<PAGE> 1
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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 MARCH 31, 1999
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)
<TABLE>
<S> <C>
DELAWARE 59-3227576
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
125 BASIN STREET, SUITE 210, DAYTONA BEACH, FL 32114
(Address of principal executive offices)
(904) 238-7035
(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 [ ]
35,901,621 shares of common stock were outstanding as of May 11, 1999,
comprised of 33,965,021 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 16.
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<PAGE> 2
<TABLE>
INDEX
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998..................................... 3
Consolidated Statements of Operations for the Three-Month
Periods Ended March 31, 1999 and 1998 (unaudited)......... 4
Consolidated Statement of Changes in Stockholders' Equity
for the Three-Month Period Ended March 31, 1999
(unaudited)............................................... 5
Consolidated Statements of Cash Flows for the Three-Month
Periods Ended March 31, 1999 and 1998 (unaudited)......... 6
Notes to Unaudited Consolidated Financial Statements........ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10
Item 3. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 15
PART II. Other Information
Item 1. Legal Proceedings........................................... 16
Item 2. Changes in Securities and Use of Proceeds................... 16
Item 3. Default Upon Senior Securities.............................. 16
Item 4. Submission of Matters to a Vote of Security Holders......... 16
Item 5. Other Information........................................... 16
Item 6. Exhibits and Reports on Form 8-K............................ 16
Signature Page........................................................ 17
</TABLE>
<TABLE>
PAGE
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<S> <C> <C>
2
</TABLE>
<PAGE> 3
PART I -- FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
BUDGET GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 73,669 $ 136,184
Restricted cash............................................. 92,449 421,467
Trade and vehicle receivables, net.......................... 317,791 425,183
Vehicle inventory........................................... 86,883 81,028
Revenue earning vehicles, net............................... 3,205,163 2,839,183
Property and equipment, net................................. 233,616 229,318
Prepaid expenses and other assets........................... 186,836 179,218
Intangibles, including goodwill, net........................ 828,283 822,490
---------- ----------
Total assets...................................... $5,024,690 $5,134,071
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Notes payable............................................... $3,559,245 $3,635,095
Accounts payable, accrued and other liabilities............. 504,582 517,107
Deferred income taxes....................................... 40,119 40,119
---------- ----------
Total liabilities................................. 4,103,946 4,192,321
---------- ----------
COMPANY OBLIGATED MANDATORILY REDEEMABLE SECURITIES OF
SUBSIDIARY................................................ 291,235 291,160
---------- ----------
STOCKHOLDERS' EQUITY
Common stock................................................ 361 360
Additional paid-in-capital.................................. 671,147 670,089
Foreign currency translation adjustment..................... (4,259) (5,169)
Accumulated deficit......................................... (35,727) (12,677)
Treasury stock.............................................. (2,013) (2,013)
---------- ----------
Total stockholders' equity........................ 629,509 650,590
---------- ----------
Total liabilities and stockholders' equity........ $5,024,690 $5,134,071
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
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BUDGET GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING REVENUE:
Vehicle rental............................................ $ 486,488 $ 339,955
Retail vehicle sales...................................... 167,956 97,291
Royalty fees and other.................................... 24,250 18,739
----------- -----------
Total operating revenue........................... 678,694 455,985
OPERATING EXPENSES:
Direct vehicle and operating.............................. 226,114 154,442
Depreciation -- vehicle................................... 137,064 94,522
Cost of retail vehicle sales.............................. 150,253 86,142
Selling, general and administrative....................... 136,983 75,989
Amortization and non-vehicle depreciation................. 16,982 9,116
Pooling expenses.......................................... -- 1,595
----------- -----------
Total operating expenses.......................... 667,396 421,806
----------- -----------
Operating income............................................ 11,298 34,179
----------- -----------
Other expense:
Vehicle interest, net....................................... 45,341 31,430
Other interest, net......................................... 1,420 8,450
----------- -----------
Total other expense............................... 46,761 39,880
LOSS BEFORE INCOME TAXES.................................... (35,463) (5,701)
Benefit for income taxes.................................... (17,036) (2,280)
Distributions on trust preferred securities................. 4,623 --
----------- -----------
NET LOSS.................................................... $ (23,050) $ (3,421)
=========== ===========
NET LOSS PER SHARE:
Basic and diluted......................................... $ (0.64) $ (0.12)
=========== ===========
Weighted average number of shares outstanding:
Basic and diluted......................................... 35,856,000 27,445,000
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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BUDGET GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1999
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY TOTAL
COMMON PAID-IN TRANSLATION ACCUMULATED TREASURY STOCKHOLDERS'
STOCK CAPITAL ADJUSTMENT DEFICIT STOCK EQUITY
------ ---------- ----------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998..... $360 $670,089 $(5,169) $(12,677) $(2,013) $650,590
Foreign currency translation..... 910 910
Shares issued in acquisition of
business....................... 1 1,016 1,017
Stock compensation............... 42 42
Net loss......................... (23,050) (23,050)
---- -------- ------- -------- ------- --------
Balance at March 31, 1999........ $361 $671,147 $(4,259) $(35,727) $(2,013) $629,509
==== ======== ======= ======== ======= ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
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BUDGET GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE-MONTH PERIODS
ENDED MARCH 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (23,050) $ (3,421)
----------- -----------
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 154,046 101,964
Deferred income taxes..................................... -- (2,280)
Changes in operating assets and liabilities, net of
effects from acquisitions:
Trade and vehicle receivables, net..................... 107,391 54,534
Vehicle inventory...................................... (5,855) (3,882)
Prepaid expenses and other assets...................... 1,982 (2,619)
Accounts payable, accrued and other liabilities........ (12,525) 34,106
----------- -----------
Total adjustments................................. 245,039 181,823
----------- -----------
Net cash provided by operating activities......... 221,989 178,402
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in restricted cash balance........................... 329,018 258,026
Proceeds from sale of revenue earning vehicles.............. 546,254 686,178
Purchases of revenue earning vehicles....................... (1,063,242) (1,061,411)
Proceeds from the sale of property and equipment............ 1,582 2,309
Purchases of property and equipment......................... (22,102) (18,873)
Payment for acquisitions, net of cash acquired.............. (1,017) (5,477)
----------- -----------
Net cash used in investing activities............. (209,507) (139,248)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from equity transactions, net...................... 1,059 494
Net decrease in vehicle obligations......................... (4,713) (36,757)
Net decrease in commercial paper............................ (75,845) (105,595)
Proceeds from other notes payable........................... 7,553 8,993
Principal payments on other notes payable................... (2,845) (8,297)
----------- -----------
Net cash used in financing activities............. (74,791) (141,162)
----------- -----------
Effect of exchange rate changes on cash..................... (206) 45
----------- -----------
Net decrease in cash and cash equivalents................... (62,515) (101,963)
Cash and cash equivalents, beginning of period.............. 136,184 161,455
----------- -----------
Cash and cash equivalents, end of period.................... $ 73,669 $ 59,492
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
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BUDGET GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
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) 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 Annual Report on Form 10-K for the year ended December 31, 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, 1999.
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 January 28, 1998, the Company
completed its acquisition of 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 1,623,478 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 for the three-month
period ended March 31, 1998, have been restated to include the accounts of
Cruise as if the companies had combined at the beginning of that period. 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 $3,652 and a net loss of $1,836 for
January 1998.
2. ACQUISITIONS
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 $125,000 in cash
and issued warrants to purchase Class A common stock, the value of which is
capped at $19,000. In addition, the Company agreed to pay Ryder TRS stockholders
a make-whole payment (with respect to the shares of Class A common stock issued
in the acquisition) to the extent that the Class A common stock trades below
approximately $33 per share over two 30-day measurement periods ending,
respectively, on June 19, 1999 and February 19, 2000. This payment may be made
in cash and/or stock at the Company's option. The Company also assumed
approximately $522,000 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 million in cash and the issuance of 445,854 shares of Class A
common stock.
7
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BUDGET GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the acquisitions had occurred at the beginning of the period 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 period.
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
MARCH 31,
------------------------
1998
------------------------
(IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C>
Operating revenue........................................... 602,375
Net loss.................................................... (14,443)
Basic and diluted loss per share............................ (0.41)
</TABLE>
The Company completed several small acquisitions of BRACC franchises
through March 31, 1999. 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. The
franchises were primarily located in France, England and Florida.
3. COMPREHENSIVE INCOME
The Company's only adjustment to arrive at comprehensive income is the
foreign currency translation adjustment. Total comprehensive loss was $22,140
and $4,119 for the three-month periods ended March 31, 1999 and 1998,
respectively.
4. EARNINGS PER SHARE
Diluted net loss per share computed under SFAS No. 128 "Earnings Per Share"
is the same as basic net loss per share due to the anti-dilutive effect (i.e.
the effect of reducing basic net loss per share) of the Company's convertible
securities and stock options.
5. RESTRUCTURING
The Company recorded a restructuring charge of approximately $14,900 in
December 1998. This amount related primarily to closing of vehicle rental and
car sales locations and centralization of certain finance and administration
functions of the Company (the "Restructuring"). At March 31 1999, approximately
70% of the employees affected have been terminated and the Company has accruals
remaining related to the restructuring of $10,600. During the three-month period
ended March 31, 1999 approximately $2,400 has been paid or utilized and accrual
reductions of approximately $100 have been recorded.
6. FINANCIAL INSTRUMENTS
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities"
establishes accounting and reporting standards for derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities and is effective for the Company beginning in July 1999. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Company expects no material impact on its financial condition
or results of operation upon adoption of SFAS No. 133 beginning January 1, 2000.
7. BUSINESS SEGMENTS
The Company is engaged in the business of the daily rental of vehicles,
principally cars, trucks and passenger vans, and the sale of used vehicles.
Segments are determined by product line and business activity.
8
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BUDGET GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Segment information for the three-month period ended March 31, 1999 and
1998 respectively are:
<TABLE>
<CAPTION>
CAR TRUCK RETAIL CAR CORPORATE AND
RENTAL RENTAL SALES ELIMINATIONS CONSOLIDATED
-------- -------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1999
Operating revenue............... $387,599 $151,486 $160,083 $(20,474) $678,694
Operating income (loss)......... 24,245 (3,724) (4,528) (4,695) 11,298
1998
Operating revenue............... 338,770 43,209 91,984 (17,978) 455,985
Operating income (loss)......... 36,150 2,490 (1,043) (3,418) 34,179
</TABLE>
8. SUBSEQUENT EVENTS
In April 1999, the Company issued unsecured senior notes with an aggregate
principal amount of $400,000 bearing interest at 9.125% due in 2006 (the
"Notes"). The net proceeds from this transaction will be primarily used to repay
the outstanding indebtedness under maturing medium-term notes used to finance
revenue-earning vehicles and certain other secured indebtedness. Pending the
repayment of the maturing medium-term notes, the Company temporarily reduced
amounts outstanding under its commercial paper facilities. The indenture
governing the Notes contains certain covenants which, among other things,
restrict the Company from incurring certain additional indebtedness, paying
dividends or redeeming or repurchasing its capital stock, consolidating, merging
or transferring assets and engaging in sale/leaseback transactions. In addition,
the Company has filed a registration statement enabling holders of the Notes to
exchange the Notes for publicly registered notes with identical terms.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Prior to the BRACC Acquisition, the Company was the largest Budget
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 June 1998 the Company acquired Ryder TRS which is accounted for by the
purchase method of accounting. 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
and 2 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 sold at retail or
from retail lots, including recreational vehicles. Royalty fees and
other -- fees generated from the Company's licensees and other non-vehicle
rental or sales items.
The Company's 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.
Vehicle and other interest, net -- interest expense, net of interest earned on
restricted cash, relating primarily to revenue-earning vehicle financing.
RESULTS OF OPERATIONS
General Operating Results. Net loss for the first quarter of 1999
increased $19.6 million to a loss of $23.0 million compared with a net loss of
$3.4 million in 1998. The loss per share for the first quarter of 1999 increased
to $0.64 per diluted share from a loss of $0.12 per diluted share in 1998,
primarily due to seasonal losses in the first quarter 1999 of Ryder TRS and
larger operating losses from the retail car sales segment, offset somewhat by an
increase in the average number of shares outstanding issued in connection with
the Ryder TRS and new car dealership acquisitions. Loss before income taxes
increased $29.8 million for the first quarter of 1999 to a loss of $35.5 million
from a loss of $5.7 million for the first quarter of 1998.
Operating Revenues. Vehicle rental revenue increased $146.5 million in the
first quarter of 1999 to $486.5 million from $340.0 million in the first quarter
of 1998. 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, and a 5.3% (same market basis) growth in
BRACC car rental revenue. Revenue from sales of vehicles increased $70.7 million
in the first quarter of 1999 to $168.0 million from $97.3 million in the first
quarter of 1998. This increase was due to new stores opened by the Company and
the acquisition of three
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new car dealerships in June 1998. Royalty fees and other revenues increased $5.5
million in the first quarter of 1999 to $24.3 million from $18.7 million in the
first quarter of 1998. These revenues largely represent royalty and other fees
from the Company's franchisees and revenue from Ryder TRS's move management
service.
Operating Expenses. Total operating expenses increased $245.6 million in
the first quarter of 1999 to $667.4 million from $421.8 million in the first
quarter of 1998. This increase was largely due to the addition of Ryder TRS's
operations to the Company's operations and the increase in cost of retail
vehicle sales. Ryder TRS's operating expenses totaled $106.1 million in the
first quarter of 1999. The cost of retail vehicle sales increased $64.1 million
in the first quarter of 1999 to $150.3 million from $86.1 million in the first
quarter of 1998. This increase is reflective of the car sales revenue growth
with the new car dealership acquisitions and new locations opened by the
Company. Amortization expense increased $7.9 million in the first quarter of
1999 to $17.0 million from $9.1 million in the first quarter of 1998. This
increase was largely due to intangibles, including goodwill, related to the 1998
acquisitions.
Other expense, net. Other expense, net of interest income, increased $6.9
million in the first quarter of 1999 to $46.8 million from $39.9 million in the
first quarter of 1998. This increase was largely 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 changes to the Company's capital
structure concurrent with the acquisition of Ryder TRS.
Benefit for income taxes. The overall year to date tax benefit reflects
the expected full year effective rate of 42.5% 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.
Distributions on trust preferred securities. The distributions on trust
preferred securities of $4.6 million represent dividend payments to holders of
these company obligated mandatorily redeemable securities issued by a subsidiary
of Budget Group, Inc. These distributions are reflected as a minority interest
under the above-mentioned caption.
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 Company's primary use of cash is the acquisition of new vehicles for
the rental fleet. The Company's existing indebtedness at March 31, 1999 has
interest rates ranging from 3.45% to 11.20% and the material terms of the
financing facilities are described below. The Company intends to fund its
operations and debt maturities 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 equity and/or debt securities which may include a substantial
portion of unsecured indebtedness. See Note 8 to the Company's unaudited
consolidated financial statements herein for a description of the $400.0 million
of unsecured debt issued subsequent to March 31, 1999.
Analysis of Cash Flows
Net cash provided by operating activities increased 24.4% to $222.0 million
during the first quarter of 1999 from $178.4 million during the first quarter
1998. The Company experienced an increase in cash received from trade and
vehicle receivables and non-cash expenses such as depreciation and amortization,
which was offset to some extent by increases in cash paid to vendors and in
interest expense.
Net cash used in investing activities is primarily attributable to cash
paid to suppliers of revenue earning vehicles and, to a lesser extent, capital
expenditures. This cash use is mainly offset by cash received from the sale of
vehicles (most of which sales were pursuant to manufacturers' vehicle repurchase
programs). Cash received from the sale of vehicles was $546.3 million and $686.2
million during the first quarters of 1999 and 1998, respectively. Cash paid to
suppliers of revenue vehicles was $1,063.2 million and $1,061.4 million during
11
<PAGE> 12
the first quarter of 1999 and 1998, respectively. Payment for acquisitions, net
of assets acquired, amounted to $1.0 million and $5.5 million during the first
quarter of 1999 and 1998, respectively. Capital expenditures, largely for new
rental locations, improvement in service levels and to upgrade computer hardware
and software were $22.1 million and $18.9 million for the first quarter of 1999
and 1998, respectively. We anticipate that the annual capital expenditures for
1999 will be approximately $85.0 million.
Net cash used in financing activities for the first quarter 1999 decreased
to a net use of $74.8 million from a net use of $141.2 million during the first
quarter 1998. This was due primarily to the lower net reduction in revenue
earning vehicles and consequently lower pay down of fleet financing facilities.
Debt Facilities -- General
The Company borrows money directly and through its special purpose fleet
financing subsidiaries, Team Fleet Financing Corporation ("TFFC") and Budget
Fleet Financing Corporation ("BFFC"). Subsidiaries also have various working
capital facilities in place to finance operating activities. At March 31, 1999,
the Company had $3,559.2 million of indebtedness outstanding, $3,428.3 million
of which represented secured fleet financing and $130.9 million of which
represented non-vehicle indebtedness. At March 31, 1999, the Company had $201.8
million of availability under various fleet financing facilities.
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 to Class A common
stock, (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 trust
preferred securities which raised approximately $290.3 million, net of related
fees, (v) the private placement of $1.1 billion of TFFC-98 notes, (vi) the
redemption of $175.0 million of Ryder TRS's outstanding 10% senior subordinated
notes and (vii) the repayment of 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 2 to the Company's unaudited consolidated financial
statements herein. See Note 8 to the Company's unaudited consolidated financial
statements herein for a description of the $400.0 million of unsecured debt
issued subsequent to March 31, 1999.
Fleet Financing Facilities
At March 31, 1999, the Company had borrowed $2.4 billion under asset-backed
MTN's and $764.6 million under a commercial paper ("CP") facility (collectively
"Fleet notes"). The MTN's are comprised of notes issued in August 1994 ("TFFC-94
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 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 March 31, 1999,
ranged from 4.90% 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 March 1999 consist of $215.5 million
for rental vehicles and $66.5 million for retail car sales inventory with
maturity dates through May 2002. 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 range from 3.45% to 11.20% at March 31, 1999.
Management expects that vehicle obligations will generally be repaid within one
year from
12
<PAGE> 13
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, require monthly interest payments and bear interest at
fixed rates ranging from 6.07% to 6.84%. The TFFC-98 notes mature in three to
seven years. Proceeds from the notes were used to refinance Ryder TRS's
commercial paper and to finance certain BRACC vehicles.
- -- The $500.0 million TFFC-97 notes and CP facility were entered into
concurrently with the BRACC acquisition. As of March 31, 1999, the CP has
various interest rates, which ranged between 4.90% and 4.98%. 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 5.75% to 7.10% at March 31, 1999. Monthly maturities on
the TFFC-94 notes commence in June 1999, with the last payment due in
November 1999, while subordinated TFFC notes of $5.7 million are due in
December 1999. These maturities will be funded through the issuance of
unsecured term notes.
- -- 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% (5.44% at March 31,
1999). Monthly maturities of $83,333 commenced in April 1999, with the last
payment due in September 1999. These maturities are expected to be funded
through the issuance of term notes, both secured and unsecured, beginning in
April 1999. See Note 8 to the Company's unaudited consolidated financial
statements herein.
Trust Preferred Securities
In June 1998, the Company issued $300.0 million of trust preferred
securities and received approximately $291.0 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 trust preferred securities 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 debentures for up to 20
consecutive quarters, which will also cause a deferral of distributions under
the trust preferred securities.
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 prime plus 0.75%
(6.69% at March 31, 1999) 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 March 31, 1999, the Company had $378.9 million in letters of
credit and $50.0 million of debt outstanding under this facility.
The credit facility was amended in the first quarter of 1999 to, among
other things, modify certain financial covenants and permit the issuance of
additional unsecured term notes to fund the maturities of MTN's.
CHANGE IN FINANCIAL CONDITION
Total assets decreased $109.4 million from $5,134.1 million at December 31,
1998 to $5,024.7 million at March 31, 1999. This decrease was due to a decrease
in trade and vehicle receivables of $107.4 million
13
<PAGE> 14
primarily in receivables due from vehicle manufacturers. Restricted cash
decreased $329.0 million to fund the increase in revenue-earning vehicles of
$366.0 million.
Total liabilities decreased by $88.4 million from $4,192.3 million at
December 31, 1998 to $4,103.9 million at March 31, 1999. This decrease, largely
notes payable of $75.9 million, resulted primarily from the use of restricted
cash to finance vehicles.
RESTRUCTURING
The Company recorded a restructuring charge of approximately $14.9 million
in December 1998. This amount related primarily to closing of vehicle rental and
car sales locations and centralization of certain finance and administration
functions of the Company. At March 31 1999, approximately 70% of the employees
affected have been terminated and the Company has accruals remaining related to
the restructuring of $10.6 million. During the three-month period ended March
31, 1999 approximately $2.4 million has been paid or utilized and accrual
reductions of approximately $0.1 million have been recorded.
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. As a result of these patterns, for vehicle rental, the
first quarter of each year is typically the weakest and the third quarter is
typically the strongest. 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 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 computer systems and applications to process critical
information incorrectly.
During 1998, the Company recognized approximately $2.8 million in expenses
to modify existing computer systems and applications and estimates that an
aggregate of approximately $4.0 million will be incurred in 1999 specifically
for Y2K modification. Approximately $0.4 million was spent in 1999 through March
31. 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 with some projects
extending into late 1999. These efforts have not significantly hampered the
Company's ongoing system development or system upgrade activities to date,
however, all available resources will be diverted to Y2K efforts in the event
that modifications fall behind schedule.
The Company is assessing the impact of the Y2K Issue on the ability of its
significant suppliers to maintain adequate service levels. Responses have been
received from about one-half of the significant
14
<PAGE> 15
suppliers identified by the Company with all respondents indicating expected
readiness for Y2K. The most critical suppliers are in the vehicle manufacturing,
telecommunications, fuel supply and banking/financing industries. A failure on
the part of these suppliers 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.
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 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 1998, the Company recognized approximately $0.9 million in expenses
related to remediation efforts and estimates that an aggregate of approximately
$3.2 million will be incurred in 1999 and 2000. Approximately $0.2 million was
spent in 1999 through March 31. 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 Item 7 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1998, and that information 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
The Company's exposure to market risk is primarily due to floating rate
interest associated with fleet debt. The Company manages interest rates through
use of a combination of fixed and floating rate debt and interest hedging
instruments. No significant changes have occurred in the Company's capital
structure or market risk profile during the period ended March 31, 1999. See the
Company's disclosures regarding market risk as of December 31, 1998 included
under item 7A of the Company's Form 10-K.
15
<PAGE> 16
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 1998, we discontinued providing services to our German
franchisee (such as reservations and credit card processing services), after
having previously terminated the related franchise agreements for alleged
contract violations. On April 15, 1999, the Munich Regional Court of Appeal held
that we had validly terminated the license agreement with Sixt effective as of
May 1997. The possibility remains, however, that a higher court in Germany could
reverse the Appeal's court decision. As a result of the dispute with Sixt, we
have experienced an adverse effect on our business in, and originating from,
Germany. We intend to replace the current franchisee with new franchisees and/or
corporate-owned locations. However, there is no assurance that such replacement
will be commercially successful.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales Of Unregistered Securities:
On February 15, 1999, in connection with the acquisition of Group
Collinet, N.A. ("Collinet") a franchisee in France, the Company issued
77,076 shares of Class A Common Stock to the shareholders of Collinet.
The foregoing issuance was made in reliance on the exemption from the
registration requirements of the Securities Act of 1933 (the "Act")
provided under Section 4(2) of the Act.
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 27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
In a Form 8-K dated March 22, 1999 and filed March 22, 1999, the Company
filed under Item 7, audited consolidated financial statements and related
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the years ended December 31, 1996, 1997 and 1998.
In a Form 8-K dated March 22, 1999 and filed March 23, 1999, the Company
filed under Item 5, a notice announcing the offering of the unsecured senior
notes.
16
<PAGE> 17
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.
<TABLE>
<S> <C>
BUDGET GROUP, INC.
--------------------------------------------
(Registrant)
Dated: May 14, 1999 By: /s/ MICHAEL CLAUER
--------------------------------------------
Michael Clauer
Executive Vice President
Chief Financial Officer
Dated: May 14, 1999 By: /s/ THOMAS L. KRAM
--------------------------------------------
Thomas L. Kram
Vice President, Controller
(Principal Accounting Officer)
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 166,118
<SECURITIES> 0
<RECEIVABLES> 317,791
<ALLOWANCES> 0<F1>
<INVENTORY> 3,292,046
<CURRENT-ASSETS> 3,775,955
<PP&E> 233,616
<DEPRECIATION> 0<F2>
<TOTAL-ASSETS> 5,024,690
<CURRENT-LIABILITIES> 544,701
<BONDS> 3,559,245
291,235
0
<COMMON> 361
<OTHER-SE> 629,148
<TOTAL-LIABILITY-AND-EQUITY> 5,024,690
<SALES> 678,694
<TOTAL-REVENUES> 678,694
<CGS> 150,253
<TOTAL-COSTS> 517,143
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,761
<INCOME-PRETAX> (35,463)
<INCOME-TAX> (17,036)
<INCOME-CONTINUING> (23,050)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,050)
<EPS-PRIMARY> (0.64)
<EPS-DILUTED> (0.64)
<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>
