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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
SEPTEMBER 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 November 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 Nine Months Ended September 30, 2002
Index Page
Part I. - Financial Information
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2002 and December 31, 2001 3
Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended September
30, 2002 and September 30, 2001 4
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 2002 and
September 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
Item 4 Controls and Procedures 21
Part II. - Other Information
Item 2 Changes in Securities and Use of Proceeds 22
Item 3 Default upon Senior Securities 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 September 30, 2002 December 31, 2001
----------------- -----------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 710 1,696
Trade receivables, net of allowance for doubtful
accounts of $1,141 at September 30, 2002
and $1,581 at December 31, 2001 17,549 18,219
Other receivables 1,318 1,293
Prepaid licenses and fees 843 681
Prepaid expenses and other current assets 6,814 3,012
--------- ---------
Total current assets 27,234 24,901
Vehicles and equipment, net 67,380 66,111
Deferred financing costs, net 3,617 4,800
Goodwill, net 32,218 75,582
Other non-current assets 731 396
--------- ---------
Total assets $ 131,180 171,790
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of obligations for capital leases $ 107 144
Borrowings under credit facility 34,982 37,436
Accounts payable 10,839 7,367
Accrued expenses and other current liabilities 14,183 11,271
Due to related parties 1,750 1,073
--------- ---------
Total current liabilities 61,861 57,291
Obligations for capital leases, excluding current installments 93 68
Long-term debt 100,588 94,787
Other long-term liabilities 4,105 2,422
Deferred tax liabilities 764 --
--------- ---------
Total liabilities 167,411 154,568
--------- ---------
Stockholders' equity (deficit):
Preferred stock; $ 0.001 par value; 5,000,000 shares authorized;
662,119 shares issued and outstanding at September 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 September 30, 2002 and December 31, 2001 21 21
Additional paid-in capital 217,489 217,489
Accumulated deficit (253,742) (200,289)
--------- ---------
Total stockholders' equity (deficit) (36,231) 17,222
--------- ---------
Total liabilities and stockholders' equity $ 131,180 171,790
========= =========
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 Nine months ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Net revenue $ 62,899 55,923 188,463 172,662
Cost of revenue, excluding depreciation 52,224 45,336 153,286 138,842
Amortization of goodwill - 516 - 1,547
Depreciation 2,770 2,637 7,680 7,393
Selling, general and administrative expenses 9,102 8,700 26,891 27,589
----------- ---------- ----------- -----------
Income (loss) from operations (1,197) (1,266) 606 (2,709)
Other income (expense):
Interest income 6 13 105 37
Interest expense (3,341) (2,766) (8,802) (8,494)
Other 100 31 277 (52)
----------- ----------- ----------- -----------
Loss before income taxes and cumulative
effect of change in accounting principle (4,432) (3,988) (7,814) (11,218)
Income tax expense (benefit) 204 (1,102) 1,053 (810)
----------- ----------- ----------- -----------
Loss before cumulative effect of
change in accounting principle (4,636) (2,886) (8,867) (10,408)
Cumulative effect of change in accounting
principle - - (43,364) -
----------- ----------- ------------ -----------
Net loss $ (4,636) (2,886) (52,231) (10,408)
=========== ============ ============ ===========
Share amounts:
Basic and diluted loss per share:
Loss before cumulative effect of
change in accounting principle $ (2.22) (1.37) (4.25) (4.97)
Cumulative effect of change in
accounting principle - - (20.78) -
----------- ----------- ----------- -----------
Net loss $ (2.22) (1.37) (25.03) (4.97)
=========== =========== =========== -----------
Weighted average shares outstanding 2,086,475 2,102,197 2,086,475 2,095,177
=========== =========== =========== ===========
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)
Nine months ended
September 30,
2002 2001
-------- --------
Net loss $(52,231) (10,408)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 8,424 9,675
Cumulative effect of change in accounting principle 43,364 -
Write off of deferred financing costs 438 -
Provision for doubtful accounts 614 662
Deferred income taxes 785 -
Interest expense, paid-in-kind 5,801 5,360
Gain (loss) on sale of vehicles and equipment, net (177) 38
Changes in operating assets and liabilities, net of effects of acquisitions:
Increase (decrease) in trade receivables 56 (629)
Increase (decrease) in other receivables 97 (55)
Increase (decrease) in prepaid licenses and fees 82 (340)
Increase in prepaid expenses and other current assets (1,108) (564)
Decrease in other non-current assets 165 57
Increase (decrease) in accounts payable 3,472 (1,443)
Decrease in accrued expenses and other current liabilities (590) (576)
Decrease in other long-term liabilities (446) (1,622)
-------- --------
Net cash provided by operating activities 8,746 155
-------- --------
Investing activities:
Purchases of vehicles and equipment (9,193) (5,802)
Proceeds from sale of vehicles and equipment 750 1,133
Amounts payable to related parties 677 486
Cash acquired in acquisition 500 -
-------- --------
Net cash used in investing activities (7,266) (4,183)
-------- --------
Financing activities:
Convertible preferred stock offering costs - (120)
Payments to be presented for funding, net - 511
Net borrowings (repayment) on revolving credit facility (2,454) 1,488
Payments of deferred financing costs - (215)
Payments on capital leases (12) (165)
-------- --------
Net cash provided by (used in) financing activities (2,466) 1,499
-------- --------
Decrease in cash and cash equivalents (986) (2,529)
Cash and cash equivalents at beginning of period 1,696 2,615
-------- --------
Cash and cash equivalents at end of period $ 710 86
======== ========
(continued)
Page 5
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(In thousands)
(Unaudited)
Nine months ended
September 30,
2002 2001
---- ----
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ 1,568 2,347
========= ========
Income tax expense, net of refunds $ (124) 346
========= ========
Supplemental disclosure of non-cash investing and financing activity:
Increase in accumulated deficit for unpaid
cumulative dividend on preferred stock $ 1,222 1,155
========= ========
Acquired net assets, net of cash $ 407 8
========= ========
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 September 30, 2002 and 2001, as the effect would be
antidilutive. Additionally, shares issuable upon conversion of the
convertible subordinated Debentures have been excluded at September
30, 2002 and 2001, as the effect would be antidilutive due to the
adjustment (decrease in net loss) for interest expense.
At September 30, 2002, the Company had outstanding preferred stock
convertible into 6,221,190 shares of common stock, stock options
exercisable to purchase 290,438 shares of common stock, warrants
exercisable to purchase 48,019 shares of common stock and subordinated
Debentures convertible into 670,587 shares of common stock. At
September 30, 2001, the Company had outstanding preferred stock
convertible into 6,221,190 shares of common stock, stock options
exercisable to purchase 306,413 shares of common stock, warrants
exercisable to purchase 48,008 shares of common stock and subordinated
Debentures convertible into 619,520 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 nine months
ended September 30, 2002 and 2001.
Three months ended
September 30,
2002 2001
---- ----
Reported net loss .................................... $ (4,636) (2,886)
Amortization of goodwill, net of tax ................. - 439
---------- --------
Adjusted net loss .................................... $ (4,636) (2,447)
========== ========
Loss per share:
Reported net loss .................................... $ (2.22) (1.37)
Amortization of goodwill ............................. - 0.20
---------- --------
Adjusted loss per share .............................. $ (2.22) (1.17)
========== ========
Page 8
UNITED ROAD SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
Nine months ended
September 30,
2002 2001
---- ----
Reported net loss $ (52,231) (10,408)
Amortization of goodwill, net of tax
- 1,320
Cumulative effect of change in accounting principle 43,364 -
--------- --------
Adjusted net loss $ (8,867) (9,088)
========= ========
Loss per share:
Reported net loss $ (4.25) (4.97)
Amortization of goodwill - 0.62
Cumulative effect of change in accounting principle (20.78) (4.35)
--------- --------
Adjusted loss per share $ (25.03) -
========= ========
(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. In September 2002,
as provided in the GE Capital Credit Facility, the Company exercised the
option to reduce the amount of maximum borrowing capacity under the GE
Capital Credit Facility from $100,000 to $75,000. 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 September 30, 2002, $34,982 was outstanding under the GE
Capital Credit Facility, excluding letters of credit of $13,758, and an
additional $6,436 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. In October 2002, the Company notified GE Capital that the
Company had failed to meet the minimum level of EBITDA and minimum ratio
of EBITDA to fixed charges for the nine months ended September 30, 2002.
On November 13, 2002, the Company entered into an amendment to the GE
Capital Credit Facility under which the banks waived the financial
covenant violations. If the Company fails to comply with these or any
other covenants in the GE Capital Credit Facility in the future, the
Company will be required to seek additional 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 future 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
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 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.
As a result of the reduction in maximum borrowing capacity under the GE
Capital Credit Facility in September 2002, the Company recorded a
write-off of previously recorded deferred financing costs in the amount
of $438. This amount was included in interest expense in the condensed
consolidated statements of operations for the three and nine months ended
September 30, 2002.
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 September 30, 2002, the Company has recorded prepaid insurance
of $3,165 and accrued expenses and other current liabilities of $1,449.
On September 30, 2002, the Company issued approximately $1,972 aggregate
principal amount of Debentures to Charterhouse, which represented the
quarterly payment-in-kind interest payment due with respect to $98,616
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.
Page 10
UNITED ROAD SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
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 operations for the
three and nine month periods ended September 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 September 30, 2002
Transport Towing Other Total
--------- --------- --------- ---------
Net revenues $ 41,455 21,444 - 62,899
Cost of revenue, including depreciation 37,949 17,045 - 54,994
Income (loss) from operations (381) 1,670 (2,486) (1,197)
Three months ended September 30, 2001
Transport Towing Other Total
--------- --------- --------- ---------
Net revenues $ 34,065 21,858 - 55,923
Cost of revenue, including depreciation 29,846 18,127 - 47,973
Income (loss) from operations 708 391 (2,365) (1,266)
The following are reconciliations of the information used by the chief
operating decision-maker to the Company's consolidated totals:
Three months ended
September 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 $ (381) 708
Towing 1,670 391
Interest expense, net (3,335) (2,753)
Other selling, general and administrative costs (2,486) (2,365)
Other income 100 31
--------- ---------
Loss before income taxes and cumulative effect of change in
accounting principle $ (4,432) (3,988)
========= =========
Nine months ended September 30, 2002
Transport Towing Other Total
--------- --------- --------- ---------
Net revenues $ 125,098 63,365 - 188,463
Cost of revenue, including depreciation 111,081 49,885 - 160,966
Income (loss) from operations 2,154 5,337 (6,885) 606
Page 11
UNITED ROAD SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
Nine months ended September 30, 2001
Transport Towing Other Total
--------- ------ ----- -----
Net revenues $ 105,232 67,430 - 172,662
Cost of revenue, including depreciation 91,255 54,980 - 146,235
Income (loss) from operations 2,756 2,643 (8,108) (2,709)
The following are reconciliations of the information used by the chief
operating decision-maker to the Company's consolidated totals:
Nine months ended
September 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 $ 2,154 2,756
Towing 5,337 2,643
Interest expense, net (8,697) (8,457)
Other selling, general and administrative costs (6,885) (8,108)
Other income (expense) 277 (52)
-------- -------
Loss before income taxes and cumulative effect of change in
accounting principle $ (7,814) (11,218)
======== =======
(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 and accrues for estimated costs related to
incurred uninsured losses. In the opinion of management, uninsured losses,
if any, resulting from the ultimate resolution of these matters, for which
no accruals have been recorded, will not have a material effect on the
Company's consolidated financial position or results of 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 September 30, 2002, the Company operated a
network of 11 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 nine months ended September 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. In the third quarter of
2002 the Company closed and consolidated two transport divisions, reallocating
vehicles to more profitable locations. The transport closures 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 nine
months ended September 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 are
included for the three and nine months ended September 30, 2001 and 2002 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 sales,
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:
.. the amounts reported for assets and liabilities;
.. the disclosure of contingent assets and liabilities at the date of the
financial statements; and
.. 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
Page 14
these estimates. Management evaluates these estimates on an ongoing basis,
utilizing historical experience and other methods considered reasonable in the
particular circumstances. Nevertheless, actual results may differ 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 the Company's 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 September 30, 2002 Compared to Three Months Ended September
30, 2001
Net Revenue. Net revenue increased $7.0 million, or 12.5%, from $55.9 million
for the three months ended September 30, 2001 to $62.9 million for the three
months ended September 30, 2002. Of the net revenue for the three months ended
September 30, 2002, 66.0% related to transport services and 34.0% related to
towing services. Transport net revenue increased $7.4 million, or 21.7%, from
$34.1 million for the three months ended September 30, 2001 to $41.5 million for
the three months ended September 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 two transport divisions in the third quarter of 2002
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
$414,000, or 1.9%, from $21.9 million for the three months ended September 30,
2001 to $21.4 million for the three months ended September 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 improved 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 $7.0
million, or 14.6%, from $48.0 million for the three months ended September 30,
2001 to $55.0 million for the three months ended September 30, 2002. Transport
cost of revenue increased $8.2 million, or 27.5%, from $29.8 million for the
three months ended September 30, 2001 to $38.0 million for the three months
ended September 30, 2002. The principal components of the increase in transport
cost of revenue consisted of an increase in costs of subcontractors and brokers
of $3.0 million, an increase in transport operating labor costs of $1.9 million,
an increase in insurance expense of $1.3 million, an increase in equipment
rental expense of $668,000, and an increase in fuel cost of $255,000 (each of
which was due, in part, to the acquisition of ATI in the first quarter of 2002).
Towing cost of revenue decreased $1.1 million, or 6.1%, from $18.1 million for
the three months ended September 30, 2001 to $17.0 million for the three months
ended September 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 $1.4 million, a decrease in vehicle maintenance
expense of $252,000, a decrease in depreciation of $116,000, and a decrease in
occupancy costs of $99,000 (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 labor costs of $325,000 and an increase in
scrap car purchases of $282,000.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $402,000, or 4.6%, from $8.7 million for the
three months ended September 30, 2001 to $9.1 million for the three months ended
September 30, 2002. Transport selling, general and administrative expenses
increased $620,000, or 19.0%, from $3.3 million for the three months ended
September 30, 2001 to $3.9 million for the three months ended September 30,
2002. The principal components of the increase in transport selling, general and
administrative expenses consisted of an increase in wages and benefits of
$230,000, an increase in advertising expenses of $123,000 and an increase in bad
debt expenses of $105,000 (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 $349,000, or 11.3%, from $3.1 million for the three months
ended September 30, 2001 to $2.7 million for the three months ended September
30, 2002. The principal components of the decrease in towing selling, general
and administrative expenses consisted of a decrease in wages and benefits of
$323,000 and a decrease in bad debt expense of $77,000, (each of which was due,
in part, to the sale of two towing divisions and the closure of another towing
division during 2001) offset, in part, by an increase in professional fees of
$63,000.
Page 15
Corporate selling, general and administrative expenses increased $121,000, or
5.1%, from $2.4 million for the three months ended September 30, 2001 to $2.5
million for the three months ended September 30, 2002. The increase in corporate
selling, general and administrative expenses was primarily due to an increase in
wages and benefits expense of $199,000, and an increase in travel and
entertainment expense of $41,000, offset, in part, by a decrease in bank service
charges of $62,000, and a decrease in professional fees of $58,000.
Amortization of Goodwill. Amortization of goodwill decreased $516,000, or
100.0%, from $516,000 for the three months ended September 30, 2001 to $0 for
the three months ended September 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 $69,000, or
15.4%, from a loss of $1.3 million for the three months ended September 30, 2001
to a loss of $1.2 million for the three months ended September 30, 2002.
Transport income from operations decreased $1.1 million from income of $708,000
for the three months ended September 30, 2001 to a loss of $381,000 for the
three months ended September 30, 2002. The decrease in transport income from
operations was primarily due to increases in cost of revenue and selling,
general and administrative expenses related to the operation of the transport
business segment as described above, offset, in part, by an increase in
transport revenue and a decrease in amortization of goodwill. Towing income from
operations increased $1.3 million, from $391,000 for the three months ended
September 30, 2001 to $1.7 million for the three months ended September 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 decrease in towing revenue.
Interest Expense, net. Interest expense increased $582,000, or 21.1%, from $2.8
million for the three months ended September 30, 2001 to $3.3 million for the
three months ended September 30, 2002. Interest income decreased $7,000, or
53.9%, from $13,000 for the three months ended September 30, 2001 to $6,000 for
the three months ended September 30, 2002. The increase in interest expense, net
was primarily related to the write-off of deferred financing costs of $438,000
related to the decline in maximum borrowing capacity and an effective interest
rate of approximately 8.3% in the third quarter of 2001 as compared to an
effective rate of approximately 8.2% in the third quarter of 2002.
Income Tax Expense. Income tax expense increased $1.3 million from a benefit of
$1.1 million for the three months ended September 30, 2001 to an expense of
$204,000 for the three months ended September 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 and the change in the estimate
of net operating loss limitations under Internal Revenue Code Section 382,
during the 2001 tax year.
Net Loss. Net loss increased $1.7 million from $2.9 million for the three months
ended September 30, 2001 to $4.6 million for the three months ended September
30, 2002. The increase in net loss related primarily to the increase in interest
and income tax expense.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30,
2001
Net Revenue. Net revenue increased $15.8 million, or 9.1%, from $172.7 million
for the nine months ended September 30, 2001 to $188.5 million for the nine
months ended September 30, 2002. Of the net revenue for the nine months ended
September 30, 2002, 66.4% related to transport services and 33.6% related to
towing services. Transport net revenue increased $19.9 million, or 18.9%, from
$105.2 million for the nine months ended September 30, 2001 to $125.1 million
for the nine months ended September 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 two transport divisions in the third quarter
of 2002, 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 $4.0
million, or 5.9%, from $67.4 million for the nine months ended September 30,
2001 to $63.4 million for the nine months ended September 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
improved performance of several of the Company's towing divisions due to
increased demand for towing services as compared to the prior year.
Page 16
Cost of Revenue. Cost of revenue, including depreciation, increased $14.7
million, or 10.1%, from $146.3 million for the nine months ended September 30,
2001 to $161.0 million for the nine months ended September 30, 2002. Transport
cost of revenue increased $19.8 million, or 21.7%, from $91.3 million for the
nine months ended September 30, 2001 to $111.1 million for the nine months ended
September 30, 2002. The principal components of the increase in transport cost
of revenue consisted of an increase in costs of subcontractors and brokers of
$9.3 million, an increase in transport operating labor costs of $5.6 million and
an increase in equipment rental of $1.9 million (each of which was due, in part,
to the acquisition of ATI in the first quarter of 2002). Towing cost of revenue
decreased $5.1 million, or 9.3%, from $55.0 million for the nine months ended
September 30, 2001 to $49.9 million for the nine months ended September 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 $4.0 million, a decrease in vehicle maintenance expense of
$863,000, a decrease in fuel costs of $597,000, and a decrease in occupancy
costs of $290,000 (each of which was due, in part, to the sale of two towing
divisions and the closure of another towing division during 2001), offset, in
part, by an increase in scrap car purchases of $452,000.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $698,000, or 2.5%, from $27.6 million for the
nine months ended September 30, 2001 to $26.9 million for the nine months ended
September 30, 2002. Transport selling, general and administrative expenses
increased $1.2 million, or 11.4%, from $10.5 million for the nine months ended
September 30, 2001 to $11.7 million for the nine months ended September 30,
2002. The principal components of the increase in transport selling, general and
administrative expenses consisted of an increase in wages and benefits of
$552,000, an increase in computer and telecommunication expenses of $347,000,
and an increase in travel related expenses of $217,000 (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 $878,000, or 9.7%, from
$9.0 million for the nine months ended September 30, 2001 to $8.1 million for
the nine months ended September 30, 2002. The principal components of the
decrease in towing selling, general and administrative expenses consisted of a
decrease in wages and benefits of $869,000 and a decrease in bad debt expense of
$190,000 (each of which was due, in part, to the sale of two towing divisions
and the closure of another towing division during 2001) offset, in part, by an
increase in professional fees of $253,000.
Corporate selling, general and administrative expenses decreased $1.2 million,
or 14.8%, from $8.1 million for the nine months ended September 30, 2001 to $6.9
million for the nine months ended September 30, 2002. The decrease in corporate
selling, general and administrative expenses was primarily due to a decrease in
professional fees of $545,000, a decrease in computer and telecommunication
expense of $311,000 and a decrease in bank service charges of $182,000.
Amortization of Goodwill. Amortization of goodwill decreased $1.5 million, or
100.0%, from $1.5 million for the nine months ended September 30, 2001 to $0 for
the nine months ended September 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 $3.3 million,
from a loss of $2.7 million for the nine months ended September 30, 2001 to
income of $606,000 for the nine months ended September 30, 2002. Transport
income from operations decreased $602,000, or 21.8%, from $2.8 million the nine
months ended September 30, 2001 to $2.2 million for the nine months ended
September 30, 2002. The decrease in transport income from operations was
primarily due to increases in cost of revenue and selling, general and
administrative expenses related to the operation of the transport business
segment as described above, offset, in part, by an increase in transport revenue
and a decrease in amortization of goodwill. Towing income from operations
increased $2.7 million, from $2.6 million for the nine months ended September
30, 2001 to $5.3 million for the nine months ended September 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 increased $308,000, or 3.6%, from $8.5
million for the nine months ended September 30, 2001 to $8.8 million for the
nine months ended September 30, 2002. Interest income increased $68,000, from
$37,000 for the nine months ended September 30, 2001, to $105,000 for the nine
months ended September 30, 2002. The increase in interest expense, net was
primarily related to the write-off of deferred financing costs of $438,000
related to the decline in maximum borrowing capacity and to an effective
interest rate of approximately 8.6% in the first nine months of 2001 as compared
to an effective rate of approximately 8.2% in the first nine months of 2002.
Income Tax Expense. Income tax expense increased $1.9 million, from a benefit of
$810,000 for the nine months ended September 30, 2001 to an expense of $1.1
million for the nine months ended September 30, 2002. The increase in income
Page 17
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 and the change in the estimate
of net operating loss limitations under Internal Revenue Code Section 382,
during the 2001 tax year.
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 nine months ended September 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 $41.7 million from $10.5 million for the nine
months ended September 30, 2001 to $52.2 million for the nine months ended
September 30, 2002. The increase in net loss related to the cumulative effect of
change in accounting principle of $43.4 million, offset, in part, by increased
income from operations of $3.3 million.
Liquidity and Capital Resources
As of September 30, 2002, the Company had approximately:
. $710,000 of cash and cash equivalents (representing deposits in
transit to GE Capital, as agent under the Company's revolving credit
facility) and another $6.4 million available for borrowing under the
revolving credit facility,
. a working capital deficit of approximately $34.6 million (including
the $35.0 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
. $100.7 million of outstanding long-term indebtedness, excluding
current installments.
During the nine months ended September 30, 2002, the Company provided $8.7
million in cash from operations. Cash provided by operating activities consisted
primarily of a net loss of $52.2 million (offset by $43.4 million related to the
cumulative effect of change in accounting principle and $14.7 million of
non-cash depreciation, amortization and interest charges), and an increase in
accounts payable of $3.5 million. During the nine months ended September 30,
2002, the Company used $7.3 million of cash in investing activities and $2.5
million of cash in financing activities. Investing activities consisted
primarily of $9.2 million of purchases of vehicles and equipment, offset by
$750,000 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 $2.5
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. In September 2002, as provided in the
GE Capital Credit Facility, the Company exercised the option to reduce the
amount of maximum borrowing capacity under the GE Capital Credit Facility from
$100.0 million to $75.0 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
September 30, 2002, approximately $35.0 million was outstanding under the
revolving credit facility (excluding letters of credit of approximately $13.8
million) and an additional $6.4 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
Page 18
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.
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
ratio of EBITDA to fixed charges and minimum levels of liquidity. In October
2002, the Company notified GE Capital that the Company had failed to meet the
minimum level of EBITDA and minimum ratio of EBITDA to fixed charges for the
nine months ended September 30, 2002. On November 13, 2002, the Company entered
into an amendment to the GE Capital Credit Facility under which the banks waived
the financial covenant violations. If the Company fails to comply with these or
any other covenants in the GE Capital Credit Facility in the future, the Company
will be required to seek additional 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 future 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 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 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.
As a result of the reduction in maximum borrowing capacity under the GE Capital
Credit Facility in September 2002, the Company recorded a write-off of
previously recorded deferred financing costs in the amount of $438,000. This
amount was included in interest expense in the condensed consolidated statements
of operations for the three and nine months ended September 30, 2002.
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 September 30, 2002, the Company has recorded prepaid insurance of $3.2
million and accrued expenses and other current liabilities of $1.4 million.
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 September 30,
2002, the Company had letters of credit outstanding in the aggregate amount of
$13.8 million. As of September 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 $8.0 million on purchases of vehicles and
equipment during the nine months ended September 30, 2002. These expenditures
were primarily for the purchase of transport and towing vehicles. During the
nine months ended September 30, 2002, the Company made expenditures of $2.7
million on towing vehicles and $5.3 million on transport vehicles. These
expenditures were financed primarily with borrowings under the GE Capital Credit
Facility. As of September 30, 2002, the Company was committed to purchase 27
vehicles from a vehicle manufacturer (with a total purchase price of $4.0
million).
Page 19
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 nine months of 2002. The Company has recorded the
unpaid amount of the fee ($1.8 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.
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, sale of asssets 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.
Page 20
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.
ITEM 4 CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded, based on
their evaluation within 90-days of the filing date of this report, that our
disclosure controls and procedures are effective for gathering, analyzing and
disclosing the information we are required to disclose in our reports filed
under the Securities Exchange Act of 1934 to ensure that information required to
be disclosed in the reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rules and forms.
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the previously mentioned evaluation.
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PART II OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
On September 30, 2002, the Company issued approximately $2.0 million aggregate
principal amount of Debentures to Charterhouse, which represented the quarterly
payment-in-kind interest payment due with respect to $98.6 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 3 DEFAULT UPON SENIOR SECURITIES
The GE Capital Credit Facility requires the Company, among other things, to
comply with certain cash management requirements and financial covenants. These
include minimum levels of EBITDA and minimum ratios of EBITDA to fixed charges.
In October 2002, the Company notified GE Capital that the Company had failed
meet the minimum level of EBITDA and minimum ratio of EBITDA to fixed charges
for the nine months ended September 30, 2002. On November 13, 2002, the Company
entered into an amendment to the GE Capital Credit Facility under which the
banks waived the financial covenant violations. If the Company fails to comply
with these or any other covenants in the GE Capital Credit Facility in the
future, the Company will be required to seek additional 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 future 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
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 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.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amendment No. 5, dated as of November 13, 2002, to Credit Agreement
dated as of July 30, 2000 by and among the Company, each of its
subsidiaries, various financial institutions, General Electric
Capital Corporation, as Agent and Fleet Financial Corporation, as
Documentation Agent.
99.1 Executive Certification
(b) Reports on 8-K
None
Page 22
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: November 14, 2002 /s/ Gerald R. Riordan
---------------------------------
Chief Executive Officer
/s/ Patrick J. Fodale
---------------------------------
Chief Financial Officer
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Gerald R. Riordan, Chief Executive Officer of United Road Services, Inc.,
(the "Company") certify that:
1) I have reviewed this quarterly report on Form 10-Q of the Company;
2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3) Based on my knowledge, the financial statements and other
financial information included in this quarterly report, fairly
present in all material respects, the financial condition, results
of operations and cash flows of the Company as of, and for, the
period presented in this quarterly report;
4) The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a -14 and 15d - 14) for the
registrant and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the Company,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5) The Company's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the Company's board of directors (or
persons performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
Company's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the Company's internal controls; and
Page 23
6) The Company's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Gerald R. Riordan
---------------------------------
Chief Executive Officer
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Patrick J. Fodale, Senior Vice President and Chief Financial Officer of
United Road Services, Inc., (the "Company") certify that:
1) I have reviewed this quarterly report on Form 10-Q of the Company;
2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3) Based on my knowledge, the financial statements and other
financial information included in this quarterly report, fairly
present in all material respects, the financial condition, results
of operations and cash flows of the Company as of, and for, the
period presented in this quarterly report;
4) The Company's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a -14 and 15d - 14)
for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the Company,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5) The Company's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the Company's board of directors (or
persons performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
Company's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal
controls; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the Company's internal controls; and
6) The Company's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Patrick J. Fodale
---------------------------------
Chief Financial Officer
Page 24