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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(MARK)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE PERIOD ENDED
JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
Commission File Number 000-24019
United Road Services, Inc.
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-3278455
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17 Computer Drive West
Albany, New York 12205
---------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518) 446-0140
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes X No
--- ---
As of August 14, 2002, the registrant had 2,086,475 shares of common stock
issued and outstanding.
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UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
Form 10-Q For The Three and Six Months Ended June 30, 2002
Index Page
Part I. - Financial Information
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2002 and December 31, 2001 3
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2002 and June 30, 2001 4
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 2002 and June 30, 2001 5
Notes to Condensed Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3 Quantitative and Qualitative Disclosures about Market Risk 21
Part II. - Other Information
Item 2 Changes in Securities and Use of Proceeds 22
Item 4 Submission of Matters to a Vote of Security Holders 22
Item 6 Exhibits and Reports on Form 8-K 22
Signatures 23
Page 2
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts and per share data)
ASSETS June 30, 2002 December 31, 2001
------------- -----------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 647 1,696
Trade receivables, net of allowance for doubtful
accounts of $1,281 at June 30, 2002
and $1,581 at December 31, 2001 17,948 18,219
Other receivables 1,155 1,293
Prepaid licenses and fees 930 681
Prepaid expenses and other current assets 8,428 3,012
------------ -------------
Total current assets 29,108 24,901
Vehicles and equipment, net 66,530 66,111
Deferred financing costs, net 4,303 4,800
Goodwill, net 32,218 75,582
Other non-current assets 809 396
----------- -----------
Total assets $ 132,968 171,790
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of obligations for capital leases $ 112 144
Borrowings under credit facility 35,691 37,436
Accounts payable 7,854 7,367
Accrued expenses and other current liabilities 15,866 11,271
Due to related parties 1,500 1,073
----------- ------------
Total current liabilities 61,023 57,291
Obligations for capital leases, excluding current installments 29 68
Long-term debt 98,616 94,787
Other long-term liabilities 3,810 2,422
Deferred tax liabilities 671 --
----------- -----------
Total liabilities 164,149 154,568
----------- -----------
Stockholders' equity (deficit):
Preferred stock; $ 0.001 par value; 5,000,000 shares authorized;
662,119 shares issued and outstanding at June 30, 2002
and December 31, 2001 1 1
Common stock; $0.01 par value; 35,000,000 shares
authorized; 2,086,475 shares issued and outstanding
at June 30, 2002 and December 31, 2001 21 21
Additional paid-in capital 217,489 217,489
Accumulated deficit (248,692) (200,289)
----------- -----------
Total stockholders' equity (deficit) (31,181) 17,222
------------ -----------
Total liabilities and stockholders' equity $ 132,968 171,790
=========== ===========
See accompanying notes to condensed consolidated financial statements.
Page 3
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net revenue $ 64,455 57,870 125,564 116,739
Cost of revenue, excluding depreciation 51,956 46,184 101,063 93,506
Selling, general and administrative expenses 8,759 9,070 17,789 18,889
Amortization of goodwill - 514 - 1,031
Depreciation 2,462 2,394 4,909 4,756
--------- --------- --------- ---------
Income (loss) from operations 1,278 (292) 1,803 (1,443)
Other income (expense):
Interest income 11 10 93 23
Interest expense (2,749) (2,851) (5,455) (5,727)
Other 31 (108) 177 (83)
--------- --------- --------- ---------
Loss before income taxes and cumulative
effect of change in accounting principle (1,429) (3,241) (3,382) (7,230)
Income tax expense 109 147 849 292
--------- --------- --------- ---------
Loss before cumulative effect of
change in accounting principle (1,538) (3,388) (4,231) (7,522)
Cumulative effect of change in accounting
principle - - (43,364) -
--------- --------- --------- ---------
Net loss $ (1,538) (3,388) (47,595) (7,522)
========= ========= ========= =========
Share amounts:
Basic and diluted loss per share:
Loss before cumulative effect of
change in accounting principle $ (0.74) (1.62) (2.03) (3.60)
========= ========= ========= =========
Net loss $ (0.74) (1.62) (22.81) (3.60)
========= ========= ========= =========
Weighted average shares outstanding 2,086,475 2,091,652 2,086,475 2,091,652
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
Page 4
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended
June 30,
2002 2001
---- ----
Net loss $(47,595) (7,522)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 5,406 6,275
Cumulative effect of change in accounting principle 43,364 -
Provision for doubtful accounts 403 480
Deferred income taxes 692 -
Interest expense, paid-in-kind 3,829 3,538
Gain (loss) on sale of vehicles and equipment, net (125) 80
Changes in operating assets and liabilities, net of effects of acquisitions:
Increase in trade receivables (132) (522)
Decrease in other receivables 260 305
Increase in prepaid licenses and fees (5) (509)
Increase in prepaid expenses and other current assets (2,722) (740)
Decrease in other non-current assets 87 28
Increase (decrease) in accounts payable 487 (2,744)
Increase (decrease) in accrued expenses and other current liabilities 1,093 (331)
Decrease in other long-term liabilities (328) (33)
-------- --------
Net cash provided by (used in) operating activities 4,714 (1,695)
-------- --------
Investing activities:
Purchases of vehicles and equipment (5,278) (4,080)
Proceeds from sale of vehicles and equipment 404 958
Amounts payable to related parties 427 250
Cash acquired in acquisition 500 -
-------- --------
Net cash used in investing activities (3,947) (2,872)
-------- --------
Financing activities:
Convertible preferred stock offering costs - (81)
Payments to be presented for funding, net - 479
Net borrowings (repayment) on revolving credit facility (1,745) 2,040
Payments of deferred financing costs - (215)
Payments on capital leases (71) (100)
-------- --------
Net cash provided by (used in) financing activities (1,816) 2,123
-------- --------
Decrease in cash and cash equivalents (1,049) (2,444)
Cash and cash equivalents at beginning of period 1,696 2,615
-------- --------
Cash and cash equivalents at end of period $ 647 171
======== ========
(continued)
Page 5
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(In thousands)
(Unaudited)
Six months ended
June 30,
2002 2001
---- ----
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ 1,130 1,772
========= =========
Income tax expense, net of refunds $ (291) 134
========= =========
Supplemental disclosure of non-cash investing and financing activity:
Increase in accumulated deficit for unpaid
cumulative dividend on preferred stock $ 808 765
========= =========
Acquired net assets, net of cash $ 407 -
========= =========
See accompanying notes to condensed consolidated financial statements.
Page 6
UNITED ROAD SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
(1) Summary of Significant Accounting Policies
(a) Interim Financial Statements
The unaudited condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures, normally included in
annual consolidated financial statements prepared in
accordance with accounting principles generally accepted in
the United States of America, have been condensed or omitted
pursuant to those rules and regulations, although United Road
Services, Inc. (the "Company") believes that the disclosures
made are adequate to make the information presented not
misleading. In the opinion of management, all adjustments
necessary to fairly present the Company's financial position,
results of operations and cash flows have been included. The
results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal
year.
It is suggested that these condensed consolidated financial
statements be read in conjunction with the audited
consolidated financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001, as filed with the SEC.
(b) Organization and Business
The Company operates in two reportable operating segments: (1)
transport and (2) towing. The transport segment provides
transport services to a broad range of customers in the new
and used vehicle markets. Revenue from transport services is
derived according to pre-set rates based on mileage or a flat
fee. Customers include automobile manufacturers, leasing and
insurance companies, automobile auction companies, automobile
dealers and individual motorists.
The towing segment provides towing, impounding, repossession
and storing services, and performs lien sales and auctions of
abandoned vehicles. In addition, the towing segment provides
recovery and relocation services for heavy-duty commercial
vehicles and construction equipment. Revenue from towing
services is principally derived from rates based on distance,
time or fixed charges, and any related impound and storage
fees. Customers of the towing division include automobile
dealers, finance companies, repair shops and fleet operators,
law enforcement agencies, municipalities and individual
motorists.
(c) Basis of Presentation
The accompanying condensed consolidated financial statements
include the accounts of the Company and its subsidiaries. The
results of operations of acquired companies have been included
in the Company's results of operations from their respective
acquisition dates. All significant intercompany transactions
have been eliminated in consolidation.
(d) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and
liabilities to prepare these unaudited condensed consolidated
financial statements in conformity with accounting principles
generally accepted in the United States of America. Actual
results could differ from those estimates.
(e) Share and Per Share Amounts
Basic earnings per share excludes dilution and is computed by
dividing net loss by the weighted average number of common
shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities
or other contracts to issue common stock (such as stock
options
Page 7
UNITED ROAD SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
and warrants) were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in
the earnings of the Company.
The effect of options, warrants and convertible preferred
stock have been excluded at June 30, 2002 and 2001, as the
effect would be antidilutive. Additionally, shares issuable
upon conversion of the convertible subordinated Debentures
have been excluded at June 30, 2002 and 2001, as the effect
would be antidilutive due to the adjustment (decrease in net
loss) for interest expense.
At June 30, 2002, the Company had outstanding preferred stock
convertible into 6,221,190 shares of common stock, stock
options exercisable to purchase 293,038 shares of common
stock, warrants exercisable to purchase 48,019 shares of
common stock and subordinated Debentures convertible into
657,441 shares of common stock. At June 30, 2001, the Company
had outstanding preferred stock convertible into 6,221,190
shares of common stock, stock options exercisable to purchase
310,913 shares of common stock, warrants exercisable to
purchase 47,919 shares of common stock and subordinated
Debentures convertible into 607,374 shares of common stock.
(f) Goodwill
Effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets". Under the provisions of SFAS No.
142, goodwill and intangible assets with indefinite useful
lives are no longer amortized. Rather, goodwill and intangible
assets with indefinite useful lives are subject to a periodic
impairment test. If the carrying value of goodwill or an
intangible asset exceeds its fair value, an impairment loss
shall be recognized. A discounted cash flow model based upon
the Company's weighted average cost of capital was used to
determine the fair value of the Company's reporting units for
purposes of testing goodwill for impairment. SFAS No. 142
defines a reporting unit as a business for which discrete
financial information is available which management regularly
reviews and has economic characteristics that differentiate it
from other components of the Company. The Company has
determined the reporting units within the towing operating
segment to be each individual division and within the
transport operating segment to be the new vehicle, used
vehicle, combined new/used vehicle, and specialty vehicle
transport businesses.
Upon adoption of SFAS No. 142, the Company recorded an
impairment loss of $43,364 ($25,354 relating to the transport
operating segment and $18,010 relating to the towing operating
segment) as the cumulative effect of a change in accounting
principle. This impairment primarily resulted from a change in
the criteria for the measurement of impairment from an
undiscounted to a discounted cash flow method and the
classification on a reporting unit basis.
The following table presents reported net loss and loss per
share adjusted for the goodwill impairment for the three and
six months ended June 30, 2002 and 2001.
Three months ended
June 30,
2002 2001
---- ----
Reported net loss .............................. $ (1,538) (3,388)
Amortization of goodwill, net of tax ........... - 494
------- -------
Adjusted net loss .............................. $ (1,538) (2,894)
======= =======
Loss per share:
Reported net loss .............................. $ (0.74) (1.62)
Amortization of goodwill ....................... - 0.24
------- -------
Adjusted loss per share ........................ $ (0.74) (1.37)
======= =======
Page 8
UNITED ROAD SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
Six months ended
June 30,
2002 2001
---- ----
Reported net loss ............................................ $ (47,595) (7,522)
Amortization of goodwill, net of tax ......................... - 1,090
Cumulative effect of change in accounting principle .......... 43,364 -
-------- -------
Adjusted net loss ............................................ $ (4,231) (6,439)
======== =======
Loss per share:
Reported net loss ............................................ $ (22.81) (3.60)
Amortization of goodwill - 0.52
Cumulative effect of change in accounting principle .......... 20.78 -
-------- -------
Adjusted loss per share ...................................... $ (2.03) (3.08)
======== =======
(g) Impact of Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 143, "Accounting for Asset Retirement Obligations",
which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. The standard applies to
legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development
and (or) normal use of the asset. Other than vehicles and
equipment, the Company does not maintain significant tangible
long-lived assets. Therefore, management does not anticipate that
the adoption of SFAS No. 143 will have a material financial impact
on the Company's consolidated financial statements. The Company
will continue to evaluate this conclusion.
In July 2002, FASB issued SFAS No. 146, "Accounting for Cost
Associated with Exit or Disposal Activities". The standard requires
companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. FASB No. 146 is to be
applied prospectively to exit or disposal activities initiated
after December 31, 2002. The Company is evaluating SFAS No. 146 and
has not made a determination as to its impact on the Company's
consolidated financial statements.
(h) Reclassifications
Certain reclassifications of the prior year's condensed
consolidated financial statements have been made to conform to the
current year presentation.
(2) Debt
In July 2000, the Company and its subsidiaries entered into a senior
secured revolving credit facility (the "GE Capital Credit Facility")
with a group of banks led by General Electric Capital Corporation ("GE
Capital"). The GE Capital Credit Facility has a term of five years and
a maximum borrowing capacity of $100,000. The facility includes a
letter of credit sub-facility of up to $15,000. The Company's borrowing
capacity under the GE Capital Credit Facility is limited to the sum of
(i) 85% of the Company's eligible accounts receivable, (ii) 80% of the
net orderly liquidation value of the Company's existing vehicles for
which GE Capital has received title certificates and other requested
documentation, (iii) 85% of the lesser of the actual purchase price or
the invoiced purchase
Page 9
UNITED ROAD SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
price of new vehicles purchased by the Company for which GE Capital has
received title certificates and other requested documentation, and (iv)
either 60% of the purchase price or 80% of the net orderly liquidation
value of used vehicles purchased by the Company for which GE Capital
has received title certificates and other requested documentation,
depending upon whether an appraisal of such vehicles has been
performed, in each case less reserves. The amount of borrowing capacity
based on vehicles amortizes quarterly on a straight line basis over a
period of 5 to 7 years. As of June 30, 2002, $35,691 was outstanding
under the GE Capital Credit Facility, excluding letters of credit of
$10,994, and an additional $8,059 was available for borrowing.
The GE Capital Credit Facility requires the Company, among other
things, to comply with certain financial covenants, including minimum
levels of earnings before interest, taxes, depreciation and
amortization ("EBITDA"), minimum ratios of EBITDA to fixed charges and
minimum levels of liquidity. If the Company fails to comply with the
covenants in the GE Capital Credit Facility, the Company will be
required to seek waivers, which may not be granted by the banks, or to
enter into amendments to the GE Capital Credit Facility, which may
contain more stringent conditions on the Company's borrowing capability
or its activities, and may require the Company to pay substantial fees
to the banks. If such waivers were not granted and the banks were to
elect to accelerate repayment of outstanding balances under the GE
Capital Credit Facility, the Company would be required to refinance its
debt or obtain capital from other sources, including sales of
additional debt or equity securities or sales of assets, in order to
meet its repayment obligations, which may not be possible. If the banks
were to accelerate repayment of amounts due under the GE Capital Credit
Facility, it would cause a default under the Company's 8% Convertible
Subordinated Debentures ("Debentures") issued to Charterhouse URS LLC
("Charterhouse"). In the event of a default under the Debentures,
Charterhouse could accelerate repayment of all amounts outstanding
under the Debentures, subject to the GE Capital Credit Facility banks'
priority. In such event, repayment of the Debentures would be required
only if the GE Capital Credit Facility was paid in full or the banks
under the credit facility granted their express written consent.
In June 2002, the Company renewed its property and casualty insurance
programs. This renewal was funded through a premium financing
arrangement requiring a payment of $1,363 at signing and $3,182 over
the next nine months. At June 30, 2002, the Company has recorded
prepaid insurance of $4,183 and accrued expenses and other current
liabilities of $2,897. As a result, the Company was in technical
default regarding a covenant in the Credit Facility. On August 13,
2002, the bank group amended the Credit Facility and waived the related
event of default.
On June 30, 2002, the Company issued approximately $1,934 aggregate
principal amount of Debentures to Charterhouse, which represented the
quarterly payment-in-kind interest payment due with respect to $96,682
aggregate principal amount of Debentures previously issued to
Charterhouse.
(3) Segment and Related Information
The Company's divisions operate under a common management structure
that evaluates each division's performance. The Company's divisions
have been aggregated into two reportable segments: (1) transport and
(2) towing. The reportable segments are considered by management to be
strategic business units that offer different services and each of
whose respective long-term financial performance is affected by similar
economic conditions.
The transport segment provides transport services to a broad range of
customers in the new and used vehicle markets. The towing segment
provides towing, impounding and storage services for motor vehicles,
lien sales and auto auctions of abandoned vehicles. In addition, the
towing segment provides recovery and relocation services for heavy-duty
commercial vehicles and construction equipment. The accounting policies
of each of the segments are the same as those of the Company, as
outlined in note 1 to the consolidated financial statements included in
the Company's Annual Report on Form 10-K for the year ended December
31, 2001. Certain amounts have been reclassified for consistent
presentation. The Company evaluates the performance of its operating
segments through an evaluation of the Company's income (loss) from
operations. Accordingly, the Company's summarized segment financial
information is presented below on the basis of income (loss) from
Page 10
UNITED ROAD SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
operations for the three and six month periods ended June 30, 2002
and 2001. Inter-segment revenues and transfers are not significant.
Summarized financial information concerning the Company's reportable
segments is shown in the following tables:
Three months ended June 30, 2002
--------------------------------
Transport Towing Other Total
--------- ------ ----- -----
Net revenues $ 43,343 21,112 - 64,455
Cost of revenue, including depreciation 37,691 16,727 - 54,418
Income (loss) from operations 1,540 1,765 (2,027) 1,278
Three months ended June 30, 2001
--------------------------------
Transport Towing Other Total
--------- ------ ----- -----
Net revenues $ 35,680 22,190 - 57,870
Cost of revenue, including depreciation 30,455 18,123 - 48,578
Income (loss) from operations 1,355 940 (2,587) (292)
The following are reconciliations of the information used by the chief
operating decision-maker to the Company's consolidated totals:
Three months ended
June 30,
Reconciliation of loss before income taxes and cumulative effect
of change in accounting principle: 2002 2001
---- ----
Total income from operations from reportable segments:
Transport $ 1,540 1,355
Towing 1,765 940
Interest expense, net (2,738) (2,841)
Other selling, general and administrative costs (2,027) (2,587)
Other expense 31 (108)
--------- ---------
Loss before income taxes and cumulative effect of change in
accounting principle $ (1,429) (3,241)
========= =========
Six months ended June 30, 2002
------------------------------
Transport Towing Other Total
--------- ------ ----- -----
Net revenues $ 83,643 41,921 - 125,564
Cost of revenue, including depreciation 73,132 32,840 - 105,972
Income (loss) from operations 2,535 3,667 (4,399) 1,803
Six months ended June 30, 2001
------------------------------
Transport Towing Other Total
--------- ------ ----- -----
Net revenues $ 71,167 45,572 - 116,739
Cost of revenue, including depreciation 61,409 36,853 - 98,262
Income (loss) from operations 2,048 2,252 (5,743) (1,443)
Page 11
UNITED ROAD SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
The following are reconciliations of the information used by the chief
operating decision-maker to the Company's consolidated totals:
Six months ended
June 30,
Reconciliation of loss before income taxes and cumulative effect
of change in accounting principle: 2002 2001
---- ----
Total income from operations from reportable segments:
Transport $ 2,535 2,048
Towing 3,667 2,252
Interest expense, net (5,362) (5,704)
Other selling, general and administrative costs (4,399) (5,743)
Other expense 177 (83)
--------- ---------
Loss before income taxes and cumulative effect of change in
accounting principle $ (3,382) (7,230)
========= =========
(4) Commitments and Contingencies
The Company is subject to certain claims and lawsuits arising in the
normal course of business, most of which involve claims for personal
injury and property damage incurred in connection with its operations.
The Company maintains various insurance coverages in order to minimize
financial risk associated with these claims. In the opinion of
management, uninsured losses, if any, resulting from the ultimate
resolution of these matters will not have a material effect on the
Company's consolidated financial position or results from operations.
Page 12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included in Item 1
of this Quarterly Report.
Forward-Looking Statements
From time to time, in written reports and oral statements, management may
discuss its expectations regarding the Company's future performance. Generally,
these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of such plans or strategies or other
actions taken or to be taken by the Company, including the impact of such plans,
strategies or actions on the Company's results of operations or components
thereof, projected or anticipated benefits from operational changes,
acquisitions or dispositions made or to be made by the Company, or projections,
involving anticipated revenues, costs, earnings or other aspects of the
Company's results of operations. The words "expect," "believe," "anticipate,"
"project," "estimate," "intend" and similar expressions, and their opposites,
are intended to identify forward-looking statements. These forward-looking
statements are not guarantees of future performance but rather are based on
currently available competitive, financial and economic data and management's
operating plans. These forward-looking statements involve risks and
uncertainties that could render actual results materially different from
management's expectations. Such risks and uncertainties include, without
limitation, risks related to the Company's limited operating history and its
ability to integrate acquired companies, risks related to the Company's ability
to successfully improve the profitability of its acquired businesses, the
availability of capital to fund operations, including expenditures for new and
replacement equipment, risks related to the adequacy, functionality, sufficiency
and cost of the Company's information systems, the loss of significant customers
and contracts, changes in applicable regulations, including but not limited to,
various federal, state and local laws and regulations regarding equipment,
driver certification, training, recordkeeping and workplace safety, potential
exposure to environmental and other unknown or contingent liabilities, risks
associated with the Company's labor relations, risks related to the adequacy of
the Company's insurance, changes in the general level of demand for towing and
transport services, price changes in response to competitive factors, risks
related to fuel, insurance, labor and other operating costs, risks related to
the loss of key personnel and the Company's ability to maintain an adequate
skilled labor force, seasonal and other event-driven variations in the demand
for towing and transport services, risks resulting from the over-the-counter
trading of the Company's common stock, general economic conditions, and other
risk factors described from time to time in the Company's reports filed with the
Securities and Exchange Commission (the "Risk Factors"). All statements herein
that are not statements of historical fact are forward-looking statements.
Although management believes that the expectations reflected in such
forward-looking statements are reasonable, there can be no assurance that those
expectations will prove to have been correct. All written forward-looking
statements by or attributable to management in this Report are expressly
qualified in their entirety by the Risk Factors. Investors must recognize that
events could turn out to be significantly different from what management
currently expects.
Overview
The Company operates in two reportable operating segments: (1) transport and (2)
towing. Through its transport segment, the Company provides transport services
for new and used vehicles to a broad range of customers throughout the United
States. Through its towing segment, the Company provides a variety of towing
services in its local markets, including towing, impounding and storing motor
vehicles, conducting lien sales and auctions of abandoned vehicles, towing heavy
equipment and towing heavy-duty commercial and recreational vehicles. The
Company's customers include commercial entities, such as automobile
manufacturers, automobile leasing companies, insurance companies, automobile
auction companies, automobile dealers, repair shops and fleet operators; law
enforcement agencies such as police, sheriff and highway patrol departments; and
individual motorists.
The Company derives revenue from towing and transport services based on
distance, time or fixed charges and from related impounding and storage fees. If
an impounded vehicle is not claimed within a period prescribed by law (typically
between 30 and 90 days), the Company initiates and completes lien proceedings
and the vehicle is sold at auction or to a scrap metal facility, depending on
the value of the vehicle. Depending on the jurisdiction, the Company may either
keep all the proceeds from the vehicle sales, or keep the proceeds up to the
amount of the towing and storage fees and pay the
Page 13
remainder to the municipality or law enforcement agency. Services are provided
in some cases under contracts with towing and transport customers. In other
cases, services are provided to towing and transport customers without a
long-term contract. The prices charged for towing and storage of impounded
vehicles for municipalities or law enforcement agencies are limited by
contractual provisions or local regulation.
In the case of law enforcement and private impound towing, payment is obtained
either from the owner of the impounded vehicle when the owner claims the vehicle
or from the proceeds of lien sales, scrap sales or auctions. In the case of the
Company's other operations, customers are billed upon completion of services
provided, with payment generally due within 30 days. Revenue is recognized as
follows: towing revenue is recognized at the completion of each engagement;
transport revenue is recognized upon the delivery of the vehicle or equipment to
its final destination; revenue from lien sales or auctions is recognized when
title to the vehicle has been transferred; and revenue from scrap sales is
recognized when the scrap metal is sold. Expenses related to the generation of
revenue are recognized as incurred.
Cost of revenue consists primarily of the following: salaries and benefits of
drivers, dispatchers, supervisors and other employees; fees charged by
subcontractors; fuel; depreciation, repairs and maintenance; insurance; parts
and supplies; other vehicle expenses; and equipment rentals.
Selling, general and administrative expenses consist primarily of the following:
compensation and benefits to sales and administrative employees; fees for
professional services; computer costs; depreciation of administrative equipment
and software; advertising; and other general office expenses.
Between May 1998 and May 1999, the Company acquired a total of 56 towing,
recovery and transport service businesses. During the third quarter of 1999, the
Company made the strategic decision not to pursue its acquisition program in
order to allow the Company to focus primarily on integrating and profitably
operating its acquired businesses. Prior to the Company's acquisition of Auction
Transport, Inc. ("ATI") in January 2002, the Company had not completed any
acquisitions since May 5, 1999. The goal of the Company's revised business
strategy is to improve the operational efficiency and profitability of its
existing businesses in order to build a stable platform for future growth. As
part of this business strategy, the Company has closed, consolidated or sold
several operating locations. As of June 30, 2002, the Company operated a network
of 13 transport divisions and 17 towing divisions located in a total of 26
states.
Management's discussion and analysis addresses the Company's historical results
of operations as shown in its unaudited condensed consolidated financial
statements for the three and six months ended June 30, 2002 and 2001.
In the second quarter of 2001 the Company sold one towing division and closed
three transport divisions and allocated certain equipment to other divisions. In
the third quarter of 2001 the Company closed one towing division. In the fourth
quarter of 2001 the Company sold one towing division. The transport closures
effected in the second quarter of 2001 were designed to combine certain
management dispatch and administrative functions, while maintaining existing
vehicle fleets. In the first quarter of 2002 the Company acquired ATI, a
transport business. The Company's operating results for the three and six months
ended June 30, 2002 include the operating results of ATI from the date of
acquisition and do not include the operating results of the divisions sold or
closed in 2001. The results of the divisions sold and closed during 2001 are
included for the three and six months ended June 30, 2001 through the date of
sale or closure. The Company's revenue, cost of revenue and selling, general and
administrative expenses were also affected by the closures, reallocations and
acquisition described above that occurred during 2001 and 2002, as described
more fully below.
Critical Accounting Policies and Estimates
The preparation of condensed consolidated financial statements in conformity
with generally accepted accounting principles and related disclosure requires
management to make estimates and assumptions that affect:
o the amounts reported for assets and liabilities;
o the disclosure of contingent assets and liabilities at the date of the
financial statements; and
o the amounts reported for revenues and expenses during the reporting period.
Specifically, management must use estimates in determining the economic useful
lives of assets, provisions for uncollectable accounts receivable, exposures
under self-insurance plans and various other recorded or disclosed amounts.
Therefore, the Company's condensed consolidated financial statements and related
disclosure are necessarily affected by these estimates. Management evaluates
these estimates on an ongoing basis, utilizing historical experience and other
Page 14
methods considered reasonable in the particular circumstances. Nevertheless,
actual results may differ significantly from estimates. To the extent that
actual outcomes differ from estimates, or additional facts and circumstances
cause management to revise estimates, the Company's financial position as
reflected in its condensed consolidated financial statements will be affected.
Any effects on business, financial position or results of operations resulting
from revisions to these estimates are recorded in the period in which the facts
that give rise to the revision become known.
Management believes that the critical accounting policies affected by the
estimates and assumptions the Company must make in the preparation of its
condensed consolidated financial statements and related disclosures relate to
revenue recognition, allowance for doubtful accounts, accrued insurance, income
taxes and the valuation of long-lived assets and goodwill.
Results of Operations
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Net Revenue. Net revenue increased $6.6 million, or 11.4%, from $57.9 million
for the three months ended June 30, 2001 to $64.5 million for the three months
ended June 30, 2002. Of the net revenue for the three months ended June 30,
2002, 67.1% related to transport services and 32.9% related to towing services.
Transport net revenue increased $7.6 million, or 21.3%, from $35.7 million for
the three months ended June 30, 2001 to $43.3 million for the three months ended
June 30, 2002. The increase in transport net revenue was primarily due to the
acquisition of ATI in the first quarter 2002, offset, in part, by the closure of
three transport divisions in the second quarter of 2001 and the weak performance
of the majority of the Company's used and specialty vehicle transport businesses
due to the decreased demand for these vehicle transport services as compared to
the prior year. Towing net revenue decreased $1.1 million, or 5.0%, from $22.2
million for the three months ended June 30, 2001 to $21.1 million for the three
months ended June 30, 2002. The decrease in towing net revenue was primarily due
to the closure of one towing division and the sale of two other towing divisions
during 2001 offset, in part, by the strong performance of several of the
Company's towing divisions due to increased demand for towing services as
compared to the prior year.
Cost of Revenue. Cost of revenue, including depreciation, increased $5.8
million, or 11.9%, from $48.6 million for the three months ended June 30, 2001
to $54.4 million for the three months ended June 30, 2002. Transport cost of
revenue increased $7.2 million, or 23.6%, from $30.5 million for the three
months ended June 30, 2001 to $37.7 million for the three months ended June 30,
2002. The principal components of the increase in transport cost of revenue
consisted of an increase in costs of subcontractors and brokers of $3.4 million,
an increase in transport operating labor costs of $2.3 million, an increase in
equipment rental expense of $680,000, an increase in vehicle maintenance expense
of $282,000 and an increase in insurance expense of $263,000 (each of which was
due, in part, to the acquisition of ATI in the first quarter of 2002). Towing
cost of revenue decreased $1.4 million, or 7.7%, from $18.1 million for the
three months ended June 30, 2001 to $16.7 million for the three months ended
June 30, 2002. The principal components of the decrease in towing cost of
revenue consisted of a decrease in costs of independent contractors, brokers and
subcontractors of $1.2 million, a decrease in vehicle maintenance expense of
$265,000, a decrease in fuel costs of $218,000, and a decrease in occupancy
costs of $95,000 (each of which was due, in part, to the closure of one towing
division and the sale of two other towing divisions during 2001), offset, in
part, by an increase in scrap car purchases of $209,000 and an increase in labor
costs of $97,000.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $311,000, or 3.4%, from $9.1 million for the
three months ended June 30, 2001 to $8.8 million for the three months ended June
30, 2002. Transport selling, general and administrative expenses increased
$494,000, or 13.7%, from $3.6 million for the three months ended June 30, 2001
to $4.1 million for the three months ended June 30, 2002. The principal
components of the increase in transport selling, general and administrative
expenses consisted of an increase in wages and benefits of $285,000, an increase
in computer and telecommunication expenses of $156,000 and an increase in travel
related expenses of $112,000 (each of which was due, in part, to the acquisition
of ATI in the first quarter of 2002) offset, in part, by a decrease in
professional fees of $118,000. Towing selling, general and administrative
expenses decreased $245,000, or 8.6%, from $2.9 million for the three months
ended June 30, 2001 to $2.6 million for the three months ended June 30, 2002.
The principal components of the decrease in towing selling, general and
administrative expenses consisted of a decrease in wages and benefits of
$316,000 and a decrease in bad debt expense of $50,000, (each of which was due,
in part, to the sale of two towing and recovery divisions and the closure of
another towing division during 2001) offset, in part, by an increase in
professional fees of $140,000.
Page 15
Corporate selling, general and administrative expenses decreased $560,000, or
21.7%, from $2.6 million for the three months ended June 30, 2001 to $2.0
million for the three months ended June 30, 2002. The decrease in corporate
selling, general and administrative expenses was primarily due to a decrease in
wages and benefits expense of $135,000, a decrease in computer and
telecommunication expense of $123,000, a decrease in professional fees of
$95,000, and a decrease in other miscellaneous administrative expenses of
$124,000.
Amortization of Goodwill. Amortization of goodwill decreased $514,000, or
100.0%, from $514,000 for the three months ended June 30, 2001 to $0 for the
three months ended June 30, 2002. The decrease is due to the adoption of SFAS
No. 142, "Goodwill and Other Intangible Assets" on January 1, 2002. The
Company's goodwill is no longer subject to amortization under the provisions of
SFAS No. 142.
Income (Loss) from Operations. Income from operations increased $1.6 million,
from a loss of $292,000 for the three months ended June 30, 2001 to income of
$1.3 million for the three months ended June 30, 2002. Transport income from
operations increased $185,000, from $1.4 million for the three months ended June
30, 2001 to $1.5 million for the three months ended June 30, 2002. The increase
in transport income from operations was primarily due to an increase in
transport revenue and a decrease in amortization of goodwill, offset, in part,
by increased cost of revenue and selling, general and administrative expenses
related to the operation of the transport business segment as described above.
Towing income from operations increased $861,000, from $940,000 for the three
months ended June 30, 2001 to $1.8 million for the three months ended June 30,
2002. The increase in towing income from operations was primarily due to a
decline in cost of revenue, amortization of goodwill and selling, general and
administrative expenses, offset, in part, by a decline in towing revenue.
Interest Expense, net. Interest expense decreased $102,000, or 3.6%, from $2.9
million for the three months ended June 30, 2001 to $2.8 million for the three
months ended June 30, 2002. Interest income increased $1,000, or 10.0%, from
$10,000 for the three months ended June 30, 2001 to $11,000 for the three months
ended June 30, 2002. The decrease in interest expense, net was primarily related
to an effective interest rate of approximately 8.3% in the second quarter of
2001 as compared to an effective rate of approximately 8.0% in the second
quarter of 2002.
Income Tax Expense. Income tax expense decreased $38,000, from $147,000 for the
three months ended June 30, 2001 to $109,000 for the three months ended June 30,
2002. The decrease in income tax expense was primarily due to a decrease in
estimated taxable income offset by the increase in the valuation allowance
relating to the Company's net operating loss carry forwards as a result of the
non-amortization of goodwill under SFAS No. 142.
Net Loss. Net loss decreased $1.9 million from $3.4 million for the three months
ended June 30, 2001 to $1.5 million for the three months ended June 30, 2002.
The decrease in net loss related to the increase in income from operations of
$1.9 million.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Net Revenue. Net revenue increased $8.9 million, or 7.6%, from $116.7 million
for the six months ended June 30, 2001 to $125.6 million for the six months
ended March 31, 2002. Of the net revenue for the six months ended June 30, 2002,
66.6% related to transport services and 33.4% related to towing services.
Transport net revenue increased $12.4 million, or 17.4%, from $71.2 million for
the six months ended June 30, 2001 to $83.6 million for the six months ended
June 30, 2002. The increase in transport net revenue was primarily due to the
acquisition of ATI in the first quarter 2002, offset, in part, by the closure of
three transport divisions in the second quarter of 2001 and the weak performance
of the majority of the Company's used and specialty vehicle transport businesses
due to the decreased demand for these vehicle transport services as compared to
the prior year. Towing net revenue decreased $3.7 million, or 8.1%, from $45.6
million for the six months ended June 30, 2001 to $41.9 million for the six
months ended June 30, 2002. The decrease in towing net revenue was primarily due
to the closure of one towing division and the sale of two other towing divisions
during 2001 offset, in part, by the strong performance of several of the
Company's towing divisions due to increased demand for towing services as
compared to the prior year.
Cost of Revenue. Cost of revenue, including depreciation, increased $7.7
million, or 7.8%, from $98.3 million for the six months ended June 30, 2001 to
$106.0 million for the six months ended June 30, 2002. Transport cost of revenue
increased $11.7 million, or 19.0%, from $61.4 million for the six months ended
June 30, 2001 to $73.1 million for the six
Page 16
months ended June 30, 2002. The principal components of the increase in
transport cost of revenue consisted of an increase in costs of subcontractors
and brokers of $6.2 million, an increase in transport operating labor costs of
$3.7 million and an increase in equipment rental of $1.2 million (each of which
was due, in part, to the acquisition of ATI in the first quarter of 2002).
Towing cost of revenue decreased $4.1 million, or 11.1%, from $36.9 million for
the six months ended June 30, 2001 to $32.8 million for the six months ended
June 30, 2002. The principal components of the decrease in towing cost of
revenue consisted of a decrease in costs of independent contractors, brokers and
subcontractors of $2.5 million, a decrease in fuel costs of $577,000, a decrease
in vehicle maintenance expense of $610,000, a decrease in towing operating labor
costs of $235,000 and a decrease in occupancy costs of $191,000 (each of which
was due, in part, to the sale of two towing divisions and the closure of another
towing division during 2001).
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $1.1 million, or 5.8%, from $18.9 million for
the six months ended June 30, 2001 to $17.8 million for the six months ended
June 30, 2002. Transport selling, general and administrative expenses increased
$773,000, or 10.7%, from $7.2 million for the six months ended June 30, 2001 to
$8.0 million for the six months ended June 30, 2002. The principal components of
the increase in transport selling, general and administrative expenses consisted
of an increase in wages and benefits of $322,000, an increase in computer and
telecommunication expenses of $257,000, and an increase in travel related
expenses of $177,000 (each of which was due, in part, to the acquisition of ATI
in the first quarter of 2002). Towing selling, general and administrative
expenses decreased $529,000, or 8.9%, from $5.9 million for the six months ended
June 30, 2001 to $5.4 million for the six months ended June 30, 2002. The
principal components of the decrease in towing selling, general and
administrative expenses consisted of a decrease in wages and benefits of
$546,000 and a decrease in bad debt expense of $132,000 (each of which was due,
in part, to the sale of two towing divisions and the closure of another towing
and recovery division during 2001) offset, in part, by an increase in
professional fees of $190,000.
Corporate selling, general and administrative expenses decreased $1.3 million,
or 22.8%, from $5.7 million for the six months ended June 30, 2001 to $4.4
million for the six months ended June 30, 2002. The decrease in corporate
selling, general and administrative expenses was primarily due to a decrease in
professional fees of $487,000, a decrease in computer and telecommunication
expense of $322,000, a decrease in wages and benefits expense of $212,000 and a
decrease in other miscellaneous administrative expenses of $157,000.
Amortization of Goodwill. Amortization of goodwill decreased $1.0 million, or
100.0%, from $1.0 million for the six months ended June 30, 2001 to $0 for the
six months ended June 30, 2002. The decrease is due to the adoption of SFAS No.
142, "Goodwill and Other Intangible Assets" on January 1, 2002. The Company's
goodwill is no longer subject to amortization under the provisions of SFAS No.
142.
Income (Loss) from Operations. Income from operations increased $3.2 million,
from a loss of $1.4 million for the six months ended June 30, 2001 to income of
$1.8 million for the six months ended June 30, 2002. Transport income from
operations increased $487,000, or 23.8%, from $2.0 million the six months ended
June 30, 2001 to $2.5 million for the six months ended June 30, 2002. The
increase in transport income from operations was primarily due to an increase in
transport revenue and a decrease in amortization of goodwill, offset, in part,
by increased cost of revenue and selling, general and administrative expenses
related to the operation of the transport business segment as described above.
Towing income from operations increased $1.3 million, or 56.5%, from $2.3
million for the six months ended June 30, 2001 to $3.7 million for the six
months ended June 30, 2002. The increase in towing income from operations was
primarily due to a decrease in cost of revenue, amortization of goodwill and
selling, general and administrative expenses, offset, in part, by a decline in
towing revenue.
Interest Expense, net. Interest expense decreased $272,000, or 4.8%, from $5.7
million for the six months ended June 30, 2001 to $5.4 million for the six
months ended June 30, 2002. Interest income increased $70,000, from $23,000 for
the six months ended June 30, 2001, to $93,000 for the six months ended June 30,
2002. The decrease in interest expense, net was primarily related to an
effective interest rate of approximately 8.5% in the first six months of 2001 as
compared to an effective rate of approximately 8.0% in the first six months of
2002.
Income Tax Expense. Income tax expense increased $557,000, from $292,000 for the
six months ended June 30, 2001 to $849,000 for the six months ended June 30,
2002. The increase in income tax expense was primarily due to the increase in
the valuation allowance relating to the Company's net operating loss carry
forwards as a result of the non-amortization of goodwill under SFAS No. 142.
Page 17
Cumulative Effect of Change in Accounting Principle. The cumulative effect of
change in accounting principle related to the impairment of goodwill under SFAS
No. 142 was $43.4 million for the six months ended June 30, 2002. Of the total
cumulative effect of change in accounting principle $26.0 million was related to
the transport operating segment and $17.4 million was related to the towing
operating segment.
Net Loss. Net loss increased $40.1 million from $7.5 million for the six months
ended June 30, 2001 to $47.6 million for the six months ended June 30, 2002. The
increase in net loss related to the cumulative effect of change in accounting
principle of $44.0 million, offset, in part, by increased income from operations
of $3.2 million.
Liquidity and Capital Resources
As of June 30, 2002, the Company had approximately:
o $647,000 of cash and cash equivalents (representing deposits in transit
to GE Capital, as agent under the Company's revolving credit facility)
and another $8.1 million available for borrowing under the revolving
credit facility,
o a working capital deficit of approximately $31.9 million (including the
$35.7 million outstanding under the Company's revolving credit facility
which, due to the factors described in note 2 to the Company's
consolidated financial statements included within the 2001 Annual Report
on Form 10-K, is reflected as a current liability), and
o $98.6 million of outstanding long-term indebtedness, excluding current
installments.
During the six months ended June 30, 2002, the Company provided $4.7 million in
cash from operations. Cash provided by operating activities consisted primarily
of a net loss of $47.6 million (offset by $43.4 million related to the
cumulative effect of change in accounting principle and $9.2 million of non-cash
depreciation, amortization and interest charges), and a decrease in accrued
expenses of $1.8 million. During the six months ended June 30, 2002, the Company
used $3.9 million of cash in investing activities and used $1.8 million of cash
from financing activities. Investing activities consisted primarily of $5.3
million of purchases of vehicles and equipment, offset by $404,000 in proceeds
from the sale of vehicles and equipment and $500,000 received in connection with
the ATI acquisition. Financing activities consisted primarily of net repayments
under the GE Capital Credit Facility of $1.7 million.
In July 2000, the Company and its subsidiaries entered into a revolving
credit facility with a group of banks for which GE Capital acts as agent. The
revolving credit facility has a term of five years and a maximum borrowing
capacity of $100 million. The facility includes a letter of credit subfacility
of up to $15 million. The Company's borrowing capacity under the revolving
credit facility is limited to the sum of (i) 85% of the Company's eligible
accounts receivable, (ii) 80% of the net orderly liquidation value of the
Company's existing vehicles for which GE Capital has received title certificates
and other requested documentation, (iii) 85% of the lesser of the actual
purchase price and the invoiced purchase price of new vehicles purchased by the
Company for which GE Capital has received title certificates and other requested
documentation, and (iv) either 60% of the purchase price or 80% of the net
orderly liquidation value of used vehicles purchased by the Company for which GE
Capital has received title certificates and other requested documentation,
depending upon whether an appraisal of such vehicles has been performed, in each
case less reserves. The amount of availability based on vehicles amortizes on a
straight line basis over a period of five to seven years. Under the revolving
credit facility, the banks have the right to conduct an annual appraisal of the
Company's vehicles. All cash receipts are forwarded to GE Capital on a daily
basis to pay down the revolver balance, and working capital and expenditure
needs are funded through daily borrowings. As of June 30, 2002, approximately
$35.7 million was outstanding under the revolving credit facility (excluding
letters of credit of approximately $11.0 million) and an additional $8.1 million
was available for borrowing.
Interest accrues on amounts borrowed under the GE Capital Credit Facility, at
the Company's option, at either the Index Rate (as defined in the GE Capital
Credit Facility) plus an applicable margin or the reserve adjusted LIBOR Rate
(as defined in the GE Capital Credit Facility) plus an applicable margin. The
rate is subject to adjustment based upon the performance of the Company, the
occurrence of an event of default or certain other events. The GE Capital Credit
Facility provides for payment by the Company of customary fees and expenses.
Page 18
The obligations of the Company and its subsidiaries under the GE Capital Credit
Facility are secured by a first priority security interest in the existing and
after-acquired real and personal, tangible and intangible assets of the Company
and its subsidiaries.
The Company currently finances its working capital requirements through cash
flow from operations and borrowings under its revolving credit facility. The
revolving credit facility requires the Company, among other things, to comply
with certain financial covenants, including minimum levels of EBITDA, minimum
ratios of EBITDA to fixed charges and minimum levels of liquidity. If the
Company fails to comply with the covenants in its revolving credit facility, the
Company will be required to seek waivers, which may not be granted by the banks,
or to enter into amendments to the credit facility which may contain more
stringent conditions on the Company's borrowing capability or its activities,
and may require the Company to pay substantial fees to the banks. If such
waivers were not granted, the Company would not be able to borrow funds to
finance its working capital requirement and would thus be required to obtain
capital from other sources (including sales of additional debt or equity
securities or sales of assets), to meet its liquidity needs, which may not be
possible. In addition, if such waivers were not granted, the banks could elect
to accelerate repayment of outstanding balances under the credit facility, in
which case the Company would be required to refinance its debt or obtain capital
from other sources (including sales of additional debt or equity securities or
sales of assets), in order to meet its repayment obligations, which may not be
possible. If the banks were to accelerate repayment of amounts due under the
credit facility, it would cause a default under the Debentures issued to
Charterhouse. In the event of a default under the Debentures, Charterhouse could
accelerate repayment of all amounts outstanding under the Debentures, subject to
the credit facility banks' priority. In such event, repayment of the Debentures
would be required only if the revolving credit facility was paid in full or the
banks under the revolving credit facility granted their express written consent.
In June 2002, the Company renewed its property and casualty insurance
programs. This renewal was funded through a premium financing arrangement
requiring a payment of $1.4 million at signing and $3.2 million over the next
nine months. At June 30, 2002, the Company has recorded prepaid insurance of
$4.2 million and accrued expenses and other current liabilities of $2.9 million.
As a result, the Company was in technical default regarding a covenant in the
revolving credit facility. On August 13, 2002, the bank group amended the
revolving credit facility and waived the related event of default.
The Company finances a portion of its operations through operating leases. These
leases relate to transport and towing vehicles, equipment (including information
systems) and real property used by the Company to conduct its business. The
terms of the Company's operating leases range from one to twenty years and
certain lease agreements provide for price escalations.
In the normal course of its business, the Company is a party to letters of
credit which are not reflected in the Company's consolidated balance sheets.
Such letters of credit are valued based on the amount of exposure under the
instrument and the likelihood of performance being requested. At June 30, 2002,
the Company had letters of credit outstanding in the aggregate amount of $11.0
million. As of June 30, 2002, no claims had been made against such letters of
credit, and management does not expect any material losses resulting from these
off-balance sheet instruments.
The Company spent approximately $5.3 million on purchases of vehicles and
equipment during the six months ended June 30, 2002. These expenditures were
primarily for the purchase of transport and towing vehicles. During the six
months ended June 30, 2002, the Company made expenditures of $1.8 million on
towing vehicles and $3.1 million on transport vehicles. These expenditures were
financed primarily with borrowings under the GE Capital Credit Facility. In
March 2000, the Company committed to purchase 60 vehicles from a vehicle
manufacturer. As of June 30, 2002, 41 of the 60 vehicles subject to the
commitment had been delivered (with a total purchase price of $6.8 million) and
a deposit of $1.6 million had been applied to such purchases. As of the date of
this report, the Company does not believe that it remains committed to purchase
the remaining 19 vehicles.
In connection with the Company's July 2000 sale of Series A Convertible
Preferred Stock (the "Series A Preferred Stock") to Blue Truck Acquisition, LLC
("Blue Truck"), an affiliate of KPS Special Situations Fund, L.P. ("KPS") (such
transaction, the "KPS Transaction"), the Company agreed to pay KPS Management
LLC, an affiliate of KPS, an annual management fee of $1.0 million, which may be
lowered to $500,000 and then to zero based upon the amount of Series A Preferred
Stock held by Blue Truck and its permitted transferees. As of the date of this
report, the Company has not paid KPS management the management fees earned
during 2001 and the first six months of 2002. The Company has recorded the
unpaid amount of the fee ($1.5 million) as an accrued liability in the
accompanying balance sheet.
In connection with the KPS Transaction, the Company agreed to pay four of its
senior executives an aggregate amount of approximately $430,000 on each of the
first and second anniversaries of the KPS Transaction as long as the executives
remained employed with the Company on such dates. In July 2001 and 2002, the
Company made the required payments.
Page 19
During the past three years, the Company has experienced decreases in its cash
flow from operations and is continually exploring opportunities to improve its
profitability, including, but not limited to, the closure or divestiture of
unprofitable divisions, consolidation of operating locations, reduction of
operating costs and the marketing of towing and transport services to new
customers in strategic market locations. The Company currently expects to be
able to fund its liquidity needs for the next twelve months through cash flow
from operations and borrowings of amounts available under its revolving credit
facility.
Seasonality
The Company may experience significant fluctuations in its quarterly operating
results due to seasonal and other variations in the demand for towing and
transport services. Specifically, the demand for towing services is generally
highest in extreme or inclement weather, such as heat, cold, rain and snow.
Although the demand for automobile transport tends to be strongest in the months
with the mildest weather, since extreme or inclement weather tends to slow the
delivery of vehicles, the demand for automobile transport is also a function of
the timing and volume of lease originations, new car model changeovers, dealer
inventories and new and used auto sales.
Fluctuations in Operating Results and Inflation
The Company's future operating results may be adversely affected by (i) the
availability of capital to fund operations, including expenditures for new and
replacement equipment, (ii) the Company's success in improving its operating
efficiency and profitability and in integrating its acquired businesses, (iii)
the loss of significant customers or contracts, (iv) the timing of expenditures
for new equipment and the disposition of used equipment, (v) changes in
applicable regulations, including but not limited to, various federal, state and
local laws and regulations regarding equipment, driver certification, training,
recordkeeping and workplace safety, (vi) changes in the general level of demand
for towing and transport services, (vii) price changes in response to
competitive factors, (viii) event-driven variations in the demand for towing and
transport services, (ix) fluctuations in fuel, insurance, labor and other
operating costs and (x) general economic conditions. As a result, operating
results from any one quarter should not be relied upon as an indication or
guarantee of performance in future quarters.
Although the Company cannot accurately anticipate the effect of inflation on its
operations, management believes that inflation has not had, and is not likely in
the foreseeable future to have, a material impact on its results of operations.
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ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes there have been no material changes in the Company's
interest rate risk position since December 31, 2001. Other types of market risk,
such as foreign exchange rate risk and commodity price risk, do not arise in the
normal course of the Company's business activities.
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PART II OTHER INFORMATION
-----------------
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
On June 30, 2002, the Company issued approximately $1.9 million aggregate
principal amount of Debentures to Charterhouse, which represented the quarterly
payment-in-kind interest payment due with respect to $96.7 million aggregate
principal amount of the Debentures previously issued to Charterhouse.
The issuance of these securities was deemed to be exempt from registration under
the Securities Act of 1933, as amended (the "Securities Act") in reliance on
Section 4(2) of the Securities Act or Regulation D thereunder as a transaction
by an issuer not involving a public offering. The recipient of the securities
was an accredited investor and represented its intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were attached to the
certificates issued in such transaction.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of the stockholders of the Company was held on June
6, 2002.
(b) At the annual meeting, Gerald R. Riordan, A. Lawrence Fagan, Michael G.
Psaros, and Stephen W. Presser were elected as Class I directors of the Company
for terms expiring at the Company's 2005 annual meeting. Edward W. Morawski,
Kenneth K. Fisher, Eugene J. Keilin and Brian J. Riley continue to serve as
Class III directors with terms expiring at the Company's 2004 annual meeting.
David P. Shapiro, Raquel V. Palmer and Joseph S. Rhodes continue to serve as
Class II directors with terms expiring at the Company's 2003 annual meeting.
(c) Set forth below is the tabulation of the votes at the annual meeting
with respect to the election of the Class I directors:
Director Votes For Votes Withheld
- -------- --------- --------------
Gerald Riordan 1,379,015 (1) 78,080 (1)
A. Lawrence Fagan 1,379,015 (1) 78,080 (1)
Michael G. Psaros 662,119 (2) 0 (2)
Stephen W. Presser 662,119 (2) 0 (2)
- ---------------
(1) Shares of Common Stock
(2) Shares of Series A Preferred Stock
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Executive Certification
(b) Reports on 8-K
None
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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.
UNITED ROAD SERVICES, INC.
Registrant
Date: August 14, 2002 /s/ Gerald R. Riordan
------------------------------------
Chief Executive Officer
/s/ Patrick J. Fodale
----------------------------------
Chief Financial Officer
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