-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O8lk7diUoA7sP92Xn4k3kNlmNIXcqkvUzuvtj1Es7zMWsAmvHLdkSvsuc6JPQ/le +QrojlsXtPvKErTqdQQlgQ== 0000950144-97-009725.txt : 19970912 0000950144-97-009725.hdr.sgml : 19970912 ACCESSION NUMBER: 0000950144-97-009725 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19970902 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BUDGET GROUP INC CENTRAL INDEX KEY: 0000922471 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-AUTO RENTAL & LEASING (NO DRIVERS) [7510] IRS NUMBER: 593227576 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-34799 FILM NUMBER: 97674234 BUSINESS ADDRESS: STREET 1: 125 BASIN ST STE 210 CITY: DAYTONA BEACH STATE: FL ZIP: 32114 BUSINESS PHONE: 9042387035 MAIL ADDRESS: STREET 1: 125 BASIN STREET CITY: DAYTONA BEACH STATE: FL ZIP: 32114 FORMER COMPANY: FORMER CONFORMED NAME: TEAM RENTAL GROUP INC DATE OF NAME CHANGE: 19940429 S-1 1 BUDGET GROUP, INC 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 2, 1997 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- BUDGET GROUP, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 7514 59-3227576 (State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer of Incorporation or Organization) Classification Code Number) Identification Number)
125 BASIN STREET, SUITE 210 DAYTONA BEACH, FL 32114 (904) 238-7035 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) SANFORD MILLER CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER BUDGET GROUP, INC. 125 BASIN STREET, SUITE 210 DAYTONA BEACH, FL 32114 (904) 238-7035 (Name, address, including zip code, and telephone number, including area code of agent for service) COPIES TO: JEFFREY M. STEIN KRIS F. HEINZELMAN KING & SPALDING CRAVATH, SWAINE & MOORE 191 PEACHTREE STREET 825 EIGHTH AVENUE ATLANTA, GEORGIA 30303 NEW YORK, NEW YORK 10019 (404) 572-4600 (212) 474-1000
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of the Registration Statement. --------------------- If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
====================================================================================================================== PROPOSED PROPOSED TITLE OF CLASS AMOUNT MAXIMUM MAXIMUM OF SECURITIES TO BE OFFERING PRICE AGGREGATE AMOUNT OF TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE(2) - ---------------------------------------------------------------------------------------------------------------------- Class A Common Stock, par value $.01 per share................... 4,500,000 shares $28.65625 $128,953,125 $39,077 ======================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a). (2) $40,015 has previously been paid. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED SEPTEMBER 2, 1997 4,500,000 SHARES (TEAM RENTAL GROUP LOGO) BUDGET GROUP, INC. CLASS A COMMON STOCK (PAR VALUE $.01 PER SHARE) ------------------------ All the shares of Class A Common Stock offered hereby (the "Offering") are being sold by Ford FSG, Inc., an affiliate of Ford Motor Company. See "Principal and Selling Stockholders". The Company will not receive any of the proceeds from the sale of the shares. The Company has two classes of Common Stock, the Class A Common Stock, par value $.01 per share, and the Class B Common Stock, par value $.01 per share. Holders of the Class A Common Stock are entitled to one vote per share and holders of the Class B Common Stock are entitled to ten votes per share. Upon completion of the Offering, the Principal Executive Officers of the Company will retain 45.6% of the combined voting power of both classes of Common Stock. See "Principal and Selling Stockholders". The last reported sale price of the Class A Common Stock, which is listed on the New York Stock Exchange under the symbol "BD", on August 29, 1997 was $29.375 per share. See "Price Range of Common Stock". SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE CLASS A COMMON STOCK. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------
PUBLIC PROCEEDS TO OFFERING UNDERWRITING SELLING PRICE DISCOUNT(1) STOCKHOLDER ------------ ------------ ------------ Per Share............................................ $ $ $ Total................................................ $ $ $
- --------------- (1) The Company and the Selling Stockholder have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting". ------------------------ The shares offered hereby are offered severally by the Underwriters, as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that certificates for the shares will be ready for delivery in New York, New York, on or about , 1997, against payment therefor in immediately available funds. GOLDMAN, SACHS & CO. CREDIT SUISSE FIRST BOSTON ABN AMRO CHICAGO CORPORATION ALEX. BROWN & SONS INCORPORATED MCDONALD & COMPANY SECURITIES, INC. J.P. MORGAN & CO. The date of this Prospectus is , 1997. 3 [Picture of Budget key fob] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON STOCK OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING". 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. As used in this Prospectus, unless the context otherwise requires, (i) "TEAM" refers to Budget Group, Inc. and its subsidiaries prior to its acquisition of Budget Rent a Car Corporation on April 29, 1997 (the "Budget Acquisition"); (ii) "BRACC" refers to Budget Rent a Car Corporation and its subsidiaries; (iii) the "Company" or "Budget Group" refers to TEAM (including BRACC) after giving effect to the Budget Acquisition; (iv) the "Budget System" or "Budget" refers to the business of renting cars and trucks and retailing late model vehicles conducted by the Company and its franchisees under the Budget name and (v) "Selling Stockholder" refers to Ford FSG, Inc., an affiliate of Ford Motor Company ("Ford"). In connection with the Budget Acquisition, Team Rental Group, Inc. changed its name to Budget Group, Inc. "Common Stock", as used herein, refers collectively and without distinction to the Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), and the Class B Common Stock, par value $.01 per share (the "Class B Common Stock"), of the Company. THE COMPANY The Company and its franchisees operate the third largest worldwide general use car and truck rental system, with approximately 3,200 locations and a peak fleet size during 1996 of 266,000 cars and 18,000 trucks. The Budget System includes locations in both the airport and local (downtown and suburban) markets in all major metropolitan areas in the United States, in many other small and mid-size U.S. markets and in more than 110 countries worldwide. Pro forma for the Budget Acquisition, the Budget System included approximately 455 company-owned locations in the United States at December 31, 1996, accounting for approximately 76% of 1996 U.S. system-wide revenues. In addition, Budget franchisees operated approximately 500 royalty-paying franchise locations in the United States at December 31, 1996. Budget is one of only three vehicle rental systems that offer rental vehicles throughout the world under a single brand name, with locations in Europe, Canada, Latin America, the Middle East, Asia/Pacific and Africa. The Budget System currently maintains more local market rental locations throughout the world than its major competitors. The Budget System is also unique among major car rental systems in that it rents trucks in most major markets worldwide. The Budget System's consumer truck rental fleet is the fourth largest in the United States. The Budget System had vehicle rental revenues of $2.5 billion for 1996. The Company is also one of the largest independent retailers of late model vehicles in the United States, with 23 retail car sales facilities and pro forma revenues of $246.9 million for 1996. The Company operates its retail car sales facilities under the name "Budget Car Sales". On April 29, 1997, the Company acquired all the capital stock of BRACC pursuant to a series of stock purchase agreements among TEAM, Ford, BRACC and the common stockholder of BRACC (the "Stock Purchase Agreements"). The consideration paid by the Company pursuant to the Stock Purchase Agreements consisted of approximately $275.0 million in cash and the issuance to Ford of 4,500 shares of Series A Convertible Preferred Stock of the Company (representing all the outstanding shares of such series). See "The Budget Acquisition". Each share of Series A Convertible Preferred Stock is non-voting, does not carry a dividend and is convertible into 1,000 shares of Class A Common Stock. In connection with the Offering, the 4,500 shares of Series A Convertible Preferred Stock issued to Ford will convert into 4,500,000 shares of Class A Common Stock, which are being offered hereby. 3 5 STRATEGY Management's long-term strategy is to create an automotive services company which leverages the asset base and expertise of the Company. The Company's assets include a trade name that is recognized around the world; locations for the rental, sale and maintenance of vehicles; a workforce that is proficient in acquiring, financing, monitoring, maintaining and selling cars and trucks; and advanced information systems to support these operations. Increasing the utilization of these assets by acquiring automobile-related businesses would reduce the Company's unit costs and increase profitability. In the near term, management has developed a business strategy designed to increase the revenues and improve the profitability of the Company. Key elements of this strategy are as follows: Enhance the Budget Brand. The Budget System's company-owned locations account for approximately 76% of U.S. revenues, which management believes is a higher percentage than many of its principal competitors. Management believes this high level of corporate ownership is a competitive advantage in the marketplace. It facilitates more consistent delivery of high quality services and improved operations and communications, thereby strengthening the Budget brand name among customers. In addition, the Company's structure facilitates national advertising and marketing programs designed to increase the public's awareness of the Budget brand. Management believes that there will be continuing opportunities to further consolidate the Budget System by acquiring additional franchise operations, and that such consolidation will further strengthen the Budget brand. Improve the Performance of Car Rental Operations. Historically, TEAM enhanced the profitability of its acquired franchise territories by reducing operating costs and increasing rental revenue. Similarly, in 1996, BRACC began initiatives to improve the performance of its company-owned operations. Management believes that the Budget Acquisition will enable the Company to combine key elements of the TEAM and BRACC strategies to achieve even greater operating efficiencies. The Company expects to undertake significant initiatives to (i) enhance the performance of its U.S. car rental operations, (ii) capitalize on the increased level of company-owned locations, (iii) increase its marketing to corporate accounts, (iv) place increased emphasis on the leisure and local rental markets (including its entry into the insurance replacement market), and (v) expand and improve Budget's international operations. Continue to Expand Retail Car Sales Operations. The increased cost of new cars and the improved reliability of low-mileage, late model cars have contributed to greater market demand for late model cars in recent years. The Company, with 23 retail car sales facilities and pro forma car sales revenues of $246.9 million for 1996, is one of the largest independent retailers of late model vehicles in the United States. The Company is establishing a nationally recognized retail car sales operation which will provide low-mileage, late model vehicles to consumers in a new car sales environment under the Budget Car Sales brand. Expand Truck Rental Operations. With the fourth largest consumer truck rental fleet in the United States, Budget is unique among major car rental systems in that it rents trucks to consumers and commercial users in most major markets worldwide. The Company expects to add truck rental locations in various markets, particularly in conjunction with the addition of new local market car rental locations. Management believes that adding truck rental locations will leverage certain fixed costs and increase consumer awareness of the Budget brand, while favorable pricing trends in the truck rental market are expected to provide attractive returns on invested capital. --------------------- Sanford Miller (Chairman of the Board and Chief Executive Officer), John P. Kennedy (Vice Chairman of the Board) and Jeffrey D. Congdon (Vice Chairman of the Board and Chief Financial Officer) (collectively, the "Principal Executive Officers") together have over 75 years of experience in the vehicle rental business and had acquired and operated 54 Budget franchises prior to the Budget Acquisition. In addition, Messrs. Miller and Congdon together have over 25 years of experience operating retail car sales facilities. The principal executive offices of the Company are located at 125 Basin Street, Suite 210, Daytona Beach, Florida 32114 (telephone number: (904) 238-7035). 4 6 RECENT DEVELOPMENTS On July 31, 1997, the Company acquired the fleet and certain other assets of Premier Rental Car, Inc. ("Premier"). The purchase price consisted of $2.0 million in cash and the refinancing of approximately $85.2 million of outstanding Premier fleet indebtedness (the "Premier Acquisition"). Premier, based in Cleveland, Ohio, provides rental cars for the insurance replacement market and owns and operates 9,000 vehicles from 101 locations in 13 major U.S. markets. In 1996, Premier had revenues of approximately $61.0 million. Premier will continue to operate under its own trade name, and the Company does not expect this acquisition to have a material effect on its earnings in 1997. In July 1997, the Company acquired the Budget franchise located in Chattanooga, Tennessee for $3.2 million. On August 19, 1997, Budget Truck Rental announced that it had entered into a four-year preferred alliance agreement with HFS Incorporated, making Budget the exclusive provider of truck rental services promoted to customers of Coldwell Banker, ERA and Century 21 real estate brands, as well as relocation customers of HFS Mobility Services, Inc. THE OFFERING Class A Common Stock offered....................... 4,500,000 shares Shares to be outstanding after the Offering: Class A Common Stock............................. 22,528,083 shares Class B Common Stock............................. 1,936,600 shares ----------- Total(a)................................. 24,464,683 shares =========== Use of proceeds.................................... The Company will not receive any of the proceeds from the sale of the shares. See "Use of Proceeds". NYSE symbol........................................ BD
- --------------- (a) Does not include (i) 3,986,049 shares of Class A Common Stock issuable upon conversion of the Company's outstanding 7.0% Convertible Subordinated Notes, Series A, due 2007 (the "Series A Convertible Notes"); (ii) 1,609,442 shares of Class A Common Stock issuable upon conversion of the Company's outstanding 6.85% Convertible Subordinated Notes, Series B, due 2007 (the "Series B Convertible Notes" and together with the Series A Convertible Notes, the "Convertible Notes"); (iii) 1,848,150 shares of Class A Common Stock and 164,000 shares of Class B Common Stock issuable pursuant to outstanding options; (iv) 187,500 shares of the Class A Common Stock reserved for issuance upon exercise of outstanding warrants; and (v) 36,667 shares of Class A Common Stock held as treasury shares. See "Management -- Benefit Plans" and "Description of Capital Stock -- Warrants". 5 7 SUMMARY PRO FORMA FINANCIAL DATA The following tables set forth summary unaudited pro forma financial data of the Company, which data were derived from the Pro Forma Consolidated Statements of Operations for the year ended December 31, 1996 and the six months ended June 30, 1997 included elsewhere in this Prospectus. The pro forma statements of operations data and other data give effect to the 1996 TEAM Transactions and the Budget Acquisition Transactions (each as defined under "Pro Forma Consolidated Statements of Operations") as if they each had occurred on January 1, 1996. The information below should be read in conjunction with the Pro Forma Consolidated Statements of Operations and the notes thereto included elsewhere in this Prospectus. The summary unaudited pro forma financial data set forth below are presented for information purposes only and do not purport to represent what the Company's results of operations would have been had the Transactions actually occurred on the date indicated or to predict the Company's results of operations in the future.
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, 1996 JUNE 30, 1997 ----------------- ------------- (IN THOUSANDS EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Operating revenue: Vehicle rental revenue.................................... $1,197,888 $ 606,504 Royalty fees.............................................. 52,711 28,612 Retail car sales revenue.................................. 246,936 130,738 Other..................................................... 14,693 3,482 ---------- ---------- Total operating revenues........................... $1,512,228 $ 769,336 ---------- ---------- Operating costs and expenses: Direct vehicle and operating.............................. 152,039 79,075 Depreciation -- vehicle................................... 327,436 174,236 Depreciation -- non-vehicle............................... 29,577 13,953 Cost of car sales......................................... 212,330 111,759 Sales, general and administrative......................... 613,769 336,678 Amortization.............................................. 12,517 6,471 ---------- ---------- Total operating costs and expenses................. $1,347,668 $ 722,172 ---------- ---------- Operating income............................................ $ 164,560 $ 47,164 ---------- ---------- Other (income) expense: Vehicle interest expense.................................. 106,921 56,895 Non-vehicle interest expense.............................. 26,929 11,799 Interest income -- restricted cash........................ (1,818) (1,848) ---------- ---------- Total other (income) expense....................... $ 132,032 $ 66,846 ---------- ---------- Income (loss) before income taxes........................... 32,528 (19,682) Provision for income taxes................................ 11,624 (8,946) ---------- ---------- Net income (loss).................................. $ 20,904 $ (10,736) ========== ========== Weighted average common and common equivalent shares outstanding: Primary................................................... 24,579 24,985 Fully diluted............................................. 28,618 25,286 Earnings per common and common equivalent share: Primary................................................... $ 0.85 $ (0.43) Fully diluted............................................. $ 0.85 $ (0.43) ========== ========== OTHER DATA: EBITDA(a)................................................... $ 524,284 $ 252,618 Adjusted EBITDA(a).......................................... 89,927 21,487 Ratio of Adjusted EBITDA to non-vehicle interest expense.... 3.3x 1.8x
- --------------- (a) EBITDA consists of income before income taxes plus (i) vehicle interest expense, (ii) non-vehicle interest expense, (iii) vehicle depreciation expense and (iv) non-vehicle depreciation and amortization expenses. Adjusted EBITDA consists of income before income taxes plus (i) non-vehicle interest expense and (ii) non-vehicle depreciation and amortization expenses. EBITDA and Adjusted EBITDA are not presented as, and should not be considered, alternative measures of operating results or cash flows from operations (as determined in accordance with generally accepted accounting principles), but are presented because they are widely accepted financial indicators of a company's ability to incur and service debt. 6 8 SUMMARY OPERATING DATA FOR THE BUDGET SYSTEM The following tables set forth summary operating data of the Budget System for the year ended December 31, 1996 and as of December 31, 1996. References to revenues of the Budget System include revenues received by BRACC and its franchisees for the rental of cars and trucks. The respective revenue contributions of locations owned by TEAM or BRACC (referred to as "company-owned" locations) have been determined by reference to the size of the vehicle fleet operated from those locations, in that fleet size generally corresponds to revenue contribution for any particular period. Company-owned and franchised Budget locations operate within the integrated Budget System and management believes that system-wide data are useful in analyzing the operations and market position of the overall Budget System, as well as the relative contributions of company-owned and franchised locations. Operations and operating data for franchisees set forth or reflected in system-wide data are based on reports provided to BRACC by franchisees in accordance with their franchise agreements and are not based on audited historical financial statements of those franchisees.
YEAR ENDED PERCENT OF DECEMBER 31, 1996 BUDGET SYSTEM ----------------- ---------------- (IN THOUSANDS) SYSTEM-WIDE DATA: Vehicle rental revenues: United States: BRACC-owned........................................ $ 871,841 61.0% TEAM-owned......................................... 234,124(a) 16.4 Other franchisees.................................. 323,818 22.6 ---------- ------- Total United States............................. $1,429,783 100.0% ---------- ======= International: BRACC-owned........................................ 91,923 8.5% Franchisees........................................ 984,368 91.5 ---------- ------- Total International............................. $1,076,291 100.0% ---------- ======= Total Budget System........................... $2,506,074 ========== Car sales revenues: BRACC................................................ $ 91,503 TEAM................................................. 155,433(b) ---------- Total Budget Group.............................. $ 246,936 ==========
AS OF PERCENT OF DECEMBER 31, 1996 BUDGET SYSTEM ----------------- ---------------- RENTAL LOCATIONS IN OPERATION: United States: BRACC-owned.......................................... 304 31.8% TEAM-owned........................................... 152 15.9 Other franchisees.................................... 500 52.3 -------- ------- Total United States ............................ 956 100.0% ======== ======= International: BRACC-owned.......................................... 70 3.1% Franchisees.......................................... 2,182 96.9 -------- ------- Total International............................. 2,252 100.0% ======== =======
- --------------- (a) Pro forma to give effect to the acquisition of VPSI, Inc. ("Van Pool") and the Phoenix Acquisition (as hereinafter defined) as if such acquisitions had been consummated on January 1, 1996. (b) Pro forma to give effect to the ValCar Acquisition (as hereinafter defined) as if such acquisition had been consummated on January 1, 1996. 7 9 SUMMARY HISTORICAL FINANCIAL DATA OF THE COMPANY The following tables set forth summary historical consolidated financial data of the Company, which have been derived from the Consolidated Financial Statements of the Company, except for the Rental Data and Retail Car Sales Data. Information for the six months ended June 30, 1997 includes the operations of BRACC from April 29, 1997. The information below should be read in conjunction with the Consolidated Financial Statements of the Company and the notes thereto included elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company".
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ---------------------------------- -------------------------- 1994 1995 1996 1996 1997 -------- -------- ---------- ---------- ------------ (IN THOUSANDS EXCEPT PER SHARE AND RENTAL AND RETAIL CAR SALES DATA) STATEMENTS OF OPERATIONS DATA: Operating revenue: Vehicle rental revenue(a)........... $ 38,642 $107,067 $ 223,250 $103,842 $ 294,559 Retail car sales revenue.............. -- 42,662 134,120 55,686 101,592 Royalties and other revenue.............. -- -- -- -- 12,618 -------- -------- ---------- -------- ---------- Total operating revenue......... $ 38,642 $149,729 $ 357,370 $159,528 $ 408,769 Depreciation -- vehicle... 7,382 27,476 60,735 28,023(b) 85,217 Operating income.......... 4,196 14,180 35,267 18,096 37,260 Vehicle interest expense................ 3,909 13,874 25,336 11,963 27,794 Non-vehicle interest expense (income), net.................... (139) (716) 838 262 3,478 Income before income taxes.................. $ 426 $ 1,022 $ 7,818 $ 5,871(b) $ 5,988 Net income................ $ 250 $ 337 $ 4,497 $ 3,523 $ 3,501 Weighted average common and common equivalent shares outstanding (000s): Primary................ 3,704 6,369 9,488 7,413 16,313 Fully diluted.......... 3,704 6,369 9,488 7,497 16,391 Earnings per common and common equivalent share: Primary................ $ 0.07 $ 0.05 $ 0.47 $ 0.48 $ 0.21 Fully diluted.......... 0.07 0.05 0.47 0.47 0.21 OPERATING DATA: EBITDA(c)................. $ 12,923 $ 45,204 $ 101,215 $ 49,112 $ 132,626 Adjusted EBITDA(c)........ 1,632 3,854 15,144 9,126 19,615 Net cash provided by operating activities... 3,660 16,148 54,379 26,618 98,017 Net cash used in investing activities............. (122,291) (46,298) (62,806) (100,028) (565,626) Net cash provided by financing activities... 119,006 29,629 58,560 84,023 685,827
8 10
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ---------------------------------- -------------------------- 1994 1995 1996 1996 1997 -------- -------- ---------- ---------- ------------ RENTAL DATA (U.S. UNLESS NOTED):(d) Locations in operation at period end............. 63 133 152 159 476 Number of usable vehicles at period end(e)....... 5,044 11,143 14,761 17,094 98,100 Rental transactions(f).... 276,000 689,000 1,166,000 551,000 1,610,000 Daily dollar average(g)... $ 37.32 $ 40.75 $ 41.19 $ 42.06 $ 42.31 Vehicle utilization(h).... 80.6% 80.0% 80.9% 80.8% 79.7% Average monthly revenue per unit(i)............ $ 909 $ 992 $ 1,017 $ 1,019 $ 1,018 RETAIL CAR SALES DATA: Locations in operation at period end............. -- 7 11 9 23 Average monthly vehicles sold................... -- 351 752 510 939 Average monthly sales revenue (000s)......... $ -- $ 5,177 $ 12,757 $ 9,281 $ 16,932
AS OF JUNE 30, 1997 -------------- (IN THOUSANDS) BALANCE SHEET DATA: Revenue earning vehicles, net............................. $2,340,807 Vehicle inventory (car sales)............................. 29,618 Total assets.............................................. 3,599,975 Fleet financing facilities................................ 2,430,703 Other notes payable....................................... 325,381 Total debt................................................ 2,756,580 Stockholders' equity...................................... 376,626
- --------------- (a) Includes revenue from vehicle rentals and related products (such as supplemental liability insurance and loss damage waivers). (b) Includes $1.9 million of automobile incentives received in 1995 that reduced vehicle depreciation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Results of Operations". (c) EBITDA consists of income before income taxes plus (i) vehicle interest expense, (ii) non-vehicle interest expense, (iii) vehicle depreciation expense and (iv) non-vehicle depreciation and amortization expenses. Adjusted EBITDA consists of income before income taxes plus (i) non-vehicle interest expense and (ii) non-vehicle depreciation and amortization expenses. EBITDA and Adjusted EBITDA are not presented as, and should not be considered, alternative measures of operating results or cash flows from operations (as determined in accordance with generally accepted accounting principles), but are presented because they are widely accepted financial indicators of a company's ability to incur and service debt. (d) Does not include data from Van Pool, the Company's van pooling operation. (e) Represents vehicles available for rent. (f) Rounded to the nearest thousand. (g) Represents rental revenue divided by the number of days that vehicles were actually rented. (h) Represents the number of days vehicles were actually rented divided by the number of days vehicles were available for rent. (i) Represents average monthly revenue divided by average monthly fleet. 9 11 SUMMARY HISTORICAL FINANCIAL DATA OF BRACC The following tables set forth summary historical consolidated financial data for BRACC, which have been derived from the Consolidated Financial Statements of BRACC. The financial data for all periods presented have been reclassified to conform to the financial statement presentation of the Company. The information below should be read in conjunction with the Consolidated Financial Statements of BRACC and the notes thereto included elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations of BRACC".
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------ ----------------------- 1994 1995 1996 1996 1997 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS EXCEPT RENTAL AND RETAIL CAR SALES DATA) STATEMENTS OF OPERATIONS DATA: Operating revenue: Vehicle rental revenue(a).............. $1,011,203 $1,034,873 $ 963,764 $ 221,778 $ 228,135 Retail car sales revenue................. 77,999 83,795 91,503 22,734 20,913 Other revenue............. 66,564 74,802 77,554 17,259 17,363 ---------- ---------- ---------- ---------- ---------- Total operating revenue............ $1,155,766 $1,193,470 $1,132,821 $ 261,771 $ 266,411 Vehicle depreciation expense................... 257,356 323,619 263,846 54,583 65,439 Operating income............. 110,075 18,583 124,651 23,543 5,332 Vehicle interest expense..... 86,127 124,758 92,738 22,949 22,589 Non-vehicle interest expense................... 18,823 25,151 31,444 7,265 7,043 Income (loss) before income taxes..................... $ 5,125 $ (131,326) $ 469 $ (6,671) $ (24,300) Net income (loss)............ $ 1,125 $ (132,640) $ (2,531) $ (7,271) $ (19,440) OPERATING DATA: EBITDA(b).................... $ 405,715 $ 378,728 $ 432,111 $ 88,813 $ 81,364 Adjusted EBITDA(b)........... 62,232 (69,649) 75,527 11,281 (6,664) Net cash provided by operating activities...... 280,793 173,944 256,290 72,826 95,811 Net cash used in investing activities................ (411,810) (180,938) (205,054) (147,880) (259,409) Net cash provided by (used in) financing activities................ 173,789 35,661 (87,561) 44,288 156,928 RENTAL DATA (U.S. UNLESS NOTED): Locations in operation at period end (worldwide).... 447 390 374 388 374 Number of usable vehicles at period end(c)............. 75,467 68,148 67,137 69,060 76,284 Rental transactions(d)....... 6,030,000 5,909,000 5,346,000 1,211,517 1,261,421 Daily dollar average(e)...... $ 38.43 $ 39.58 $ 41.26 $ 41.57 $ 40.33 Vehicle utilization(f)....... 77.4% 75.1% 76.7% 76.2% 79.5% Average monthly revenue per unit(g)................... $ 904 $ 904 $ 966 $ 960 $ 962 RETAIL CAR SALES DATA: Locations in operation at period end................ 8 9 11 9 11 Average monthly vehicles sold...................... 462 449 491 497 480 Average monthly sales revenue (000s).................... $ 6,500 $ 6,983 $ 7,625 $ 7,578 $ 6,971
10 12
AS OF MARCH 31, 1997 -------------- (IN THOUSANDS) BALANCE SHEET DATA: Revenue earning vehicles, net............................. $ 1,494,755 Vehicle inventory......................................... 14,828 Total assets.............................................. 2,484,152 Fleet financing facilities................................ 1,513,259 Other notes payable....................................... 474,055 Total debt................................................ 1,987,314 Mandatory redeemable preferred stock...................... 5,272 Stockholders' equity...................................... 121,288
- --------------- (a) Includes revenue from vehicle rentals and related products (such as insurance and loss damage waivers). (b) EBITDA consists of income before income taxes plus (i) vehicle interest expense, (ii) non-vehicle interest expense, (iii) vehicle depreciation expense and (iv) non-vehicle depreciation and amortization expenses. Adjusted EBITDA consists of income before income taxes plus (i) non-vehicle interest expense and (ii) non-vehicle depreciation and amortization expenses. EBITDA and Adjusted EBITDA are not presented as, and should not be considered, alternative measures of operating results or cash flows from operations (as determined in accordance with generally accepted accounting principles), but are presented because they are widely accepted financial indicators of a company's ability to incur and service debt. (c) Represents vehicles available for rent. (d) Rounded to the nearest thousand. (e) Represents rental revenue divided by the number of days that vehicles were actually rented. (f) Represents the number of days vehicles were actually rented divided by the number of days vehicles were available for rent. (g) Represents average monthly revenue divided by average monthly fleet. FORWARD-LOOKING STATEMENTS This Prospectus contains certain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations and business of the Company, including statements under the captions "Pro Forma Consolidated Financial Statements", "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company" and "Business". These forward-looking statements involve certain risks and uncertainties. No assurance can be given that any of such matters will be realized. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following: (a) the Company's ability to service its debt or to obtain financing for its fleet vehicles; (b) management and integration of the operations of TEAM and BRACC following the Budget Acquisition and the success of initiatives undertaken by the Company to increase its revenues and improve its profitability; (c) competitive pressure in the vehicle rental and retail car sales industries; and (d) general economic conditions. For further information on other factors which could affect the financial results of the Company and such forward-looking statements, see "Risk Factors". 11 13 RISK FACTORS Prospective investors should consider carefully the following factors in addition to other information included in this Prospectus before purchasing any of the shares of Class A Common Stock. SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT The Company has substantial indebtedness and significant debt service requirements. As of June 30, 1997, the Company's total indebtedness was $2,756.6 million (representing 88.0% of its total capitalization), of which $2,430.7 million represented senior secured indebtedness for the purchase of vehicles and $325.9 million represented non-vehicle indebtedness (representing 10.4% of its total capitalization, excluding fleet debt). As of June 30, 1997, the Company had $241.2 million of incremental availability under its vehicle financing facilities to finance the purchase of fleet vehicles. The degree to which the Company is leveraged has important consequences for holders of the Class A Common Stock, including the following: (i) the ability of the Company to obtain additional financing in the future, whether for working capital, fleet purchases, acquisitions or other purposes, may be impaired; (ii) a substantial portion of the Company's cash flow from operations is required to be dedicated to the payment of principal and interest on its indebtedness, thereby reducing funds available to the Company for other purposes; (iii) the Company's flexibility in planning for or reacting to changes in market conditions may be limited; (iv) the Company may be more vulnerable in the event of a downturn in its business; and (v) because a substantial portion of its indebtedness bears interest at floating rates, any increase in prevailing interest rates will result in an increase in interest expense incurred by the Company, which could have an adverse effect on its results of operations. See "Capitalization", "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Liquidity and Capital Resources" and "Description of Certain Indebtedness". The ability of the Company to meet its debt service obligations will depend on its future operating performance and financial results, which will be subject in part to factors beyond the control of the Company. Although management believes that the Company's cash flow will be adequate to meet its interest and principal payments, there can be no assurance that the Company will continue to generate earnings in the future sufficient to cover its fixed charges. If the Company is unable to generate earnings in the future sufficient to cover its fixed charges and is unable to borrow sufficient funds under its existing credit lines or from other sources, it may be required to refinance all or a portion of its existing indebtedness or to sell all or a portion of its assets. There can be no assurance that a refinancing would be possible, nor can there be any assurance as to the timing of any asset sales or the proceeds which the Company could realize therefrom. In addition, the terms of certain indebtedness of the Company restrict the ability of the Company to sell assets and the use of the proceeds therefrom. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Liquidity and Capital Resources". If for any reason, including a shortfall in anticipated operating results or proceeds from asset sales, the Company were unable to meet its debt service obligations, it would be in default under the terms of its indebtedness. In the event of such a default, the holders of such indebtedness could elect to declare all such indebtedness immediately due and payable, including accrued and unpaid interest, and to terminate their commitments (if any) with respect to funding obligations under such indebtedness. In addition, such holders could proceed against their collateral, which, in the case of the fleet financing facilities, consists of substantially all the Company's fleet. Any default with respect to any of the Company's indebtedness could result in a default under other indebtedness or result in a bankruptcy of the Company. AVAILABILITY OF FINANCING The Company depends upon third-party financing to purchase its fleet vehicles. Continued availability of such financing on favorable terms will be critical to the Company's operations. As of June 30, 1997, 66.0% of the Company's indebtedness was incurred in connection with major vehicle manufacturers' vehicle repurchase programs. As a result, a significant change in the credit quality of the vehicle 12 14 manufacturers, particularly Ford, would significantly affect the Company's ability to obtain such financing on favorable terms. In addition, certain events, such as a material increase in damage to vehicles, could reduce the value of the collateral securing the Company's fleet financing facilities and cause the acceleration of the repayment of such facilities. An inability of the Company to obtain vehicle financing on favorable terms would have a material adverse effect on the Company's financial condition and results of operations. There can be no assurance that the sources of financing utilized by the Company or alternative financing will remain or become available to the Company or that such financing will be available on terms acceptable to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Liquidity and Capital Resources". INTEGRATION OF BUDGET ACQUISITION The Budget Acquisition was significantly larger than any of TEAM's previous acquisitions and the combination and integration of the respective operations of TEAM and BRACC are of a substantially greater scale than previously undertaken by either company. The difficulties of managing such combination and integration are increased by the necessity of coordinating the operations of geographically diverse organizations, of integrating different strategies and operating systems, of integrating management and operating personnel from both companies and of managing a worldwide franchise system. The success of the Company following the Budget Acquisition depends on the ability of the Company's management team to: (a) manage a significantly larger organization, (b) maintain and further develop relationships with Budget franchisees and (c) conduct operations on a worldwide basis. There can be no assurance that the Company's management team will be able to successfully manage the combined operations of TEAM and BRACC. An inability to successfully manage the integration of TEAM and BRACC would have a material adverse effect on the Company's results of operations and financial condition. ABILITY TO IMPLEMENT GROWTH STRATEGY Management is undertaking initiatives to increase the Company's revenues and improve its profitability by, among other things, acquiring the operations of certain franchisees, enhancing its operations outside the United States, expanding its retail car sales operations, adding car rental locations in its existing markets, adding truck rental locations and expanding its truck rental fleet, and increasing its marketing efforts to corporate accounts. In addition, management expects the Company to realize certain cost savings and other operating efficiencies as a result of the implementation of its business strategy. Increasing the revenues of the Company, and realizing cost savings and other operating efficiencies, could be affected by a number of factors beyond the Company's control, such as general economic conditions, increased operating costs, competitive conditions in the vehicle rental industry, levels of air travel, fuel shortages, increased costs of vehicles and regulatory developments. See "Business -- Strategy". Each of these initiatives will involve risks to the Company, and there can be no assurance that the Company will be successful in growing its business or that the Company will achieve the expected cost savings and other operating efficiencies. In addition, the Company's substantial leverage could affect its success in growing its business. See "-- Substantial Leverage; Ability to Service Debt". COMPETITION The vehicle rental industry is characterized by intense competition, particularly with respect to price and service. In any geographic market, the Company may encounter competition from national, regional and local vehicle rental companies. Budget's main competitors in the car rental market are The Hertz Corporation ("Hertz"), Avis, Inc. ("Avis"), Alamo Rent-A-Car, Inc. ("Alamo"), National Car Rental System, Inc. ("National") and Enterprise Rent-A-Car Company ("Enterprise"). In consumer truck rentals, Budget faces competition primarily from U-Haul International, Inc. ("U-Haul"), Ryder TRS, Inc. ("Ryder") and Penske Truck Rental ("Penske"). There have been occasions when the major vehicle rental companies have been adversely affected by industry-wide price cutting, and the Company has on such occasions lowered its prices in response. The Company will not generally be able to unilaterally raise its prices or to maintain its prices in times of industry-wide price cutting. See "Business -- Competition". 13 15 The retail car sales industry also is characterized by intense competition, consisting primarily of local new car dealerships selling new and late model cars. In addition to local dealerships, the Company may face competition from retailers such as CarMax and AutoNation that compete on the basis of large inventory size, no-haggle pricing and after-sale service. RESTRICTIONS IMPOSED BY INDEBTEDNESS The terms of the Company's indebtedness include a number of significant covenants that, among other things, restrict the ability of the Company to dispose of assets, incur additional indebtedness, create liens, repay other indebtedness, pay dividends, make certain investments or acquisitions, repurchase or redeem capital stock, engage in mergers or consolidations, or engage in certain transactions with affiliates, and otherwise restrict corporate activities. There can be no assurance that such restrictions will not adversely affect the Company's ability to finance its future operations or capital needs or to engage in other business activities that may be in the interest of the Company. In addition, the terms of certain of such indebtedness also require the Company to comply with certain financial tests. The ability of the Company to comply with such covenants may be affected by events beyond the Company's control. A breach of any of these covenants or the inability of the Company to comply with the required financial ratios could result in a default under such indebtedness. In the event of any such default, the lenders under such indebtedness could elect to declare all borrowings outstanding under such indebtedness, together with accrued interest and other fees, to be due and payable, to require the Company to apply all of its available cash to repay such borrowings or to prevent the Company from making scheduled debt service payments. If the Company were unable to repay any such borrowings when due, the lenders could proceed against their collateral. If the indebtedness of the Company under such collateralized indebtedness or other indebtedness were to be accelerated, there can be no assurance that the assets of the Company would be sufficient to repay such indebtedness in full. There can be no assurance that the Company will be able to comply with the covenants included in its debt agreements in the future or that it would be able to obtain any necessary waivers of those covenants. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Liquidity and Capital Resources" and "Description of Certain Indebtedness". POTENTIAL CHANGES IN MANUFACTURERS' REPURCHASE PROGRAMS Approximately 89% of the vehicles purchased by TEAM and approximately 85% of the vehicles purchased by BRACC in model year 1997 were eligible for repurchase by specified automobile manufacturers at fixed prices on designated dates pursuant to such manufacturers' vehicle repurchase programs ("Program Vehicles"). The availability of Program Vehicles limits a car rental company's risk of a decline in residual value at the time of disposition and enables it to fix its depreciation expense in advance. Vehicle depreciation is the largest cost factor in the Company's vehicle rental operations. Management believes that manufacturers' repurchase programs enable the manufacturers to stimulate fleet sales in times of weak consumer demand for new automobiles. In response to strong U.S. consumer demand for passenger vehicles in 1993 and 1994, the major U.S. automobile manufacturers reduced the number of vehicles subject to repurchase programs and the financial incentives associated with these programs. U.S. consumer demand for passenger vehicles began to weaken during the second quarter of 1995, and this weakness continued through 1996. In response to these market conditions, there was an increase in the availability of repurchase programs with respect to 1996 model year vehicles, particularly repurchase programs for imported vehicles, and these programs have continued for 1997 model year vehicles. However, the Company could be adversely affected if automobile manufacturers reduce the availability of Program Vehicles, related incentives or increase the guaranteed depreciation. See "The Budget Acquisition -- Related Agreements -- Supply Agreement". SEASONALITY The third quarter, during the peak summer travel months, has historically been the strongest quarter of the year for both TEAM and BRACC. As a result, any occurrence that disrupts travel patterns during 14 16 the summer period could have a material adverse effect on the Company's annual performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Seasonality". COSTS OF REGULATORY AND ENVIRONMENTAL COMPLIANCE The Company is subject to various foreign, federal, state and local laws and regulations that affect the conduct of its operations, including those relating to the sale of loss damage waivers, vicarious liability of vehicle owners, consumer protection, advertising, used vehicle sales, the taxing and licensing of vehicles, franchising operations and sales, and environmental compliance and remediation. There can be no assurance that compliance with these laws and regulations or the adoption of modified or additional laws and regulations will not require material expenditures by the Company or otherwise have a material adverse effect on its results of operations or financial condition. See "Business -- Regulatory and Environmental Matters". DEPENDENCE ON PRINCIPAL SUPPLIER For many years, Ford has been BRACC's principal supplier of vehicles. The number of vehicles purchased from Ford has varied from year to year. In model year 1997, approximately 73% of BRACC's U.S. vehicle purchases were comprised of Ford vehicles. Under the terms of the supply agreement that was entered into concurrently with the Budget Acquisition, the Company agreed to purchase or lease Ford vehicles in such quantity that the percentage of new Ford vehicles purchased or leased by the Company in the United States, Canada, and other countries outside the European Union represents at least 70% of the total new vehicle acquisitions by the Company, with a minimum quantity of at least 80,000 vehicles in the United States in each model year. See "The Budget Acquisition -- Related Agreements -- Supply Agreement". Given the volume of vehicles purchased from Ford by the Company, shifting significant portions of the fleet purchases to other manufacturers would require lead time and certain operational changes. As a result, any inability of Ford to supply the Company with the planned number and types of vehicles, any significant decline in the quality and customer satisfaction with respect to Ford vehicles or any failure of the parties to reach an agreement on the terms of any purchases, could have a material adverse effect on the Company's financial condition and results of operations. RISKS OF INTERNATIONAL OPERATIONS For 1996, on a pro forma basis, 8.9% of the Company's revenues were derived from its international operations. The Company's international vehicle rental operations are subject to certain risks, including adverse developments in the foreign political and economic environment, varying governmental regulations, foreign currency fluctuations, potential difficulties in staffing and managing foreign operations and potential adverse tax consequences. There can be no assurance that any of these factors will not have a material adverse effect on the Company's results of operations or financial condition. DEPENDENCE ON PRINCIPAL EXECUTIVE OFFICERS The Company's existing operations and continued future development are dependent in part on the active participation of Messrs. Miller, Kennedy and Congdon. The loss of the services of one or more of these individuals could have a material adverse effect on the Company. The Company has no employment agreements or covenants not to compete with any of its executive officers or significant employees. See "Management". SHARES ELIGIBLE FOR FUTURE SALE A substantial number of shares of Class A Common Stock currently outstanding, or issuable upon conversion of the Company's outstanding Convertible Notes, or upon exercise of stock options and stock purchase warrants, are or will become eligible for future sale in the public market at prescribed times pursuant to registration rights of certain security holders or applicable regulations. The Company has 15 17 agreed, promptly following completion of the Offering, to file a shelf registration statement relating to the 5,595,491 shares of Class A Common Stock issuable upon conversion of the outstanding Convertible Notes. The Company's directors and executive officers, who in the aggregate beneficially own 2,856,858 shares of Common Stock, have agreed that for a period of 90 days after the date of this Prospectus, and the Company has agreed that for a period of 90 days after the date of this Prospectus, they will not sell or otherwise dispose of any shares of Common Stock without the prior written consent of Goldman, Sachs & Co. See "Underwriting". Significant sales of the Class A Common Stock in the public market following the Offering could adversely affect prevailing market prices. See "Shares Eligible for Future Sale". SUBSTANTIAL VOTING POWER BY PRINCIPAL EXECUTIVE OFFICERS The Company has two classes of Common Stock: Class A Common Stock, holders of which are entitled to one vote per share, and Class B Common Stock, holders of which are entitled to ten votes per share. Messrs. Miller, Kennedy and Congdon own all outstanding shares of Class B Common Stock, which, following the Offering, together with the Class A Common Stock owned by such individuals, will represent approximately 45.6% of the combined voting power of both classes of Common Stock. As a result, such officers will be able to exert substantial influence over the election of the Company's Board of Directors, thereby increasing the probability that members elected by them will continue to direct the business, policies and management of the Company. See "Principal and Selling Stockholders". POTENTIAL ANTI-TAKEOVER EFFECTS OF CHARTER AND BYLAW PROVISIONS; POSSIBLE ISSUANCES OF PREFERRED STOCK Certain provisions of Delaware law, the Company's Amended and Restated Certificate of Incorporation (in particular, the voting rights of the Class B Common Stock) and the Company's Bylaws could delay or impede the removal of incumbent directors and could make it more difficult for a third party to acquire, or could discourage a third party from attempting to acquire, control of the Company. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Class A Common Stock. In addition, shares of preferred stock may be issued by the Board of Directors without stockholder approval on such terms and conditions, and having such rights, privileges and preferences, as the Board of Directors may determine. The rights of the holders of the Class A Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The Company has no current plans to issue any shares of preferred stock. See "Description of Capital Stock -- Preferred Stock" and "Description of Capital Stock -- Section 203". 16 18 USE OF PROCEEDS The Company will not receive any proceeds from the Offering. All the proceeds from the Offering will be received by the Selling Stockholder. PRICE RANGE OF COMMON STOCK The Class A Common Stock has been listed on the NYSE under the symbol "BD" since April 17, 1997. From the time of the Company's initial public offering on August 25, 1994 through April 16, 1997, the Class A Common Stock was traded on The Nasdaq National Market. The following table sets forth the high and low sale prices per share for the Class A Common Stock as reported to the Company by The Nasdaq National Market and the NYSE, as applicable, for the periods indicated:
HIGH LOW ------- ------- 1995 First Quarter............................................. $ 9.75 $ 8.00 Second Quarter............................................ 9.00 7.25 Third Quarter............................................. 11.75 6.1875 Fourth Quarter............................................ 10.75 8.00 1996 First Quarter............................................. 10.50 8.25 Second Quarter............................................ 17.50 9.25 Third Quarter............................................. 20.25 12.375 Fourth Quarter............................................ 20.25 15.25 1997 First Quarter............................................. 29.50 16.00 Second Quarter............................................ 34.875 19.00 Third Quarter (through August 29, 1997)................... 35.50 28.1875
On August 29, 1997, the last sale price of the Class A Common Stock as reported on the NYSE was $29.375 per share. As of August 29, 1997, there were approximately 94 holders of record of the Class A Common Stock. DIVIDEND POLICY Although the Company is currently able to pay dividends, subject to limitations under the terms of its indebtedness, the Company has never declared or paid dividends on its Common Stock. It is the current policy of the Board of Directors of the Company to retain earnings for use in the business and not to pay any cash dividends on the Common Stock. Any declaration and payment of cash dividends on the Common Stock will be subject to the discretion of the Company's Board of Directors and will be dependent upon the Company's financial condition, results of operations, cash requirements and future prospects, the limitations under the terms of its indebtedness and other factors deemed relevant by the Company's Board of Directors. There can be no assurance that any such dividends will be declared or paid. 17 19 CAPITALIZATION The following table sets forth the capitalization of the Company as of June 30, 1997 and as adjusted to reflect the conversion of the Series A Convertible Preferred Stock and the Offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Liquidity and Capital Resources".
AT JUNE 30, 1997 --------------------------- ACTUAL AS ADJUSTED ----------- ----------- (IN THOUSANDS) Vehicle debt: Asset-backed notes(a)..................................... $ 1,550,459 $ 1,550,459 Commercial paper.......................................... 812,511 812,511 Other fleet obligations................................... 67,733 67,733 ----------- ----------- Total vehicle debt................................ $ 2,430,703 $ 2,430,703 Non-vehicle debt: 9.57% Guaranteed Senior Notes due 2007.................... 165,000 165,000 Convertible Notes......................................... 125,000 125,000 Other notes payable....................................... 35,381 35,381 Capital lease obligations................................. 496 496 ----------- ----------- Total non-vehicle debt............................ $ 325,877 $ 325,877 ----------- ----------- Total debt...................................... $ 2,756,580 $ 2,756,580 ----------- ----------- Stockholders' equity: Series A Convertible Preferred Stock, $.01 par value, 10,000 shares authorized, 4,500 shares issued and outstanding; no shares issued and outstanding, as adjusted(c)............................................ 105,750 --(b) Class A Common Stock, $.01 par value, one vote per share, 35,000,000 shares authorized; 17,999,750 shares issued and 17,963,083 shares outstanding; 22,499,750 shares issued and 22,463,083 shares outstanding, as adjusted(c)............................................ 180 225(b) Class B Common Stock, $.01 par value, ten votes per share, 2,500,000 shares authorized; 1,936,600 shares issued and outstanding........................................ 19 19 Additional paid-in capital.................................. 265,185 370,890 Pension liability adjustment................................ -- -- Foreign currency translation adjustment..................... (42) (42) Retained earnings........................................... 5,864 5,864 Treasury stock (at cost).................................... (330) (330) ----------- ----------- Total stockholders' equity........................ $ 376,626 $ 376,626 ----------- ----------- Total capitalization............................ $ 3,133,206 $ 3,133,206 =========== ===========
(footnotes on following page) 18 20 - --------------- (a) Consists of the "First Fleet Financing Facility", the "Second Fleet Financing Facility" and the "Third Fleet Financing Facility" and the "1997 Fleet Financings", as described and defined under "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Liquidity and Capital Resources". (b) As adjusted to reflect conversion of the Series A Convertible Preferred Stock into 4,500,000 shares of Class A Common Stock, all of which are being sold in the Offering. (c) Does not include (i) 3,986,049 shares of Class A Common Stock issuable upon conversion of the Series A Convertible Notes; (ii) 1,609,442 shares of Class A Common Stock issuable upon conversion of the Series B Convertible Notes; (iii) 1,848,150 shares of Class A Common Stock and 164,000 shares of Class B Common Stock issuable pursuant to options outstanding at June 30, 1997; (iv) 187,500 shares of the Class A Common Stock reserved for issuance upon exercise of outstanding warrants; and (v) 36,667 shares of Class A Common Stock held as treasury shares. See "Management -- Benefit Plans" and "Description of Capital Stock -- Warrants". 19 21 PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS INTRODUCTION The following unaudited Pro Forma Consolidated Statements of Operations are based on the historical financial statements of the Company for the year ended December 31, 1996 and the six months ended June 30, 1997 and of BRACC for the year ended December 31, 1996 and the period through April 29, 1997, adjusted to give effect to the transactions described below. The pro forma consolidated statements of operations for the year ended December 31, 1996 give effect to the following transactions as if they had occurred on January 1, 1996: (i) certain transactions effected by TEAM during 1996 that are more fully described below (the "1996 TEAM Transactions") and (ii) the Budget Acquisition and certain related transactions that are more fully described below (the "Budget Acquisition Transactions" and, together with the 1996 TEAM Transactions, the "Transactions"). The pro forma consolidated statements of operations for June 30, 1997 give effect to the Budget Acquisition Transactions as if they had occurred on January 1, 1997. The 1996 TEAM Transactions consist of the following: (i) TEAM's acquisition of Van Pool, which was effective on February 1, 1996, TEAM's acquisition of the Phoenix Budget franchise (the "Phoenix Acquisition"), which was effective on March 1, 1996, and TEAM's acquisition of ValCar Rental Car Sales, Inc. ("ValCar"), which was effective on August 1, 1996 (the "ValCar Acquisition"); (ii) the sale of 3,821,007 shares of Class A Common Stock by TEAM in a public offering in July 1996 (the "July 1996 Public Offering"); (iii) the partial refinancing of TEAM's vehicle rental fleet in December 1996 through the $176.0 million aggregate principal amount Third Fleet Financing Facility; (iv) the private placement of $80.0 million aggregate principal amount of Series A Convertible Notes in December 1996; and (v) the repayment of certain of TEAM's outstanding indebtedness from the proceeds of (ii), (iii) and (iv) above. The Budget Acquisition Transactions consist of the following: (i) the Budget Acquisition, including the repayment, purchase and forgiveness of certain indebtedness and the necessary purchase accounting and elimination entries; (ii) the sale of 8,625,000 shares of Class A Common Stock by TEAM in a public offering in April 1997 (the "April 1997 Public Offering") and the application of the net proceeds thereof; (iii) the private placement (the "Debt Placements") of $45,000,000 aggregate principal amount of Convertible Notes and $165,000,000 aggregate principal amount of 9.57% Guaranteed Senior Notes due 2007 (the "Guaranteed Senior Notes") and the application of the net proceeds thereof; and (iv) the April 1997 credit facilities for fleet financings (the "April 1997 Fleet Financings") with an aggregate commitment of $1.4 billion and the application of the net proceeds thereof and the repayment of certain of BRACC's outstanding indebtedness to Ford from the net proceeds thereof. All acquisitions, including the Budget Acquisition, have been accounted for using the purchase method of accounting. The Pro Forma Consolidated Statements of Operations do not purport to represent what the Company's results of operations would have been had the Transactions actually occurred on the date indicated or to predict the Company's results of operations in the future. These statements are qualified in their entirety by, and should be read in conjunction with, the historical financial statements of the Company and BRACC and the notes thereto included elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of BRACC". The Pro Forma Consolidated Statements of Operations have been prepared using the purchase method of accounting, whereby the total cost of the Budget Acquisition has been allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values at the effective date of the Budget Acquisition. The Pro Forma Consolidated Statements of Operations give effect only to the adjustments set forth in the accompanying notes and do not reflect any other benefits anticipated by management as a result of the Budget Acquisition Transactions and the implementation of its business strategy or the possible effects of the Supply Agreement and Advertising Agreement (as defined). 20 22 PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
ADJUSTMENTS ADJUSTMENTS FOR PRO FORMA FOR BUDGET PRO FORMA HISTORICAL 1996 TEAM HISTORICAL HISTORICAL ACQUISITION BUDGET TEAM TRANSACTIONS(A) TEAM BRACC TRANSACTIONS GROUP ---------- --------------- ---------- ---------- ------------ ---------- Operating revenue: Vehicle rental revenue.......... $223,250 $10,874 $234,124 $ 963,764 $ -- $1,197,888 Royalty fees.................... -- -- -- 60,352 (7,641)(k) 52,711 Retail car sales revenue........ 134,120 21,313 155,433 91,503 -- 246,936 Other........................... -- -- -- 17,202 (2,509)(k) 14,693 -------- ------- -------- ---------- -------- ---------- Total operating revenue... $357,370 $32,187 $389,557 $1,132,821 $(10,150) $1,512,228 Operating costs and expenses: Direct vehicle and operating.... 35,098 2,372 37,470 121,288 (6,719)(k) 152,039 Depreciation -- vehicle......... 60,735 2,855 63,590 263,846 -- 327,436 Depreciation -- non-vehicle..... 2,589 343 2,932 26,645 -- 29,577 Cost of car sales............... 113,747 19,639 133,386 78,944 -- 212,330 Advertising, promotion and selling....................... 22,983 915 23,898 83,304 (2,509)(k) 104,693 Facilities...................... 20,406 871 21,277 114,325 -- 135,602 Personnel....................... 53,097 1,955(b) 55,052 248,655 -- 303,707 General and administrative...... 11,605 3,968(c) 15,573 54,194 -- 69,767 Amortization.................... 1,843 90(d) 1,933 16,969 (6,385)(l) 12,517 -------- ------- -------- ---------- -------- ---------- Total operating costs and expenses................ $322,103 $33,008 $355,111 $1,008,170 $(15,613) $1,347,668 -------- ------- -------- ---------- -------- ---------- Operating income (loss)........... $ 35,267 $ (821) $ 34,446 $ 124,651 $ 5,463 $ 164,560 -------- ------- -------- ---------- -------- ---------- Other (income) expense: Vehicle interest expense........ 25,336 (4,419)(e) 20,917 92,738 (6,734)(m)(n) 106,921 Non-vehicle interest expense.... 1,501 4,292(f) 5,793 31,444 (10,308)(o)(p) 26,929 Interest income -- restricted cash.......................... (781) (929)(g) (1,710) -- (108)(q) (1,818) Non-recurring bank fees......... 1,275 (1,275)(h) -- -- -- -- Related party interest.......... 118 (118)(i) -- -- -- -- -------- ------- -------- ---------- -------- ---------- Total other (income) expense................. $ 27,449 $(2,449) $ 25,000 $ 124,182 $(17,150) $ 132,032 Income before income taxes........ 7,818 1,628 9,446 469 22,613 32,528 Provision for income taxes...... 3,321 651(j) 3,972 3,000 4,652(r) 11,624 -------- ------- -------- ---------- -------- ---------- Net income (loss)......... $ 4,497 $ 977 $ 5,474 $ (2,531) $ 17,961 $ 20,904 ======== ======= ======== ========== ======== ========== Weighted average common and common equivalent shares outstanding: Primary......................... 9,488 11,515 24,579 ========== Fully diluted................... 9,552 11,578 28,618 ========== Earnings per common and common equivalent share: Primary......................... $ 0.47 $ 0.48 $ 0.85(s) ========== Fully diluted................... 0.47 0.47 0.85 ==========
21 23 NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS) Adjustments for 1996 TEAM Transactions: (a) Reflects the inclusion of the operations of Van Pool, the Phoenix Budget franchise, and ValCar from January 1, 1996, to their respective dates of acquisition by TEAM of February 1, March 1, and August 1, 1996, respectively, as reflected in the table below.
VAN POOL PHOENIX VALCAR TOTAL -------- ------- ------- ------- Operating revenue: Vehicle rental revenue........................... $2,660 $8,214 -- $10,874 Retail car sales revenue......................... -- -- $21,313 21,313 ------ ------ ------- ------- Total operating revenues.................... $2,660 $8,214 $21,313 $32,187 ------ ------ ------- ------- Operating costs and expenses: Direct vehicle and operating..................... 893 1,479 -- 2,372 Depreciation -- vehicle.......................... 676 2,179 -- 2,855 Depreciation -- non-vehicle...................... 8 229 106 343 Cost of car sales................................ -- -- 19,639 19,639 Advertising, promotion and selling............... -- 915 -- 915 Facilities....................................... 33 838 -- 871 Personnel........................................ 379 1,913 -- 2,292 General and administrative....................... 148 436 3,421 4,005 Amortization of franchise rights................. -- 8 -- 8 ------ ------ ------- ------- Total operating costs and expenses.......... $2,137 $7,997 $23,166 $33,300 ------ ------ ------- ------- Operating income (loss)............................ 523 217 (1,853) (1,113) Other (income) expense: Vehicle interest expense......................... 232 991 318 1,541 Non-vehicle interest expense (income), net....... (21) 2 -- (19) ------ ------ ------- ------- Total other expense......................... $ 211 $ 993 $ 318 $ 1,522 Income (loss) before taxes......................... 312 (776) (2,171) (2,635) Provision (benefit) for income taxes............. 125 (310) (869) (1,054) ------ ------ ------- ------- Net income (loss).................................. $ 187 $ (466) $(1,302) $(1,581) ====== ====== ======= =======
(b) Reflects the net increase in personnel expense of $1,955 attributable to: Operations of purchased businesses as reflected in note (a).................................................... $2,292 Reduction relating to salaries and bonuses previously paid to officers of the Phoenix Budget franchise.............................. (312) Reduction resulting from the elimination of a retirement plan................................................... (25) ------ Net increase in personnel expense.................. $1,955 ======
(c) Reflects the net increase in general and administrative expense of $3,968 attributable to: Operations of purchased businesses as reflected in note (a).................................................... $ 4,005 Elimination of management fees paid to former shareholders of ValCar................................. (108) Royalty payments made by ValCar to BRACC for the right to use the "Budget" trade name for its retail car sales facilities during the preacquisition period............ 71 ------- Net increase in general and administrative expense........................................... $ 3,968 =======
(d) Reflects the net increase in amortization expense of $90 attributable to: Operations of purchased businesses as reflected in note (a).................................................... $ 8 Amortization of franchise rights resulting from the Phoenix Acquisition.................................... 60 Amortization of franchise rights resulting from the ValCar Acquisition..................................... 22 ------- Net increase in amortization expense............... $ 90 =======
22 24 NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 -- (CONTINUED) (IN THOUSANDS) (e) Reflects the net decrease in vehicle interest expense of $4,419 attributable to: Operations of purchased businesses as reflected in note (a).................................................... $ 1,541 Amortization of costs incurred in connection with the Third Fleet Financing Facility......................... 260 Interest savings due to the refinancing of debt at reduced interest rates under the Third Fleet Financing Facility............................................... (6,220) ------- Net decrease in vehicle interest expense........... $(4,419) =======
(f) Reflects the net increase in non-vehicle interest expense of $4,292 attributable to: Operations of purchased businesses as reflected in note (a).................................................... $ (19) Interest expense that would have been incurred on borrowings of $15.0 million to effect the Phoenix Acquisition............................................ 217 Interest expense incurred on the Series A Convertible Notes.................................................. 3,901 Amortization of costs incurred in connection with the issuance of Series A Convertible Notes................. 193 ------- Net increase in non-vehicle interest expense....... $ 4,292 ======= Because the Series A Convertible Notes are unsecured indebtedness, the entire interest expense is included in non-vehicle interest expense, even though a portion of the proceeds have been used to fund the fleet. Based on the average fleet debt outstanding during the period that could have been funded by the Series A Convertible Notes, approximately $3,000 of the interest cost incurred is attributable to funding the fleet.
(g) Reflects the $929 increase in interest income -- restricted cash earned on restricted cash balances remaining in TEAM's restricted cash account after application of the proceeds received from the Third Fleet Financing Facility, the Series A Convertible Notes and the July 1996 Public Offering to TEAM's outstanding indebtedness. Under the terms of the Third Fleet Financing Facility, specified amounts of cash are required to be maintained in a restricted cash account, with such amounts earning interest at a rate of 4.5% per annum. (h) Reflects the elimination of $1,275 in non-recurring financing fees related to bridge loans that were repaid with the proceeds of the July 1996 Public Offering and that would not have been incurred on a pro forma basis. (i) Reflects the elimination of $118 of related party interest due to repayment of the related party debt. (j) Reflects the tax effect of the pro forma adjustments, based on an effective tax rate of approximately 40%. Adjustments for Budget Acquisition Transactions: (k) Reflects the elimination of the following transactions between TEAM and BRACC: Advertising fees paid by TEAM which were recognized as other revenue by BRACC................................. $2,509 Royalty expenses paid by TEAM which were recognized as royalty fees by BRACC.................................. 6,241
Also reflects the elimination of the current year effect of $1,400 royalty fees recognized by BRACC and $478 royalty expense recognized by TEAM related to the warrant to purchase shares of Class A Common Stock of TEAM held by BRACC (the "BRACC Warrant"). The BRACC Warrant was issued by TEAM in August 1994 and, following the Budget Acquisition, is no longer outstanding. (l) Reflects the elimination of $16,969 of amortization of BRACC's existing goodwill and records an increase of $10,584 amortization on the net goodwill and other intangible assets recorded through purchase accounting adjustments. 23 25 NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 -- (CONTINUED) (IN THOUSANDS) (m) Reflects the increase in vehicle interest expense attributable to: Interest expense related to the April 1997 Fleet Financings............................................. $54,641 Amortization of costs incurred in connection with certain of the April 1997 Fleet Financings............. 1,169 ------- Increase in vehicle interest expense............... $55,810 =======
(n) Reflects the decrease in vehicle interest expense attributable to: Interest savings on vehicle debt refinanced through the April 1997 Fleet Financings............................ $54,532 Interest savings on vehicle debt to Ford paid down by BRACC in connection with the Budget Acquisition................................ 8,012 ------- Decrease in vehicle interest expense............... $62,544 =======
(o) Reflects the increase in non-vehicle interest expense attributable to: Interest expense related to the Debt Placements......... $18,873 Amortization of costs incurred in connection with certain of the April 1997 Fleet Financings and the Debt Placements............................................. 1,481 ------- Increase in non-vehicle interest expense........... $20,354 =======
(p) Reflects the decrease in non-vehicle interest expense attributable to: Elimination of interest on BRACC indebtedness to Ford purchased by TEAM through the issuance of Series A Convertible Preferred Stock............................... $ 7,634 Elimination of interest on working capital debt of $131,692 forgiven by Ford.......................................... 10,330 Elimination of interest on BRACC indebtedness to Ford paid down by BRACC using the proceeds from BRACC's sale of newly issued common stock to TEAM......................... 12,698 ------- Decrease in non-vehicle interest expense................ $30,662 =======
(q) Reflects $108 of interest income - restricted cash on the $2,400 increase in restricted cash resulting from the receipt of Ford's funding of the special bonus program implemented in connection with the Budget Acquisition. See "The Budget Acquisition - Terms of the Stock Purchase Agreements -- Special Bonus Program". (r) Reflects a tax provision attributable to the combined group on a pro forma basis. (s) Unaudited pro forma earnings per common and common equivalent share data for Budget Group are calculated using 24,578,786 shares of Common Stock, which include the 4,500,000 shares of Class A Common Stock into which the outstanding Series A Convertible Preferred Stock is convertible and which are being offered hereby. 24 26 PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
ADJUSTMENTS HISTORICAL HISTORICAL BRACC FOR BUDGET PRO FORMA BUDGET THROUGH ACQUISITION BUDGET GROUP BUDGET ACQUISITION(A) TRANSACTIONS GROUP ---------- --------------------- ------------ --------- Operating revenue: Vehicle rental revenue.............. $294,559 $311,945 $ -- $606,504 Royalty fees........................ 12,618 18,433 (2,439)(b) 28,612 Retail car sales revenue............ 101,592 29,146 -- 130,738 Other............................... -- 4,699 (1,217)(b) 3,482 -------- -------- ------- -------- Total operating revenue...... $408,769 $364,223 $(3,656) $769,336 Operating costs and expenses: Direct vehicle and operating........ 38,402 43,112 (2,439)(b) 79,075 Depreciation -- vehicle............. 85,217 89,019 -- 174,236 Depreciation -- non-vehicle......... 5,361 8,592 -- 13,953 Cost of car sales................... 86,068 25,691 -- 111,759 Advertising, promotion and selling........................... 35,050 37,844 (1,217)(b) 71,677 Facilities.......................... 30,326 38,937 -- 69,263 Personnel........................... 71,403 86,916 -- 158,319 General and administrative.......... 16,707 20,712 -- 37,419 Amortization........................ 2,975 5,824 (2,328)(c) 6,471 -------- -------- ------- -------- Total operating costs and expenses................... $371,509 $356,647 $(5,984) $722,172 -------- -------- ------- -------- Operating income...................... $ 37,260 $ 7,576 $ 2,328 $ 47,164 -------- -------- ------- -------- Other (income) expense: Vehicle interest expense............ 27,794 30,346 (1,245)(d)(e) 56,895 Non-vehicle interest expense........ 5,290 10,576 (4,067)(f)(g) 11,799 Interest income -- restricted cash.............................. (1,812) -- (36)(h) (1,848) -------- -------- ------- -------- Total other (income) expense.................... $ 31,272 $ 40,922 $(5,348) $ 66,846 -------- -------- ------- -------- Income (loss) before income taxes..... 5,988 (33,346) 7,676 (19,682) Provision (benefit) for income taxes............................. 2,487 (3,970) (7,463)(i) (8,946) -------- -------- ------- -------- Net income (loss)............ $ 3,501 $(29,376) $15,139 $(10,736) ======== ======== ======= ======== Weighted average common and common equivalent shares outstanding: Primary............................. 16,313 24,985 ======== Earnings (loss) per common and common equivalent share: Primary............................. $ 0.21 $ (0.43)(j) ========
25 27 NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 (IN THOUSANDS) (a) Reflects the inclusion of the operations of BRACC from January 1, 1997 to April 29, 1997, the date of the acquisition of BRACC by the Company. (b) Reflects the elimination of the following transactions between TEAM and BRACC: Advertising fees paid by TEAM which were recognized as other revenue by BRACC................................ $1,217 Royalty expenses paid by TEAM which were recognized as royalty fees by BRACC................................. 1,700
Also reflects the elimination of the current period effect of $739 royalty fees recognized by BRACC and $739 royalty expense recognized by TEAM related to the BRACC Warrant. (c) Reflects the elimination of $5,824 of amortization of BRACC's existing goodwill and records an increase of $3,496 amortization on the net goodwill and other intangible assets recorded through purchase accounting adjustments. (d) Reflects the increase in vehicle interest expense attributable to: Interest expense related to the April 1997 Fleet Financings............................................ $17,899 Amortization of costs incurred in connection with certain of the April 1997 Fleet Financings............ 384 ------- Increase in vehicle interest expense.............. $18,283 =======
(e) Reflects the decrease in vehicle interest expense attributable to: Interest savings on vehicle debt refinanced through the April 1997 Fleet Financings........................... $17,696 Interest savings on vehicle debt to Ford paid down by BRACC in connection with the Budget Acquisition....... 1,832 ------- Decrease in vehicle interest expense.............. $19,528 =======
(f) Reflects the increase in non-vehicle interest expense attributable to: Interest expense related to the Debt Placements........ $ 6,205 Amortization of costs incurred in connection with certain of the April 1997 Fleet Financings and the Debt Placements....................................... 487 ------- Increase in non-vehicle interest expense.......... $ 6,692 =======
(g) Reflects the decrease in non-vehicle interest expense attributable to: Elimination of interest on BRACC indebtedness to Ford purchased by TEAM through the issuance of Series A Convertible Preferred Stock............................... $ 2,478 Elimination of interest on working capital debt of $131,692 forgiven by Ford.......................................... 3,353 Elimination of interest on BRACC indebtedness to Ford paid down by BRACC using the proceeds from BRACC's sale of newly issued common stock to TEAM......................... 4,928 ------- Decrease in non-vehicle interest expense............... $10,759 =======
(h) Reflects $36 of interest income -- restricted cash on the $2,400 increase in restricted cash resulting from the receipt of Ford's funding of the special bonus program implemented in connection with the Budget Acquisition. See "The Budget Acquisition -- Terms of the Stock Purchase Agreements -- Special Bonus Program". 26 28 (i) Reflects a tax provision attributable to the combined group on a pro forma basis. (j) Unaudited pro forma earnings per common and common equivalent share data for Budget Group are calculated using 24,968,050 shares of Common Stock, which include the 4,500,000 shares of Class A Common Stock into which Ford's Series A Convertible Preferred Stock is convertible and which are being offered hereby. 27 29 SELECTED HISTORICAL FINANCIAL DATA OF THE COMPANY The following table sets forth selected consolidated statement of operations data and selected consolidated balance sheet data of the Company. The selected financial data for each of the five years ended December 31, 1996 are derived from the consolidated financial statements of the Company. The data presented for each of the six months ended June 30, 1996 and 1997 are derived from unaudited financial statements, but in the opinion of the Company reflect all adjustments (consisting of normal recurring adjustments) that the Company considers necessary for a fair presentation of such information in accordance with generally accepted accounting principles. Information for the six months ended June 30, 1997 includes the operations of BRACC from April 29, 1997. The selected financial data below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company" and the Consolidated Financial Statements and notes thereto included elsewhere in this Prospectus.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------------- ------------------- 1992 1993 1994 1995 1996 1996 1997 ------- ------- ------- -------- -------- -------- -------- (IN THOUSANDS) STATEMENTS OF OPERATIONS DATA: Operating revenue: Vehicle rental revenue(a)............ $21,968 $22,321 $38,642 $107,067 $223,250 $103,842 $294,559 Retail car sales revenue............... -- -- -- 42,662 134,120 55,686 101,592 Royalties and other revenue............... -- -- -- -- -- -- 12,618 ------- ------- ------- -------- -------- -------- -------- Total operating revenue........ $21,968 $22,321 $38,642 $149,729 $357,370 $159,528 $408,769 ------- ------- ------- -------- -------- -------- -------- Operating expenses: Direct vehicle and operating............. 5,989 5,452 9,439 13,704 35,098 12,742 38,402 Depreciation -- vehicle... 2,832 4,358 7,382 27,476 60,735 28,023(b) 85,217 Depreciation -- non- vehicle............... 212 229 446 1,341 2,589 1,210 5,361 Cost of car sales....... -- -- -- 38,021 113,747 47,295 86,068 Advertising, promotion and selling........... 1,477 1,658 3,090 11,826 22,983 10,609 35,050 Facilities.............. 2,662 2,695 4,398 11,121 20,406 9,417 30,326 Personnel............... 4,292 4,537 7,947 24,515 53,097 24,005 71,403 General and administrative........ 736 790 1,515 6,686 11,605 7,135 16,707 Amortization............ 151 152 229 859 1,843 996 2,975 ------- ------- ------- -------- -------- -------- -------- Total operating expenses....... $18,351 $19,871 $34,446 $135,549 $322,103 $141,432 $371,509 ------- ------- ------- -------- -------- -------- -------- Operating income.......... $ 3,617 $ 2,450 $ 4,196 $ 14,180 $ 35,267 $ 18,096 $ 37,260 ------- ------- ------- -------- -------- -------- -------- Other (income) expense: Vehicle interest expense............... $ 2,440 $ 2,462 $ 3,909 $ 13,874 $ 25,336 $ 11,963 $ 27,794 Non-vehicle interest expense (income), net................... 619 401 (139) (716) 838 262 3,478 Non-recurring expense (income).............. -- (1,023) -- -- 1,275 -- -- ------- ------- ------- -------- -------- -------- -------- Total other expense........ $ 3,059 $ 1,840 $ 3,770 $ 13,158 $ 27,449 $ 12,225 $ 31,272 ------- ------- ------- -------- -------- -------- -------- Income before income taxes................... 558 610 426 1,022 7,818 5,871(b) 5,988 Provision for income taxes................... -- 182 176 685 3,321 2,348 2,487 ------- ------- ------- -------- -------- -------- -------- Net income................ $ 558 $ 428 $ 250 $ 337 $ 4,497 $ 3,523 $ 3,501 ======= ======= ======= ======== ======== ======== ======== Weighted average common and common equivalent shares outstanding: Primary............... -- -- 3,704 6,369 9,488 7,413 16,313 Fully diluted......... -- -- 3,704 6,369 9,488 7,497 16,391 Earnings per common and common equivalent share: Primary............... -- -- $ 0.07 $ 0.05 $ 0.47 $ 0.48 $ 0.21 Fully diluted......... -- -- 0.07 0.05 0.47 0.47 0.21
28 30
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------------- ---------------------- 1994 1995 1996 1996 1997 --------- -------- ---------- -------- ---------- (IN THOUSANDS EXCEPT RENTAL AND RETAIL CAR SALES DATA) OPERATING DATA: EBITDA(c).......................... $ 12,923 $ 45,204 $ 101,215 $ 49,112 $ 132,626 Adjusted EBITDA(c)................. 1,632 3,854 15,144 9,126 19,615 Net cash provided by operating activities....................... 3,660 16,148 54,379 26,618 98,017 Net cash used in investing activities....................... (122,291) (46,298) (62,806) (100,028) (565,626) Net cash provided by financing activities....................... 119,006 29,629 58,560 84,023 685,827 RENTAL DATA (U.S. UNLESS NOTED):(d) Locations in operation at period end.............................. 63 133 152 159 476 Number of usable vehicles at period end(e)........................... 5,044 11,143 14,761 17,094 98,100 Rental transactions(f)............. 276,000 689,000 1,166,000 551,000 1,610,000 Daily dollar average(g)............ $ 37.32 $ 40.75 $ 41.19 $ 42.06 $ 42.31 Vehicle utilization(h)............. 80.6% 80.0% 80.9% 80.8% 79.7% Average monthly revenue per unit(i).......................... $ 909 $ 992 $ 1,017 $ 1,019 $ 1,018 RETAIL CAR SALES DATA: Locations in operation at period end.............................. -- 7 11 9 23 Average monthly vehicles sold...... -- 351 752 510 939 Average monthly sales revenue (000s)........................... $ -- $ 5,177 $ 12,757 $ 9,281 $ 16,932
AS OF AS OF DECEMBER 31, JUNE 30, -------------------------------------------------- ---------- 1992 1993 1994 1995 1996 1997 ------- ------- -------- -------- -------- ---------- (IN THOUSANDS) BALANCE SHEET DATA: Revenue earning vehicles, net......... $23,343 $23,577 $ 97,127 $219,927 $319,257 $2,340,807 Vehicle inventory..................... -- -- 943 8,938 16,413 29,618 Total assets.......................... 32,027 33,325 162,991 386,323 587,223 3,599,975 Fleet financing facilities............ 23,890 23,857 123,779 295,647 360,120 2,430,703 Other notes payable................... 3,795 3,632 2,785 22,586 93,989 325,381 Total debt............................ 27,880 28,533 127,187 319,017 454,689 2,756,580 Redeemable preferred stock............ 2,747 2,747 -- -- -- -- Common stock warrant.................. -- -- 2,000 2,000 2,000 -- Stockholders' equity (deficit)........ (1,344) (1,251) 26,748 39,592 92,001 376,626
- --------------- (a) Includes revenue from vehicle rentals and related products (such as insurance and loss damage waivers). (b) Includes $1.9 million of automobile incentives received in 1995 that reduced vehicle depreciation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Results of Operations". (c) EBITDA consists of income before income taxes plus (i) vehicle interest expense, (ii) non-vehicle interest expense, (iii) vehicle depreciation expense and (iv) non-vehicle depreciation and amortization expenses. Adjusted EBITDA consists of income before income taxes plus (i) non-vehicle interest expense and (ii) non-vehicle depreciation and amortization expenses. EBITDA and Adjusted EBITDA are not presented as, and should not be considered, alternative measures of operating results or cash flows from operations (as determined in accordance with generally accepted accounting principles), but are presented because they are widely accepted financial indicators of a company's ability to incur and service debt. (d) Does not include data from Van Pool. (e) Represents vehicles available for rent. (f) Rounded to the nearest thousand. (g) Represents rental revenue divided by the number of days that vehicles were actually rented. (h) Represents number of days vehicles were actually rented divided by the number of days vehicles were available for rent. (i) Represents the average monthly revenue divided by average monthly fleet. 29 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY GENERAL Prior to the Budget Acquisition, Team Rental Group, Inc. 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, TEAM 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. Through its 152 vehicle rental locations, TEAM had pro forma vehicle rental revenues of $234.1 million for 1996. TEAM had pro forma sales revenues of $155.4 million for 1996. TEAM's retail car sales business has represented an increasing portion of TEAM's revenues since the opening of TEAM's first retail car sales facility in November 1994. TEAM added six retail car sales facilities during 1995, with the retail car sales business producing $42.6 million of revenue for 1995 (representing 28.5% of TEAM's total historical revenue for the year), and added four facilities during 1996. The retail car sales business produced $134.1 million of revenue for 1996 (representing 37.5% of TEAM's total historical revenue for the year and 34.4% of TEAM's total pro forma revenue for the year). TEAM's retail car sales business produced $1.3 million of operating income in 1995 (representing 8.8% of TEAM's total operating income) and $1.9 million of operating income in 1996 (representing 5.3% of TEAM's total operating income). At December 31, 1995 and 1996 and June 30, 1997, the retail car sales business represented 7.8%, 8.3% and 2.6% of the Company's total identifiable assets, respectively. See Note 15 of the Notes to the Consolidated Financial Statements of the Company. The 1994 results of operations reported herein include the consolidated accounts of the San Diego, California, Richmond, Virginia and Albany and Rochester, New York Budget franchises and the acquired operations of the Pittsburgh and Philadelphia, Pennsylvania, Cincinnati, Ohio and Fort Wayne, Indiana Budget franchises from their respective acquisition dates through December 31, 1994. The 1995 results of operations reported herein include the consolidated operations of the entities comprising TEAM at December 31, 1994 and the acquired operations of the Dayton, Ohio, Charlotte, North Carolina, Hartford, Connecticut, and Los Angeles, California Budget franchises from their respective acquisition dates through December 31, 1995. The 1996 results of operations reported herein include the acquired operations of the Phoenix Budget franchise, Van Pool and ValCar from their respective acquisition dates. On April 29, 1997, TEAM acquired the stock of BRACC. The consideration paid by TEAM pursuant to the Stock Purchase Agreements consisted of (i) approximately $275.0 million in cash and (ii) the issuance to Ford of 4,500 shares of newly created Series A Convertible Preferred Stock of the Company, which does not carry a dividend and which will be converted into 4,500,000 shares of Class A Common Stock in connection with this Offering. The results of operations of the Company for the six months ended June 30, 1997 include the operations of BRACC from April 29, 1997. 30 32 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of operating revenues represented by certain items in the Company's consolidated statements of operations.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------- ---------------- 1994 1995 1996 1996 1997 ----- ----- ----- ------ ------ Vehicle rental revenue........................ 100.0% 71.5% 62.5% 65.1% 72.1% Retail car sales revenue...................... -- 28.5 37.5 34.9 24.9 Royalties and other revenue................... -- -- -- -- 3.0 ----- ----- ----- ----- ----- Total operating revenue..................... 100.0 100.0 100.0 100.0 100.0 Direct vehicle and operating expenses......... 24.4 9.2 9.8 8.0 9.4 Cost of car sales............................. -- 25.4 31.9 29.6 21.1 Vehicle depreciation expense.................. 19.1 18.4 17.0 17.6 20.8 Non-vehicle depreciation expense.............. 1.2 0.9 0.7 0.8 1.3 Advertising, promotion and selling............ 8.0 7.9 6.4 6.6 8.6 Facilities.................................... 11.4 7.4 5.7 5.9 7.4 Personnel..................................... 20.6 16.3 14.9 15.1 17.5 General and administrative expenses........... 3.9 4.5 3.2 4.5 4.1 Amortization of franchise rights.............. 0.6 0.5 0.5 0.6 0.7 ----- ----- ----- ----- ----- Operating income.............................. 10.8 9.5 9.9 11.3 9.1 Vehicle interest expense...................... 10.1 9.3 7.1 7.5 6.8 Non-vehicle interest expense (income), net.... (0.4) (0.5) 0.2 0.1 0.8 Nonrecurring expense (income)................. -- -- 0.4 -- -- ----- ----- ----- ----- ----- Income before income taxes.................... 1.1 0.7 2.2 3.7 1.5 Provision for income taxes.................... 0.5 0.5 0.9 1.5 0.6 ----- ----- ----- ----- ----- Net income.................................... 0.6% 0.2% 1.3% 2.2% 0.9% ===== ===== ===== ===== =====
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996 GENERAL OPERATING RESULTS. Net income for the first six months of 1997 approximated that of the first six months of 1996 at $3.5 million. Earnings per share for the first six months of 1997 decreased 56.3% to $.21 per share from $.48 per share in 1996 due to the increase in average shares outstanding as a result of the July 1996 Public Offering (4.6 million shares) and the April 1997 Public Offering (8.6 million shares) and the issuance of Series A Convertible Preferred Stock in connection with the acquisition of BRACC (convertible into 4.5 million shares). Income before income taxes increased $100,000, or 1.7%, for the first six months of 1997 to $6.0 million from $5.9 million for the first six months of 1996. OPERATING REVENUES. Vehicle rental revenue increased $190.7 million, or 183.8%, in the first six months of 1997 to $294.6 million from $103.8 million in the first six months of 1996 due to the acquisition of BRACC, which added a significant number of locations and vehicles to the Company's operations. Vehicle sales revenue increased $45.9 million, or 82.4%, in the first six months of 1997 to $101.6 million from $55.7 million in the first six months of 1996 due to the addition of the car sales operations of BRACC as well as new stores opened by the Company. Royalties and other revenues totaled $12.6 million in the first six months of 1997 and largely represent royalty and other fees due from the Company's franchisees. OPERATING EXPENSES. Total operating expenses increased $230.1 million, or 162.7%, in the first six months of 1997 to $371.5 million from $141.4 million in the first six months of 1996. This increase was also due to the addition of BRACC's operations to the Company's operations. The cost of vehicles sold increased $38.8 million, or 82.0%, in the first six months of 1997 to $86.1 million from $47.3 million in 1996. This increase reflects the growth of car sales revenue with the addition of BRACC car sales locations and new locations opened by the Company. Amortization expense increased $2.0 million, or 200%, in the first six months of 1997 to $3.0 million from $1.0 million in the first six months of 1996, largely due to intangibles, including goodwill, related to the BRACC Acquisition. 31 33 OTHER (INCOME) EXPENSE, NET. Interest expense, net of interest income, increased $19.2 million, or 156.6%, in the first six months of 1997 to $31.3 million from $12.2 million in the first six months of 1996, due to the financing of fleet and other borrowings related to the BRACC Acquisition, net of investment income due to the increase in cash. PROVISION FOR INCOME TAXES. The provision for income taxes increased $100,000 in the first six months of 1997 to $2.5 million from $2.4 million for the first six months of 1996. The tax provision reflects a rate which is higher than the statutory rate due to the effects of state and local income taxes net of the federal benefit. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 GENERAL OPERATING RESULTS. Net income for 1996 increased $4.2 million, or 1,234.4%, to $4.5 million from $337,000 for 1995. Income before provision for income taxes increased over seven times from $1.0 million in 1995 to $7.8 million for 1996. This increase was due to TEAM's acquisition activity and the growth of TEAM's car sales operations from seven locations at December 31, 1995 to 11 locations at December 31, 1996. Operating income for 1996 increased $21.1 million, or 148.7%, from $14.2 million for 1995 to $35.3 million for 1996, due primarily to an increase in the vehicle fleet resulting from the acquisitions of the Budget franchises in Arizona and Southern California and Van Pool. The daily average rental rate increased slightly to $41.19 in 1996 from $40.75 in 1995. OPERATING REVENUES. Vehicle rental revenues for 1996 increased $116.2 million, or 108.5%, from $107.1 million in 1995 to $223.3 million in 1996. The increase in rental revenues was due primarily to the increase in the size of TEAM from operating 133 rental locations in 12 franchise areas at December 31, 1995 to operating 152 locations in 13 franchise territories at December 31, 1996, and to the acquisition of Van Pool in February 1996. Revenues from TEAM's retail car sales operations increased $91.5 million from $42.7 million in 1995 to $134.1 million in 1996 due to the expansion of TEAM's car sales facilities from seven locations at December 31, 1995 to 11 locations at December 31, 1996. OPERATING EXPENSES. Operating expenses increased approximately $186.6 million, or 137.6%, to $322.1 million for 1996 as compared to $135.5 million for 1995. The growth of TEAM's vehicle rental operations through the acquisitions discussed above was the principal cause of all the increases in TEAM's operating expenses. Vehicle depreciation increased approximately $33.3 million, or 121.0%, in 1996 due to an increase in fleet of 7,800 vehicles. Advertising expenses increased from $11.8 million in 1995 to $23.0 million for 1996 due to the increase in the size of the rental operations and due to the growth of the retail car sales operations from five markets at December 31, 1995 to 11 markets at December 31, 1996. The retail car sales business typically incurs greater advertising expense than the car rental business. Facilities' expense increased $9.3 million, or 83.5%, in 1996 as compared to 1995 due to the addition of 19 locations since December 31, 1995. Personnel costs increased approximately 116.6% in 1996 as compared to 1995 due to an increase of approximately 800 employees since December 31, 1995. Other operating expense increased due to a greater volume of rental business resulting from the 1995 and 1996 acquisitions. OTHER (INCOME) EXPENSE, NET. Interest expense, net of interest income, increased from $13.2 million for 1995 to $27.4 million for 1996. Vehicle interest expense increased approximately $11.5 million in 1996 due to the increase in the size of TEAM's rental fleet from approximately 7,800 vehicles at December 31, 1995 to approximately 15,600 vehicles at December 31, 1996. Non-vehicle interest (income) expense changed from income of $716,000 in 1995 to $838,000 of expense in 1996. This increase was primarily due to non-vehicle interest paid on financing for the acquisition of the Phoenix Budget franchise. PROVISION FOR INCOME TAXES. The provision for income taxes increased $2.6 million from $685,000 for 1995 to $3.3 million for 1996. The tax provision is calculated at a rate of approximately 42.5%. The increase in provision is due to the enhanced profitability of TEAM in 1996 as compared to 1995. 32 34 YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994 GENERAL OPERATING RESULTS. Net income for 1995 increased $87,000, or 34.8%, to $337,000 from $250,000 in 1994. Income before income taxes more than doubled to $1.0 million in 1995 from $426,000 in 1994. The increase in pre-tax income was due to an increase in operating income of $10.0 million resulting from the growth of TEAM's retail car sales operations from one facility at December 31, 1994 to seven facilities at December 31, 1995 and the acquisition of four additional Budget vehicle rental operations, which was offset by increases in interest expense of $9.4 million, due primarily to the increased size of the fleet throughout 1995 as a result of the acquisitions occurring between August 1994 and October 1995, described above. The provision for income taxes increased from $176,000 in 1994 to $685,000 in 1995 due to the enhanced profitability of TEAM, nondeductible amortization expense, and state income taxes. The daily average rental rate increased to $40.75 in 1995 from $37.32 in 1994, an increase of 9.2%. OPERATING REVENUES. Operating revenues increased 287.8% in 1995 to $149.7 million from $38.6 million in 1994. This increase was primarily due to the acquisitions discussed above and to an increased volume of vehicle rental business in 1995, resulting in an increase in the number of rental revenue days to 2,590,000 days in 1995 from 1,027,000 days in 1994. The daily average rental rate increased 9.2% from $37.32 in 1994 to $40.75 in 1995; the average rental term experienced a slight decrease from 3.82 days in 1994 to 3.76 days in 1995. OPERATING EXPENSES. Operating expenses increased approximately $101.1 million, or 293.5%, to $135.5 million for 1995 from $34.4 million in 1994. This increase was due in large measure to the growth of TEAM's retail car sales operations, which included $38.0 million of cost of sales for which there was no significant comparable expense in 1994, as well as to increases resulting from the increase in fleet and personnel due to the four acquisitions occurring during 1995. Direct vehicle and operating expense increased $4.3 million or 45.2% to $13.7 million from $9.4 million, due to the increase in the size of the fleet from 5,044 vehicles at December 31, 1994 to 11,144 vehicles at December 31, 1995. The increased costs for vehicle maintenance recorded to direct vehicle and operating expenses were partially offset by a decrease in the number of leased vehicles during the period, as expenses for owned vehicles are charged to both vehicle depreciation and interest expense, whereas leased vehicles are charged to direct vehicle and operating expense. Vehicle depreciation expense increased $20.1 million, or 272.2%, to $27.5 million due to an increase in fleet size of 121% to 11,144 vehicles at December 31, 1995. Personnel expenses increased 208.5% to $24.5 million due to the 226% increase in the employee base from 525 employees at December 31, 1994 to 1,709 employees at December 31, 1995. The number of locations from which TEAM rented vehicles increased from 63 locations at December 31, 1994 to 133 locations at December 31, 1995. OTHER INCOME AND EXPENSE. Other expense-net increased approximately $9.4 million, or 249.0%, in 1995 due primarily to interest expense on the increased vehicle fleet operated by TEAM in 1995. Vehicle interest increased $10.0 million due to the increased size of the vehicle fleet throughout 1995. This increase was offset by an increase in interest income of $0.7 million earned on cash restricted for acquiring vehicles under TEAM's existing fleet financing facilities. PROVISION FOR INCOME TAXES. The provision for income taxes increased 289.2% to $685,000 in 1995 from $176,000 in 1994. TEAM's effective tax rate increased from 41.3% in 1994 to 67.0% in 1995. The increase in the tax provision was due to the enhanced profitability of TEAM in 1995, certain amortization expense that was not deductible for income taxes purposes, and state income taxes. 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 and leasing companies. The material terms of the Company's financing facilities are described below and under the caption "Description of Certain Indebtedness". The Company's existing indebtedness at June 30, 1997 has interest rates ranging from 5.6% to 9.6%. The Company intends to fund its operations through asset- 33 35 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. At June 30, 1997, the Company had borrowed $2.4 billion under asset-backed notes, which are utilized largely to finance vehicles eligible for certain manufacturers' vehicle repurchase programs. Proceeds from the notes that are temporarily unutilized for vehicle financing are maintained in restricted cash accounts with the trustees. The notes are collateralized by the secured vehicles and the restricted cash accounts. Rates on asset-backed notes at June 30, 1997 range from 5.6% to 7.8%. The Company's other vehicle obligations consist of outstanding lines of credit to purchase rental fleet and retail car sales inventory. Collateralized available lines of credit at June 30, 1997 consist of $13.0 million for rental vehicles and $26.0 million for retail car sales inventory with maturity dates through May 1998. 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 ranging from 6.9% to 8.5% at June 30, 1997. 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 sale of the vehicles. Monthly payments of interest only for retail car sales inventory obligations are required at an annual interest rate of 8.5% at June 30, 1997. Retail car sales inventory obligations are paid when the inventory is sold but in no event later than 120 days after the date of purchase. Net cash provided by operating activities for the six months ended June 30, 1997 increased 268.4% to $98.0 million from $26.6 million for the six months ended June 30, 1996. Net cash provided by operating activities for 1996 increased 237.9% to $54.4 million from $16.1 million in 1995. Net cash provided by operating activities for 1995 increased 341.2% to $16.1 million from $3.7 million in 1994. In each period, the Company experienced increases in cash received from rentals which were offset to some extent by increases in cash paid to vendors and employees and in interest expenses. Net cash used in investing activities for the six months ended June 30, 1997 increased 465.5% to $565.6 million from $100.0 million for the six months ended June 30, 1996. Net cash used in investing activities is primarily attributable to cash paid to suppliers of revenue 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 $460.6 million, $293.9 million and $73.7 million for 1996, 1995 and 1994, respectively. Cash paid to suppliers of revenue vehicles was $517.1 million, $315.9 million and $155.2 million for 1996, 1995 and 1994, respectively. The increase in cash paid to suppliers of revenue vehicles during 1996 was a result of the increased number of operating locations throughout 1996. Payment for acquisitions, net of assets acquired, amounted to $5.1 million, $6.5 million and $5.7 million for 1996, 1995 and 1994, respectively. Net cash provided by financing activities for the six months ended June 30, 1997 increased 716.2% to $685.8 million from $84.0 million for the six months ended June 30, 1996. Net cash provided by financing activities for 1996 increased 98.0% to $58.6 million from $29.6 million in 1995, due primarily to proceeds received from the issuance of Class A Common Stock and the Series A Convertible Notes, which was partially offset by the utilization of a portion of these proceeds to repay existing vehicle and non-vehicle debt. Net cash provided by financing activities for 1995 decreased 75.1% to $29.6 million from $119.0 million in 1994, due primarily to the receipt of proceeds from the Company's initial public offering and a vehicle financing facility in 1994, for which there were no corresponding receipts in 1995. 34 36 FLEET FINANCING FACILITIES Historically, TEAM's operations were partially funded by cash provided from operating activities and by financing provided under asset-backed notes issued under the First, Second and Third Fleet Financing Facilities (collectively, the "Fleet Financing Facilities"). At December 31, 1996, amounts outstanding under the Fleet Financing Facilities were comprised of $105.7 million of asset-backed notes issued by TEAM's special purpose finance subsidiary, Team Fleet Financing Corporation ("TFFC"), in August 1994 (the "First Fleet Financing Facility"), $40.0 million of asset-backed notes assumed by TEAM in connection with the acquisition of the Los Angeles, California Budget franchise in October 1995 (the "Second Fleet Financing Facility") and $176.0 million of asset-backed notes issued by TFFC in December 1996 (the "Third Fleet Financing Facility"). These facilities have been principally utilized to finance Program Vehicles. Proceeds from these facilities that are temporarily unutilized for vehicle financing are maintained in restricted cash accounts with the trustee and are not available for other purposes. The notes issued under these facilities are collateralized by the financed vehicles and the restricted cash accounts, with the vehicles being leased to TEAM's operating subsidiaries. The First Fleet Financing Facility is comprised of senior and subordinated notes. The senior notes require monthly interest payments at an annual rate of average LIBOR, as defined, plus 0.75% (6.4% at December 31, 1996). Monthly principal payments of $16.7 million commence in June 1999 with the last payment due in November 1999. The subordinated notes included in the First Fleet Financing Facility require monthly interest payments at an annual rate of average LIBOR, as defined, plus 1.30% (6.9% at December 31, 1996) and are payable in full in December 1999. The Second Fleet Financing Facility is comprised of senior and subordinated notes. The senior notes require monthly interest payments at an annual rate of average LIBOR, as defined, plus 0.60% (6.2% at December 31, 1996). Monthly principal payments of $4.8 million commence in November 1997 with the last payment due in June 1998. The subordinated notes included in the Second Fleet Financing Facility require monthly interest payments at an annual rate of average LIBOR, as defined, plus 1.0% (6.6% at December 31, 1996) and are payable in full in July 1998. The Third Fleet Financing Facility is comprised of senior and subordinated notes. The senior notes require monthly interest payments at an annual rate of 6.65%. Monthly principal payments of $13.8 million commence in 2001 with the last payment due in 2002. The subordinated notes included in the Third Fleet Financing Facility require monthly interest payments at an annual rate of 7.10% and are payable in full in June 2002. Up to $100 million of the Third Fleet Financing may be used to finance vehicles that are not Program Vehicles. APRIL 1997 FLEET FINANCINGS The April 1997 Fleet Financings entered into concurrently with the Budget Acquisition provide financing for $1.4 billion of vehicles. The April 1997 Fleet Financings consist of a $900.0 million commercial paper facility and an additional $500.0 million asset-backed note facility. The asset-backed note facility consists of senior and subordinated notes. The senior notes require monthly interest payments at an annual rate of 7.35%. Monthly principal payments of $39.4 million commence November 2001 with a final payment due in October 2002. The subordinated notes require monthly interest payments at an annual rate of 7.80% and are payable in full in November 2002. BUDGET FLEET FINANCING FACILITY Historically, BRACC's operations were partially funded with cash provided by notes issued by Budget Fleet Finance Corporation (the "BFFC Facility"), which is a special purpose bankruptcy remote corporation. The Company has continued to utilize borrowings under the BFFC Facility to fund its operations. The BFFC Facility consists of $500.0 million of senior notes requiring monthly interest payments at LIBOR plus 0.50% (6.14% at August 21, 1997). Six monthly principal payments of $83.3 million commence in April 1999 with the last payment due in September 1999. 35 37 THE DEBT PLACEMENTS Concurrently with the Budget Acquisition, the Company issued $45.0 million aggregate principal amount of Series B Convertible Notes, and BRACC issued $165.0 million aggregate principal amount of Guaranteed Senior Notes, which are guaranteed by the Company and certain subsidiaries of the Company. The Guaranteed Senior Notes bear interest at a rate of 9.57% and mature in 2007. In addition, the note purchase agreements relating to the Series A Convertible Notes, which had been issued in December 1996, were amended to extend the maturity of the Series A Convertible Notes to April 2007 and conform other terms to the terms of the Series B Convertible Notes. At a conversion price of $20.07 per share, the Series A Convertible Notes are convertible into an aggregate of 3,986,049 shares of Class A Common Stock, bear interest at a rate of 7.0% and mature in 2007. At a conversion price of $27.96 per share, the Series B Convertible Notes are convertible into 1,609,442 shares of Class A Common Stock, bear interest at a rate of 6.85% and mature in 2007. See "Description of Certain Indebtedness". APRIL 1997 WORKING CAPITAL FACILITY Concurrently with the Budget Acquisition, BRACC entered into a $300.0 million five-year secured credit facility (the "April 1997 Working Capital Facility"), which is guaranteed by the Company. At June 30, 1997, the Company had $256.1 million in letters of credit outstanding under this facility. The following is a summary of the material terms and conditions of the New Working Capital Facility. The April 1997 Working Capital Facility consists of a five-year senior, secured revolving credit facility in the amount of $300.0 million. The April 1997 Working Capital Facility provides that (i) up to $100 million is available for loans, (ii) up to $40 million (or the equivalent thereof in certain foreign currencies) of such $100 million is available under a multi-currency subfacility, (iii) up to $300 million is available for letters of credit and (iv) up to $225 million of such $300 million is available for letters of credit for credit enhancement of commercial paper or similar fleet financing programs. In addition, aggregate letter of credit and loan outstandings under the April 1997 Working Capital Facility are subject to a borrowing base limitation and may not at any time exceed the sum of 85% of eligible receivables (as defined therein), 100% of eligible repurchase vehicles (as defined therein), 85% of eligible non-repurchase vehicles (as defined therein), and 100% of eligible cash and cash equivalents (as defined therein). All letters of credit and loans under the April 1997 Working Capital Facility mature on or by the fifth anniversary of the date of the loan agreement. Interest accrues on borrowings outstanding under the April 1997 Working Capital Facility, at the Company's option, at a rate equal to (i) either the higher of (A) the interest rate established by Credit Suisse as its base or prime rate in effect at its principal office in New York City and (B) the federal funds effective rate from time to time plus 0.5% (the higher of these being known as the "ABR") plus the applicable margin for ABR loans (which margin shall range from approximately 0.25% to 1.25%) or (ii) the rate at which Eurocurrency deposits in the relevant denomination currency for one, two, three or six months (as selected by the Company) are offered by Credit Suisse in the relevant interbank Eurocurrency market plus the applicable margin for the Eurocurrency rate (which margin shall range from 1.25% to 2.25%). The April 1997 Working Capital Facility requires the Company to pay the following fees: (i) a commitment fee based on the ratio of adjusted debt to adjusted EBITDA of the Company and ranging from 0.25% to 0.375% per annum; (ii) a letter of credit fee on the aggregate amount available under outstanding letters of credit equal to a rate per annum which is the same as the applicable margin for Eurocurrency loans from time to time in effect; and (iii) a letter of credit fronting fee equal to a rate per annum of 1/8% of the aggregate amount available under each letter of credit issued. The April 1997 Working Capital Facility is secured by (a) a first-priority lien on (i) the capital stock of BRACC and each direct and indirect subsidiary of BRACC (with respect to the international subsidiaries, no more than 65% of the stock of each subsidiary will be required to be pledged in the event that a pledge of a greater percentage would result in material increased tax or similar liabilities for Budget Group and its subsidiaries on a consolidated basis); (ii) cash and other working capital such as 36 38 receivables and related contract rights of BRACC and its subsidiaries (other than assets pledged as security in respect of a vehicle financing program); and (iii) all assets included in the borrowing base and (b) as to letters of credit issued as credit and/or liquidity enhancement for the Company's commercial paper program, perfected liens on the assets surrounding the commercial paper issued pursuant to the commercial paper program (which, in the case of credit enhancement, will generally be subordinated). The April 1997 Working Capital Facility contains a number of customary affirmative covenants, including covenants which require BRACC and the Company to deliver financial statements and other reports; pay other obligations; maintain corporate existence; comply with laws and contracts; maintain properties and insurance; maintain books and records; grant the lenders certain inspection rights; provide notices of defaults, litigation and material events; and comply with environmental matters. The April 1997 Working Capital Facility also contains a number of customary negative covenants, including limitations on indebtedness (including preferred stock), liens, guarantee obligations, mergers, consolidations, liquidations and dissolutions, sales of assets, leases, dividends and other payments in respect of capital stock, capital expenditures, investments, loans and advances; payments and modifications of subordinated and other debt instruments, transactions with affiliates, changes in fiscal year; negative pledge clauses; and changes in lines of business. BRACC and the Company are required to meet certain financial covenants, consisting of (a) a minimum net worth (as defined) of the Company equal to the sum of (i) $263,375 plus 50% of the net income of the Company for each fiscal year commencing with 1997 as shall have been completed on or prior to the time of computation plus 50% of the net equity proceeds (as defined); (b) a maximum leverage ratio (as defined) of 5.60 to 1.00 for the quarter ending September 30, 1997, declining to 3.25 to 1.00 for the quarter ending December 31, 1999 and each fiscal quarter thereafter; and (c) a minimum interest coverage ratio (as defined) of 2.50 to 1.00 for the quarter ending September 30, 1997, increasing to 3.25 to 1.00 for the quarter ending September 30, 1999 and each fiscal quarter thereafter. See "Description of Certain Indebtedness -- The April 1997 Working Capital Facility". CHANGE IN FINANCIAL CONDITION Total assets increased $3.0 billion from $587.2 million at December 31, 1996 to $3.6 billion at June 30, 1997. This increase resulted primarily from increases in revenue-earning vehicles of $2.0 billion and intangibles of $324.6 million resulting from the BRACC Acquisition. Total liabilities increased $2.7 billion from $493.2 million at December 31, 1996 to $3.2 billion at June 30, 1997 due primarily to an additional $2.3 billion of net borrowings largely to finance the vehicles of BRACC. The increase in stockholders' equity of approximately $284.6 million was due to the April 1997 Public Offering and issuance of Series A Convertible Preferred Stock in connection with the Budget Acquisition. 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. 37 39 SEASONALITY Generally, in the vehicle rental industry, revenues increase in the spring and summer months (with the exception of resort destinations) due to the overall increase in business and leisure travel 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 car sales business is subject to seasonal effects, with lower sales during the winter months. See "Risk Factors -- Seasonality". 38 40 SELECTED HISTORICAL FINANCIAL DATA OF BRACC The following table sets forth selected consolidated statement of operations data and selected consolidated balance sheet data of BRACC. The selected financial data for each of the five years ended December 31, 1996 are derived from the consolidated financial statements of BRACC. The data presented for each of the periods ended March 31, 1996 and 1997 are derived from unaudited financial statements, but in the opinion of BRACC reflect all adjustments (consisting of normal recurring adjustments) that BRACC considers necessary for a fair presentation of such information in accordance with generally accepted accounting principles. The selected financial data below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations of BRACC" and the Consolidated Financial Statements and notes thereto included elsewhere in this Prospectus.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, -------------------------------------------------------------- ------------------- 1992 1993 1994 1995 1996 1996 1997 ---------- ---------- ---------- ---------- ---------- -------- -------- (DOLLARS IN THOUSANDS) STATEMENTS OF OPERATIONS DATA: Operating revenue: Vehicle rental revenue(a)............. $1,080,700 $ 954,188 $1,011,203 $1,034,873 $ 963,764 $221,778 $228,135 Retail car sales revenue................ 72,253 63,596 77,999 83,795 91,503 22,734 20,913 Other revenue............ 61,435 61,903 66,564 74,802 77,554 17,259 17,363 ---------- ---------- ---------- ---------- ---------- -------- -------- Total operating revenue......... $1,214,388 $1,079,687 $1,155,766 $1,193,470 $1,132,821 $261,771 $266,411 Operating costs and expenses: Direct vehicle and operating.............. 221,239 176,252 134,126 153,081 121,288 25,871 31,713 Depreciation -- vehicle... 278,344 206,271 257,356 323,619 263,846 54,583 65,439 Depreciation -- non- vehicle................ 25,297 20,431 21,410 19,520 26,645 6,502 6,413 Cost of car sales........ 64,639 54,969 67,314 72,416 78,944 19,598 18,430 Advertising, promotion and selling............ 108,978 99,879 99,738 106,446 83,304 19,441 27,585 Facilities............... 115,155 108,741 110,386 113,286 114,325 28,471 28,904 Personnel................ 274,081 248,947 269,370 280,901 248,655 61,939 63,985 General and administrative......... 85,625 82,731 69,117 88,612 54,194 17,638 14,430 Intangible amortization........... 17,223 17,852 16,874 17,006 16,969 4,185 4,180 ---------- ---------- ---------- ---------- ---------- -------- -------- Total operating costs and expenses........ $1,190,581 $1,016,073 $1,045,691 $1,174,887 $1,008,170 $238,228 $261,079 Operating income........... $ 23,807 $ 63,614 $ 110,075 $ 18,583 $ 124,651 $ 23,543 $ 5,332 Other expense: Vehicle interest expense................ 101,032 78,205 86,127 124,758 92,738 22,949 22,589 Non-vehicle interest expense................ 18,923 16,283 18,823 25,151 31,444 7,265 7,043 ---------- ---------- ---------- ---------- ---------- -------- -------- Income (loss) before provision for income taxes.................... $ (96,148) $ (30,874) $ 5,125 $ (131,326) $ 469 $ (6,671) $(24,300) Provision for income taxes.................... (4,900) -- 4,000 1,314 3,000 600 (4,860) ---------- ---------- ---------- ---------- ---------- -------- -------- Net income (loss).......... $ (91,248) $ (30,874) $ 1,125 $ (132,640) $ (2,531) $ (7,271) $(19,440) ========== ========== ========== ========== ========== ======== ========
39 41
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------ ----------------------- 1994 1995 1996 1996 1997 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS EXCEPT RENTAL AND RETAIL CAR SALES DATA) OPERATING DATA: EBITDA(b).................... $ 405,715 $ 378,728 $ 432,111 $ 88,813 $ 81,364 Adjusted EBITDA(b)........... 62,232 (69,649) 75,527 11,281 (6,664) Net cash provided by operating activities...... 280,793 173,944 256,290 72,826 95,811 Net cash used in investing activities................ (411,810) (180,938) (205,054) (147,880) (259,409) Net cash provided by (used in) financing activities................ 173,789 35,661 (87,561) 44,288 156,928 RENTAL DATA (U.S. UNLESS NOTED): Locations in operation at period end (worldwide).... 447 390 374 388 374 Number of usable vehicles at period end(c)............. 75,467 68,148 67,137 69,060 76,284 Rental transactions(d)....... 6,030,000 5,909,000 5,346,000 1,211,517 1,261,421 Daily dollar average(e)...... $ 38.43 $ 39.58 $ 41.26 $ 41.57 $ 40.33 Vehicle utilization(f)....... 77.4% 75.1% 76.7% 76.2% 79.5% Average monthly revenue per unit(g)................... $ 904 $ 904 $ 966 $ 960 $ 962 RETAIL CAR SALES DATA: Locations in operation at period end................ 8 9 11 9 11 Average monthly vehicles sold...................... 462 449 491 497 480 Average monthly sales revenue (000s).................... $ 6,500 $ 6,983 $ 7,625 $ 7,578 $ 6,971
AS OF DECEMBER 31, AS OF -------------------------------------------------------------- MARCH 31, 1992 1993 1994 1995 1996 1997 ---------- ---------- ---------- ---------- ---------- ------------ (IN THOUSANDS) BALANCE SHEET DATA: Revenue earning vehicles, net..................... $1,362,548 $1,339,000 $1,543,661 $1,353,989 $1,303,975 $ 1,494,755 Vehicle inventory......... 5,753 7,396 9,674 11,756 14,299 14,828 Total assets.............. 2,590,002 2,405,204 2,602,374 2,488,115 2,328,115 2,484,152 Fleet financing facilities.............. 1,628,190 1,462,783 1,614,247 1,465,472 1,361,619 1,513,259 Other notes payable....... 216,326 245,714 268,039 452,475 468,767 474,055 Total debt................ 1,844,516 1,708,497 1,882,286 1,917,947 1,830,386 1,987,314 Mandatory redeemable preferred stock......... 206,250 221,250 236,250 251,250 5,178 5,272 Stockholders' equity...... 111,934 59,558 49,909 (106,102) 143,965 121,288
- --------------- (a) Includes revenue from vehicle rentals and related products (such as insurance and loss damage waivers). (b) EBITDA consists of income before income taxes plus (i) vehicle interest expense, (ii) non-vehicle interest expense, (iii) vehicle depreciation expense and (iv) non-vehicle depreciation and amortization expenses. Adjusted EBITDA consists of income before income taxes plus (i) non-vehicle interest expense and (ii) non-vehicle depreciation and amortization expenses. EBITDA and Adjusted EBITDA are not presented as, and should not be considered, alternative measures of operating results or cash flows from operations (as determined in accordance with generally accepted accounting principles), but are presented because they are widely accepted financial indicators of a company's ability to incur and service debt. (c) Represents vehicles available for rent. (d) Rounded to the nearest thousand. (e) Represents rental revenue divided by the number of days that vehicles were actually rented. (f) Represents the number of days vehicles were actually rented divided by the number of days vehicles were available for rent. (g) Represents average monthly revenue divided by average monthly fleet. 40 42 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF BRACC GENERAL Budget Rent a Car Corporation (following the Budget Acquisition, a wholly owned subsidiary of the Company) is the owner of the "Budget" trademark on a worldwide basis and is the international franchisor of the Budget System, which is the third largest worldwide general use car and truck rental system with approximately 3,000 locations. BRACC was established in 1958 as a vehicle rental company serving the downtown and suburban markets of cities in the United States and Canada. In 1960, BRACC began its franchising activities and positioned itself as the value leader among the competing car rental companies. BRACC remained primarily a franchise system until the 1980s when it undertook a strategic shift to acquire franchisees with a view to becoming an operating company. Management believes that company-owned locations provide enhanced customer service and earnings on a long-term basis. Additionally, BRACC believes that its identification as a lower cost provider of rental vehicles may protect its competitive position in the event of negative economic developments. For the year ended December 31, 1996, BRACC had 304 company-owned locations which accounted for more than 60% of the Budget System's U.S. fleet. Additionally, BRACC has expanded its operating strategy to international markets and has company-owned locations in the United Kingdom, France, Switzerland, Australia and New Zealand which account for more than 8% of the Budget System's international rental revenue. BRACC's international operations have historically been largely franchised. For 1994, 1995, 1996 and the three months ended March 31, 1997, royalty fees from international franchisees were 21.2%, 21.9%, 22.6% and 22.3% of BRACC's total international revenue and represented 45.9%, 49.0%, 50.4% and 53.8% of BRACC's total royalty fees, respectively. The franchised nature of BRACC's operations lowered its funding and overall capital requirements. At December 31, 1994, 1995, 1996, and March 31, 1997, BRACC's international operations accounted for 6.2%, 6.8%, 8.0% and 7.4% of BRACC's total assets, respectively, while the percent of BRACC's total debt represented by these operations was 3.1%, 3.1%, 3.9% and 3.6% respectively. See Note 16 of the Notes to the Consolidated Financial Statements of BRACC. 41 43 RESULTS OF OPERATIONS The following table sets forth for the periods indicated the percentage of operating revenues represented by certain items in BRACC's combined statements of operations.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, --------------------------- ------------------ 1994 1995 1996 1996 1997 ----- ----- ----- ------ ------ Vehicle rental revenue.............. 87.5% 86.7% 85.1% 84.7% 85.6% Royalty fee revenue................. 4.6 4.9 5.3 5.1 5.1 Retail car sales revenue............ 6.7 7.0 8.1 8.7 7.8 Other revenue....................... 1.2 1.4 1.5 1.4 1.4 ----- ----- ----- ----- ----- Total operating revenue... 100.0 100.0 100.0 100.0 100.0 Direct vehicle and operating expenses.......................... 11.6 12.8 10.7 9.9 11.9 Depreciation -- vehicles............ 22.3 27.1 23.3 20.9 24.6 Depreciation -- non-vehicle......... 1.9 1.6 2.4 2.4 2.4 Cost of vehicles sold at retail..... 5.8 6.1 7.0 7.5 6.9 Advertising, promotion and selling expenses.......................... 8.6 8.9 7.3 7.4 10.4 Facilities.......................... 9.5 9.5 10.1 10.9 10.8 Personnel........................... 23.3 23.5 21.9 23.7 24.0 General and administrative expenses.......................... 6.0 7.5 4.8 6.7 5.4 Intangible amortization............. 1.5 1.4 1.5 1.6 1.6 ----- ----- ----- ----- ----- Earnings before interest and income taxes............................. 9.5 1.6 11.0 9.0 2.0 Interest expense.................... 9.1 12.6 11.0 11.5 11.1 ----- ----- ----- ----- ----- Income (loss) before income taxes... 0.4 (11.0) 0.0 (2.5) (9.1) Provision for income taxes.......... 0.3 0.1 0.2 0.2 (1.8) ----- ----- ----- ----- ----- Net income (loss)................... 0.1% (11.1)% (0.2)% (2.8)% (7.3)% ===== ===== ===== ===== =====
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996 GENERAL OPERATING RESULTS. BRACC incurred a net loss of $19.4 million in the three months ended March 31, 1997 compared to a net loss of $7.3 million in the three months ended March 31, 1996. The loss before income taxes increased to $24.3 million in the three months ended March 31, 1997 from a loss of $6.7 million in the three months ended March 31, 1996. The increased loss reflects higher depreciation and other vehicle costs as well as higher net advertising and promotion expenses. OPERATING REVENUES. Operating revenues increased $4.6 million, or 1.8%, to $266.4 million in the three months ended March 31, 1997 from $261.8 million in the three months ended March 31, 1996. Vehicle rental revenue increased $6.4 million, or 2.9%, to $228.1 million in the three months ended March 31, 1997 from $221.8 million in the three months ended March 31, 1996, primarily due to a 5.5% increase in vehicle rental days that was somewhat offset by a 3.0% decrease in the daily average rental rate. Retail car sales revenue decreased $1.8 million, or 8.0% reflecting a 3.4% decrease in the number of units sold and a change to lower priced units in the mix of vehicles sold. OPERATING EXPENSES. Operating expenses increased $22.9 million, or 9.6%, to $261.1 million in the three months ended March 31, 1997 from $238.2 million in the three months ended March 31, 1996. Direct vehicle and operating expenses increased $5.8 million, or 22.6%, to $31.7 million in the three months ended March 31, 1997 from $25.9 million in the three months ended March 31, 1996 largely due to a $2.5 million increase in vehicle damage and repair expenses, an $800,000 increase in vehicle shuttling expenses (which helped improve the utilization of revenue earning vehicles by 3.3%) and a 2.2% increase in the average number of vehicles. Vehicle depreciation expenses increased $10.9 million, or 19.9%, to $65.4 million in the three months ended March 31, 1997 from $54.6 million in the three months ended March 31, 1996, largely due to the increase in fleet size and a $7.5 million favorable adjustment to expense in 1996 on trucks to align monthly depreciation charges with actual costs experienced upon final disposition of the asset. Cost of vehicles sold decreased $1.2 million, or 6.0%, to 42 44 $18.4 million in the three months ended March 31, 1997 from $19.6 million in the three months ended March 31, 1996 reflecting the lower number of units sold and the change in mix. Advertising, promotion and selling expenses increased $8.1 million, or 41.9%, to $27.6 million in the three months ended March 31, 1997 from $19.4 million in the three months ended March 31, 1996 largely due to a $5.7 million decrease in funding of advertising and promotion from third parties and a $.6 million increase in advertising expenditures. General and administrative expenses decreased $3.2 million, or 18.2%, to $14.4 million in the three months ended March 31, 1997 from $17.6 million in the three months ended March 31, 1996 largely due to an improvement in bad debt expenses of $1.6 million in 1997 reflecting temporary collection difficulties experienced in the beginning of 1996 (following the centralization of accounting functions) and a $1.1 million gain in the three months ended March 31, 1997 related to a gain on sale of the company's investment in Compass Computer Services, Inc. INTEREST EXPENSE. Interest expense decreased by $582,000, or 1.9%, to $29.6 million in the three months ended March 31, 1997 from $30.2 million in the three months ended March 31, 1996 as slightly lower interest rates in 1997 more than offset the higher borrowings levels reflective of the increase in fleet levels. PROVISION FOR INCOME TAXES. The provision for income taxes increased by $5.5 million to a benefit of $4.9 million in the three months ended March 31, 1997 from a provision of $600,000 in the three months ended March 31, 1996. The improvement is the result of recognizing a benefit based on the expected effective tax rate of 20% in 1997 versus recording the provision on the straight-line method in 1996 due to expected break-even or lower results for the full year. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 GENERAL OPERATING RESULTS. BRACC had a net loss of $2.5 million for 1996 compared to a net loss of $132.6 million for 1995. Income before income taxes increased to $469,000 for 1996 from a loss of $131.3 million for 1995. This improvement reflects the changes BRACC implemented during 1996 by placing a greater focus on cost reductions, location and segment profitability, customer service and operational consistency. OPERATING REVENUES. Operating revenues decreased $60.7 million, or 5.1%, to $1,132.8 million for 1996 from $1,193.4 million for 1995. Vehicle rental revenues decreased $71.1 million, or 6.9%, to $963.8 million for 1996 from $1,034.9 million for 1995, primarily due to a change in fleet mix, which reduced the number of higher priced luxury and specialty vehicles, and the elimination of unprofitable segments of the business, including selected low margin government and tour businesses. The daily average rental rate increased to $41.26 in 1996 from $39.58 in 1995, an increase of 4.2%, partly reflective of the reduction in low margin business and an upward movement in the daily rental prices. Royalty fees increased $2.5 million, or 4.3%, to $60.4 million in 1996 from $57.9 million in 1995 due to growth in international markets. Retail car sales revenue increased $7.7 million, or 9.2%, to $91.5 million for 1996 from $83.8 million for 1995 largely due to a 9.4% increase in the number of units sold. OPERATING EXPENSES. Operating expenses decreased $166.7 million, or 14.2%, to $1,008.2 million for 1996 from $1,174.9 million for 1995. Vehicle depreciation expense decreased $59.8 million, or 18.5%, to $263.8 million for 1996 from $323.6 million for 1995, as a result of more closely aligning fleet mix with customer demand, a lower depreciation rate on purchased risk vehicles for depreciated values to reflect the fair market wholesale values for vehicles to be sold (due to a strong used car and truck wholesale environment), and a 13.7% reduction in average fleet size resulting from an 11.6% reduction in rental volume. The smaller fleet size reduced vehicle depreciation by approximately $44.2 million while the risk vehicle depreciation change, the change in fleet mix and all other changes provided the remaining $15.6 million decrease from 1995. Direct vehicle and operating expenses decreased $31.8 million, or 20.8%, to $121.3 million in 1996 from $153.1 million in 1995, largely due to the reduction in average fleet size. The change in fleet mix, which reduced the number of higher priced luxury and specialty vehicles, and continued improvement in risk management expenses, reflecting ongoing efforts to minimize the exposure to higher risk renters, together contributed to an $11.7 million reduction in vehicle damage 43 45 expenses and a $14.2 million reduction in vehicle insurance expenses. Non-vehicle depreciation expense increased $7.1 million, or 36.5% to $26.6 million for 1996 from $19.5 million for 1995, largely due to amortization of a new reservation system installed in the fourth quarter of 1995. Cost of vehicles sold at retail increased $6.5 million, or 9.0% to $78.9 million for 1996 from $72.4 million for 1995 largely due to the higher number of units sold. Advertising, promotion and selling expenses decreased $23.1 million, or 21.7%, to $83.3 million in 1996 from $106.4 million in 1995, primarily due to the improvement in marketing focus to fewer programs with stronger impact resulting in a $7.4 million decrease in advertising spending and $14.9 million in lower selling costs associated with lower revenues. Facilities expenses remained relatively constant for 1996 and 1995. Personnel expenses decreased $32.2 million, or 11.5%, to $248.7 million in 1996 from $280.9 million in 1995, $12.6 million of which was due to a substantial salary reduction resulting from a decrease in the U.S. salaried workforce initiated in late 1995, $9.3 million of which was due to a 1995 charge against earnings for the reduction of U.S. salaried workforce and centralization of accounting functions, and approximately $8.3 million of which was due to a reduction in rental volume and corresponding variable labor costs. General and administrative expenses decreased $34.4 million, or 38.8%, to $54.2 million in 1996 from $88.6 million in 1995, due to the reduction in salaried headcount, a continued emphasis on controlling discretionary expenses and the impact of centralization charges recorded in 1995. Specifically, travel related expenses decreased $5.8 million, outside professional services decreased $3.5 million, bad debt expense decreased $5.6 million, and the year to year impact of centralization charges decreased by $7.5 million. Intangible amortization expense remained relatively constant for 1996 and 1995. INTEREST EXPENSE. Interest expense decreased $25.7 million, or 17.2%, to $124.2 million for 1996 from $149.9 million in 1995. A reduction in the average borrowing rate resulted in a $7.6 million decrease while all other changes, largely lower borrowing levels, reflective of the reduction in average fleet size and mix changes, resulted in a reduction of $18.1 million. PROVISION FOR INCOME TAXES. The provision for income taxes increased to $3.0 million for 1996 from $1.3 million in 1995 due to higher foreign income taxes, primarily in the United Kingdom. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 GENERAL OPERATING RESULTS. BRACC had a net loss of $132.6 million for 1995 compared to net income of $1.1 million for 1994. Loss before income taxes was $131.3 million for 1995 compared to income before income taxes of $5.1 million for 1994. These losses were due to substantially higher operating costs and greater interest expense which were not fully offset through higher revenue. OPERATING REVENUES. Operating revenues increased by $37.7 million, or 3.3%, to $1,193.5 million in 1995 from $1,155.8 million in 1994. Vehicle rental revenues increased $23.7 million, or 2.3% to $1,034.9 million in 1995 from $1,011.2 million in 1994. This increase was due to a 3.0% increase in the daily average rental rate, partially offset by a 1.1% reduction in vehicle rental days. Retail car sales revenue increased $5.8 million, or 7.4%, to $83.8 million for 1995 from $78.0 million for 1994, primarily due to a change to higher priced units in the mix of vehicles sold. Royalty fees increased $4.7 million, or 8.9%, to $57.9 million in 1995 from $53.2 million in 1994, primarily due to growth in international markets. Other revenues increased $3.5 million, or 26.3%, to $16.9 million in 1995 from $13.4 million in 1994 largely due to improvements in credit card processing income. The daily average rental rate increased to $39.58 in 1995 from $38.43 in 1994, an increase of 3.0%. OPERATING EXPENSES. Operating expenses increased $129.2 million, or 12.4% to $1,174.9 million in 1995 from $1,045.7 million in 1994. Vehicle depreciation expense increased $66.3 million, or 25.8%, to $323.6 million in 1995 from $257.3 million in 1994, due to higher manufacturer depreciation rates for Program Vehicles, a change in fleet mix to include more specialty vehicles and a 1.8% increase in average fleet size. The higher manufacturer program rates resulted in increased depreciation expense of approximately $59.9 million and the remaining $6.4 million increase was primarily due to larger fleet size. Direct vehicle and operating expenses increased $19.0 million, or 14.1%, to $153.1 million in 1995 from $134.1 million in 1994, primarily due to higher salvage/wreck and theft expense, the change in fleet mix 44 46 to include more luxury and specialty vehicles and a higher average fleet size. Non-vehicle depreciation expense decreased $1.9 million, or 8.8%, to $19.5 million in 1995 from $21.4 million in 1994. Cost of vehicles sold at retail increased $5.1 million, or 7.6%, to $72.4 million in 1995 from $67.3 million in 1994 reflecting a more costly mix of vehicles. Advertising, promotion and selling expenses increased $6.7 million, or 6.7%, to $106.4 million in 1995 from $99.7 million in 1994, primarily due to $2.2 million of higher selling costs associated with higher revenues, $3.5 million of marketing costs for credential reissuance in conjunction with the new corporate logo and the remainder due to other net marketing expenditures, largely frequent flyer programs. Facilities expenses increased $2.9 million, or 2.6%, to $113.3 million in 1995 from $110.4 million in 1994, due to minor increases in several areas, such as $2.5 million in lease expense for rental and administrative facilities and $.5 million for repairs and maintenance. Personnel expenses increased $11.5 million, or 4.3%, to $280.9 million in 1995 from $269.4 million in 1994, largely due to a $9.3 million one-time charge taken in 1995 in conjunction with the reduction in the U.S. salaried workforce and the centralization of accounting functions. General and administrative expenses increased $19.5 million, or 28.2%, to $88.6 million in 1995 from $69.1 million in 1994, due to a $5.3 million one-time restructuring charge related to a reduction in BRACC's workforce in 1995 and centralization of accounting functions, $3.0 million due to the non-recurrence of a legal settlement in 1994 related to a contract dispute regarding the failed attempt to design and build a multi-user reservation processing system, and increases in other general expenses, including travel related costs of $2.0 million and bad debt of $1.4 million. Intangible amortization expenses remained relatively constant for 1995 and 1994. INTEREST EXPENSE. Interest expense increased $44.9 million, or 42.8%, to $149.9 million for 1995 from $105.0 million in 1994. An increase in the average borrowing rate resulted in a $30.8 million increase while the remaining increase of $14.1 million was largely due to higher borrowing levels reflective of the increase in average fleet size and mix changes. PROVISION FOR INCOME TAXES. The provision for income taxes decreased to $1.3 million for 1995 from $4.0 million in 1994 primarily due to lower deferred federal and foreign income taxes. LIQUIDITY AND CAPITAL RESOURCES OF BRACC See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Liquidity and Capital Resources". 45 47 BUSINESS GENERAL The Company and its franchisees operate the third largest worldwide general use car and truck rental system, with approximately 3,200 locations and a peak fleet size during 1996 of 266,000 cars and 18,000 trucks. The Budget System includes locations in both the airport and local (downtown and suburban) markets in all major metropolitan areas in the United States, in many other small and mid-size U.S. markets and in more than 110 countries worldwide. Pro forma for the Budget Acquisition, the Budget System included approximately 455 company-owned locations in the United States at December 31, 1996, accounting for approximately 76% of 1996 U.S. system-wide revenues. In addition, Budget franchisees operated approximately 500 royalty-paying franchise locations in the United States at December 31, 1996. Budget is one of only three vehicle rental systems that offer rental vehicles throughout the world under a single brand name, with locations in Europe, Canada, Latin America, the Middle East, Asia/Pacific and Africa. The Budget System currently maintains more local market rental locations throughout the world than its major competitors. The Budget System is also unique among major car rental systems in that it rents trucks in most major markets worldwide. The Budget System's consumer truck rental fleet is the fourth largest in the United States. The Company is also one of the largest independent retailers of late model vehicles in the United States, with 23 retail car sales facilities and pro forma revenues of $246.9 million for 1996. The Company operates its retail car sales facilities under the name "Budget Car Sales". BACKGROUND BRACC In 1960, BRACC began franchising car and truck rental operations serving the downtown and suburban areas of cities in the United States and Canada. Budget established its first major airport location in 1967, but maintained a marketing strategy of offering good value to price-sensitive personal renters. Historically, BRACC operated the broadest distribution system in the industry, with more full-service local market locations in the United States and worldwide than its major competitors and the largest integrated system offering both cars and trucks in most markets worldwide. During the 1980s, BRACC undertook a strategic shift from being structured as a franchising company to functioning as an operating company. For the year ended December 31, 1996, BRACC's 304 company-owned locations in the United States accounted for approximately 61.0% of the Budget System's vehicle rental U.S. revenues, while its 70 company-owned locations outside the United States accounted for approximately 8.5% of the Budget System's international vehicle rental revenues. For the year ended December 31, 1996, BRACC's company-owned locations accounted for approximately 38.5% of total worldwide Budget System revenues. At December 31, 1996, Budget franchisees (including TEAM) maintained 652 locations in the United States and 2,182 locations internationally. TEAM Prior to the Budget Acquisition, TEAM was the largest U.S. Budget franchisee and was one of the largest independent retailers of late model automobiles in the United States. TEAM became a publicly held corporation in August 1994, with 23 locations in four franchise territories, and embarked on a strategy to significantly expand its Budget franchise base by further consolidating Budget franchise operations and to develop a branded retail car sales operation within its Budget franchise territories. Since its initial public offering, TEAM pursued an aggressive growth strategy in both its vehicle rental and retail car sales operations. TEAM added an additional nine Budget franchise territories in that period. With 152 locations as of December 31, 1996, TEAM accounted for approximately 14.8% of the Budget System's 1996 U.S. revenues. Concurrently with the development of its Budget franchise business, TEAM developed or acquired 11 retail car sales facilities. 46 48 Sanford Miller (Chairman of the Board and Chief Executive Officer), John P. Kennedy (Vice Chairman of the Board) and Jeffrey D. Congdon (Vice Chairman of the Board and Chief Financial Officer) together have over 75 years of experience in the vehicle rental business and had acquired and operated 54 Budget franchises prior to the Budget Acquisition. In addition, Messrs. Miller and Congdon together have over 25 years of experience operating retail car sales facilities. BUDGET GROUP Budget Group consists of 455 company-owned locations in the United States, including 21 of the 25 largest airport rental markets in the United States. Pro forma for the Budget Acquisition, Budget Group accounted for approximately 76% of the Budget System's 1996 U.S. system-wide revenues. Accordingly, the Budget Acquisition marked a significant furtherance of the initiative undertaken by BRACC approximately 10 years ago to make the transition from being a franchising company to being an operating company, as well as furtherance of TEAM's strategy of consolidating the Budget System. The Company believes that its increased level of company-owned operations will enable it to improve the performance of the Budget System and to compete more effectively in both the corporate and consumer segments of the vehicle rental industry. The Company is managed by officers having significant experience with BRACC and TEAM, who utilize operating strategies and systems that have proven most effective for BRACC and TEAM. STRATEGY Management's long-term strategy is to create an automotive services company which leverages the asset base and expertise of the Company. The Company's assets include a trade name that is recognized around the world; locations for the rental, sale and maintenance of vehicles; a workforce that is proficient in acquiring, financing, monitoring, maintaining and selling cars and trucks; and advanced information systems to support these operations. Increasing the utilization of these assets by acquiring automobile-related businesses would reduce the Company's unit costs and increase profitability. In the near term, management has developed a business strategy designed to increase the revenues and improve the profitability of the Company. Key elements of this strategy are as follows: - Enhance the Budget brand - Improve the performance of car rental operations - Continue to expand retail car sales operations - Expand truck rental operations ENHANCE THE BUDGET BRAND The Budget System is approximately 76% company-owned in the United States, giving the Company a percentage of company-owned locations that management believes is higher than many of its principal competitors. Management believes this high level of corporate ownership is a competitive advantage in the marketplace. It facilitates more consistent delivery of high quality services and improved operations and communications, thereby strengthening the Budget brand name among customers. Improved "front counter" systems will be designed to present a more consistent image to Budget customers, both corporate and individual, with an increased emphasis on quality of service and customer satisfaction. The Company's structure facilitates national advertising and marketing programs designed to increase the public's awareness of the Budget brand. In addition, management believes that there will be continuing opportunities to further consolidate the Budget System by acquiring additional franchise operations, and that such consolidation will further strengthen the Budget brand. IMPROVE THE PERFORMANCE OF CAR RENTAL OPERATIONS Historically, TEAM enhanced the profitability of its acquired franchise territories by reducing operating costs and increasing rental revenue. Similarly, in 1996, BRACC began initiatives to improve the 47 49 performance of its company-owned operations. Management believes that the Budget Acquisition has enabled the Company to combine key elements of the TEAM and BRACC strategies to achieve even greater operating efficiencies. The Company expects to undertake significant initiatives to (i) enhance the performance of its U.S. car rental operations, (ii) capitalize on the increased level of company-owned locations, (iii) increase its marketing to corporate accounts, (iv) place increased emphasis on the leisure and local rental markets (including its entry into the insurance replacement market), and (v) expand and improve Budget's international operations. ENHANCE THE PERFORMANCE OF U.S. CAR RENTAL OPERATIONS. TEAM and BRACC have each successfully enhanced the profitability of their operations by implementing cost reduction strategies. These strategies have included centralizing certain corporate functions (such as credit card and warranty processing), extending their fleet management practices in order to improve fleet utilization and per unit cost versus yield, improving the timing and processing of fleet deliveries and dispositions, reducing fleet downtime, and improving fleet make/model composition to better match customer demand. TEAM and BRACC have each also implemented cost management practices to reduce overall personnel costs, lower vehicle maintenance expense and damage repair costs and increase the effectiveness of their servicing procedures. In order to increase revenues of its acquired operations, TEAM and BRACC have utilized various yield management models to optimize pricing and fleet utilization (for example, by tracking demand patterns and allowing local managers to shift fleet inventory between locations). The Company believes that it will be able to utilize various elements of these operating strategies to enhance the performance of the combined TEAM/BRACC operations. CAPITALIZE ON THE INCREASED LEVEL OF COMPANY-OWNED LOCATIONS. Management believes that the addition of the 151 locations that TEAM operated in its 13 franchise territories to the 304 locations operated by BRACC in the United States will significantly improve the car rental operations of Budget Group in the United States. Specifically, the increased level of company-owned operations is expected to facilitate more consistent delivery of services, uniform prices and communications to customers and allow the Company to improve its yields and fleet utilization in many of its locations. Management believes that the combination of TEAM and BRACC operations in contiguous markets can significantly improve the marketing programs and operating efficiency of the combined company. For example, the Company expects to achieve increased efficiencies by integrating BRACC's operations at Los Angeles International Airport with TEAM's operations throughout Southern California, BRACC's operations in the New York City area with TEAM's operation in Philadelphia, and BRACC's operation in Boston with TEAM's operation in Hartford. Combining the operations of TEAM and BRACC, the Company operates in 21 of the 25 largest airport rental markets in the United States. The Company expects to manage the combined companies more efficiently by integrating critical management information systems, developing more comprehensive customer data and combining the two companies' regional management organizations. INCREASE MARKETING TO CORPORATE ACCOUNTS. Approximately one-half of the Company's pro forma car rental revenue for 1996 was derived from corporate accounts, with this customer base accounting for approximately one-half of the Company's rentals from airport locations. Management believes that it will be able to increase the contribution from corporate accounts, both in absolute dollars and as a percentage of its car rental revenues, by significantly increasing its marketing efforts to corporate accounts. Specifically, management believes that middle market companies (companies that would have accounts in the $500,000 to $1.0 million annual revenue range) provide usage and yield characteristics that are favorable for the Company. Management expects to broaden the Company's marketing effort to this targeted customer base by adding additional marketing personnel and believes that the improved consistency of service and pricing throughout the Budget System, driven in significant part by the higher percentage of company-owned locations, will be particularly important in marketing to this customer base. PLACE INCREASED EMPHASIS ON THE LEISURE AND LOCAL MARKETS. The Company intends to place an increased emphasis on the leisure and local markets. Budget's success in the leisure market has 48 50 been driven by its reputation for offering vacation travelers favorable rates on high quality cars and the strength of its operations at airports in travel destinations. Management believes that corporate ownership of Budget's operations in Florida, Hawaii, Southern California and Phoenix will improve the Company's ability to market Budget's services to tour operators, travel agents, travel wholesalers and cruise lines. The local segment of the car rental industry consists of facilities located near downtown or suburban areas and is directed toward individuals renting cars while their automobiles are being repaired, for out of town travel or for special occasions, and toward businesses seeking automobiles or vans for occasional local use. Budget was founded in 1958 in order to serve this segment, and enhanced its position through an affiliation with Sears, Roebuck & Co. ("Sears") in 1970 (which allows Budget to rent cars and trucks under the Sears name ("Sears Car and Truck Rental") at over 900 locations throughout the United States). The Company currently maintains more full-service local market locations worldwide than its major competitors. Maintaining a strong position in the local market significantly improves Budget's fleet utilization, as cars may be shuttled from airports to downtown and suburban locations for weekend use. Management believes that it will be able to improve its performance in the local market segment by adding locations in certain existing local markets, which is expected to allow the Company to generate additional revenues with relatively small increases in administrative overhead. Additionally, such locations typically have less intense rate competition and fewer corporate customers utilizing negotiated rate structures. Through its recent acquisition of Premier, the Company expects to significantly improve its participation in the insurance replacement market. Premier owns and operates 9,000 vehicles from 101 locations in 13 major U.S. markets, and will continue to operate under its own trade name. EXPAND AND IMPROVE INTERNATIONAL OPERATIONS. Budget is one of only three systems that offers rental vehicles throughout the world under a single brand name and Budget is recognized as a market leader in several key foreign markets, including Canada, Germany and many Latin American and Caribbean countries. Management believes that the strength of the Budget System in foreign markets has important value in name recognition and serving the needs of local customers and international travelers. For 1996, approximately 44.1% of the Budget System's worldwide revenues were derived from its 2,252 locations in more than 110 countries. Company-owned operations at international locations in the United Kingdom, France, Switzerland, Australia and New Zealand accounted for approximately 8.5% of the Budget System's 1996 international revenues, with the remainder attributable to the operations of approximately 2,182 franchised locations. Management believes that it will be able to improve the Company's international operations by implementing programs through which underperforming franchisees will be able to improve their operating results. Management also believes that certain emerging markets, such as the Pacific Rim and Southeast Asia, provide growth opportunities for the Budget System, and that it will be able to add locations in these markets, either directly or through franchisees. CONTINUE TO EXPAND RETAIL CAR SALES OPERATIONS The increased cost of new cars and the improved reliability of low-mileage, late model cars have contributed to greater market demand for late model cars in recent years. Notwithstanding this growth, the retail car sales market remains highly fragmented, with most late model cars being sold through the used car operations of local or regional new car dealerships. Management believes that the market for late model cars is currently undergoing significant changes, with the emergence of companies retailing late model cars on a national or regional basis. The Company's Principal Executive Officers have more than 25 years of experience in acquiring and selling low-mileage, late model cars. The Company, with 23 retail car sales facilities and pro forma car sales revenues of $246.9 million for 1996, is one of the largest independent retailers of late model cars in the United States. Management believes that it will be able to improve the performance of the acquired BRACC retail sales facilities by incorporating certain systems that TEAM utilized in its retail car sales operations and that it will be able to achieve efficiencies by combining and centralizing certain functions. 49 51 The Company plans to establish a nationally recognized and branded retail car sales operation which will provide low mileage, late model cars to consumers in a new car sales environment under the Budget Car Sales brand. Management expects the Company to establish multiple sales facilities in many of its markets, which will allow the Company to benefit from shared administration and marketing programs with its vehicle rental business. EXPAND TRUCK RENTAL OPERATIONS With the fourth largest consumer truck rental fleet in the United States, Budget is unique among major car rental systems in that it rents trucks to consumers and commercial users in most major markets worldwide. Budget has long been considered an innovator in the truck rental market, having introduced the first all-diesel-equipped and all-automatic-transmission fleets for consumer use, as well as four-door versions of moving trucks that provide seating for a family or moving crew. TEAM implemented a strategy of expanding its truck rental operations in its franchised territories, and management believes the Company will be able to significantly expand Budget's truck rental business. Management expects the Company to add truck rental locations in various markets, particularly in conjunction with the addition of new local market locations. Management believes that adding truck rental locations will leverage certain fixed costs and increase consumer awareness of the Budget brand, while favorable pricing trends in the truck rental market are expected to provide attractive returns on invested capital. THE BUDGET SYSTEM The Company provides consistent system-wide services, a state-of-the-art reservation system and other opportunities to all vehicle rental locations within the Budget System. For 1996, pro forma for the consummation of the Budget Acquisition, company-owned locations accounted for approximately 76% of the U.S. revenues of the Budget System. SYSTEM-WIDE SERVICES The Company provides the Budget System with: (i) national promotion, advertising and public relations; (ii) reservations and information systems; (iii) data processing support; (iv) marketing programs with hotels and airlines; (v) Sears Car and Truck Rental concessions; (vi) a sales staff for marketing to corporate customers and the travel community; (vii) credit card services for commercial customers; (viii) training in local marketing techniques; (ix) operation, training and support; (x) fleet purchasing programs; and (xi) a company-owned fleet of cars and trucks for one-way rentals. In general, pursuant to its agreements with its franchisees, the Company is required to expend a certain percentage of franchise royalties that it receives on advertising and promotion. In addition, the Company negotiates with automobile manufacturers to develop vehicle acquisition and disposition programs that are available to franchisees as well as to company-owned locations. The Company facilitates one-way car rentals between approximately 325 selected company-owned and franchised locations in the United States. This one-way program is also in place for truck rentals at approximately 325 locations. A limited fleet of vehicles owned by the Company is dedicated to supplement the one-way vehicle rental capacity of the participating locations. This program enables the Budget System to operate more fully as an integrated network of locations. RESERVATIONS SYSTEM The Company operates a state-of-the-art computerized reservation system through WizCom. Budget's main reservation facility is located in the Dallas metropolitan area and has over 400 employees. Auxiliary centers are located in Toronto, Canada, the United Kingdom, Australia and New Zealand. These centers are linked with the major airline and travel industry reservation systems through the worldwide Budget reservation network. The main reservation facility accepts inquiries and reservations for Budget System locations worldwide on a 24-hour basis, 365 days a year. The reservation centers utilize an extensive database maintained on rates and vehicles available for nearly all Budget System locations, a 50 52 special file of pertinent information on frequent renters and other information that facilitates the Budget System's business. SEARS CAR AND TRUCK RENTAL In 1970, BRACC established a contractual relationship with Sears which allows Budget operating locations to provide car and truck rental under the Sears name. Sears Car and Truck Rental customers may use their Sears charge card for payment of rental charges. Sears Car and Truck Rental is available at approximately 900 Budget locations in the United States. MANAGEMENT INTEGRATION The Company is managed by a combination of managers from TEAM and BRACC. Sanford Miller, the Chairman and Chief Executive Officer of TEAM prior to the Budget Acquisition, is the Chairman and Chief Executive Officer of the Company. The prior managements of TEAM and BRACC have been integrated to create an effective and experienced management team for the Company which draws upon the knowledge and strengths of the two organizations. The majority of the Company's corporate functions continue to be managed by BRACC personnel. See "Management". The Company's primary corporate functions will be centralized in its worldwide headquarters in Lisle, Illinois. TEAM previously maintained a decentralized management structure of its day-to-day rental operations. As part of the Budget Acquisition, TEAM's rental operations are being merged into BRACC's and centralized to achieve cost savings. RENTAL OPERATIONS Budget rents a wide variety of automobiles and trucks, most of which consist of the current and immediately preceding model years. Vehicle rentals are generally made on a daily, weekly or monthly basis and generally include unlimited mileage. Rental charges are computed on the basis of the length of the rental or, in some cases, on the length of the rental plus a mileage charge. Rates vary at different locations depending on the type of vehicle rented, the local market and competitive and cost factors. Most rentals are made utilizing rate plans under which the customer is responsible for gasoline used during the rental. Budget also generally offers its customers the convenience of leaving a rented vehicle at a Budget location in a city other than the one in which it was rented, although, consistent with industry practices, a drop-off charge or special intercity rate may be imposed. The following table sets forth for the periods indicated the number of owned and franchised locations of Budget in North America and at international locations and certain other data of Budget Group:
YEAR ENDED DECEMBER 31, ----------------- 1995 1996 ------- ------- Locations in operation: United States: BRACC-owned............................................ 311 304 TEAM-owned............................................. 133 152 Other franchisees...................................... 560 500 ------- ------- Total U.S......................................... 1,004 956 International: BRACC-owned............................................ 79 70 Franchisees............................................ 2,027 2,182 ------- ------- Total International............................... 2,106 2,252 ------- ------- Budget System................................ 3,110 3,208 Average fleet size(a)....................................... 233,081 235,874
- --------------- (a) Average fleet size is the number of vehicles (both cars and trucks) owned or leased by Budget each day of the period divided by the number of days in the period. 51 53 NORTH AMERICAN OPERATIONS At December 31, 1996, BRACC owned and operated 304 Budget locations in the United States, and franchisees (including TEAM) owned and operated 652 Budget locations in the United States and 390 Budget locations in Canada. Of the U.S. facilities, nearly 300 primarily serve airport business and more than 650 serve local market (downtown and suburban) locations. Budget's mix of business consists of approximately 65% in the airport segment and 35% in the local segment. In addition, at December 31, 1996, BRACC rented trucks at 151 of its company-owned locations and TEAM rented trucks at 93 of its locations. Budget is in many cases one of five to seven vehicle concessionaires at the airports in which it operates. In general, concession fees for airport locations are based on a percentage of total commissionable revenues (as determined by each airport authority), subject to minimum annual guaranteed amounts. Concessions are typically awarded by airport authorities every three to five years based upon competitive bids. Budget's concession arrangements with the various airport authorities generally impose certain minimum operating requirements, provide for relocation in the event of future construction and provide for abatement of the minimum annual guarantee in the event of extended low passenger volume. INTERNATIONAL OPERATIONS At December 31, 1996, BRACC owned and operated 70 international Budget locations, consisting of 36 European locations (including the Middle East and Africa) and 34 locations in the Asia/Pacific region, and franchisees owned and operated 2,182 international Budget locations, consisting of 1,140 European locations (including the Middle East and Africa), 263 Latin American locations and 389 locations in the Asia/Pacific region. Budget locations can be found in more than 110 countries outside the United States. Budget is recognized as a market leader in Canada, Germany and many Latin American and Caribbean countries. VAN POOLING OPERATIONS Van Pool, the Company's commuter van pooling subsidiary, was acquired by TEAM in February 1996 and maintains offices in 21 cities located in 15 states and the District of Columbia. Founded in 1977, Van Pool provides van pooling services to individuals, corporations and municipalities. Pursuant to van pool agreements between the Company and either the volunteer driver, corporation or municipality (the "contracting party"), the contracting party agrees to drive or arrange a van pool which travels a fixed route set by the Company. The Company sets the fees, which are collected by the driver and remitted to the Company. Van Pool employs approximately 40 individuals at its home office in Troy, Michigan and approximately 40 individuals in its local markets, and at December 31, 1996 operated a fleet of approximately 3,250 passenger vans. RENTAL VEHICLE PURCHASING Budget participates in a variety of vehicle purchase programs with major domestic and foreign vehicle manufacturers. On average during model year 1997, 73% of BRACC's vehicle purchases consisted of Ford vehicles, 6% of Toyota vehicles and the remaining 16% of General Motors, Mazda, Hyundai and Chrysler vehicles. These percentages vary among BRACC's operations and will most likely change from year to year. The average price for automobiles purchased by BRACC in 1996 for its rental fleet was approximately $18,300. On average during 1996, 29% of TEAM's automobile purchases consisted of Chrysler vehicles, 37% of Ford vehicles and 21% of Nissan and Toyota vehicles. The average price for automobiles purchased by TEAM in 1996 for its rental fleet was approximately $18,100. Budget's principal relationship has historically been with Ford, with an emphasis on products from the Lincoln-Mercury Division of Ford. Concurrently with the Budget Acquisition, the Company entered into a new ten-year Supply Agreement with Ford. Under the new Supply Agreement, the Company agreed (i) to purchase or lease at least 70% of the total number of vehicles leased or purchased by it in each model year from Ford and (ii) to purchase or lease at least 80,000 new Ford vehicles in each model year 52 54 in the United States. Under the Supply Agreement, Ford and its affiliates are required to offer to the Company and its affiliates and franchisees generally, for each model year, vehicles and fleet programs at prices that are competitive with the vehicles and fleet programs of other automobile manufacturers. See "The Budget Acquisition -- Related Agreements -- Supply Agreement". FLEET UTILIZATION AND SEASONALITY Budget's business is subject to seasonal variations in customer demand, with the summer vacation period representing the peak season for vehicle rentals. The general seasonal variation in demand, along with more localized changes in demand at each of the Company's locations, causes the Company to vary its fleet size over the course of the year. For 1996, BRACC's average monthly fleet size ranged from a low of 64,900 vehicles in January to a high of 88,600 vehicles in August. Fleet utilization, which is based on the average number of days vehicles are rented compared to the total number of days vehicles are available for rental, ranged from 73% in January to 83% in August and averaged 77% for 1996. For 1996, TEAM's average monthly fleet size (excluding Van Pool) ranged from a low of 10,694 vehicles in January to a high of 18,870 vehicles in July. Fleet utilization ranged from 79% in June to 85% in August and averaged 81% for 1996. RENTAL RELATED PRODUCTS Although the dominant source of the Company's total revenue is time and mileage charges from the rental of vehicles and franchise payments from its franchisees, the Company also generates revenue from rental related products such as loss damage waivers, personal accident insurance, personal effects protection, additional liability insurance, other travel related insurance coverages and travel related products. The travel related products from which the Company generates revenue include vehicle upgrades, gasoline sales, intercity drop-off charges and miscellaneous items such as baby seats, ski racks, cellular phones and additional driver fees. MARKETING The Company's promotional and marketing activities are designed to promote Budget as a value service provider and to promote brand loyalty. The Company has a sales force of approximately 200 employees worldwide. Budget's national advertising program is implemented through a variety of media, including national and local television, radio, newspapers, magazines, airline ticket jackets, airline in-flight magazines and strategically located billboards, an Internet site, counter and store collateral materials and merchandise. The Company also has cooperative advertising arrangements with airlines, hotels, travel agency consortia and others in the travel industry. Budget participates in a number of airline frequent flyer programs (including United Airlines, Southwest Airlines, Alaska Airlines, Aeromexico and Lufthansa), as well as certain hotel programs, theme park programs and credit card affinity programs. Budget also has a frequent renter program, Awards Plus, which gives renters a strong incentive to bring all of their car rental business to Budget. In addition, the Company has contracts with a number of airlines, hotels and other organizations pursuant to which such organizations agree to recommend Budget's services during their reservation calls and to transfer interested customers to a Budget reservation agent. In addition, in connection with the Budget Acquisition, the Company has undertaken to carry out promotional programs that feature and promote the rental of Ford vehicles. See "The Budget Acquisition -- Related Agreements -- Advertising Agreement". CUSTOMER SERVICE Budget's commitment to delivering a consistently high level of customer service is a critical element of its success strategy. Each month, over 3,000 Budget customers are randomly surveyed to measure service levels by location. Budget identifies specific areas of achievement and opportunity from these surveys. Areas of improvement are addressed on a system-wide level and standard methods and measures are developed. To drive improvement, the service standards are audited routinely by 53 55 management and service delivery standards assessors. The major areas of these assessments include: (i) speed of rental/return process including busing where applicable, (ii) vehicle condition and availability, (iii) customer interaction including helpfulness and courtesy and (iv) location image. In addition, Budget utilizes a toll-free "800" number that allows customers to report problems directly to the customer relations department. Monthly reports of the types and number of complaints received are used in conjunction with the customer satisfaction reports by location management as feedback of customer service delivery. Furthermore, Budget participates in the annual J.D. Power and Associates survey process to ensure that competitive levels of performance are achieved. INFORMATION TECHNOLOGY The Company's information technology is designed to provide Budget worldwide with high quality, cost-effective systems and services on a timely basis. In late 1995, BRACC implemented its state-of-the-art reservation system, which consists of a highly integrated mainframe system with an intelligent workstation component for reservation agents, allowing them to access pertinent information in a fast and user-friendly manner. The reservation system has direct interfaces to the airline system and captures key corporate and customer information. The Company's rental counter and back-office system, BEST I, supports both company-owned and franchisee operations. The Company's fleet system supports fleet finance, dealership accounting and ordering for all brands of vehicles including direct ordering lines to Ford, Toyota, Nissan and Mazda. The Company's human resources, benefits and payroll interface is supported by a client-server system that automatically feeds to an outsourced payroll system. The Company intends to continue to enhance and consolidate its information technology systems allowing Budget to deliver consistent customer service at all of its locations. VEHICLE RENTAL FACILITIES The Company leases substantially all of its U.S. airport and local market rental facilities and, pro forma for the Budget Acquisition, operated from 455 rental locations at December 31, 1996. The airport facilities are located on airport property owned by airport authorities or located near the airport in locations convenient for bus transport of customers to the airport. Each airport facility includes vehicle storage areas, a vehicle maintenance facility, a car wash, a refueling station and rental and return facilities. Local market rental facilities generally consist of a limited parking facility and a rental and return desk and are generally subject to fixed-term leases with renewal options. Certain of these leases also have purchase options at the end of their terms. FRANCHISING Of Budget's 3,208 worldwide locations at December 31, 1996, 2,833 were owned and operated by franchisees (including TEAM), with franchisees representing 62% of system-wide revenues for 1996. As of June 30, 1997, BRACC maintained over 800 separate franchise agreements with almost 600 franchisees. BRACC has franchise locations in more than 110 countries worldwide. Franchised locations range from large operations in major airport markets with fleet sizes in excess of 4,000 vehicles and franchise territories within an entire country to operations in small markets with fleets of fewer than 50 vehicles. The Company considers its relationships with its franchisees to be excellent. It works closely with franchise advisory councils in formulating and implementing sales, advertising and promotion, and operating strategies and meets regularly with these advisors and other franchisees at regional, national and international meetings. The Company has an ongoing growth strategy of adding new franchises worldwide when opportunities arise. Incremental franchises provide the Company with a source of high margin revenue as there are relatively few additional fixed costs associated with fees paid by new franchisees to the Company. 54 56 The Company's relationship with each Budget franchisee is governed by franchise agreements (the "Franchise Agreements"), which grant to the franchisees certain exclusive territories in which to operate the Budget vehicle rental business. The Franchise Agreements provide the Company with significant rights regarding the business and operations of each franchise and impose restrictions on the transfer of the franchise and on the transfer of the franchisee's capital stock without the consent of the Company. Each franchisee is required to operate each of its franchises in accordance with certain standards contained in the Budget operating manual (the "Operating Manual"). The Company has the right to monitor the operations of franchisees and any default by a franchisee under a Franchise Agreement or the Operating Manual may give the Company the right to terminate the underlying franchise. In general, the Franchise Agreements grant the franchisees the exclusive right to operate a Budget Rent a Car and/or Budget Rent a Truck business in a particular geographic area for a stated period. Franchise Agreements generally provide for an unlimited number of renewal terms. Upon renewal, the terms and conditions of Franchise Agreements (other than with respect to royalty fees) may be amended from those contained in the existing Franchise Agreements. The standard royalty fee payable to the Company under Franchise Agreements is 7.5% of gross rental revenues in the United States and 5% of gross rental revenues in international markets, but certain of the Company franchisees have franchise agreements with different royalty fee structures. Pursuant to each Franchise Agreement, the franchisee must meet certain guidelines relating to the number of rental offices in the franchised territory, the number of vehicles maintained for rental and the amount of advertising and promotion expenditures. In general, each Franchise Agreement provides that the franchisee shall not engage in any other vehicle rental business within the franchise territory during the term of such agreement and for 12 months thereafter. In addition, franchisees agree not to use the word "Budget" or any other Budget trademark other than in their vehicle rental business. RENTAL VEHICLE DISPOSITION BRACC's operating strategy was to maintain its fleet at an average age of four months or less, and TEAM's operating strategy was to maintain its fleet at an average age of six months or less. Approximately 88% of the vehicles purchased by BRACC and approximately 85% of the vehicles purchased by TEAM in model year 1996 were Program Vehicles. These programs currently require that the Company maintain Program Vehicles in its fleet for a minimum number of months and impose numerous return conditions, including those related to mileage and repair condition. More than 97% of the Program Vehicles purchased by Budget Group and scheduled to be returned in 1996 were eligible for return. At the time of return to the manufacturer, the Company receives the price guaranteed at the time of purchase and are thus protected from fluctuations in the prices of previously-owned vehicles in the wholesale market at the time of disposition. The future percentages of Program Vehicles in the Company's fleet will be dependent on the availability and attractiveness of manufacturers' repurchase programs, over which the Company has no control. See "Risk Factors -- Potential Changes in Manufacturers' Repurchase Programs". In addition to manufacturers' repurchase programs, the Company disposes of its rental fleet through automobile auctions, sales to wholesalers and internal retail car sales operations. While the disposal of rental vehicles through internal retail car sales operations has been limited to date, management believes that such dispositions may increase as Budget retail car sales operations continue to grow and as management evaluates the mix of the Company's Program Vehicles and vehicles not subject to manufacturers' repurchase programs. RETAIL CAR SALES OPERATIONS The Company sells cars, sport utility vehicles and trucks through its retail car sales facilities and is one of the largest independent retailers of late model vehicles in the United States. Immediately prior to the Budget Acquisition, TEAM operated 11 retail car sales facilities, with 1996 revenues of approximately $134.1 million, and BRACC operated 11 retail car sales facilities, with 1996 revenues of approximately 55 57 $91.5 million. Since the Budget Acquisition, the Company has opened three new retail car sales facilities and consolidated four of the facilities previously operated by BRACC into two facilities. RETAIL CAR SALES INVENTORY In 1996, the vehicles sold at Budget retail car sales facilities consisted primarily of 1996 model year automobiles and passenger vans, with some 1995 model year vehicles and very few 1994 model year vehicles. TEAM and BRACC historically acquired most of their retail car sales inventory at auctions, although they have acquired some cars from their rental fleets. In the future, the Company expects to increase its acquisitions of cars from the disposition of cars used in its rental fleet and to purchase a smaller portion from auctions. The Company coordinates car purchases among its retail car sales locations to enable it to benefit from volume purchases of cars. VEHICLE PRICING AND FINANCING While many cars display stickers indicating their "blue book" value, customers are permitted to negotiate pricing terms with the sales managers. Various local enterprises provide financing to customers of the Company on a non-exclusive basis. To supplement its sale of vehicles, the Company sells extended service contracts and related consumer products to their customers. RETAIL CAR SALES/SERVICE FACILITIES Each of the retail car sales facilities originally operated by TEAM consists of a showroom and an outdoor display area, which together accommodate the on-site display of at least 100 cars, and a service area. Although certain of these retail car sales facilities have been converted from facilities that were used in other businesses, the Company prefers to build its own retail car sales facilities and believes that such facilities can be built at an average cost of approximately $1.2 million. The service departments operated at each retail car sales facility are responsible for inspecting a car's condition and for providing necessary reconditioning and maintenance services before sale. These services are provided uniformly for its retail car sales facilities in accordance with an inspection checklist developed by the Company. Service departments also provide after-sale service for the Company's customers. The retail car sales facilities originally operated by BRACC are typically smaller than TEAM's car sales facilities and do not include service departments. COMPETITION The vehicle rental industry is characterized by intense competition, particularly with respect to price and service. In any geographic market, the Company may encounter competition from national, regional and local vehicle rental companies. Budget's main competitors in the rental market are Hertz, Avis, Alamo, National and Enterprise. In consumer truck rentals, Budget faces competition from U-Haul, Ryder and Penske. There have been occasions when the major vehicle rental companies have been adversely affected by industry-wide price cutting, and TEAM and BRACC have on such occasions lowered their prices in response. The Company will not generally be able to unilaterally raise its prices or to maintain its prices in times of industry price cutting. The retail car sales business is also characterized by intense competition from a range of regional and local car dealerships and other retailers of previously-owned vehicles. Management believes that the Company competes primarily against new car dealers retailing previously-owned cars. The Company's retail car sales facilities are located among similar facilities and, in some instances, together with the Company's rental operations. The entry of large, well-capitalized retailers of late model previously-owned cars may provide Budget Group with significant additional competition. See "Risk Factors -- Competition". 56 58 INSURANCE The TEAM car rental locations have insurance coverage of $1 million with a $500,000 self-insured retention with respect to bodily injury and property damage claims arising from the use of its vehicles, with the exception of its California operations, where it has a $1 million self-insured retention, and its New York operations, where it has first dollar insurance coverage for renters age 25 or older. Budget Car Sales has insurance coverage of $1 million with a $25,000 self-insured retention with respect to bodily injury, personal injury and property damage claims arising from its garage operations. There is also general liability coverage of $1 million per occurrence with a $2 million aggregate coverage with no self-insured retention. Van Pool has insurance coverage of $1 million with a $500,000 self-insured retention with respect to bodily injury and property damage claims arising from the use of its vehicles. There is a $100 million umbrella policy for all liability coverages. The above operations have workers' compensation insurance with a $250,000 per person and a $750,000 aggregate self-insured retention. BRACC has a $2 million per occurrence self-insured retention in the U.S., with the exception of its Manhattan, New York operations, where it has first dollar insurance coverage for renters age 25 or older with respect to bodily injury and property damage claims. BRACC's international operations have the following self-insured retention: $1 million in the United Kingdom, no retention in France, $1,000 in Australia and in Switzerland and $5,000 in New Zealand, with respect to bodily injury and property damage claims. BRACC has a $2 million self-insured retention on its general liability coverage. There is a $100 million umbrella policy for all liability coverages. BRACC has workers' compensation insurance with a $500,000 per person and a $6.5 million aggregate self-insured retention. Premier has a $2 million per occurrence, first dollar insurance policy for bodily injury and property damage claims. There is a policy for $1 million per occurrence and a $2 million aggregate deductible with no retention and a $100 million umbrella policy for all liability coverages. Budget Group has $100 million property coverage with a $1.5 million per occurrence and a $2.5 million aggregate deductible along with a $250,000 maintenance deductible for each additional occurrence resulting in losses in excess of $2.5 million aggregate deductible. In addition, the Company has a $25 million directors and officers liability policy. REGULATORY AND ENVIRONMENTAL MATTERS The Company is subject to foreign, federal, state and local laws and regulations, including those relating to taxing and licensing of vehicles, franchising, consumer credit, environmental protection, retail vehicle sales and labor matters. MATTERS AFFECTING THE VEHICLE RENTAL INDUSTRY Approximately 7.0% and 6.8% of the 1996 car rental revenues of TEAM and BRACC, respectively, were generated from the sale of loss damage waivers. The United States House of Representatives has from time to time contemplated legislation that would regulate the conditions under which loss damage waivers may be sold by car rental companies. For example, in January 1995, a bill was introduced in the United States House of Representatives which seeks to prohibit the imposition of liability on renters for loss of, or damage to, rented vehicles, except in certain circumstances, and, if passed, would prohibit the sale of loss damage waivers. To date, no action has been taken on this bill. In addition, approximately 40 states have considered legislation affecting the sale of loss damage waivers. To date, 18 of those states have enacted legislation requiring disclosure to each customer at the time of rental that a loss damage waiver may not be necessary; certain states have enacted legislation limiting rental car companies' right to offer loss damage waivers for sale and limiting potential customer liability to specified amounts; and other states have capped the rates that may be charged for loss damage waivers to stated amounts per day. Adoption of national or additional state legislation limiting the sale, or capping the rates, of loss damage waivers could further restrict sales of this product, and additional limitations on potential customer liability could increase costs to the Company. Certain states currently make vehicle owners 57 59 (including vehicle rental companies) vicariously liable for the actions of any person lawfully driving an owned vehicle, regardless of fault. Vehicle rental companies are also subject to various federal, state and local consumer protection laws and regulations including those relating to advertising and disclosure of charges to customers. The National Association of Attorneys General has promulgated suggested guidelines for car rental advertisements. ENVIRONMENTAL MATTERS The principal environmental regulatory requirements applicable to the Company's operations relate to the ownership or use of tanks for the storage of petroleum products, such as gasoline, diesel fuel and waste oils; the treatment or discharge of waste waters; and the generation, storage, transportation and off-site treatment or disposal of waste materials. Approximately 170 of the Company's locations contain petroleum products stored in underground or aboveground tanks. The Company conducts environmental compliance programs designed to maintain compliance with applicable technical and operational requirements, including periodic integrity testing of underground storage tanks and providing financial assurance for remediation of spills or releases. The Company believes that its operations currently are in compliance, in all material respects, with such regulatory requirements. However, the Company, as well as those competing entities which own or operate underground storage tanks, must achieve compliance with certain Federal underground storage tank requirements by 1998. The Company believes that the remaining costs of complying with these requirements for 1997 and 1998 will be approximately $3 million. The historical and current uses of the Company's facilities may have resulted in spills or releases of various hazardous materials or wastes or petroleum products ("Hazardous Substances") which now, or in the future, could require remediation. The Company also may be subject to requirements related to remediation of Hazardous Substances that have been released to the environment at properties they own or operate, or owned or operated in the past, or at properties to which they send, or have sent, Hazardous Substances for treatment or disposal. Such remediation requirements generally are imposed without regard to fault, and liability for any required environmental remediation can be substantial. The Company may be eligible for reimbursement or payment of remediation costs associated with releases from registered underground storage tanks in states that have established funds to assist in the payment of such remediation costs. Subject to certain deductibles, the availability of funds, the compliance status of the tanks and the nature of the release, these tank funds may be available to the Company for use in remediating releases from their tank systems. Certain of the TEAM locations have been the subject of environmental remediation as a consequence of leaks or spills and continue to have some level of environmental impairment that may require further remediation. In connection with the acquisition of franchise territories in Philadelphia, Pittsburgh and Cincinnati, the seller, Chrysler Credit Corporation, Inc. ("CCC"), agreed to provide up to $873,750 through 1997 for remediation activities at sites in those areas shown to be impaired by assessments performed under the supervision of TEAM. Although the ultimate cost of these remediation activities is currently unknown, management believes that the amount of funding to be provided by CCC will be sufficient to cover the cost of these remediation activities. Approximately 140 BRACC-owned rental facilities contain underground storage tanks. In connection with the Budget Acquisition, Ford has agreed subject to certain limitations to indemnify the Company against losses incurred by the Company arising out of or resulting from breaches by BRACC of BRACC representations and warranties in its Stock Purchase Agreement (including those relating to environmental matters), to the extent such losses are not covered by an insurance policy or a reserve established by BRACC, relating to any action by a third party in connection with environmental matters. Ford's indemnity obligation for environmental and certain other matters is capped at $40 million. However, Ford is not required to indemnify the Company unless such loss exceeds $15,000 and the breach of all representations and warranties (including those relating to environmental matters) has resulted in aggregate losses in excess of $2.0 million, nor is Ford required to pay the first $2.0 million of such aggregate losses (including those relating to environmental matters). 58 60 Although the potential cost of any necessary remediation at the TEAM and BRACC facilities is not precisely known, it is not expected to exceed $5 million over the next three to five years. See "Risk Factors -- Costs of Regulatory and Environmental Compliance". FRANCHISE MATTERS As a franchisor, BRACC is subject to federal, state and foreign laws regulating various aspects of franchise operations and sales. These laws impose registration and disclosure requirements on franchisors in the offer and sale of franchises and, in certain states, also apply substantive standards to the relationship between the franchisor and the franchisee, including those pertaining to default, termination and nonrenewal of franchises. OTHER MATTERS Regulations enacted by various federal and state authorities affect the Company's business. The financing activities of the Company's retail car sales operations are subject to federal truth in lending, consumer leasing and equal credit opportunity regulations, as well as state and local motor vehicle finance laws, installment finance laws, insurance laws, usury laws, installment sales laws and other consumer protection regulations. LEGAL MATTERS From time to time, the Company is subject to routine litigation incidental to its business. Recently, the Company terminated the franchise arrangement of its franchisee for Germany based on alleged violations of the terms of the underlying franchise agreement. Such termination is being contested by the franchisee. The Company intends to seek to replace such franchisee with a new franchisee and/or company-owned locations. The Company is not currently involved in any legal proceeding which it believes would have a material adverse effect upon its financial condition or results of operations. EMPLOYEES At June 30, 1997, the Company had approximately 12,700 employees, including part-time and "on call" employees who shuttle vehicles between locations. At June 30, 1997, approximately 1,200 employees in various locations throughout the United States were subject to collective bargaining agreements. These collective bargaining agreements expire between 1997 and 1999. The Company believes that its employee relations are good. TRADEMARKS The Company owns the trademarks Budget(R) and Budget Rent a Car, which have been registered with the United States Patent and Trademark Office. The Company considers its name and logo rights to be an important part of its business. HEADQUARTERS The Company's headquarters facility consists of a 2,500 square foot leased office in Daytona Beach, Florida. Other significant properties include 149,088 square feet of leased office space plus 11,400 square feet of space for a data center in Lisle, Illinois, a suburb of Chicago, a 69,300 square foot reservations center in Carrollton, Texas, which is owned by the Company, a 61,168 square foot leased administrative center in Orlando, Florida, and a 21,600 square foot leased international headquarters facility in Hemel Hempstead, England, a suburb of London. Management believes that these facilities are sufficient for the needs of the Company. 59 61 THE BUDGET ACQUISITION GENERAL On April 29, 1997, TEAM acquired the capital stock of BRACC pursuant to the terms of the Stock Purchase Agreements. The material terms of the Budget Acquisition are described below. TERMS OF THE STOCK PURCHASE AGREEMENTS CONSIDERATION The consideration paid by TEAM pursuant to the Stock Purchase Agreements consisted of (i) approximately $275.0 million cash and (ii) the issuance to Ford of 4,500 shares of the newly created Series A Convertible Preferred Stock. Each share of Series A Convertible Preferred Stock is non-voting, does not carry a dividend and is convertible into 1,000 shares of Class A Common Stock. In addition, TEAM purchased approximately $95.2 million of the currently outstanding indebtedness of BRACC to Ford and Ford canceled an additional $134.1 million of outstanding BRACC indebtedness. TEAM also refinanced approximately $870.7 million of indebtedness outstanding primarily under BRACC's then-existing fleet financing facilities. SPECIAL BONUS PROGRAM Pursuant to the Stock Purchase Agreements, in connection with the Budget Acquisition, Ford contributed $2.4 million in cash to the Company in connection with the establishment of the Special Bonus Program providing for bonus payments to BRACC employees. As part of the Special Bonus Program, effective April 29, 1997, the Company granted options to purchase an aggregate of 440,000 shares of Class A Common Stock (the "Special Bonus Options") to approximately 4,750 BRACC employees under its 1994 Option Plan. See "Management -- Benefit Plans -- 1994 Option Plan". The Company also made cash payments aggregating $316,250 to former officers of BRACC. The Special Bonus Options, together with the cash payments to former officers, had an aggregate value of $4.8 million. INDEMNIFICATION Under the terms of the Stock Purchase Agreements, subject to certain limitations described below, Ford has agreed to indemnify the Company against losses arising out of or resulting from (a) any breach by Ford of a representation or warranty contained in the Stock Purchase Agreements, (b) any breach by BRACC of any BRACC representation or warranty (without giving effect (other than with respect to representations on environmental liabilities) to any exception contained therein for matters that would or would not, as the case may be, have a material adverse effect on BRACC), (c) any breach by the common stockholder of BRACC of a representation, warranty or covenant contained in its Stock Purchase Agreement or (d) any failure by Ford to perform any agreement or covenant contained in the Stock Purchase Agreements. Ford will not be required to indemnify the Company for any losses except to the extent that (i) the breach of the particular representations and warranties as to which indemnification is sought has resulted in losses, individually, in excess of $15,000 and (ii) the breach of all such representations and warranties as to which indemnification is sought has resulted in aggregate losses in excess of $2.0 million (subject to limited exceptions with respect to tax and environmental matters). Ford will not, in any event, be required to pay (x) the first $2.0 million of losses incurred by the Company or (y) more than $40.0 million for all losses of the Company under the Stock Purchase Agreements or otherwise. The $40.0 million limitation does not apply with respect to any claim for indemnification in respect of a breach by BRACC of its representations and warranties with respect to employee programs and taxes. Claims for breaches of representations and warranties must be brought prior to the first anniversary of the closing date of the Budget Acquisition (subject to certain limited exceptions, including representations with respect to tax, environmental and employee benefit matters). 60 62 The Company has agreed to indemnify Ford against, and agreed to protect, save and keep harmless Ford from payment of, and assumed liability for the payment of, all losses arising out of or resulting from (i) any breach by the Company of a representation or warranty contained in the Stock Purchase Agreements or (ii) any failure by the Company to perform any agreement or covenant contained in the Stock Purchase Agreements. PREFERRED STOCKHOLDERS AGREEMENT In connection with the consummation of the Budget Acquisition, Ford and the Company entered into the Preferred Stockholders Agreement (the "Preferred Stockholders Agreement"). Pursuant to the terms of the Preferred Stockholders Agreement, Ford has agreed that, during the period commencing on April 29, 1997 and terminating on the first anniversary of such closing date, Ford and its affiliates will not, directly or indirectly, (i) purchase or otherwise acquire, or propose or offer to purchase or otherwise acquire, any equity securities of the Company if, immediately after such purchase or acquisition, Ford's equity interest in the Company would equal or exceed the equity interest of Ford in TEAM as of the closing date of the Budget Acquisition, or (ii) propose or offer to enter into certain Business Combinations (the "Standstill Agreement"). "Business Combination" means any one of the following transactions: (i) any merger or consolidation of BRACC or any subsidiary of BRACC with Ford or any affiliate of Ford; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition by BRACC in one or a series of transactions to or with Ford or any affiliate of Ford of all or a substantial part of the consolidated assets of BRACC; (iii) the adoption of any plan or proposal for the liquidation or dissolution of BRACC proposed by or on behalf of Ford or any affiliate of Ford; or (iv) any reclassification of securities, recapitalization of BRACC or any merger or consolidation of BRACC with any subsidiary of BRACC or any other transaction to which BRACC is a party which has the effect of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of BRACC or any subsidiary of BRACC which is owned by Ford or any affiliate of Ford. The Standstill Agreement will not apply during any period in which Ford's equity interest in the Company is less than ten percent, to any issuance and sale of new equity securities by the Company to Ford or any Ford affiliate, or to certain other permitted acquisition transactions. Additionally, Ford has agreed that it will not, directly or indirectly, sell, transfer or otherwise dispose of any equity securities of the Company beneficially owned by Ford except pursuant to a registered underwritten public offering, pursuant to an applicable exemption from the registration requirements of the Securities Act, to the Company or a subsidiary thereof, or to a Ford affiliate. The Company has agreed that, during the period beginning on the date of the Preferred Stockholders Agreement and ending on the earliest of (i) nine months following the date thereof, (ii) the date on which Ford's equity interest in the Company is less than 50% of its equity interest as of the closing date of the Budget Acquisition and (iii) if, on the date eight months from the date of the Preferred Stockholders Agreement, there is not pending a request for registration pursuant to Ford's demand registration rights (including a request in connection with which securities registered pursuant to a registration statement in connection with a Ford demand registration request have not all been offered or fully distributed), then, on the eight-month anniversary of the closing date of the Budget Acquisition, the Company will not (x) issue or sell equity securities of the Company (subject to certain exceptions), (y) acquire control of any person or assets or business for cash consideration in excess of $20 million or (z) make any acquisition in a transaction involving equity securities of the Company (subject to certain exceptions) without the written consent of Ford. The Offering is being conducted pursuant to Ford's exercise of certain registration rights with respect to the equity securities of the Company held by Ford and its affiliates, and the Standstill Agreement and the restrictions on the Company described in the preceding sentence will terminate upon completion of the Offering. RELATED AGREEMENTS SUPPLY AGREEMENT Concurrently with the consummation of the Budget Acquisition, BRACC entered into a supply agreement with Ford (the "Supply Agreement"). Under the terms of the Supply Agreement, the 61 63 Company agreed to purchase or lease Ford vehicles in such quantity in the United States, Canada and other countries outside the European Union such that the percentage of Ford vehicles purchased or leased in each country will be at least 70% of the total number of vehicles leased or purchased in each model year by BRACC and its affiliates. In the United States, BRACC and its affiliates and franchisees will purchase or lease at least 80,000 Ford vehicles in each model year. Under the terms of the Supply Agreement, Ford and its affiliates agreed to offer to the Company and its affiliates and franchisees generally, for each model year, vehicles and fleet programs that are competitive with the vehicles and fleet programs of other automobile manufacturers. The Supply Agreement specifies that "competitive" shall be determined by comparison with the vehicles and fleet programs offered by other automobile manufacturers as to price, delivery dates, quality, durability, design, reputation, suitability for the Budget business, model availability, guaranteed depreciation, resale value, turn back costs and other repurchase terms. Ford also agreed to make reasonable allocations of Ford vehicles available to BRACC and its affiliates and franchisees, with such allocation in the United States in any model year to constitute at least 80,000 vehicles. The Supply Agreement will be effective from September 1, 1997 through August 31, 2007, and is subject to exceptions and revisions upon the occurrence of force majeure events. Under the terms of the Supply Agreement, the Company agreed to pay Ford, on September 1, 1998 and on each anniversary through September 1, 2004, an annual royalty equal to the greater of (i) one percent of net vehicle revenue of BRACC locations prior to the Budget Acquisition for the prior model year, or (ii) a specified minimum amount (equal to $9.9 million for the September 1, 1998 annual royalty payment and subject to adjustment for each annual period thereafter, based upon changes in the consumer price index). The minimum royalty payable with respect to each model year will be reduced by a stated amount for each Ford vehicle purchased by the Company and its affiliates and franchisees in excess of 123,000 Ford vehicles. The aggregate of all royalties paid to Ford over the term of the Supply Agreement is subject to a limit of $100 million. ADVERTISING AGREEMENT Concurrently with the consummation of the Budget Acquisition, the Company entered into a ten-year advertising agreement with Ford (the "Advertising Agreement") under which the Company has undertaken to carry out promotional programs that feature and promote the rental of Ford vehicles. Such promotional programs include a wide variety of advertising and promotional activities to promote Ford products. Under the terms of the Advertising Agreement, Ford will pay to the Company for such advertising and promotional activities a stated base amount for each model year with an annual consumer price index adjustment. The base amount is fixed for the first five model years (beginning with model year 1998) and Ford and the Company agree to negotiate in good faith to determine the base amount for the last five years of the Advertising Agreement. Ford will not be required to pay the amount specified under the Advertising Agreement for any model year if the percentage of Ford vehicles acquired during the model year falls below 55%, subject to certain exceptions set forth in the Advertising Agreement, and will be required to pay more than the base amount if the percentage of Ford vehicles acquired during the model year exceeds 55%. Payments by Ford under the Advertising Agreement are also subject to reduction if the total of Ford vehicles acquired in any model year falls below the total of Ford vehicles acquired in model year 1997. 62 64 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information with respect to the Company's executive officers and directors:
NAME AGE POSITIONS WITH THE COMPANY ---- --- -------------------------- Sanford Miller.................................. 44 Chairman of the Board of Directors, Chief Executive Officer and Director John P. Kennedy................................. 52 Vice Chairman of the Board of Directors and Director Jeffrey D. Congdon.............................. 54 Vice Chairman of the Board of Directors, Chief Financial Officer and Director Robert L. Aprati................................ 53 Executive Vice President, General Counsel and Secretary Scott R. White.................................. 33 Executive Vice President, Corporate Development Ronald D. Agronin............................... 59 Director James F. Calvano................................ 60 Director Martin P. Gregor................................ 34 Director Alan D. Liker................................... 59 Director Jeffrey R. Mirkin............................... 44 Director Dr. Stephen L. Weber............................ 55 Director
Directors are elected annually to serve until the next annual meeting of stockholders and until their successors are elected and qualified. Officers are elected by and serve at the discretion of the Board of Directors. Sanford Miller has been the Chairman of the Board of Directors and Chief Executive Officer of the Company since April 1994. From August 1991 to August 1994, he was Vice President of Tranex Rental of New York, Inc. ("Tranex"), which operated the Albany and Rochester Budget franchises, and from December 1991 to August 1994, was Vice President of Capital City Leasing, Inc. ("Capital City"), which operated the Richmond, Virginia Budget franchise. From 1989 to 1991, Mr. Miller served as Director of Marketing, Special Accounts for BRACC. From 1981 to 1989, Mr. Miller was an executive officer and principal stockholder of corporations that owned and operated 30 Budget franchises that were sold to BRACC in 1989. From 1979 to 1981, he was a North East Regional Field Operations Manager for BRACC. Mr. Miller served as President of the American Car Rental Association, a nation-wide industry trade association, in 1993 and as Chairman of the Licensee Local Market Advisory Board of the Budget System in 1989 and 1990. Mr. Miller is also a director of MoneyGram Payment Systems, Inc. ("MoneyGram") and Colonial Bank of Volusia County. Mr. Miller is the first cousin of Mr. Agronin. John P. Kennedy has been Vice Chairman of the Board of Directors since April 1997 and was President, Chief Operating Officer and a director of the Company from April 1994 to April 1997. From November 1991 to August 1994, he was President of Metro West, Inc., whose wholly owned subsidiary previously owned the Company's San Diego airport operations. From September 1989 to October 1991, he was an independent consultant to the vehicle rental industry. From July 1985 to August 1989, he served as President of NYRAC, Inc. d/b/a Budget Rent a Car of Kennedy and La Guardia Airports. From 1968 to 1984, he served in various capacities with Avis, including as Vice President of Operations. Jeffrey D. Congdon has been the Chief Financial Officer and a director of the Company since April 1994 and was elected Vice Chairman of the Board of Directors in April 1997. Since December 1990, he has been Secretary and Treasurer of Tranex Credit Corporation, which provides financing for purchases of previously owned vehicles. From 1980 to 1989, he was an executive officer and principal stockholder of corporations that owned and operated 30 Budget franchises that were sold to BRACC in 1989. From 1982 to 1996, Mr. Congdon owned and operated retail new and/or used car sales operations in Indianapolis, Indiana. 63 65 Robert L. Aprati has been Executive Vice President, General Counsel and Secretary of the Company since August 1997, was Senior Vice President, General Counsel and Secretary of BRACC from January 1988 to July 1997 and was Vice President, General Counsel and Secretary of BRACC from September 1978 to January 1988. Mr. Aprati has been a long-standing director, and currently is President, of the American Car Rental Association. Scott R. White has been Executive Vice President, Corporate Development of the Company since February 1997. From August 1992 to February 1997, he worked in the Investment Banking Department of Credit Suisse First Boston Corporation, most recently as a Vice President. Mr. White received his J.D. degree from the University of Texas School of Law in May 1992 and is a member of the State Bar of Texas. In addition, he was a Financial Analyst at The First Boston Corporation from July 1986 to July 1989. Ronald D. Agronin was elected as a director of the Company in April 1994. Since 1993, Mr. Agronin has served as Vice Chairman of Black Clawson Company ("Black Clawson"), a manufacturer of paper making machinery, and as President and Chief Executive Officer of United Container Machinery, Inc. ("United Container Machinery"), a corrugating machinery manufacturer. He served as Executive Vice President and Chief Operating Officer of Black Clawson from 1987 to 1993. He currently serves as a director of Black Clawson and United Container Machinery. Mr. Agronin is the first cousin of Mr. Miller. James F. Calvano was elected as a director of the Company in August 1994. Since October 1996, Mr. Calvano has been the Chairman and Chief Executive Officer of MoneyGram, a provider of electronic money transfer services, and from February 1996 to October 1996, he was President and Chief Executive Officer of MoneyGram. From February 1995 to February 1996, he was Executive Vice President of Marketing for Travelers Group, a subsidiary of Travelers, Inc. From November 1993 to February 1995, he was Chief Administrative Officer of Travelers Insurance Companies. From June 1991 to May 1993, Mr. Calvano was President and Chief Operating Officer of New Valley Corp. Two months before he assumed this position, New Valley Corp. suspended payments on its publicly held debt. An involuntary bankruptcy petition under Title 11 of the U.S. Code was filed against New Valley Corp. in November 1991 and a voluntary bankruptcy petition under Title 11 was filed by New Valley Corp. in March 1993. From January 1989 to December 1990, Mr. Calvano was President and Chief Executive Officer of Carlson Travel Group and Executive Vice President of Carlson Companies Inc. From November 1986 to December 1988, he served as President of Commercial Credit Corp. and Executive Vice President of Primerica Corp. Mr. Calvano served American Express Travel Related Services Co., Inc. as its Vice Chairman, President of Payment Systems Division, USA and President of Consumer Financial Services Division, USA between October 1981 and November 1986. From 1972 to 1981, Mr. Calvano was employed by Avis and served in various capacities, including President and Chief Executive Officer, Executive Vice President and Chief Operating Officer and Group Vice President, Western Hemisphere. Martin P. Gregor was elected as a director of the Company in December 1996. Mr. Gregor serves as a financial advisor to many public and private corporations. Mr. Gregor is a Managing Director of McDonald & Company Securities, Inc., a position he has held since June 1997, and has served as Resident Manager of the Indianapolis North office of that firm since December 1989. Alan D. Liker was elected as a director of the Company in October 1995. He has served as a business advisor to a number of individuals and companies during the past five years, including as Vice President of Budget Rent-A-Car of Southern California ("SoCal"), a licensee of BRACC and, through its wholly owned subsidiary, an operator of Budget locations in Southern California since February 1992. Mr. Liker is also a director of Herbalife International. Mr. Liker was a director of Shaklee Corporation and its Japanese affiliate, Shaklee KK, until their sale in 1989. From 1976 to 1980, he was a principal of Xerox Development Corporation, a strategic planning unit of Xerox Corporation. Mr. Liker was previously a law professor at Harvard University, University of California (Los Angeles) and University of Southern California law schools. Previously he was a director of First Charter Bank and Shop Television Network. See "Certain Transactions". 64 66 Jeffrey R. Mirkin was elected as a director of the Company in October 1995. Since 1985, Mr. Mirkin has been the Chief Executive Officer of SoCal, a licensee of BRACC, and, through its wholly owned subsidiary, an operator of Budget locations in Southern California. See "Certain Transactions". Dr. Stephen L. Weber was elected as a director of the Company in April 1994. Since June 1996, Dr. Weber has been the President of San Diego State University. From August 1995 to June 1996, he was the Interim Provost at the State University of New York System Office. From 1988 to June 1996, he was President of State University of New York at Oswego. The Company's Board of Directors has a Compensation Committee and an Audit/Finance Committee. The Compensation Committee, composed of Mr. Agronin and Dr. Weber, establishes salaries, incentives and other forms of compensation for directors, officers and other employees of the Company, administers various incentive compensation and benefit plans and recommends policies relating to such plans. The Audit/Finance Committee, composed of Messrs. Agronin and Calvano, reviews the Company's accounting practices, internal accounting controls and financial results and oversees the engagement of the Company's independent auditors. Nonemployee directors receive an annual retainer of $18,000 and participate in the 1994 Directors' Stock Option Plan (as hereinafter defined). The Company also pays the reasonable out-of-pocket expenses of each director in connection with his attendance at each Board or committee meeting. In connection with the Company's acquisition of the Los Angeles, California Budget franchise (the "Los Angeles Acquisition"), the Company and the Principal Executive Officers agreed that for so long as SoCal and its general partners own 500,000 or more shares of the Class A Common Stock received in the Los Angeles Acquisition, the Company and the Principal Executive Officers will nominate and use their best efforts to elect to the Company's Board of Directors two persons designated by SoCal and further, for so long as SoCal and its general partners own less than 500,000 but more than 250,000 shares of Class A Common Stock, the Company and the Principal Executive Officers agreed to nominate to the Company's Board of Directors one person designated by SoCal. Following the Los Angeles Acquisition, Messrs. Mirkin and Liker were designated by SoCal and thereafter elected to the Board of Directors of the Company. 65 67 EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth a summary of the compensation paid by the Company during the last three fiscal years to the Chief Executive Officer and the other executive officers of the Company whose salary and bonus exceeded $100,000 for 1996 (the "Named Executive Officers").
LONG TERM ANNUAL COMPENSATION COMPENSATION --------------------------------- --------------------- OTHER ANNUAL SECURITIES UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION OPTIONS --------------------------- ---- -------- ------------- --------------------- Sanford Miller........................ 1996 $208,250 $ -- 60,000 Chairman of the Board and Chief 1995 $183,667 $ -- 30,000 Executive Officer 1994 $ 91,108(1) $14,067(2) -- John P. Kennedy....................... 1996 $197,500 $ -- 52,000 Vice Chairman of the Board 1995 $173,333 $ -- 25,000 of Directors 1994 $ 94,558 $ -- -- Jeffrey D. Congdon.................... 1996 $197,292 $ -- 52,000 Vice Chairman of the Board 1995 $173,333 $ -- 25,000 of Directors and Chief Financial 1994 $ 26,250(3) $ -- -- Officer
- --------------- (1) Does not include $6,924 of cash dividends paid by Tranex and Capital City to Mr. Miller in 1994. (2) Other annual compensation consists of $12,476 of payments made by the Company with respect to vehicles used by Mr. Miller in 1994 and $1,591 of gasoline expenses in connection with the use of these vehicles in 1994. (3) Represents salary for the period from August 24, 1994 through December 31, 1994. OPTION GRANTS DURING 1996 AND YEAR END OPTION VALUES The following table describes the stock options granted to the Named Executive Officers of the Company during 1996.
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM -------------------------------------------------------- ------------------------ NUMBER OF PERCENT OF TOTAL SECURITIES OPTIONS UNDERLYING GRANTED TO EXERCISE OR OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION NAME GRANTED(A) FISCAL YEAR PER SHARE DATE 5% 10% ---- ---------- ---------------- ----------- ---------- --------- ----------- Mr. Miller........... 60,000 13.3% $11.25 04/15/06 $424,504 $1,075,776 Mr. Kennedy.......... 52,000 10.4 11.25 04/15/06 367,906 932,314 Mr. Congdon.......... 52,000 10.4 11.25 04/15/06 367,906 932,314
- --------------- (a) Represents options to purchase shares of Class B Common Stock. 66 68 The following table describes the value of unexercised options that were held by the Named Executive Officers of the Company as of December 31, 1996.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT DECEMBER 31, 1996 AT DECEMBER 31, 1996(A) --------------------------------- --------------------------------- NAME EXERCISABLE(B) UNEXERCISABLE(C) EXERCISABLE(B) UNEXERCISABLE(C) ---- -------------- ---------------- -------------- ---------------- Mr. Miller........................ 30,000 60,000 $198,750 $292,500 Mr. Kennedy....................... 25,000 52,000 165,625 253,500 Mr. Congdon....................... 25,000 52,000 165,625 253,500
- --------------- (a) Based upon the closing price of Class A Common Stock on December 31, 1996 of $16.125. (b) Represents options to purchase shares of Class A Common Stock. (c) Represents options to purchase shares of Class B Common Stock. No options were exercised by the Named Executive Officers in 1996. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee is composed of Mr. Agronin and Dr. Weber, neither of whom has ever been an officer or employee of the Company or any of its subsidiaries or entered into a related party transaction with the Company. BENEFIT PLANS 1994 OPTION PLAN The 1994 Option Plan provides for the grant to selected key employees of the Company and its subsidiaries of either incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986 (the "Code") or nonqualified options (intended not to qualify as incentive stock options) to purchase Common Stock. The 1994 Option Plan is administered by the Compensation Committee of the Board of Directors. The price per share of a stock option must be at least the fair market value per share as of the date of grant. In the case of an employee who owns more than 10% of the voting power of the Company, the price per share under an incentive stock option must be at least 110% of the fair market value per share as of the date of grant. No option may be exercised within six months from the date of grant, except that an option will be immediately exercisable upon the occurrence of certain events, including a "change in control" of the Company as defined in the 1994 Option Plan. Except in the event of the death or disability of a holder of nonqualified stock options, no option may be exercised more than 10 years after its date of grant (and, in the case of an employee who owns more than 10% of the voting power of the Company, an incentive stock option held by such employee may not be exercised more than five years after its date of grant). Unless sooner terminated, the 1994 Option Plan terminates on April 24, 2004. As of the date of this Prospectus, 1,882,850 options are outstanding under the 1994 Option Plan (including 164,000 options to purchase shares of Class B Common Stock). No additional options may be granted under the 1994 Option Plan without receipt of stockholder approval of an amendment to increase the number of shares that may be issued thereunder. In connection with the Special Bonus Program established as part of the Budget Acquisition, the Company granted, effective April 29, 1997, Special Bonus Options to purchase an aggregate of 440,000 shares of Class A Common Stock to approximately 4,750 BRACC employees under its 1994 Option Plan. Following the Budget Acquisition, the Company also granted options to purchase an aggregate of 675,000 shares of Class A Common Stock (the "Company Options") to approximately 1,550 employees of the Company that were not previously employed by BRACC. The Company Options include 90,000 options granted to Mr. Miller and 75,000 options granted to each of Messrs. Congdon and Kennedy. Of the Company Options granted to Messrs. Miller, Kennedy and Congdon, an aggregate of 214,850 options were granted subject to approval by the stockholders of an amendment to the plan to increase the number of shares that may be issued thereunder. The Special Bonus Options and the Company Options are exercisable on the second 67 69 anniversary of the date of grant and are exercisable for a period of eight years thereafter. See "The Budget Acquisition -- Terms of the Stock Purchase Agreements -- Special Bonus Program". 1994 DIRECTORS' STOCK OPTION PLAN The Company's 1994 Directors' Stock Option Plan (the "1994 Directors' Plan") provides for the grant to directors of the Company who are not employees of the Company of options to purchase Class A Common Stock. The 1994 Directors' Plan is administered by the Board of Directors. The maximum number of shares of the Class A Common Stock subject to options granted pursuant to the 1994 Directors' Plan is 150,000. The exercise price per share under an option is the fair market value per share as of the date of grant. The options are exercisable in full beginning six months after the date of grant, except that an option will be immediately exercisable upon the occurrence of certain events, including a "change in control" of the Company as defined in the 1994 Directors' Plan. Except in the event of a holder's death or disability, no option may be exercised more than 10 years after its date of grant. Unless sooner terminated, the 1994 Directors' Plan will terminate on April 24, 2004. As of the date of this Prospectus, 130,000 options are outstanding under the 1994 Directors' Plan. CERTAIN TRANSACTIONS Concurrently with the completion of the Company's initial public offering in August 1994, the Principal Executive Officers and certain current and former employees of the Company (the "Exchange Stockholders"), who were the stockholders of certain of the corporations that owned the Albany and Rochester, New York, Richmond, Virginia and San Diego, California Budget franchises, exchanged all of their shares of these corporate entities for an aggregate of 563,400 shares of the Class A Common Stock and 1,936,450 shares of the Class B Common Stock (the "Share Exchange"). The Principal Executive Officers thereby acquired 100% of the shares of the Class B Common Stock that have been issued by the Company. Upon consummation of the Share Exchange and the redemption of the preferred stock of the Company's subsidiary that operates the San Diego airport franchise, all the Albany, Rochester, Richmond and San Diego operating companies became wholly owned subsidiaries of the Company. See "Shares Eligible for Future Sale". Pursuant to an agreement dated as of November 1, 1994, Team Rental of Ft. Wayne, Inc., a wholly owned subsidiary of the Company, purchased all the shares of capital stock of Ft. Wayne Rental Group, Inc. ("Ft. Wayne"). Ft. Wayne, which was owned by Mr. Miller and others, including a former employee of the Company, acquired the assets comprising the Ft. Wayne business in June 1993 for approximately $26,000, plus the assumption of approximately $66,000 of liabilities. The total purchase price for the stock of Ft. Wayne was 18,500 shares of the Class A Common Stock, valued at approximately $200,000. Mr. Miller received 7,400 shares of Class A Common Stock in exchange for his shares of Ft. Wayne stock. Prior to the acquisition of Ft. Wayne, Tranex, which became a subsidiary of the Company in the Share Exchange, leased vehicles to Ft. Wayne. The aggregate payments under this lease amounted to approximately $366,000 in 1994. The Company's Richmond, Virginia airport facility is leased from a partnership formed by Mr. Miller and an employee of the Company (the "Richmond Partnership"). This lease terminates in 1998, subject to renewal. Rental payments under the lease agreement amounted to approximately $95,000, $97,000 and $100,000 in 1994, 1995 and 1996, respectively. The monthly base rent under this lease (approximately $7,900, $8,100 and $8,300 in 1994, 1995 and 1996, respectively) escalates by approximately 3% per annum. The Company has entered into another lease for a non-airport facility located in Chesterfield County, Virginia that is owned by the Richmond Partnership. This lease commenced in June 1994 and terminates in May 1999, subject to renewal. Rental payments under the lease agreement amounted to approximately $24,000, $33,000 and $43,000 in 1994, 1995 and 1996, respectively. The monthly base rent under this lease was approximately $3,400, $3,500 and $3,600 in 1994, 1995 and 1996, respectively, and escalates by approximately 3% per annum. The Company's Rochester, New York airport facility is leased from a partnership formed by Mr. Miller and a former employee of the Company. 68 70 This lease terminates in 2003, subject to renewal. The monthly base rent under this lease (approximately $6,700, $6,800 and $7,000 in 1994, 1995 and 1996, respectively) escalated by 5% per annum until August 30, 1996, and thereafter annual increases will be the higher of 5% or the amount of the increase in the consumer price index. Rental payments under the lease amounted to $75,000, $81,000 and $84,000 in 1994, 1995 and 1996, respectively. All of these leases are on a triple net basis (i.e., the Company is responsible for the payment of taxes, insurance and utilities and for the general maintenance of these facilities in addition to its obligations to pay base rent). All of these leases provide for an initial term of ten years and two five-year renewal terms. The Company believes that these leases are on terms no less favorable to the Company than could be obtained from unaffiliated third parties. The Company's Philadelphia, Pennsylvania retail vehicle sales facility, regional administrative headquarters and vehicle maintenance facility are leased from MCK Real Estate Corporation ("MCK"), which is owned by the Principal Executive Officers. This lease terminates in September 2002, subject to renewal. Rental payments under the lease were approximately $168,000 and $316,000 for 1995 and 1996, respectively. The monthly base rent (approximately $26,000 per month in 1995) escalates by 3% per annum. The Company's Richmond, Virginia retail car sales facility is leased from MCK. This lease terminates in October 2000, subject to renewal. Rental payments under the lease were approximately $10,000 and $121,000 for 1995 (one month) and 1996, respectively. The monthly base rent under this lease (approximately $10,000 per month in 1996) escalates by 3% per annum. The Company's Dayton, Ohio retail car sales facility, which opened in April 1996, is leased from MCK. This lease terminates in March 2001, subject to renewal. The monthly base rent under this lease (approximately $10,000 per month in 1996) escalates by 3% per annum. All of these leases are on a triple net basis. The Company believes that these leases are on terms no less favorable to the Company than could be obtained from unaffiliated third parties. Prior to the Company's initial public offering in August 1994, the Company's subsidiaries funded their operations in part through loans from the Company's executive officers. From December 1989 to June 1994, the Company was provided loans by the Principal Executive Officers, all of which, together with accrued interest, were repaid upon the completion of the Company's initial public offering. At that time, the Company repaid loans previously made by Mr. Miller in the aggregate principal amount of $1,052,257 with a weighted average interest rate of 12.7%, loans previously made by Mr. Congdon in the aggregate principal amount of $1,156,257 with a weighted average interest rate of 12.4%, and loans previously made by Mr. Kennedy in the aggregate principal amount of $690,000 with a weighted average interest rate of 13.3%. In addition, in order to finance the organizational expenses incurred by the Company prior to its initial public offering, Messrs. Miller, Congdon and Kennedy advanced the following amounts: Mr. Miller -- $41,289 at prime plus 1.5% and $3,300, non-interest bearing; Mr. Congdon -- $14,266 at prime plus 1.5% and $1,800, non-interest bearing; and Mr. Kennedy -- $14,266 at prime plus 1.5% and $1,800, non-interest bearing. All of these advances, together with accrued interest, were repaid upon completion of the initial public offering. In connection with the Los Angeles Acquisition, the Company entered into a franchise agreement with SoCal, under which the Company agreed to pay to the seller, SoCal, a royalty equal to 5% of the monthly gross revenues derived from those operations, subject to a minimum amount. In addition, the Company issued a note to SoCal in the principal amount of approximately $4,750,000 (the "SoCal Note"), assumed the obligations of SoCal under a note in the principal amount of approximately $4,700,000 which was secured by the personal guaranty of Jeffrey R. Mirkin (the "SoCal Bank Note") and assumed certain other indebtedness that was personally guaranteed by Mr. Mirkin. Mr. Mirkin is the Chief Executive Officer and a general partner of SoCal and, upon consummation of the Los Angeles Acquisition, became a director of the Company. The Company operates as a sub-franchisee of SoCal in the San Diego territory and pays royalty fees to SoCal based on rental revenues for vehicles other than trucks. In 1994, 1995 and 1996, the Company paid SoCal approximately $1,000,000, $1,200,000 and $3,700,000 in royalty fees, respectively. Except as described above, prior to the Los Angeles Acquisition, there was no material relationship between the Company and SoCal. The SoCal Note, together with 69 71 accrued interest of $103,906, and the SoCal Bank Note were repaid in April 1996. There was approximately $700,000 of other indebtedness payable by the Company to SoCal at December 31, 1996. In connection with the acquisition of ValCar in August 1996, the Company paid $400,000 in cash to acquire all the capital stock of ValCar and assumed an unsecured note payable to Jeffrey D. Congdon in the amount of $1.5 million. The note is due on demand and bears interest at the prime rate plus 2%. Pursuant to this note, the Company made payments to Mr. Congdon in the amount of $64,449 in 1996. Sanford Miller is a member of the board of directors of Colonial Bank of Volusia County in Ormond Beach, Florida. The Company maintains a checking account at that bank with an average balance of $100,000. 70 72 PRINCIPAL AND SELLING STOCKHOLDERS The table below sets forth, as of August 28, 1997, certain information with respect to the beneficial ownership of Common Stock by (i) each person who is known by the Company to be the beneficial owner of more than 5% of either class of Common Stock of the Company and (ii) each of the directors and Named Executive Officers of the Company and all directors and executive officers as a group. As of that date, the Company had outstanding 18,028,083 shares of Class A Common Stock and 1,936,600 shares of Class B Common Stock. The Class B Common Stock is convertible into Class A Common Stock on a share-for-share basis at the option of the holder. Each share of Class A Common Stock is entitled to one vote and each share of Class B Common Stock is entitled to ten votes. This table also gives effect to shares that may be acquired pursuant to options, convertible notes and convertible preferred stock, as described in the footnotes below.
CLASS A COMMON STOCK CLASS B COMMON STOCK ------------------------------------------------- ----------------------------------------- PERCENT OF CLASS A SHARES NUMBER OF BENEFICIALLY OWNED NUMBER OF PERCENT OF CLASS A --------------------------- CLASS B CLASS B DIRECTORS AND EXECUTIVE SHARES BENEFICIALLY PRIOR TO AFTER SHARES BENEFICIALLY SHARES BENEFICIALLY OFFICERS OWNED(A) THE OFFERING THE OFFERING OWNED OWNED - ----------------------- ------------------- ------------ ------------ ------------------- ------------------- Sanford Miller........... 1,012,500(b) 5.3% 4.3% 905,800 46.8% Jeffrey D. Congdon....... 612,350(c) 3.3 2.6 515,400 26.6 John P. Kennedy.......... 600,500(d) 3.2 2.6 515,400 26.6 Ronald D. Agronin........ 14,500(e) * * -- -- James F. Calvano......... 12,500(e) * * -- -- Martin P. Gregor......... 15,905(f) * * -- -- Alan D. Liker............ 71,003(g) * * -- -- Jeffrey R. Mirkin........ 662,500(h) 3.7 2.9 -- -- Dr. Stephen L. Weber..... 15,600(e) * * -- -- All directors and executive officers as a group (11 persons)..... 3,020,858(i) 14.8 12.1 1,936,600 100.0 SELLING STOCKHOLDER - ------------------------- Ford FSG, Inc............ 4,500,000(j) 21.1 -- -- -- OTHER FIVE PERCENT STOCKHOLDERS - ------------------------- Metropolitan Life Insurance Company...... 2,027,053(k) 10.4 8.5 -- -- The Equitable Companies Incorporated........... 1,915,400(l) 10.6 8.5 -- -- John Hancock Mutual Life Insurance Company...... 1,424,467(m) 7.3 5.9 -- -- New York Life Insurance Company................ 1,354,165(n) 7.0 5.7 -- -- Putnam Investments, Inc.................... 1,599,003(o) 8.9 7.1 -- -- PERCENT OF TOTAL VOTING POWER OF DIRECTORS AND EXECUTIVE COMMON STOCK OFFICERS AFTER THE OFFERING - ----------------------- ------------------ Sanford Miller........... 25.9% Jeffrey D. Congdon....... 15.3 John P. Kennedy.......... 15.2 Ronald D. Agronin........ * James F. Calvano......... * Martin P. Gregor......... * Alan D. Liker............ * Jeffrey R. Mirkin........ * Dr. Stephen L. Weber..... * All directors and executive officers as a group (11 persons)..... 58.6 SELLING STOCKHOLDER - ------------------------- Ford FSG, Inc............ -- OTHER FIVE PERCENT STOCKHOLDERS - ------------------------- Metropolitan Life Insurance Company...... 4.7 The Equitable Companies Incorporated........... 4.6 John Hancock Mutual Life Insurance Company...... 3.3 New York Life Insurance Company................ 3.1 Putnam Investments, Inc.................... 3.8
- --------------- * Less than 1%. (a) In determining the number and percent of shares beneficially owned by each person, shares that may be acquired by such person pursuant to options, convertible notes or convertible preferred stock exercisable or convertible within 60 days of the date hereof are deemed outstanding for purposes of determining the total number of outstanding shares for such person and are not deemed outstanding for such purpose for all other stockholders. To the best of the Company's knowledge, except as otherwise indicated, beneficial ownership includes sole voting and dispositive power with respect to all shares. (b) Includes (i) 905,800 shares of Class A Common Stock issuable upon conversion of Class B Common Stock, (ii) 30,000 shares of Class A Common Stock issuable upon exercise of options and (iii) 4,000 shares of Class A Common Stock owned by Mr. Miller's children. Mr. Miller's address is 125 Basin Street, Dayton Beach, Florida 32114. (c) Includes (i) 515,400 shares of Class A Common Stock issuable upon conversion of Class B Common Stock and (ii) 25,000 shares of Class A Common Stock issuable upon exercise of options. Mr. Congdon's address is 2445 Directors Row, Suite K, Indianapolis, Indiana 46241. 71 73 (d) Includes (i) 515,400 shares of Class A Common Stock issuable upon conversion of Class B Common Stock and (ii) 25,000 shares of Class A Common Stock issuable upon exercise of options. Mr. Kennedy's address is 18 King's Highway, Westport, Connecticut 06880. (e) Includes 12,500 shares of Class A Common Stock issuable upon exercise of options. (f) Includes 7,500 shares of Class A Common Stock issuable upon exercise of options. (g) Includes (i) 46,003 shares of Class A Common Stock that may be acquired by Mr. Liker pursuant to an option granted by SoCal to Mr. Liker and (ii) 12,500 shares of Class A Common Stock issuable upon exercise of options. (h) Represents (i) 650,000 shares of Class A Common Stock beneficially owned by SoCal, a general partnership, of which Mr. Mirkin is a general partner and the trustee of certain trusts which are general partners of SoCal and (ii) 12,500 shares of Class A Common Stock issuable upon exercise of options. Mr. Mirkin's address is 150 South Doheny Drive, Beverly Hills, California 90211. (i) Includes (i) 1,936,600 shares of Class A Common Stock issuable upon conversion of Class B Common Stock and (ii) 166,500 shares issuable upon the exercise of options. (j) In connection with the Budget Acquisition, Ford acquired 4,500 shares of Series A Convertible Preferred Stock, which are convertible upon sale into an aggregate of 4,500,000 shares of Class A Common Stock. These 4,500,000 shares of Class A Common Stock are being sold in the Offering. (k) Includes 1,335,053 shares of Class A Common Stock issuable upon conversion of Convertible Notes as described under "Description of Certain Indebtedness -- Convertible Notes". Certain of this information is included in reliance upon a Schedule 13G filed by Metropolitan Life Insurance Company ("Metropolitan") with the Securities and Exchange Commission (the "Commission") on February 11, 1997. Metropolitan's address is 334 Madison Avenue, Convent Station, New Jersey 07961. (l) Represents shares of Class A Common Stock owned by subsidiaries of The Equitable Companies Incorporated ("The Equitable") as follows: (i) 134,000 shares of Class A Common Stock held by The Equitable Life Assurance Society of the United States, and (ii) 1,781,400 shares of Class A Common Stock held by Alliance Capital Management L.P. This information is included in reliance upon a Schedule 13G filed by The Equitable with the Commission on July 10, 1997. The Equitable's address is 787 Seventh Avenue, New York, New York 10019. (m) Represents shares of Class A Common Stock issuable upon conversion of Convertible Notes. John Hancock Mutual Life Insurance Company's address is John Hancock Place, 200 Clarendon Street, Boston, Massachusetts 02117. (n) Represents shares of Class A Common Stock issuable upon conversion of Convertible Notes. New York Life Insurance Company's address is 51 Madison Avenue, New York, New York 10010. (o) Represents shares of Class A Common Stock owned by subsidiaries of Putnam Investments, Inc. ("Putnam"), which is a subsidiary of Marsh & McLennan Companies, Inc. ("Marsh & McLennan"), as follows: (i) 1,181,203 shares of Class A Common Stock held by Putnam Investment Management, Inc. ("PIM"), as to which PIM has shared dispositive power, and (ii) 417,800 shares of Class A Common Stock held by The Putnam Advisory Company, Inc. ("PAC"); PAC shares voting power with respect to 359,800 of such shares and shares dispositive power with respect to all of such shares. This information is included in reliance upon a Schedule 13G filed by Marsh & McLennan, Putnam, PIM and PAC with the Commission on May 14, 1997. The address of Marsh & McLennan is 1166 Avenue of the Americas, New York, New York 10036. The address of Putnam, PIM and PAC is One Post Office Square, Boston, Massachusetts 02109. 72 74 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 35,000,000 shares of the Class A Common Stock, 2,500,000 shares of the Class B Common Stock and 250,000 shares of the preferred stock, $.01 par value per share (the "Preferred Stock"). As of August 28, 1997, there were 18,028,083 shares of the Class A Common Stock, 1,936,600 shares of the Class B Common Stock and 4,500 shares of Preferred Stock outstanding. Upon completion of the Offering, there will be an additional 4,500,000 shares of Class A Common Stock outstanding and there will be no shares of Preferred Stock outstanding. All of the outstanding shares of Class B Common Stock are held by the Principal Executive Officers. CLASS A COMMON STOCK AND CLASS B COMMON STOCK VOTING RIGHTS Each share of the Class A Common Stock is entitled to one vote and each share of the Class B Common Stock is entitled to ten votes on all matters submitted to a vote of the stockholders. The Class A Common Stock and the Class B Common Stock vote together as a single class on all matters presented for a vote of the stockholders, except as noted below and as provided under the Delaware General Corporation Law. Immediately following the Offering, the holders of the Class B Common Stock will have, together with the Class A Common Stock owned by such individuals, approximately 45.6% of the combined voting power of the outstanding Class A and Class B Common Stock. As a result, the Principal Executive Officers will be able to exert substantial influence over the election of the Company's Board of Directors, thereby ensuring that members elected by them will continue to direct the business, policies and management of the Company. The Company's Amended and Restated Certificate of Incorporation requires a vote of 60% of the number of shares of the Class B Common Stock outstanding, voting separately as a class, and a majority of the shares of the Class A Common Stock, voting separately as a class, to approve any modification to the rights and privileges of the Class A Common Stock or the Class B Common Stock or any reclassification or recapitalization of the Company's outstanding capital stock. DIVIDENDS Each share of the Class A Common Stock is entitled to receive dividends if, as and when declared by the Board of Directors of the Company out of funds legally available therefor. Identical dividends, if any, must be paid on both the Class A Common Stock and the Class B Common Stock at any time that dividends are paid on either, except that stock dividends payable on shares of the Class B Common Stock are payable only in shares of the Class B Common Stock and stock dividends payable on shares of the Class A Common Stock are payable only in shares of the Class A Common Stock. If a dividend or distribution payable in the Class A Common Stock is made on the Class A Common Stock, the Company must also make a pro rata and simultaneous dividend or distribution of shares of Class B Common Stock on the Class B Common Stock. If a dividend or distribution payable in Class B Common Stock is made on the Class B Common Stock, the Company must also make a pro rata and simultaneous dividend or distribution of shares of Class A Common Stock on the Class A Common Stock. CONVERTIBILITY Each share of the Class B Common Stock is convertible at any time at the option of the holder into the Class A Common Stock on a share-for-share basis. Shares of the Class B Common Stock will be automatically converted into shares of the Class A Common Stock on a share-for-share basis in the event that the record or beneficial ownership of such shares of the Class B Common Stock is transferred (including, without limitation, by way of gift, settlement, will or intestacy) to any person or entity that was not a holder of Class B Common Stock at the time of transfer. Therefore, the shares of Class B Common Stock will only exist so long as they are held by one or more of the Principal Executive Officers. Shares of the Class A Common Stock are not convertible. 73 75 LIQUIDATION RIGHTS In the event of the dissolution of the Company, after satisfaction of amounts payable to creditors and distribution to the holders of outstanding Preferred Stock, if any, of amounts to which they may be preferentially entitled, holders of the Class A Common Stock and the Class B Common Stock are entitled to share ratably in the assets available for distribution to the stockholders. OTHER PROVISIONS There are no preemptive rights to subscribe for any additional securities which the Company may issue and there are no redemption provisions or sinking fund provisions applicable to the Class A Common Stock or the Class B Common Stock, nor is either class subject to calls or assessments by the Company. All outstanding shares of Common Stock are, and all shares to be outstanding upon completion of the Offering will be, legally issued, fully paid and nonassessable. PREFERRED STOCK GENERAL The Board of Directors of the Company has the authority, without further action by the stockholders, to cause the Company to issue up to 250,000 shares of preferred stock (the "Preferred Stock") in one or more series and to fix the rights, preferences, privileges and restrictions granted to or imposed upon any unissued shares of Preferred Stock and to fix the number of shares comprising any series and the designations of such series. The issuance of Preferred Stock, while providing flexibility in connection with possible financings, acquisitions and other corporate transactions, could, among other things, adversely affect the voting power of the holders of Common Stock and, under certain circumstances, make it more difficult for a third party to gain control of the Company, deny stockholders the receipt of a premium on their Common Stock and have an adverse effect on market price of the Common Stock. SERIES A CONVERTIBLE PREFERRED STOCK In January 1997, the Board of Directors authorized the issuance of 10,000 shares of Preferred Stock, par value $0.01 per share, designated as the "Series A Convertible Preferred Stock". In connection with the Budget Acquisition, 4,500 shares of Series A Convertible Preferred Stock were issued to Ford. In connection with the Offering, the 4,500 Shares of Series A Preferred Stock will convert into 4,500,000 shares of Class A Common Stock, which are being offered hereby. RANK. The Series A Convertible Preferred Stock ranks, with respect to dividend rights and rights on liquidation, senior to the Common Stock. VOTING RIGHTS. The holders of the Series A Convertible Preferred Stock are not entitled to any voting rights, except as otherwise provided by law or as noted below. The affirmative vote of a majority of the shares of Series A Convertible Preferred Stock, voting as a separate class, will be required to amend the Amended and Restated Certificate of Incorporation if such amendment affects materially and adversely the specified rights, preferences, privileges or voting rights of the Series A Convertible Preferred Stock. DIVIDENDS. Each share of the Series A Convertible Preferred Stock is entitled to receive dividends if, as and when declared by the Board of Directors of the Company out of funds legally available therefor. No dividends may be declared by the Board of Directors on the Common Stock or any other class of stock ranking junior to the Series A Convertible Preferred Stock unless full cumulative dividends have been or contemporaneously are declared and paid with respect to the Series A Convertible Preferred Stock. CONVERTIBILITY. Each share of Series A Convertible Preferred Stock will automatically be converted into 1,000 shares of Class A Common Stock (subject to adjustment in the case of stock dividends, subdivisions, reverse stock splits or reclassifications of outstanding Class A Common Stock) in the event 74 76 that the record ownership of such Series A Convertible Preferred Stock is transferred to any person other than Ford or an affiliate of Ford. LIQUIDATION RIGHTS. In the event of the dissolution, liquidation or winding up of the affairs of the Company, after satisfaction of amounts payable to creditors, holders of shares of Series A Convertible Preferred Stock are entitled to receive distributions in the same amount that such holders would receive if such shares were converted into shares of Class A Common Stock immediately prior to the dissolution, liquidation or winding up of the affairs of the Company, in preference to any payment to holders of Common Stock or any other securities ranking junior to the Series A Convertible Preferred Stock. OTHER PROVISIONS. There are no preemptive rights to subscribe for any additional securities which the Company may issue and there are no redemption provisions or sinking fund provisions applicable to the Series A Convertible Preferred Stock, nor is the Series A Convertible Preferred Stock subject to calls or assessments by the Company. CONVERTIBLE NOTES In December 1996, the Company issued $80.0 million aggregate principal amount of Series A Convertible Notes. The Series A Convertible Notes are convertible, at the option of the holders, into Class A Common Stock at a conversion price of $20.07 per share. The outstanding Series A Convertible Notes are convertible into an aggregate of 3,986,049 shares of Class A Common Stock. In connection with the Budget Acquisition, the Company issued $45.0 million aggregate principal amount of Series B Convertible Notes. The Series B Convertible Notes are convertible, at the option of the holders, into Class A Common Stock at a conversion price of $27.96 per share. The outstanding Series B Convertible Notes are convertible into an aggregate of 1,609,442 shares of Class A Common Stock. WARRANTS In connection with financing provided to the Company in April 1996, the Company issued to NationsBank, National Association (South) a warrant (the "NationsBank Warrant") to purchase 187,500 shares of Class A Common Stock at the then current market price ($10.87 per share). The NationsBank Warrant is exercisable at any time until April 2001. BYLAW PROVISIONS The Company's Bylaws provide that special meetings of the stockholders may be called only by the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the President or the Secretary of the Company, or by one or more stockholders holding shares entitled to cast not less than a majority of the aggregate votes entitled to be cast at such meeting. The Bylaws also provide that any action which may be taken at any meeting of stockholders may be taken without a meeting and without prior notice if written consents approving the action are signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to take such action at a meeting of stockholders. These provisions will make it more difficult for a third party to gain control of the Company. REGISTRATION RIGHTS Concurrently with the consummation of the Budget Acquisition, the Company and Ford entered into the Preferred Stockholders Agreement, pursuant to which registration rights were granted to Ford with respect to any Series A Convertible Preferred Stock or Class A Common Stock issued to Ford as part of the Equity Consideration (the "Ford Registrable Securities"). The Offering is being conducted pursuant to Ford's exercise of these registration rights. The Company has agreed to pay the costs and expenses incurred in connection with the Offering, other than underwriting discounts and commissions. In connection with the sale of the Series A Convertible Notes in December 1996, the Company entered into a registration rights agreement granting holders registration rights with respect to the shares of Class A Common Stock into which the notes are convertible. In connection with the sale of Series B 75 77 Convertible Notes, the Company amended and restated the registration rights agreement (the "Notes Registration Rights Agreement") to which the holders of Series A Convertible Notes were parties, and the holders of Series B Convertible Notes became parties thereto. The Notes Registration Rights Agreement provides that the Company will file a shelf registration statement relating to the Series B Convertible Notes and the shares of Class A Common Stock issuable upon conversion of the Convertible Notes at the earlier of one year from the date of issuance of the Series B Convertible Notes or promptly after the disposition by Ford of at least 2.25 million shares of Class A Common Stock (the "probation period"). Accordingly, the Company expects to file this registration statement promptly following the completion of the Offering. The holders may require the Company to effect an underwritten public offering pursuant to the shelf registration statement. In addition, the holders of all outstanding Series A Convertible Notes and the Series B Convertible Notes may require the Company to register such notes at any time during the probation period. The Company may prohibit offers and sales of securities pursuant to the registration statements under certain circumstances. The Company has also agreed to pay the costs and expenses of each registration effected under the Notes Registration Rights Agreement, other than underwriting discounts and commissions. Concurrently with completion of its initial public offering in August 1994, the Company and the Exchange Stockholders entered into the registration rights agreement (the "Registration Rights Agreement") granting such holders registration rights with respect to the shares of Common Stock received by them as a result of the Share Exchange. The Registration Rights Agreement provides that the holders of at least 33% of the outstanding shares received in the Share Exchange may require the Company to register such shares under the Securities Act of 1933 (the "Securities Act") on two occasions, provided that the aggregate offering price of the shares so registered is not less than $1 million on each occasion. The Company has agreed to refrain from selling its securities during the 10-day period prior to, and the 180-day period following, the consummation of each underwritten offering made pursuant to the Registration Rights Agreement. The Company has also agreed to pay the costs and expenses of each registration effected under the Registration Rights Agreement, other than underwriting discounts and commissions. The Registration Rights Agreement was amended in November 1994 to include persons who received 18,500 shares of Class A Common Stock in the Company's acquisition of a Budget franchise territory. The holders of shares issuable upon exercise of the NationsBank Warrant are entitled to one demand and unlimited "piggyback" registration rights. The Company will bear the expenses of registering such shares, other than underwriting discounts and commissions. In connection with the Los Angeles Acquisition, the Company and SoCal entered into a registration rights agreement granting SoCal and its affiliated entities unlimited "piggyback" registration rights, subject to certain conditions. The Company will bear the expenses of registering such shares, other than underwriting discounts and commissions. INDEMNIFICATION MATTERS As permitted by the Delaware General Corporation Law, the Company's Amended and Restated Certificate of Incorporation provides that directors of the Company will not be personally liable to the Company 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 Company or its stockholders, (ii) for 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, relating to prohibited dividends, distributions and repurchases or redemptions of stock, or (iv) for any transaction from which the director derives an improper personal benefit. The Company's Bylaws provide that the Company shall indemnify its directors, officers, employees and other agents, to the fullest extent provided by Delaware law. The Company has also entered into indemnification agreements with certain of its executive officers and directors. The indemnification agreements require the Company, among other things, to indemnify such directors and officers against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from willful misconduct of a culpable nature), and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. The Company maintains directors' and officers' insurance against certain liabilities. 76 78 Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the arrangements described above, the Company has been advised that, in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. At present, there is no pending material litigation or proceeding involving any director, officer, employee or agent of the Company where indemnification will be required or permitted. SECTION 203 The Company is subject to Section 203 of the Delaware General Corporation Law, which prohibits a publicly held Delaware corporation from consummating a "business combination", except under certain circumstances, with an "interested stockholder" for a period of three years after the date such person became an "interested stockholder" unless (i) before such person became an interested stockholder, the board of directors of the corporation approved the transaction in which the interested stockholder became an interested stockholder or approved the business combination; (ii) upon consummation of the transaction that resulted in the interested stockholder's becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding shares held by directors who are also officers of the corporation and certain shares held by employee stock plans); or (iii) following the transaction in which such person became an interested stockholder, the business combination is approved by the board of directors of the corporation and authorized at a meeting of stockholders by the affirmative vote of the holders of 66 2/3% of the outstanding voting stock of the corporation not owned by the interested stockholder. An "interested stockholder" generally is defined as a person who, together with affiliates and associates, owns (or, within the prior three years, owned) 15% or more of a corporation's outstanding voting stock. A "business combination" includes mergers, asset sales and certain other transactions resulting in a financial benefit to an interested stockholder. TRANSFER AGENT The transfer agent and registrar for the Class A Common Stock is ChaseMellon Shareholder Services. 77 79 DESCRIPTION OF CERTAIN INDEBTEDNESS THE APRIL 1997 WORKING CAPITAL FACILITY In April 1997, BRACC entered into a working capital facility (the "April 1997 Working Capital Facility"), for which Credit Suisse First Boston acted as agent, to replace TEAM's $10.0 million working capital facility. Each of the direct and indirect subsidiaries of BRACC guaranteed the April 1997 Working Capital Facility, subject to certain exceptions. The following is a summary of the material terms and conditions of the April 1997 Working Capital Facility. The April 1997 Working Capital Facility consists of a five-year senior, secured revolving credit facility in the amount of $300 million. The April 1997 Working Capital Facility provides that (i) up to $100 million will be available for loans, (ii) up to $40 million (or the equivalent thereof in certain foreign currencies) of such $100 million will be available under a multi-currency subfacility, (iii) up to $300 million will be available for letters of credit and (iv) up to $225 million of such $300 million will be available for letters of credit for credit enhancement of commercial paper or similar fleet financing programs. In addition, aggregate letter of credit and loan outstandings under the April 1997 Working Capital Facility will be subject to a borrowing base limitation and may not at any time exceed the sum of 85% of eligible receivables (as defined therein), 100% of eligible repurchase vehicles (as defined therein), 85% of eligible non-repurchase vehicles (as defined therein), and 100% of eligible cash and cash equivalents (as defined therein). All letters of credit and loans under the April 1997 Working Capital Facility will mature on or by the fifth anniversary of the date of the loan agreement. Interest accrues on borrowings outstanding under the April 1997 Working Capital Facility, at the Company's option, at a rate equal to (i) either the higher of (A) the interest rate established by Credit Suisse as its base or prime rate in effect at its principal office in New York City and (B) the federal funds effective rate from time to time plus 0.5% (the higher of these being known as the "ABR") plus the applicable margin for ABR loans (which margin shall range from approximately 0.25% to 1.25%) or (ii) the rate at which Eurocurrency deposits in the relevant denomination currency for one, two, three or six months (as selected by the Company) are offered by Credit Suisse in the relevant interbank Eurocurrency market plus the applicable margin for the Eurocurrency rate (which margin shall range from 1.25% to 2.25%). The April 1997 Working Capital Facility requires the Company to pay the following fees: (i) a commitment fee based on the ratio of adjusted debt to adjusted EBITDA of the Company and ranging from 0.25% to 0.375% per annum; (ii) a letter of credit fee on the aggregate amount available under outstanding letters of credit equal to a rate per annum which is the same as the applicable margin for Eurocurrency loans from time to time in effect; and (iii) a letter of credit fronting fee equal to a rate per annum of 1/8% of the aggregate amount available under each letter of credit issued. The April 1997 Working Capital Facility is secured by (a) a first-priority lien on (i) the capital stock of BRACC and each direct and indirect subsidiary of BRACC (with respect to the international subsidiaries, no more than 65% of the stock of each subsidiary will be required to be pledged in the event that a pledge of a greater percentage would result in material increased tax or similar liabilities for the Company and its subsidiaries on a consolidated basis); (ii) cash and other working capital such as receivables and related contract rights of BRACC and its subsidiaries (other than assets pledged as security in respect of a vehicle financing program); and (iii) all assets included in the borrowing base and (b) as to letters of credit issued as credit and/or liquidity enhancement for the Company's commercial paper program, perfected liens on the assets surrounding the commercial paper issued pursuant to the commercial paper program (which, in the case of credit enhancement, will generally be subordinated). The April 1997 Working Capital Facility contains a number of customary affirmative covenants, including covenants which require BRACC and the Company to deliver financial statements and other reports; pay other obligations; maintain corporate existence; comply with laws and contracts; maintain properties and insurance; maintain books and records; grant the lenders certain inspection rights; provide notices of defaults, litigation and material events; and comply with environmental matters. The April 1997 Working Capital Facility also contains a number of customary negative covenants, including limitations on 78 80 indebtedness (including preferred stock), liens, guarantee obligations, mergers, consolidations, liquidations and dissolutions, sales of assets, leases, dividends and other payments in respect of capital stock, capital expenditures, investments, loans and advances; payments and modifications of subordinated and other debt instruments, transactions with affiliates, changes in fiscal year; negative pledge clauses; and changes in lines of business. BRACC and the Company are required to meet certain financial covenants, consisting of (a) a minimum net worth (as defined) of the Company equal to the sum of (i) $263.4 million plus 50% of the net income of the Company for each fiscal year commencing with 1997 as shall have been completed on or prior to the time of computation plus 50% of the net equity proceeds (as defined); (b) a maximum leverage ratio (as defined) of 5.60 to 1.00 for the quarter ending September 30, 1997, declining to 3.25 to 1.00 for the quarter ending December 31, 1999 and each fiscal quarter thereafter; and (c) a minimum interest coverage ratio (as defined) of 2.50 to 1.00 for the quarter ending September 30, 1997, increasing to 3.25 to 1.00 for the quarter ending September 30, 1999 and each fiscal quarter thereafter. CONVERTIBLE NOTES SERIES A CONVERTIBLE NOTES In December 1996, the Company issued $80.0 million aggregate principal amount of 7.0% Convertible Subordinated Notes, Series A, due 2003. At a conversion price of $20.07 per share, the Series A Convertible Notes are convertible into an aggregate of 3,986,049 shares of Class A Common Stock. Concurrently with the issuance of the Series B Convertible Notes, the note purchase agreements relating to the Series A Convertible Notes were amended to extend the maturity of the notes to 2007 and to conform certain terms of the notes to the terms of the Series B Convertible Notes. SERIES B CONVERTIBLE NOTES Concurrently with the consummation of the Budget Acquisition, the Company issued $45.0 million aggregate principal amount of 6.85% Convertible Subordinated Notes, Series B, due 2007. The Series A Convertible Notes and the Series B Convertible Notes are generally treated as a single class of notes for all purposes. The Series B Convertible Notes are convertible, at the option of the holders, into an aggregate of 1,609,442 shares of Class A Common Stock, after the earlier of the first anniversary of the date of issuance or the disposition by Ford of at least 2.25 million shares of Class A Common Stock, at a conversion price of $27.96 per share. Accordingly, the Series B Convertible Notes will become convertible upon completion of the Offering. REDEMPTION The Series A Convertible Notes and the Series B Convertible Notes are redeemable, in whole or in part, at the option of the Company, at a premium equal to 4.567% and 4.667%, respectively, declining in equal amounts to par in April 2006, plus accrued and unpaid interest to the redemption date, provided that prior to April 2002, no such redemption of the Convertible Notes will be permitted unless the closing price of the Class A Common Stock for at least ten consecutive trading days (commencing 20 trading days before the Company's notice of redemption) was at least 150% of the conversion price for the notes of such series. REGISTRATION RIGHTS The Company has granted registration rights to the holders of the Convertible Notes. For a description of such registration rights, see "Description of Capital Stock -- Registration Rights". COVENANTS The Convertible Notes contain a number of customary affirmative covenants, including covenants which require the Company to pay principal and interest on the Convertible Notes, maintain properties, 79 81 pay taxes and claims, maintain its corporate existence, and continue in its lines of business. Furthermore, the Convertible Notes contain covenants limiting consolidation or merger and limiting the sale, lease or conveyance of all or substantially all of the Company's assets. In addition, upon a change of control (as defined in the note purchase agreements), each noteholder may require the Company to repurchase the Convertible Notes held by such holder at 101% of the principal amount thereof plus accrued interest to the date of repurchase. The Convertible Notes do not contain any financial covenants. GUARANTEED SENIOR NOTES Concurrently with the consummation of the Budget Acquisition, BRACC issued $165.0 million aggregate principal amount of 9.57% Guaranteed Senior Notes due 2007. The Guaranteed Senior Notes are guaranteed by the Company and certain subsidiaries of BRACC. MANDATORY REDEMPTION The Guaranteed Senior Notes require annual principal payments equal to $23.6 million commencing on the fourth anniversary of the date of issuance. OPTIONAL REDEMPTION The Guaranteed Senior Notes are redeemable at any time at the option of BRACC, in whole or in part, at a price equal to the greater of par or the present value of the future debt service on such notes, discounted at 75 basis points above the then current yield to maturity of a U.S. Treasury security with a maturity comparable to the remaining weighted average life of the notes. In addition, as long as any Convertible Notes are outstanding, there must be outstanding at least $23.0 million aggregate principal amount of Guaranteed Senior Notes. COVENANTS The Guaranteed Senior Notes contain a number of customary affirmative covenants, including covenants which require the Company to comply with law; maintain insurance; maintain its properties; pay taxes and claims; maintain its corporate existence; and continue in its lines of business. Furthermore, the Guaranteed Senior Notes contain covenants limiting liens, sale and leaseback transactions, restricted subsidiary debt, consolidated funded debt, maintenance of consolidated stockholders' equity, sale of assets, mergers or consolidations, restricted payments and transactions with affiliates. The Company is required to meet certain financial covenants, consisting of (a) a minimum pro forma non-vehicle interest coverage ratio of 2.0 to 1 prior to January 1, 2000 and 3.0 to 1 thereafter; (b) minimum non-vehicle leverage ratio (as defined) of 6.3 to 1 prior to January 1, 1999, 5.0 to 1 thereafter and prior to January 1, 2000, 4.0 to 1 thereafter and prior to January 1, 2001, 3.5 to 1 thereafter and prior to January 1, 2002 and 3.0 to 1 thereafter; and (c) a minimum consolidated stockholders' equity (as defined) equal to the sum of 80% of consolidated net worth at the closing of the Budget Acquisition plus 50% of consolidated net income (as defined) for each fiscal year beginning with the year ending December 31, 1997 for which consolidated net income is positive. In addition, upon a change of control (as defined in the note purchase agreement), each noteholder may require the Company to repurchase the notes held by such holder at 101% of the principal amount thereof plus accrued interest to the date of repurchase. APRIL 1997 FLEET FINANCINGS For a description of the Company's April 1997 Fleet Financings, see "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Liquidity and Capital Resources". 80 82 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have outstanding 22,528,083 shares of the Class A Common Stock and 1,936,600 shares of the Class B Common Stock. The Class B Common Stock is convertible into Class A Common Stock on a share-for-share basis and must be converted to effect any public sale of such stock. Of these shares, 21,213,933 shares, including the 4,500,000 shares of Class A Common Stock sold in the Offering, will be freely tradeable without restriction under the Securities Act, except for any shares purchased by an "affiliate" of the Company (as that term is defined in the Securities Act), which will be subject to the resale limitations of Rule 144 under the Securities Act. The remaining 1,296,450 shares of the Class A Common Stock and all shares of the Class B Common Stock are "restricted" securities within the meaning of Rule 144 and may not be resold in a public distribution, except in compliance with the registration requirements of the Securities Act or pursuant to Rule 144. All these shares of Class A Common Stock and all outstanding shares of Class B Common Stock are eligible for sale under Rule 144. The Company's directors and executive officers, who in the aggregate beneficially own 3,020,858 shares of Common Stock, have agreed that they will not sell, contract or offer to sell or otherwise dispose of, directly or indirectly, any shares of capital stock of the Company for a period of 90 days from the date of this Prospectus without the prior written consent of Goldman, Sachs & Co., on behalf of the Underwriters. See "Underwriting". After such date, certain of these stockholders have the right to demand that the Company register their shares under the Securities Act in accordance with agreements between such holders and the Company and may be able to dispose of their shares in a registered public offering effected thereunder. In addition, certain stockholders, the holders of the Convertible Notes and the holder of the stock purchase warrant possess certain demand and/or "piggyback" registration rights. See "Description of Capital Stock -- Registration Rights" and "Management -- Benefit Plans". The Company has reserved 1,750,000 shares of Common Stock for issuance under the 1994 Option Plan (which may be either Class A Common Stock or Class B Common Stock) and 150,000 shares of Class A Common Stock for issuance under the 1994 Directors' Plan. There are 1,882,150 stock options currently issued and outstanding under the 1994 Option Plan (of which 164,000 are options to purchase Class B Common Stock) and 130,000 stock options issued and outstanding under the 1994 Directors' Plan. The Company filed a Form S-8 Registration Statement under the Securities Act to register 760,000 shares of the Common Stock issuable under the 1994 Option Plan and 25,000 shares of Class A Common Stock issuable under the 1994 Directors' Plan. Shares issued upon the exercise of stock options after the effective date of the Form S-8 registration statement became eligible for resale in the public market without restriction, subject to Rule 144 limitations applicable to affiliates and the lock-up agreements applicable to certain shares and options. The Company expects to file a Form S-8 Registration Statement with respect to the remaining shares of Common Stock issuable under the 1994 Option Plan and the 1994 Directors' Plan. The Company has further reserved 187,500 shares of Class A Common Stock for issuance upon the exercise of stock purchase warrants. LEGAL MATTERS The validity of the shares of the Class A Common Stock offered hereby will be passed upon for the Company by King & Spalding, Atlanta, Georgia. The Underwriters have been represented by Cravath, Swaine & Moore, New York, New York. EXPERTS The consolidated financial statements of Budget Group, Inc. as of and for the year ended December 31, 1996, included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent certified public accountants, as indicated in their report 81 83 with respect thereto and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said report. The consolidated financial statements of Budget Group, Inc. as of December 31, 1995 and for each of the two years in the period ended December 31, 1995 included in this Prospectus and the related financial statement schedules included elsewhere in the Registration Statement have been audited by Deloitte & Touche LLP ("D&T"), independent auditors, as stated in its reports appearing herein and elsewhere in the Registration Statement, and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. The consolidated financial statements of BRACC as of December 31, 1995 and 1996 and for each of the three years in the period ended December 31, 1996 have been included in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein and upon the authority of said firm as experts in accounting and auditing. On November 26, 1996, TEAM appointed Arthur Andersen LLP as its independent accounting firm for the remainder of 1996. TEAM's Audit Committee recommended the appointment, which was approved by the Board of Directors. Concurrently, the Board of Directors elected to dismiss D&T, TEAM's former independent accounting firm. The report of D&T on TEAM's financial statements for the two years ended December 31, 1995 contained no adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. Since TEAM's inception, D&T's reports on TEAM's financial statements have not contained an adverse opinion or a disclaimer of opinion, nor were the opinions qualified or modified as to uncertainty, audit scope or accounting principles, nor were there any events of the type requiring disclosure under Item 304(a)(1)(v) of Regulation S-K under the Securities Act. With regard to Item 304(a)(1)(iv) of Regulation S-K, TEAM has previously reported the following: (i) On February 2, 1996, TEAM announced that it would restate its financial statements for all periods since its initial public offering in 1994. This restatement resulted from a change in the accounting treatment of the BRACC Warrant issued to BRACC concurrently with TEAM's initial public offering in August 1994. This change in accounting treatment was the subject of numerous discussions between officers of TEAM and representatives of D&T (including discussions between D&T and the Audit Committee of the Company's Board of Directors, which occurred in January 1996), and was approved by the Audit Committee and announced to the public on February 2, 1996. TEAM believes this matter was resolved to the satisfaction of D&T; (ii) in late 1995, TEAM received funds from a vehicle manufacturer that it accounted for in a manner similar to funds it had received from a vehicle manufacturer in 1993. In March 1996, D&T advised TEAM that it did not deem the 1995 transaction analogous to the 1993 transaction. D&T discussed this matter with officers of TEAM, and TEAM issued its financial statements in accordance with the recommendation of D&T. In connection with the resolution this matter, neither the Board of Directors nor any committee thereof formally discussed this matter with D&T. TEAM believes that this matter was resolved to the satisfaction of D&T. The Company has provided D&T with a copy of the disclosures contained herein and D&T has indicated in a letter to the Commission that it agrees with these disclosures. A copy of such letter is filed as an exhibit to the Registration Statement. Neither TEAM nor anyone acting on its behalf consulted with Arthur Andersen LLP regarding any of the matters referred to in Item 304(a)(2) of Regulation S-K prior to its appointment. 82 84 ADDITIONAL INFORMATION The Company is subject to the informational requirements of the Exchange Act and, in accordance therewith, files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information filed by the Company with the Commission can be inspected and copied at the public reference section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, or at its Regional Offices located at 7 World Trade Center, Suite 1300, New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies of such materials can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a World Wide Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants such as the Company which file electronically with the Commission. In addition, the Company's Class A Common Stock currently is traded on the New York Stock Exchange ("NYSE") and such reports, proxy and information statements and other information concerning the Company can be inspected and copied at the offices of the NYSE located at 20 Broad Street, New York, New York 10005. The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act with respect to the Class A Common Stock offered hereby. This Prospectus, which is a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement. For further information with respect to the Company and the Class A Common Stock, reference is made to the Registration Statement and the exhibits and schedules filed as a part thereof. The Company believes that all statements made herein that summarize the provisions of any documents accurately describe the material provisions of all such referenced documents. The Registration Statement and the exhibits and schedules thereto may be inspected, without charge, at the public reference section or regional offices of the Commission at the addresses indicated above. Copies of the Registration Statement can be obtained from the public reference section of the Commission upon payment of prescribed fees. 83 85 INDEX TO FINANCIAL STATEMENTS
PAGE ---- BUDGET GROUP, INC. - ----------------------------- Consolidated Condensed Balance Sheets as of December 31, 1996 and June 30, 1997.................................... F-2 Consolidated Statements of Operations for the Six Month Periods Ended June 30, 1996 and 1997...................... F-3 Consolidated Statement of Changes in Stockholders' Equity for the Six Month Period Ended June 30, 1997.............. F-4 Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 1996 and 1997...................... F-5 Notes to Unaudited Consolidated Financial Statements........ F-6 Report of Independent Certified Public Accountants.......... F-9 Independent Auditors' Report................................ F-10 Consolidated Balance Sheets as of December 31, 1995 and 1996...................................................... F-11 Consolidated Statements of Income for Each of the Three Years in the Period Ended December 31, 1996............... F-12 Consolidated Statements of Stockholders' Equity (Deficit) for Each of the Three Years in the Period Ended December 31, 1996.................................................. F-13 Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 1996............... F-14 Notes to Consolidated Financial Statements.................. F-15 BUDGET RENT A CAR CORPORATION - ------------------------------------ Consolidated Balance Sheets as of December 31, 1996 and March 31, 1997............................................ F-33 Consolidated Statements of Operations for the Three Months Ended March 31, 1997 and 1996............................. F-34 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1994, 1995 and 1996 and the Three Months Ended March 31, 1997............................... F-35 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1997 and 1996............................. F-36 Notes to Consolidated Financial Statements.................. F-37 Independent Auditors' Report................................ F-38 Consolidated Balance Sheets as of December 31, 1995 and 1996...................................................... F-39 Consolidated Statements of Operations -- December 31, 1994, 1995 and 1996............................................. F-41 Consolidated Statements of Stockholders' Equity -- Years Ended December 31, 1994, 1995 and 1996.................... F-42 Consolidated Statements of Cash Flows -- December 31, 1994, 1995 and 1996............................................. F-43 Notes to Consolidated Financial Statements.................. F-44
F-1 86 BUDGET GROUP, INC. CONSOLIDATED CONDENSED BALANCE SHEETS
DECEMBER 31, JUNE 30, 1996 1997 ------------ ------------ (UNAUDITED) (AMOUNTS IN THOUSANDS) ASSETS Cash and cash equivalents................................... $ 50,490 $ 181,338 Restricted cash............................................. 66,336 153,706 Trade and vehicle receivables, net of allowance for doubtful accounts.................................................. 31,302 233,782 Accounts receivable, related parties........................ 58 58 Prepaids, inventories and deposits.......................... 13,972 81,462 Vehicle Inventory........................................... 16,413 29,618 Revenue earning vehicles, net............................... 319,257 2,340,807 Property and equipment, net................................. 18,502 135,363 Other assets................................................ -- 48,398 Intangible assets, net...................................... 70,893 395,443 -------- ---------- Total assets...................................... $587,223 $3,599,975 ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Accounts payable and accrued expenses....................... $ 31,127 $ 463,400 Capital lease obligations................................... 580 496 Notes payable............................................... 454,109 2,756,084 Deferred income taxes....................................... 7,406 3,369 -------- ---------- Total liabilities................................. 493,222 3,223,349 -------- ---------- COMMON STOCK WARRANT........................................ 2,000 -- STOCKHOLDERS' EQUITY: Convertible preferred stock............................... -- 105,750 Common stock.............................................. 112 199 Additional paid-in capital................................ 89,856 265,185 Foreign currency translation adjustment................... -- (42) Retained earnings......................................... 2,363 5,864 Treasury stock............................................ (330) (330) -------- ---------- Total stockholders' equity........................ 92,001 376,626 -------- ---------- Total liabilities and stockholders' equity...... $587,223 $3,599,975 ======== ==========
See accompanying notes to unaudited consolidated financial statements. F-2 87 BUDGET GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTH PERIODS ENDED JUNE 30, -------------------------- 1996 1997 ----------- ----------- (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) OPERATING REVENUE: Vehicle rental revenue.................................... $103,842 $294,559 Retail car sales revenue.................................. 55,686 101,592 Royalty fees and other.................................... -- 12,618 -------- -------- Total operating revenue........................... 159,528 408,769 OPERATING COSTS AND EXPENSES: Direct vehicle and operating.............................. 12,742 38,402 Depreciation -- vehicles.................................. 28,023 85,217 Depreciation -- non-vehicle............................... 1,210 5,361 Cost of car sales......................................... 47,295 86,068 Advertising, promotion and selling........................ 10,609 35,050 Facilities................................................ 9,417 30,326 Personnel................................................. 24,005 71,403 General and administrative................................ 7,135 16,707 Amortization.............................................. 996 2,975 -------- -------- Total operating costs and expenses................ 141,432 371,509 -------- -------- Operating income............................................ 18,096 37,260 -------- -------- OTHER (INCOME) EXPENSE: Vehicle interest expense.................................. 11,963 27,794 Non-vehicle interest expense.............................. 931 5,290 Interest income -- restricted cash........................ (787) (1,812) Related party interest.................................... 118 -- -------- -------- Total other (income) expense...................... 12,225 31,272 -------- -------- Income before income taxes.................................. 5,871 5,988 Provision for income taxes.................................. 2,348 2,487 -------- -------- Net income.................................................. $ 3,523 $ 3,501 ======== ======== Net income per common and common equivalent share........... $ 0.48 $ 0.21 ======== ======== Weighted average common and common equivalent shares outstanding............................................... 7,413 16,313 ======== ========
See accompanying notes to unaudited consolidated financial statements. F-3 88 BUDGET GROUP, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1997 (UNAUDITED)
FOREIGN CONVERTIBLE ADDITIONAL CURRENCY TOTAL PREFERRED COMMON PAID-IN TRANSLATION RETAINED TREASURY STOCKHOLDERS' STOCK STOCK CAPITAL ADJUSTMENT EARNINGS STOCK EQUITY ----------- ------ ---------- ----------- --------- -------- ------------- (AMOUNTS IN THOUSANDS) Balance at December 31, 1996... $ -- $112 $ 89,856 $ -- $2,363 $(330) $ 92,001 Shares issued in conjunction with acquisition of Budget Rent a Car Corporation....... 105,750 105,750 Net proceeds from stock offering..................... 87 175,329 175,416 Foreign currency translation... (42) (42) Net income..................... 3,501 3,501 -------- ---- -------- ---- ------ ----- -------- Balance at June 30, 1997....... $105,750 $199 $265,185 $(42) $5,864 $(330) $376,626 ======== ==== ======== ==== ====== ===== ========
See accompanying notes to unaudited consolidated financial statements. F-4 89 BUDGET GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, ------------------------------ 1996 1997 ----------- ------------- (DOLLAR AMOUNTS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 3,523 $ 3,501 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation........................................... 29,233 90,538 Amortization........................................... 1,133 2,975 (Gain)/Loss on sale of vehicles and equipment.......... -- (1,640) Deferred income tax benefit............................ (268) 2,963 Provision for losses on accounts receivable............ -- 716 Changes in operating assets and liabilities: Accounts receivable.................................. (3,321) (9,638) Vehicle inventory.................................... (6,952) (1,965) Prepaids, inventories and deposits................... (2,507) (14,420) Accounts payable and accrued expenses................ (5,797) 24,987 Other liabilities.................................... --------- ----------- Total adjustments................................. 23,095 94,516 --------- ----------- Net cash provided by operating activities......... 26,618 98,017 --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Restricted cash........................................... 64,853 84,690 Proceeds from sale of revenue-earning vehicles............ 119,348 495,770 Purchases of revenue-earning vehicles..................... (263,809) (1,000,330) Purchase of BRACC and rental vehicle franchise rights, net of cash acquired....................................... (11,497) (143,164) Proceeds from sale of property and equipment.............. -- 3,274 Purchases of equipment and improvements................... (8,924) (7,016) Investment in joint ventures and other.................... -- 1,150 --------- ----------- Net cash used in investing activities............. (100,028) (565,626) --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving credit/notes payable to banks and other notes payable.................................... 26,074 171,209 Principal payments on revolving credit/notes payable to banks and other notes payable.......................... (500) (173,836) Proceeds from fleet lender notes.......................... 108,893 685,657 Principal payments on fleet lender notes.................. (50,362) (462,447) Proceeds from commercial paper............................ -- 2,272,676 Principal payments on commercial paper.................... -- (1,982,764) Proceeds from issuance of common stock.................... -- 175,416 Principal payments on capital leases...................... (82) (84) --------- ----------- Net cash provided by financing activities......... 84,023 685,827 --------- ----------- Net increase in cash and cash equivalents................... 10,613 218,218 Cash and cash equivalents, beginning of period.............. 357 116,826 --------- ----------- Cash and cash equivalents, end of period.................... $ 10,970 $ 335,044 ========= ===========
See accompanying notes to unaudited consolidated financial statements. F-5 90 BUDGET GROUP, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Budget Group, Inc., previously named Team Rental 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 accruals) which, 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, 1996. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year ending December 31, 1997. Certain amounts in the 1996 financial statements have been reclassified to conform with the current year presentation. On April 29, 1997, pursuant to stock purchase agreements entered into on January 13, 1997, the Company completed its acquisition of Budget Rent a Car Corporation ("BRACC") in a purchase transaction and changed its name to Budget Group, Inc. After the consummation of the BRACC acquisition, BRACC and its franchisees (collectively referred to as the "Budget System") operate the third largest worldwide general use car and truck rental system, with approximately 3,200 locations and a peak fleet size during 1996 of 266,000 cars and 18,000 trucks. The Budget System includes locations in both the airport and local (downtown and suburban) markets in all major metropolitan areas in the United States, in many other small and mid-size U.S. markets and in more than 110 countries worldwide. Pro forma for the BRACC Acquisition, the Budget System included approximately 455 company-owned locations in the United States at December 31, 1996, accounting for approximately 76% of 1996 U.S. system-wide revenues. In addition, Budget franchisees operated approximately 500 royalty-paying franchise locations in the United States at December 31, 1996. Budget is one of only three vehicle rental systems that offer rental vehicles throughout the world under a single brand name, with locations in Europe, Canada, Latin America, the Middle East, Asia/Pacific and Africa. The Budget System currently maintains more local market rental locations throughout the world than most of its major competitors. The Budget System is also unique among major car rental systems in that it rents trucks in most major markets worldwide. The Budget System's consumer truck rental fleet is the fourth largest in the United States. BRACC is also one of the largest independent retailers of late model vehicles in the United States, operating 23 retail car sales facilities under the name "Budget Car Sales" with pro forma revenues of $246.9 million for 1996. The consolidated financial statements for the six months ended June 30, 1997 give effect to the Company's acquisition of BRACC from the date of acquisition through the end of the period presented. The consolidated financial statements for the six months ended June 30, 1996 give effect to the Company's acquisition of all of the outstanding stock of the Budget franchise in Phoenix, Arizona, and VPSI, Inc.("VPSI"), both of which were acquired in February 1996, from the date of acquisition through the end of the period presented. 2. 1996 ACQUISITIONS Acquisition of Van Pool Operations -- In February 1996, the Company purchased for a nominal amount all of the outstanding stock of VPSI, located in Detroit, Michigan. VPSI provides commuter van F-6 91 BUDGET GROUP, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) pooling services to business commuters in 22 states, and operated a rental fleet of approximately 3,300 vans as of the acquisition date. Acquisition of Phoenix Franchise -- In February 1996, the Company purchased all of the outstanding stock of Arizona Rent-A-Car Systems, Inc., located in Phoenix, Arizona, for approximately $18 million consisting of cash of approximately $5.0 million, promissory notes of $10.0 million and 272,727 shares of Class A common stock. Acquisition of ValCar Rental Car Sales, Inc. -- On August 1, 1996, the Company acquired all of the outstanding stock of ValCar Rental Car Sales, Inc. for $400,000 cash. ValCar owns and operates four retail vehicle sales facilities in Indianapolis, Indiana, and was formerly owned by a director and officer of the Company. If the acquisitions (including the acquisition of BRACC) 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.
SIX MONTH PERIODS ENDED JUNE 30, --------------------- 1997 1996 --------- --------- (IN THOUSANDS EXCEPT PER SHARE DATA) Operating revenue........................................... 769,336 728,021 Income before income taxes.................................. (19,090) 12 Net income.................................................. (11,072) 628 Earnings per share.......................................... (.60) .03
3. OTHER EVENTS On April 17, 1997, the Company's Class A common stock began trading on the New York Stock Exchange under the ticker symbol "BD". Prior to that time, the Company's Class A Common Stock had been traded on The Nasdaq National Market. In conjunction with and concurrent to the acquisition of BRACC on April 29, 1997, the Company sold 8,625,000 shares of Class A common stock at a price of $21.625 in a public offering raising proceeds, net of underwriting commissions, of $177.2 million. The Company also issued 4,500 shares of Series A convertible, non-voting preferred stock, each share of which is convertible into 1,000 shares of the Company's Class A common stock, to Ford Motor Company. The common shares underlying the preferred stock had a value of approximately $105.8 million for purposes of determining the purchase price (based on the three day period beginning on January 12) and $97.3 million at the time of issuance (based on the public offering price). The Company also entered into the following debt financing transactions concurrently with the acquisition of BRACC: (i) $165.0 million of guaranteed senior notes at a rate of 9.57% maturing in 2007; (ii) $45.0 million of convertible subordinated notes at a rate of 6.85%, convertible into 1,609,442 shares of Class A common stock at a conversion price of $27.96 per share and maturing in 2007; (iii) a variable-rate commercial paper vehicle financing facility in the amount of $900 million; (iv) a $500 million asset-backed note vehicle financing facility maturing in 2001 and 2002, composed of a senior note in the amount of $472.5 million bearing interest at a rate of 7.35% and a subordinated note in the amount of $27.5 million bearing interest at a rate of 7.80%; and (v) a $300 million five-year secured working capital facility bearing interest at an initial rate of 1.75% over LIBOR, guaranteed by Budget Group and secured primarily by accounts receivable, cash and unencumbered vehicles. F-7 92 BUDGET GROUP, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. SUBSEQUENT EVENTS Acquisition of Premier Car Rental, Inc. -- On July 31, 1997, the Company acquired the fleet and certain other assets and assumed certain liabilities of Premier Car Rental, Inc. ("Premier") for approximately $87.2 million. Premier owns and operates 9,000 vehicles from 101 locations in 13 major U.S. markets. Premier will operate as its own brand and continue to serve the insurance replacement market. In 1996, Premier had revenues of approximately $61 million. The Company does not expect this acquisition to have a material effect on earnings in 1997. In July 1997, the Company acquired the Budget franchise located in Chattanooga, Tennessee for $3.2 million. F-8 93 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To Budget Group, Inc.: We have audited the accompanying consolidated balance sheet of Budget Group, Inc. (a Delaware corporation formerly known as Team Rental Group, Inc.) and subsidiaries as of December 31, 1996, and the related consolidated statements of income, stockholders' equity (deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Budget Group, Inc. as of December 31, 1995, and for each of the two years in the period then ended were audited by other auditors whose report dated April 12, 1996, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Budget Group, Inc. and subsidiaries as of December 31, 1996, and the consolidated results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Orlando, Florida, March 14, 1997 (except with respect to certain matters discussed in Note 16 as to which the dates are April 22, April 29, July 10 and July 31, 1997) F-9 94 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of Budget Group, Inc.: We have audited the consolidated balance sheet of Budget Group, Inc. (formerly known as Team Rental Group, Inc.) as of December 31, 1995, and the related consolidated statements of income, stockholders' equity (deficit) and cash flows for each of the two years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Budget Group, Inc. as of December 31, 1995, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Indianapolis, Indiana April 12, 1996 F-10 95 BUDGET GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1995 AND 1996 (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1995 1996 -------- -------- ASSETS Cash and cash equivalents................................... $ 357 $ 50,490 Restricted cash............................................. 67,731 66,336 Trade and vehicle receivables, net of allowance for doubtful accounts of $2,297 and $4,008............................. 20,928 31,302 Accounts receivable, related parties........................ 61 58 Vehicle inventory........................................... 8,938 16,413 Revenue earning vehicles, net............................... 219,927 319,257 Property and equipment, net................................. 12,503 18,502 Deferred financing fees, net of accumulated amortization of $425 and $791............................................. 2,266 3,950 Franchise rights, net of accumulated amortization of $1,500 and $3,250................................................ 46,670 68,469 Other assets................................................ 6,942 10,022 Other intangible assets, net of accumulated amortization of $35 in 1996............................................... -- 2,424 -------- -------- Total assets...................................... $386,323 $587,223 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Notes payable............................................... $318,233 $454,109 Capital lease obligations................................... 784 580 Accounts payable............................................ 14,698 14,601 Accrued and other liabilities............................... 9,315 16,526 Deferred income taxes....................................... 1,701 7,406 -------- -------- Total liabilities................................. 344,731 493,222 -------- -------- COMMITMENTS AND CONTINGENCIES COMMON STOCK WARRANT........................................ 2,000 2,000 STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value, 250,000 shares authorized, no shares issued or outstanding........................... -- -- Class A common stock, $.01 par value, one vote per share, 17,500,000 shares authorized, 5,257,116 and 9,357,050 shares issued............................................. 53 93 Class B common stock, $.01 par value, 10 votes per share, 2,500,000 shares authorized, 1,936,600 shares issued...... 19 19 Additional paid-in capital.................................. 41,984 89,856 Retained earnings (deficit)................................. (2,134) 2,363 Treasury stock, at cost (36,667 shares of Class A common stock).................................................... (330) (330) -------- -------- Total stockholders' equity........................ 39,592 92,001 -------- -------- Total liabilities and stockholders' equity........ $386,323 $587,223 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. F-11 96 BUDGET GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1994 1995 1996 ------- -------- -------- Operating revenue: Vehicle rental revenue.................................... $38,642 $107,067 $223,250 Retail car sales revenue.................................. -- 42,662 134,120 ------- -------- -------- Total operating revenue........................... 38,642 149,729 357,370 ------- -------- -------- Operating costs and expenses: Direct vehicle and operating.............................. 9,439 13,704 35,098 Depreciation -- vehicles.................................. 7,382 27,476 60,735 Depreciation -- non-vehicle............................... 446 1,341 2,589 Cost of vehicle sales..................................... -- 38,021 113,747 Advertising, promotion and selling........................ 3,090 11,826 22,983 Facilities................................................ 4,398 11,121 20,406 Personnel................................................. 7,947 24,515 53,097 General and administrative................................ 1,515 6,686 11,605 Amortization.............................................. 229 859 1,843 ------- -------- -------- Total operating costs and expenses................ 34,446 135,549 322,103 ------- -------- -------- Operating income............................................ 4,196 14,180 35,267 ------- -------- -------- Other (income) expense: Vehicle interest expense.................................. 3,909 13,874 25,336 Non-vehicle interest expense.............................. 341 473 1,501 Interest income -- restricted cash........................ (670) (1,348) (781) Non-recurring bank fees................................... -- -- 1,275 Related party interest expense............................ 190 159 118 ------- -------- -------- Total other expense............................... 3,770 13,158 27,449 ------- -------- -------- Income before income taxes.................................. 426 1,022 7,818 Provision for income taxes.................................. 176 685 3,321 ------- -------- -------- Net income.................................................. $ 250 $ 337 $ 4,497 ======= ======== ======== Weighted average common and common equivalent shares outstanding............................................... 3,704 6,369 9,488 ======= ======== ======== Earnings per common and common equivalent share............. $ 0.07 $ 0.05 $ 0.47 ======= ======== ========
The accompanying notes are an integral part of these consolidated statements. F-12 97 BUDGET GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS)
TOTAL ADDITIONAL RETAINED STOCKHOLDERS' COMMON PAID-IN EARNINGS TREASURY EQUITY STOCK CAPITAL (DEFICIT) STOCK (DEFICIT) ------ ---------- --------- -------- ------------- Balance, January 1, 1994................... $ 15 $ 239 $(1,505) $ -- $(1,251) Net income............................... -- -- 250 -- 250 Distributions on redeemable preferred stock................................. -- (183) -- -- (183) Dividends to common stockholders......... -- -- (47) -- (47) Net proceeds from initial public offering.............................. 45 28,903 -- -- 28,948 Deferred taxes due to a change in tax status from nontaxable to taxable..... -- -- (1,169) -- (1,169) Shares issued in business combination.... -- 200 -- -- 200 ---- ------- ------- ----- ------- Balance, December 31, 1994................. 60 29,159 (2,471) -- 26,748 Net income............................... -- -- 337 -- 337 Shares issued in business combinations... 12 12,825 -- -- 12,837 Class A common stock acquired for treasury.............................. -- -- -- (330) (330) ---- ------- ------- ----- ------- Balance, December 31, 1995................. 72 41,984 (2,134) (330) 39,592 Net income............................... -- -- 4,497 -- 4,497 Shares issued in business combination.... 2 2,725 -- -- 2,727 Warrants issued in conjunction with financing............................. -- 686 -- -- 686 Net proceeds from stock offering......... 38 44,402 -- -- 44,440 Proceeds from exercise of stock options............................... -- 59 -- -- 59 ---- ------- ------- ----- ------- Balance, December 31, 1996................. $112 $89,856 $ 2,363 $(330) $92,001 ==== ======= ======= ===== =======
The accompanying notes are an integral part of these consolidated statements. F-13 98 BUDGET GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS)
1994 1995 1996 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 250 $ 337 $ 4,497 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation............................................ 7,828 28,817 63,324 Amortization............................................ 534 1,761 2,396 Deferred income tax provision........................... (8) 540 2,479 Warrants issued in connection with financing............ -- -- 686 Provision for doubtful accounts......................... (282) 1,796 320 Changes in certain assets and liabilities, net of effects of 1994, 1995 and 1996 acquisitions -- Receivables............................................. (871) (11,189) (6,230) Vehicle inventory....................................... -- (7,995) (3,463) Other assets............................................ (1,788) 387 (1,350) Accounts payable........................................ (2,259) 9,484 (9,469) Accrued and other liabilities........................... 256 (7,790) 1,189 --------- --------- --------- Net cash provided by operating activities........... 3,660 16,148 54,379 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Change in restricted cash balance......................... (32,691) (13,271) 1,395 Proceeds from sale of revenue earning vehicles............ 73,728 293,905 460,550 Proceeds from sale of property and equipment.............. 51 -- -- Purchases of revenue-earning vehicles..................... (155,176) (315,863) (517,079) Purchases of property and equipment....................... (637) (4,562) (2,608) Purchases of franchise rights............................. (1,839) -- -- Payment for acquisitions, net of cash acquired............ (5,727) (6,507) (5,064) --------- --------- --------- Net cash used in investing activities............... (122,291) (46,298) (62,806) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sales of stock, net......................... 28,948 -- 44,499 Net increase (decrease) in vehicle obligations............ (5,760) 20,947 (220,901) Net increase (decrease) in working capital facilities..... -- 6,890 (9,500) Proceeds from notes payable -- Medium term notes....................................... 105,682 -- 176,000 Convertible subordinated notes.......................... -- -- 80,000 Related party........................................... 1,392 -- -- Other................................................... 2,610 3,399 -- Principal payments -- Related party........................................... (3,200) (276) (4,900) Other................................................... (5,665) (259) (4,197) Capital leases.......................................... (410) (666) (204) Payment of financing fees................................. (1,614) (76) (2,237) Distributions on redeemable preferred stock............... (183) -- -- Repayment of redeemable preferred stock................... (2,747) -- -- Dividends to common stockholders.......................... (47) -- -- Purchase of treasury stock................................ -- (330) -- --------- --------- --------- Net cash provided by financing activities........... 119,006 29,629 58,560 --------- --------- --------- Net increase (decrease) in cash and cash equivalents........ 375 (521) 50,133 Cash and cash equivalents, beginning of year................ 503 878 357 --------- --------- --------- Cash and cash equivalents, end of year...................... $ 878 $ 357 $ 50,490 ========= ========= =========
The accompanying notes are an integral part of these consolidated statements. F-14 99 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Budget Group, Inc. (the "Company") engages in the business of the daily rental of vehicles, including cars, trucks and passenger vans and the sale of late-model used vehicles. The Company is the largest United States franchisee of Budget Rent a Car ("Budget"), operating franchises granted by Budget Rent a Car Corporation ("BRACC") through its operating subsidiaries serving thirteen metropolitan regions in the United States. These franchises include Philadelphia and Pittsburgh, Pennsylvania; San Diego, California; Southern California (excluding San Diego); Phoenix, Arizona; Cincinnati and Dayton, Ohio; Albany and Rochester, New York; Charlotte, North Carolina; Richmond, Virginia; Hartford, Connecticut and Fort Wayne, Indiana. The Company engages in the sale of late-model used vehicles in San Diego and Los Angeles, California; Dayton and Cincinnati, Ohio; Philadelphia, Pennsylvania; Charlotte, North Carolina; Richmond, Virginia and Indianapolis, Indiana. MCK Realty, Inc. ("MCK") leases certain facilities to the Company and is owned by the Company's principal stockholders. Because MCK is controlled by the Company and the Company has guaranteed the lease payments assigned to a bank, MCK is included in the consolidated financial statements of the Company. Basis of Presentation Concurrent with the Company's 1994 initial public offering (Note 2), the Company exchanged 563,400 shares of Class A common stock and 1,936,450 shares of Class B common stock for all of the outstanding common stock of its San Diego, Albany, Richmond and Rochester franchises ("the combined companies") which, accordingly, became wholly owned subsidiaries (the "Share Exchange"). The 1994, 1995 and 1996 consolidated financial statements include the accounts of Team Rental Group, Inc., its wholly owned subsidiaries and MCK. All significant intercompany accounts have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments including money market funds, commercial paper and time deposits purchased with an original maturity of three months or less to be cash equivalents. Restricted Cash Restricted cash consists of Medium Term Notes proceeds not currently invested in eligible revenue earning vehicles. Under the terms of the Medium Term Notes Indentures, the Company is required to purchase revenue earning vehicles with the proceeds or maintain the excess as restricted cash. F-15 100 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) Vehicle Inventory Vehicle inventory is stated at the lower of cost (determined based on specific identification) or market. Revenue-Earning Vehicles Revenue-earning vehicles are stated at cost less related discounts and manufacturers' incentives and are depreciated over their estimated economic lives or at rates corresponding to manufacturers' repurchase program guidelines, where applicable. Depreciation rates generally range from 1.0% to 2.5% per month. Management periodically reviews depreciable lives and rates based on a variety of factors including general economic conditions and estimated holding periods of the vehicles. Gains and losses upon the sale of revenue-earning vehicles are recorded as an adjustment to depreciation expense. Property and Equipment Property and equipment is recorded at cost. Depreciation is being provided on the straight-line method over the following estimated useful lives: Buildings................................ 10-23 years Equipment, furniture and fixtures........ 3-10 years Capital leases and leasehold improvements........................... Lesser of estimated useful lives or terms of related leases
Deferred Financing Fees Direct costs incurred in connection with the Company's borrowings have been deferred and are being amortized over the terms of the related loan agreements on the straight-line method. On July 9, 1996, the Company utilized proceeds from its public offering of Class A common stock to repay a $10,000 bridge financing facility it had obtained from a bank in the second quarter of 1996. In conjunction with this bank financing, the Company issued warrants valued at $700, which are included in additional paid-in capital, and paid additional fees of approximately $1,000. As a result of this repayment, the Company wrote off all unamortized fees related to this financing, totaling $1,275. Prepaid Royalty Fees Prepaid royalty fees of $1,217 and $739 (net of accumulated amortization of $783 and $1,261) at December 31, 1995 and 1996, respectively, are related to the abatement of fees at the Company's Philadelphia operations through June 15, 1999 and are recorded in other assets. The prepaid fees are being amortized using an accelerated method over the royalty abatement period of five years. Amortization of the prepaid royalty fees of $203, $580 and $478 is reflected in direct vehicle and operating expenses in the accompanying consolidated statements of income for the years ended December 31, 1994, 1995 and 1996, respectively. Franchise Rights Franchise agreements are renewable for an unlimited number of one- and five-year periods, subject to certain terms and conditions. Fees paid for franchise rights are capitalized and amortized using the straight-line method over forty years. The Company believes that the vehicle rental industry and, F-16 101 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) therefore, vehicle rental franchises have an expected life in excess of forty years and the industry will continue as long as the automobile is an accepted method of transportation. The specific markets the Company serves are considered to be stable and are locations which are major national or regional commercial centers that attract business and leisure travelers who need rental vehicles. Circumstances that would indicate possible impairment to franchise rights include the failure of BRACC to maintain its international network of rental car franchises, the termination of the Company's presence in one or more major airport markets, or a significant permanent decline in cash flows from rental operations. The impairment would be measured as the amount by which the carrying value of the related asset exceeds the present value of estimated future annual cash flows generated by the franchise operations utilizing an appropriate discount rate. Management has determined that no material impairment of franchise rights existed at December 31, 1995 or 1996. Other Intangible Assets Other intangible assets consists of the goodwill recorded related to the ValCar acquisition (see Note 3). Goodwill is amortized using the straight-line method over forty years. Amortization expense of $35 is reflected in the accompanying consolidated statement of income for the year ended December 31, 1996. The Company evaluates the realizability of its goodwill based upon the nondiscounted cash flows and operating income expected to be generated by the assets purchased in the acquisition giving rise to the goodwill. Any impairment would be measured as the amount by which the carrying value of the goodwill exceeds the present value of estimated future annual cash flows generated by the assets purchased utilizing an appropriate discount rate. Management has determined that no material impairment of goodwill existed at December 31, 1996. Advertising, Promotion and Selling Advertising, promotion and selling expense are charged to expense as incurred. The Company incurred advertising expense of $412, $2,347 and $6,912 in 1994, 1995 and 1996, respectively. Income Taxes The Company accounts for income taxes using an asset and liability approach that requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in the tax law or rates. Changes in tax laws or rates will be recognized in the future years in which they occur. Earnings Per Common and Common Equivalent Share Earnings per common and common equivalent share for the year ended December 31, 1994, was computed assuming all of the outstanding common stock of the combined companies (which totaled 2,500,000 shares) was outstanding the entire year and the shares issued in connection with the initial public offering and the Fort Wayne acquisition were outstanding from the dates issued. Earnings per common and common equivalent share for the years ended December 31, 1995 and 1996, were based on the weighted average number of common shares outstanding during the year considering the acquisitions in each respective year and the purchase of treasury stock. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 establishes new F-17 102 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) standards for computing and presenting earnings per share ("EPS"). Specifically, SFAS No. 128 replaces the presentation of primary EPS with a presentation of basic EPS, requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997; earlier application is not permitted. Management has determined that the adoption of SFAS No. 128 will not have a material effect on the accompanying consolidated financial statements. Retention of Self-Insured Risks At December 31, 1996, the Company has automobile liability insurance coverage of up to $6,000, with a $500 retention per occurrence with respect to personal injury and damage claims arising from the use of its vehicles, except with respect to vehicles rented through its Los Angeles, San Diego and Phoenix operations. Under California law, vehicle rental customers are primarily liable for damages arising from the use of rental vehicles. Vehicle rental companies are secondarily liable for such damages up to an amount limited by California law to $35 per occurrence, unless the vehicle rental company has negligently maintained the vehicle or has "negligently entrusted" the vehicle to a rental customer. In addition, a vehicle rental company can be held liable for damages arising from use of its vehicles by its employees. The Company's Phoenix operations are self-insured, with a $500 retention. The Company's workers compensation coverage is subject to a $500 retention. The Company's general liability coverage is $1,000 per occurrence, $2,000 aggregate coverage with no retention. The Company provides reserves on reported claims and claims incurred but not reported at each balance sheet date based on actuarial estimates. The actuarially determined reserves are necessarily based on estimates, and while management believes that the amounts are adequate, the ultimate liability may be in excess of, or less than, the amounts provided. Such estimates are reviewed and evaluated in light of claim experience and existing circumstances. Any changes in estimates from this review process are reflected in operations currently. Environmental Costs The Company's operations include the storage and dispensing of gasoline. Expenses in connection with the remediation of accidental fuel discharges at various locations are provided for when it is probable that obligations have been incurred and amounts can be reasonably estimated. The Company has made no material payments for environmental remediation that have not been reimbursed by responsible parties. Stock Options In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), which encourages, but does not require, companies to adopt the fair value based method of accounting for stock-based employee compensation plans. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Companies are also permitted to continue to account for such transactions under Accounting Principles Board ("APB") Opinion No. 25, but are required to disclose, on a pro forma basis, net income and, if presented, earnings per share, as if the fair value based method of accounting had been applied. F-18 103 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) Effective January 1, 1996, the Company elected to adopt only the disclosure requirements of SFAS No. 123. Accordingly, the Company will continue to account for stock-based employee compensation under APB Opinion No. 25. 2. PUBLIC STOCK OFFERINGS The Company sold 3,300,000 shares of Class A common stock on August 25, 1994 and 154,400 shares of Class A common stock on September 19, 1994 at $9.50 per share to investors in an initial public offering resulting in gross proceeds of $32,800 to the Company. Net proceeds to the Company after offering expenses were $28,948. The net proceeds were used to acquire certain assets (certain liabilities were also assumed) of Freedom River, Inc. ("Freedom River"), capitalize Team Fleet Finance Corporation ("TFFC"), a wholly owned subsidiary, acquire vehicles under operating leases, redeem the outstanding redeemable preferred stock, acquire the Budget Rent a Truck franchise rights for San Diego, California, repay loans and accrued interest to related and non-related third parties, and purchase equipment leased from related parties. The Company sold an additional 3,821,007 shares of Class A common stock on July 2, 1996 at $13.00 per share to investors in a public offering resulting in gross proceeds of $49,673 to the Company. Net proceeds to the Company after offering expenses were $44,440. The net proceeds were used to repay certain outstanding indebtedness and for general corporate purposes. 3. ACQUISITIONS During 1994, 1995 and 1996, the Company acquired certain Budget franchise operations, a retail vehicle sales operation and a commuter van pooling operation. The acquisitions have been accounted for under the purchase method of accounting and, accordingly, the Company has allocated the cost of the acquisitions on the basis of the estimated fair value of the assets acquired and liabilities assumed. The 1996 allocation for the ValCar Acquisition, as further discussed below, is based on a preliminary estimate related to litigation claims and may be revised at a later date. The accompanying consolidated statements of income and cash flows reflect the operations of the acquired companies from their respective acquisition dates. 1994 ACQUISITIONS Freedom River Concurrent with the initial public offering, the Company acquired certain assets and assumed certain operating liabilities of Freedom River from Chrysler Credit Corporation ("CCC"), a secured creditor of Freedom River, pursuant to a private foreclosure sale conducted by CCC. The assets acquired consisted of the Budget vehicle rental operations in the Philadelphia and Pittsburgh, Pennsylvania and Cincinnati, Ohio metropolitan areas. Substantially all of Freedom River's assets, other than its fleet, were purchased for approximately $10,600. Fort Wayne Franchise In November 1994, the Company exchanged 18,500 shares of Class A common stock for all of the outstanding common stock of Fort Wayne Rental Group, Inc. located in Fort Wayne, Indiana. A principal stockholder and director of the Company, who was a stockholder of Fort Wayne Rental Group, Inc., received 7,400 shares of Class A common stock in this transaction. F-19 104 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 1995 ACQUISITIONS Dayton Franchise In January 1995, the Company purchased all of the outstanding stock of Don Kremer, Inc. located in Dayton, Ohio, for $1,300. The acquisition funding consisted of $650 cash and two notes totaling $650. Charlotte Franchise In January 1995, the Company purchased all of the outstanding stock of MacKay Car & Truck Rentals, Inc., located in Charlotte, North Carolina, for approximately $8,405, consisting of cash of $8,277 and 13,483 shares of Class A common stock. Hartford Franchise In March 1995, the Company purchased all of the outstanding stock of Rental Car Resources, Inc., located in Hartford, Connecticut, for approximately $1,475 by issuing 157,333 shares of Class A common stock. BRAC-OPCO Franchise In October 1995, the Company purchased all of the outstanding stock of BRAC-OPCO, Inc., which operates Budget franchises in the greater Los Angeles area, excluding the vehicle rental operations at Los Angeles International Airport, for approximately $11,234 by issuing 1,050,000 shares of Class A common stock. 1996 ACQUISITIONS Van Pool Operations In February 1996, the Company purchased for a nominal amount all of the outstanding stock of VPSI, Inc. ("VPSI"), located in Detroit, Michigan. VPSI provides commuter van pooling services to business commuters in 22 states, and operated a rental fleet of approximately 3,400 vans as of December 31, 1996. Phoenix Franchise In March 1996, the Company purchased all of the outstanding stock of Arizona Rent-A-Car Systems, Inc., located in Phoenix, Arizona, for approximately $18,000, consisting of cash of $5,000, promissory notes of $10,000 and 272,727 shares of Class A common stock. ValCar Rental Car Sales, Inc. On August 1, 1996, the Company acquired all of the outstanding stock of ValCar Rental Car Sales, Inc. for $400 cash. ValCar owns and operates four retail vehicle sales facilities in Indianapolis, Indiana, and was formerly owned by a director and officer of the Company. F-20 105 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) If the 1995 and 1996 acquisitions had occurred at the beginning of 1995, the Company's results of operations would have been as shown in the following table. The 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 1995.
YEAR ENDED DECEMBER 31, ----------------------- 1995 1996 ---------- ---------- (UNAUDITED) Operating revenue........................................... $ 337,926 $ 389,557 Net income.................................................. $ 3,512 $ 2,961 Earnings per common share................................... $ 0.46 $ 0.31
4. REVENUE-EARNING VEHICLES Revenue-earning vehicles consist of the following at December 31:
1995 1996 -------- -------- Revenue-earning vehicles.................................... $245,849 $335,461 Less -- accumulated depreciation and amortization........... (25,922) (16,204) -------- -------- $219,927 $319,257 ======== ========
5. PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31:
1995 1996 ------- -------- Land and buildings.......................................... $10,160 $ 13,729 Leasehold improvements...................................... 3,994 7,379 Furniture, fixtures and office equipment.................... 7,069 13,167 ------- -------- 21,223 34,275 Less -- accumulated depreciation and amortization........... (8,720) (15,773) ------- -------- $12,503 $ 18,502 ======= ========
Included in property and equipment at December 31, 1995 and 1996, are $827 and $580, respectively, of assets held under capital leases. F-21 106 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 6. NOTES PAYABLE Notes payable consist of the following at December 31:
1995 1996 -------- -------- Medium term notes: Senior.................................................... $138,500 $304,500 Subordinated.............................................. 7,182 17,182 Convertible subordinated notes.............................. -- 80,000 Vehicle obligations......................................... 149,965 38,438 Working capital facilities.................................. 9,500 -- Related party obligations................................... 5,792 892 Other notes payable......................................... 7,294 13,097 -------- -------- $318,233 $454,109 ======== ========
Medium Term Notes Medium term notes are comprised of notes issued by TFFC in August 1994 ("TFFC-94 notes"), notes assumed in the acquisition of BRAC-OPCO, Inc. in October 1995 ("OPCO notes") and notes issued by TFFC in December 1996 ("TFFC-96 notes")(collectively, "MTN notes"). MTN notes are secured by the underlying vehicles and restricted cash of $66,336 at December 31, 1996. The TFFC-94 notes consist of senior notes and subordinated notes. The senior notes, with an aggregate principal balance of $100,000 at December 31, 1995 and 1996, bear interest at an average LIBOR rate, as defined, plus 0.75% (6.38% per annum at December 31, 1996). Monthly principal payments of $16,667 commence in June 1999 with the last payment due in November 1999. The subordinated notes, with an aggregate principal balance of $5,682 at December 31, 1995 and 1996, bear interest at an average LIBOR rate, as defined, plus 1.30% (6.93% per annum at December 31, 1996) and are payable in full in December 1999. Interest on the TFFC-94 notes is payable monthly. The OPCO notes consist of senior notes and subordinated notes. The senior notes, with an aggregate principal balance of $38,500 at December 31, 1995 and 1996, bear interest at an average LIBOR rate, as defined, plus 0.60% (6.23% per annum at December 31, 1996). Monthly principal payments of $4,812 commence in November 1997 with the last payment due in June 1998. The subordinated notes, with an aggregate principal balance of $1,500 at December 31, 1995 and 1996, bear interest at an average LIBOR rate, as defined, plus 1.0% (6.63% per annum at December 31, 1996) and are payable in full in December 1998. Interest on the OPCO notes is payable monthly. The TFFC-96 notes consist of senior notes and subordinated notes. The senior notes, with an aggregate principal balance of $166,000 at December 31, 1996, bear interest at 6.65% per annum. Monthly principal payments of $13,833 commence in 2001 with the last payment due in 2002. The subordinated notes, with an aggregate principal balance of $10,000 at December 31, 1996, bear interest at 7.10% per annum and are payable in full in 2002. Interest on the TFFC-96 notes is payable monthly. Convertible Subordinated Notes In December 1996, the Company issued convertible subordinated notes with an aggregate principal amount of $80,000 bearing interest at 7% per annum due 2003. At a conversion price of $20.07, the convertible subordinated notes are convertible into 3,986,049 shares of Class A Common Stock. See Note 16. F-22 107 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) Vehicle Obligations Vehicle obligations consist of outstanding lines of credit to purchase rental vehicles and retail car sales inventory. Collateralized lines of credit at December 31, 1996, consist of $203,000 for rental vehicles and $26,000 for retail car sales inventory with maturity dates ranging from April 1997 to May 1998. 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. Vehicle obligations relating to the rental fleet are generally amortized over 5 to 15 months with monthly principal payments ranging from 2% to 3% of the capitalized vehicle cost. When rental vehicles are sold, the related unpaid obligation is due. Interest payments for rental fleet facilities are due monthly at annual interest rates ranging from 7.0% to 8.75% at December 31, 1996. Management expects vehicle obligations will generally be repaid within one year with proceeds received from either the repurchase of the vehicles by the manufacturers in accordance with the terms of the manufacturers' rental fleet programs or from the sale of the vehicles. In November 1996, Team Fleet Services Corporation ("TFSC") and VPSI, wholly owned subsidiaries of the Company, entered into Revolving Credit Agreements with NationsBank, National Association (South), as Agent (the "Agent") for the lenders party thereto, providing for up to $100,000 and $50,000, respectively, of financing for the acquisition of program vehicles (the "Revolving Credit Facilities"). The interest rates of loans under the Revolving Credit Facilities are, at the option of TFSC and VPSI and up to certain amounts, based on the Agent's prime rate, LIBOR or CD rates. The weighted average interest rate of loans outstanding under the Revolving Credit Facilities at December 31, 1996, was 7.125%. Monthly payments of interest are required on obligations relating to vehicle inventory at prime plus .25% (8.50% per annum at December 31, 1996). Vehicle inventory obligations are paid when the inventory is sold but in no event later than 120 days after the date of purchase. Working Capital Facilities At December 31, 1996, the Company had an unutilized working capital facility of $10,000, which requires monthly interest payments on the outstanding balance at LIBOR plus 2.50% (8.125% at December 31, 1996). This facility, which expires in April 1997, is collateralized by accounts receivable, vehicle inventory, property and equipment, certain intangibles, investments and all other personal property of the Company and guarantees of certain subsidiaries. This agreement is subject to certain covenants, the most restrictive of which requires the Company to maintain certain financial ratios and minimum tangible net worth and prohibits the payment of cash dividends. At December 31, 1996, the Company was in compliance with all covenants. F-23 108 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) Future principal payments of notes payable at December 31, 1996 are as follows:
YEAR ENDING DECEMBER 31, AMOUNT - ------------ -------- 1997........................................................ $ 61,906 1998........................................................ 30,376 1999........................................................ 105,682 2000........................................................ 145 2001........................................................ 110,667 Thereafter.................................................. 145,333 -------- $454,109 ========
7. RELATED PARTY TRANSACTIONS The Company leases facilities from entities owned by certain stockholders. Operating lease payments for the years ended December 31, 1994, 1995 and 1996, were $196, $220 and $227, respectively. MCK has assigned lease payments from the Company to a bank. Prior to the acquisition of the Fort Wayne operations (see Note 3), the Company leased fleet vehicles to Fort Wayne Rental Group, Inc. for approximately $366 for the year ended December 31, 1994. At December 31, 1995 and 1996, the Company had non-interest bearing notes receivable totaling $61 and $58 due from a stockholder and director which are payable on demand. Additionally, at December 31, 1996, the Company had a payable to a stockholder and director in the amount of $1,500 which is included in accrued and other liabilities on the accompanying consolidated balance sheet. The outstanding balance bears interest at prime plus 2.0% (10.25% per annum at December 31, 1996), is unsecured and is payable on demand. Approximately $564 and $4,013 of cash and cash equivalents are on deposit with or are being held as agent for the Company by a bank at December 31, 1995 and 1996, respectively. A stockholder and director of the Company serves on the bank's board of directors. In connection with the Los Angeles acquisition, the Company entered into a franchise agreement with the seller to pay a royalty of 5% of the monthly gross revenues derived from those operations, as well as the Company's San Diego operations. A director of the Company is the Chief Executive Officer and a general partner of the seller. In 1996, the Company paid the seller approximately $3,700 in royalty fees in accordance with this agreement. 8. LEASES The Company leases certain revenue earning vehicles and facilities under leases that expire at various dates through May 2014. Generally, the facility leases are subject to payment increases based on cost of living indices and require the Company to pay taxes, maintenance, insurance and certain other operating expenses. Certain facility leases require the Company to pay fixed amounts plus contingent rentals based on gross rental revenues, as defined, and gasoline sales. F-24 109 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) Future minimum payments under noncancellable leases at December 31, 1996 are as follows:
YEAR ENDING CAPITAL OPERATING DECEMBER 31, LEASES LEASES ------------ ------- --------- 1997...................................................... $ 210 $10,935 1998...................................................... 172 8,654 1999...................................................... 167 7,704 2000...................................................... 137 5,934 2001...................................................... 3 2,549 Thereafter................................................ -- 9,208 ----- ------- $ 689 $44,984 ======= Less -- amounts representing interest..................... (109) ----- $ 580 =====
Rent expense consists of the following:
YEAR ENDED DECEMBER 31, --------------------------- 1994 1995 1996 ------ ------- -------- Revenue earning vehicles................................ $3,121 $ 1,518 $ 1,555 Facilities: Minimum rentals....................................... 1,990 5,914 14,422 Contingent rentals.................................... 1,923 3,502 3,353 ------ ------- -------- Total......................................... $7,034 $10,934 $ 19,330 ====== ======= ========
9. INCOME TAXES The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31, ------------------------- 1994 1995 1996 ----- ----- ------- Current: Federal.................................................. $184 $ -- $ 92 State.................................................... -- 145 750 Deferred: Federal.................................................. (23) 470 2,161 State.................................................... 15 70 318 ---- ---- ------ $176 $685 $3,321 ==== ==== ======
F-25 110 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) The provision for income taxes differs from the amount computed using the statutory federal income tax rate as follows:
YEAR ENDED DECEMBER 31, ------------------------- 1994 1995 1996 ----- ----- ------- Income tax provision at federal statutory rate............. $130 $348 $2,658 Effect of (earnings) losses of nontaxable (subchapter S) companies................................................ 645 -- (87) Nondeductible portion of amortization of franchise rights and goodwill............................................. 12 94 306 State tax provision, net of federal benefit................ 30 215 391 Benefit of net operating loss carryforwards................ (645) -- -- Other...................................................... 4 28 53 ---- ---- ------ $176 $685 $3,321 ==== ==== ======
The tax effects of temporary differences that give rise to the Company's deferred tax assets and liabilities are as follows at December 31:
1995 1996 ------- ------- Deferred tax assets: Net operating loss carryforwards.......................... $13,195 $16,846 Non-deductible reserves................................... 2,267 5,459 Alternative minimum tax carryforward...................... 197 966 Valuation allowance....................................... (7,378) (9,515) ------- ------- 8,281 13,756 ------- ------- Deferred tax liabilities: Difference between book and tax bases of revenue earning vehicles and property and equipment.................... 8,690 19,327 Franchise rights.......................................... 1,292 1,835 ------- ------- 9,982 21,162 ------- ------- Net deferred tax liability................................ $ 1,701 $ 7,406 ======= =======
Concurrent with the Share Exchange in 1994, the nontaxable status of the commonly owned companies was terminated and a deferred tax liability of approximately $1,169 was recorded with a corresponding charge to the accumulated deficit. At December 31, 1996, the Company and its subsidiaries have federal tax loss carryforwards of approximately $43,360 expiring between December 2005 and December 2011. The Company has recorded a valuation allowance for a portion of the acquired net operating loss carryforwards due to the uncertainty of their ultimate realization. Any subsequently recognized tax benefits attributed to the change in the valuation allowance will reduce franchise rights. The increase in the valuation allowance during 1996 resulted from an increase related to net operating loss carryforwards and uncertainty regarding their ultimate realization. The Internal Revenue Code places limitations on the utilization of net operating losses and similar tax attributes by a corporation in the event of a stock ownership change aggregating more than 50% over a specified time period. Net operating loss carryforwards in existence when ownership changes occur are subject to an annual utilization limitation that may restrict the future utilization of the net operating losses. F-26 111 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) Similarly, utilization of losses generated during years when separate returns have been filed may be limited in the future. Such limitations have been considered in the determination of deferred income taxes. 10. BENEFIT PLANS Stock Options On April 25, 1994, the Company adopted the 1994 Incentive Stock Option Plan (the "ISO Plan") and the 1994 Directors' Stock Option Plan (the "Directors' Plan"). The Company accounts for these plans under APB Opinion No. 25 under which no compensation cost has been recognized. Had compensation cost been determined consistent with SFAS No. 123, the Company's net income and EPS would have been reduced to the following unaudited pro forma amounts:
FOR THE YEAR ENDED DECEMBER 31, ------------------ 1995 1996 ------- ------- Net Income....................... As Reported...................... $ 377 $4,497 Pro Forma........................ (36) 3,375 Primary Earnings Per Common and Common Equivalent Share............... As Reported...................... 0.05 0.47 Pro Forma........................ (0.01) 0.36
Because the SFAS No. 123 method of accounting has only been applied to options granted in 1995 and 1996, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The ISO Plan provides for the issuance of up to 760,000 shares of Class A or Class B common stock to key employees. The ISO Plan stock options may be either incentive stock options or nonqualified options and expire ten years after the date of grant. The exercise price of incentive stock options may not be less than the fair market value of the underlying shares at the date of grant. The exercise price for nonqualified options may not be less than 85% of the fair market value of the underlying shares or, if greater, the book value of the underlying shares at the date of grant. The Directors' Plan provides for the issuance of shares of Class A common stock to directors of the Company who are not employees of the Company. The Directors' Plan stock options are nonqualified, vest six months following the date of grant and expire ten years after the date of grant. The exercise price of the nonqualified options under the Directors' Plan is the fair market value of the underlying shares at the date of grant. F-27 112 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) A summary of the status of the Company's two stock option plans at December 31, 1995 and 1996, and activity during the years then ended is presented in the table and narrative below:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ------- ---------------- Outstanding -- December 31, 1994.......................... 15,000 $ 9.50 Granted................................................. 202,000 9.50 ------- Outstanding -- December 31, 1995.......................... 217,000 9.50 Granted................................................. 547,650 11.70 Exercised............................................... (6,200) 9.50 Forfeited............................................... (8,600) 11.13 ------- Outstanding -- December 31, 1996.......................... 749,850 11.09 =======
As of December 31, 1996, options for 585,850 shares and 164,000 shares of Class A and Class B common stock, respectively, remained outstanding under the Company's stock option plans.
1995 1996 ------ ------- Exercisable at end of year -- Shares.................................................... 15,000 247,700 Weighted average exercise price........................... $9.50 $9.76 Weighted average fair value of options granted during the year...................................................... $4.52 $5.48
At December 31, 1996, 62,500 of the 749,850 options outstanding have exercise prices between $9.50 and $11.25 with a weighted average exercise price of $10.55 and a weighted average remaining contractual life of 8.8 years. All of these options are exercisable. The remaining 687,350 options have exercise prices between $9.50 and $17.50, with a weighted average exercise price of $11.14 and a weighted average remaining contractual life of 9.0 years. Of these options, 185,200 are exercisable; their weighted average exercise price is $9.50. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. For options granted under the ISO Plan, a risk-free rate of return of 6.21% and an expected life of three years were assumed. For options granted under the Directors' Plan, a risk-free rate of return of 6.49% and an expected life of seven years were assumed. Additionally, for each option plan there was no expected dividend yield and an expected volatility of 60%. Profit Sharing Plan The Company adopted a Profit Sharing Plan with a 401(k) arrangement under the Internal Revenue Code effective January 1, 1996. Employees are eligible to participate after completing one year of service and attaining age 21. Participants may contribute 1%-15% of their gross compensation. The Company may make discretionary contributions not to exceed 15% of the total plan compensation. During 1996, the Company made discretionary contributions of approximately $146.5 to the Profit Sharing Plan. 11. COMMON STOCK WARRANT Concurrently with the Freedom River acquisition and in consideration of the abatement of certain future royalty fees to BRACC with respect to Freedom River's Philadelphia vehicle rental operation and other consideration received from BRACC, the Company issued a warrant to BRACC (the "Common Stock Warrant") to purchase 175,000 shares of Class A common stock at the initial public offering price. F-28 113 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) The warrant became exercisable on August 24, 1996, and expires on August 24, 1999. Subsequent to August 24, 1998, and prior to August 24, 1999, BRACC will have the right to cause the Company to repurchase the Common Stock Warrant for $2,000. The Company has reserved Class A common stock for the Common Stock Warrant. 12. COMMITMENTS AND CONTINGENCIES Franchise Agreements The Company has various franchise agreements with BRACC which require the payment of monthly royalty fees. These fees vary from a flat fee of $13.25 per car to 7.5% of gross rental revenues, as defined in the franchise agreements. The above franchise agreements are renewable for an unlimited number of five-year periods, subject to certain terms and conditions. Concurrent with the initial public offering, the Company purchased for $1,750 the direct franchise rights for Budget Rent a Truck facilities to operate in certain geographic locations in San Diego County and Imperial County, California. This reduced substantially all truck rental royalty fees to 5% of gross rental revenues, as defined. Prior to the purchase of the direct franchise rights, the Company paid royalty fees of 12% of gross rental revenue. The Company also participates in a "One-Way" truck rental program in San Diego County and Imperial County, California sponsored by BRACC whereby trucks owned by BRACC are stationed at the Company's facilities for one-way rental by outside parties. The Company retains fees for Budget "One Way" truck rental revenue of 20%. Revenues from the "One-Way" truck rental program for the years ended December 31, 1994, 1995 and 1996 were $558, $1,027, and $1,451, respectively. Sublicense Agreements The Company has sublicense agreements with Budget of Southern California which entitles the Company to operate Budget Car Rental facilities in Southern California. Sublicense fees to Budget of Southern California range from 5% to 6.5% of gross revenues as defined in the sublicense agreements. The Company also has a sublicense agreement with Transportation Storage Associates ("TSA") for the right to rent trucks in and around Los Angeles County. Fees to TSA are 12% of gross revenues as defined in the sublicense agreement. Royalty and sublicense fees expensed by the Company for the years ended December 31, 1994, 1995 and 1996 were $2,348, $5,715 and $9,598, respectively. Budget reservation fees expensed by the Company for the years ended December 31, 1994, 1995 and 1996 were $1,574, $3,904 and $6,375, respectively. Regulatory and Environmental Matters The Company is subject to various federal, state and local laws and regulations that affect its operations, including those relating to the sale of loss damage waivers, vicarious liability of vehicle owners, consumer protection, advertising, used vehicle sales, the taxing and licensing of vehicles, franchising operations and sales, and environmental protection and clean-up. The Company maintains an environmental compliance program designed to maintain compliance with applicable technical and operational requirements, including periodic integrity testing of underground storage tanks and providing financial assurance for remediation of spills or releases. The Company believes that its operations currently are in compliance, in all material respects, with such F-29 114 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) regulatory requirements. However, there are several technical specifications regarding underground storage tanks applicable to the Company's facilities, many of which will become effective in 1998. The Company believes that the remaining costs of complying with these requirements for 1997 and 1998 will be approximately $3 million. Litigation The Company has contingencies with respect to litigation arising in the ordinary course of business. In the opinion of management, such litigation will not result in any loss which would materially affect the financial position or results of operations of the Company. 13. FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, Disclosure about Fair Value of Financial Instruments. The estimated fair value amounts are determined by the Company, using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amount. Cash and Cash Equivalents, Restricted Cash, Receivables and Accounts Payable The carrying amounts of these financial assets and liabilities at December 31, 1995 and 1996, approximate fair value because of the short maturity of these instruments. Notes Payable The carrying amount of a portion of the Company's notes payable approximates fair value at December 31, 1995 and 1996, since the debt is at floating interest rates. The carrying amount of the Company's fixed-rate notes payable approximates fair value at December 31, 1996, due to the recent issuance of such debt. Common Stock Warrant The estimated fair value is based on a pricing model which considers stock volatility and the put feature of the Common Stock Warrant. The estimated fair value was $1,750 at December 31, 1996. 14. SUPPLEMENTAL CASH FLOW DISCLOSURES In 1996, the Company issued approximately 272,727 shares of Class A common stock with a value of $2,727 and notes payable of $10,000 for the 1996 acquisitions. The Company issued approximately 1,220,816 shares of Class A common stock with a value of $12,837 and notes payable of $650 for the 1995 acquisitions. In 1994, $525 of revenue earning vehicles and property and equipment were financed through capital leases. The terms of a capital lease with certain stockholders and a director were modified and, therefore, the capital lease asset and obligation of $536 were eliminated. The net book value of the facility lease and capital lease obligation of $536 was deducted from proceeds from the sale of property and equipment and principal payments of capital lease obligations, respectively. The Company also issued F-30 115 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) $200 of Class A common stock to acquire the Fort Wayne franchise. In addition, property and equipment of $4,441 were acquired and notes payable of $4,016 were assumed in connection with the Freedom River acquisition. In 1994, the Company recorded prepaid royalty fees and the Common Stock Warrant of $2,000 for the abatement of certain fees (see Note 11). The Company paid interest of $4,091, $13,764 and $26,955 in 1994, 1995 and 1996, respectively. Income taxes of $182, $346 and $1,017 were paid in 1994, 1995 and 1996, respectively. 15. SEGMENT INFORMATION The Company is engaged in the business of the daily rental of vehicles, principally cars, trucks, and passenger vans, and the retail sale of used vehicles. Segment information for the year ended December 31, 1996, is as follows:
RETAIL VEHICLE VEHICLE SALES RENTAL CONSOLIDATED -------------- -------- ------------ Sales to unaffiliated customers.................. $134,120 $223,250 $357,370 Depreciation and amortization.................... 1,482 63,685 65,167 Operating income................................. 1,857 33,410 35,267 Income before provision for income taxes......... 409 7,409 7,818 Identifiable assets.............................. 48,885 538,338 587,223 Capital expenditures -- revenue earning vehicles....................................... -- 517,079 517,079
Segment information for the year ended December 31, 1995, is as follows:
RETAIL VEHICLE VEHICLE SALES RENTAL CONSOLIDATED -------------- -------- ------------ Sales to unaffiliated customers.................. $42,662 $107,067 $149,729 Depreciation and amortization.................... 193 29,483 29,676 Operating income................................. 1,254 12,926 14,180 Income (loss) before provision for income taxes.......................................... 1,869 (847) 1,022 Identifiable assets.............................. 30,195 356,128 386,323 Capital expenditures -- revenue earning vehicles....................................... -- 315,863 315,863
The Company operated in only the rental segment for the year ended December 31, 1994. F-31 116 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 16. SUBSEQUENT EVENT On April 29, 1997, pursuant to stock purchase agreements entered into on January 13, 1997, the Company completed its acquisition of Budget Rent a Car Corporation ("BRACC") in a purchase transaction and changed its name to Budget Group, Inc. In conjunction with and concurrent to the BRACC acquisition, the Company sold 8,625,000 shares of Class A common stock at a price of $21,625 in a public offering raising proceeds, net of offering costs incurred, of $177,200. The Company also issued 4,500 shares of Series A convertible, non-voting preferred stock, each share of which is convertible into 1,000 shares of the Company's Class A common stock, to Ford Motor Company. The common shares underlying the preferred stock had a value of approximately $105,800 for purposes of determining the purchase price (based on the three day period surrounding January 13, 1997) and $97,300 at the time of issuance (based on the public offering price). The Company also entered into the following debt financing transactions concurrently with the acquisition: (i) $165,000 of guaranteed senior notes at a rate of 9.57% maturing 2007; (ii) $45,000 of convertible subordinated notes at a rate of 6.85%, convertible into 1,609,442 shares of Class A common stock based on a conversion price of $27.96 and maturing in 2007; (iii) a variable-rate commercial paper vehicle financing facility in the amount of $900,000; (iv) a $500,000 asset-backed note vehicle financing facility maturing in 2001 and 2002, composed of a senior note in the amount of $472,500 bearing interest at a rate of 7.35% and a subordinated note in the amount of $27,500 bearing interest at a rate of 7.80%; and (v) a $300,000 five-year accrued working capital facility bearing interest at an initial rate of 1.75% over LIBOR, guaranteed by the Company and secured primarily by accounts receivable, cash and unencumbered vehicles. In connection with the above mentioned debt financing transactions, the Company extended the maturity of the Convertible Subordinated Notes (see Note 6) to 2007. In order to accommodate the shares issued in connection with the BRACC acquisition, on April 22, 1997, the shareholders of the Company approved an increase in the number of authorized Class A common shares to 35,000,000 shares. On July 31, 1997, the Company acquired the fleet and certain other assets and assumed certain liabilities of Premier Car Rental, Inc. ("Premier") for approximately $87,200. Premier owns and operates 9,000 vehicles from 101 locations in 13 major U.S. markets. Premier will operate as its own brand and continue to serve the insurance replacement market, and the Company does not expect this acquisition to have a material effect on its earnings in 1997. On July 10, 1997, the Company acquired the Budget franchise located in Chattanooga, Tennessee for $3,200. F-32 117 BUDGET RENT A CAR CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31, 1996 1997 ------------ ----------- (UNAUDITED) (IN THOUSANDS) ASSETS Cash and cash equivalents................................... $ 59,547 $ 52,877 Trade and vehicle receivables, net.......................... 135,371 181,209 Accounts receivable, related parties........................ 67,192 0 Prepaid expenses, inventories and deposits.................. 50,146 51,151 Vehicle inventory........................................... 14,299 14,828 Revenue earning vehicles, net............................... 1,303,975 1,494,755 Property and equipment, net................................. 114,537 113,799 Other assets................................................ 53,102 50,555 Intangibles, including goodwill, net........................ 529,946 524,978 ---------- ---------- Total assets...................................... $2,328,115 $2,484,152 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Accounts payable and accrued expenses....................... $ 344,780 $ 353,851 Accounts payable -- Ford.................................... 2,994 20,922 Income taxes payable........................................ 812 (4,495) Notes payable -- Ford....................................... 846,708 1,016,363 Notes payable............................................... 983,678 970,951 ---------- ---------- Total liabilities................................. 2,178,972 2,357,592 Mandatory redeemable preferred stock........................ 5,178 5,272 STOCKHOLDERS' EQUITY Common stock................................................ -- -- Additional paid-in-capital.................................. 564,994 564,994 Costs incurred for raising equity capital................... (9,555) (9,555) Pension liability adjustment................................ (12,409) (12,409) Foreign currency translation adjustment..................... (7,497) (10,639) Retained earnings........................................... (391,568) (411,103) ---------- ---------- Total stockholders' equity........................ 143,965 121,288 ---------- ---------- Total liabilities and stockholders' equity........ $2,328,115 $2,484,152 ========== ==========
See accompanying notes to unaudited consolidated financial statements. F-33 118 BUDGET RENT A CAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, -------------------- 1996 1997 -------- -------- (IN THOUSANDS) Operating revenue: Rental revenue............................................ $221,778 $228,135 Car sales revenue......................................... 22,734 20,913 Royalties and other revenue............................... 17,259 17,363 -------- -------- Total operating revenue........................... 261,771 266,411 -------- -------- Operating expenses: Direct vehicle and operating.............................. 25,871 31,713 Depreciation -- vehicles.................................. 54,583 65,439 Depreciation -- nonvehicle................................ 6,502 6,413 Cost of car sales......................................... 19,598 18,430 Advertising, promotion and selling........................ 19,441 27,585 Facilities................................................ 28,471 28,904 Personnel................................................. 61,939 63,985 General and administrative................................ 17,638 14,430 Amortization.............................................. 4,185 4,180 -------- -------- Total operating expenses.......................... 238,228 261,079 -------- -------- Operating income............................................ 23,543 5,332 -------- -------- Other (income) expense: Vehicle interest.......................................... 22,949 22,589 Other interest, net....................................... 7,265 7,043 -------- -------- Total other (income) expense...................... 30,214 29,632 -------- -------- Income before income taxes.................................. (6,671) (24,300) Provision for income taxes (benefit)........................ 600 (4,860) -------- -------- Net loss.................................................... $ (7,271) $(19,440) ======== ========
See accompanying notes to unaudited consolidated financial statements. F-34 119 BUDGET RENT A CAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
COSTS INCURRED FOREIGN ADDITIONAL FOR RAISING PENSION CURRENCY PREFERRED COMMON PAID-IN EQUITY LIABILITY TRANSLATION ACCUMULATED STOCK STOCK CAPITAL CAPITAL ADJUSTMENT ADJUSTMENT DEFICIT --------- -------- ---------- ----------- ---------- ----------- ----------- (IN THOUSANDS) Balance at December 31, 1993.................. $309,000 $ -- $ 1,000 $(9,555) $ (6,388) $(15,899) $(218,600) Dividends in arrears............. -- -- -- -- -- -- (15,000) Net income............ -- -- -- -- -- -- 1,125 Pension liability adjustment.......... -- -- -- -- 144 -- -- Foreign currency translation......... -- -- -- -- -- 4,082 -- -------- -------- -------- ------- -------- -------- --------- Balance at December 31, 1994.................. 309,000 -- 1,000 (9,555) (6,244) (11,817) (232,475) Dividends in arrears............. -- -- -- -- -- -- (15,000) Net loss.............. -- -- -- -- -- -- (132,640) Pension liability adjustment.......... -- -- -- -- (8,866) -- -- Foreign currency translation......... -- -- -- -- -- 495 -- -------- -------- -------- ------- -------- -------- --------- Balance at December 31, 1995.................. 309,000 -- 1,000 (9,555) (15,110) (11,322) (380,115) Dividends in arrears............. -- -- -- -- -- -- -- Series A............ -- -- -- -- -- -- (8,750) Series X............ -- -- -- -- -- -- (172) Net loss.............. -- -- -- -- -- -- (2,531) Exchange of preferred stock............... (309,000) -- 563,994 -- -- -- -- Pension liability adjustment.......... -- -- -- -- 2,701 -- -- Foreign currency translation......... -- -- -- -- -- 3,825 -- -------- -------- -------- ------- -------- -------- --------- Balance at December 31, 1996.................. -- -- 564,994 (9,555) (12,409) (7,497) (391,568) Dividends in arrears............. -- -- -- -- -- -- (95) Net loss.............. -- -- -- -- -- -- (19,440) Foreign currency translation......... -- -- -- -- -- (3,142) -- -------- -------- -------- ------- -------- -------- --------- Balance at March 31, 1997.................. $ -- $ -- $564,994 $(9,555) $(12,409) $(10,639) $(411,103) ======== ======== ======== ======= ======== ======== =========
See accompanying notes to unaudited consolidated financial statements. F-35 120 BUDGET RENT A CAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, ----------------------- 1996 1997 --------- ----------- (IN THOUSANDS) Cash flows from operating activities: Net income (loss)......................................... $ (7,271) $ (19,440) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation........................................... 60,035 71,852 Intangible Amortization................................ 4,185 4,180 Provision for losses on accounts receivable............ 690 (709) (Gain)/Loss on sale of vehicles and equipment.......... (5,077) (2,292) Changes in operating assets and liabilities: Receivables.......................................... 41,689 22,063 Vehicles held for resale............................. (2,891) (529) Prepaid expenses, inventories and deposits........... (5,573) (1,005) Income taxes payable................................. (18) (5,307) Accounts payable and accrued expenses................ (12,943) 26,998 --------- ----------- Total adjustments................................. 80,097 115,251 --------- ----------- Net cash provided by operating activities................... 72,826 95,811 Cash flows from investing activities: Purchase of vehicles...................................... (685,527) (770,814) Proceeds from the sale of vehicles........................ 535,505 511,554 Purchases of property, plant and equipment................ (5,437) (3,791) Proceeds from the sale of property, plant and equipment... 2,202 2,651 Investment in joint ventures and other.................... 5,377 991 --------- ----------- Net cash used in investing activities....................... (147,880) (259,409) Cash flows from financing activities: Proceeds from revolving credit/notes payable to banks and other notes payable.................................... 201,178 190,579 Principal payments of revolving credit/notes payable to banks and other notes payable.......................... (199,693) (185,291) Proceeds from fleet lender notes.......................... 608,827 735,035 Principal payments on fleet lender notes.................. (570,310) (577,635) Proceeds from commercial paper............................ 859,753 3,621,502 Principal payments on commercial paper.................... (855,467) (3,627,262) --------- ----------- Net cash provided by financing activities................... 44,288 156,928 --------- ----------- Net increase in cash and cash equivalents................... (30,766) (6,670) Cash and cash equivalents, beginning of period.............. 95,872 59,547 --------- ----------- Cash and cash equivalents, end of period.................... $ 65,106 $ 52,877 ========= ===========
See accompanying notes to unaudited consolidated financial statements. F-36 121 BUDGET RENT A CAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) (1) Interim financial information as of March 31, 1997 and for the three months ended March 31, 1997 and 1996 is unaudited. Management believes that the unaudited, interim financial statements reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the Company's consolidated financial position as of March 31, 1997 and the consolidated results of operations and cash flows for the three months ended March 31, 1997 and 1996. Information for the interim periods is not necessarily indicative of results to be expected for the full year. F-37 122 INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors of Budget Rent a Car Corporation: We have audited the accompanying consolidated balance sheets of Budget Rent a Car Corporation and subsidiaries as of December 31, 1995 and 1996 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Budget Rent a Car Corporation and subsidiaries as of December 31, 1995 and 1996 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Chicago, Illinois February 18, 1997 F-38 123 BUDGET RENT A CAR CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1996
1995 1996 ---------- ---------- (IN THOUSANDS EXCEPT SHARE DATA) ASSETS Cash and cash equivalents................................... $ 95,872 $ 59,547 Receivables: Vehicle rental and sales, less allowance of $29,133 in 1995 and $36,271 in 1996............................... 90,707 79,296 Royalty fees and other amounts due from franchisees, less allowance of $9,000 in 1995 and $5,458 in 1996......... 38,186 31,656 Installment notes, $617 in 1995 and $835 in 1996, due within one year........................................ 6,758 8,071 Vehicle related programs -- Ford.......................... 89,283 67,192 Vehicle related programs -- other......................... 5,292 2,155 Other..................................................... 10,806 14,193 ---------- ---------- 241,032 202,563 Prepaid expenses and taxes, inventories and deposits........ 53,452 50,146 Vehicles held for sale...................................... 11,756 14,299 Vehicles, at cost........................................... 1,498,060 1,449,476 Less accumulated depreciation............................. (144,071) (145,501) ---------- ---------- 1,353,989 1,303,975 Property and equipment, at cost: Land...................................................... 31,990 32,652 Buildings and leasehold improvements...................... 113,863 120,900 Furniture and equipment................................... 102,991 107,275 Construction in progress.................................. 3,068 5,525 ---------- ---------- 251,912 266,352 Less accumulated depreciation and amortization......... (140,030) (151,815) ---------- ---------- 111,882 114,537 Other assets................................................ 75,920 53,102 Intangibles, including goodwill, less accumulated amortization of $109,746 in 1995 and $126,715 in 1996..... 544,212 529,946 ---------- ---------- $2,488,115 $2,328,115 ========== ==========
F-39 124
1995 1996 ---------- ---------- (IN THOUSANDS EXCEPT SHARE DATA) LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expenses, including outstanding checks of $31,840 in 1995 and $27,410 in 1996............. $ 246,694 $ 207,531 Accounts payable -- Ford.................................... 22,909 2,994 Current income taxes payable................................ 93 812 Self-insurance liability.................................... 155,324 137,249 Notes payable -- Ford....................................... 989,646 846,708 Notes payable -- other...................................... 928,301 983,678 Mandatory Redeemable Preferred Stock: Series A, 10% cumulative, redeemable, par value $.01, stated value $1,000; 150,000 shares authorized; 150,000 shares issued and outstanding, including $101,250 ($675 per share) in 1995 of dividends in arrears............. 251,250 -- Series X, 7.5% cumulative, redeemable, par value $.01, stated value $1,000; 291,000 shares authorized, 5,006.46 shares issued and outstanding, including $172 ($34 per share) in 1996 of dividends in arrears........ -- 5,178 Stockholders' equity: Preferred stock: Series B, cumulative, participating, par value $.01, stated value $1,000; 309,000 shares authorized; 309,000 shares issued and outstanding in 1995........ 309,000 -- Common stock, par value $.01; 10,000 shares authorized, issued and outstanding................................. -- -- Additional paid-in capital................................ 1,000 564,994 Costs incurred for raising equity capital................. (9,555) (9,555) Pension liability adjustment.............................. (15,110) (12,409) Foreign currency translation adjustment................... (11,322) (7,497) Accumulated deficit....................................... (380,115) (391,568) ---------- ---------- (106,102) 143,965 ---------- ---------- $2,488,115 $2,328,115 ========== ==========
See accompanying notes to consolidated financial statements. F-40 125 BUDGET RENT A CAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS DECEMBER 31, 1994, 1995 AND 1996
1994 1995 1996 ---------- ---------- ---------- (IN THOUSANDS) Revenue: Vehicle rental....................................... $1,011,203 1,034,873 963,764 Retail car sales..................................... 77,999 83,795 91,503 Royalty fees......................................... 53,147 57,861 60,352 Other................................................ 13,417 16,941 17,202 ---------- ---------- ---------- 1,155,766 1,193,470 1,132,821 ---------- ---------- ---------- Expenses: Direct vehicle and operating......................... 134,126 153,081 121,288 Depreciation -- vehicles............................. 257,356 323,619 263,846 Depreciation and amortization -- nonvehicle.......... 21,410 19,520 26,645 Cost of vehicles sold at retail...................... 67,314 72,416 78,944 Advertising, promotion and selling................... 99,738 106,446 83,304 Occupancy............................................ 110,386 113,286 114,325 Personnel............................................ 269,370 280,901 248,655 General and administrative........................... 69,117 88,612 54,194 Intangible amortization.............................. 16,874 17,006 16,969 ---------- ---------- ---------- 1,045,691 1,174,887 1,008,170 ---------- ---------- ---------- Earnings before interest and income taxes.............. 110,075 18,583 124,651 Interest expense....................................... 104,950 149,909 124,182 ---------- ---------- ---------- Income (loss) before income taxes...................... 5,125 (131,326) 469 Provision for income taxes............................. 4,000 1,314 3,000 ---------- ---------- ---------- Net income (loss)...................................... $ 1,125 (132,640) (2,531) ========== ========== ==========
See accompanying notes to consolidated financial statements. F-41 126 BUDGET RENT A CAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
COSTS INCURRED FOREIGN ADDITIONAL FOR RAISING PENSION CURRENCY PREFERRED COMMON PAID-IN EQUITY LIABILITY TRANSLATION ACCUMULATED STOCK STOCK CAPITAL CAPITAL ADJUSTMENT ADJUSTMENT DEFICIT --------- -------- ---------- ----------- ---------- ----------- -------------- (IN THOUSANDS) Balance at December 31, 1993............ $309,000 $ -- $ 1,000 $(9,555) $ (6,388) $(15,899) $(218,600) Dividends in arrears.......... -- -- -- -- -- -- (15,000) Net income.......... -- -- -- -- -- -- 1,125 Pension liability adjustment....... -- -- -- -- 144 -- -- Foreign currency translation...... -- -- -- -- -- 4,082 -- -------- -------- -------- ------- -------- -------- --------- Balance at December 31, 1994............ 309,000 -- 1,000 (9,555) (6,244) (11,817) (232,475) Dividends in arrears.......... -- -- -- -- -- -- (15,000) Net loss............ -- -- -- -- -- -- (132,640) Pension liability adjustment....... -- -- -- -- (8,866) -- -- Foreign currency translation...... -- -- -- -- -- 495 -- -------- -------- -------- ------- -------- -------- --------- Balance at December 31, 1995............ 309,000 -- 1,000 (9,555) (15,110) (11,322) (380,115) Dividends in arrears:......... -- -- -- -- -- -- -- Series A......... -- -- -- -- -- -- (8,750) Series X......... -- -- -- -- -- -- (172) Net loss............ -- -- -- -- -- -- (2,531) Exchange of preferred stock............ (309,000) -- 563,994 -- -- -- -- Pension liability adjustment....... -- -- -- -- 2,701 -- -- Foreign currency translation...... -- -- -- -- -- 3,825 -- -------- -------- -------- ------- -------- -------- --------- Balance at December 31, 1996............ $ -- $ -- $564,994 $(9,555) $(12,409) $ (7,497) $(391,568) ======== ======== ======== ======= ======== ======== =========
See accompanying notes to consolidated financial statements. F-42 127 BUDGET RENT A CAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS DECEMBER 31, 1994, 1995 AND 1996
1994 1995 1996 ------------ ----------- ------------ Operating activities: Net income (loss)............................... $ 1,125 $ (132,640) $ (2,531) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization................ 278,766 343,140 290,491 Intangible amortization...................... 16,874 17,006 16,969 Gain on sale of vehicles and equipment....... (25,389) (20,333) (14,137) Provision for losses on accounts receivable................................. 9,205 9,581 6,350 Equity in (earnings) loss of equity investees.................................. 61 (1,665) -- Changes in operating assets and liabilities, net of effects from franchise acquisitions: Receivables................................ (12,537) (23,998) 32,118 Prepaid expenses and taxes, inventories and deposits................................ (3,065) 2,710 3,306 Vehicles held for sale..................... (2,278) (2,082) (2,543) Accounts payable and accrued expenses...... 34,458 (2,674) (56,377) Current income taxes payable............... 434 (341) 719 Estimated self-insurance liability......... (16,861) (14,760) (18,075) ------------ ----------- ------------ Net cash provided by operating activities......... 280,793 173,944 256,290 ------------ ----------- ------------ Investing activities: Purchase of vehicles............................ (2,841,717) (2,783,295) (2,196,399) Proceeds from sale of vehicles.................. 2,402,724 2,666,523 2,000,129 Purchase of property and equipment.............. (14,692) (19,144) (25,265) Proceeds from the sale of property and equipment.................................... 8,846 8,940 7,180 Changes in other assets......................... 33,029 (53,962) 9,301 ------------ ----------- ------------ Net cash used in investing activities............. (411,810) (180,938) (205,054) ------------ ----------- ------------ Financing activities: Proceeds from revolving credit facility and other notes payable.......................... 2,130,732 2,101,462 839,349 Principal payments on revolving credit facility and other notes payable...................... (2,108,407) (1,917,026) (823,057) Proceeds from fleet lender notes................ 2,021,290 1,739,199 2,194,033 Principal payments on fleet lender notes........ (2,114,124) (1,833,544) (2,353,082) Proceeds from commercial paper.................. 10,098,459 7,777,064 10,878,540 Principal payments on commercial paper.......... (10,354,161) (7,831,494) (10,823,344) Proceeds from notes payable to other vehicle lenders...................................... 500,000 -- -- ------------ ----------- ------------ Net cash provided by (used in) financing activities...................................... 173,789 35,661 (87,561) ------------ ----------- ------------ Increase (decrease) in cash and cash equivalents..................................... 42,772 28,667 (36,325) Cash and cash equivalents at beginning of year.... 24,433 67,205 95,872 ------------ ----------- ------------ Cash and cash equivalents at end of year.......... $ 67,205 $ 95,872 $ 59,547 ============ =========== ============
See accompanying notes to consolidated financial statements. F-43 128 BUDGET RENT A CAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994, 1995 AND 1996 (DOLLARS IN THOUSANDS) (1) SIGNIFICANT ACCOUNTING POLICIES General On March 30, 1989, pursuant to an agreement and plan of merger, as amended, Budget Rent a Car Corporation (the Company) became a wholly owned subsidiary of Beech Holdings Corp. (Holdings). Effective December 31, 1995, Holdings was merged with and into the Company (the Merger). All shares of Holdings stock outstanding prior to the Merger were retired and new shares of Company stock, with rights and preferences similar to the retired Holdings shares, were issued to the stockholders of Holdings. The accompanying financial statements are presented as if the Merger had taken place on January 1, 1994. The most significant impact of the Merger on the consolidated financial statements of the Company was to increase intangible assets (and amortization expense) and to increase stockholders' equity. On July 16, 1996, pursuant to a Recapitalization Plan approved by the Company's Board of Directors and stockholders, the Company exchanged all previously issued and outstanding shares of Preferred A and Preferred B stock for 5,006.46 shares of a new series (Series X) of mandatory redeemable preferred stock. As a result of the exchange, additional paid-in capital increased $563,994, while Series B preferred stock, at stated value, decreased $309,000 and mandatory redeemable preferred stock (Series A) was reduced by $260,000. See note 11 to the consolidated financial statements. Description of Business The Company is engaged in the business of vehicle rental through both owned and franchised operations. Company owned vehicle rental operations are located primarily throughout the United States and Western Europe. The largest concentration (approximately 25%) of vehicle rental assets is located in the highly competitive Florida market. Franchised vehicle operations are located worldwide. Customers are mainly business and leisure travelers. No customer accounts for more than 10% of the Company's revenues. Principles of Consolidation The consolidated financial statements include the accounts and operations of the Company and its majority-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. Investments in less than majority-owned entities are accounted for using the equity method, under which the Company's share of operating results are reflected in income as earned and dividends are credited against the investment when received. Cash and Cash Equivalents Cash equivalents include all highly liquid investments with an original maturity of three months or less. Computer Software Systems License fees related to the Company's purchased reservation system and associated applications and databases are capitalized and amortized over ten years. Costs associated with the internal development of other computer software systems and system enhancements are capitalized and amortized over three years. F-44 129 BUDGET RENT A CAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Intangibles, Including Goodwill Costs in excess of the fair value of net assets acquired as a result of the acquisition of the Company and in conjunction with acquisitions of franchise vehicle rental operations are capitalized and amortized over 40 years on the straight-line method. The carrying value of goodwill is reviewed whenever events or changes in circumstances indicate that the carrying value may not be recoverable through projected undiscounted future operating cash flows. Although no impairment is indicated at December 31, 1996, the assessment of recoverability will be impacted if estimated projected undiscounted operating cash flows are not achieved. Other Revenues Other revenues largely consist of income before interest and taxes for insurance and credit card processing operations, the Company's share of operating results of equity investees and revenues generated from miscellaneous services provided to the Company's franchisees. Vehicle Dispositions Repurchase programs with vehicle manufacturers require the manufacturers to repurchase the vehicles after varying time frames at agreed upon prices (subject to defined condition and mileage standards). Vehicles subject to these programs are capitalized and depreciated such that no gain or loss is realized upon disposition. Gains or losses realized on vehicles sold through the wholesale market are recorded as adjustments to depreciation expense. Depreciation and Amortization Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Estimated useful lives range from 25 years for buildings to three to seven years for furniture and equipment. Costs of leasehold improvements are amortized on the straight-line method over the shorter of the lease term or the estimated useful life of the related assets. Vehicles are depreciated at rates ranging from 1.0% to 2.5% per month, depending on vehicle type. Advertising, Promotion and Selling Advertising, promotion and selling costs are expensed as incurred. The Company incurred advertising expenses of $33,326, $38,552 and $31,201 in 1994, 1995 and 1996, respectively. Environmental Costs Environmental remediation costs are recorded in accrued expenses based on estimates of known environmental remediation exposures when it becomes probable that a liability has been incurred. Environmental exposures are largely related to underground storage tanks. Expenditures are expected to be made over the next three years. A receivable is recorded for amounts recoverable from third-parties when collection becomes probable. Self-insurance Liability The Company is self-insured with respect to personal and property liability claims up to specified limits. Third-party insurance is maintained for claims in excess of the limits. A liability is recorded for known claims and for incurred but not reported incidents based on actuarially computed estimates of F-45 130 BUDGET RENT A CAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) expected loss. The liability recorded as a result of these actuarially computed estimates may experience material changes from year to year as incurred but not reported incidents become known and known claims are settled. The Company maintained unused letters of credit amounting to $122,324 and $89,272 at December 31, 1995 and 1996, respectively, largely in support of its insurance liability in certain states and supporting the reimbursement of claims paid by third-party claims administrators. Income Taxes Deferred taxes are recognized to the extent they are expected to be payable upon distribution of earnings of foreign and unconsolidated subsidiaries. The Company uses a September 30 fiscal year for U.S. Federal income tax purposes. The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, as measured by the enacted tax rates which will be in effect when those temporary differences are expected to be recovered or settled. Deferred tax expense is the result of changes in the net deferred tax assets and liabilities. The effect of a change in tax rates is recognized in the period that includes the enactment date. Translation of Foreign Financial Statements The financial statements of the Company's foreign affiliates have been translated into U.S. dollars in accordance with SFAS No. 52. Accordingly, assets and liabilities of foreign operations are translated at period-end rates of exchange, with any resultant translation adjustments reported as a separate component of stockholders' equity. Income statement accounts are translated at average exchange rates for the period and gains and losses from foreign currency transactions are included in net income. Derivatives Premiums paid for purchased interest rate cap agreements are amortized to interest expense over the terms of the cap. Unamortized premiums are included in prepaid expenses in the balance sheet. Accounts receivable under cap agreements are accrued with a corresponding reduction of interest expense. Gains and losses on foreign exchange contracts and futures related to qualifying hedges of firm commitments or anticipated transactions are deferred and are recognized in income when the hedged transaction occurs. The Company does not engage in speculative derivatives. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Changes in Accounting Estimates During 1994, 1995 and 1996 the Company recorded adjustments related to prior year actuarial estimates of its self-insurance liability. The effect of these adjustments was to increase income before F-46 131 BUDGET RENT A CAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) taxes by approximately $8,000 in 1994, to decrease income before taxes by approximately $15,000 in 1995 and to increase income before taxes by approximately $19,000 in 1996. Reclassifications Certain amounts in the 1994 and 1995 consolidated financial statements have been reclassified to conform with the current year presentation. (2) VEHICLES, AT COST Vehicles, at cost largely represent revenue earning cars and trucks. At December 31, 1995 and 1996 the net book value of vehicles subject to repurchase programs was approximately $1,077,000 and $940,047, respectively. (3) REORGANIZATION AND CENTRALIZATION The accompanying financial statements for 1995 include charges and accruals of approximately $14,600 ($9,300 in personnel expense and $5,300 in general and administrative expense) related to a reorganization and centralization primarily of the finance and administrative functions of the Company (the "Reorganization"). In conjunction with the Reorganization, approximately 450 employees were identified for termination, primarily in finance and operations management. As of December 31, 1996, all affected employees have been terminated or accepted other open positions. At December 31, 1996, the remaining accruals relating to the Reorganization totaled approximately $2,300. During 1996, amounts paid and non-cash accrual reductions totaled approximately $11,000 and $1,300, respectively. (4) OTHER ASSETS Other assets include purchased software and capitalized software systems development costs, net of accumulated amortization, which amount to approximately $65,351 and $53,101 at December 31, 1995 and 1996, respectively. In addition, other assets includes the Company's 50% investment in Compass Computer Services, Inc. (Compass) and a 20% investment in a foreign rental operation. Compass provides, among other services, reservation data processing. The Company received dividends from Compass of $850, $150 and $8,088 during 1994, 1995 and 1996, respectively. In 1996, $5,000 of the dividends represents the fair value of property and equipment received. The combined revenues of the Company's investees during 1994, 1995 and 1996 amount to less than 10% of consolidated revenues. At December 31, 1996, the amount of undistributed earnings of Compass included in consolidated accumulated deficit is not significant. F-47 132 BUDGET RENT A CAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (5) NOTES PAYABLE Notes payable at December 31 consist of the following:
FINAL INTEREST RATE MATURITY 1995 1996 ---------------- -------------- ---------- ---------- Fleet lender revolving notes................. 7.23% to 8.40% 1997 $598,710 $426,370 Commercial paper payable............... 5.20% to 6.35% 1997 312,320 367,516 Vehicle lender term notes................. 6.02% 1999 500,000 500,000 Revolving credit facility.............. 7.73% 1997 392,718 418,218 Foreign notes........... 4.06% to 11.55% 1997 to 2012 58,893 71,676 Note payable to vendor................ 6.20% 1998 39,975 35,875 Notes payable to former owners of franchises purchased by the Company............... 10.00% to 12.00% 1997 to 1999 2,038 1,562 Other................... 5.48% to 9.00% 1997 to 2007 13,293 9,169 ---------------- -------------- ---------- ---------- $1,917,947 $1,830,386 ========== ==========
Fleet lender revolving notes: The fleet lender revolving notes are secured by the applicable vehicles and vehicle program receivables. The notes bear interest at rates that vary with commercial paper rates or the prime rate. The Company makes monthly principal payments based on depreciation of the related vehicles adjusted for net additions or disposals. It is the Company's intention and ability to renew the fleet lender revolving notes or to obtain financing under similar terms when the present agreements expire. At December 31, 1995 and 1996, $593,937 and $426,370, respectively, are due to Ford. Commercial paper payable: The commercial paper payable (the "paper") is secured by the applicable vehicles and vehicle program receivables. Under limited circumstances the paper may be repaid by draws under a related, bank provided liquidity facility ($725,000) or a related letter of credit ($120,000). The paper is issued periodically with maturities up to 90 days. It is the Company's intention and ability to renew the liquidity facility and letter of credit or to obtain financing under similar terms when the present agreements expire in July 1997 and July 1998, respectively. Vehicle lender term notes: The vehicle lender term notes (the "notes") are secured by the applicable vehicles and vehicle program receivables. Under limited circumstances the notes may be repaid by draws under a related letter of credit ($25,000). Revolving credit facility: The revolving credit facility, which provides funding of working capital, bears interest at rates that vary with commercial paper rates and is due to Ford. The unused and available commitment of the credit facility was $57,282 and $106,782 at December 31, 1995 and 1996, respectively. Foreign notes: The foreign notes primarily provide financing for vehicle purchases and the funding of working capital. At December 31, 1995 and 1996, approximately $53,917 and $67,733, respectively, relate to vehicle debt while $4,976 and $3,943, respectively, relate to the funding of working capital and various other debt. At December 31, 1995 and 1996, $2,991 and $2,120, respectively, are due to Ford. Notes payable to vendor: The note payable to vendor relates to the Company's license agreement for the reservation system and associated applications and databases. Substantially all of the Company's assets serve as collateral under the various credit agreements. Cash deposits restricted as to use amounted to $52,471 and $28,359 at December 31, 1995 and 1996, F-48 133 BUDGET RENT A CAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) respectively. The fleet lender revolving notes, liquidity facility, vehicle lender term notes and revolving credit facility each contain restrictive covenants relating to, among other things, incurring liens, paying dividends or selling certain assets. Additionally, the revolving credit facility has specific covenants relating to net worth, leverage and capital expenditures. Compliance with these covenants has been waived. Maturities: Scheduled aggregate maturities of notes payable at December 31 are as follows:
1995 1996 ---------- ---------- 1996........................................................ $1,375,455 $ -- 1997........................................................ 4,629 1,308,854 1998........................................................ 7,977 18,976 1999........................................................ 505,159 501,207 2000........................................................ 4,567 496 2001........................................................ 4,596 368 Thereafter.................................................. 15,564 485 ---------- ---------- $1,917,947 $1,830,386 ========== ==========
Interest payments amounted to $105,214, ($63,038 to Ford) $149,219 ($83,627 to Ford) and $124,483 ($74,815 to Ford) in the years ended December 31, 1994, 1995 and 1996, respectively. In 1995 the Company capitalized $1,233 of interest costs incurred. (6) FINANCIAL INSTRUMENTS Interest Rate Caps: The Company enters into interest rate cap agreements to limit its exposure to increases in interest rates. Under these agreements, the Company will receive payment in the event that 30 day commercial paper rates exceed levels varying from 5.00% to 5.75%. The Company had interest rate cap agreements outstanding in the notional amount of $500,000 at December 31, 1995 and 1996, respectively. In 1996, fees of approximately $3,600 have been paid to the counterparties (major banks) and are amortized on the straight-line method to interest expense over the protection period (through December 1997). At December 31, 1995 and 1996, the unamortized fees amounted to approximately $3,390 and $3,600, respectively. The Company is exposed to credit-related loss, to the extent of the fair value of the contracts, in the event of nonperformance by the counterparties to the agreements, but believes this risk to be minimal given the high credit ratings of the counterparties. Foreign exchange contracts: The Company employs forward foreign exchange contracts to limit its exposure to currency fluctuations on certain intercompany loans between foreign operations. Under these agreements, the Company is obligated to sell foreign currencies (primarily European) in exchange for British Sterling or U.S. dollars at dates several months into the future. These contracts are subject to the creditworthiness of the counterparties (large banks), but the Company believes this risk to be minimal given the high credit ratings of the counterparties. At December 31, 1995, no foreign exchange contracts were outstanding. At December 31, 1996, the Company had approximately $7,254 in forward foreign exchange contracts outstanding and had deferred expenses of approximately $77. (7) PENSION AND OTHER BENEFIT PLANS Substantially all employees of the United Kingdom and certain employees in the U.S. are covered under noncontributory pension plans. Plan benefits are based on final average compensation. The Company's funding policy for the domestic pension plan is to contribute the minimum ERISA contribution F-49 134 BUDGET RENT A CAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) required under the projected unit credit actuarial cost method. Effective December 31, 1991, the Company suspended its domestic defined benefit pension plan. As a result of this suspension, employees will earn no additional benefits under the plan. The domestic plan is supplemented by an unfunded, nonqualified plan providing benefits (as computed under the benefit formula) in excess of limits imposed by Federal tax law. The cost of the supplemental plan was approximately $1,009, $1,053 and $1,005 in 1994, 1995 and 1996, respectively. Effective August 1996 the Company established an unfunded, nonqualified plan providing benefits to its officers, (the Executive Protection Plan) based on a percentage of final compensation. The cost of the Executive Protection Plan was approximately $87 in 1996. The Company also maintains a Savings Plus Plan. Under this plan, an eligible employee of the Company, or its participating subsidiaries, who has completed one year of continuous service and enrolls in the plan may elect to defer from 1% to 15% of specified compensation under a "cash or deferred arrangement" under Section 401(k) of the Internal Revenue Code, subject to certain limitations. The Company contributes varying amounts (25% to 75%) on the first 6% of each participating employee's eligible salary deferrals to various funds established by the plan. The cost of the plan was approximately $2,436, $2,657 and $2,332 in 1994, 1995 and 1996, respectively. The Company maintains a defined contribution benefit plan covering all employees eligible under the Savings Plus Plan. The amount of funds contributed to the plan each year, if any, is at the discretion of the Board of Directors, based on a percentage of an employee's total cash compensation. The cost of the plan was approximately $5,368, $3,096 and $2,761 in 1994, 1995 and 1996, respectively. Each of the Company's defined benefit plan's accumulated benefits exceed the plan's assets at December 31, 1996 and 1995. The following table sets forth the domestic and foreign pension plans' funded status and amounts recognized in the Company's consolidated financial statements at December 31:
1995 1996 ------------------ ------------------ DOMESTIC FOREIGN DOMESTIC FOREIGN PLANS PLAN PLANS PLAN -------- ------- -------- ------- Actuarial present value of benefit obligations: Vested benefits......................... $(27,328) $(3,123) $(27,615) $(4,685) Nonvested benefits...................... (1,033) (52) (1,103) (69) -------- ------- -------- ------- Accumulated benefit obligation............ $(28,361) $(3,175) $(28,718) (4,754) ======== ======= ======== ======= Projected benefit obligation for service rendered to date........................ (28,361) (3,920) (28,767) (5,768) Plan assets at fair value, primarily participation in common trust funds..... 14,650 6,185 16,183 7,936 -------- ------- -------- ------- Excess (deficiency) of plan assets over projected benefit obligation............ (13,711) 2,265 (12,584) 2,168 Unrecognized net asset at transition...... -- (3) 1,217 (3) Unrecognized net loss (gain).............. 15,110 (200) 12,458 398 Adjustment required to recognize minimum liability............................... (15,110) -- (13,626) -- -------- ------- -------- ------- Prepaid (accrued) pension cost............ $(13,711) $ 2,062 $(12,535) 2,563 ======== ======= ======== =======
F-50 135 BUDGET RENT A CAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1994 1995 1996 ------------------ ------------------ ------------------ DOMESTIC FOREIGN DOMESTIC FOREIGN DOMESTIC FOREIGN PLANS PLAN PLANS PLAN PLANS PLAN -------- ------- -------- ------- -------- ------- Service cost for benefits earned during the period..... $ -- $ 149 $ -- $ 158 $ 24 $ 447 Interest cost on projected benefit obligation........... 1,639 224 1,809 253 1,916 344 Return on plan assets.......... 334 (520) (2,728) (526) (1,904) (666) Net amortization and deferral..................... (1,141) (43) 1,996 (3) 1,335 -- ------- ----- ------- ----- ------- ----- Pension expense (income)....... $ 832 $(190) $ 1,077 $(118) $ 1,371 $ 125 ======= ===== ======= ===== ======= =====
The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation for 1995 and 1996 was 6.8% and 7.1%, respectively. No compensation increase has been assumed as no additional benefits will be earned under the domestic plans. The assumed compensation increase under the Executive Protection Plan and foreign plan was 5% and 4%, respectively. The expected long-term rate of return on plan assets for 1995 and 1996 was 10% and 9.5%, respectively. The Company has recognized additional liabilities related to each of its domestic plans as the unfunded liability recognized as accrued pension cost is less than the actuarially determined accumulated benefit obligation. The additional liability is reflected in the accompanying balance sheets as follow at December 31:
1995 1996 ------- ------- Unrecognized prior service cost (increase intangible assets)................................................... $ -- $ 1,217 Additional liability in excess of unrecognized prior service cost (decrease stockholders' equity)...................... 15,110 12,409 ------- ------- Additional liability (increase accounts payable and accrued expenses)................................................. $15,110 $13,626 ======= =======
(8) INCOME TAXES The provision for income taxes for the years ended December 31 consists of the following:
1994 1995 1996 ------ ------ ------ Current: State.................................................... $ 823 $ 448 $1,148 Foreign 1,676 866 1,852 ------ ------ ------ 2,499 1,314 3,000 Deferred................................................... 1,501 -- -- ------ ------ ------ $4,000 $1,314 $3,000 ====== ====== ======
Net income tax payments amounted to $102, $1,640 and $2,196 in the years ended December 31, 1994, 1995 and 1996, respectively. F-51 136 BUDGET RENT A CAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Reconciliations of income taxes at the statutory U.S. Federal income tax rate and the effective tax rate for the years ended December 31 are as follows:
1994 1995 1996 ------- -------- ------- Federal income tax provision at statutory rate......... $ 1,794 $(45,964) $ 164 Intangible amortization and adjustments................ 3,856 6,070 5,884 Provision for state taxes net of federal benefit....... 535 -- 746 Change in the beginning of the year valuation allowance for deferred tax assets allocated to income tax expense.............................................. (1,345) 44,383 (684) Effect of foreign operations........................... (1,170) (2,625) (3,199) Other.................................................. 330 (550) 89 ------- -------- ------- $ 4,000 $ 1,314 $ 3,000 ======= ======== =======
Income (loss) before income tax expense from foreign sources was $5,216, $7,049 and $8,436 for the years ended December 31, 1994, 1995 and 1996, respectively. The significant components of deferred income tax expense for the years ended December 31 are as follows:
1994 1995 1996 ------- -------- ----- Deferred tax expense (benefit) (arising from changes in deferred tax assets and liabilities).................. $ 2,845 $(47,010) $ 684 Increase (decrease) in beginning-of-the-year balance of the valuation allowance for deferred tax assets....... (1,344) 47,010 (684) ------- -------- ----- $ 1,501 $ -- $ -- ======= ======== =====
F-52 137 BUDGET RENT A CAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred liabilities at December 31 relate to the following:
1995 1996 --------- --------- Deferred tax assets: Estimated self-insurance liability........................ $ 59,859 $ 54,060 Accrued expenses-pension.................................. (217) 800 Accounts receivable, principally due to allowance for doubtful accounts...................................... 5,600 6,391 Accrued salaries and bonuses.............................. 4,225 2,103 Accrued expenses -- other................................. 881 (1,315) Net operating loss carryforwards.......................... 87,952 76,672 Business tax credit carryforwards......................... 5,881 5,881 Alternative minimum tax credit carryforwards.............. 2,811 2,811 Foreign tax credit carryforwards.......................... 3,035 4,319 Foreign tax assets and net operating loss carryforwards... 245 1,308 Other..................................................... 479 479 --------- --------- Total gross deferred tax assets........................ 170,751 153,509 Less valuation allowance............................... (112,697) (112,013) --------- --------- Net deferred tax assets................................ 58,054 41,496 Deferred tax liabilities: Vehicles, principally due to differences in depreciation........................................... (19,515) (2,986) Other assets, principally due to research and development............................................ (23,196) (22,714) Intangibles, principally due to amortization of identifiable items..................................... (12,483) (13,387) Other..................................................... (2,860) (2,409) --------- --------- Total gross deferred tax liabilities...................... (58,054) (41,496) --------- --------- Net deferred tax asset...................................... $ -- $ -- ========= =========
At December 31, 1996, the Company has net operating loss carryforwards for federal income tax purposes of $207,222 which are available to offset future federal taxable income through 2011. The Company's business tax credit carryforwards for federal income tax purposes are available to reduce future federal income taxes through 2011 and the Company's alternative minimum tax credit carryforwards are available to reduce future federal regular income taxes, if any, over an indefinite period. The foreign tax credits, available to reduce future federal income taxes, if any, expire from 1997 through 2001. During the year, as a result of the Recapitalization Plan, the Company experienced a change of ownership for income tax purposes which may limit the availability of the above carryover in future years. Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 1996 will be allocated as follows:
AMOUNT -------- Income tax benefit that would be reported in the consolidated statements of operations..................... $ 95,764 Reduction of intangibles, including goodwill................ 16,249 -------- $112,013 ========
(9) LITIGATION The Company was a defendant in a lawsuit (in which it filed counter claims) that sought unspecified damages for alleged breach of contract related to its interest in the INTRICO Partnership (a joint venture partnership, which was created to develop a new state of the art hotel and vehicle rental reservation system). In January 1994 the Company reached a settlement in this matter. Amounts received in the settlement were sufficient to reimburse the Company for its investment in the partnership, capitalized F-53 138 BUDGET RENT A CAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) expenditures and capitalized interest and had no other material impact on the Company's consolidated financial condition. Other litigation arising in the normal course of business is pending against the Company. Management believes that the Company has meritorious defenses to all significant litigation and that the ultimate outcome of the litigation will not have a material adverse effect on the Company's consolidated financial position or results of operations. (10) LEASES AND AIRPORT CONCESSION FEES Expenses for operating leases and airport concession fees for the years ended December 31 amount to:
1994 1995 1996 ------- ------- ------- Minimum fees........................................ $73,401 $66,439 $71,540 Contingent fees..................................... 24,855 32,113 28,340 ------- ------- ------- $98,256 $98,552 $99,880 ======= ======= =======
Vehicle leasing expenses of $20,154, $20,937 and $24,713 for the years ended December 31, 1994, 1995 and 1996, respectively, are not included in the table above. Contingent fees are largely based on a percentage of revenues at certain locations. The Company is required by most of the leases for its operating facilities to pay real estate taxes, insurance and other occupancy expenses. In addition, the Company guarantees airport concession fees on behalf of certain franchisees. Future minimum commitments as of December 31, 1996 for noncancelable leases and concession agreements are as follows:
AMOUNT -------- 1997........................................................ $ 58,146 1998........................................................ 35,767 1999........................................................ 23,092 2000........................................................ 16,923 2001........................................................ 12,977 Thereafter.................................................. 61,640 -------- $208,545 ========
Several of the Company's leases include renewal options for varying periods. (11) MANDATORY REDEEMABLE PREFERRED STOCK Series X preferred stock (Series X): The Series X is entitled to cumulative dividends, payable quarterly, when and if declared by the Board of Directors, at an annual rate of 7.5% of its stated value. The Series X is subject to mandatory redemption in March 2004 at its then liquidation value (stated value plus any unpaid accumulated dividends). The Series X ranks prior to all other equity securities of the Company with respect to dividends rights and rights upon liquidation. The Series X stockholders may vote only with respect to matters which would alter or change the powers, preferences or special rights of the shares including authorization to issue any stock ranking equal or prior to the Series X. A majority of Series X shares are required to approve any matters brought to a vote. F-54 139 BUDGET RENT A CAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Series A preferred stock (Series A): The Series A is entitled to cumulative dividends, payable quarterly, when and if declared by the Board of Directors, at an annual rate of 10% of its stated value. The Series A is subject to mandatory redemption in March 2004 at its then liquidation value (stated value plus any unpaid accumulated dividends). The Series A ranks prior to all other equity securities of the Company other than Series X with respect to dividend rights and rights upon liquidation. The Series A stockholders may vote only with respect to matters which would alter or change the powers, preferences or special rights of the shares including authorization to issue any stock ranking equal or prior to the Series A. A majority of Series A shares are required to approve any matters brought to a vote. The affirmative vote of the original purchaser is required to approve these matters as long as the original purchaser owns shares of Series A and Series B preferred stock which collectively have an aggregate stated value of at least $1,000. (12) STOCKHOLDERS' EQUITY Series B preferred stock (Series B): The Series B is entitled to cumulative dividends, payable quarterly, when and if declared by the Board of Directors, equal to 100% of earnings, after deduction of dividends on the Series A, up to a maximum annual dividend of $25,000. The Series B ranks prior to the common stock with respect to rights upon liquidation. The Series B stockholders may vote only with respect to matters which would alter or change the powers, preferences or special rights of the shares including authorization to issue any stock ranking equal or prior to the Series B. A majority of Series B shares is required to approve any matters brought to a vote. (13) ENVIRONMENTAL MATTERS The Company has recorded amounts which, in management's best estimate, will be sufficient to satisfy anticipated costs of known remediation requirements. At December 31, 1996 the Company has accrued $3,400 for estimated environmental remediation costs and expects to expend approximately $1,900 during 1997. Amounts receivable from third parties for reimbursement of remediation expenditures is not significant. Due to factors such as continuing changes in 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. The Company does not expect such future costs to have a material adverse effect on the Company's consolidated financial position or results of operations. (14) RELATED-PARTY TRANSACTIONS Prior to the Recapitalization Plan, Ford Motor Company (Ford) and its affiliates held all of the outstanding preferred stock of the Company and hold a minimal amount of Series X at December 31, 1996. Ford and the Company are parties to a vehicle supply agreement, effective through August 1998, pursuant to which owned locations are to acquire at least 70% of their annual vehicle purchases from Ford. The agreement provides that Ford vehicles will be competitive with vehicles of other manufacturers in terms of price and other factors. A related agreement between Ford and the Company, effective through August 2007, provides for certain incentives to be paid by Ford to the Company dependent on the attainment of certain volume purchase requirements. Ford represents the Company's largest debtor and creditor at December 31, 1995 and 1996. F-55 140 BUDGET RENT A CAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (15) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS Cash and cash equivalents, receivables and accounts payable and accrued expenses: The carrying amounts approximate fair value due to the short maturity of these instruments. Notes payable: The carrying amounts approximate fair value as a majority of the obligations incur interest at a floating, market rate that is reset monthly. In addition, the significant terms of fixed rate obligations do not differ materially from those currently available to the Company. Interest rate cap agreements: As described in note 6 to the consolidated financial statements, the Company has recorded $3,600 in capitalized fees related to various interest rate cap agreements. The fair value of these agreements at December 31, 1996, based on a sampling of financial institutions' and brokers' quotes is approximately $2,020. (16) GEOGRAPHICAL SEGMENT INFORMATION The Company operates in two major geographical areas; North America and International. Information by area for the years ended December 31 is as follows:
1994 1995 1996 ---------- ---------- ---------- Revenue: North America................................ $1,040,847 $1,064,182 $ 997,907 International................................ 114,919 129,288 134,914 ---------- ---------- ---------- Total................................ $1,155,766 $1,193,470 $1,132,821 ========== ========== ========== Income Before Taxes: North America................................ $ (3,209) $ (140,921) $ (10,882) International................................ 8,334 9,595 11,351 ---------- ---------- ---------- Total................................ $ 5,125 $ (131,326) $ 469 ========== ========== ========== Identifiable Assets: North America................................ $2,440,040 $2,318,120 $2,142,798 International................................ 162,334 169,995 185,317 ---------- ---------- ---------- Total................................ $2,602,374 $2,488,115 $2,328,115 ========== ========== ==========
(17) SUBSEQUENT EVENT -- SALE OF THE COMPANY On January 13, 1997, Team Rental Group, Inc. and its subsidiaries (TEAM) entered into stock purchase agreements (the Agreements) with Ford, the common stockholder of the Company and the Company, pursuant to which TEAM agreed to acquire the capital stock of the Company. Under the Agreements, all outstanding fleet lender revolving notes and commercial paper payable will be refinanced. In addition, the Company will be obligated to repay a portion of its outstanding indebtedness under the revolving credit facility and Ford will cancel a portion of the indebtedness. F-56 141 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Selling Stockholder has agreed to sell to each of the Underwriters named below, and each of such Underwriters, for whom Goldman, Sachs & Co., Credit Suisse First Boston Corporation, ABN AMRO Chicago Corporation, Alex. Brown and Sons Incorporated, McDonald & Company Securities, Inc. and J.P. Morgan Securities, Inc. are acting as representatives (the "Representatives"), has severally agreed to purchase from the Selling Stockholder, the respective number of shares of Class A Common Stock set forth opposite its name below:
NUMBER OF SHARES OF CLASS A COMMON UNDERWRITER STOCK ----------- --------- Goldman, Sachs & Co. ....................................... Credit Suisse First Boston Corporation...................... ABN AMRO Chicago Corporation................................ Alex. Brown and Sons Incorporated........................... McDonald & Company Securities, Inc.......................... J.P. Morgan Securities, Inc................................. --------- Total............................................. 4,500,000 =========
Under the terms and conditions of the Underwriting Agreement, the Underwriters are committed to take and pay for all of the shares offered hereby, if any are taken. The Underwriters propose to offer the shares of Class A Common Stock in part directly to the public at the initial public offering price set forth on the cover page of this Prospectus and in part to certain securities dealers at such price less a concession of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain brokers and dealers. After the shares of Class A Common Stock are released for sale to the public, the offering price and other selling terms may from time to time be varied by the Representatives. The Company's directors and executive officers, who in the aggregate beneficially own 2,810,855 shares of Common Stock, and the Company have agreed that, during the period beginning from the date of this Prospectus and continuing to and including the date 90 days after the date of this Prospectus, they will not offer, sell, contract to sell or otherwise dispose of any securities of the Company (other than pursuant to employee stock option or purchase plans existing or on the conversion or exchange of convertible or exchangeable securities outstanding, on the date of this Prospectus) which are substantially similar to the shares of Class A Common Stock or which are convertible into or exchangeable for securities which are substantially similar to the shares of Class A Common Stock without the prior written consent of Goldman, Sachs & Co., except for the shares of Class A Common Stock offered hereby. In addition, the Company may issue up to 500,000 shares of Class A Common Stock in connection with acquisitions. The recipients of such shares will be subject to restrictions on disposition similar to those imposed by the Representatives on the Company and its directors and executive officers. The Company and the Selling Stockholder have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act. In connection with the Offering, the Underwriters may purchase and sell the Class A Common Stock in the open market. These transactions may include over-allotment and stabilization transactions and purchases to cover syndicate short positions created in connection with the Offering. The Underwriters also may impose a penalty bid, whereby selling concessions allowed to syndicate members and other broker-dealers in respect of the Class A Common Stock sold in the Offering for their account may be reclaimed by the syndicate if such securities are repurchased by the syndicate in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the Class A Common Stock, which may be higher than the price that might otherwise prevail in the open market; and U-1 142 these activities, if commenced, may be discontinued at any time. These transactions may be effected on the New York Stock Exchange, in the over-the-counter market or otherwise. Credit Suisse First Boston Corporation has acted as placement agent in connection with each of the Fleet Financing Facilities, the offering of the Convertible Notes and the Debt Placements, and as underwriter for TEAM's initial public offering and its public offering in July 1996. In addition, Credit Suisse First Boston Corporation acted as placement agent for a fleet financing by SoCal shortly before it was acquired by TEAM. Additionally, Credit Suisse First Boston acted as administrative agent and co-syndication agent in connection with the Company's commercial paper facility and liquidity facility. Credit Suisse First Boston Corporation also acted as financial advisor to the Company in connection with the Budget Acquisition. Credit Suisse First Boston, a Swiss bank and an affiliate of Credit Suisse First Boston Corporation, was the agent for the New Working Capital Facility. U-2 143 ========================================================== NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................... 3 Risk Factors............................. 12 Use of Proceeds.......................... 17 Price Range of Common Stock.............. 17 Dividend Policy.......................... 17 Capitalization........................... 18 Pro Forma Consolidated Statements of Operations............................. 20 Selected Historical Financial Data of the Company............................ 28 Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company.............. 30 Selected Historical Financial Data of BRACC.................................. 39 Management's Discussion and Analysis of Financial Condition and Results of Operations of BRACC.................... 41 Business................................. 46 The Budget Acquisition................... 60 Management............................... 63 Certain Transactions..................... 68 Principal and Selling Stockholders....... 71 Description of Capital Stock............. 73 Description of Certain Indebtedness...... 78 Shares Eligible for Future Sale.......... 81 Legal Matters............................ 81 Experts.................................. 81 Additional Information................... 83 Index to Financial Statements............ F-1 Underwriting............................. U-1
========================================================== ========================================================== 4,500,000 SHARES BUDGET GROUP, INC. CLASS A COMMON STOCK (PAR VALUE $.01 PER SHARE) ------------------------ [BUDGET LOGO] ------------------------ GOLDMAN, SACHS & CO. CREDIT SUISSE FIRST BOSTON ABN AMRO CHICAGO CORPORATION ALEX. BROWN & SONS INCORPORATED MCDONALD & COMPANY SECURITIES, INC. J.P. MORGAN & CO. REPRESENTATIVES OF THE UNDERWRITERS ========================================================== 144 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the fees and expenses in connection with the issuance and distribution of the securities being registered hereunder, all of which are being paid by the Company. Except for the SEC registration fee and NASD filing fee, all amounts are estimates. Securities and Exchange Commission registration fee......... $ 40,015 Transfer agents' fees....................................... 10,000 Printing and engraving expenses............................. 100,000 Legal fees and expenses..................................... 150,000 Accounting fees and expenses................................ 150,000 Miscellaneous............................................... 49,985 -------- Total............................................. $500,000 ========
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS. Section 145 of the General Corporation Law of the State of Delaware ("DGCL") provides that a corporation has the power to indemnify any director or officer, or former director or officer, who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) against the expenses, (including attorneys' fees), judgments, fines or amounts paid in settlement actually and reasonably incurred by them in connection with the defense of any action by reason of being or having been directors or officers, if such person shall have acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, provided that such person had no reasonable cause to believe his conduct was unlawful, except that, if such action shall be in the right of the corporation, no such indemnification shall be provided as to any claim, issue or matter as to which such person shall have been judged to have been liable to the corporation unless and to the extent that the Court of Chancery of the State of Delaware, or any court in which such suit or action was brought, shall determine upon application that, in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper. As permitted by Section 102(b)(7) of the DGCL, the Amended and Restated Certificate of Incorporation of the Company (filed herewith as Exhibit 3.2) (the "Restated Certificate of Incorporation") provides that no director shall be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director other than (i) for breaches of the director's duty of loyalty to the Company and its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for the unlawful payment of dividends or unlawful stock purchases or redemptions under Section 174 of the DGCL, and (iv) for any transaction from which the director derived an improper personal benefit. The Company's Bylaws provide indemnification of the Company's directors and officers, both past and present, to the fullest extent permitted by the DGCL, and allow the Company to advance or reimburse litigation expenses upon submission by the director or officer of an undertaking to repay such advances or reimbursements if it is ultimately determined that indemnification is not available to such director or officer pursuant to the Bylaws. The Company's Bylaws will also authorize the Company to purchase and maintain insurance on behalf of an officer or director, past or present, against any liability asserted against him in any such capacity whether or not the Company would have the power to indemnify him against such liability under the provisions of the Restated Certificate of Incorporation or Section 145 of the DGCL. II-1 145 The Company has entered into indemnification agreements with each of its directors and certain of its executive officers. The indemnification agreements require the Company, among other things, to indemnify such directors and officers against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from willful misconduct of a culpable nature), and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. The Underwriting Agreement filed herewith as Exhibit 1.1 provides for the indemnification by the Underwriters of directors and certain officers of the Company against certain liabilities. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. In November 1994, the Company issued an aggregate of 18,500 shares of Class A Common Stock to the stockholders of Fort Wayne Rental Group, Inc. ("Fort Wayne") in exchange for all of the outstanding shares of capital stock of Fort Wayne (the "Fort Wayne Acquisition"). The Class A Common Stock issued in the Fort Wayne Acquisition were issued to the following persons: Sanford Miller -- 7,400 shares, Richard Sapia -- 6,475 shares, and Andrew Klein -- 4,625 shares. Such shares of Class A Common Stock were issued pursuant to the exemption from registration under Section 4(2) of the Securities Act in reliance, in part, on the representations and warranties set forth in the Fort Wayne Acquisition agreement. In January 1995, the Company issued 13,483 shares of Class A Common Stock to MacKay Car & Truck Rentals, Inc. in partial consideration for all of the outstanding shares of capital stock of McKay Car & Truck Rentals, Inc. (the "Charlotte Acquisition"). The shares of Class A Common Stock issued in the Charlotte Acquisition were issued pursuant to the exemption registration under Section 4(2) of the Securities Act in reliance, in part, upon the representations and warranties set forth in the Charlotte Acquisition agreement. In March 1995, the Company issued 157,333 shares of Class A Common Stock to the shareholders of Rental Car Resources, Inc. ("Resources") in exchange for all of the outstanding shares of Rental Car Resources, Inc. (the "Hartford Acquisition"). The shares of Class A Common Stock issued in the Hartford Acquisition were issued pursuant to the exemption from registration under Section 4(2) of the Securities Act in reliance, in part, on the representations and warranties set forth in the Hartford Acquisition agreement. In October 1995, the Company issued 1,050,000 shares of Class A Common Stock to Budget Rent-a- Car of Southern California ("SoCal") in exchange for all of the outstanding shares of BRAC-OPCO, Inc. (the "Los Angeles Acquisition"). The shares of Class A Common Stock issued in the Los Angeles Acquisition were issued pursuant to the exemption from registration under Section 4(2) of the Securities Act in reliance, in part, on SoCal's representations and warranties set forth in the Los Angeles Acquisition agreement. In February 1996, the Company issued 272,727 shares of Class A Common Stock to Katzin Investments L.C. in partial consideration for all of the outstanding shares of capital stock of Arizona Rent-A-Car Systems, Inc. (the "Phoenix Acquisition"). The shares of Class A Common Stock issued in the Phoenix Acquisition were issued pursuant to the exemption from registration under Section 4(2) of the Securities Act in reliance, in part, upon the representations and warranties set forth in the Phoenix Acquisition agreement. In December 1996, the Company issued $80,000,000 of 7.0% Convertible Subordinated Notes, Series A, due 2003 (the "Series A Convertible Notes") in a private transaction to certain insurance companies. The Series A Convertible Notes are convertible into 3,986,049 shares of Class A Common Stock of the Company. In April 1997, the Company issued $45,000,000 of 6.85% Convertible Subordinated Notes, Series B, due 2007 (the "Series B Convertible Notes"; together with the Series A Convertible Notes, the "Convertible Subordinated Notes") in a private transaction to certain institutional investors. The Series B Convertible Notes are convertible into 1,609,442 shares of Class A Common II-2 146 Stock of the Company. The Convertible Subordinated Notes were issued pursuant to the exemption from registration under Section 4(2) of the Securities Act in reliance, in part, upon the representations and warranties set forth in the Note Purchase Agreements. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits: The Registrant agrees to furnish a copy of all agreements relating to long-term debt upon request of the Commission.
EXHIBIT NO. DESCRIPTION - ------- ----------- *1.1 -- Form of Underwriting Agreement. 2.1 -- Share Exchange Agreement dated April 25, 1994 among Team Rental Group, Inc., Sanford Miller, Jeffrey Congdon, John Kennedy, Brian Britton, Richard Hinkle and Richard Sapia (incorporated by reference to Exhibit 10.24 to the Company's Registration Statement on Form S-1, File No. 33-78274, dated April 28, 1994). 2.2 -- First Amendment to Share Exchange Agreement dated June 13, 1994 among Team Rental Group, Inc., Sanford Miller, Jeffrey Congdon, John Kennedy, Brian Britton, Richard Hinkle and Richard Sapia (incorporated by reference to Exhibit 10.36 to Amendment No. 1 to the Company's Registration Statement on Form S-1, File No. 33-78274, dated June 17, 1994). 2.3 -- Second Amendment to Share Exchange Agreement dated July 5, 1994 among Team Rental Group, Inc., Sanford Miller, Jeffrey Congdon, John Kennedy, Brian Britton, Richard Hinkle and Richard Sapia (incorporated by reference to Exhibit 10.38 to Amendment No. 2 to the Company's Registration Statement on Form S-1, File No. 33-78274, dated July 7, 1994). 2.4 -- Agreement, dated October 20, 1995, among Team Rental Group, Inc., Team Rental of Southern California, Inc., BRAC-OPCO, Inc., and Budget Rent-A-Car of Southern California (incorporated by reference to Exhibit 2.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 2.5 -- Stock Purchase Agreement, dated as of December 21, 1995, by and among the Company, Arizona Rent-A-Car Systems, Inc., David Katzin, Michael Katzin, Jon David Katzin, Gabrielle De Lavigne, the David Katzin Irrevocable Trust (dated November 17, 1989) and Katzin Investments L.C. (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated December 21, 1995). 2.6 -- Stock Purchase Agreement, dated as of November 1, 1994, by and between Team Rental of Ft. Wayne, Inc., Sanford Miller, Richard Sapia and Andrew Klein (incorporated by reference to Exhibit 10.38 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 2.7 -- Common Stock Purchase Agreement, dated as of January 13, 1997, between John J. Nevin and Team Rental Group, Inc. (incorporated by reference to Exhibit 2.7 to the Company's Registration Statement on Form S-1, File No. 333-21691, dated February 12, 1997). 2.8 -- Budget Stock Purchase Agreement, dated as of January 13, 1997, between Budget Rent A Car Corporation and Team Rental Group, Inc. (incorporated by reference to Exhibit 2.8 to the Company's Registration Statement on Form S-1, File No. 333-21691, dated February 12, 1997). 2.9 -- Preferred Stock Purchase Agreement, dated as of January 13, 1997, between Ford Motor Company and Team Rental Group, Inc. **2.10 -- Preferred Stockholders Agreement between Ford Motor Company and Team Rental Group, Inc. 3.1 -- Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1, File No. 33-78274, dated April 28, 1994).
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EXHIBIT NO. DESCRIPTION - ------- ----------- 3.2 -- Amendment to Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.2 to Amendment No. 2 to the Company's Registration Statement on Form S-1, File No. 333-4507, dated June 28, 1996). **3.3 -- Amendment to Amended and Restated Certificate of Incorporation of the Company. **3.4 -- Budget Group, Inc. Series A Preferred Stock Certificate of Designations. 3.5 -- By-Laws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1, File No. 33-78274, dated April 28, 1994). **4.1 -- Specimen Stock Certificate. 4.2 -- Base Indenture between Team Fleet Financing Corporation, as Issuer, Team Rental Group, Inc., as Servicer and Team Interestholder, and Bankers Trust Company, as Trustee, relating to Rental Car Asset Backed Notes (incorporated by reference to Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 4.3 -- Supplemental Indenture relating to Rental Car Asset Backed Notes (incorporated by reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 4.4 -- Base Indenture among BRAC SOCAL Funding Corporation, as Issuer, BRAC-OPCO, Inc., as Servicer and Retained Interestholder, and Bankers Trust Company, as Trustee (incorporated by reference to Exhibit 4.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 4.5 -- Series 1995-1 Supplement to Base Indenture among BRAC SOCAL Funding Corporation, as Issuer, BRAC-OPCO, Inc., as Servicer and Retained Interestholder, and Bankers Trust Company, as Trustee (incorporated by reference to Exhibit 4.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 4.6 -- Supplement No. 1 to Indenture, dated as of October 20, 1995, among BRAC SOCAL Funding Corporation, BRAC-OPCO, Inc., Team Rental of Southern California, Inc. and Bankers Trust Company, as Trustee (incorporated by reference to Exhibit 4.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 4.8 -- Registration Rights Agreement, dated as of August 25, 1994, among the Company, Brian Britton, Jeffrey Congdon, Richard Hinkle, John Kennedy, Sanford Miller and Richard Sapia (incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 4.9 -- First Amendment to Registration Rights Agreement, dated as of November 1, 1994, among the Company, Brian Britton, Jeffrey Congdon, Richard Hinkle, John Kennedy, Sanford Miller and Richard Sapia (incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 4.10 -- Letter Agreement, dated as of November 1, 1994, between Andrew Klein and the Company acknowledging that Andrew Klein is a party to the Registration Rights Agreement, dated as of August 25, 1994, as amended (incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 4.11 -- Registration Rights Agreement, dated as of October 20, 1995, between Team Rental Group, Inc. and Budget Rent-A-Car of Southern California (incorporated by reference to Exhibit 4.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 4.12 -- Registration Rights Agreement, dated as of December 1, 1996, between Team Rental Group, Inc. and the holders of the Convertible Subordinated Notes (incorporated by reference to Exhibit 4.12 to the Company's Registration Statement on Form S-1, File No. 333-21691, dated February 12, 1997). 4.13 -- Warrant No. 1-1994, dated as of August 24, 1994, to purchase 175,000 shares of Class A Common Stock, par value $.01 per share, of the Company, issued to Budget Rent-A-Car Corporation (incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994).
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EXHIBIT NO. DESCRIPTION - ------- ----------- 4.14 -- NationsBank Warrant dated as of April 26, 1996 (incorporated by reference to Exhibit 4.14 to the Company's Registration Statement on Form S-1, File No. 333-21691, dated February 12, 1997). 4.15 -- Amended and Restated Base Indenture dated as of December 1, 1996 among Team Fleet Financing Corporation, as Issuer, Team Rental Group, Inc., as Servicer and Team Interestholder, and Bankers Trust Company, as Trustee (incorporated by reference to Exhibit 4.15 to the Company's Registration Statement on Form S-1, File No. 333-21691, dated February 12, 1997). 4.16 -- Series 1996-1 Supplement to the Amended and Restated Base Indenture dated as of December 1, 1996 among Team Fleet Financing Corporation, as Issuer, Team Rental Group, Inc., as Servicer and Team Interestholder, and Bankers Trust Company, as Trustee (incorporated by reference to Exhibit 4.16 to the Company's Registration Statement on Form S-1, File No. 333-21691, dated February 12, 1997). 4.17 -- Amended and Restated Master Motor Vehicle Lease Agreement dated as of December 1, 1996 among Team Fleet Financing Corporation, as Lessor, Team Rental Group, Inc., as Guarantor, and certain subsidiaries of Team Rental Group, Inc., as lessees (incorporated by reference to Exhibit 4.17 to the Company's Registration Statement on Form S-1, File No. 333-21691, dated February 12, 1997). 4.18 -- Motor Vehicle Lease Agreement Series 1996-1 dated as of December 1, 1996 among Team Fleet Financing Corporation, as Lessor, Team Rental Group, Inc., as Guarantor, and certain subsidiaries of Team Rental Group, Inc., as lessees (incorporated by reference to Exhibit 4.18 to the Company's Registration Statement on Form S-1, File No. 333-21691, dated February 12, 1997). *5.1 -- Opinion of King & Spalding. 10.1 -- Amended and Restated Sublicense Agreement, dated as of October 20, 1995, between Budget Rent-A-Car of Southern California and Team Rental of Southern California, Inc., along with Corporate Guaranty of Team Rental Group, dated as of October 20, 1995 (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.2 -- Lease Agreement dated September 1, 1993 between Miller and Hinkle, a Florida general partnership, and Capital City Leasing, Inc., as amended by First Amendment dated as of July 1, 1994 (Henrico County, Virginia) (incorporated by reference to Exhibit 10.41 to Amendment No. 3 to the Company's Registration Statement on Form S-1, File No. 33-78274, dated August 12, 1994). 10.3 -- Lease Agreement dated June 1, 1994 between Miller and Hinkle, a Florida general partnership, and Capital City Leasing, Inc. (Chesterfield County, Virginia) (incorporated by reference to Exhibit 10.25 to Amendment No. 1 to the Company's Registration Statement on Form S-1, File No. 333-4507, dated June 13, 1996). 10.4 -- Lease Agreement dated as of September 12, 1995 between MCK Real Estate Corporation, Team Car Sales of Richmond, Inc. and Team Rental Group, Inc. (incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.5 -- Agreement of Lease dated as of August 31, 1995 between MCK Real Estate Corporation and Team Rental of Philadelphia, Inc. (incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). +10.6 -- Supply Agreement among Ford Motor Company, Team Rental Group, Inc. and Budget Rent A Car Corporation (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1, File No. 333-21691, dated February 12, 1997). +10.7 -- Advertising Agreement between Ford Motor Company and Budget Rent A Car Corporation (incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1, File No. 333-21691, dated February 12, 1997).
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EXHIBIT NO. DESCRIPTION - ---------- ----------------------------------------------------------------------------------------------------- 10.8 -- Credit Agreement dated May 16, 1995 by and among Team Rental Group, Inc., Team Fleet Services Corporation and BankOne Indianapolis, N.A. (incorporated by reference to Exhibit 10.42 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.9 -- First Amendment to BankOne Credit Agreement dated November 1, 1995 (incorporated by reference to Exhibit 10.43 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.10 -- Second Amendment to BankOne Credit Agreement dated February 2, 1996 (incorporated by reference to Exhibit 10.44 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.11 -- Form of World Omni, Inc. Term Note (incorporated by reference to Exhibit 10.45 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.12 -- Promissory Note, dated October 20, 1995, from Team Rental of Southern California, Inc. to Budget Rent-A-Car of Southern California in the principal amount of approximately $4,775,000 (incorporated by reference to Exhibit 10.46 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.13 -- Promissory Note, dated February 27, 1996, from the Company to Katzin Investments L.C. in the aggregate principal amount of $10,000,000 (incorporated by reference to Exhibit 10.47 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.14 -- Term Note dated February 27, 1996 from NationsBank, N.A. (South) to the Company (incorporated by reference to Exhibit 10.48 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.15 -- Amendment No. 1 to Term Note dated April 2, 1996 from NationsBank, N.A. (South) to the Company (incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 1996). 10.16 -- Amendment No. 2 to Term Note dated May 27, 1996 from NationsBank, N.A. (South to the Company (incorporated by reference to Exhibit 10.47 to Amendment No. 1 to the Company's Registration Statement on Form S-1, File No. 333-4507, dated June 13, 1996). 10.17 -- Revolving Credit Agreement by and between VPSI, Inc. and NationsBank, N.A. (South) dated February 6, 1996 (incorporated by reference to exhibit 10.4 to the Company's Form 10-Q for the quarter ended March 31, 1996). 10.18 -- Amendment and Waiver No. 1 to the Revolving Credit Agreement and Security Agreement by and between VPSI, Inc. and NationsBank, N.A. (South) dated March 28, 1996 (incorporated by reference to Exhibit 10.5 to the Company's Form 10-Q for the quarter ended March 31, 1996). 10.19 -- Revolving Credit Agreement dated as of May 31, 1996 among Team Fleet Services Corporation, NationsBank, N.A. (South and certain Lenders (incorporated by reference to Exhibit 10.50 to Amendment No. 1 to the Company's Registration Statement on Form S-1, File No. 333-4507, dated June 13, 1996). 10.20 -- Subordinated Notes Purchase Agreement, dated as of December 1, 1996, by and between the Company and the investors listed therein (incorporated by reference to Exhibit 10.20 of the Company's Registration Statement on Form S-1, File No. 333-21691, dated February 12, 1997). 10.21 -- Subordination Agreement, dated as of October 20, 1995, among Budget Rent-A-Car of Southern California, BRAC-OPCO, Inc., Team Rental Group, Inc. and Team Rental of Southern California (incorporated by reference to Exhibit 10.49 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.22 -- Shareholders' Agreement, dated as of October 20, 1995, by and among Team Rental Group , Inc., the holders of the Company's Class B Common Stock, and Budget Rent-A-Car of Southern California (incorporated by reference to Exhibit 10.50 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995).
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EXHIBIT NO. DESCRIPTION - ------- ----------- 10.23 -- 1994 Incentive Stock Option Plan (incorporated by reference to Exhibit 10.27 to the Company's Registration Statement on Form S-1, File No. 33-78274, dated April 28, 1994). 10.24 -- Amendment No. 1 to 1994 Incentive Stock Option Plan (incorporated by reference to Exhibit 10.54 to Amendment No. 2 to the Company's Registration Statement on Form S-1, File No. 333-4507, dated June 28, 1996). 10.25 -- 1994 Director's Plan (incorporated by reference to Exhibit 10.28 to the Company's Registration Statement on Form S-1, File No. 33-78274, dated April 28, 1994). 10.26 -- Indemnification Agreement dated April 25, 1994 between the Company and Sanford Miller (incorporated by reference to Exhibit 10.29 to the Company's Registration Statement on Form S-1, File No. 33-78274, dated April 28, 1994). 10.27 -- Indemnification Agreement dated April 25, 1994 between the Company and John Kennedy (incorporated by reference to Exhibit 10.30 to the Company's Registration Statement on Form S-1, File No. 33-78274, dated April 28, 1994). 10.28 -- Indemnification Agreement dated April 25, 1994 between the Company and Jeffrey Congdon (incorporated by reference to Exhibit 10.31 to the Company's Registration Statement on Form S-1, File No. 33-78274, dated April 28, 1994). 10.29 -- Indemnification Agreement dated April 25, 1994 between the Company and Ronald Agronin (incorporated by reference to Exhibit 10.32 to the Company's Registration Statement on Form S-1, File No. 33-78274, dated April 28, 1994). 10.30 -- Indemnification Agreement dated April 25, 1994 between the Company and Stephen Weber (incorporated by reference to Exhibit 10.33 to the Company's Registration Statement on Form S-1, File No. 33-78274, dated April 28, 1994). 16.1 -- Letter re: Change in Certifying Accountant (incorporated by reference to Exhibit 16 to the Company's Current Report on Form 8-K dated November 26, 1996, as amended). **21.1 -- Subsidiaries of the Company. **23.1 -- Consent of Deloitte & Touche LLP. **23.2 -- Consent of Arthur Andersen LLP. **23.3 -- Consent of KPMG Peat Marwick LLP. 23.4 -- Consent of King & Spalding (included in Exhibit 5.1).
- --------------- * To be filed by amendment. ** Filed herewith. + The Company has been granted confidential treatment of portions of this Exhibit. Accordingly, portions thereof have been omitted and filed separately with the Commission. (b) Financial Statement Schedules of Budget Group, Inc. and Subsidiaries: All schedules are omitted because the information is not required or because the information is included in the combined financial statements or notes thereto. ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of II-7 151 appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: 1. For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a part of this registration statement as of the time it was declared effective. 2. For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-8 152 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Atlanta, State of Georgia on August 29, 1997. BUDGET GROUP, INC. By: /s/ SANFORD MILLER ------------------------------------ Sanford Miller Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities indicated on this 29th day of August, 1997.
SIGNATURE TITLE --------- ----- /s/ SANFORD MILLER Chairman of the Board and Chief Executive - ----------------------------------------------------- Officer (Principal Executive Officer) and Sanford Miller Director /s/ JOHN KENNEDY Vice Chairman and Director - ----------------------------------------------------- John Kennedy Vice Chairman, Chief Financial Officer - ----------------------------------------------------- (Principal Financial and Accounting Jeffrey Congdon Officer) and Director /s/ RONALD D. AGRONIN Director - ----------------------------------------------------- Ronald D. Agronin /s/ STEPHEN L. WEBER Director - ----------------------------------------------------- Stephen L. Weber /s/ JEFFREY MIRKIN Director - ----------------------------------------------------- Jeffrey Mirkin Director - ----------------------------------------------------- Alan Liker Director - ----------------------------------------------------- James F. Calvano /s/ MARTIN P. GREGOR Director - ----------------------------------------------------- Martin P. Gregor
II-9 EX-2.10 2 PREFERRED STOCKHOLDERS AGREEMENT 1 EXHIBIT 2.10 PREFERRED STOCKHOLDERS AGREEMENT DATED AS OF April 29, 1997 BETWEEN FORD MOTOR COMPANY AND TEAM RENTAL GROUP, INC. 2 TABLE OF CONTENTS Page ---- ARTICLE I DEFINITIONS.................................... 1 SECTION 1.1. Definitions.................................................. 1 ARTICLE II BUSINESS COMBINATIONS BETWEEN THE COMPANY AND Ford; VOTING OF SHARES OF CLASS A COMMON STOCK....................... 8 SECTION 2.1. Purchases of Equity Securities............................... 8 SECTION 2.2. Additional Limitations....................................... 9 ARTICLE III CONDUCT OF THE COMPANY BUSINESS....................................... 10 SECTION 3.1. Conduct of the Company Business............................... 10 SECTION 3.2. Consent Rights................................................ 12 SECTION 4.1. Transfer of Class A Common Stock.............................. 13 ARTICLE V REGISTRATION RIGHTS................................................... 14 SECTION 5.1. Restrictive Legend............................................ 14 SECTION 5.2. Notice of Proposed Transfer................................... 15 SECTION 5.3. Request for Registration...................................... 16 SECTION 5.4. Incidental Registration....................................... 22 SECTION 5.5. Registration on Form S-3...................................... 25 SECTION 5.6. Obligations of the Company.................................... 26 SECTION 5.7. Furnish Information........................................... 35 SECTION 5.8. Expenses of Registration...................................... 35 SECTION 5.9. Underwriting Requirements..................................... 36 SECTION 5.10. Rule 144 and Rule 144A Information............................ 36 SECTION 5.11. Indemnification............................................... 37 SECTION 5.12. Lockup........................................................ 44 SECTION 5.13. Transfer of Registration Rights............................... 45 SECTION 5.14. Selection of Counsel.......................................... 45 ARTICLE VI REPRESENTATIONS AND WARRANTIES........................................ 46 SECTION 6.1. Representations of the Company................................ 46 SECTION 6.2. Representations of Ford....................................... 48 -i- 3 Page ---- ARTICLE VII MISCELLANEOUS............................. 51 SECTION 7.1. Notices...................................................... 51 SECTION 7.2. Costs and Expenses........................................... 52 SECTION 7.3. Amendment and Modification................................... 52 SECTION 7.4. Waivers and Extensions....................................... 53 SECTION 7.5. Interpretation............................................... 53 SECTION 7.6. Entire Agreement; Third Party Beneficiaries; Assignment............................ 54 SECTION 7.7. Severability................................................. 54 SECTION 7.8. Governing Law................................................ 55 SECTION 7.9. Specific Performance......................................... 55 SECTION 7.10. Resolution of Disputes....................................... 55 SECTION 7.11. Consent to Jurisdiction; Waiver of Jury Trial........................................... 55 -ii- 4 INDEX OF DEFINED TERMS Term Page - ---- ---- Acquisition................................................................. 12 Affiliate................................................................... 1 Associate................................................................... 1 Board Action Matter......................................................... 13 Board of Directors.......................................................... 1 Business Combination........................................................ 1 Class A Common Stock........................................................ 2 Class B Common Stock........................................................ 2 Common Stock................................................................ 2 Common Stock Voting Power................................................... 3 Company .................................................................... 1 Control..................................................................... 53 Equity Security............................................................. 3 Exchange Act................................................................ 3 Existing Company Registration Rights........................................ 3 Fair Market Value........................................................... 3 Ford........................................................................ 1 Ford Affiliate.............................................................. 4 Ford's Interest............................................................. 4 Governmental Entity......................................................... 47 Holder...................................................................... 4 Indemnified party........................................................... 40 Indemnifying party.......................................................... 40 Initial Percentage.......................................................... 4 Initiating Holders.......................................................... 16 Line of Business............................................................ 4 Minimum Amount.............................................................. 5 NASD........................................................................ 35 New Security................................................................ 5 NYSE........................................................................ 3 Permitted Acquisition Transaction........................................... 5 Person...................................................................... 53 Preferred Stock............................................................. 6 Protection Period........................................................... 6 Register.................................................................... 6 Registered.................................................................. 6 Registrable Security........................................................ 6 Registration................................................................ 6 Response Notice............................................................. 12 SEC......................................................................... 7 Securities Act.............................................................. 7 Standstill Period .......................................................... 8 Subsidiary.................................................................. 8 Substantial Part............................................................ 8 To the Company's knowledge.................................................. 53 Transaction Notice.......................................................... 12 U.S. Corporation............................................................ 46 Unaffiliated Stockholders................................................... 8 -iii- 5 PREFERRED STOCKHOLDERS AGREEMENT PREFERRED STOCKHOLDERS AGREEMENT, dated as of April 29, 1997, between FORD MOTOR COMPANY, a Delaware corporation ("Ford"), and TEAM RENTAL GROUP, INC., a Delaware corporation (the "Company"). ARTICLE I DEFINITIONS SECTION 1.1. Definitions. Capitalized terms used herein which are not otherwise defined have the same meaning as in the Preferred Stock Purchase Agreement. As used in this Agreement, the following terms have the following meanings: (a) "Affiliate" has the same meaning as in Rule 12b-2 promulgated under the Exchange Act. (b) "Associate" has the same meaning as in Rule 12b-2 promulgated under the Exchange Act. (c) "Board of Directors" means the Board of Directors of the Company. (d) "Business Combination" means any one of the following transactions: (i) Any merger or consolidation of the Company or any Subsidiary of the Company with (A) Ford or (B) any other person (other than the Company) which is, or after such merger or consolidation would be, an Affiliate or Associate of Ford; (ii) Any sale, lease, exchange, mortgage, pledge, transfer or other disposition by the Company (in one transaction or a series of transactions) to or with 6 Ford or any Affiliate or Associate of Ford of all or a Substantial Part of the consolidated assets of the Company; or (iii) The adoption of any plan or proposal for the liquidation or dissolution of the Company proposed by or on behalf of Ford or any Affiliate or Associate of Ford; or (iv) Any reclassification of securities (including any reverse stock split), recapitalization of the Company, or any merger or consolidation of the Company with any Subsidiary thereof or any other transaction to which the Company is a party (whether or not with or into or otherwise involving Ford or any Affiliate or Associate of Ford) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Company or any Subsidiary thereof which is directly or indirectly owned by Ford or any Affiliate or Associate of Ford (e) "Class A Common Stock" means the Class A Common Stock, par value $.01 per share, of the Company. (f) "Class B Common Stock" means the Class B Common Stock, par value $.01 per share, of the Company. (g) "Common Stock" means the Class A Common Stock and/or the Class B Common Stock. -2- 7 (h) "Common Stock Voting Power" means the total number of votes which could be cast in respect of Common Stock at a properly called stockholders meeting. (i) "Equity Security" means any (i) Common Stock, (ii) securities of the Company convertible into or exchangeable for Common Stock, including the Preferred Stock, and (iii) options, rights, warrants and similar securities issued by the Company to acquire Common Stock. (j) "Exchange Act" means the Securities Exchange Act of 1934, and the rules and regulations promulgated thereunder, as amended. (k) "Existing Company Registration Rights" means the registration rights described on Schedule A. (l) "Fair Market Value" means: (i) in the case of a security, the average of the closing sale prices during the thirty day period immediately preceding the date in question of such security on the Composite Tape for New York Stock Exchange ("NYSE") listed stocks or, if such security is not quoted on the Composite Tape, on the NYSE or, if such security is not listed on the NYSE, on the principal United States securities exchange registered under the Exchange Act on which such security is listed or, if such Security is not listed on any such exchange, the average of the closing sale prices or the closing bid quotations of such security during the thirty day period preceding the date of determination on The Nasdaq National Market or any system then in use or, if no such quotations are available, the fair market value on -3- 8 the date in question of such security as determined by the Board of Directors in good faith; and (ii) in the case of property other than cash or a security, the fair market value of such property on the date in question as determined by the Board of Directors in good faith. (m) "Ford Affiliate" means any person controlled by Ford, controlling, or under common control with, Ford, and any person acting in concert with Ford. Notwithstanding the foregoing, however, the Company shall not be deemed to be an Affiliate of Ford (n) "Ford's Interest" means the percentage of Common Stock Voting Power represented by the shares of Class A Common Stock issuable upon conversion of the Preferred Stock controlled directly or indirectly by Ford and the Ford Affiliates. (o) "Holder" shall mean any holder of Registrable Securities. (p) "Initial Percentage" means the percentage of Common Stock Voting Power represented immediately after the Closing by the shares of Class A Common Stock issuable upon conversion of the Preferred Stock that Ford and the Ford Affiliates acquire from the Company on the Closing Date pursuant to the Preferred Stock Purchase Agreement. (q) "Line of Business" means, with respect to the Company, the business of owning and operating car and truck rental locations, as owner or licensee, parking locations, van pools, used car sales and purchase locations, and any -4- 9 other activities reasonably incidental to the foregoing activities, including owning, operating and licensing computer reservation systems relating thereto. (r) "Minimum Amount" means Registrable Securities representing at least 33% of the Registrable Securities comprising the Initial Percentage; provided that, if, at any time, fewer than such amount of Registrable Securities are held by all Holders, then the Minimum Amount shall be the Registrable Securities held by all such Holders. (s) "New Security" means any Equity Security issued by the Company for cash or cash equivalents; provided that "New Security" shall not include (i) securities issuable upon conversion of any convertible Equity Security, (ii) securities issuable upon exercise of any option, warrant or other similar Equity Security, (iii) securities issuable at any time to employees, directors or consultants of the Company, or any Subsidiary of the Company, pursuant to any employee stock offering, plan, or arrangement approved by the Board of Directors (or an appropriate committee thereof), and (iv) securities issuable in connection with any stock split, stock dividend or recapitalization of the Company. (t) A "Permitted Acquisition Transaction" means either (i) a tender or exchange offer for outstanding shares of Common Stock, (ii) a Business Combination that is conditioned upon approval by Unaffiliated Stockholders holding at least a majority of the shares of Common Stock -5- 10 held by Unaffiliated Stockholders, or (iii) a merger following the consummation of a tender or exchange offer described in clause (i) above pursuant to which Unaffiliated Stockholders would receive consideration identical to that which they would have received had they participated in such tender or exchange offer. (u) "Preferred Stock" means the Series A Preferred Stock of the Company. (v) "Protection Period" means the period commencing on the date hereof and ending on the earliest of (i) nine months following the date hereof, (ii) the date on which Ford's Interest is less than 50% of the Initial Percentage and (iii) if, on the date eight months from the date hereof (the "Eight Month Anniversary"), there shall not be pending a request for registration pursuant to Section 5.3 (including a request in connection with which a registration statement has been declared effective but the Registrable Securities thereunder shall not all have been offered or fully distributed), then, on the Eight Month Anniversary. (w) "Register," "registered" and "registration" shall refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act and the declaration or ordering of effectiveness of such registration statement or document. (x) "Registrable Security" shall mean (i) any Equity Security held by Ford that was issued to Ford by the Company pursuant to, or otherwise acquired by Ford in accordance -6- 11 with, the terms of this Agreement or the Preferred Stock Purchase Agreement, (ii) any Equity Security issued as (or issued upon the conversion or exercise of any warrant, right, option or other convertible security which is issued as) a dividend or other distribution with respect to, or in exchange for, or in replacement of, a Registrable Security, and (iii) any Equity Security issued by way of a stock split of a Registrable Security. For purposes of this Agreement, any Registrable Securities shall cease to be Registrable Securities when (w) a registration statement covering such Registrable Securities has been declared effective and such Registrable Securities have been disposed of pursuant to such effective registration statement, (x) such Registrable Securities shall have been disposed of pursuant to Rule 144 (or any similar provision then in effect) under the Securities Act, (y) such Registrable Securities are sold by a person in a transaction in which the rights under the provisions of this Agreement are not assigned, or (z) such Registrable Securities shall cease to be outstanding. In no event shall the Company be required to register the Preferred Stock under the Exchange Act. (y) "SEC" means the Securities and Exchange Commission. (z) "Securities Act" means the Securities Act of 1933, and the rules and regulations promulgated thereunder, as amended. -7- 12 (aa) "Standstill Period" means a period of time commencing at the Closing Date and terminating on the first anniversary of the Closing Date. (ab) "Subsidiary" has the same meaning as in Rule 12b-2 promulgated under the Exchange Act. (ac) A "Substantial Part" of the Company means more than 10% of the Fair Market Value of the total assets of the Company and its Subsidiaries as of the end of its most recent fiscal quarter ending prior to the time the determination is made. (ad) "Unaffiliated Stockholders" means stockholders of the Company other than Ford or Ford Affiliates. ARTICLE II BUSINESS COMBINATIONS BETWEEN THE COMPANY AND Ford; VOTING OF SHARES OF CLASS A COMMON STOCK SECTION 2.1. Purchases of Equity Securities. (a) During the Standstill Period, Ford and the Ford Affiliates shall not (i) directly or indirectly, purchase or otherwise acquire, or propose or offer to purchase or otherwise acquire, any Equity Securities whether by tender offer, market purchase, privately negotiated purchase, Business Combination or otherwise, if, immediately after such purchase or acquisition, Ford's Interest would equal or exceed the Initial Percentage, or (ii) directly or indirectly propose or offer to enter into a Business Combination. (b) The prohibitions contained in Section 2.1(a) shall not apply (i) during any period in which Ford's Interest is less than 10%, (ii) to any Permitted Acquisition Transaction following -8- 13 (A) the commencement by any third party of (1) a bona fide tender or exchange offer to purchase in excess of 20% of the Common Stock Voting Power that the Board of Directors either recommends acceptance of, expresses no opinion and remains neutral toward or is unable to take a position with respect to, (2) a bona fide proposal to acquire all or substantially all of the assets of the Company that the Board of Directors is actively entertaining and the consummation of which would require approval by the Stockholders of the Company pursuant to Section 271 of the Delaware General Corporation Law or (3) a bona fide proposal to enter into any acquisition or other business combination transaction with the Company that the Board of Directors is actively entertaining, in the case of each of clauses (1) through (3), which shall not have been approved in advance by the Company or the Board of Directors, or (B) the Company entering into (or announcing its intention to do so) a definitive agreement, or an agreement contemplating a definitive agreement, for any of the transactions described in clauses (1) through (3) above, or (iii) to any issuance and sale of New Securities by the Company to Ford or an Ford Affiliate. SECTION 2.2. Additional Limitations. During the Standstill Period, Ford and the Ford Affiliates shall not: (a) other than in connection with an election contest to which Rule 14a-11 under the Exchange Act applies, and which is initiated by a third party or which is otherwise approved by the Board of Directors, make, or in any way participate, directly or indirectly, in any "solicitation" -9- 14 of "proxies" to vote (as such terms are used in the proxy rules of the SEC) or seek to advise, encourage or influence any person or entity with respect to the voting of any shares of capital stock of the Company, initiate, propose or otherwise solicit stockholders of the Company for the approval of one or more stockholder proposals or induce or attempt to induce any other individual, firm, corporation, partnership or other entity to initiate any stockholder proposal; (b) deposit any Equity Securities into a voting trust or subject any Equity Securities to any arrangement or agreement with respect to the voting of such securities or form, join or in any way participate in a "group" (within the meaning of Section 13(d)(3) of the Exchange Act) with respect to any Equity Securities; provided that the foregoing shall not prohibit any such action to effectuate the provisions of Section 2.3; or (c) except in connection with a transaction permitted by Section 2.1(b) hereof, make any public announcement with respect to a transaction of the type described in Section 2.1(a) hereof. -10- 15 ARTICLE III CONDUCT OF THE COMPANY BUSINESS SECTION 3.1. Conduct of the Company Business. Subject to Section 3.2, the Company agrees, during the Protection Period, that: (a) the Company shall not, directly or indirectly, issue or sell Equity Securities, except (i) in connection with acquisitions of Budget Licensees (as defined in the Supply Agreement dated April 29, 1997 among the Company, Budget Rent A Car Corporation and Ford), (ii) in transactions not required to be registered pursuant to the Securities Act, (iii) in transactions involving the issuance of Equity Securities (other than Common Stock), (iv) issuances to employees, officers or directors of the Company or its subsidiaries pursuant to compensation arrangements or benefit plans existing on the date hereof and (v) issuances pursuant to any other option, right or warrant of the Company outstanding on the date hereof; provided that, in the case of any transaction permitted under clauses (i), (ii) and (iii) above, except as required pursuant to Existing Company Registration Rights, during the Protection Period, no holder of Common Stock issued in connection with, or pursuant to conversion, exchange or exercise of Equity Securities issued in connection with, such transaction (or any transferee thereof) shall have the right to request the Company to register such Common Stock under the Securities Act; -11- 16 (b) the Company shall not acquire control of any person (whether by merger, consolidation, purchase of stock or assets, assumption of liabilities, or otherwise), or any assets or business of any person (an "Acquisition") for cash consideration in excess of $20 million, except that the foregoing shall not prohibit any Acquisition of a Budget Licensee; and (c) the Company shall not make any Acquisition in a transaction involving the issuance of Equity Securities, other than Acquisitions within the Company's Line of Business. SECTION 3.2. Consent Rights. If the Company desires to engage in a transaction prohibited by Section 3.1, then the Company shall request Ford's consent to such transaction by giving notice to Ford in writing (which notice shall provide reasonable detail concerning the proposed transaction so that Ford can reasonably evaluate such proposed transaction) (a "Transaction Notice"). Ford shall have seven days from the date of its receipt of a Transaction Notice to evaluate the proposed transaction. If Ford shall not have notified the Company in writing (any such notice, a "Response Notice") on or prior to the seventh day following the date of its receipt of the Transaction Notice that Ford (i) does not consent to the proposed transaction or (ii) requires additional time to evaluate the proposed transaction, then Ford shall be deemed to have consented to the proposed transaction. If Ford delivers a Response Notice and it contains the response indicated in clause (ii) above, then such -12- 17 Response Notice shall also indicate in good faith whether consent to the proposed action would require approval by Ford's Board of Directors or any committee thereof (a "Board Action Matter"). If a Response Notice indicates that the proposed transaction is a Board Action Matter, then Ford shall have 30 days from the date of the Response Notice to notify the Company in writing that it does not consent to the proposed transaction. If a Response Notice does not indicate that the proposed transaction is a Board Approval Matter, then Ford shall have 7 days from the date of the Response Notice to notify the Company in writing that it does not consent to the proposed transaction. If no such notice is delivered to the Company within such 30-day or 7-day period, as the case may be, then Ford shall be deemed to have consented to the proposed transaction. Notwithstanding anything to the contrary in this Section 3.2, Ford shall use reasonable efforts to respond to any Transaction Notice as promptly as practicable after its receipt thereof and shall act reasonably in withholding its consent, provided that it shall have received information with regard to a proposed transaction reasonable for it to be able to properly evaluate it. ARTICLE IV TRANSFER OF COMMON STOCK SECTION 4.1. Transfer of Class A Common Stock. (a) Ford will not, and will not permit any Ford Affiliate to, directly or indirectly sell, transfer or otherwise dispose of any Equity Securities, except (i) pursuant to a registered underwritten public offering in accordance with Article V, -13- 18 (ii) pursuant to an applicable exemption from the registration requirements of the Securities Act, (iii) to the Company or a Subsidiary thereof, or (iv) to a Ford Affiliate (or any Associate of Ford or a Ford Affiliate). (b) Proposed transfers of Equity Securities that are not in compliance with this Article IV shall be of no force or effect and the Company shall not be required to file a registration statement under the Securities Act in connection with such proposed transfers. ARTICLE V REGISTRATION RIGHTS SECTION 5.1. Restrictive Legend. Each certificate representing Registrable Securities shall, except as otherwise provided in this Section 5.1 or in Section 5.2, be stamped or otherwise imprinted with a legend substantially in the following form: "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS IT HAS BEEN REGISTERED UNDER THAT ACT OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE." A certificate shall not bear such legend if in the opinion of counsel satisfactory to the Company (it being agreed that Simpson Thacher & Bartlett or the Assistant General Counsel of Ford shall be satisfactory) the securities being sold thereby may be publicly sold without registration under the Securities Act. -14- 19 SECTION 5.2. Notice of Proposed Transfer. Prior to any proposed transfer of any Registrable Securities (other than under the circumstances described in Section 5.3, 5.4 or 5.5), the Holder thereof shall give written notice to the Company of its intention to effect such transfer. Each such notice shall describe the manner of the proposed transfer and, if requested by the Company, shall be accompanied by an opinion of counsel satisfactory to the Company (it being agreed that Simpson Thacher & Bartlett or the Assistant General Counsel of Ford shall be satisfactory) to the effect that the proposed transfer does not violate the terms of this Agreement and that the proposed transfer may be effected without registration under the Securities Act, whereupon the Holder of such security shall be entitled to transfer such security in accordance with the terms of its notice; provided, however, that no such opinion of counsel shall be required for a transfer to an Ford Affiliate. Each certificate for Registrable Securities transferred as above provided shall bear the legend set forth in Section 5.1, except that such certificate shall not bear such legend if (i) such transfer is in accordance with the provisions of Rule 144 (or any other rule permitting public sale without registration under the Securities Act) or (ii) the opinion of counsel referred to above is to the further effect that the transferee and any subsequent transferee (other than an Affiliate of the Company) would be entitled to transfer such securities in a public sale without registration under the Securities Act. The restrictions provided for in this Section 5.2 shall not apply to securities that are -15- 20 not required to bear the legend prescribed by Section 5.1 in accordance with the provisions of that Section. SECTION 5.3. Request for Registration. (a) At any time, and from time to time, on and after the date hereof, any of the Holders (the "Initiating Holders") may request in a written notice that the Company file a registration statement under the Securities Act (or a similar document pursuant to any other statute then in effect corresponding to the Securities Act) covering the registration of at least the Minimum Amount of Registrable Securities in the manner specified in such notice; provided that, at the time of such request, such Holders shall have a good faith intention to offer and sell pursuant to such registration statement at least the Minimum Amount of Registrable Securities. Following receipt of any notice under this Section 5.3 the Company shall (x) within ten days notify all other Holders of such request in writing and (y) thereupon will, as expeditiously as possible, use its best efforts to cause to be filed for registration under the Securities Act all Registrable Securities that the Initiating Holders and such other Holders have, within ten days after the Company has given such notice, requested to be registered in accordance with the manner of disposition specified in such notice by the Initiating Holders; provided, however, that, if (i) (A) the Company is in possession of material non-public information, (B) the Board of Directors of the Company determines in good faith that disclosure of such material non-public information would not be in the best interests of the Company and its stockholders and (C) the Board -16- 21 of Directors of the Company or the Chief Executive Officer or the Chief Financial Officer of the Company determines (based on advice of counsel) that such prohibition is necessary in order to avoid a requirement to disclose such material non-public information, or (ii) the Company has made a public announcement relating to an acquisition or business combination transaction including the Company and/or one or more of its subsidiaries (A) that is material to the Company and its subsidiaries taken as a whole (and for such purpose no transaction shall be deemed material unless, on a pro forma basis and after giving effect thereto, consolidated assets or consolidated revenues of the Company and its subsidiaries as of the end of or for the most recently completed fiscal year would be increased by at least 10%) and (B) the Board of Directors of the Company or the Chief Executive Officer or the Chief Financial Officer of the Company determines in good faith that offers and sales of Registrable Securities prior to the consummation of such transaction (or such earlier date as the Board of Directors or the Chief Executive Officer or the Chief Financial Officer of the Company shall determine) is not in the best interests of the Company and its stockholders, then the Company shall not be required to file a registration statement until the earlier of (x) the second day after the conditions in clause (i) or (ii) have ceased to exist and (y) the 30th day following receipt by the Company of the notice from the Initiating Holders under this Section 5.3; provided, further, that, (I) notwithstanding anything to the contrary contained herein, the Company shall not be required to -17- 22 cause any such registration statement to be declared effective prior to the date which is three months from the date hereof and (II) the Company shall not be required to file more than four registration statements in response to requests pursuant to this Section 5.3. Notwithstanding clause (II) of the second proviso to the immediately preceding sentence, after the third month from the date hereof, if (1) a Transaction Notice is received by Ford from the Company pursuant to Section 3.2, (2) Ford rejects the proposal included in such Transaction Notice and (3) within three months of the date of receipt of the Transaction Notice (such three-month period, the "Demand Period"), the Holders do not make a registration request under Section 5.3 (provided that such a registration request shall be deemed to have been made by the Holders during the Demand Period if such a registration request was already pending at the time the Company's request was made, including a registration request in which a registration statement has been declared effective but the Registrable Securities thereunder shall not all have been offered or fully distributed), then the number of registration requests that may be made by the Holders pursuant to Section 5.3 as to which the Company will be required to pay expenses pursuant to Section 5.8 shall be reduced by one; provided that at least one right to make a registration request under Section 5.3 shall always be paid by the Company; and provided, further, that any further Transaction Notice received from the Company during any Demand Period shall not lead to a reduction of the number of registration requests under Section 5.3 that may be made by the Holders and shall not -18- 23 cause another Demand Period to commence whether or not Ford rejects the proposal included by the Company in such Transaction Notice. (b) If the Initiating Holders intend to have the Registrable Securities distributed by means of an underwritten offering, the Company shall include such information in the written notice referred to in clause (x) of Section 5.3(a) above. In such event, the right of any Holder to include its Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwritten offering and the inclusion of such Holder's Registrable Securities in the underwritten offering to the extent provided below. All Holders proposing to distribute Registrable Securities through such underwritten offering shall enter into an underwriting agreement in customary form with the underwriter or underwriters. The lead managing underwriter shall be selected by a majority in interest of the Initiating Holders and any co-managing underwriters shall be selected jointly by a majority in interest of the Initiating Holders and the Company, each acting reasonably. No Holder shall be required to make any representations or warranties to or agreements with the Company or the underwriters other than representations, warranties or agreements regarding such Holder, the statements contained in the registration statement that were supplied by such Holder in writing expressly for use therein, the Registrable Securities of such Holder and such Holder's intended method of distribution and any other representations required by law or reasonably required by the underwriter. If any Holder of -19- 24 Registrable Securities disapproves of the terms of the underwriting, such Holder may elect to withdraw all its Registrable Securities by written notice to the Company, the managing underwriter and the Initiating Holders. The securities so withdrawn also shall be withdrawn from registration. (c) Notwithstanding any provision of this Agreement to the contrary, the Company shall not be required to effect a registration pursuant to this Section 5.3 during the period starting with the date of filing by the Company of, and ending on a date 90 days following the effective date of, (i) any other registration statement requested under this Section 5.3 or Section 5.5 or (ii) a registration statement pertaining to a public offering of securities for the account of the Company or on behalf of the selling stockholders under any other registration rights agreement, in each case which the Holders have been entitled to join pursuant to Section 5.4 and, in the case of clause (ii) only, pursuant to which the Holders have had the opportunity to sell all Registrable Securities which the Holders desired to sell thereunder; provided that (x) the Company shall actively employ in good faith all reasonable efforts to cause any such registration statement referred to in clause (i) or (ii) above to become effective as soon as possible and (y) with respect to any such registration statement involving an underwritten offering, the 90 day period referred to above may be reduced or waived in the discretion of the managing underwriter for such offering. -20- 25 (d) A registration requested pursuant to this Section 5.3 shall not be deemed to have been effected pursuant to this Section 5.3 for purposes of Section 5.8 unless (i) it has been declared effective by the SEC, (ii) it has remained effective for the period set forth in Section 5.6(a), and (iii) the offering of Registrable Securities pursuant to such registration is not subject to any stop order, injunction or other order or requirement of the SEC. (e) Subject to the following sentence, if a requested registration pursuant to this Section 5.3 involves an underwritten offering and the lead managing underwriter advises the Company in writing that, in its opinion, the number of securities requested to be included in such registration (including securities of the Company which are not Registrable Securities) exceeds the number that can reasonably be sold in such offering, the Company will first include in such registration all the Registrable Securities requested to be included in such registration by the Initiating Holders. In the event that the number of Registrable Securities requested to be included in such registration exceeds the number which, in the opinion of such lead managing underwriter, may reasonably be sold, the number of such Registrable Securities to be included in such registration shall not exceed the number of Registrable Securities that the lead managing underwriter advises can reasonably be sold and shall be allocated pro rata among all Initiating Holders on the basis of the relative number of shares of Registrable Securities then held by each such Holder (provided -21- 26 that any shares hereby allocated to any such Holder that exceed such Holder's request shall be reallocated among the remaining requesting Holders in like manner). In the event that the number of Registrable Securities requested to be included in such registration is less than the number which, in the opinion of the lead managing underwriter, may reasonably be sold, the Company may include in such registration any securities the Company wishes to sell up to the number of securities that, in the opinion of the lead managing underwriter, may reasonably be sold. During the Protection Period, the Company will not, except as required pursuant to Existing Company Registration Rights, include in any requested registration pursuant to this Section 5.3 any securities which are not Registrable Securities (other than securities to be issued and sold by the Company) without the prior written consent of the holders of at least a majority of the Registrable Securities included in such registration. SECTION 5.4. Incidental Registration. Subject to Section 5.9, if at any time the Company determines that it shall file a registration statement under the Securities Act (other than a registration statement on a Form S-4 or S-8 or any successor or similar forms) on any form that also would permit the registration of the Registrable Securities and such filing is to be on its behalf and/or on behalf of selling holders of its securities for the general registration of Common Stock to be sold for cash, the Company shall each such time promptly give each Holder written notice of such determination setting forth the date on which the Company proposes to file such registration -22- 27 statement, which date shall be no earlier than thirty days from the date of such notice, and advising each Holder of its right to have Registrable Securities included in such registration. Upon the written request of any Holder received by the Company no later than fifteen days after the date of the Company's notice, the Company shall use its best efforts to cause to be included for registration under the Securities Act all of the Registrable Securities that each such Holder has so requested to be registered; provided that if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to proceed with the proposed registration of the securities to be sold by it, the Company may, at its election, give written notice of such determination to each Holder of Registrable Securities and, thereupon, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith), without prejudice, however, to the rights of any Holder to request such registration to be effected as a registration under Section 5.3. If, in the written opinion of the lead managing underwriter (or, in the case of a non-underwritten offering, in the written opinion of the Company), the total number of such securities to be so registered, including such Registrable Securities, will exceed the maximum number of the Company's securities that can reasonably be sold, then the Company shall -23- 28 include in such registration (i) first, all the securities the Company proposes to sell for its own account or is required to register on behalf of any third party exercising rights similar to those granted in Section 5.3(a) up to such maximum number, and (ii) second, to the extent that the number of securities which the Company proposes to sell for its own account or is required to register on behalf of any third party exercising rights similar to those granted in Section 5.3(a) is less than the number of equity securities which the Company has been advised can reasonably be sold, all Registrable Securities requested to be included in such registration by the Holders pursuant to this Section 5.4 and all shares of Common Stock requested to be included by third parties exercising the rights similar to those granted in this Section 5.4; provided that if the number of Registrable Securities and other shares of Common Stock requested to be included in such registration by the Holders pursuant to this Section 5.4 and third parties exercising rights similar to those granted in this Section 5.4, together with the number of securities to be included in such registration pursuant to clause (i) of this Section 5.4, exceeds the number which the Company has been advised can reasonably be sold in such offering, the number of such Registerable Securities requested to be included in such registration by the Holders pursuant to this Section 5.4 shall, except to the extent required under the Existing Company Registration Rights, be limited to such extent and shall be allocated pro rata among all such requesting Holders and third parties exercising rights similar to those granted in this -24- 29 Section 5.4 on the basis of the relative number of Registrable Securities each such Holder has requested to be included in such registration and the number of shares of Equity Securities requested to be included in such registration by such third parties. SECTION 5.5. Registration on Form S-3. If at any time (a) any Holder requests in writing that the Company file a registration statement on Form S-3 or any successor thereto for a public offering of all or any portion of the Registrable Securities held by such requesting Holder and (b) the Company is a registrant entitled to use Form S-3 or any successor thereto, then the Company shall use its best efforts to cause to be filed for registration under the Securities Act on Form S-3 or any successor thereto, for public sale in accordance with the method of disposition specified in such request, including, without limitation, pursuant to Rule 415 under the Securities Act, the Registrable Securities specified in such request. Whenever the Company is required by this Section 5.5 to use its best efforts to cause to be filed for registration Registrable Securities, each of the limitations, procedures and requirements of Section 5.3(b), (c), (e) and (f) (including but not limited to the requirement that the Company notify all Holders from whom a request has not been received and provide them with the opportunity to participate in the offering) shall apply to such registration. Any underwritten offering of Registrable Securities pursuant to a registration statement filed under this Section 5.5 which permits offers and sales pursuant to Rule 415 -25- 30 under the Securities Act shall, in each case, be for the Minimum Amount of Registrable Securities. Any registration requested pursuant to this Section 5.5 shall be considered a request pursuant to Section 5.3. SECTION 5.6. Obligations of the Company. Whenever required under Section 5.3 or Section 5.5 to use its best efforts to effect the registration of any Registrable Securities, the Company shall, as expeditiously as possible: (a) prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its reasonable best efforts to cause such registration statement to become and remain effective for the period of the distribution contemplated thereby determined as provided hereafter; (b) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement, and furnish to the Holders of the Registrable Securities copies of any such amendments and supplements prior to their being used or filed with the SEC; (c) furnish to the Holders such numbers of copies of the registration statement and the prospectus included therein (including each preliminary prospectus and any amendments or supplements thereto in conformity with the -26- 31 requirements of the Securities Act) and such other documents and information as they may reasonably request and make available for inspection by the parties referred to in Section 5.6(d) below such financial and other information and books and records of the Company, and cause the officers, directors, employees, counsel and independent certified public accountants of the Company to respond to such inquiries, as shall be reasonably necessary, in the judgment of the respective counsel referred to in such Section, to conduct a reasonable investigation within the meaning of Section 11 of the Securities Act; (d) provide (i) the Holders of the Registrable Securities to be included in such registration statement, (ii) the underwriters (which term, for purposes of this Agreement, shall include a person deemed to be an underwriter within the meaning of Section 2(11) of the Securities Act), if any, thereof, (iii) the sales or placement agent, if any, therefor, (iv) counsel for such underwriters or agent, and (v) not more than one counsel for all the Holders of such Registrable Securities, the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the SEC, and each amendment or supplement thereto; (e) use its best efforts to file for registration or qualification the Registrable Securities covered by such registration statement under such other securities or blue -27- 32 sky laws of such jurisdictions within the United States and Puerto Rico as shall be reasonably appropriate for the distribution of the Registrable Securities covered by the registration statement; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to register or qualify to do business in, or to file a general consent to service of process in any jurisdiction wherein it would not but for the requirements of this paragraph (e) be obligated to do so, or to take any action that would subject it to taxation in an amount greater than it would be subject but for the requirements of this paragraph; and provided further that the Company shall not be required to qualify such Registrable Securities in any jurisdiction in which the securities regulatory authority requires that any Holder submit its Registrable Securities to the terms, provisions and restrictions of any escrow, lockup or similar agreement(s) for consent to sell Registrable Securities in such jurisdiction unless such Holder agrees to do so; (f) promptly notify the selling Holders of Registrable Securities, the sales or placement agent, if any, therefor and the managing underwriter or underwriters, if any, thereof and confirm such advice in writing, (i) when such registration statement or the prospectus included therein or any prospectus amendment or supplement or post-effective amendment has been filed, and, with respect to such registration statement or any post-effective amendment, when -28- 33 the same has become effective, (ii) of any comments by the SEC or by any Blue Sky or securities commissioner or regulator of any state with respect thereto or any request by the SEC for amendments or supplements to such registration statement or prospectus or for additional information, (iii) of the issuance by the SEC of any stop order suspending the effectiveness of such registration statement or the initiation or threatening of any proceedings for that purpose, (iv) if at any time the representations and warranties of the Company contained in any underwriting agreement or other customary agreement cease to be true and correct in all material respects or (v) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (g) use its reasonable best efforts to obtain the withdrawal of any order suspending the effectiveness of such registration statement or any post-effective amendment thereto at the earliest practicable date; (h) promptly notify each Holder for whom such Registrable Securities are covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included or incorporated by reference in such registration -29- 34 statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make, in light of the circumstances under which they were made, the statements therein not misleading, and at the request of any such Holder promptly prepare and furnish to such Holder a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make, in light of the circumstances under which they were made, the statements therein not misleading; (i) furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to Section 5.3 or Section 5.5, if the method of distribution is by means of an underwriting, on the date that the Registrable Securities are delivered to the underwriters for sale pursuant to such registration, or if such Registrable Securities are not being sold through underwriters, on the date that the registration statement with respect to such Registrable Securities becomes effective, (1) a signed opinion, dated such date, of the independent legal counsel representing the Company for the purpose of such registration, addressed to the underwriters, if any, and if such Registrable Securities are not being sold through -30- 35 underwriters, then to the Holders making such request, as to such matters as such underwriters or the Holders holding a majority of the Registrable Securities included in such registration, as the case may be, may reasonably request and as would be customary in such a transaction; and (2) letters dated such date and the date the offering is priced from the independent certified public accountants of the Company, addressed to the underwriters, if any, and if such Registrable Securities are not being sold through underwriters, then to the Holders making such request and, if such accountants refuse to deliver such letters to such Holders, then to the Company (i) stating that they are independent certified public accountants within the meaning of the Securities Act and that, in the opinion of such accountants, the financial statements and other financial data of the Company included or incorporated by reference in the registration statement or the prospectus, or any amendment or supplement thereto, comply as to form in all material respects with the applicable accounting requirements of the Securities Act and (ii) covering such other financial matters (including information as to the period ending not more than five (5) business days prior to the date of such letters) with respect to the registration in respect of which such letter is being given as such underwriters or the Holders holding a majority of the Registrable Securities included in such registration, as the -31- 36 case may be, may reasonably request and as would be customary in such a transaction; (j) enter into customary agreements (including if the method of distribution is by means of an underwriting, an underwriting agreement in customary form, including, without limitation, customary indemnification provisions substantially consistent with Section 5.11 and, to the extent required by the underwriters, customary lockup provisions substantially consistent with Section 5.12) and take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registrable Securities to be so included in the registration statement; (k) use its reasonable best efforts to obtain the consent or approval of each governmental agency or authority, whether federal, state or local, which may be required to effect registration or the offering or sale in connection therewith or to enable the selling Holder or Holders to offer, or to consummate the disposition of, their Registrable Securities; (l) cooperate with the Holders of the Registrable Securities and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold, which certificates shall conform to the requirements of The Nasdaq National Market or any securities exchange on which the Registrable Securities are then listed or admitted to trading and shall not bear any restrictive legends; and, in -32- 37 the case of an underwritten offering, enable such Registrable Securities to be in such denominations and registered in such names as the managing underwriters may request at least two business days prior to any sale of the Registrable Securities; (m) otherwise comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, but not later than eighteen months after the effective date of the registration statement, an earnings statement covering the period of at least twelve months beginning with the first full month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act; (n) use its reasonable best efforts to list the Registrable Securities covered by such registration statement with any securities exchange or quotation system on which the Class A Common Stock of the Company is then listed or quoted; and (o) use its best efforts to make available the executive officers of the Company to participate with the Holders of Registrable Securities and any underwriters in any "road shows" or other selling efforts that may be reasonably requested by the Holders in connection with the methods of distribution for the Registrable Securities. For purposes of Sections 5.6(a) and 5.6(b), and with respect to (i) registration required pursuant to Section 5.3, (A) the period -33- 38 of distribution of Registrable Securities in a firm commitment underwritten public offering shall be deemed to extend until each underwriter has completed the distribution of all securities purchased by it and (B) the period of distribution of Registrable Securities in any other registration shall be deemed to extend until the earlier of the sale of all Registrable Securities covered thereby and 180 days (or such shorter period as may be required in the underwriting agreement) after the effective date thereof and (ii) registrations required pursuant to Section 5.5, the period of distribution of Registrable Securities in any registration (firm commitment underwritten or otherwise) shall be deemed to extend until the earlier of the sale of all Registrable Securities covered thereby and two years after the effective date thereof. Each Holder of Registrable Securities agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in clause (h) of this Section 5.6, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until such Holder's receipt of the copies of the supplemented or amended prospectus contemplated by clause (h) of this Section 5.6, and, if so directed by the Company, such Holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Holder's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice; provided, however, that any period of time during which a Holder -34- 39 must discontinue disposition of Registrable Securities shall not be included in the determination of a period of distribution for purposes of Section 5.6(a) and Section 5.6(b). SECTION 5.7. Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Agreement that the Holders shall furnish to the Company such information regarding themselves, the Registrable Securities held by them, and the intended method of disposition of such securities as the Company shall reasonably request and as shall be required in connection with the action to be taken by the Company. SECTION 5.8. Expenses of Registration. All expenses incurred in connection with (i) each registration or attempted registration pursuant to Section 5.4, (ii) the first three registrations effected pursuant to Section 5.3 or 5.5 and (iii) any attempted registration (or partial registration deemed not to have been effected pursuant to Section 5.3 or 5.5 by operation of Sections 5.3(d) or (e)) occurring prior to the third registration effected pursuant to Section 5.3 or 5.5 of this Agreement, excluding underwriters' discounts and commission, but including without limitation all registration, filing and qualification fees, word processing, duplicating, printers' and accounting fees (including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance), fees of the National Association of Securities Dealers, Inc. (the "NASD") or listing fees, all fees and expenses of complying with state securities or blue sky laws, fees and -35- 40 disbursements of counsel for the Company, any fees and disbursements of underwriters customarily paid by the issuers or sellers of securities, including liability insurance if the Company so desires or if the underwriters so require, and the reasonable fees and expenses of any special experts retained in connection with the requested registration and other reasonable out-of-pocket expenses of Holders, shall be paid by the Company. The foregoing provisions with respect to expenses shall in no way limit the rights of the Holders to request registration pursuant to Sections 5.3 and 5.5 or the number of registrations which may be requested thereunder. SECTION 5.9. Underwriting Requirements. In connection with any underwritten offering, the Company shall not be required under Section 5.4 to include Registrable Securities in such underwritten offering unless the Holders of such Registrable Securities accept the terms of the underwriting of such offering that have been reasonably agreed upon between the Company and the underwriters selected by the Company. SECTION 5.10. Rule 144 and Rule 144A Information. With a view to making available the benefits of certain rules and regulations of the SEC which may at any time permit the sale of the Registrable Securities to the public without registration, at all times, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act; -36- 41 (b) use its best efforts to file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) furnish to each Holder of Registrable Securities forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of such Rule 144 and of the Securities Act and the Exchange Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as such Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing such Holder to sell any Registrable Securities without registration. SECTION 5.11. Indemnification. In the event any Registrable Securities are included in a registration statement under this Agreement: (a) The Company shall indemnify and hold harmless each Holder, such Holder's directors and officers, and each person, if any, who controls such Holder or participating person within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) to which they may become subject under the Securities Act or otherwise, -37- 42 insofar as such losses, claims, damages or liabilities (or proceedings in respect thereof) arise out of or are based on any untrue or alleged untrue statement of a material fact contained in such registration statement, preliminary prospectus, final prospectus or amendments or supplements thereto or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the indemnity agreement contained in this Section 5.11(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld); provided further that the Company shall not be liable to any Holder, such Holder's directors and officers or controlling person in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in connection with such registration statement, preliminary prospectus, final prospectus or amendments or supplements thereto, in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, such Holder's directors and officers or controlling person; provided, further, that as to any preliminary prospectus or any final prospectus this indemnity agreement shall not -38- 43 inure to the benefit of any Holder, such Holder's directors and officers or controlling persons on account of any losses, claims, damages or liability arising from the sale of Class A Common Stock to any person by such Holder if such Holder or its representatives failed to send or give a copy of the final prospectus or a prospectus supplement, as the case may be (excluding documents incorporated by reference therein), as the same may be amended or supplemented, to that person within the time required by the Securities Act, and the untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact in such preliminary prospectus or final prospectus was corrected in the final prospectus or such prospectus supplement, as the case may be (excluding documents incorporated by reference therein), unless such failure resulted from non-compliance by the Company with Section 5.6(c). Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of any such Holder, such Holder's directors and officers, participating person or controlling person, and shall survive the transfer of such securities by such Holder. (b) Each Holder requesting or joining in a registration severally and not jointly shall indemnify and hold harmless the Company, each of its directors and officers and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities -39- 44 Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to the Holders but only with reference to written information relating to such Holder furnished to the Company expressly for use in connection with such registration; provided, however, that the indemnity agreement contained in this Section 5.11(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of such Holder (which consent shall not be unreasonably withheld); and provided further that the liability of each Holder hereunder shall be limited to the proportion of any such loss, claim, damage, liability or expense that is equal to the proportion that the net proceeds from the sale of the shares sold by such Holder under such registration statement bears to the total net proceeds from the sale of all securities sold thereunder, but not in any event to exceed the net proceeds received by such Holder from the sale of Registrable Securities covered by such registration statement. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to either of the two preceding paragraphs, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably -40- 45 satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the reasonable fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all such indemnified parties and that all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by the Holders, in the case of parties indemnified pursuant to the second preceding paragraph, and by the Company, in the case of parties indemnified pursuant to the first preceding paragraph. The indemnifying party shall not be liable for any settlement of any proceeding -41- 46 effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (d) If the indemnification provided for in the first or second paragraph of this Section 5.11 is unavailable to -42- 47 an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified party in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages or liabilities referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5.11(d) were determined by pro rata allocation or by any other -43- 48 method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 5.11, no Holder shall be required to contribute any amount in excess of the amount of net proceeds received by such Holder from the sale of Registrable Securities covered by such registration statement. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 5.11 are not exclusive and shall not limit any right or remedies that may otherwise be available to any indemnified party at law or in equity. SECTION 5.12. Lockup. Each Holder shall, in connection with any registration of the Company's securities, upon the request of the Company or the underwriters managing any underwritten offering of such securities, agree in writing not to effect any sale, disposition or distribution of any Registrable Securities (other than that included in the registration) without the prior written consent of the managing underwriter for such period of time (not to exceed 90 days) from the effective date of such registration as the Company or the underwriters may specify; provided, however, that, to the extent required by the underwriters in an underwritten offering, all executive officers and directors of the Company (other than executive officers and directors owning an aggregate of less than 1% of the outstanding -44- 49 Common Stock as of the effective date of such registration statement) shall also have agreed not to effect any sale, disposition or distribution of any Registrable Securities under the circumstances and pursuant to the terms set forth in this Section 5.12. SECTION 5.13. Transfer of Registration Rights. The registration rights of any Holder under this Agreement with respect to the Registrable Securities may be transferred to any transferee of such Registrable Securities who acquires any Registrable Securities of any Holder; provided, that (i) the transferring Holder shall give the Company written notice at or prior to the time of such transfer stating the name and address of the transferee and identifying the securities with respect to which the rights under this Agreement are being transferred, (ii) such transferee shall agree in writing, in form and substance reasonably satisfactory to the Company, to be bound as a Holder by the provisions of this Article V, and (iii) immediately following such transfer the further disposition of such securities by such transferee is restricted under the Securities Act. SECTION 5.14. Selection of Counsel. In connection with any registration of Registrable Securities pursuant to Sections 5.3, 5.4 and 5.5 hereof, the Holders of a majority of the Registrable Securities covered by any such registration may select one counsel to represent all Holders of Registrable Securities covered by such registration. ARTICLE VI -45- 50 REPRESENTATIONS AND WARRANTIES SECTION 6.1. Representations of the Company. The Company represents and warrants as follows: (a) Due Organization of the Company and its Subsidiaries. Each of the Company and its Subsidiaries is a corporation duly organized, validly existing, and, with respect to those Subsidiaries of the Company organized under the laws of one of the states of the United States of America or the District of Columbia (a "U.S. Corporation"), is in good standing as a domestic corporation under the laws of the state of its organization with all requisite corporate power and authority to own, lease and operate its properties and to conduct its business as presently conducted. Each of the Subsidiaries of the Company which is a U.S. Corporation is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, except where the failure to be so qualified as required would not prevent or materially hinder or delay the ability of the Company to perform its obligations hereunder. (b) Validity of Agreement. The Company has all necessary corporate power and authority to enter into this Agreement and to perform its obligations hereunder. The execution, delivery and performance of this Agreement by the Company have been duly authorized by all necessary corporate action on the part of the Company. This Agreement has been duly executed and delivered by the Company and, assuming due -46- 51 authorization, execution and delivery by Ford, constitutes a legal, valid and binding obligation of the Company enforceable against it in accordance with its terms, except as affected by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally and general equitable principles (whether considered in a proceeding in equity or at law). (c) Consents and Approvals; No Violations. The execution, delivery or performance of this Agreement by the Company will not (i) conflict with or result in any breach of any provision of the certificate of incorporation or by-laws or similar organizational documents of the Company or any of its Subsidiaries, (ii) require the Company or any of its Subsidiaries to make any filing with, or the Company or any of its Subsidiaries to obtain any permit, authorization, consent or approval of, any court, arbitral tribunal, administrative agency or commission or other governmental or other regulatory authority, commission or agency (a "Governmental Entity"), except for filings with any Governmental Entity in connection with an offering of securities pursuant to Article V hereof, (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, -47- 52 guarantee, other evidence of indebtedness, lease, concession agreement, franchise agreement, license, contract, agreement or other instrument or obligation to which the Company or any of its Subsidiaries is a party or by which any of them or any of their properties or assets may be bound or (iv) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Company or any of its Subsidiaries or any of their properties or assets, except, in the case of clauses (ii), (iii) and (iv), for failures to make filings, or to obtain permits, authorizations, consents or approvals, or violations, breaches, defaults, or rights of termination, amendment, cancellation or acceleration, which would not prevent or materially hinder or delay the ability of the Company to perform its obligations hereunder. (d) Litigation. There is no action, suit or proceeding before or by any Governmental Entity, domestic or foreign, now pending or, to the Company's knowledge, threatened against the Company or any of its Subsidiaries which, if adversely determined, would prevent or materially hinder or delay the ability of the Company to perform its obligations under this Agreement. SECTION 6.2. Representations of Ford. Ford represents and warrants as follows: (a) Due Organization of Ford and its Subsidiaries. Each of Ford and its Subsidiaries is a corporation duly organized, validly existing, and, with respect to those Subsidiaries of Ford which are U.S. Corporations, is in good -48- 53 standing as a domestic corporation under the laws of the state of its organization with all requisite corporate power and authority to own, lease and operate its properties and to conduct its business as presently conducted. Each of the Subsidiaries of Ford which is a U.S. Corporation is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, except where the failure to be so qualified as required would not prevent or materially hinder or delay the ability of Ford to perform its obligations hereunder. (b) Validity of Agreement. Ford has all necessary corporate power and authority to enter into this Agreement and to perform its obligations hereunder. The execution, delivery and performance of this Agreement by Ford have been duly authorized by all necessary corporate action on the part of Ford. This Agreement has been duly executed and delivered by Ford and, assuming due authorization, execution and delivery by Ford, constitutes a legal, valid and binding obligation of Ford enforceable against it in accordance with its terms, except as affected by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally and general equitable principles (whether considered in a proceeding in equity or at law). (c) Consents and Approvals; No Violations. The execution, delivery or performance of this Agreement by Ford -49- 54 will not (i) conflict with or result in any breach of any provision of the certificate of incorporation or by-laws or similar organizational documents of Ford or any of its Subsidiaries, (ii) require Ford or any of its Subsidiaries to make any filing with, or Ford or any of its Subsidiaries to obtain any permit, authorization, consent or approval of, any Governmental Entity, except for filings with any Governmental Entity in connection with an offering of securities pursuant to Article V hereof, (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, guarantee, other evidence of indebtedness, lease, concession agreement, franchise agreement, license, contract, agreement or other instrument or obligation to which Ford or any of its Subsidiaries is a party or by which any of them or any of their properties or assets may be bound or (iv) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Ford or any of its Subsidiaries or any of their properties or assets, except, in the case of clauses (ii), (iii) and (iv), for failures to make filings, or to obtain permits, authorizations, consents or approvals, or violations, breaches, defaults, or rights of termination, amendment, cancellation or acceleration, which would not -50- 55 prevent or materially hinder or delay the ability of Ford to perform its obligations hereunder. (d) Litigation. There is no action, suit or proceeding before or by any Governmental Entity, domestic or foreign, now pending or, to Ford's knowledge, threatened against Ford or any of its Subsidiaries which, if adversely determined, would prevent or materially hinder or delay the ability of Ford to perform its obligations under this Agreement. ARTICLE VII MISCELLANEOUS SECTION 7.1. Notices. All notices, requests, demands or other communications provided herein shall be made in writing and shall be deemed to have been duly given (unless otherwise specifically provided in any Section of this Agreement) if delivered as follows: If to Ford: Ford Motor Company The American Road Dearborn, Michigan 48121 Attention: Secretary Fax: (313) 337-9591 Tel: (313) 323-2260 -and- Simpson Thacher & Bartlett 425 Lexington Avenue New York, New York 10017-3954 Attention: David J. Sorkin, Esq. Fax: (212) 455-2502 Tel: (212) 455-2000 -51- 56 If to the Company: Team Rental Group, Inc. 125 Basin Street, Suite 210 Daytona Beach, Florida 32114 Attention: Chief Executive Officer Fax: (904) 238-7461 Tel: (904) 238-7035 with a copy to: King & Spalding 191 Peachtree Street Atlanta, Georgia 30303 Attention: John J. Kelley III, Esq. Fax: (404) 572-5100 Tel: (404) 572-4600 or to such other address as either party shall have specified by notice in writing to the other party. All such notices, requests, demands and communications shall be deemed to have been received on (i) the date of delivery if sent by messenger, (ii) on the business day following the business day on which delivered to a recognized courier service if sent by overnight courier, or (iii) on the fifth business day after the mailing thereof if sent by mail. Notices may also be delivered by fax, provided that any such notice also is delivered in a manner contemplated by clause (i), (ii) or (iii) above. SECTION 7.2. Costs and Expenses. All costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses, except as otherwise provided in Article V. SECTION 7.3. Amendment and Modification. This Agreement may be amended, modified and supplemented in any and all respects by written agreement of the parties hereto. -52- 57 SECTION 7.4. Waivers and Extensions. Each party to this Agreement may waive any right of such party or any breach or default of the other party to this Agreement or conditions to its own obligations; provided that such waiver will not be effective against the waiving party unless it is in writing, is signed by such party and specifically refers to this Agreement. Waivers may be made in advance or after the right waived has arisen or the breach or default waived has occurred. Any waiver may be conditional. No waiver of any breach of any agreement or provision herein contained shall be deemed a waiver of any preceding or succeeding breach thereof nor of any other agreement or provision herein contained. No waiver or extension of time for performance of any obligations or acts shall be deemed a waiver or extension of the time for performance of any other obligations or acts. SECTION 7.5. Interpretation. (a) Titles and headings of sections of this Agreement are for convenience only and shall not affect the construction of any provision of this Agreement. (b) Whenever the phrase "to the Company's knowledge" is used in this Agreement, such phrase means the actual knowledge of the persons listed on Schedule 8.6. (c) The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise. (d) The term "person" means an individual, corporation, partnership, limited liability company, association, -53- 58 trust, incorporated organization, Governmental Entity or other entity. SECTION 7.6. Entire Agreement; Third Party Beneficiaries; Assignment. This Agreement: (a) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, and (b) is not intended to confer upon any person other than the parties hereto and any Holder any rights or remedies hereunder. Except as otherwise provided in Section 5.13, neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other party. This Agreement will be binding upon the parties and their respective successors and assigns. SECTION 7.7. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement in accordance with Section 7.3 so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in -54- 59 order that the transactions contemplated hereby may be consummated as originally contemplated to the fullest extent possible. SECTION 7.8. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of Delaware without giving effect to the principles of conflicts of law thereof. SECTION 7.9. Specific Performance. The parties hereto agree that irreparable damage would occur in the event any material provision of this Agreement were not performed in accordance with the terms hereof and that the parties shall be entitled to the remedy of specific performance of the material terms hereof, in addition to any other remedy at law or equity. SECTION 7.10. Resolution of Disputes. If a dispute arises between the parties relating to this Agreement, then the parties hereto (and Ford, as a third party beneficiary of the provisions of this Agreement) shall implement the procedures set forth in Section 8.11 of the Preferred Stock Purchase Agreement, subject to the provisions thereof. SECTION 7.11. Consent to Jurisdiction; Waiver of Jury Trial. (a) Subject to Section 7.10, each of the parties hereto: (i) consents to submit itself to the personal jurisdiction of (A) the United States District Court for the Eastern District of Michigan in the event any dispute arises out of this Agreement or any of the transactions contemplated by this Agreement to the extent such court -55- 60 would have jurisdiction with respect to such dispute and (B) the Courts of the State of Michigan otherwise; (ii) agrees that it will not attempt to deny or defeat such personal jurisdiction or venue by motion or other request for leave from any such court; (iii) agrees that it will not bring any action relating to this Agreement or any of the transactions contemplated by this Agreement in any court other than such courts; and (iv) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to such party at its address set forth in Section 7.1 or at such other address of which the other party shall have been notified pursuant thereto; and (v) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction. -56- 61 (B) EACH PARTY HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING IN RELATION TO THIS AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. -57- 62 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. TEAM RENTAL GROUP, INC. By: /s/ John P. Kennedy ------------------------------------- Name: John P. Kennedy Title: President FORD MOTOR COMPANY By: /s/ Sally W. Schwartz ------------------------------------- Name: Sally W. Schwartz Title: Assistant Secretary -58- 63 PREFERRED STOCKHOLDERS AGREEMENT SCHEDULE A BUYER'S OUTSTANDING REGISTRATION RIGHTS 1. Registration Rights Agreement dated as of August 25, 1994 between buyer and the Individuals listed therein, as amended by First Amendment to Registration Rights Agreement dated as of November 1, 1994, as amended by First Amendment to Registration Rights Agreement, dated as of November 1, 1994. 2. Registration Rights Agreement dated as of March 8, 1995 between Buyer and James Salatto. 3. Registration Rights Agreement dated as of October 20, 1995 between Buyer and Budget Rent A Car of Southern California (BRAC-OPCO). 4. Registration Rights granted pursuant to Warrant dated as of April 26, 1996 to purchase 187,500 shares of Class A Common Stock Granted to NationsBank. 5. Registration Rights Agreement dated as of December 18, 1996 between Buyer and the holders of 7.0% Convertible Subordinated Notes due 2003. 6. Registration Rights granted pursuant to Warrant dated as of August 24, 1994 to purchase 175,000 shares of Class A Common Stock granted to Budget Rent A Car Corporation. EX-3.3 3 AMENDMENT TO AMENDED & RESTATED CERT. OF INC. 1 EXHIBIT 3.3 CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF TEAM RENTAL GROUP, INC. Team Rental Group, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: 1. That pursuant to an action duly and properly taken by the Board of Directors of the Corporation, resolutions were duly adopted setting forth a proposed amendment of the Amended and Restated Certificate of Incorporation of the Corporation, declaring said amendment to be advisable and referring said amendment to the stockholders of the Corporation for consideration thereof and approval and adoption by the stockholders at the annual meeting of the stockholders of the Corporation to be duly called by the Board of Directors of the Corporation (the "Annual Meeting"). The resolution setting forth the proposed amendment (the "Amendment") is as follows: NOW, THEREFORE, BE IT RESOLVED, that Section FIRST of the Company's Certificate of Incorporation is hereby amended by deleting Section FIRST in its entirety and replacing it with the following: "FIRST: Name. The name of the Corporation is Budget Group, Inc." FURTHER RESOLVED, that Section FOURTH of the Company's Certificate of Incorporation is hereby amended by deleting paragraph A of Section FOURTH in its entirety and replacing it with the following: "FOURTH: A. Authorized Capital. The Corporation is authorized to issue 37,750,000 shares of capital stock, consisting of 37,500,000 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, 35,000,000 shares shall be designated "Class A Common Stock" and 2,500,000 shares shall be designated "Class B Common Stock." The rights, preferences, privileges and restrictions granted and imposed upon the Preferred Stock, the Class A Common Stock and the Class B Common Stock are set forth below." 2. That thereafter, pursuant to a resolution of the Board of Directors calling for the Amendment to be submitted to a vote of the stockholders at the Annual Meeting, the Amendment was approved and adopted by the stockholders at the Annual Meeting, at which meeting the necessary number of shares were voted in favor of the Amendment in accordance with Section 242 of the General Corporation Law of the State of Delaware. 3. That the Amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. 4. The undersigned officer of the Corporation hereby acknowledges that the foregoing is the act and deed of the Corporation and that the facts stated herein are true. 2 IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be affixed to this Certificate and has caused this Certificate to be signed this 28th day of April, 1997. By: /s/ Sanford Miller ------------------------------------ Sanford Miller Chairman and Chief Executive Officer 2 EX-3.4 4 PREFERRED STOCK CERTIFICATE OF DESIGNATIONS 1 EXHIBIT 3.4 TEAM RENTAL GROUP, INC. CERTIFICATE OF DESIGNATIONS ------------------------------- Pursuant to Section 151 of the General Corporation Law of the State of Delaware ------------------------------- TEAM RENTAL GROUP, INC. (the "Corporation"), a corporation organized and existing under the General Corporation Law of the State of Delaware, does hereby certify that pursuant to the provisions of Section 151 of the General Corporation Law of the State of Delaware, its Board of Directors, at a meeting duly called and held on January 13, 1997, adopted the following resolution, which resolution remains in full force and effect as of the date hereof: WHEREAS, the Board of Directors of the Corporation (the "Board of Directors") is authorized, within the limitations and restrictions stated in the Amended and Restated Certificate of Incorporation, to fix by resolution or resolutions the designation of each series of preferred stock and the powers, designations, preferences and relative participating, optional or other rights, if any, or the qualifications, limitations or restrictions thereof, including, without limiting the generality of the foregoing, such provisions as may be desired concerning voting, redemption, dividends, dissolution or the distribution of assets, conversion or exchange, and such other subjects or matters as may be fixed by resolution or resolutions of the Board 2 of Directors under the General Corporation Law of State of Delaware; and WHEREAS, it is the desire of the Board of Directors, pursuant to its authority as aforesaid, to authorize and fix the terms of a series of preferred stock and the number of shares constituting such series: NOW, THEREFORE, BE IT RESOLVED, that there is hereby authorized such series of preferred stock on the terms and with the provisions herein set forth: (1) Designation. The designation of a series of Preferred Stock, par value $0.01 per share, shall be "Series A Convertible Preferred Stock" (the "Series A Preferred Stock") consisting of 10,000 shares. (2) Rank. The Series A Preferred Stock shall, with respect to dividend rights and rights on liquidation, winding up and dissolution, rank prior to the Class A Common Stock, par value $0.01 per share, of the Corporation (the "Class A Common Stock") and the Class B Common Stock, par value $0.01 per share, of the Corporation (the "Class B Common Stock" and, together with the Class A Common Stock, the "Common Stock"). (All equity securities of the Corporation to which the Series A Preferred Stock ranks prior, including the Common Stock, are collectively referred to herein as the "Junior Securities", all equity securities of the Corporation with which the Series A Preferred Stock ranks on a parity are collectively referred to herein as the "Parity Securities" and all equity securities of the -2- 3 Corporation (other than convertible debt securities) to which the Series A Preferred Stock ranks junior, whether with respect to dividends or upon liquidation, dissolution, winding up or otherwise, are collectively referred to herein as the "Senior Securities".) The Series A Preferred Stock shall be subject to the creation of Junior Securities, Parity Securities and Senior Securities. (3) Dividends. (i) The holders of the shares of Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available for the payment of dividends, cumulative cash dividends in respect of each such share in such amount as the holder thereof would receive if such share were converted into shares of Class A Common Stock pursuant to paragraph (6) hereof immediately prior to the record date for payment of any cash dividend on the Class A Common Stock, in preference to dividends on Junior Securities. (ii) All dividends paid with respect to shares of the Series A Preferred Stock pursuant to paragraph (3)(i) shall be paid pro rata to the holders entitled thereto. (iii) No full dividends shall be declared by the Board of Directors or paid or set apart for payment by the Corporation on any Parity Securities, nor shall the Corporation make any distribution in respect of any Parity Securities, either directly or indirectly, and whether in cash, obligations or shares of the Corporation or other property, unless full cumulative dividends have been or -3- 4 contemporaneously are declared and paid. If any dividends are not paid in full, as aforesaid, upon the shares of the Series A Preferred Stock and any other Parity Securities, all dividends or distributions declared upon shares of the Series A Preferred Stock and any other Parity Securities shall be declared pro rata so that the amount of dividends or distributions declared per share of the Series A Preferred Stock and such Parity Securities shall in all cases bear to each other the same ratio that accrued dividends per share on the Series A Preferred Stock and such Parity Securities bear to each other. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on the Series A Preferred Stock or any other Parity Securities which may be in arrears. Any dividend not paid pursuant to paragraph (3)(i) hereof or this paragraph (3)(iii) shall be fully cumulative and shall accrue (whether or not declared), without interest, as set forth in paragraph (3)(i) hereof. (iv) (a) Holders of shares of the Series A Preferred Stock shall be entitled to receive the dividends provided for in paragraph (3)(i) hereof in preference to and in priority over any dividends upon any of the Junior Securities. (b) So long as any shares of the Series A Preferred Stock are outstanding, the Board of Directors shall not declare, and the Corporation shall not pay or set apart for payment any dividend on any of the Junior Securities or make -4- 5 any payment on account of, or set apart for payment money for a sinking or other similar fund for, the repurchase, redemption or other retirement of, any of the Junior Securities or Parity Securities or any warrants, rights or options exercisable for or convertible into any of the Junior Securities or Parity Securities (other than the repurchase, redemption or other retirement of debentures or other debt securities that are convertible or exchangeable into any of the Junior Securities or Parity Securities), or make any distribution in respect of the Junior Securities, either directly or indirectly, and whether in cash, obligations or shares of the Corporation or other property (other than distributions or dividends in Junior Securities to the holders of Junior Securities), and shall not permit any corporation or other entity directly or indirectly controlled by the Corporation to purchase or redeem any Class A Common Stock or any warrants, rights, calls or options exercisable for or convertible into Class A Common Stock (other than the repurchase, redemption or other retirement of debentures or other debt securities that are convertible or exchangeable into Class A Common Stock or the repurchase, redemption or other retirement of less than 1% of the then outstanding Class A Common Stock) unless prior to or concurrently with such declaration, payment, setting apart for payment, repurchase, redemption or other retirement or distribution, as the case may be, the holders of the Series A Preferred Stock have the opportunity to -5- 6 participate therein pro rata with the holders of Class A Common Stock. (v) Subject to the foregoing provisions of this paragraph (3), the Board of Directors may declare and the Corporation may pay or set apart for payment dividends and other distributions on any of the Junior Securities or Parity Securities, and may repurchase, redeem or otherwise retire any of the Junior Securities or Parity Securities or any warrants, rights or options exercisable for or convertible into any of the Junior Securities or Parity Securities, and the holders of the shares of the Series A Preferred Stock shall not be entitled to share therein. (4) Liquidation Preference. (i) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the holders of shares of Series A Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders the same amount that such holders would receive if such shares were converted into shares of Class A Common Stock pursuant to paragraph (6) hereof immediately prior to such voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, in preference to any such payment on Junior Securities. If the assets of the Corporation are not sufficient to pay in full the liquidation payments payable to the holders of outstanding shares of the Series A Preferred Stock and any Parity -6- 7 Securities, then the holders of all such shares shall share ratably in such distribution of assets in accordance with the amount which would be payable on such distribution if the amounts to which the holders of outstanding shares of Series A Preferred Stock and the holders of outstanding shares of such Parity Securities are entitled were paid in full. Except as provided in this paragraph (4)(i), holders of Series A Preferred Stock shall not be entitled to any distribution in the event of liquidation, dissolution or winding up of the affairs of the Corporation. (ii) For the purposes of this paragraph (4), neither the voluntary sale, conveyance, lease, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Corporation nor the consolidation or merger of the Corporation with or into one or more other corporations nor the consolidation or merger of one or more corporations with or into the Corporation shall be deemed to be a voluntary or involuntary liquidation, dissolution or winding up. (5) Status of Shares of Series A Preferred Stock Acquired by the Corporation. Shares of Series A Preferred Stock that have been issued and reacquired in any manner, including shares purchased or redeemed or exchanged or converted, shall (upon compliance with any applicable provisions of the laws of the State of Delaware) have the status of authorized and unissued shares of the class of -7- 8 Series A Preferred Stock undesignated as to series and may be redesignated and reissued as part of any series of the Series A Preferred Stock. (6) Conversion. (i) Each share of Series A Preferred Stock shall automatically be converted into 1,000 shares of the Class A Common Stock, subject to adjustment as provided in this paragraph (6) (the "Conversion Number") in the event that the record ownership of such share of Series A Preferred Stock shall be transferred to or held by any person or entity that is not Ford Motor Company, a Delaware corporation ("FCo."), or an affiliate of FCo. previously identified as such to the Corporation. A pledge of shares of Series A Preferred Stock as security for an obligation of a holder of such shares of Series A Preferred Stock shall not be considered a transfer for purposes of this paragraph (6)(i), unless and until record 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. (ii) Before any certificates representing shares of Class A Common Stock shall be delivered upon conversion, the holder of shares of Series A Preferred Stock whose shares -8- 9 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 certificates representing the Class A 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. (iii) The Conversion Number shall be subject to adjustment from and after January 13, 1997 and from time to time as follows: (a) If, from and after January 13, 1997, the Corporation shall (w) declare or pay a dividend on its outstanding Class A Common Stock in shares of Class A Common Stock or make a distribution to all holders of its Class A Common Stock in shares of Class A Common Stock, (x) subdivide its outstanding shares of Class A Common Stock into a greater number of shares of Class A Common Stock, (y) combine its outstanding shares of Class A Common Stock into a smaller number of shares of Class A Common Stock or (z) issue by reclassification of its shares of Class A Common Stock other securities of the Corporation, then the Conversion Number in -9- 10 effect immediately prior thereto shall be adjusted so that any shares of Series A Preferred Stock thereafter converted shall be entitled to receive the number and kind of shares of Class A Common Stock or other securities that the holder would have owned or have been entitled to receive after the happening of any of the events described above had such shares of Series A Preferred Stock been converted into shares of Class A Common Stock immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this paragraph (6)(iii)(a) shall become effective immediately after the record date for the dividend payment, subdivision, combination or issuance, if any, or, if there is no such record date, then on the date of such event. Such adjustments shall be made successively. (b) In the event that, from and after January 13, 1997, the Corporation shall be a party to any transaction (including without limitation any (i) recapitalization or reclassification of the Class A Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination of the Class A Common Stock), (ii) any consolidation or merger of the Corporation with or into any other person or any merger of another person into the Corporation (other than a merger which does not result in a -10- 11 reclassification, conversion, exchange or cancellation of outstanding shares of Class A Common Stock of the Corporation), (iii) any sale or transfer of all or substantially all of the assets of the Corporation or (iv) any compulsory share exchange) pursuant to which all or substantially all of the Class A Common Stock shall be exchanged for, converted into, acquired for or constitute solely the right to receive cash, securities, property or other assets, then appropriate provision shall be made as part of the terms of such transaction whereby each share of Series A Preferred Stock then outstanding shall thereafter be convertible only into the kind and amount of cash, securities, property and other assets that would have been receivable upon such transaction by a holder of the number of shares of Class A Common Stock into which such share of Series A Preferred Stock might have been converted immediately prior to such transaction. The Corporation or the person formed by such consolidation or resulting from such merger or which acquired such assets or which acquired the Corporation's shares, as the case may be, shall make provisions in its certificate or articles of incorporation or other constituent document to establish such right. Such certificate or articles of incorporation or other constituent document shall provide for adjustments which, for events subsequent to the effective date of -11- 12 such certificate or articles of incorporation or other constituent document, shall be as nearly equivalent as may be practicable to the adjustments provided for in this paragraph (6)(ii). The above provisions shall similarly apply to successive transactions of the type described in this paragraph (6)(ii)(b). (iv) The Corporation will pay any and all documentary, stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Class A Common Stock on the conversion of shares of Series A Preferred Stock pursuant to this paragraph (6); provided, however, that the Corporation shall not be required to pay any tax which may be payable in respect of any registration of transfer involved in the issue or delivery of shares of Class A Common Stock in a name other than that of the registered holder of Series A Preferred Stock converted, 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. (v) (a) The Corporation shall at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Class A Common Stock or its issued Class A Common Stock held in its treasury, or both, for the purpose of effecting the conversion of the Series A Preferred Stock, the full number of shares of Class A Common Stock then deliverable upon the -12- 13 conversion of all outstanding shares of the Series A Preferred Stock. (7) Voting Rights. (i) The holders of record of shares of Series A Preferred Stock shall not be entitled to any voting rights except as hereinafter provided in this paragraph (7) or as otherwise provided by law. (ii) So long as any shares of the Series A Preferred Stock are outstanding, the Corporation shall not, without the affirmative vote or consent of the holders of at least a majority of the shares of Series A Preferred Stock at the time outstanding, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting called for the purpose, at which the holders of Series A Preferred Stock shall vote separately as a class, amend the Amended and Restated Certificate of Incorporation of the Corporation so as to affect materially and adversely the specified rights, preferences, privileges or voting rights of shares of Series A Preferred Stock. (8) Limitations. Except as may otherwise be required by law, the shares of Series A Preferred Stock shall not have any powers, preferences or relative, participating, optional or other special rights other than those specifically set forth in this resolution (as such resolution may be amended from time to time) or otherwise in the Amended and Restated Certificate of Incorporation of the Corporation. -13- 14 IN WITNESS WHEREOF, Team Rental Group, Inc. has caused his certificate to be executed by Sanford Miller, its Chairman of the Board and Chief Executive Officer, and attested by John Congdon, its Chief Financial Officer and Secretary, as of this 13th day of January, 1997. TEAM RENTAL GROUP, INC By: /s/ Sanford Miller ----------------------------------- Name: Sanford Miller Title: Chairman of the Board and Chief Executive Officer Attest: /s/ Jeffrey D. Congdon - ----------------------------------- Name: Jeffrey D. Congdon Title: Chief Financial Officer and Secretary -14- EX-4.1 5 SPECIMEN STOCK CERTIFICATE 1 EXHIBIT 4.1 NUMBER BUDGET GROUP, INC. SHARES BGA INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE CLASS A COMMON STOCK CUSIP 119003 10 1 THIS IS TO CERTIFY that is the owner of FULLY PAID AND NON-ASSESSABLE SHARE OF CLASS A COMMON STOCK, $.01 PAR VLAUE, OF ===================================================== BUDGET GROUP, INC. =========================================================== transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed or assigned. This certificate and the share represented hereby are issued and shall be subject to all of the provisions of the Amended and Restated Certificate of Incorporation and the By-Laws of the Corporation as amended from time to time. This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated BUDGET GROUP, INC CORPORATE /s/ John P. Kennedy SEAL /s/ Sanford Miller -------------------- DELAWARE ------------------------------ SECRETARY CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER (c) SECURITY-COLUMBIAN UNITED STATES BANKNOTE CORPORATION COUNTERSIGNED AND REGISTERED: CHASEMELLON SHAREHOLDER SERVICES, L.L.C. TRANSFER AGENT AND REGISTRAR AUTHORIZED SIGNATURE
2 BUDGET GROUP, INC. A statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights as established, from time to time, by the Amended and Restated Certificate of Incorporation of the Corporation as amended from time to time and by any certificate of determination, the number of shares constituting each class and series, and the designations thereof, may be obtained by the holder hereof upon request and without charge at the principal office of the Corporation. The following abbreviations, when used in the inscription of the face of this certificate, shall be construed as though they were written out according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian TEN ENT - as tenants by the entireties --------- ------------ JT TEN - as joint tenants with right of (Cust) (Minor) survivorship and not as tenants under Uniform Gifts to Minors in common Act ----------------------- (State)
Additional abbreviations may also be used though not in the above list For value received, ____________________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ---------------------------------------- [ ] ---------------------------------------- - ------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- shares - ----------------------------------------------------------------------- of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney - ----------------------------------------------------------------------- to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated -------------------- NOTICE: ---------------------------------------------------------------------------------------------- THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERNATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. SIGNATURE(S) GUARANTEED: ---------------------------------------------------------------------------------------------- THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LAON ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEED MEDALLION PROGRAM) PURSUANT TO S.E.C. RULE 17AD-15.
EX-21.1 6 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 LIST OF SUBSIDIARIES OF BUDGET GROUP, INC.
Name Under Which Subsidiary State of Incorporation It Does Business ---------- ---------------------- ---------------- Budget Rent A Car Delaware Corporation Reservation Services, Inc. Texas Team Realty Services, Inc. Delaware Budget Rent a Car of Canada Canada Limited Team Fleet Services Delaware Corporation Team Fleet Financing Delaware Corporation Budget Rent A Car Systems, Delaware Inc. Tranex Rentals of New York, New York Budget Rent a Car of Albany Inc. Mackay Car & Truck Rentals, North Carolina Budget Rent a Car of Inc. Charlotte Capital City Leasing, Inc. Florida Team Rental of Cincinnati, Delaware Budget Rent a Car of Inc. Cincinnati Team Rental of Pittsburgh, Delaware Budget Rent a Car of Inc. Pittsburgh Team Rental of Philadelphia, Delaware Budget Rent a Car of Inc. Philadelphia Westeam Enterprises, Inc. California Team Rental of Rochester, Delaware Inc. Team Rental of Southern Delaware Budget Car & Truck Rental California, Inc.
2 BRAC SOCAL Funding Delaware Corporation VPSI, Inc. Delaware Team Rental of Connecticut, Delaware Budget Rent a Car of Inc. Hartford Arizona Rent-a-Car Systems, Delaware Budget Rent a Car of Phoenix Inc. Metro West, Inc. Delaware Lee-Al, Inc. California Budget Fleet Finance Delaware Corporation Diversified Services, Inc. Delaware Automated Transportation, California Inc. Expert Leasing, Inc. Florida Rapid Rentals, Inc. District of Columbia Moisant Car Sales, Inc. Louisiana Budget Rent a Car of New Louisiana Orleans, Inc. Budget Funding Corporation Delaware Team Claims Services, Inc. Delaware BRAC of New York, Inc. Delaware NYRAC, Inc. New York Rebound Services, Inc. Delaware Long Island Car & Truck Delaware Rental, Inc. Team Rental of Ft. Wayne, Delaware Inc. Fort Wayne Rental Group, Indiana Inc.
3 Dayton Auto Lease Delaware Company, Inc. Don Kremer, Inc. Ohio Budget Rent a Car of Dayton 200-214 N. Michigan Illinois Avenue, Inc. BRAC Reinsurance Company Bermuda LTD. Control Risk Corporation Illinois Philip Jacobs Insurance California Agency, Inc. BRAC Credit Corporation Delaware Compass Computer Services, Delaware Inc. Budget Car Sales, Inc. Indiana (formerly known as Team Care Sales, Inc.) ValCar Rental Car Sales, Inc. Indiana IN Motors VI, LLC Indiana Budget Car Sales TCS Properties, LLC Indiana Team Car Sales of Delaware Budget Car Sales Philadelphia, Inc. Team Car Sales of Richmond, Delaware Budget Car Sales Inc. Team Car Sales of San Delaware Diego, Inc. Team Car Sales of Dayton, Delaware Budget Car Sales Inc. Team Car Sales of Charlotte, Delaware Budget Car Sales Inc. Team Car Sales of Southern Delaware California, Inc.
4 Budget Sales Corporation Delaware Budget Rent a Car Delaware International, Inc. Budget Rent a Car Espana, Spain S.A. Budget Rent a Car, Ltd., England Ireland BRACRENT, S.A. Spain BTI (U.K.) plc England BTI (Gatwick) Limited England BTI (Stansted) Limited England BTI (London) Limited England BTI (Marble Arch) Limited England BTI (Slough) Limited England BTI (Heathrow) Limited England Budget Locacao de Veiculos Brazil Ltda. Budget Rent a Car Limited New Zealand Budget Rent a Car Australia Operations (N.Z.) Pty Limited Target Rent a Car Limited New Zealand Budget Lease Management New Zealand (Car Sales) Limited Budget Rent a Car of Japan, Delaware Inc. (formerly BRAC of Japan, Inc.) Budget Rent a Car Asia- Delaware Pacific, Inc. (formerly BRAC RPS, Inc., formerly Budget Leasing Corporation) BRAC Australia Pty. Ltd. Australia
5 Budget Rent a Car Pty. Australia Limited Societe Financiere et de France Participation Budget France, S.A. France
EX-23.1 7 CONSENT OF DELOITTE AND TOUCHE 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of Budget Group, Inc. on Form S-1 of our report dated April 12, 1996, appearing in the Prospectus, which is part of this Registration Statement and to the reference to us under the heading "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Indianapolis, Indiana August 29, 1997 EX-23.2 8 CONSENT OF ARTHUR ANDERSEN 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS As independent certified public accountants, we hereby consent to the use of our report (and to all references to our firm) included in or made a part of this Registration Statement. /s/ Arthur Andersen LLP August 29, 1997 Orlando, Florida EX-23.3 9 CONSENT OF KPMG 1 EXHIBIT 23.3 CONSENT OF KPMG PEAT MARWICK LLP The Board of Directors of Budget Rent a Car Corporation: We consent to the inclusion of our report herein and to the reference to our firm under the heading "Experts" in the prospectus of Budget Group, Inc. dated September 2, 1997. KPMG Peat Marwick LLP September 2, 1997 Chicago, Illinois -----END PRIVACY-ENHANCED MESSAGE-----