-----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, KJvB8y4+S2unFgqt5mE087KMRxUfm++ZF6+Cafc+Rz44DvPmk/sLQG4BUC/21B3D 6tuwsegQgCaEsGoyBWEbXA== 0000950144-98-007012.txt : 19980601 0000950144-98-007012.hdr.sgml : 19980601 ACCESSION NUMBER: 0000950144-98-007012 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980528 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980529 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: 8-K SEC ACT: SEC FILE NUMBER: 000-23962 FILM NUMBER: 98634466 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 8-K 1 BUDGET GROUP, INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 Date of Report (Date of Earliest Event Reported): MAY 28, 1998 BUDGET GROUP, INC. (Exact Name of Registrant as Specified in Charter) DELAWARE 0-78274 59-3227576 (State or Other Jurisdiction (Commission File No.) (I.R.S. Employer of Incorporation) Identification No.) 125 Basin Street, Suite 210 Daytona Beach, Florida 32114 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (904) 238-7035 --------------------------------------------------------------------- (Former Name or Former Address, if Changed Since Last Report) 2 Item 5. Other Events The following consolidated financial statements of Budget Group, Inc. reflecting the pooled operations of Budget Group, Inc. and subsidiaries and Cruise America, Inc., which was acquired by Budget Group, Inc. on January 28, 1998, are filed as part of this Report: Report of Independent Certified Public Accountants Independent Auditors' Report Consolidated Balance Sheets - December 31, 1996 and 1997 Consolidated Statements of Income for Each of the Three Years in the Period Ended December 31, 1997 Consolidated Statements of Stockholders' Equity for Each of the Three Years in the Period Ended December 31, 1997 Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 1997 Notes to Consolidated Financial Statements Item 7. Financial Statements and Exhibits (c) Exhibits: The following exhibits are filed as part of this Report:
Exhibit Number Description of Exhibit 23.1 Consent of Arthur Andersen LLP 23.2 Consent of Deloitte & Touche LLP
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. BUDGET GROUP, INC. /s/ Robert L. Aprati ----------------------------------- By: Robert L. Aprati Executive Vice President, General Counsel and Secretary Dated: May 28, 1998 3 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Certified Public Accountants.......... F-2 Independent Auditors' Report................................ F-3 Consolidated Balance Sheets December 31, 1996 and 1997.................................................. F-4 Consolidated Statements of Income for Each of the Three Years in the Period Ended December 31, 1997..... F-5 Consolidated Statements of Stockholders' Equity for Each of the Three Years in the Period Ended December 31, 1997.................................................. F-6 Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 1997...................................................... F-7 Notes to Consolidated Financial Statements.................. F-8
F-1 4 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To Budget Group, Inc.: We have audited the consolidated balance sheets of Budget Group, Inc. (a Delaware corporation formerly known as Team Rental Group, Inc.) and subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for the three years in the period ended December 31, 1997. 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 audits. We did not audit the 1995 consolidated statements of income, stockholders' equity and cash flows of Budget Group, Inc. and subsidiaries, prior to their restatement for the effect of the merger with Cruise America, Inc. Such statements reflect total revenues of 63 percent of the related consolidated total revenues after giving effect to the merger with Cruise America, Inc. These statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to amounts included for Budget Group, Inc., prior to their restatement for the effect of the merger with Cruise America, Inc., is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 consolidated financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Budget Group, Inc. and subsidiaries as of December 31, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Orlando, Florida, March 20, 1998 F-2 5 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of Budget Group, Inc.: We have audited the consolidated statements of income, stockholders' equity and cash flows of Budget Group, Inc. (formerly known as Team Rental Group, Inc.) for the year ended December 31, 1995, which are not separately included herein. 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 audit. 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, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Budget Group, Inc. for the year ended December 31, 1995 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Indianapolis, Indiana April 12, 1996 F-3 6 BUDGET GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1997
1996 1997 -------- ---------- (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) ASSETS Cash and cash equivalents................................... $ 54,009 $ 161,455 Restricted cash............................................. 66,336 282,731 Trade and vehicle receivables, net.......................... 32,192 334,018 Vehicle inventory........................................... 28,490 46,944 Revenue earning vehicles, net............................... 398,893 2,090,704 Property and equipment, net................................. 28,838 147,547 Prepaid expenses and other assets........................... 18,151 91,681 Intangibles, including goodwill, less accumulated amortization of $3,285 in 1996 and $11,739 in 1997........ 70,893 532,228 -------- ---------- $697,802 $3,687,308 ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Notes payable............................................... $531,396 $2,686,199 Accounts payable, accrued and other liabilities............. 33,915 431,691 Deferred income taxes....................................... 10,046 110,479 -------- ---------- Total liabilities................................. 575,357 3,228,369 -------- ---------- COMMITMENTS AND CONTINGENCIES (NOTES 9, 11, 13 AND 17) COMMON STOCK WARRANT........................................ 2,000 -- STOCKHOLDERS' EQUITY Preferred stock, $0.01 par value, 250,000 shares authorized, no shares issued or outstanding........................... -- -- Series A convertible preferred stock, $0.01 par value, 10,000 shares authorized, no shares issued or outstanding............................................... -- -- Class A common stock, $0.01 par value, one vote per share, 17,500,000 (in 1996) and 35,000,000 (in 1997) shares authorized, 10,972,090 (in 1996) and 25,528,532 (in 1997) shares issued............................................. 109 255 Class B common stock, $0.01 par value, 10 votes per share, 2,500,000 shares authorized, 1,936,600 shares issued (in 1996 and 1997)............................................ 19 19 Additional paid-in capital.................................. 114,891 425,222 Foreign currency translation adjustment..................... (720) (2,477) Retained earnings........................................... 6,476 36,250 Treasury stock, at cost (36,667 shares of Class A common stock).................................................... (330) (330) -------- ---------- Total stockholders' equity........................ 120,445 458,939 -------- ---------- Total liabilities and stockholders' equity........ $697,802 $3,687,308 ======== ==========
See accompanying notes to consolidated financial statements. F-4 7 BUDGET GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
1995 1996 1997 -------- -------- ---------- (IN THOUSANDS EXCEPT PER SHARE DATA) Operating revenue: Vehicle rental revenue.................................... $151,733 $276,294 $1,070,436 Retail vehicle sales revenue.............................. 86,178 169,336 289,111 Royalty fees and other.................................... 1,571 2,178 51,889 -------- -------- ---------- Total operating revenue........................... 239,482 447,808 1,411,436 -------- -------- ---------- Operating costs and expenses: Direct vehicle and operating.............................. 23,019 48,306 143,163 Depreciation -- vehicle................................... 38,077 71,734 292,112 Depreciation -- non-vehicle............................... 2,287 3,576 15,076 Cost of vehicle sales..................................... 76,848 146,513 251,068 Advertising, promotion and selling........................ 13,723 25,165 95,805 Facilities................................................ 12,409 21,387 96,804 Personnel................................................. 34,728 63,876 260,330 General and administrative................................ 14,323 17,807 77,628 Amortization.............................................. 859 1,843 8,454 -------- -------- ---------- Total operating costs and expenses................ 216,273 400,207 1,240,440 -------- -------- ---------- Operating income............................................ 23,209 47,601 170,996 -------- -------- ---------- Other (income) expense: Vehicle interest expense.................................. 20,491 32,405 101,066 Non-vehicle interest expense.............................. 728 1,732 20,075 Interest income -- restricted cash........................ (1,348) (781) (5,744) Non-recurring bank fees................................... -- 1,275 -- Related party interest expense............................ 159 118 -- -------- -------- ---------- Total other expense............................... 20,030 34,749 115,397 -------- -------- ---------- Income before income taxes.................................. 3,179 12,852 55,599 Provision for income taxes.................................. 1,467 5,101 25,825 -------- -------- ---------- Net income.................................................. $ 1,712 $ 7,751 $ 29,774 -------- -------- ---------- Weighted average number of shares outstanding -- basic...... 7,970 10,836 20,112 -------- -------- ---------- Basic earnings per share.................................... $ 0.21 $ 0.72 $ 1.48 -------- -------- ---------- Weighted average number of shares outstanding -- diluted.... 8,007 11,149 27,863 -------- -------- ---------- Diluted earnings per share.................................. $ 0.21 $ 0.70 $ 1.25 ======== ======== ==========
See accompanying notes to consolidated financial statements. F-5 8 BUDGET GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
FOREIGN CONVERTIBLE ADDITIONAL CURRENCY RETAINED TOTAL PREFERRED COMMON PAID-IN TRANSLATION EARNINGS TREASURY STOCKHOLDERS' STOCK STOCK CAPITAL ADJUSTMENT (DEFICIT) STOCK EQUITY ----------- ------ ---------- ----------- --------- -------- ------------- (IN THOUSANDS) BALANCE, JANUARY 1, 1995....... $ -- $ 75 $ 54,036 $ (833) $(2,987) $ -- $ 50,291 Net income................... -- -- -- -- 1,712 -- 1,712 Shares issued in business combinations............... -- 12 12,825 -- -- -- 12,837 Foreign currency translation................ -- -- -- 148 -- -- 148 Proceeds from exercise of stock options.............. -- -- 70 -- -- -- 70 Class A common stock acquired for treasury............... -- -- -- -- -- (330) (330) --------- ---- -------- ------- ------- ----- -------- BALANCE, DECEMBER 31, 1995..... -- 87 66,931 (685) (1,275) (330) 64,728 Net income................... -- -- -- -- 7,751 -- 7,751 Shares issued in business combinations............... -- 2 2,725 -- -- -- 2,727 Warrants issued in conjunction with financing.................. -- -- 686 -- -- -- 686 Net proceeds from stock offering .................. -- 38 44,402 -- -- -- 44,440 Foreign currency translation adjustment................. -- -- -- (35) -- -- (35) Proceeds from exercise of stock options.............. -- 1 147 -- -- -- 148 --------- ---- -------- ------- ------- ----- -------- BALANCE, DECEMBER 31, 1996..... -- 128 114,891 (720) 6,476 (330) 120,445 Net income................... -- -- -- -- 29,774 -- 29,774 Shares issued in business combinations............... 105,750 2 8,521 -- -- -- 114,273 Net proceeds from stock offerings.................. -- 91 188,406 -- -- -- 188,497 Proceeds from exercise of stock options.............. -- 6 5,663 -- -- -- 5,669 Foreign currency translation................ -- -- -- (1,757) -- -- (1,757) Conversion of preferred stock...................... (105,750) 45 105,705 -- -- -- -- Proceeds from exercise of warrants................... -- 2 2,036 -- -- -- 2,038 --------- ---- -------- ------- ------- ----- -------- BALANCE, DECEMBER 31, 1997..... $ -- $274 $425,222 $(2,477) $36,250 $(330) $458,939 ========= ==== ======== ======= ======= ===== ========
See accompanying notes to consolidated financial statements. F-6 9 BUDGET GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
1995 1996 1997 -------- -------- ---------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net Income................................................ $ 1,712 $ 7,751 $ 29,774 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 40,821 76,491 312,087 Deferred income tax provision.......................... 1,332 4,247 25,836 Warrants issued in connection with financing........... -- 686 -- Changes in operating assets and liabilities, net of effects from acquisitions: Trade and vehicle receivables, net..................... (10,356) (2,988) (95,635) Prepaid expenses and other assets...................... (1,606) (53) (7,359) Vehicle inventory...................................... (2,987) (1,253) (3,284) Accounts payable, accrued and other liabilities........ 2,286 (7,704) (25,774) -------- -------- ---------- Net cash provided by operating activities......... 31,202 77,177 235,645 -------- -------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Change in restricted cash balance......................... (13,271) 1,395 (213,715) Proceeds from sale of revenue earning vehicles............ 317,658 484,084 1,747,286 Proceeds from sale of property and equipment.............. 3 4 19,490 Purchases of revenue earning vehicles..................... (362,038) (569,118) (2,063,627) Purchases of property and equipment....................... (4,804) (3,362) (10,893) Payment for acquisitions, net of cash acquired............ (6,507) (5,064) (143,164) -------- -------- ---------- Net cash used in investing activities............. (68,959) (92,061) (664,623) -------- -------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from equity transactions, net.................... 70 44,588 196,204 Net increase (decrease) in vehicle obligations............ 28,672 (208,920) (694,100) Net increase (decrease) in working capital facilities..... 6,890 (9,500) -- Net increase (decrease) in commercial paper............... (276) (4,900) 348,850 Proceeds from other notes payable......................... 3,399 256,000 710,000 Principal payments on other notes payable................. (2,608) (8,876) (24,099) Payment of financing fees................................. (76) (2,237) -- Purchase of treasury stock................................ (330) -- -- -------- -------- ---------- Net cash provided by financing activities......... 35,741 66,155 536,855 -------- -------- ---------- Effect of exchange rate changes on cash................... 148 (35) (431) -------- -------- ---------- Net increase (decrease) in cash and cash equivalents...... (1,868) 51,236 107,446 Cash and cash equivalents, beginning of year.............. 4,641 2,773 54,009 -------- -------- ---------- Cash and cash equivalents, end of year.................... $ 2,773 $ 54,009 $ 161,455 ======== ======== ==========
See accompanying notes to consolidated financial statements. F-7 10 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997 (DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) (1) SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Budget Group, Inc. and subsidiaries (the "Company") are engaged in the business of the daily rental of vehicles, including cars, trucks, passenger vans and recreational vehicles (through both owned and franchised operations) and the sale of late model used vehicles and new recreational vehicles. 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 (formerly Team Rental Group, Inc.) to Budget Group, Inc. Prior to the acquisition (the "BRACC Acquisition"), the Company was the largest United States franchisee of BRACC. On January 28, 1998, the Company completed its acquisition of Cruise America, Inc. ("Cruise") in a stock-for-stock merger accounted for as a pooling of interests. In connection with the merger, the Company issued 1,623,462 shares of Class A common stock in exchange for all the outstanding common stock of Cruise. In addition, the Company issued 111,478 options to purchase Class A common stock in exchange for all of the outstanding options to purchase stock of Cruise. The accompanying consolidated financial statements have been restated to include the accounts of Cruise as if the companies had combined at the beginning of the first period presented. Prior to the merger, Cruise's fiscal year ended on April 30. In recording the business combination, Cruise's prior year financial statements have been restated to conform with the Company's fiscal year end. There were no significant transactions between the Company and Cruise prior to the combination and immaterial adjustments were recorded to conform Cruise's accounting policies. The results of operations for the separate companies and the combined amounts presented in the consolidated statements of income are as follows.
YEAR ENDED DECEMBER 31, -------------------------------- 1995 1996 1997 -------- -------- ---------- Operating revenue Budget Group, Inc......................................... $149,729 $357,370 $1,303,762 Cruise America, Inc. ..................................... 89,753 90,438 107,674 -------- -------- ---------- Combined............................................... $239,482 $447,808 $1,411,436 ======== ======== ========== Net Income Budget Group, Inc. ....................................... $ 337 $ 4,497 $ 36,926 Cruise America, Inc. ..................................... 1,375 3,254 (7,152) -------- -------- ---------- Combined............................................... $ 1,712 $ 7,751 $ 29,774 ======== ======== ==========
Company-owned vehicle rental operations are located primarily throughout the United States and Western Europe. The largest concentration (approximately 20%) 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, F-8 11 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) under which the Company's share of operating results is reflected in income as earned and dividends are credited against the investment when received. 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 funds borrowed under medium term note and commercial paper programs not invested in revenue earning vehicles. Under the terms of these agreements, any unused funds are required to be maintained in restricted accounts and are invested in qualified short-term instruments. TRADE AND VEHICLE RECEIVABLES, NET Trade and vehicle receivables are stated net of the related allowance for doubtful accounts. The following table reflects the activity in the allowance for doubtful accounts for each of the three years in the period ended December 31, 1997:
1995 1996 1997 ------- ------ ------- Balance at beginning of year............................... $ 655 $2,451 $ 4,063 Provision.................................................. 802 453 8,415 Writeoffs.................................................. (1,350) (181) (9,035) Increase due to acquisitions............................... 2,344 1,340 45,629 ------- ------ ------- Balance at end of year..................................... $ 2,451 $4,063 $49,072 ======= ====== =======
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 or fair market value at the date of acquisition, as appropriate, and are depreciated over their estimated economic lives or at rates corresponding to manufacturers' repurchase program guidelines, where applicable. Repurchase programs typically require the manufacturers to repurchase the vehicles after varying time frames at agreed upon prices (subject to defined condition and mileage standards). 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 period of the vehicles. Gains and losses upon the sale of revenue earning vehicles are recorded as an adjustment to depreciation expense. F-9 12 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment is recorded at cost or fair market value at the date of acquisition, as appropriate. Depreciation is being provided on the straight-line method over the following estimated useful lives: Buildings................................................... 10-25 years Equipment, furniture and fixtures........................... 3-10 years
The carrying value of property and equipment 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, 1997, the assessment of recoverability will be impacted if estimated projected undiscounted operating cash flows are not achieved. DEFERRED FINANCING FEES Direct costs incurred in connection with the Company's borrowings have been recorded as a prepaid expense and are being amortized over the terms of the related loan agreements to interest expense on the straight-line method, which approximates the effective interest 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. COMPUTER SOFTWARE SYSTEMS The Company's purchased reservation system and associated applications and databases have been recorded at fair market value at the date of acquisition. Costs associated with the internal development of other computer software systems and system enhancements are capitalized. Amortization is being provided on the straight-line method over two to eight years. INTANGIBLES, INCLUDING GOODWILL Intangible assets, net, consist of the following at December 31:
1996 1997 ------- -------- Franchise agreements........................................ $ -- $118,000 Trade name.................................................. -- 187,817 Goodwill.................................................... 70,893 226,411 ------- -------- $70,893 $532,228 ======= ========
Identifiable intangible assets primarily arose from the allocation of purchase prices of businesses acquired. Franchise agreements and trade name relate to the BRACC Acquisition. Goodwill represents the excess of the purchase price over the estimated fair value of all identifiable assets acquired. The intangible assets are amortized over 40 years using the straight-line method. The carrying value of intangibles 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, 1997, the assessment of recoverability will be impacted if estimated projected undiscounted operating cash flows are not achieved. F-10 13 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ENVIRONMENTAL COSTS Environmental remediation costs are recorded in accounts payable, accrued and other liabilities and in facilities expense in the accompanying consolidated financial statements 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 largely self-insured with respect to personal and property liability claims up to specified limits. Third-party insurance is maintained in limited areas and for claims in excess of those specified limits. A liability in the amount of approximately $5,130 and $129,774 as of December 31, 1996 and 1997, respectively, which is included in accounts payable, accrued and other liabilities, is recorded for known claims and for incurred but not reported incidents based on actuarially computed estimates of 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 $58,156 at December 31, 1997, 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 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 Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation". 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. ROYALTY FEES AND OTHER REVENUES Royalty fees and other revenues largely consist of monthly royalty fees from franchisees, income before interest and taxes for insurance product 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. F-11 14 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ADVERTISING, PROMOTION AND SELLING Advertising, promotion and selling expense, other than direct response advertising, are charged to expense as incurred. The Company incurred advertising expense of $4,244, $9,094 and $36,636 in 1995, 1996 and 1997, respectively. 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 and other assets in the accompanying consolidated balance sheets. Accounts receivable under cap agreements are accrued with a corresponding reduction of interest expense. There were no such agreements outstanding at December 31, 1997. 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. There were no such contracts outstanding at December 31, 1997. The Company does not engage in speculative derivatives. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share". SFAS No. 128 established new 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. Basic EPS was calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS was calculated by dividing net income available to common stockholders after assumed conversion of dilutive securities by the sum of the weighted average number of common shares outstanding plus all additional common shares that would have been outstanding if potentially dilutive common shares had been issued. The following table reconciles the net income and number of shares utilized in the EPS calculations for each of the three years in the period ended December 31, 1997 (share information in thousands):
YEAR ENDED DECEMBER 31, -------------------------- 1995 1996 1997 ------ ------- ------- Net income................................................. $1,712 $ 7,751 $29,774 Effect of interest and loan fee amortization on convertible securities -- net of income taxes........................ -- -- 4,983 ------ ------- ------- Net income available to common stockholders after assumed conversion of dilutive securities........................ $1,712 $ 7,751 $34,757 ------ ------- ------- Weighted average number of common shares used in basic EPS...................................................... 7,970 10,836 20,112 Effect of dilutive securities: Stock options.............................................. 37 313 704 Convertible securities..................................... -- -- 7,047 ------ ------- ------- Weighted average number of common shares and dilutive potential common stock used in diluted EPS............... 8,007 11,149 27,863 ====== ======= =======
F-12 15 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Options to purchase approximately 77,000 shares of Class A common stock were outstanding at December 31, 1997, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the stock for the period. STOCK OPTIONS In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation", 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 based 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 earnings per share, as if the fair value based method of accounting had been applied. 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 3,821,007 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. The Company sold 8,625,000 shares of Class A common stock on April 29, 1997 (at a price of $21.625 per share) raising proceeds of $174,489, net of applicable offering costs. An additional 450,000 shares of Class A common stock were sold on October 1, 1997 (at a price of $33.00 per share) raising net proceeds of $14,008. The net proceeds of the April offering were used to provide a portion of the financing for the BRACC Acquisition. The net proceeds of the October offering were used for working capital purposes. (3) ACQUISITIONS During 1995, 1996 and 1997, the Company acquired certain Budget franchise operations, retail vehicle sales operations, a commuter van pooling operation, BRACC and an insurance replacement car rental business. 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 tangible and identifiable intangible assets acquired and liabilities assumed. The accompanying consolidated statements of income and cash flow reflect the operations of the acquired companies from their respective acquisition dates. 1995 ACQUISITIONS Acquisition of 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. F-13 16 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Acquisition of 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. Acquisition of 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. Acquisition of BRAC-OPCO Franchise -- In October 1995, the Company purchased all of the outstanding stock of BRAC-OPCO, Inc., which operated 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 Acquisition of VPSI, Inc. ("VPSI") 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 provided commuter van 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 $18,000, consisting of cash of approximately $5,000, promissory notes of $10,000 and 272,727 shares of Class A common stock. Acquisition of ValCar Rental Car Sales, Inc. ("ValCar") -- In August 1996, the Company acquired all of the outstanding stock of ValCar for $400 in cash. ValCar owned and operated four retail vehicle sales facilities in Indianapolis, Indiana, and was formerly owned by a director and officer of the Company. 1997 ACQUISITIONS BRACC Acquisition -- On January 13, 1997, the Company entered into an agreement to purchase all of the outstanding shares of BRACC in a purchase transaction. The cash portion of the purchase price (approximately $275,000) was partially funded through the April stock offering (see Note 2 to supplemental consolidated financial statements). The Company also issued to Ford Motor Company 4,500 shares of Series A convertible, non-voting preferred stock, each share of which was converted into 1,000 shares of the Company's Class A common stock. 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 beginning on January 12) and $95,175 at the time of issuance. The Company also entered into the following debt financing transactions concurrently with the BRACC Acquisition: (i) $165,000 of guaranteed senior notes at a rate of 9.57% maturing in 2007; (ii) $45,000 of convertible subordinated notes at a rate of 6.85% maturing in 2007; (iii) a variable-rate commercial paper vehicle financing facility in the amount of $900,000; (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 secured working capital facility bearing interest at an initial rate of 1.75% over LIBOR and secured primarily by accounts receivable, cash and unencumbered vehicles. Acquisition of Premier Car Rental -- On July 31, 1997, the Company acquired, through its wholly owned subsidiary, Premier Car Rental LLC ("Premier"), the fleet and certain other assets and assumed certain liabilities of Premier Car Rental, Inc. for approximately $87,200, consisting of $2,000 in cash and the refinancing of approximately $85,200 of Premier Car Rental, Inc.'s outstanding fleet indebtedness. Premier operates as its own brand and serves the insurance replacement market. F-14 17 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Acquisition of St. Louis Franchise -- On October 1, 1997, the Company purchased all of the outstanding stock of Budget Rent a Car of St. Louis, Inc., located in St. Louis, Missouri, for approximately $9,524, consisting of cash of $1,000 and 246,167 shares of Class A common stock. If the 1996 and 1997 acquisitions had occurred at the beginning of 1996, 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 1996.
YEAR ENDED DECEMBER 31, ----------------------- 1996 1997 ---------- ---------- (UNAUDITED) Operating revenue........................................... $1,617,869 $1,784,440 Net income.................................................. 23,930 15,872 EPS -- basic................................................ 1.21 0.69 EPS -- diluted.............................................. 0.97 0.58
(4) REVENUE EARNING VEHICLES Revenue earning vehicles consist of the following at December 31:
1996 1997 -------- ---------- Revenue earning vehicles.................................... $435,648 $2,376,834 Less -- accumulated depreciation............................ (36,755) (286,130) -------- ---------- $398,893 $2,090,704 ======== ==========
(5) PROPERTY AND EQUIPMENT Property and equipment, net, consist of the following at December 31:
1996 1997 -------- -------- Land........................................................ $ 8,552 $ 30,301 Buildings and leasehold improvements........................ 24,445 101,427 Furniture, fixtures and office equipment.................... 18,968 54,225 -------- -------- 51,965 185,953 Less -- accumulated depreciation and amortization........... (23,127) (38,406) -------- -------- $ 28,838 $147,547 ======== ========
(6) PREPAID EXPENSES AND OTHER ASSETS Prepaid expenses and other assets include purchased software and capitalized software systems development costs, net of accumulated amortization, which amounts to approximately $6,806 at December 31, 1997. In addition, prepaid expenses and other assets include the Company's 20% investment in a foreign rental operation. The revenue of the Company's investee amounts to less than 10% of consolidated revenues and the amount of undistributed earnings included in consolidated retained earnings is not significant. F-15 18 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (7) NOTES PAYABLE Notes payable consist of the following at December 31:
1996 1997 -------- ---------- Commercial paper............................................ $ -- $ 871,448 Medium term notes: Senior...................................................... 304,500 1,267,376 Subordinated................................................ 17,182 44,682 Convertible subordinated notes.............................. 80,000 125,000 Vehicle obligations......................................... 91,889 86,400 Guaranteed senior notes..................................... -- 165,000 Senior term notes........................................... 17,013 14,171 Foreign notes............................................... -- 66,781 Note payable to vendor...................................... -- 15,677 Other....................................................... 20,812 29,664 -------- ---------- $531,396 $2,686,199 ======== ==========
COMMERCIAL PAPER The $900,000 commercial paper facility (the "Paper") was established in April 1997, bears interest at rates ranging from 5.75% to 6.15% at December 31, 1997, and 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 ($825,000) or a related letter of credit ($95,000). The Paper is issued periodically with maturities of up to 58 days. It is the Company's intention and ability to renew the liquidity facility or to obtain financing under similar terms when the present agreement expires in April 1998. No amounts were drawn under the bank provided liquidity facility or related letter of credit at December 31, 1997. MEDIUM TERM NOTES Medium term notes are comprised of notes issued in August 1994 ("TFFC-94 notes"), notes assumed in the acquisition of BRAC-OPCO, Inc. in October 1995 ("OPCO notes"), notes issued in December 1996 ("TFFC-96 notes"), notes issued in April 1997 ("TFFC-97 notes") and notes assumed in the BRACC Acquisition ("BFFC-94A notes") (collectively "MTN notes"). MTN notes are secured by the underlying vehicles and restricted cash of $66,336 and $282,731 at December 31, 1996 and 1997, respectively. Under limited circumstances the MTN notes may be repaid by draws under related letters of credit amounting to $85,000 at December 31, 1997. No amounts were drawn under the related letter of credit at December 31, 1997. 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, 1996 and 1997, bear interest at an average LIBOR rate, as defined, plus 0.75% (6.86% per annum at December 31, 1997). 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, 1996 and 1997, bear interest at an average LIBOR rate, as defined, plus 1.30% (7.41% per annum at December 31, 1997) and are payable in full in December 1999. Interest on the TFFC-94 notes is payable monthly. The BFFC-94A notes consist of an aggregate principal balance of $500,000 at December 31, 1997 and bear interest at an average LIBOR rate, as defined, plus 0.50% (6.36% per annum at December 31, 1997). Interest on the BFFC-94A notes is payable monthly. Monthly principal payments of $83,333 commence in April 1999, with the last payment due in September 1999. F-16 19 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The OPCO notes consist of senior notes and subordinated notes. The senior notes, with an aggregate principal balance of $38,500 and $28,876 at December 31, 1996 and 1997, bear interest at an average LIBOR rate, as defined, plus 0.60% (6.71% per annum at December 31, 1997). Monthly principal payments of $4,812 commenced 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, 1996 and 1997, bear interest at an average LIBOR rate, as defined, plus 1.0% (7.11% per annum at December 31, 1997) 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 and 1997, bear interest at 6.65% per annum. Monthly principal payments of $13,833 commence in May 2001 with the last payment due in April 2002. The subordinated notes, with an aggregate principal balance of $10,000 at December 31, 1996 and 1997, bear interest at 7.10% per annum and are payable in full in 2002. Interest on the TFFC-96 notes is payable monthly. The TFFC-97 notes consist of senior notes and subordinated notes. The senior notes, with an aggregate principal balance of $472,500 at December 31, 1997, bear interest at 7.35% per annum. Monthly principal payments of $39,375 commence in November 2001, with the last payment due in October 2002. The subordinated notes, with an aggregate principal balance of $27,500 at December 31, 1997, bear interest at 7.80% per annum and are payable in full in 2002. Interest on the TFFC-97 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 7.0% per annum due 2003. The term of the notes was extended to 2007 in conjunction with the BRACC Acquisition. At a conversion price of $20.07 per share, the convertible subordinated notes are convertible into 3,986,049 shares of Class A common stock. In April 1997, the Company issued convertible subordinated notes with an aggregate principal amount of $45,000 bearing interest at 6.85% per annum due 2007. At a conversion price of $27.96 per share, the convertible subordinated notes are convertible into 1,609,442 shares of Class A common stock. VEHICLE OBLIGATIONS Vehicle obligations consist of outstanding lines of credit to purchase rental vehicles and vehicle inventory. Collateralized lines of credit at December 31, 1997, consist of $13,000 for rental cars and approximately $27,000 for retail car sales inventory with maturity dates through May 1998 and approximately $125,000 for recreational rental and sales vehicles with maturities through December 2001. Vehicle obligations are collateralized by vehicles financed under these credit facilities and proceeds from the sale, lease or rental of rental vehicles and vehicle inventory. Vehicle obligations relating to the rental fleet are generally amortized over five to 15 months with monthly principal payments generally ranging from 2.0% to 3.0% 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 10.5% at December 31, 1997. 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 repurchase programs or from the sale of the vehicles. GUARANTEED SENIOR NOTES Concurrent with the BRACC Acquisition, the Company issued $165,000 of guaranteed senior notes. The guaranteed senior notes bear interest at 9.57% per annum, mature in 2007 and are unsecured. The agreement F-17 20 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) under which the notes were issued includes certain covenants, the most restrictive of which require the Company to maintain certain financial ratios and minimum net worth. At December 31, 1997, the Company was in compliance with all covenants. SENIOR TERM NOTES The senior term notes bear interest at 9.0% per annum and are payable in annual installments through March 2002. FOREIGN NOTES The foreign notes primarily provide financing for vehicle purchases and the funding of working capital. At December 31, 1997, approximately $64,885 relates to vehicle debt while $1,896 relates to the funding of working capital and various other debt. The foreign notes are largely secured by vehicles, bear interest at rates ranging from 6.55% to 9.0% per annum and mature from 1998 through 2003. NOTE PAYABLE TO VENDOR The note payable to vendor relates to the Company's license agreement for the reservation system and associated applications and databases. The note bears interest at 6.20% per annum and is due in November 1998. WORKING CAPITAL FACILITIES The Company has a $300,000 five-year senior, secured revolving credit facility, bearing interest at an initial rate of 1.75% over LIBOR. At December 31, 1997, the Company had $238,156 in letters of credit outstanding under this facility. The working capital facility is secured by eligible cash, eligible receivables and unencumbered vehicles. The agreement governing the credit facility includes certain convenants, the most restrictive of which require the Company to maintain certain financial ratios and minimum tangible net worth and restrict the payment of cash dividends. At December 31, 1997, the Company was in compliance with all convenants. No amounts were drawn on this facility at December 31, 1997. Scheduled aggregate maturities of notes payable at December 31, 1997, are as follows:
YEAR ENDING DECEMBER 31, AMOUNT - ------------------------ ---------- 1998........................................................ $1,097,351 1999........................................................ 609,860 2000........................................................ 5,098 2001........................................................ 192,566 2002........................................................ 490,383 Thereafter.................................................. 290,941 ---------- $2,686,199 ==========
(8) RELATED PARTY TRANSACTIONS The Company leases facilities from an entity owned by certain stockholders. Operating lease payments for the years ended December 31, 1995, 1996 and 1997, were $220, $227 and $586, respectively. The entity assigned lease payments from the Company to a bank. At December 31, 1996 and 1997, the Company had a payable to a stockholder and director in the amount of $1,500 which is included in notes payable in the accompanying consolidated balance sheet. The outstanding F-18 21 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) balance bears interest at prime plus 2.0% (10.50% per annum at December 31, 1997), is unsecured and is payable on demand. Approximately $4,013 and $19,811 of cash and cash equivalents are on deposit with or are being held as agent for the Company by a bank at December 31, 1996 and 1997, respectively. A stockholder and director of the Company served on the bank's board of directors. In connection with the BRAC-OPCO franchise 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. BRACC had a similar agreement related to the Los Angeles airport. A director of the Company is the Chief Executive Officer and a general partner of the seller. In 1996 and 1997, the Company paid the seller approximately $3,700 and $6,213, respectively, in royalty fees in accordance with these agreements. For many years, Ford has been BRACC's principal supplier of vehicles and held an equity interest in the Company from the time of the BRACC Acquisition through October 6, 1997. 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 BRACC 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. 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. (9) LEASES The Company leases certain revenue earning vehicles and facilities under operating leases that expire at various dates. 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. In addition, the Company guarantees airport commission fees on behalf of certain licensees. Expense for operating leases and airport concession fees consists of the following:
YEAR ENDED DECEMBER 31, ---------------------------- 1995 1996 1997 ------- ------- -------- Revenue earning vehicles................................. $ 1,518 $ 1,555 $ 15,914 Facilities: Minimum rentals.......................................... 7,202 15,403 66,566 Contingent rentals....................................... 3,502 3,353 17,615 ------- ------- -------- $12,222 $20,311 $100,095 ======= ======= ========
F-19 22 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Future minimum payments under noncancellable leases and concession agreements at December 31, 1997, are as follows:
YEAR ENDING DECEMBER 31, - ------------------------ 1998........................................................ $ 51,028 1999........................................................ 34,925 2000........................................................ 27,427 2001........................................................ 21,425 2002........................................................ 17,509 Thereafter.................................................. 41,575 -------- $193,889 ========
(10) INCOME TAXES The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31, ------------------------- 1995 1996 1997 ------ ------ ------- Current: Federal................................................... $ -- $ 104 $ (11) State..................................................... 145 750 502 Foreign................................................... -- -- 816 Deferred.................................................. 1,322 4,247 24,518 ------ ------ ------- $1,467 $5,101 $25,825 ====== ====== =======
The provision for income taxes differs from the amount computed using the statutory federal income tax rate as follows:
YEAR ENDED DECEMBER 31, ------------------------- 1995 1996 1997 ------ ------ ------- Income tax provision at federal statutory rate.............. $1,078 $4,356 $19,536 Effect of earnings of nontaxable (subchapter S) companies... -- (87) -- Nondeductible portion of amortization of intangibles........ 94 306 2,466 State tax provision, net of federal benefit................. 315 624 876 Change in valuation allowance............................... -- -- 2,361 Other....................................................... (20) (98) 586 ------ ------ ------- $1,467 $5,101 $25,825 ====== ====== =======
F-20 23 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The tax effects of temporary differences that give rise to the deferred tax assets and liabilities at December 31, relate to the following:
1996 1997 -------- -------- Deferred tax assets: Net operating loss carryforwards.......................... $ 24,234 $ 78,258 Estimated self insurance liability........................ 1,998 55,358 Accrued expenses -- pension............................... -- 8,549 Accounts receivable, principally due to allowance for doubtful accounts..................................... -- 8,570 Business tax credit carryforwards......................... 540 7,654 Foreign tax credit carryforwards.......................... -- 1,930 Alternative minimum tax carryforwards..................... 1,072 3,907 Foreign tax assets and net operating loss carryforwards... -- 2,319 Non-deductible reserves, accrued expenses and other....... 4,461 15,683 -------- -------- Total gross deferred tax assets................... 32,305 182,228 Less -- valuation allowance....................... (9,622) (74,666) -------- -------- 22,683 107,562 Deferred tax liabilities: Difference between book and tax bases of revenue earning vehicles and property and equipment.................... 30,894 86,654 Intangibles............................................... 1,835 127,878 Other..................................................... -- 3,509 -------- -------- Total gross deferred tax liabilities.............. 32,729 218,041 -------- -------- Net deferred tax liability........................ $ 10,046 $110,479 ======== ========
At December 31, 1997, the Company and its subsidiaries have federal tax loss carryforwards of approximately $211,233 expiring through 2011. The Company has recorded a valuation allowance for a portion of the acquired net operating loss carryforwards and other credit carryforwards due to the uncertainty of their ultimate realization. Any subsequently recognized tax benefits attributed to the change in the valuation allowance will reduce intangibles. 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 increase in the valuation allowance during 1997 resulted from the net operating loss carryforwards and other credit carryforwards acquired in the BRACC Acquisition that will be limited in their use. (11) PENSION AND OTHER BENEFIT PLANS Substantially all employees in 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 plan is to contribute the minimum ERISA contribution required under the projected unit credit actuarial cost method. The domestic defined benefit pension plan has been suspended. As a result of this suspension, employees 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 $695 in 1997. The Company maintains an unfunded, nonqualified plan providing benefits to certain of its officers, (the "Executive Protection Plan") based on percentage of final compensation. The cost of the Executive Protection Plan was approximately $161 in 1997. 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 F-21 24 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, plus an additional contribution 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 $147 and $4,025 in 1996 and 1997, respectively. Each of the Company's domestic defined benefit plan's accumulated benefits exceed the plan's assets at December 31, 1997. 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, 1997:
DOMESTIC FOREIGN PLANS PLAN -------- ------- Actuarial present value of benefit obligations: Vested benefits........................................... $ 29,303 $5,464 Nonvested benefits........................................ 1,033 147 -------- ------ Accumulated benefit obligation.............................. $ 30,336 $5,611 -------- ------ Projected benefit obligation for service rendered to date... $ 30,388 $6,684 Plan assets at fair value, primarily participation in common trust funds............................................... 17,220 9,056 -------- ------ Excess (deficiency) of plan assets over projected benefit obligation................................................ (13,168) 2,372 Unrecognized net asset at transition........................ 1,080 (3) Unrecognized net loss (gain)................................ (6,994) 423 -------- ------ Prepaid (accrued) pension cost.............................. $(19,082) $2,792 -------- ------ Service cost for benefits earned during the period.......... $ 48 $ 537 Interest cost on projected benefit obligation............... 1,383 394 Return on plan assets....................................... (1,213) (754) Net amortization and deferral............................... 730 -- -------- ------ Pension expense............................................. $ 948 $ 177 ======== ======
The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation for 1997 was 7%. 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 1997 was 9.5%. F-22 25 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 pro forma amounts:
YEAR ENDED DECEMBER 31, ------------------------- 1995 1996 1997 ------ ------ ------- Net income.............................................. As Reported $1,712 $7,751 $29,774 Pro Forma 1,339 6,596 25,189 EPS -- basic............................................ As Reported 0.21 0.72 1.48 Pro Forma 0.17 0.61 1.25 EPS -- diluted.......................................... As Reported 0.21 0.70 1.25 Pro Forma 0.17 0.61 1.11
The calculated 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 1,750,000 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 are exercisable not less than six months nor more than 10 years after the date of grant. Options granted under the ISO Plan in 1997 become exercisable between 18 and 24 months 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 and are exercisable not less than six months nor more than 10 years after the date of grant. Options granted under the Directors' Plan in 1997 become exercisable six months 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. A summary of the status of the Company's two stock option plans at December 31, 1995, 1996 and 1997 and activity during the years then ended is presented in the table and narrative below:
WEIGHTED AVERAGE SHARES EXERCISE PRICE --------- -------------- Outstanding -- December 31, 1994............................ 123,783 $10.54 Granted................................................... 202,000 9.50 Exercised................................................. (6,569) 10.69 --------- Outstanding -- December 31, 1995............................ 319,214 9.88 Granted................................................... 572,916 12.05 Exercised................................................. (16,026) 10.23 Forfeited................................................. (8,600) 11.13 --------- Outstanding -- December 31, 1996............................ 867,504 11.29 Granted................................................... 1,674,480 22.87 Exercised................................................. (547,632) 10.66 Forfeited................................................. (86,290) 19.25 --------- Outstanding -- December 31, 1997............................ 1,908,062 21.27 =========
F-23 26 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of December 31, 1997, options for 1,668,062 shares and 240,000 shares of Class A and Class B common stock, respectively, remained outstanding under the Company's stock option plans.
1995 1996 1997 -------- -------- -------- Exercisable at end of year Shares............................................... 117,214 352,721 326,178 Weighted average exercise price...................... $ 10.53 $ 10.36 $ 13.85 Weighted average fair value of options granted during the year............................................. $ 4.52 $ 4.89 $ 10.07
At December 31, 1997, 1,413,285 of the 1,908,062 options outstanding have an exercise price of $22.38 and a remaining contractual life of 9.3 years. Of these options, 60,000 are exercisable. The remaining 494,777 options have exercise prices between $9.50 and $36.44, with a weighted average exercise price of $18.11 and a weighted average remaining contractual life of 8.5 years. Of these options, 266,178 are exercisable with a weighted average exercise price of $11.92. The 494,777 options includes the pro forma issuance of 111,478 options to Cruise option holders with a weighted average exercise price of $12.86. 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 weighted average risk-free rate of return of 5.89% and an expected life of three years were assumed. For options granted under the Directors' Plan, a risk-free rate of return of 6.63% and an expected life of five years were assumed. Additionally, for each option plan there was no expected dividend yield and an expected volatility of 58%. (12) COMMON STOCK WARRANT Concurrent with the acquisition of the Budget franchise in Philadelphia and in consideration of the abatement of certain future royalty fees to BRACC with respect to the 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. This warrant has been retired in 1997 following the Company's acquisition of BRACC. (13) COMMITMENTS AND CONTINGENCIES In October 1997, a California jury awarded damages of approximately $7.4 million against Cruise in the lawsuit entitled Altman's America, et al. v. American Land Cruisers of California et al. The judgment included a $2.6 million award of punitive damages. In addition, in November 1997, the court awarded plaintiff's counsel fees and expenses of $2.5 million. The Company believes the jury verdict is unjust and that the damages awarded are inappropriate and excessive. The Company intends to vigorously pursue a reversal of the jury decision or the elimination of the damages awarded through the California Court of Appeal. The action arose out of a claim for an alleged wrongful termination by Cruise of a sublease agreement with one of its former concession operators. The lawsuit has been pending since May 1987 and has been tried twice previously. The first trial resulted in a judgment for the plaintiff of approximately $3.5 million that was reversed on appeal and remanded for retrial. The second trial resulted in a net judgment for Cruise of $399,000, which was reduced on appeal and again remanded for a retrial. Pending appeal, the Company has taken a one-time charge of $10 million to establish an accrual for damages in the fourth quarter of 1997. This charge is included in general and administrative expenses in the accompanying supplemental consolidated statements of income. 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. F-24 27 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, 1997, the Company has accrued $3,301 for estimated environmental remediation costs and expects to expend approximately $2,600 during 1998. Amounts receivable from third parties for reimbursement of remediation expenditures are not significant. Due to factors such as continuing changes in the environmental laws and regulatory requirements, the availability and application of technology, the identification of presently unknown remediation sites and changes in the extent of expected remediation efforts, estimated costs for future environmental compliance and remediation are subject to uncertainty and it is difficult to predict the amount or timing of future remediation requirements. 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) 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, TRADE AND VEHICLE RECEIVABLES AND ACCOUNTS PAYABLE, ACCRUED AND OTHER LIABILITIES The carrying amounts of these financial assets and liabilities at December 31, 1996 and 1997, 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 market value at December 31, 1996 and 1997, 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 and 1997, due to the recent issuance of such debt or because such notes do not have terms that differ materially from those currently available to the Company. (15) SUPPLEMENTAL CASH FLOW DISCLOSURES In 1995, the Company issued 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 1996, the Company issued 272,727 shares of Class A common stock with a value of $2,727 and notes payable of $10,000 for the 1996 acquisitions. In 1997, the Company issued 4,746,167 shares of Class A common stock with a value of $114,274 for the 1997 acquisitions. These amounts reflect the conversion of 4,500 shares of Series A convertible, non-voting preferred stock into 4,500,000 shares of Class A common stock which were sold by the selling stockholder in October 1997. The Company paid interest of $20,656, $34,333 and $109,476 in 1995, 1996 and 1997, respectively. Income taxes of $346, $1,017, and $1,796 were paid in 1995, 1996 and 1997, respectively. F-25 28 BUDGET GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On occasion, the Company acquires goods and services in exchange for revenue earning vehicles. During 1997, revenue earning vehicles in the amount of $2,100 were exchanged for goods and services. (16) 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, 1995, is as follows:
RETAIL VEHICLE SALES VEHICLE RENTAL CONSOLIDATED -------------- -------------- ------------ Sales to unaffiliated customers.................. $86,178 $153,304 $239,482 Depreciation and amortization.................... 193 41,030 41,223 Operating income................................. 5,943 17,266 23,209 Income (loss) before income taxes................ 6,558 (3,379) 3,179 Identifiable assets.............................. 45,782 437,962 483,744 Capital expenditures -- revenue earning vehicles....................................... -- 362,038 362,038
Segment information for the year ended December 31, 1996, is as follows:
RETAIL VEHICLE SALES VEHICLE RENTAL CONSOLIDATED -------------- -------------- ------------ Sales to unaffiliated customers.................. $169,336 $278,472 $447,808 Depreciation and amortization.................... 1,482 75,671 77,153 Operating income................................. 4,307 43,294 47,601 Income before income taxes....................... 2,859 9,993 12,852 Identifiable assets.............................. 60,962 636,840 697,802 Capital expenditures -- revenue earning vehicles....................................... -- 569,118 569,118
Segment information for the year ended December 31, 1997, is as follows:
RETAIL VEHICLE SALES VEHICLE RENTAL CONSOLIDATED -------------- -------------- ------------ Sales to unaffiliated customers.................. $289,111 $1,122,325 $1,411,436 Depreciation and amortization.................... 283 315,359 315,642 Operating income................................. 1,411 169,585 170,996 Income before income taxes....................... 1,917 53,682 55,599 Identifiable assets.............................. 113,436 3,573,872 3,687,308 Capital expenditures -- revenue earning vehicles....................................... -- 2,063,627 2,063,627
(17) SUBSEQUENT EVENTS On March 4, 1998, the Company entered into an Agreement and Plan of Merger, as amended (the "Merger Agreement"), to acquire all of the outstanding stock of Ryder TRS Inc. ("Ryder TRS"), based in Denver, Colorado, for approximately $264,000 of cash, Class A common stock and warrants, subject to adjustment and the other terms and conditions of the Merger Agreement. In addition, the Company will assume approximately $266,000 of fleet debt and $175,000 of other debt. The acquisition will be accounted for under the purchase method of accounting. F-26 EX-23.1 2 CONSENT OF ARTHUR ANDERSEN 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS As independent certified public accountants, we hereby consent to the incorporation by reference of our report included in this Form 8-K into Budget Group, Inc.'s (formerly known as Team Rental Group, Inc.) previously filed Registration Statement File No.'s 333-41093, 333-47079, 333-04757 and 333-49819. May 28, 1998 /s/ Arthur Andersen LLP Orlando, Florida EX-23.2 3 CONSENT OF DELOITTE & TOUCHE 1 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-04757, 333-47079 and 333-9819 of Budget Group, Inc. (formerly known as Team Rental Group, Inc.) on Form S-8 and Registration Statement No. 333-41093 of Budget Group, Inc. on Form S-3 of our report dated April 12, 1996, appearing in the Current Report on Form 8-K of Budget Group, Inc. dated May 28, 1998. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Indianapolis, Indiana May 28, 1998 -----END PRIVACY-ENHANCED MESSAGE-----