
Amortization and non-vehicle depreciation - includes amortization of goodwill
and other intangibles as well as depreciation of capitalized assets. Interest,
net-interest expense, net of interest earned on restricted cash, relating
primarily to revenue earning vehicle financing.
RESULTS OF OPERATIONS
Third Quarter 1998 Compared with Third Quarter 1997
General Operating Results. Income before extraordinary item for the third
quarter of 1998 increased $30.4 million to $61.3 million from $30.9 million in
1997. The income before extraordinary item per share for the third quarter of
1998 increased to $1.38 per diluted share from $0.99 per diluted share in 1997
due to the increase in earnings partially offset by an increase in the average
number of shares outstanding. Income before income taxes increased $49.9 million
for the third quarter of 1998 to $103.6 million from $53.8 million for 1997.
Ryder TRS contributed approximately $12.9 million in earnings before taxes for
the third quarter of 1998.
Operating Revenues. Vehicle rental revenue increased $221.3 million in the third
quarter of 1998 to $644.7 million from $423.4 million in 1997. This increase was
largely due to the acquisition of Ryder TRS in the second quarter of 1998, which
added a significant number of locations and vehicles to the Company's
operations. Revenue from sales of vehicles increased $102.4 million in the third
quarter of 1998 to $183.3 million from $80.9 million in 1997. This increase was
due to new stores opened by the Company, and the acquisition of three new car
dealerships in June 1998. Royalty fees and other revenues increased $8.0 million
in the third quarter of 1998 to $28.6 million from $20.6 million in 1997. These
revenues largely represent royalty and other fees from the Company's franchisees
and revenue from Ryder TRS's move management service.
11
<PAGE> 12
Operating Expenses. Total operating expenses increased $271.2 million in the
third quarter of 1998 to $699.5 million from $428.4 million in 1997. This
increase was also largely due to the addition of Ryder TRS's operations to the
Company's operations. Direct vehicle and operating expenses reflect a reduction
in insurance reserves of approximately $17.8 million in the third quarter of
1998. This reduction was due to changes in actuarial estimates of losses based
on continued favorable trends in the frequency and severity of accidents as well
as changes in claims handling procedures implemented within the past year. The
cost of retail vehicle sales increased $95.6 million in the third quarter of
1998 to $166.0 million from $70.4 million in 1997. This increase is reflective
of the vehicle sales revenue growth with the new car dealership acquisitions and
new locations opened by the Company. Gross margins from vehicle sales declined
contributing to an operating loss of $4.5 million in the third quarter of 1998
compared to a loss of $.8 million in 1997 for the retail car sales segment. The
Company expects to slow the expansion of vehicle sales locations through
mid-1999 to focus on improving the results of under-performing stores. Selling,
general and administrative expenses in the third quarter of 1998 were favorably
impacted by an increase of $9.0 million from 1997 in third party funding of
promotional programs. Amortization and non-vehicle depreciation expense
increased $7.3 million in the third quarter of 1998 to $16.2 million from $8.9
million in 1997. This increase was largely due to intangibles, including
goodwill, and property and equipment related to the acquisition of Ryder TRS.
Other (Income) Expense, net. Other expense, net of interest income, increased
$10.7 million in the third quarter of 1998 to $53.4 million from $42.7 million
in 1997. This increase was due to the financing of fleet and other borrowings
related to the acquisition of Ryder TRS, net of investment income due to the
increase in cash and restricted cash, and the debt extinguishment costs
previously mentioned.
Recent Revenue and Expense Trends. Volume levels in 1998 as compared to the
prior year for BRACC car rental (on a same market basis) has shown a declining
trend through the year. Growth over the prior period in the first quarter was
approximately 11% and has declined steadily to approximately 2% in the third
quarter period. This trend appears to be continuing into the fourth quarter. The
Company has continued to focus on maintaining pricing which has allowed the
average daily revenue per day to generally average 1% to 3% above the prior year
(on a same market basis) throughout the year to date period. However, this
volume trend has negatively impacted the Company's ability to maintain targeted
fleet utilization levels, which have generally remained slightly (within 1
percentage point) below prior year levels. The Company is formulating a response
to these trends and is actively reviewing its distribution network across all
brands to seek additional synergies and fleet and other asset utilization
opportunities.
Year to Date September 30, 1998 versus September 30, 1997
General Operating Results. Income before extraordinary item for the first nine
months of 1998 increased $30.5 million to $62.6 million from $32.2 million in
1997. The income before extraordinary item per share for the first nine months
of 1998 increased to $1.78 per diluted share from $1.38 per diluted share in
1997 due to the increase in earnings partially offset by an increase in the
average number of shares outstanding. Income before income taxes increased $48.4
million for the first nine months of 1998 to $105.2 million from $56.7 million
for 1997. Income before income taxes reflects debt extinguishment costs of $9.5
million in 1998 largely for Class A common stock issued to induce conversion of
$80.0 million of convertible subordinated notes. The Company also recognized an
extraordinary loss of $45.3 million, net of income tax benefits, in 1998 related
to the early extinguishment of guaranteed senior notes and Ryder TRS's 10%
senior subordinated notes. See Note 3 to the Company's unaudited consolidated
financial statements. Ryder TRS contributed approximately $19.1 million in
earnings before taxes for the four months ended September 30, 1998.
Operating Revenues. Vehicle rental revenue increased $697.7 million in the first
nine months of 1998 to $1,434.8 million from $737.1 million in 1997. This
increase was largely due to the acquisition of BRACC in the second quarter of
1997 and the acquisition of Ryder TRS in the second quarter of 1998, which added
a significant number of locations and vehicles to the Company's operations.
Revenue from sales of vehicles increased $219.5 million in the first nine months
of 1998 to $421.4 million from $201.9 million in 1997. This increase was due to
the addition of the car sales operations of BRACC, new stores opened by the
Company, and the acquisition of three new car dealerships in June 1998. Royalty
fees and other revenues increased $36.4 million in the first nine months of 1998
to $70.8 million from $34.4 million in 1997. These revenues largely represent
royalty and other fees from the Company's franchisees as a result of the BRACC
Acquisition and revenue from Ryder TRS's move management service.
Also see Recent Revenue and Expense Trends under the Third Quarter 1998 Compared
to the Third Quarter 1997 discussion.
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Operating Expenses. Total operating expenses increased $835.8 million in the
first nine months of 1998 to $1,674.8 million from $839.0 million in 1997. This
increase was also largely due to the addition of BRACC's and Ryder TRS's
operations to the Company's operations. Direct vehicle and operating expenses
reflect a reduction in insurance reserves of approximately $22.0 million in the
first nine months of 1998. This reduction was due to changes in actuarial
estimates of losses based on continued favorable trends in the frequency and
severity of accidents as well as changes in claims handling procedures
implemented within the past year. The cost of retail vehicle sales increased
$203.5 million in the first nine months of 1998 to $377.2 million from $173.7
million in 1997. This increase is reflective of the vehicle sales revenue growth
with the addition of BRACC car sales locations, the new car dealership
acquisitions and new locations opened by the Company. Gross margins from vehicle
sales declined contributing to increased operating losses of $7.1 million in the
first nine months of 1998 from $.2 million in 1997 for the retail car sales
segment. The Company expects to slow the expansion of vehicle sales locations
through mid-1999 to focus on improving the results of under-performing stores.
Selling, general and administrative expenses in the first nine months of 1998
were favorably impacted by an increase of $10.6 million from 1997 in third party
funding of promotional programs. Amortization and non-vehicle depreciation
expense increased $19.2 million in the first nine months of 1998 to $36.9
million from $17.7 million in 1997. This increase was largely due to
intangibles, including goodwill, and property and equipment related to the
acquisitions of BRACC and Ryder TRS.
Other (Income) Expense, net. Other expense, net of interest income, increased
$69.3 million in the first nine months of 1998 to $146.9 million from $77.6
million in 1997. This increase was due to the financing of fleet and other
borrowings related to the acquisitions of BRACC and Ryder TRS, net of investment
income due to the increase in cash and restricted cash, and the debt
extinguishment costs previously mentioned.
Provision for income taxes. The overall year to date tax provision (including
the extraordinary items) reflects the expected overall full year effective rate
of 38% which is higher than the statutory rate due to the effects of
non-deductible intangible amortization and the impact of state and local income
taxes net of the federal benefit. Also impacting the rate is the effect of the
distributions on trust preferred securities shown below the provision at its
gross amount while the tax benefit is included in the provision.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's operations have been funded by cash provided from
operating activities and by financing provided by banks, automobile
manufacturers' captive finance companies, leasing companies and asset-backed
notes. The material terms of the Company's financing facilities are described
below. The Company's existing indebtedness at September 30, 1998 has interest
rates ranging from 5.58% to 11.20%. The Company intends to fund its operations
through asset-backed notes and revolving credit facilities with financial
institutions for fleet financing and working capital, as well as through other
similar facilities and through placements or offerings of additional debt and/or
equity securities.
Recent Debt Placements and Retirements
Concurrent with the closing of the Ryder TRS acquisition, the Company
implemented a number of changes to its capital structure. These changes included
(i) the amendment and restatement of its existing $300.0 million secured
revolving credit facility to increase such facility to $550.0 million, (ii) the
conversion of $80.0 million of convertible subordinated notes, (iii) the
redemption of $165.0 million of guaranteed senior notes, (iv) the issuance, by a
subsidiary of the Company, of 6,000,000 shares of High Tides which raised
approximately $290.3 million, net of related fees, (v) the private placement of
$1.1 billion of TFFC-98 notes, (vi) tendered for the redemption of $175.0
million of Ryder TRS's outstanding 10% senior subordinated notes and (vii)
repaid approximately $340.0 million of Ryder TRS's outstanding commercial paper.
The redemptions (early extinguishments) resulted in charges totaling $45.3
million, after income tax benefits, and the conversion premium to holders of the
convertible subordinated notes resulted in charges of $9.5 million. See Note 3
to the Company's unaudited consolidated financial statements.
13
<PAGE> 14
Fleet Financing Facilities
At September 30, 1998, the Company had borrowed $2.4 billion under asset-backed
medium term notes ("MTN notes") and $800 million under a commercial paper ("CP")
facility (collectively "Fleet notes"). The MTN notes are comprised of notes
issued in August 1994 ("TFFC-94 notes"), notes assumed in the acquisition of a
franchisee in October 1995 ("OPCO notes"), notes issued in December 1996
(TFFC-96 notes"), notes issued in April 1997 ("TFFC-97 notes"), notes assumed in
the BRACC Acquisition ("BFFC-94A notes"), and notes issued in conjunction with
the acquisition of Ryder TRS (TFFC-98 notes"). The Fleet notes are utilized
largely to finance vehicles eligible for certain manufacturers' vehicle
repurchase programs and other allowable used cars and trucks. Proceeds from the
Fleet notes that are temporarily unutilized for vehicle financing are maintained
in restricted cash accounts with the trustees. The Fleet notes are
collateralized by the secured vehicles and the restricted cash accounts.
Interest rates on the Fleet notes at September 30, 1998 ranged from 5.58% to
7.80%.
The Company's other vehicle obligations consist of outstanding lines of credit
to purchase rental fleet and retail car sales inventory. Borrowings under
collateralized available lines of credit at September 30, 1998 consist of $188.3
million for rental vehicles and $69.6 million for retail car sales inventory
with maturity dates through January 1999. Vehicle obligations are collateralized
by revenue earning vehicles financed under these credit facilities and proceeds
from the sale, lease or rental of rental vehicles and retail car sales
inventory. Interest payments for rental fleet facilities are due monthly at
annual interest rates that ranged from 7.70% to 11.20% at September 30, 1998.
Management expects that vehicle obligations will generally be repaid within one
year from the balance sheet date with proceeds received from either the
repurchase of the vehicles by the manufacturers in accordance with the terms of
the manufacturers' vehicle repurchase programs or from the sales of the
vehicles.
Medium Term Notes
The $1.1 billion TFFC-98 notes were entered into concurrently with the
acquisition of Ryder TRS and bear interest at fixed rates ranging from 6.07% to
6.84%. The TFFC-98 notes mature in from three to seven years. Proceeds from the
notes were used to refinance Ryder TRS's commercial paper and to finance certain
BRACC vehicles. Unused proceeds are reflected in restricted cash on the balance
sheet at September 30, 1998.
The $500.0 million TFFC-97 notes and CP facility were entered into concurrently
with the BRACC Acquisition. As of September 30, 1998, the CP has various
interest rates, which ranged between 5.58% and 5.60%. The TFFC-97 note facility
requires monthly interest payments at an annual rate ranging from 7.35% to
7.80%.
The TFFC-94 notes and TFFC-96 notes totaled $281.6 million with interest rates
ranging from 6.44% to 7.10%. The OPCO notes were repaid upon their maturity in
October 1998.
The Company has continued to utilize borrowings under the BFFC-94A notes to fund
its fleet. The BFFC-94A notes consist of $500.0 million of senior notes
requiring monthly interest payments at LIBOR plus 0.50% (6.17% at September 30,
1998).
High Tides
The Company issued $300.0 million of High Tides and received approximately
$290.3 million in net proceeds. These funds were used to redeem the guaranteed
senior notes and to partially fund the redemption of Ryder TRS's 10% senior
subordinated notes which occurred in July 1998. The High Tides are subject to
mandatory redemption upon the redemption of the underlying debentures due on
June 15, 2028. The Company has the right to defer interest payments due on the
subordinated debentures for up to 20 consecutive quarters which will also cause
a deferral of distributions under the High Tides.
Working Capital Facility
Concurrent with the acquisition of Ryder TRS, the Company entered into an
amended and restated secured credit facility to increase its size from $300.0
million to $550.0 million. This facility requires monthly interest payments on
the outstanding balance at a rate based on LIBOR plus 1.75% (or 7.42% at
September 30, 1998) and expires in 2003. The facility is secured primarily by
cash, accounts receivable and vehicles and is subject to certain covenants, the
most restrictive of which require the Company to maintain certain financial
ratios and minimum tangible net worth and restrict the payment of cash
dividends. At September 30, 1998, the Company had $387.2 million in letters of
credit outstanding under this facility.
14
<PAGE> 15
CHANGE IN FINANCIAL CONDITION
Total assets increased $1,489.2 million from $3,689.9 million at December 31,
1997 to $5,179.1 million at September 30, 1998. This increase, largely revenue
earning vehicles of $952.8 million and intangibles of $310.4 million, resulted
primarily from the acquisition of Ryder TRS and seasonal increases in revenue
earning vehicles. Restricted cash increased $85.9 million largely as a result of
issuing the previously mentioned medium term notes. Property and equipment, net
increased by $65.1 million due to investments in vehicle rental and sales
locations and the acquisition of Ryder TRS. This investment activity is expected
to slow in the next quarter and first half of 1999. Also see Note 2 to the
unaudited consolidated financial statements.
Total liabilities increased by $938.1 million from $3,231.0 million at December
31, 1997 to $4,169.1 million at September 30, 1998. This increase, largely notes
payable of $829.1 million, resulted primarily from the acquisition of Ryder TRS
and the issuance of the medium term notes. The Company obligated mandatorily
redeemable securities of subsidiary represent the High Tides issued in June
1998. Also see the Consolidated Statement of Changes in Stockholders' Equity and
Note 3 to the unaudited consolidated financial statements.
INFLATION
The increased acquisition cost of vehicles is the primary inflationary factor
affecting the Company's operations. Many of the Company's other operating
expenses are inflation sensitive, with increases in inflation generally
resulting in increased costs of operations. The effect of inflation-driven cost
increases on the Company's overall operating costs is not expected to be greater
for the Company than for its competitors.
SEASONALITY
Generally, in the vehicle rental industry, revenue increases in the spring and
summer months due to the overall increase in business and leisure travel and
moving activity during this season. The Company increases the size of its fleet
and work force in the Spring and Summer to accommodate increased rental activity
during these periods and decreases its fleet and work force in the Fall and
Winter. However, many of the Company's operating expenses (such as rent,
insurance and administrative personnel) are fixed and cannot be reduced during
the Fall and Winter. The retail vehicle sales business is also subject to
seasonal effects, with lower sales during the Winter months.
YEAR 2000 ISSUE
The Company has assessed and continues to assess the impact of the year 2000
("Y2K") on its reporting systems and operations (the "Y2K Issue"). The Y2K Issue
exists because many computer systems and applications and non-computer systems
that utilize computer technology currently use two-digit date fields to
designate a year. As the century date occurs, certain date sensitive systems
will recognize the year 2000 as the year 1900 or may not recognize the date at
all. This inability to properly treat or recognize the year 2000 may cause
certain systems to process critical information incorrectly.
During 1997, the Company recognized approximately $2.2 million in expenses to
modify existing computer systems and applications and estimates that an
aggregate of approximately $6.7 million will be incurred in 1998 and 1999
specifically for Y2K modification. Approximately $2.2 million was spent in 1998
through September 30. The most significant systems undergoing or to undergo
modifications are the reservation and rental transaction processing systems. A
failure in these systems could cause significant disruption in customer service
levels and therefore materially impact the Company's operating results and
financial condition. The Company is using both internal and external resources
and expects to complete all major modification efforts by mid-1999. These
efforts have not significantly hampered the Company's ongoing system development
or system upgrade activities.
The Company is assessing the impact of the Y2K Issue on the ability of its
significant suppliers and vendors to maintain adequate service levels. The most
critical suppliers and vendors are in the vehicle manufacturing,
telecommunications, fuel supply and banking/financing industries. A failure on
the part of these suppliers and vendors or their products could cause
significant disruption in operations and therefore materially impact the
Company's operating results and financial condition. The Company believes that
the computer technology embedded in the vehicles it has in fleet, or expects to
purchase, is Y2K ready and expects to complete the entire assessment by
mid-1999.
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<PAGE> 16
There can be no assurance that the critical third party suppliers upon which the
Company relies will be successful in taking corrective action in a timely
manner. The Company is developing contingency plans with respect to certain
areas which are intended to allow the Company to continue to operate in the
event of a Y2K failure. The contingency plans will include performing certain
processes manually, repairing affected systems and changing suppliers and
vendors as necessary. These contingency plans may not be successful in avoiding
the disruption of service particularly in the reservation and vehicle rental
processes.
ENVIRONMENTAL MATTERS
The Company has assessed and continues to assess the impact of environmental
remediation efforts on its operations. The Company's exposure largely relates to
the clean-up and replacement of underground gasoline storage tanks. During 1997,
the Company recognized approximately $0.7 million in expenses related to
remediation efforts and estimates that an aggregate of approximately $3.3
million will be incurred in 1998 and 1999. Approximately $1.2 million was spent
in 1998 through September 30. Based on past experience, management expects these
estimates will be sufficient to satisfy anticipated costs of known remediation
requirements. However, due to factors such as continuing changes in the
environmental laws and regulatory requirements, the availability and application
of technology, the identification of presently unknown remediation sites and
changes in the extent of expected remediation efforts, estimated costs for
future environmental compliance and remediation are subject to uncertainty and
it is difficult to predict the amount or timing of future remediation
requirements.
FORWARD LOOKING STATEMENTS
This Form 10-Q and other statements issued or made from time to time by Budget
Group, Inc. or its representatives contain statements which may constitute
"forward looking statements" under the Private Securities Litigation Act of
1995. Those statements include statements regarding the intent, belief or
current expectations of Budget Group, Inc. and members of its management team,
as well as the assumptions on which such statements are based. Prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties and that
actual results may differ materially from those contemplated by such
forward-looking statements. Important factors currently known to management that
could cause actual results to differ materially from those in forward-looking
statements are set forth in the safe harbor compliance statement for
forward-looking statements included as Exhibit 99.1 and Annex A to the Company's
Annual Report on Form 10-K, and that statement is hereby incorporated by
reference in this Form 10-Q. The Company undertakes no obligation to update or
revise forward-looking statements to reflect changed assumptions, the occurrence
of unanticipated events or changes to future operating results over time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
16
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The following discussion updates certain legal proceedings previously
reported by the Company:
The Company terminated the franchise agreement of its franchisee for
Germany based on alleged violations of provisions in the underlying
franchise agreement and ceased to provide services, such as
reservations and credit card processing, effective as of October 23,
1998. Reservations that would have been transmitted to and serviced by
the Company's franchisee in Germany are now being handled, on an
interim basis, by National Car Rental locations in Germany, pursuant
to an agreement between the Company and National Car Rental. The
franchise termination is being contested by the franchisee. The
Company intends to replace the current German franchisee with a new
franchisee and/or company-owned locations when the pending legal
issues are resolved. Until such time, the Company may experience an
adverse effect on business in, and originating from, Germany.
Mr. Mirkin, a director of the Company, has been the President and Chief
Executive Officer and a general partner of Budget Rent a Car of
Southern California, a general partnership ("SoCal"), since 1985. SoCal
has a Budget car rental franchise from BRACC for all of Southern
California. The Company operates as a subfranchisee of SoCal at many
locations in Southern California. SoCal's declaratory judgment action,
which was filed on October 14, 1997, in the Superior Court of Los
Angeles seeking a determination as to whether the Company must pay
royalty fees on the rental of pickup vehicles to SoCal, was settled in
July 1998, by the agreement of the parties to split royalty fee revenue
on the rental of pickup vehicles in Southern California.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 3.1 Amended and Restated Certificate of Incorporation
Exhibit 27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
In a Form 8-K/A dated June 19, 1998 and filed on July 2, 1998, the
Company filed under Item 7(b), pro forma consolidated financial
statements reflecting the Company's acquisition of Ryder TRS, Inc.
In a Form 8-K dated July 2, 1998 and filed July 2, 1998, the Company
filed under Item 5, consolidated financial statements and related
Management's Discussion and Analysis of Financial Condition and Results
of Operations for the years ended December 31, 1995, 1996 and 1997,
reflecting the pooled operations of the Company including Cruise
America, Inc.
In a Form 8-K/A dated June 19, 1998 and filed July 22, 1998, the
Company filed under Item 7(a) and (c), financial information of the
business acquired and exhibits regarding the Company's acquisition of
Ryder TRS, Inc.
In a Form 8-K dated June 19, 1998 and filed September 4, 1998, the
Company filed under Item 7, additional pro forma consolidated financial
statements reflecting the Company's acquisition of Ryder TRS, Inc.
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<PAGE> 18
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BUDGET GROUP, INC.
------------------
(Registrant)
Dated: November 13, 1998 By: /s/ Michael Clauer
-------------------
Michael Clauer
Senior Vice President
Chief Financial Officer
Dated: November 13, 1998 By: /s/ Thomas L. Kram
--------------------
Thomas L. Kram
Vice President, Controller
(Principal Accounting Officer)
18
<PAGE> 1
EXHIBIT 3.1
AMENDED AND
RESTATED
CERTIFICATE OF INCORPORATION
OF
BUDGET GROUP, INC.
FIRST: Name. The name of the corporation is Budget Group,
Inc. (the "Corporation").
SECOND: Registered Office and Agent. The address of the
registered office of the Corporation in the State of Delaware is 1209 Orange
Street, Wilmington, New Castle County, Delaware 19801. The name of the
registered agent at such address is The Corporation Trust Company.
THIRD: Purposes. The purposes for which the Corporation is
formed are to engage in any lawful act or activity for which corporations may be
organized under the Delaware General Corporation Law and to possess and exercise
all of the powers and privileges granted by such law and any other law of
Delaware.
FOURTH: A. Authorized Capital
The Corporation is authorized to issue 73,000,000 shares of
capital stock, consisting of 72,750,000 shares of common stock, par value $.01
per share (the "Common Stock"), and 250,000 shares of preferred stock, par value
$.01 per share (the "Preferred Stock"). Of the shares of Common Stock,
70,000,000
<PAGE> 2
shares shall be designated "Budget Class A Common Stock" and 2,750,000 shares
shall be designated "Budget Class B Common Stock." The rights, preferences,
privileges and restrictions granted and imposed upon the Preferred Stock, Class
A Common Stock and Class B Common Stock are set out hereinbelow.
B. Preferred Stock
The Preferred Stock may be issued from time to time in one or
more series with such designations, preferences, and relative participating,
optional or other special rights and qualifications, limitations or restrictions
adopted by the Board of Directors providing for the issuance of such Preferred
Stock or series thereof; and the Board of Directors is hereby expressly granted
the authority to fix by resolution or resolutions such designations and powers,
preferences and rights and such qualifications, limitations or restrictions
which are permitted by Section 151 of the General Corporation Law of Delaware,
as amended from time to time, in respect of any class or classes of stock or any
series of any class of stock of the Corporation that may be desired, including,
but not by way of limitation, the number, distinctive name and serial
designation of such class or series; any dividends payable and the rate, time
for and priority of payment thereof; whether such dividends shall be cumulative
or not; any participating or other special rights with respect to the payment of
dividends; any conversion, exchange, purchase or other privilege to acquire
shares of any other class or series of the Preferred Stock or Common Stock of
the Corporation; any
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voting power; and any redemption and liquidation price or preference.
C. Class A Common Stock.
The shares of Class A Common Stock and shares of Class B Common
Stock shall be identical in all respects and shall have equal rights and
privileges except as expressly set forth in this paragraph C and in paragraph D
of this Article FOURTH. Upon dissolution of the Corporation, shares of Class A
Common Stock and Class B Common Stock are entitled to share ratably in the
assets thereof that may be available for distribution after satisfaction of
creditors and the payment of any liquidation preference of any outstanding
shares of Preferred Stock.
1. Dividends.
(a) Subject to the rights of the holders of the Preferred Stock,
if any, such dividends or distributions as may be determined by the Board of
Directors of the Corporation from time to time may be declared and paid or made
upon shares of Class A Common Stock out of any source at the time lawfully
available for the payment of dividends; provided that (subject to subparagraphs
(b) and (c) below of this paragraph C.1.) identical dividends or distributions
are declared and paid concurrently on shares of Class B Common Stock. If
dividends or distributions are declared and paid upon shares of Class B Common
Stock (subject to subparagraphs (b) and (c) below of this paragraph C.1.),
identical dividends or distributions shall be declared and paid concurrently on
shares of Class A Common Stock.
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<PAGE> 4
(b) No dividend may be declared and paid in shares of Class A
Common Stock unless (i) the dividend is payable only to holders of shares of
Class A Common Stock and (ii) a dividend payable to holders of Class B Common
Stock is declared and paid concurrently in the same number of shares of Class B
Common Stock per outstanding share of Class B Common Stock as the number of
shares of Class A Common Stock declared and paid per outstanding share of Class
A Common Stock.
(c) No dividend may be declared and paid in Class B Common Stock
unless (i) the dividend is payable only to holders of Class B Common Stock and
(ii) a dividend payable to holders of shares of Class A Common Stock is
declared and paid concurrently in the same number of shares of Class A Common
Stock per outstanding share of Class A Common Stock as the number of shares of
Class B Common Stock declared and paid per outstanding share of Class B Common
Stock.
2. Stock Combinations and Subdivisions. Shares of Class A Common
Stock shall not be combined or subdivided unless at the same time there is a
proportionate combination or subdivision of shares of Class B Common Stock. If
shares of Class B Common Stock are combined or subdivided, a proportionate
combination or subdivision of shares of Class A Common Stock shall be made at
the same time.
3. Voting. Except as may otherwise be required by law, the holders
of shares of Class A Common Stock shall vote together with the holders of Class
B Common Stock as a
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<PAGE> 5
single class, provided that the holders of Class A Common Stock will have one
(1) vote per share and the holders of Class B Common Stock shall have ten (10)
votes per share.
D. Class B Common Stock.
1. Dividends and Distributions. Subject to the provisions of
paragraph C.1. of this Article FOURTH, dividends and distributions may be
declared and paid or made upon shares of Class B Common Stock as may be
permitted by applicable law.
2. Stock Combinations and Subdivisions. Subject to the provisions of
paragraph C.2. of this Article FOURTH, shares of Class B Common Stock may be
combined or subdivided in such manner as may be permitted by applicable law.
3. Voting. Subject to the provisions of paragraph C.3. of this
Article FOURTH, shares of Class B Common Stock shall have ten (10) votes per
share on all matters that may be submitted to a vote or consent of the
shareholders.
4. Conversion.
(a) Each holder of record of shares of Class B Common Stock may,
in such holder's sole discretion and at such holder's option, convert any whole
number or all of such holder's shares of Class B Common Stock into fully paid
and nonassessable shares of Class A Common Stock at the rate of one (1) share
of Class A Common Stock for each share of Class B Common Stock surrendered for
conversion. Any such conversion may be effected by any holder of Class B Common
Stock by surrendering such holder's certificate or certificates for the shares
of Class B
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<PAGE> 6
Common Stock to be converted, duly endorsed, at the office of the Corporation
or any transfer agent for Class B Common Stock, together with a written notice
to the Corporation at such office that such holder elects to convert all or a
specified number of shares of Class B Common Stock and stating the name or
names in which such holder desires the certificate or certificates for such
shares of Class A Common Stock to be issued. Promptly thereafter, unless
otherwise prohibited by law, the Corporation shall issue and deliver to such
holder or such holder's nominee or nominees, a certificate or certificates for
the number of shares of Class A Common Stock to which such holder shall be
entitled as aforesaid. Such conversion shall be deemed to have been made at
the close of business on the day of such surrender and the person or persons
entitled to receive shares of Class A Common Stock issuable on such conversion
shall be treated for all purposes as the record holder or holders of such
shares of Class A Common Stock on that date.
(b) Each share of Class B Common Stock shall automatically be
converted into one share of Class A Common Stock in the event that the
beneficial or record ownership of such share of Class B Common Stock shall be
transferred (including, without limitation, by way of gift, settlement, will or
intestacy) to any person or entity that is not then a record or beneficial
holder of shares of Class B Common Stock. A pledge of shares of Class B Common
Stock as security for an obligation of a holder of such shares of Class B
Common Stock shall not be
- 6 -
<PAGE> 7
considered a transfer for purposes of this paragraph D.4(b), unless and until
beneficial ownership of such shares is transferred to the pledgeholder. The
conversion into Class A Common Stock shall be deemed to have occurred (whether
or not certificates representing such shares are surrendered) as of the close of
business on the date of transfer, and the person or persons entitled to receive
shares of Class A Common Stock issuable on such conversion shall be treated for
all purposes as the record holder or holders of such shares of Class A Common
Stock on that date.
(c) Before any shares of Class A Common Stock shall be delivered
upon conversion, the holder of shares of Class B Common Stock whose shares have
been converted into shares of Class A Common Stock shall deliver the
certificate(s) representing such shares to the Corporation or its duly
authorized agent (or if such certificates have been lost stolen or destroyed,
such holder shall execute an agreement satisfactory to the Corporation to
indemnify the Corporation from any loss incurred by it in connection with such
conversion), specifying the place where the Common Stock issued in conversion
thereof shall be sent. The endorsement of the share certificate shall be in
form satisfactory to the Corporation or such agent, as the case may be.
(d) The number of shares of Class A Common Stock into which the
shares of Class B Common Stock may be converted shall be subject to adjustment
from time to time in the event of
- 7 -
<PAGE> 8
any capital reorganization, reclassification of stock of the Corporation,
consolidation or merger of the Corporation with or into another corporation, or
sale or conveyance of all or substantially all of the assets of the Corporation
to another corporation or other entity or person. Each share of Class B Common
Stock shall thereafter be convertible into such kind and amount of securities
or other assets, or both, as are issuable or distributable in respect of each
share of Class A Common Stock. In any such case, appropriate adjustments shall
be made by the Board of Directors of the Corporation in the application of the
provisions herein set forth with respect to the rights and interests thereafter
of the holders of Class B Common Stock to the end that the provisions set forth
herein shall thereafter be applicable, as nearly as reasonably may be, in
relation to any securities or other assets thereafter deliverable on conversion
of shares of Class B Common Stock.
(e) The Corporation shall, at all times, reserve and keep available out
of the authorized and unissued shares of Class A Common Stock, solely for the
purpose of effecting the conversion of the outstanding shares of Class B Common
Stock, such number of shares of Class A Common Stock as shall from time to time
be sufficient to effect conversion of all outstanding shares of Class B Common
Stock and if, at any time, the number of authorized and unissued shares of Class
A Common Stock shall not be sufficient to effect conversion of the then
outstanding shares of Class B Common Stock, the Corporation shall take such
- 8 -
<PAGE> 9
corporate action as may be necessary to increase the number of authorized
and unissued shares of Class A Common Stock to such number as shall be
sufficient for such purposes.
(f) The Corporation shall pay any and all issue and other taxes that
may be payable in respect of any issue or delivery of shares of Class A Common
Stock on conversion of shares of Class B Common Stock pursuant hereto. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of the issue of any shares of Class A Common Stock in a name other
than that in which the shares of Class B Common Stock so converted was
registered, and no such issue or delivery shall be made unless and until the
person requesting such issue has paid to the Corporation the amount of any such
tax, or has established, to the satisfaction of the Corporation, that such tax
has been paid.
(g) If any shares of capital stock to be reserved for the purpose of
conversion of shares of Class B Common Stock require registration or listing
with, or approval of, or inclusion in any governmental authority, stock exchange
or other regulatory body, or any automated quotation system of a national
securities association, under any federal or state law or regulation or
otherwise, before such shares may be validly issued or delivered upon
conversion, the Corporation will in good faith and as expeditiously as possible
endeavor to secure such registration, listing, approval or inclusion, as the
case may be.
- 9 -
<PAGE> 10
(h) All shares of Class A Common Stock which may be issued upon
conversion of shares of Class B Common Stock will upon issuance by the
Corporation be validly issued, fully paid and non-assessable and free from all
taxes, liens and charges with respect to the issuance thereof.
(i) All certificates representing shares of Class B Common
Stock surrendered for conversion shall be appropriately canceled on the books
of the Corporation, and the number of authorized shares of Class B Common
Stock shall be reduced by the number of shares so converted.
(j) In case the Corporation shall take a record of the holders
of its shares of Class A Common Stock for the purpose of:
(1) entitling them to receive a dividend, or any other
distribution, payable otherwise than in cash; or
(2) entitling them to receive rights to acquire any
security issued by the Corporation; or
(3) any proposed reclassification, reorganization,
consolidation, merger, conveyance or voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, and in any such case, the Corporation shall cause to be mailed to the
holders of record of the outstanding shares of Class B Common Stock at least
ten (10) days prior to the date hereinafter specified, a notice stating the
date on which (x) a
- 10 -
<PAGE> 11
record is to be taken for the purpose of such dividend, distribution or rights,
or (y) such reclassification, reorganization, consolidation, merger,
conveyance, dissolution, liquidation or winding up is to take place and the
day, if any is to be fixed, as of which record holders of shares of Class A
Common Stock shall be entitled to exchange their shares of Class A Common Stock
for securities or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, dissolution, liquidation or
winding up.
(k) So long as any shares of Class B Common Stock are
outstanding, the Corporation shall not, without first obtaining the approval by
vote or written consent, in the manner provided by law, of the holders of (i)
at least a majority of the total number of shares of Class A Common Stock
outstanding, voting separately as a class, and (ii) at least sixty percent
(60%) of the total number of shares of Class B Common Stock outstanding, voting
separately as a class, (A) alter or change the rights or privileges of shares
of the Common Stock; (B) amend any provision of Section C or this Section D of
this Article FOURTH; or (C) effect any reclassification or recapitalization of
the Corporation's outstanding Common Stock.
FIFTH: Additional Powers of Board of Directors. The Board of
Directors shall have power, without shareholder action, to make by-laws for the
Corporation and to amend, alter or repeal any by-laws.
- 11 -
<PAGE> 12
SIXTH: Voting by Ballot. Elections of Directors need not be by
ballot unless the by-laws of the Corporation provide otherwise.
SEVENTH: Limited Liability of Directors. The directors of the
Corporation shall be entitled to the full benefits of all limitations on the
liability of directors generally that are now or hereafter become available
under the Delaware General Corporation Law. Without limiting the generality of
the foregoing, no director of the Corporation shall be liable to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability: (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for any acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the Delaware General Corporation Law or (iv)
for any transaction from which the director derived an improper personal
benefit. Any repeal or modification of this Article SEVENTH shall be prospective
only, and shall not affect, to the detriment of any director, any limitation on
the personal liability of a director of the Corporation existing at the time of
such repeal or modification.
EIGHTH: Classified Board of Directors. The directors shall be
divided into three classes, designated Class I, Class II and Class III. Each
Class shall consist, as nearly as may be possible, of one-third of the total
number of directors constituting the entire Board of Directors. The term of the
initial Class I Directors shall terminate on the date of the 2001 Annual Meeting
of Stockholders; the term of the initial Class II Directors shall terminate on
the date of the 2000 Annual Meeting of Stockholders; and the term of the initial
Class III Directors shall terminate on the date of the 1999 Annual Meeting of
Stockholders. At each Annual Meeting of Stockholders beginning in 1999,
successors to the Class of directors whose term expires at that Annual Meeting
of Stockholders shall be elected for a three-year term. If the number of
directors is changed, any increase or decrease in directorship shall be
apportioned among the Classes so as to maintain the number of directors in each
Class as nearly equal as possible, and any additional directors of any Class
elected to fill a vacancy resulting from an increase in such class shall hold
office only until the next election of directors of that Class by the
stockholders of the Corporation, but in no case will a decrease in the number of
directors shorten the term of any incumbent director. Directors shall hold
office until the Annual Meeting of Stockholders for the year in which their
terms expire and until their successors shall be duly elected and qualified,
subject, however, to prior death, resignation, retirement, disqualification or
removal from office.
Notwithstanding the foregoing, whenever the holders of any one or more classes
or series of Preferred Stock issued by the corporation shall have the right,
voting separately by class or series, to elect directors at an Annual or
Special Meeting of Stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of this Certificate of Incorporation, or the resolution or resolutions
adopted by the board of directors creating such class or series, as the case
may be, applicable thereto, and such directors so elected shall not be divided
into classes pursuant to this Article EIGHTH unless expressly provided by such
terms.
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 487,122
<SECURITIES> 0
<RECEIVABLES> 344,818
<ALLOWANCES> 0 <F1>
<INVENTORY> 3,128,618
<CURRENT-ASSETS> 3,960,558
<PP&E> 212,650
<DEPRECIATION> 0 <F2>
<TOTAL-ASSETS> 5,179,144
<CURRENT-LIABILITIES> 653,789
<BONDS> 3,515,337
291,085
0
<COMMON> 360
<OTHER-SE> 718,573
<TOTAL-LIABILITY-AND-EQUITY> 5,179,144
<SALES> 1,926,906
<TOTAL-REVENUES> 1,926,906
<CGS> 377,188
<TOTAL-COSTS> 1,297,650
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 146,909
<INCOME-PRETAX> 105,159
<INCOME-TAX> 37,211
<INCOME-CONTINUING> 62,606
<DISCONTINUED> 0
<EXTRAORDINARY> (45,296)
<CHANGES> 0
<NET-INCOME> 17,310
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.62
<FN>
<F1>RECEIVABLES ARE REPORTED NET OF ALLOWANCES FOR DOUBTFUL ACCOUNTS ON THE
BALANCE SHEET
<F2>PROPERTY, PLANT & EQUIPMENT IS REPORTED NET OF ACCUMULATED DEPRECIATION ON
THE BALANCE SHEET
</FN>
</TABLE>
