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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the transition period from __________ to __________
Commission file number: 000-24010
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UNITED ROAD SERVICES, INC.
(Exact name of registrant as specified in its charter)
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Delaware 94-3278455
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
17 Computer Drive West 12205
Albany, New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(518) 446-0140
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Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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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 such
filing requirements for the past 90 days. Yes |X| No |_|
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The registrant estimates that the aggregate market value of the registrant's
Common Stock held by non-affiliates on March 20, 2002 was $594,110.*
The following documents are incorporated into this Form 10-K by reference:
None.
As of March 20, 2002, 2,086,475 shares of the registrant's Common Stock were
outstanding.
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* Without acknowledging that any individual director or executive officer of
the Company is an affiliate, the shares over which they have voting control
have been included as owned by affiliates solely for the purposes of this
computation.
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PART I
ITEM 1. Business
General
United Road Services, Inc. (the "Company") provides automobile transport and
motor vehicle and equipment towing and recovery services. As of December 31,
2001, the Company operated a network of 12 transport divisions and 17 towing and
recovery divisions located in a total of 20 states. During 2001, approximately
60.8% of the Company's net revenue was derived from the provision of transport
services and approximately 39.2% of its net revenue was derived from the
provision of towing and recovery services. Further information with respect to
these segments of the Company's business may be found below in "Operations and
Services Provided" and in note 12 to the Company's Consolidated Financial
Statements included elsewhere herein.
The Company provides transport services for new and used vehicles throughout
the United States. The Company's transport customers include commercial
entities, such as automobile leasing companies, insurance companies, automobile
manufacturers, automobile auction companies and automobile dealers, and
individual motorists.
The Company offers a broad range of towing and recovery services in its
local markets, including towing, impounding and storing motor vehicles,
conducting lien sales and auctions of abandoned vehicles, towing heavy equipment
and recovering and towing heavy-duty commercial and recreational vehicles. The
Company's towing and recovery customers include commercial entities, such as
automobile leasing companies, insurance companies, automobile dealers, repair
shops and fleet operators, municipalities, law enforcement agencies such as
police, sheriff and highway patrol departments, and individual motorists.
Recent Developments
On January 16, 2002, the Company acquired Auction Transport, Inc. ("ATI")
from a subsidiary of Manheim Auction, Inc. ("Manheim") in a stock purchase
transaction. ATI, headquartered in Lee's Summit, Missouri, provides automobile
transport services to various Manheim auction locations and on a for hire basis.
ATI operates a fleet of approximately 185 vehicles and also provides integrated
vehicle logistics management services. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Acquisition of ATI."
Operations and Services Provided
Transport
The Company provides new and used automobile transport services for a wide
range of customers, including leasing companies, automobile manufacturers,
automobile dealers, automobile auction companies, insurance companies, brokers
and individuals. With respect to new automobiles, transport services typically
begin with a telephone call or other communication from an automobile
manufacturer or dealer requesting the transportation of a specified number of
vehicles between specified locations. A large percentage of the Company's used
automobile transport business derives from automobile auctions, where an on-site
Company representative negotiates with individual dealers and auction
representatives to transport vehicles to and from the auction. In each case, the
dispatcher or auction sales representative records the relevant information,
checks the location and status of the Company's vehicle fleet and assigns the
job to a particular vehicle. The automobiles are then collected and transported
to the requested destination or an intermediate location for pick up by another
Company vehicle.
The Company typically provides services as needed by a customer and charges
the customer according to pre-set rates based on mileage or negotiated flat
rates. The Company transports large numbers of new vehicles for automobile
manufacturers from ports and railheads to individual dealers pursuant to
contracts. During the year ended December 31, 2001, one such customer, a big
three automobile manufacturer, represented approximately 10% of the Company's
total consolidated net revenue. The loss of this customer could have a material
adverse effect on the Company's business, financial condition and results of
operations if the Company were not able to replace
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the lost revenue with revenue from other sources. The Company's contracts with
vehicle manufacturers typically have terms of three years or less and may be
terminated at any time for material breach. Upon expiration of the initial term,
the manufacturer may renew the contract on a year-to-year basis if it is
satisfied with the Company's performance. Otherwise a new contract is awarded
pursuant to competitive bidding. The Company's other transport services, which
include transporting large numbers of used vehicles from automobile auctions
(where off-lease vehicles are sold) to individual dealers, transporting
automobiles for dealers who transfer new cars from one region to another, and
local collection and delivery support to long-haul automobile transporters, are
typically not subject to contracts.
Towing and Recovery
The Company provides a broad range of towing and recovery services for a
diverse group of commercial, government and individual customers in its local
markets. Towing and recovery services typically begin with a telephone call
requesting assistance. The call may come from a law enforcement officer, a
commercial fleet dispatcher, a private business or an individual. The dispatcher
records the relevant information regarding the vehicle or equipment to be towed
or recovered, checks the location and status of the division's vehicle fleet (at
times using a computerized positioning system) and assigns the job to a
particular vehicle. The vehicle or equipment is then collected and towed to one
of several locations, depending on the nature of the customer.
Municipality and Law Enforcement Agency Towing. The Company provides towing
services to various municipalities and law enforcement agencies. In this market,
vehicles are typically towed to one of the Company's facilities where the
vehicle is impounded and placed in storage. The vehicle remains in storage until
its owner pays the Company the towing fee (which is typically based on an hourly
charge or mileage) and any daily storage fees, and pays any fines due to the
municipality or law enforcement agency. If the vehicle is not claimed within a
period prescribed by law (typically between 30 and 90 days), the Company
completes lien proceedings and sells the vehicle 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 of the proceeds from vehicle sales, or keep
proceeds up to the amount of towing and storage fees and pay the remainder to
the municipality or law enforcement agency. The Company provides services in
some cases under contracts with municipalities or police, sheriff and highway
patrol departments, typically for terms of five years or less. Such contracts
often may be terminated for material breach and are typically subject to
competitive bidding upon expiration. In other cases, the Company provides these
services to municipalities or law enforcement agencies without a long-term
contract. Whether pursuant to a contract or an ongoing relationship, the Company
generally provides these services for a designated geographic area, which may be
shared with one or more other companies.
Private Impound Towing. The Company provides impound towing services to
private customers, such as shopping centers, retailers and hotels, which engage
the Company to tow vehicles that are parked illegally on their property. As in
law enforcement agency towing, the Company generates revenues through the
collection of towing and storage fees from vehicle owners, and from the sale of
vehicles that are not claimed.
Insurance Salvage Towing. The Company provides insurance salvage towing
services to insurance companies and automobile auction companies for a
per-vehicle fee based on the towing distance. This business involves secondary
towing, since the vehicles involved typically have already been towed to a
storage facility. For example, after an accident, a damaged or destroyed vehicle
is usually towed to a garage or impound yard. The Company's insurance salvage
towing operations collect these towed vehicles and deliver them to repair shops,
automobile auction companies or scrap metal facilities as directed by the
customer.
Commercial Road Service. The Company provides road services to a broad range
of commercial customers, including automobile dealers and repair shops. The
Company typically charges a flat fee and mileage premium for these towing
services. Commercial road services also include towing and recovery of
heavy-duty trucks, recreational vehicles, buses and other large vehicles,
typically for commercial fleet operators. The Company charges an hourly rate
based on the towing vehicle used for these specialized services.
Heavy Equipment Towing. The Company provides heavy equipment towing services
to construction companies, contractors, municipalities and equipment leasing
companies. The Company bases its fees for these services on the vehicle used and
the distance traveled.
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Consumer Road Service. The Company also tows disabled vehicles for
individual motorists and national motor clubs. The Company generally tows such
vehicles to repair facilities for a flat fee paid by either the individual
motorist or the motor club.
Safety and Training
The Company uses a variety of programs to improve safety and promote an
accident-free environment. These programs include regular driver training and
certification, drug testing and safety bonuses. These programs are designed to
ensure that all employees comply with the Company's safety standards, the
Company's insurance carriers' safety standards and federal, state and local laws
and regulations. The Company believes that its emphasis on safety and training
helps it attract and retain quality employees.
Competition
The market for towing, recovery and transport services is extremely
competitive. Competition is based primarily on quality, service, timeliness,
price and geographic proximity. The Company competes with certain large
transport companies on a national and regional basis and with certain large
towing and recovery companies on a regional and local basis, some of which may
have greater financial and marketing resources than the Company. The Company
also competes with thousands of smaller local companies, which may have lower
overhead cost structures than the Company and may, therefore, be able to provide
their services at lower rates than the Company. The Company believes that it is
able to compete effectively because of its commitment to high quality service,
geographic scope, broad range of services offered, experienced management and
operational economies of scale.
Sales and Marketing
The Company's sales and marketing strategy is to expand market penetration
through strategically oriented direct sales techniques. The Company currently
focuses its sales and marketing efforts on large governmental and commercial
accounts, including automobile manufacturers, leasing companies, insurance
companies and governmental entities, with the goal of fostering long-term
relationships with these customers.
Dispatch and Information Systems
The Company has experienced difficulties in implementing common operating
systems for its transport and towing and recovery divisions to perform vehicle
dispatch and other administrative functions, and currently relies on a
combination of common operating systems and systems used by acquired divisions
prior to their acquisition by the Company. Each of the operating systems used by
the Company's divisions is linked with the Company's enterprise system. The
Company has an information systems services agreement with Syntegra (USA) Inc.
("Syntegra") pursuant to which Syntegra provides data center, desktop and help
desk support services to the Company. The Syntegra agreement is terminable by
either party upon (i) 90 days notice and the payment by the terminating party of
an early termination fee of $950,000 or (ii) a material breach by the other
party. In conjunction with Syntegra, the Company intends to continue to
re-evaluate its information system needs and take appropriate action to improve
the utility and cost-effectiveness of its information systems.
The Company anticipates that it will need to update and expand its
information systems, or develop or purchase and implement new systems as it
re-evaluates its needs. The Company expects that any such upgrade, expansion of
existing systems or development, purchase or implementation of new systems will
require substantial capital expenditures.
Government Regulation and Environmental Matters
Towing, recovery and transport services are subject to various federal,
state and local laws and regulations regarding equipment, driver certification,
training, recordkeeping and workplace safety. The Company's vehicles and
facilities are subject to periodic inspection by the United States Department of
Transportation and similar state and local agencies to monitor compliance with
such laws and regulations. The Company's failure to comply with such laws and
regulations could subject the Company to substantial fines and could lead to the
closure of operations
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that are not in compliance. Companies providing towing, recovery and transport
services are required to have numerous federal, state and local licenses and
permits. Failure by the Company to obtain or maintain such licenses and permits
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's operations are subject to a number of federal, state and local
laws and regulations relating to the storage of petroleum products, hazardous
materials and impounded vehicles, as well as safety regulations relating to the
upkeep and maintenance of the Company's vehicles. In particular, the Company's
operations are subject to federal, state and local laws and regulations
governing leakage from salvage vehicles, waste disposal, the handling of
hazardous substances, environmental protection, remediation, workplace exposure
and other matters. The Company believes that it is in substantial compliance
with all such laws and regulations. The Company does not currently expect to
spend any substantial amounts in the foreseeable future in order to meet current
environmental or workplace health and safety requirements. It is possible that
an environmental claim could be made against the Company or that the Company
could be identified by the Environmental Protection Agency, a state agency or
one or more third parties as a potentially responsible party under federal or
state environmental law. If the Company is subject to such a claim or is so
identified, the Company may incur substantial investigation, legal and
remediation costs. Such costs could have a material adverse effect on the
Company's business, financial condition and results of operations.
Seasonality
The demand for towing, recovery and transport services is subject to
seasonal and other variations. Specifically, the demand for towing and recovery
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.
Employees
As of December 31, 2001, the Company had approximately 1,708 employees,
leased an additional 187 employees and used approximately 178 independent
contractors. The Company believes that it has a satisfactory relationship with
its employees. None of the Company's employees are currently members of unions.
Factors Influencing Future Results and Accuracy of Forward-Looking Statements
In the normal course of its business, the Company, in an effort to help keep
its stockholders and the public informed about the Company's operations, may
from time to time issue or make certain statements, either in writing or orally,
that are or contain forward-looking statements, as that term is defined in the
federal securities laws. 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. The Company cautions readers that such statements are not guarantees
of future performance or events and are subject to a number of factors that may
tend to influence the accuracy of the statements and the projections upon which
the statements are based, including but not limited to those discussed below. As
noted elsewhere in this Report, all phases of the Company's operations are
subject to a number of uncertainties, risks, and other influences, many of which
are outside the control of the Company, and any one of which, or a combination
of which, could materially affect the financial condition and results of
operations of the Company and whether forward-looking statements made by the
Company ultimately prove to be accurate.
The following discussion outlines certain factors that could affect the
Company's financial condition and results of operations for 2002 and beyond and
cause them to differ materially from those that may be set forth in
forward-looking statements made by or on behalf of the Company.
4
Limited Combined Operating History; Risks of Integrating and Operating
Acquired Companies
The Company conducted no operations and generated no net revenue prior to
its initial public offering in May 1998. At the time of its initial public
offering, the Company purchased seven towing, recovery and transport businesses.
Between May 6, 1998 and May 5, 1999, the Company acquired a total of 49
additional businesses. Prior to their acquisition by the Company, such companies
were operated as independent entities. A number of these businesses, now
operating as divisions of the Company, have experienced performance difficulties
since being acquired by the Company. As a result, during 2000, the Company sold
one division and closed six other divisions and during 2001, the Company sold
two divisions and closed four other divisions. There can be no assurance that
the Company will be able to improve the profitability of its underperforming
businesses or that it will be able to operate the combined enterprise on a
profitable basis.
Risks Related to Improving Profitability
A key element of the Company's business strategy is to increase the revenue
and improve the profitability of the companies it has acquired. The Company is
seeking to enhance its revenue by increasing asset utilization, deploying new
equipment and drivers if and when appropriate and expanding both the scope of
services the Company offers and its customer base. The Company's ability to
increase revenue will be affected by various factors, including the availability
of capital to invest in new equipment, the demand for towing, recovery and
transport services, the level of competition in the industry, and the Company's
ability to attract and retain a sufficient number of qualified personnel.
The Company is also seeking to improve its profitability by various means,
including eliminating duplicative operating costs and overhead, decreasing
unnecessary administrative, systems and other costs, and capitalizing on its
purchasing power. The Company's ability to improve profitability will be
affected by various factors, including unexpected increases in operating or
administrative costs, the Company's ability to benefit from the elimination of
redundant operations and the strength of the Company's management on a national,
regional and local level. Many of these factors are beyond the Company's
control. There can be no assurance that the Company will be successful in
increasing revenue or improving its profitability.
Availability of Capital
The Company's ability to execute its business strategy will depend to a
great extent on the availability of capital. The Company has experienced, and
may continue to experience, a significant decrease in its cash flow from
operations. While management continues to explore opportunities to improve the
Company's cash flow from operations through, among other things, the closure or
divestiture of unprofitable divisions, consolidation of operating locations,
reduction of operating costs and the marketing of towing, recovery and transport
services to new customers in strategic market locations, there can be no
assurance that such efforts will be successful in improving the Company's cash
flow. The Company currently expects to be able to fund its liquidity needs for
at least the next twelve months through cash flow from operations and borrowings
of amounts available under its revolving credit facility under which General
Electric Capital Corporation ("GE Capital") acts as agent. However, any failure
by the Company to meet the financial covenants in its credit facility will,
unless waived by the banks, result in an inability to borrow and/or an immediate
obligation to repay all amounts outstanding under the credit facility. Also,
unless it is successful in improving its cash flow from operations, the Company
may not be able to fund its working capital needs or invest in its longer-term
growth strategy. In the event that the Company is not able to fund its liquidity
needs from cash flow from operations and/or borrowings under its credit
facility, it would be necessary for the Company to raise additional capital,
through the issuance of debt or equity securities, bank debt or sales of assets,
which may not be possible on satisfactory terms, or at all. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Company's revolving credit facility requires the Company, among other
things, to comply with certain financial covenants, including minimum levels of
earnings before taxes, depreciation and amortization ("EBITDA"), minimum ratios
of EBITDA to fixed charges and minimum levels of liquidity. In October 2001, the
Company notified GE Capital that the Company had failed to meet the minimum
level of EBITDA and minimum ratio of
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EBITDA to fixed charges for the period ended September 30, 2001. In December
2001, the Company notified GE Capital that the Company would fail to meet the
minimum level of EBITDA and minimum ratio of EBITDA to fixed charges for the
period ended December 31, 2001, and that the Company was not expected to meet
the minimum liquidity requirement in the first quarter of 2002.
On February 14, 2002, the Company entered into an amendment to the revolving
credit facility under which the banks waived these financial covenant
violations, waived a covenant violation with respect to the banks' consent to
the ATI acquisition and provided for the addition of ATI as a borrower under the
credit facility. The amendment reduces the minimum required levels of EBITDA and
increases the minimum required ratios of EBITDA to fixed charges under the
revolving credit facility. The amendment also reduced the minimum liquidity
requirement for the period beginning February 15, 2002 and ending March 15,
2002. In addition, the amendment increases the maximum amount of annual
operating lease payments the Company and its subsidiaries may make in fiscal
years 2002 through 2004.
If the Company fails to comply with these amended provisions or violates
other covenants in the revolving credit facility, the Company will be required
to seek additional 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 future waivers
were not granted and the banks were to elect to accelerate repayment of
outstanding balances under the 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 credit facility, it would cause a
default under the debentures issued to Charter 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 credit facility
banks' priority. In such event, repayment of the debentures would be required
only if the credit facility was paid in full or the banks under the credit
facility granted their express written consent.
Competition
The market for towing, recovery and transport services is extremely
competitive. Such competition is based primarily on quality, service,
timeliness, price and geographic proximity. The Company competes with certain
large transport companies on a national and regional basis and certain large
towing and recovery companies on regional and local basis, some of which may
have greater financial and marketing resources than the Company. The Company
also competes with thousands of smaller local companies, which may have lower
overhead cost structures than the Company and may, therefore, be able to provide
their services at lower rates than the Company.
Information Systems
The Company has experienced difficulties in implementing common operating
systems in its towing and recovery and transport locations. As a result, the
Company currently relies on a combination of common operating systems and
systems used by acquired divisions prior to their acquisition by the Company.
The Company anticipates that it will need to update and expand its information
systems, or develop or purchase and implement new systems as it continues to
re-evaluate its needs. The Company expects that any update or expansion of its
existing systems or any development, purchase or implementation of new systems
will require the Company to make substantial capital expenditures, which could
have a material adverse effect on the Company's financial condition and results
of operations. In addition, the Company could encounter unexpected delays in
developing and implementing new systems, which could interfere with its
business. Any significant interruption in the Company's operations could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Customer Relationships and Contracts
The Company provides transport services to certain automobile manufacturers
and other commercial customers under contracts, which typically have terms of
three years or less and may be terminated at any time for material breach. Upon
expiration of the initial term of these contracts, the manufacturer typically
may renew the contract on
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a year-to-year basis if it is satisfied with the Company's performance.
Otherwise, a new contract is awarded pursuant to competitive bidding. The
Company also provides towing and recovery services to certain municipalities and
a number of law enforcement agencies under contracts. These towing and recovery
contracts usually have terms of five years or less, may be terminated at any
time for material breach, and typically are subject to competitive bidding upon
expiration. The Company has towing, recovery and transport contracts
representing approximately $1.7 million in annual revenue that are scheduled to
expire during 2002. It is possible that some or all of these transport or towing
and recovery contracts may not be renewed upon expiration or may be renewed on
terms less favorable to the Company based upon prevailing economic conditions at
the time of renewal. It is also possible that at some future time more of the
Company's customers may implement a competitive bidding process for the award of
transport or towing and recovery contracts. The Company has no formal contract
with a large number of its customers, and it is possible that one or more
customers could elect, at any time, to stop utilizing the Company's services.
During the year ended December 31, 2001, one of the Company's transport
customers, a big three automobile manufacturer, represented approximately 10% of
the Company's total consolidated net revenue. The loss of this customer could
have a material adverse effect on the Company's business, financial condition
and results of operations if the Company were not able to replace the lost
revenue with revenue from other sources.
Regulation
Towing, recovery and transport services are subject to various federal,
state and local laws and regulations regarding equipment, driver certification,
training, recordkeeping and workplace safety. The Company's vehicles and
facilities are subject to periodic inspection by the United States Department of
Transportation and similar state and local agencies to monitor compliance with
such laws and regulations. The Company's failure to comply with such laws and
regulations could subject the Company to substantial fines and could lead to the
closure of operations that are not in compliance. Companies providing towing,
recovery and transport services are required to have numerous federal, state and
local licenses and permits. Failure by the Company to obtain or maintain such
licenses and permits could have a material adverse effect on the Company's
business, financial condition and results of operations.
Potential Exposure to Environmental Liabilities
The Company's operations are subject to a number of federal, state and local
laws and regulations relating to the storage of petroleum products, hazardous
materials and impounded vehicles, as well as safety regulations relating to the
upkeep and maintenance of vehicles. In particular, the Company's operations are
subject to federal, state and local laws and regulations governing leakage from
salvage vehicles, waste disposal, the handling of hazardous substances,
environmental protection, remediation, workplace exposure and other matters. It
is possible that an environmental claim could be made against the Company or
that the Company could be identified by the Environmental Protection Agency, a
state agency or one or more third parties as a potentially responsible party
under federal or state environmental laws. In such event, the Company could be
forced to incur substantial investigation, legal and remediation costs. Such
costs could have a material adverse effect on the Company's business, financial
condition and results of operations.
Potential Liabilities Associated with Acquired Businesses
The businesses that the Company has acquired could have liabilities that the
Company did not discover during its pre-acquisition due diligence
investigations. Such liabilities may include, but are not limited to,
liabilities arising from environmental contamination or non-compliance by prior
owners with environmental laws or regulatory requirements. As a successor owner
or operator, the Company may be responsible for such liabilities. Any such
liabilities or related investigations could have a material adverse effect on
the Company's business, financial condition and results of operations.
Labor Relations
Although currently none of the Company's employees are members of unions, it
is possible that some employees could unionize in the future. If the Company's
employees were to unionize, the Company could incur
7
higher ongoing labor costs and could experience a significant disruption of its
operations in the event of a strike or other work stoppage. Any of these
possibilities could have a material adverse effect on the Company's business,
financial condition and results of operations.
Liability and Insurance
From time to time, the Company is subject to various claims relating to its
operations, including (i) claims for personal injury or death caused by
accidents involving the Company's vehicles and service personnel, (ii) workers'
compensation claims and (iii) other employment related claims. Although the
Company maintains insurance (subject to deductibles), such insurance may not
cover certain types of claims, such as claims under specified dollar thresholds
or claims for punitive damages or for damages arising from intentional
misconduct (which are often alleged in third-party lawsuits). In the future, the
Company may not be able to maintain adequate levels of insurance on reasonable
terms. In addition, it is possible that existing or future claims may exceed the
level of the Company's insurance or that the Company may not have sufficient
capital available to pay any uninsured claims.
New Vehicle Manufacturers
A significant percentage of the Company's transport business is derived from
new vehicle manufacturers. A decrease in production rates of new vehicles by
such manufacturers may cause a decrease in the amount of new vehicle transport
business conducted by the Company. In addition, decreasing financial performance
by such new vehicle manufacturers may cause them to seek price and other
concessions from the Company. Any decrease in new vehicle transport business
conducted by the Company or any price or other concessions granted by the
Company to such manufacturers could have a material adverse effect on the
Company's business, financial condition and results of operations.
Fuel Prices
Fuel costs constitute a significant portion of the Company's operating
expenses. Although the Company attempts to pass fuel price increases onto its
customers in the form of fuel surcharges, the Company may not always be
successful in mitigating the effects of fuel price increases on its operations.
In addition, the cost of fuel is subject to many economic and political factors
which are beyond the Company's control. Significant fuel shortages or increases
in fuel prices could have a material adverse effect on the Company's business,
financial condition and results of operations.
Quarterly Fluctuations of Operating Results
The Company has experienced, and may continue to experience, significant
fluctuations in quarterly operating results due to a number of factors. These
factors could include: (i) the Company's success in improving operating
efficiency and profitability, and in integrating its acquired businesses; (ii)
the loss of significant customers or contracts; (iii) the timing of expenditures
for new equipment and the disposition of used equipment; (iv) price changes in
response to competitive factors; (v) changes in the general level of demand for
towing, recovery and transport services; (vi) event-driven variations in the
demand for towing, recovery and transport services; (vii) the availability of
capital to fund operations, including expenditures for new and replacement
equipment; (viii) 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; (ix)
fluctuations in fuel, insurance, labor and other operating costs; and (x)
general economic conditions. As a result, operating results for any one quarter
should not be relied upon as an indication or guarantee of performance in future
quarters.
Seasonality
The demand for towing, recovery and transport services is subject to
seasonal and other variations. Specifically, the demand for towing and recovery
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.
8
Reliance on Key Personnel
The Company is highly dependent upon the experience, abilities and continued
efforts of its senior management. The loss of the services of one or more of the
key members of the Company's senior management could have a material adverse
effect on the Company's business, financial condition and results of operations
if the Company is unable to find a suitable replacement in a timely manner. The
Company does not presently maintain "key man" life insurance with respect to
members of its senior management.
The Company's operating facilities are managed by regional and local
managers who have substantial knowledge of and experience in the local towing,
recovery and transport markets served by the Company. Such managers include
former owners and employees of businesses the Company has acquired. The loss of
one or more of these managers could have a material adverse effect on the
Company's business, financial condition and results of operations if the Company
is unable to find a suitable replacement in a timely manner.
The timely, professional and dependable service demanded by towing, recovery
and transport customers requires an adequate supply of skilled dispatchers,
drivers and support personnel. Accordingly, the Company's success will depend on
its ability to employ, train and retain the personnel necessary to meet its
service requirements. From time to time, and in particular areas, there are
shortages of skilled personnel. In the future, the Company may not be able to
maintain an adequate skilled labor force necessary to operate efficiently, the
Company's labor expenses may increase as a result of a shortage in supply of
skilled personnel, or the Company may have to curtail its operations as a result
of labor shortages.
OTC Bulletin Board Listing
Since the Company's common stock was delisted from the Nasdaq National
Market ("Nasdaq") on May 22, 2000, the common stock has been traded
over-the-counter and quoted on the Over-the-Counter Electronic Bulletin Board
(the "OTC Bulletin Board"). Trading of securities on the OTC Bulletin Board is
generally limited and trades are effected on a less regular basis than on other
exchanges or quotation systems (such as Nasdaq). Accordingly, investors who own
or purchase the Company's common stock will find that its liquidity or
transferability is limited. Investors may find it difficult to purchase or
dispose of, or obtain accurate quotations as to the market value of, the
Company's common stock. Additionally, the listing of the Company's common stock
on the OTC Bulletin Board may negatively affect the Company's ability to sell
additional securities or to secure additional financing.
Control by Principal Stockholder
Blue Truck Acquisition, LLC ("Blue Truck"), a Delaware limited liability
company controlled by KPS Special Situations Fund, L.P. ("KPS"), owns shares of
the Company's Series A Convertible Preferred Stock (the "Series A Preferred
Stock") convertible into approximately 76.6% of the Company's common stock. Blue
Truck is entitled to vote the shares of Series A Preferred Stock on an
as-converted basis on all matters submitted to a vote of the Company's
stockholders, except for certain elections of directors. In addition, Blue Truck
currently has the right to designate and elect a majority of the Board of
Directors. As a result, Blue Truck has effective control of the Company,
including the power to direct the Company's policies and to determine the
outcome of all matters submitted to a vote of the Company's stockholders. This
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company, including transactions in which stockholders
might otherwise receive a premium over current market prices for their shares.
9
ITEM 2. Properties
As of December 31, 2001, the Company operated 29 divisions, consisting of 64
facilities located in 20 states. These properties consisted of 38 facilities
used to garage, repair and maintain towing and recovery vehicles, impound and
store towed vehicles, conduct lien sales and auctions and house administrative
and dispatch operations for the Company's towing and recovery operations, and 26
facilities used as marshalling sites and to garage, repair and maintain
transport vehicles and house administrative and dispatch operations for the
Company's transport operations. All of the Company's facilities are leased from
other parties. As of December 31, 2001, the Company's headquarters consisted of
approximately 14,100 square feet of leased space in Albany, New York.
As of December 31, 2001, the Company operated a fleet of approximately 646
towing and recovery vehicles and approximately 589 transport vehicles. The
Company believes that its vehicles are generally well-maintained and adequate
for its current operations.
ITEM 3. Legal Proceedings
On April 27, 2001, David A. Caron, the former owner of Caron Auto Works,
Inc. and Caron Auto Brokers, Inc. (collectively, "Caron Auto"), one of the
businesses acquired by the Company in connection with the Company's initial
public offering, filed suit against the Company in the Supreme Court of the
State of New York, County of New York. In his complaint, Mr. Caron claimed that
the Company breached certain of its obligations under consulting and employment
agreements allegedly entered into between the Company and Mr. Caron in
connection with the Caron Auto acquisition. Mr. Caron claimed, among other
things, that the Company failed to pay certain advances and commissions for
acquisition related-consulting services allegedly provided by Mr. Caron. The
complaint sought unspecified damages. In November 2001, the Company and Mr.
Caron entered into a settlement agreement with respect to the claims made by Mr.
Caron in the suit. Pursuant to the settlement agreement, the suit was dismissed
with prejudice on December 16, 2001.
On October 17, 2001, David J. Floyd, the former owner of Falcon Towing and
Auto Delivery, Inc. ("Falcon"), one of the businesses acquired by the Company in
connection with the Company's initial public offering, filed suit against the
Company in the United Stated District Court, Northern District of New York. Mr.
Floyd is a beneficial owner of greater than 5% of the Company's common stock.
See "Security Ownership of Certain Beneficial Owners and Management." In his
complaint, Mr. Floyd claims that the Company failed to pay earnout payments
allegedly owed to Mr. Floyd under the merger agreement entered into with respect
to the Falcon acquisition. In November 2001, the Company filed an answer to the
complaint, denying Mr. Floyd's claims. In February 2002, the case was
transferred to the United States District Court, Southern District of New York.
No amount of damages was claimed in the complaint and discovery has not yet
commenced. Therefore, the Company has not yet determined the potential damages
to be claimed by the plaintiff. The Company intends to defend this action
vigorously.
The Company is from time to time a party to litigation arising in the
ordinary course of its business (most of which involves claims for personal
injury or property damage incurred in connection with the Company's operations).
The Company does not believe that any such litigation in which the Company is
currently involved will have a material adverse effect on its business,
financial condition or results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of the stockholders of the Company was held on
November 29, 2001.
(b) At the annual meeting, Edward W. Morawski, Kenneth K. Fisher, Eugene J.
Keilin and Brian J. Riley were elected as Class III directors of the Company for
terms expiring at the Company's 2004 annual meeting. Gerald R. Riordan, A.
Lawrence Fagan, Michael G. Psaros, and Stephen P. Presser continue to serve as
Class I directors with terms expiring at the Company's 2002 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.
10
(c) Set forth below is the tabulation of the votes at the annual meeting
with respect to the election of the Class III directors:
Director Votes For Votes Withheld
- -------- --------- --------------
Edward W. Morawski 1,549,650 (1) 31,342 (1)
Kenneth K. Fisher 1,562,239 (1) 28,753 (1)
Eugene J. Keilin 662,119 (2) 0 (2)
Brian J. Riley 662,119 (2) 0 (2)
- ---------------
(1) Shares of Common Stock
(2) Shares of Series A Preferred Stock
11
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock was quoted on the Nasdaq National Market under
the symbol "URSI" from May 1, 1998 through May 22, 2000 when the Company was
delisted from Nasdaq. On May 22, 2000, the common stock began to be traded
over-the-counter and quoted on the OTC Bulletin Board under the symbol "URSI."
The table below sets forth the high and low sale prices for the Common Stock on
the Nasdaq National Market or the OTC Bulletin Board, as applicable, for the
periods indicated. All share prices have been adjusted to give effect to the
one-for-ten reverse split of the outstanding common stock effected as of May 4,
2000 (the "Reverse Stock Split"). The prices presented for the period from
January 1, 1999 through December 31, 2001 reflect inter-dealer prices without
retail mark-ups, mark-downs or commissions, and may not reflect actual
transactions.
1999 High Low
---- ---- ---
First Quarter ............................. 195.00 42.50
Second Quarter ............................ 80.00 45.625
Third Quarter ............................. 51.25 25.00
Fourth Quarter ............................ 36.25 10.00
2000 High Low
---- ---- ---
First Quarter ............................. 29.6875 12.50
Second Quarter ............................ 18.125 3.0625
Third Quarter ............................. 3.50 1.81
Fourth Quarter ............................ 2.23 0.45
2001 High Low
---- ---- ---
First Quarter ............................. 0.81 0.41
Second Quarter ............................ 0.53 0.24
Third Quarter ............................. 0.51 0.25
Fourth Quarter ............................ 0.45 0.23
As of March 20, 2002, there were 226 record holders of the Company's common
stock.
The Company has never paid any cash dividends on its common stock and
intends to retain its earnings to finance the development of its business for
the foreseeable future. Any future determination as to the payment of cash
dividends will depend upon such factors as earnings, capital requirements, the
Company's financial condition, restrictions in financing agreements and other
factors deemed relevant by the Company's Board of Directors. The payment of
dividends by the Company is restricted by the Company's revolving credit
facility, the Certificate of Designations for its Series A Preferred Stock and
the Amended and Restated Purchase Agreement between the Company and Charterhouse
(the "Amended Charterhouse Purchase Agreement").
Sale of Unregistered Securities
On December 31, 2001, 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 $92.9 million
aggregate principal amount of debentures previously issued to Charterhouse.
The sale of the securities listed above 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 promulgated
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 certificate issued in such transaction.
12
ITEM 6. Selected Financial Data
The following selected consolidated financial data as of December 31, 2001,
2000, 1999, 1998 and 1997 and for the years ended December 31, 2001, 2000, 1999
and 1998, and the period from July 25, 1997 (inception) to December 31, 1997,
have been taken from the consolidated financial statements of the Company. For
financial statement presentation purposes, Northland Auto Transporters, Inc. and
Northland Fleet Leasing, Inc. (collectively, "Northland"), one of the companies
acquired by the Company in May 1998 in connection with its initial public
offering, has been designated as the Company's predecessor entity. The following
selected historical financial data for Northland as of December 31, 1997 and for
the year ended December 31, 1997 have been derived from the audited financial
statements of Northland.
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the consolidated financial statements and the related notes
included elsewhere in this Report.
Period From
Year Ended December 31, July 25, 1997
----------------------- (inception) to
2001 2000 1999 1998 December 31, 1997
---- ---- ---- ---- -----------------
(In thousands, except per share amounts and share data)
Consolidated Statement of Operations
Data--United Road Services, Inc.:
Net revenue ................................ $ 226,529 $ 246,566 $ 255,112 $ 87,919 $ --
Cost of revenue ............................ 193,503 212,651 202,588 64,765 --
----------- ----------- ----------- ----------- -----------
Gross profit ............................... 33,026 33,915 52,524 23,154 --
Selling, general and administrative expenses 36,129 43,514 42,139 12,428 174
Goodwill amortization ...................... 2,063 3,710 5,439 1,745 --
Impairment charge .......................... -- 129,455 28,281 -- -----------
----------- ----------- ----------- ----------- --
Income (loss) from operations .............. (5,166) (142,764) (23,335) 8,981 -----------
Interest income (expense) and other, net ... (11,566) (14,322) (11,523) (1,086) (174)
----------- ----------- ----------- ----------- --
Income (loss) before income taxes .......... (16,732) (157,086) (34,858) 7,895 -----------
Income tax expense (benefit) ............... 3,073 1,846 (5,158) 3,503 (174)
=========== =========== =========== =========== --
Net income (loss) .......................... $ (13,659) $ (158,932) $ (29,700) $ 4,392 $ (174)
----------- ----------- ----------- ----------- ===========
Basic net income (loss) per share .......... $ (6.52) $ (81.95) $ (17.54) $ 4.30 $ (0.84)
=========== =========== =========== =========== ===========
Diluted net income (loss) per share ........ $ (6.52) $ (81.95) $ (17.54) $ 4.23 $ (0.84)
=========== =========== =========== =========== ===========
Shares used in computing basic net income
(loss) per share ........................... 2,096,248 1,939,337 1,693,311 1,022,181 205,530
=========== =========== =========== =========== ===========
Shares used in computing diluted net income
(loss) per share ........................... 2,096,248(1) 1,939,337(1) 1,693,311(1) 1,038,991(2) 205,530(2)
=========== =========== =========== =========== ===========
At December 31,
--------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data--United Road Services, Inc.:
Working capital (deficit) .......................... $ (32,390) $ (28,201) $ (34,208) $ 9,330 $ (104)
Total assets ....................................... 171,790 178,393 322,445 248,732 50
Long-term obligations, excluding current
Installments ................................... 94,855 88,115 82,758 65,255 --
Stockholders' equity (deficit) ..................... 17,222 32,606 166,413 163,766 (104)
13
Year Ended
December 31, 1997
-----------------
(In thousands)
Historical Statement of Operations
Data--Northland:
Net revenue......................... $ 10,159
Operating income.................... 1,438
Other expense, net.................. (49)
Net income.......................... 1,054
At December 31, 1997
--------------------
(In thousands)
Historical Balance Sheet
Data--Northland:
Working Capital...................... $ 399
Total assets......................... 5,465
Long-term obligations, excluding
current installments................. 1,074
Stockholders' equity................. 3,045
- ---------------
(1) Represents actual weighted average shares outstanding. The effect of
options, warrants, shares withheld in connection with acquisitions or
earn-out shares payable to the former owners of the businesses the Company
acquired in connection with its initial public offering and one other
acquired company have been excluded, as the effect would be anti-dilutive.
(2) Represents actual weighted average outstanding shares, adjusted for any
incremental effect of options, warrants, shares withheld in connection with
acquisitions and 1998 earn-out shares payable to the former owners of the
businesses the Company acquired in connection with its initial public
offering and one other acquired company.
14
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following information should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Report.
All share and per-share amounts in the discussion below and in the
accompanying consolidated financial statements have been restated to give effect
to the one-for-ten reverse stock split effected by the Company on May 4, 2000.
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,
recovery 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, recovery 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. Certain other
important factors that could cause actual results to differ materially from
management's expectations ("Forward-Looking Statements") are disclosed in this
Report. All written forward-looking statements by or attributable to management
in this Report are expressly qualified in their entirety by the Risk Factors and
the Forward-Looking Statements. 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 and recovery. 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 and recovery segment, the
Company provides a variety of towing and recovery services in its local markets,
including towing, impounding and storing motor vehicles, conducting lien sales
and auctions of abandoned vehicles, towing heavy equipment and recovering 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.
15
The Company derives revenue from towing, recovery 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 remainder
to the municipality or law enforcement agency. Services are provided in some
cases under contracts with towing, recovery and transport customers. In other
cases, services are provided to towing, recovery 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 and recovery 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 the
near term in order to allow the Company to focus primarily on integrating and
profitably operating its acquired businesses. Prior to the Company's acquisition
of 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
December 31, 2001, the Company operated a network of 12 transport divisions and
17 towing and recovery divisions located in a total of 20 states. During 2001,
approximately 60.8% of the Company's net revenue was derived from the provision
of transport services and approximately 39.2% of its net revenue was derived
from the provision of towing and recovery services.
Management's discussion and analysis addresses the Company's historical
results of operations and financial condition as shown in its consolidated
financial statements for the years ended December 31, 2001, 2000 and 1999. The
historical results for the year ended December 31, 1999 includes the results of
all businesses acquired prior to December 31, 1999 from their respective dates
of acquisition. The Company did not acquire any businesses in the years ending
December 31, 2001 and 2000.
All of the acquisitions completed by the Company to date have been accounted
for using the purchase method of accounting. As a result, the amount by which
the fair value of the consideration paid exceeds the fair value of the net
assets purchased by the Company has been recorded as goodwill. From the
respective acquisition dates to December 31, 2001, this goodwill has been
amortized, using its estimated useful life of 40 years, as a non-cash charge to
operating income. Pursuant to a recently adopted accounting standard, the
Company will cease to amortize approximately $75.6 million of goodwill related
to its prior acquisitions. In lieu of amortization, the Company will be required
to perform an initial impairment review of its goodwill in 2002 and annual
impairment reviews thereafter. See "--Critical Accounting Policies -- Valuation
of long-lived assets and goodwill" and "--Recently Issued Accounting Standards"
below.
16
In the fourth quarter of 1999 and the second quarter of 2000, based upon a
comprehensive review of the Company's long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121 and an analysis of
the recoverability of goodwill under Accounting Principles Board ("APB") Opinion
No. 17, the Company recorded impairments of long-lived assets and goodwill of
$28.3 million at December 31, 1999 and $129.5 million at June 30, 2000.
Critical Accounting Policies and Estimates
The preparation of 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 financial statements and related disclosure
are necessarily affected by 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 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 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 following are the Company's most critical
accounting policies affected by the estimates and assumptions the Company must
make in the preparation of its financial statements and related disclosure:
Revenue. The Company derives revenue from towing, recovery and transport
services based on distance, time or fixed charges and from related impounding,
storage and other fees. Transport revenue is recognized upon the delivery of
vehicles or equipment to their final destination, towing revenue is recognized
at the completion of each towing engagement and revenues from impounding,
storage, lien sales, repairs and auctions are recorded when the service is
performed or when title to the vehicles has been transferred. Expenses related
to the generation of revenue are recognized as incurred.
Allowance for doubtful accounts. Management must make estimates of the
uncollectability of accounts receivable. Management specifically analyzes
historical bad debt trends, customer concentrations, customer credit-worthiness
and current economic trends when evaluating the adequacy of the allowance for
doubtful accounts. The Company's accounts receivable balance as of December 31,
2001 was $18.2 million, net of an allowance for doubtful accounts of $1.6
million.
Accrued insurance. The Company is self-insured up to a certain stop-loss
limit for employee health, accident liability and workers' compensation
insurance. Therefore, management must make estimates of potential insurance
losses related to the then-current accounting period. Significant management
judgements and estimates must be made and used in connection with establishing
such an insurance accrual. Management analyzes historical claim trends and
current economic conditions in evaluating the adequacy of the insurance accrual.
Material differences could result in the amount and timing of insurance expenses
for any period if management were to make different judgements or utilize
different estimates. The Company's reserve for health insurance, workers
compensation and cargo losses at December 31, 2001 was $4.7 million.
Accounting for income taxes. As part of the process of preparing its
consolidated financial statements, the Company is required to estimate income
taxes for each of the jurisdictions in which it operates. This process
17
involves estimation of the actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items, such as
depreciation, goodwill and allowance for doubtful accounts, for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within the consolidated balance sheet. The
Company must then assess the likelihood that any deferred tax assets will be
recovered from future taxable income and, to the extent the Company believes
that recovery is not likely, a valuation allowance must be established. To the
extent a valuation allowance is established or increased in a period, expense is
recorded within the tax provision in the Company's consolidated statement of
operations.
Significant management judgment is required in determining the provision for
income taxes, deferred tax assets and liabilities and any valuation allowance
recorded against net deferred tax assets. At December 31, 2001, the Company had
a valuation allowance of $5.5 million, due to uncertainties related to the
Company's ability to utilize certain deferred tax assets (consisting primarily
of certain net operating losses carried forward) before they expire. The
valuation allowance is based on estimates of taxable income by jurisdiction and
the period over which the Company's deferred tax assets will be recoverable. In
the event that actual results differ from these estimates or the Company adjusts
these estimates in future periods, the Company may need to establish an
additional valuation allowance which could materially impact the Company's
financial position and results of operations. The Company's deferred tax asset
at December 31, 2001 was $5.5 million, which was offset by the valuation
allowance of $5.5 million, resulting in a net deferred tax asset of zero at
December 31, 2001.
Valuation of long-lived assets and goodwill. The Company accounts for
long-lived assets in accordance with the provisions of SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
of. SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Long-lived assets, specifically towing and transport vehicles,
acquired as part of a business combination accounted for using the purchase
method are evaluated along with the allocated goodwill in the determination of
recoverability. Goodwill is allocated based on the proportion of the fair value
of the long-lived assets acquired to the purchase price of the business
acquired. Vehicles are recorded at the lower of cost or fair value as of the
date of purchase under purchase accounting. Replacements of engines and certain
other significant costs may be capitalized, if they extend the useful life of
the asset. Expenditures for maintenance and repairs are expensed as costs are
incurred. Depreciation is determined using the straight-line method over the
remaining estimated useful lives of the individual assets. Recoverability of
assets, including allocated goodwill, to be held and used is measured by a
comparison of the carrying amount of those assets to the undiscounted future
operating cash flows expected to be generated by those assets.
In accordance with Accounting Principles Board ("APB") Opinion No. 17,
Intangible Assets, the Company continually evaluates whether events and
circumstances that may affect the characteristics or comparable data discussed
above warrant revised estimates of the useful lives or recognition of a
charge-off of the carrying amounts of the associated goodwill. The Company
performs an analysis of the recoverability of goodwill using a cash flow
approach consistent with the Company's analysis of impairment of long-lived
assets under SFAS No. 121. This approach considers the estimated undiscounted
future operating cash flows of the Company. The amount of goodwill impairment,
if any, is measured on estimated fair value based on the best information
available. The Company generally estimates fair value by discounting estimated
future cash flows using a discount rate reflecting the Company's average cost of
funds.
In January 2002, SFAS No. 142, Goodwill and Other Intangible Assets, became
effective, and, as a result, the Company will cease to amortize approximately
$75.6 million of goodwill. In lieu of amortizing goodwill, SFAS No. 142 requires
the Company to perform an initial impairment review of its goodwill in 2002 and
annual impairment reviews thereafter. See "--Recently Issued Accounting
Standards" below.
Results of Operations
In the first quarter of 1999, the Company acquired nine transport businesses
and four towing and recovery businesses. In the second quarter of 1999, the
Company acquired one transport business and one towing and recovery business. In
the first quarter of 2000, the Company sold one towing and recovery division. In
the second
18
quarter of 2000, the Company closed two transport divisions and one towing and
recovery division, and in some cases allocated certain equipment to other
divisions. In the third quarter of 2000, the Company closed one towing and
recovery division and allocated certain equipment to other divisions. In the
fourth quarter of 2000, the Company closed two towing and recovery divisions and
allocated certain equipment to other divisions. In the second quarter of 2001,
the Company sold one towing and recovery division and closed three transport
divisions and allocated certain equipment to other divisions. In the third
quarter of 2001, the Company closed one towing and recovery division. In the
fourth quarter of 2001, the Company sold one towing and recovery division. The
transport closures were designed to combine certain management dispatch and
administrative functions, while maintaining existing vehicle fleets. The
Company's operating results for 2001 do not include the operating results of the
towing and recovery divisions sold or closed in 2000. The results of the towing
and recovery divisions closed or sold during 2001 are included for the period
prior to sale or closure. The Company's revenue, cost of revenue and selling,
general and administrative expenses were also affected by the closures and
reallocations described above that occurred during 2000 and 2001, as described
more fully below.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net Revenue. Net revenue decreased $20.1 million, or 8.2%, from $246.6
million for the year ended December 31, 2000 to $226.5 million for the year
ended December 31, 2001. Of the net revenue for the year ended December 31,
2001, 60.8% related to transport services and 39.2% related to towing and
recovery services. Transport net revenue decreased $13.7 million, or 9.1%, from
$151.3 million for the year ended December 31, 2000 to $137.6 million for the
year ended December 31, 2001. The decrease in transport net revenue was
primarily due to the closure of two transport divisions in the second quarter of
2000 and the closure of three transport divisions in the second quarter of 2001
and the weak performance of the majority of the Company's transport businesses
due to decreased demand for new and used vehicle transport services as compared
to the prior year, some of which was attributable to the events of September 11,
2001. The events of September 11, 2001 resulted in limited access to the New
York City and Long Island service areas from the Company's Newark, New Jersey
facility, a lack of movement throughout the country of test vehicles by a major
automobile manufacturing customer, reduced activity at certain automobile
auctions due to travel limitations and a slow down in the new and used car
markets associated with the growing sense of uncertainty about the future of the
economy. Towing and recovery net revenue decreased $6.4 million, or 6.7%, from
$95.3 million for the year ended December 31, 2000 to $88.9 million for the year
ended December 31, 2001. The decrease in towing and recovery net revenue was
primarily due to the closure of three towing and recovery divisions during the
last six months of 2000, the sale of two towing and recovery divisions and the
closure of another towing and recovery division during 2001 and the weak
performance of many of the Company's towing and recovery businesses due to
decreased demand for towing and recovery services as compared to the prior year,
some of which was attributable to the events of September 11, 2001. The events
of September 11, 2001 resulted in a reduction in impound activity in certain
metropolitan areas, reduced towing activity as a result of the substantial
reduction in tourism which impacted certain markets.
Cost of Revenue. Cost of revenue, including depreciation, decreased $19.2
million, or 9.0%, from $212.7 million for the year ended December 31, 2000 to
$193.5 million for the year ended December 31, 2001. Transport cost of revenue
decreased $10.7 million, or 8.1%, from $131.5 million for the year ended
December 31, 2000 to $120.8 million for the year ended December 31, 2001. The
principal components of the decrease in transport cost of revenue consisted of a
decrease in the costs of transport independent contractors, brokers and
subcontractors of $5.0 million, a decrease in costs of transport operating
salaries and wages of $2.7 million and a decrease in fuel costs of $2.6 million
(each of which was due, in part, to the closure of two transport divisions in
the second quarter of 2000 and the closure of three transport divisions in 2001
and the effect of the decrease in demand for transport services discussed
above), offset, in part, by an increase in insurance expense of $833,000. Towing
and recovery cost of revenue decreased $8.5 million, or 10.5%, from $81.2
million for the year ended December 31, 2000 to $72.7 million for the year ended
December 31, 2001. The principal components of the decrease in towing and
recovery cost of revenue consisted of a decrease in towing and recovery
operating labor costs of $2.0 million, a decrease in vehicle maintenance expense
of $1.0 million, a decrease in fuel costs of $958,000, a decrease in costs of
towing and recovery independent contractors, brokers and subcontractors of
$834,000, a decrease in insurance expense of $741,000 and a decrease in
facility, occupancy and related costs of $693,000 (each of which was due, in
part, to the sale of one towing and recovery division and the closure of four
other towing and recovery divisions during 2000, the sale of two towing and
recovery divisions and the closure of another towing and recovery division
during 2001
19
and the effect of the decreased demand for towing and recovery services
discussed above), combined with a decrease in the cost of scrap vehicle
purchases of $1.6 million.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $7.4 million, or 17.0%, from $43.5 million for
the year ended December 31, 2000 to $36.1 million for the year ended December
31, 2001. Transport selling, general and administrative expenses decreased $1.2
million, or 7.9%, from $15.1 million for the year ended December 31, 2000 to
$13.9 million for the year ended December 31, 2001. The principal components of
the decrease in transport selling, general and administrative expenses consisted
of a decrease in bad debt expense of $912,000, a decrease in other miscellaneous
administration costs of $449,000 and a decrease in computer and
telecommunications expenses of $266,000 (each of which was due, in part, to the
closure of two transport divisions in the second quarter of 2000 and the closure
of three transport divisions in 2001), offset, in part, by an increase in salary
and wages of $260,000 and an increase in professional fees of $192,000. Towing
selling, general and administrative expenses decreased $2.4 million, or 17.0%,
from $14.1 million for the year ended December 31, 2000 to $11.7 million for the
year ended December 31, 2001. The principal components of the decrease in towing
and recovery selling, general and administrative expenses consisted of a
decrease in bad debt expense of $1.3 million, a decrease in professional fees of
$631,000 and a decrease in miscellaneous administrative expenses of $356,000
(each of which was due, in part, to the sale of one towing and recovery division
and the closure of four other towing and recovery divisions during 2000 and the
sale of two towing and recovery divisions and the closure of another towing and
recovery division during 2001), offset, in part, by an increase in salary and
wages expense of $262,000.
Corporate selling, general and administrative expenses decreased $3.8
million, or 26.6%, from $14.3 million for the year ended December 31, 2000 to
$10.5 million for the year ended December 31, 2001. The decrease in corporate
selling, general and administrative expenses was primarily due to a 2000
non-recurring charge of $2.1 million related to contractual change of control
payments to certain members of management, a decrease in wages and benefits
expense of $700,000, a decrease in professional fees of $805,000 and a decrease
in travel and entertainment expenses of $249,000.
Amortization of Goodwill. Amortization of goodwill decreased $1.6 million,
or 44.4%, from $3.7 million for the year ended December 31, 2000 to $2.1 million
for the year ended December 31, 2001. The decrease in goodwill amortization was
the result of impairment charges of $118.1 million as of June 30, 2000
associated with the Company's ongoing review of the recorded value of its
long-lived assets and the recoverability of goodwill.
Impairment Charge. Impairment charges were $129.5 million for the year ended
December 31, 2000. These impairment charges consisted of a non-cash charge of
$118.1 million related to recoverability of goodwill under APB Opinion No. 17
and a non-cash charge of $11.4 million related to the Company's comprehensive
review of its long-lived assets in accordance with SFAS No. 121. The 2000
impairment charge recorded under APB Opinion No. 17 included $75.7 million
related to the recoverability of goodwill at the Company's transport divisions
and $42.4 million related to the recoverability of goodwill at the Company's
towing and recovery divisions. The 2000 impairment charge recorded under SFAS
No. 121 included impairment charges of $2.5 million on the recorded value of
vehicles and equipment at the Company's transport divisions and $2.1 million on
the recorded value of vehicles and equipment at the Company's towing and
recovery divisions and impairment charges of $2.9 million on the recoverability
of allocated goodwill at the Company's transport divisions and $3.9 million on
the recoverability of allocated goodwill at the Company's towing and recovery
divisions. No impairment charges were recorded in the year ended December 31,
2001.
Income (Loss) from Operations. Loss from operations decreased $137.6
million, or 96.4%, from a loss of $142.8 million for the year ended December 31,
2000 to a loss of $5.2 million for the year ended December 31, 2001. Excluding
the effect of impairment charges of $129.5 million in 2000, loss from operations
decreased $8.1 million, or 60.9%, from a loss of $13.3 million for the year
ended December 31, 2000 to a loss of $5.2 million for the year ended December
31, 2001. Transport income from operations increased $80.5 million, or 102.5%,
from a loss of $78.5 million for the year ended December 31, 2000 to income of
$2.0 million for the year ended December 31, 2001. Excluding the effect of
transport impairment charges of $81.1 million in 2000, transport income from
operations decreased $630,000, or 24.2%, from $2.6 million for the year ended
December 31, 2000 to $2.0 million the year ended December 31, 2001. The decrease
in transport income from operations was primarily due to decreased transport
revenue, offset, in part by, decreased cost of revenue and selling, general and
administrative
20
expenses related to the operation of the transport business segment as described
above. Towing and recovery income from operations increased $53.3 million, from
a loss of $50.0 million for the year ended December 31, 2000 to income of $3.3
million for the year ended December 31, 2001. Excluding the effect of towing and
recovery impairment charges of $48.4 million in 2000, towing and recovery income
from operations increased $5.3 million, from a loss of $1.6 million for the year
ended December 31, 2000 to income of $3.7 million for the year ended December
31, 2001. The increase in towing and recovery income from operations was
primarily due to decreased cost of revenue and selling, general and
administrative expenses related to the operation of the towing and recovery
business segment, as described above.
Interest Expense, Net. Interest expense decreased $2.7 million, or 19.0%,
from interest expense of $14.2 million for the year ended December 31, 2000 to
interest expense of $11.5 million for the year ended December 31, 2001. Interest
income decreased $244,000 from $284,000 for the year ended December 31, 2000 to
$40,000 for the year ended December 31, 2001. The decrease in interest expense,
net was related to a non-recurring charge of $1.7 million relating to the
refinancing of the Company's credit facility with a new group of lenders in
2000, a decrease in the effective interest rate for credit facility borrowings
of approximately 1.0% in the year ended December 31, 2001 as compared to the
year ended December 31, 2000 and lower levels of debt during the first six
months of 2001 as compared to the first six months of 2000.
Income Tax Expense (Benefit). Income tax expense decreased $4.9 million,
from an income tax expense of $1.8 million for the year ended December 31, 2000
to an income tax benefit of $3.1 million for the year ended December 31, 2001.
The decrease in income tax expense was largely due to an ownership change on
July 20, 2000 under Internal Revenue Code Section 382, resulting in the
limitation of all net operating losses generated by the Company from inception
through July 20, 2000. As a result of such limitation, the Company wrote off the
tax effect of net operating losses generated prior to 2000 in the amount of $7.1
million and did not record the tax benefit of net operating losses generated
from January 1, 2000 through July 20, 2000 in the amount of $6.9 million. During
2000, the Company generated net operating losses subsequent to the July 20, 2000
ownership change resulting in a tax benefit of $8.9 million. In addition, during
2000, the Company established a valuation allowance of $3.7 million against the
deferred tax assets. In the year ended December 31, 2001, the Company recorded a
tax benefit of $4.8 million, offset, in part, by an increase in the valuation
allowance of $1.1 million.
Net Income (Loss). Net loss decreased $145.2 million, from a net loss of
$158.9 million for the year ended December 31, 2000 to a net loss of $13.7
million for the year ended December 31, 2001. The decrease in net loss related
largely to the increase in income from operations of $137.6 million and the
decrease in income tax expense of $4.9 million for the year ended December 31,
2001 as compared to the year ended December 31, 2000.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net Revenue. Net revenue decreased $8.5 million, or 3.3%, from $255.1
million for the year ended December 31, 1999 to $246.6 million for the year
ended December 31, 2000. Of the net revenue for the year ended December 31,
2000, 61.4% related to transport services and 38.6% related to towing and
recovery services. Transport net revenue decreased $4.0 million, or 2.6%, from
$155.3 million for the year ended December 31, 1999 to $151.3 million for the
year ended December 31, 2000. The decrease in transport net revenue was largely
due to the impact of a decrease in demand for both new and used vehicle
transport services in the fourth quarter of 2000, the impact of the closure of
two transport divisions during 2000 and the weak performance of certain
transport businesses subsequent to the Company's consolidation of certain
divisions offset, in part, by the inclusion of a full year of operating results
of the ten transport businesses acquired during the first half of 1999. Towing
and recovery net revenue decreased $4.5 million, or 4.5%, from $99.8 million for
the year ended December 31, 1999 to $95.3 million for the year ended December
31, 2000. The decrease in towing and recovery net revenue was largely due to the
sale of one towing and recovery division and the closure of four other towing
and recovery divisions during 2000 and weak performance of certain towing and
recovery businesses subsequent to acquisition, which performance was, in some
cases, also negatively affected by the Company's consolidation of divisions.
Such decrease in towing and recovery net revenue was offset, in part, by the
inclusion of a full year of operating results of the five towing and recovery
businesses acquired during the first half of 1999.
Cost of Revenue. Cost of revenue, including depreciation, increased $10.1
million, or 5.0%, from $202.6 million for the year ended December 31, 1999 to
$212.7 million for the year ended December 31, 2000. Transport
21
cost of revenue increased $8.7 million, or 7.1%, from $122.8 million for the
year ended December 31, 1999 to $131.5 million for the year ended December 31,
2000. The increase in transport cost of revenue was primarily due to the
inclusion of a full year of costs of the ten transport businesses acquired
during the first half of 1999 offset, in part, by reduced costs resulting from
the closure of two transport divisions during 2000. The principal components of
the increase in transport cost of revenue consisted of an increase in costs of
independent contractors, brokers and subcontractors of $2.5 million, an increase
in fuel costs of $1.7 million, an increase in insurance liabilities associated
with workers' compensation and other claims (that individually did not meet
insurance deductibles) of $1.9 million, an increase in labor costs of $1.0
million, an increase in depreciation expense of $678,000, an increase in vehicle
maintenance expenses of $673,000 and an increase in equipment rental expense of
$435,000. Towing and recovery cost of revenue increased $1.4 million, or 1.8%,
from $79.8 million for the year ended December 31, 1999 to $81.2 million for the
year ended December 31, 2000. The increase in towing and recovery cost of
revenue was primarily due to the inclusion of a full year of costs of the five
towing and recovery businesses acquired the first half of 1999 offset, in part,
by reduced costs resulting from the sale of one towing and recovery division and
the closure of four other towing and recovery divisions during 2000. The
principal components of the increase in towing and recovery cost of revenue
consisted of an increase in insurance liabilities associated with workers
compensation and other claims (that individually did not meet insurance
deductibles) of $1.2 million and an increase in fuel costs of $988,000 offset,
in part, by a decrease in expenses related to scrap vehicle purchases of $1.1
million.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.4 million, or 3.3%, from $42.1 million for
the year ended December 31, 1999 to $43.5 million for the year ended December
31, 2000. Transport selling, general and administrative expenses increased
$753,000 from $14.3 million for the year ended December 31, 1999 to $15.1
million for the year ended December 31, 2000. The principal components of the
increase in transport selling, general and administrative expenses consisted of
an increase in bad debt expense of $183,000, an increase in advertising expenses
of $221,000, an increase in computer and telecommunications expenses of $64,000
and an increase in miscellaneous transport selling general and administrative
expenses of $461,000, offset, in part, by a decrease in salary and wages expense
of $292,000 (which was due, in part, to the closure of two transport divisions
during 2000). Towing and recovery selling, general and administrative expenses
increased $365,000, from $13.8 million for the year ended December 31, 1999 to
$14.1 million for the year ended December 31, 2000. The principal components of
the increase in towing and recovery selling, general and administrative expenses
consisted of an increase in professional fees of $386,000, an increase in bad
debt expense of $761,000, an increase in miscellaneous administrative expenses
of $257,000 and increased costs associated with managing and integrating the
five towing and recovery businesses acquired during the first half of 1999,
offset, in part, by a decrease in salary and wages expense of $713,000 (which
was due, in part, to the sale of one towing and recovery division and the
closure of four other towing and recovery divisions during 2000).
Corporate selling, general and administrative expenses increased $257,000,
or 1.8%, from $14.0 million for the year ended December 31, 1999 to $14.3
million for the year ended December 31, 2000. The increase in corporate selling,
general and administrative expenses was primarily due to an increase in
professional fees of $1.2 million, an increase in bank service charges of
$280,000, and an increase in computer and telecommunications expenses of $93,000
offset, in part, by a decrease in salary and wage expenses of $477,000 and a
decrease in travel expenses of $587,000. The increase in corporate selling,
general and administrative expense includes a non-recurring charge of $2.1
million incurred in 2000 relating to contractual change of control payments to
certain members of management, non-recurring compensation charges and salary and
wage expense of $1.7 million incurred in 1999 associated with the 1999
departures of the Company's former Chief Executive Officer, President and Chief
Operating Officer and Chief Acquisition Officer and $1.1 million of professional
fees and compensation charges incurred in 1999 in connection with the
termination of the Company's acquisition program.
Amortization of Goodwill. Amortization of goodwill decreased $1.7 million,
or 31.5%, from $5.4 million for the year ended December 31, 1999 to $3.7 million
for the year ended December 31, 2000. The decrease in goodwill amortization was
the result of impairment charges of $118.1 million as of June 30, 2000 and $28.3
million as of December 31, 1999 associated with the Company's ongoing review of
the recorded value of its long-lived assets and the recoverability of goodwill
and the sale of one towing and recovery division in the first quarter of 2000.
Impairment Charge. Impairment charges were $129.5 million for the year ended
December 31, 2000. These impairment charges consisted of a non-cash charge of
$118.1 million related to recoverability of goodwill under
22
APB Opinion No. 17 and a non-cash charge of $11.4 million related to the
Company's comprehensive review of its long-lived assets in accordance with SFAS
No. 121. The 2000 impairment charge recorded under APB Opinion No. 17 included
$75.7 million related to the recoverability of goodwill at the Company's
transport divisions and $42.4 million related to the recoverability of goodwill
at the Company's towing and recovery divisions. The 2000 impairment charge
recorded under SFAS No. 121 included impairment charges of $2.5 million on the
recorded value of vehicles and equipment at the Company's transport divisions
and $2.1 million on the recorded value of vehicles and equipment at the
Company's towing and recovery divisions. The 2000 impairment charge recorded
under SFAS No. 121 also included impairment charges of $2.9 million on the
recoverability of allocated goodwill at the Company's transport divisions and
$3.9 million on the recoverability of allocated goodwill at the Company's towing
and recovery divisions.
Impairment charges were $28.3 million for the year ended December 31, 1999.
These impairment charges consisted of a non-cash charge of $21.7 million related
to recoverability of goodwill under APB Opinion No. 17 and a non-cash charge of
$6.6 million related to the Company's comprehensive review of its long-lived
assets in accordance with SFAS No. 121. The 1999 impairment charge recorded
under APB Opinion No. 17 included $10.0 million related to the recoverability of
goodwill at two of the Company's transport divisions and $11.7 million related
to the recovery of goodwill at seven of the Company's towing and recovery
divisions. The 1999 impairment charge recorded under SFAS No. 121 included
impairment expenses of $2.6 million on the recorded value of vehicles and
equipment and impairment expenses of $4.0 million on the recoverability of
goodwill at six of the Company's towing and recovery divisions (four of which
were included in the seven divisions noted above).
Income (Loss) from Operations. Loss from operations increased $119.5
million, or 513%, from a loss of $23.3 million for the year ended December 31,
1999 to a loss of $142.8 million for the year ended December 31, 2000. Excluding
the effect of impairment charges of $28.3 million in 1999 and $129.5 million in
2000, income from operations decreased $18.3 million, or 366%, from income of
$5.0 million for the year ended December 31, 1999 to a loss of $13.3 million for
the year ended December 31, 2000. Transport income from operations decreased
$83.8 million, or 1,607%, from income of $5.3 million for the year ended
December 31, 1999 to a loss of $78.5 million for the year ended December 31,
2000. Excluding the effect of transport impairment charges of $10.0 million in
1999 and $81.1 million in 2000, transport income from operations decreased $12.7
million, or 83.0%, from $15.3 million for the year ended December 31, 1999 to
$2.6 million the year ended December 31, 2000. The decrease in transport income
from operations was primarily due to a decline in revenue and increased labor
and fuel expenses, offset, in part, by the impact of a full year of revenues of
the ten transport businesses acquired during the first half of 1999 and the
decrease in costs resulting from closure of two transport divisions during 2000.
Towing and recovery income from operations decreased $35.4 million, or 243%,
from a loss of $14.6 million for the year ended December 31, 1999 to a loss of
$50.0 million for the year ended December 31, 2000. Excluding the effect of
towing and recovery impairment charges of $18.3 million in 1999 and $48.4
million in 2000, towing and recovery income from operations decreased $5.3
million, or 143.2%, from income of $3.7 million for the year ended December 31,
1999 to a loss of $1.6 million for the year ended December 31, 2000. The
decrease in towing and recovery income from operations was primarily due to
increased insurance, fuel and bad debt expenses offset, in part, by the
inclusion of a full year of revenues of the five towing and recovery businesses
acquired during the first half of 1999 and the decrease in costs resulting from
sale of one towing and recovery division and the closure of four other towing
and recovery divisions during 2000.
Interest Expense, Net. Interest expense increased $2.8 million, or 24.6%,
from interest expense of $11.4 million for the year ended December 31, 1999 to
interest expense of $14.2 million for the year ended December 31, 2000. Interest
income increased $207,000 from interest income of $77,000 for the year ended
December 31, 1999 to interest income of $284,000 for the year ended December 31,
2000. The increase in interest expense, net was related to a non-recurring
charge of $1.7 million relating to the refinancing of the Company's credit
facility with a new group of lenders, an increase in the effective interest rate
for credit facility borrowings of approximately 1.2% in the year ended December
31, 2000 as compared to the year ended December 31, 1999 and higher levels of
debt incurred to finance the acquisitions that occurred during the first half of
1999, offset, in part, by lower borrowings in third and fourth quarter of 2000
as a result of a $27.0 million equity investment in July 2000.
Income Tax Expense (Benefit). Income tax expense (benefit) increased $7.0
million, from an income tax benefit of $5.2 million for the year ended December
31, 1999 to an income tax expense of $1.8 million for the year ended December
31, 2000. The increase in income tax expense was largely due to an ownership
change on July 20,
23
2000 under Internal Revenue Code Section 382, resulting in the limitation of all
net operating losses generated by the Company from inception through July 20,
2000. As a result of such limitation, the Company wrote off the tax effect of
net operating losses generated prior to 2000 in the amount of $7.1 million and
did not record the tax benefit of net operating losses generated from January 1,
2000 through July 20, 2000 in the amount of $6.9 million. During 2000, the
Company generated net operating losses subsequent to the July 20, 2000 ownership
change resulting in a tax benefit of $8.9 million. In addition, during 2000, the
Company established a valuation allowance of $3.7 million against the deferred
tax assets.
Net Income (Loss). Net income decreased $129.2 million, from net loss of
$29.7 million for the year ended December 31, 1999 to a net loss of $158.9
million for the year ended December 31, 2000. The decrease in net income related
largely to the decrease in income from operations of $119.5 million and the
decrease in income tax benefit of $3.8 million for the year ended December 31,
2000 as compared to the year ended December 31, 1999.
Liquidity and Capital Resources
General
As of December 31, 2001, the Company had approximately:
. $1.7 million of cash and cash equivalents (representing deposits in
transit to GE Capital, as agent under the Company's revolving credit
facility) and another $4.3 million available for borrowing under the
revolving credit facility,
. a working capital deficit of approximately $32.4 million (including the
$37.4 million outstanding under the Company's credit facility which, due
to the factors described in note 2 to the Company's Consolidated
Financial Statements included elsewhere herein, is reflected as a
current liability), and
. $94.9 million of outstanding long-term indebtedness, excluding current
installments.
During the year ended December 31, 2001, the Company provided $1.3 million
in cash from operations and used $6.9 million of cash in investing activities.
Of the cash used in investing activities, $8.1 million related to purchases of
new vehicles and equipment, offset by proceeds of $1.4 million from the sale of
vehicles and equipment. During the year ended December 31, 2001, the Company
provided $4.7 million in cash from financing activities. Financing activities
consisted of the net borrowings under the Company's revolving credit facility of
$5.3 million and payments on long-term debt and payments of deferred financing
costs of $486,000.
Revolving Credit Facility
On July 20, 2000, the Company and its subsidiaries entered into a revolving
credit facility with a group of banks for which GE Capital acts as agent. On the
same date, the Company terminated its prior credit facility and repaid all
amounts outstanding thereunder.
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
24
balance, and all working capital and expenditure needs are funded through daily
borrowings. As of December 31, 2001, approximately $37.5 million was outstanding
under the revolving credit facility (excluding letters of credit of $13.6
million) and an additional $4.3 million was available for borrowing.
Interest accrues on amounts borrowed under the revolving credit facility, at
the Company's option, at either the Index Rate (as defined in the credit
facility) plus an applicable margin or the reserve adjusted LIBOR Rate (as
defined in the credit facility) plus an applicable margin. The effective
interest rate for the year ended December 31, 2001 was 7.3%. 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 obligations of the Company and its subsidiaries under the revolving
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 revolving credit facility provides for payment by the Company of
customary fees and expenses, including an annual monitoring fee of $150,000. In
the year ended December 31, 2000, the Company paid approximately $3.0 million in
fees (including the monitoring fee) and expenses related to the revolving credit
facility and the Company's sale of Series A Preferred Stock to CFE, Inc. (now
known as GE Capital CFE, Inc.), an affiliate of GE Capital ("CFE"). In the year
ended December 31, 2001, the Company paid the monitoring fee of $150,000 and
paid $212,000 in other fees and expenses related to the revolving credit
facility. At December 31, 2001, $3.1 million of the fees and expenses paid in
connection with the revolving credit facility in 2000 and 2001 were recorded as
deferred financing costs and will be amortized over the five year term of the
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. In
October 2001, 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 period ended September 30, 2001. In December 2001, the Company notified
GE Capital that the Company would fail to meet the minimum level of EBITDA and
minimum ratio of EBITDA to fixed charges for the period ended December 31, 2001,
and that the Company was not expected to meet the minimum liquidity requirement
in the first quarter of 2002.
On February 14, 2002, the Company entered into an amendment to the revolving
credit facility under which the banks waived these financial covenant
violations, waived a covenant violation with respect to the banks' consent to
the ATI acquisition and provided for the addition of ATI as a borrower under the
credit facility. The amendment reduces the minimum required levels of EBITDA and
increases the minimum required ratios of EBITDA to fixed charges under the
revolving credit facility. The amendment also reduced the minimum liquidity
requirement for the period beginning February 15, 2002 and ending March 15,
2002. In addition, the amendment increases the maximum amount of annual
operating lease payments the Company and its subsidiaries may make in fiscal
years 2002 through 2004.
If the Company fails to comply with these amended provisions or violates
other covenants in the revolving credit facility, the Company will be required
to seek additional 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 future waivers
were not granted and the banks were to elect to accelerate repayment of
outstanding balances under the 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 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 credit facility was paid in full or the banks under the credit facility
granted their express written consent.
Lease Arrangements and Letters of Credit
25
The Company finances a portion of its operations through operating leases.
These leases relate to transport and towing and recovery 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.
Certain of the operating lease agreements are with the former
owners/shareholders of the businesses the Company has acquired, and cover the
facilities used in the acquired business' operations. The Company does not
believe that the terms of these lease arrangements with such former owners
differ from those which would likely be negotiated with clearly independent
third parties.
The following table shows, as of December 31, 2001, the Company's future
minimum lease payments under noncancelable operating leases (with initial or
remaining lease terms in excess of one year). This table does not include the
operating lease payments assumed by the Company in the ATI transaction described
below in "--Acquisition of ATI."
Operating leases
----------------
($ in thousands)
Year ending December 31, Related Party Other Total
------------------------ ------------- ----- -----
2002 .................................... $2,245 3,924 6,169
2003 .................................... 1,571 2,488 4,059
2004 .................................... 487 1,879 2,366
2005 .................................... 297 1,115 1,412
2006 .................................... 208 249 457
Thereafter .............................. 1,402 50 1,452
------ ----- ------
Future minimum lease payments ........... $6,210 9,705 15,915
====== ===== ======
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 December 31,
2001, the Company had letters of credit outstanding in the aggregate amount of
$13,649,000. As of December 31, 2001, 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.
Preferred Stock Dividends and Debenture Interest
The terms of the Company's Series A Preferred Stock provide that, prior to
July 20, 2008, holders of outstanding Series A Preferred Stock are entitled to
receive cumulative dividends on each share of Series A Preferred Stock each
quarter at the annual rate of (i) 5.5% until July 20, 2006, and (ii) 5.0%
thereafter, of the Series A Preferred Base Liquidation Amount (as defined
below). The "Series A Preferred Base Liquidation Amount" is equal to the
purchase price per share of the Series A Preferred Stock ($40.778), subject to
certain adjustments. The dividends are payable in cash at the end of each
quarter or, at the election of the Company, will cumulate to the extent unpaid.
In the event that the Company elects to culmulate such dividends, dividends will
also accumulate on the amount cumulated at the same rate. Once the election to
cumulate a dividend has been made, the Company may no longer pay such dividend
in cash, other than in connection with a liquidation, dissolution or winding up
of the Company. The Company has never paid cash dividends on the Series A
Preferred Stock and, as a result, aggregate dividends of approximately $2.2
million had accumulated on the Series A Preferred Stock as of December 31, 2001.
Holders of the Series A Preferred Stock are entitled to participate in all
dividends payable to holders of the Company's common stock. The Company's
obligation to pay dividends terminates on July 20, 2008, or earlier if the
Company's common stock trades above a specified price level.
26
The debentures issued to Charterhouse bear interest at a rate of 8%
annually, payable in-kind for the first five years following issuance, and
thereafter either in kind or in cash, at the Company's discretion. As of
December 31, 2001, $94.8 million of debentures (including debentures issued as
in-kind interest) were outstanding. During the year ended December 31, 2001, the
Company recorded $10.6 million in interest expense and deferred financing fees
related to the debentures.
Vehicle and Equipment Expenditures
The Company spent approximately $8.1 million on purchases of vehicles and
equipment during the year ended December 31, 2001. These expenditures were
primarily for the purchase of, and capitalized repairs on, transport and towing
and recovery vehicles. During the year ended December 31, 2001, the Company made
expenditures of $3.2 million on towing and recovery vehicles and $3.8 million on
transport vehicles. These expenditures were financed primarily with cash flow
from operations and borrowings under the revolving credit facility. As of
December 31, 2001, the Company is under a commitment to pay approximately $2.9
million for the purchase of 14 transport and 14 towing and recovery vehicles. In
March 2000, the Company committed to purchase 60 vehicles from a vehicle
manufacturer. As of December 31, 2001, 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. The Company is
currently in discussions with the manufacturer regarding the remaining 19
vehicles.
Information Systems Expenditures
During 2001, the Company spent approximately $1.8 million for the management
of its data center and the development of its financial and information systems.
Pursuant its agreement with Syntegra, the Company expects to pay Syntegra
approximately $2.0 million for these services during 2002. Although it is
expected that the Company will need to upgrade and expand its financial and
information systems in the future, or to develop or purchase and implement new
systems, the Company cannot currently quantify the amount that will need to be
spent to do so.
Executive Change of Control Payments
In connection with the Company's sale of Series A Preferred Stock to Blue
Truck (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, the Company made
the required payments of $430,000, with an additional payment in the aggregate
amount $430,000 expected to be made in July 2002, subject to the continued
employment of such executives.
Management Fee
In connection with the KPS Transaction, the Company agreed to pay KPS
Management, LLC, an affiliate of KPS ("KPS Management"), an annual management
fee of $1.0 million, which may be lowered to $500,000 and then to zero based on
the amount of Series A Preferred Stock held by Blue Truck and its permitted
transferees. The fee is payable on a quarterly basis. As of December 31, 2001,
the Company had not paid KPS Management the 2001 fee of $1.0 million. Such fee
is payable to KPS Management upon its request. The Company has recorded the
amount of the fee as an accrued liability at December 31, 2001.
Future Liquidity Needs
During the past two years, the Company has experienced a significant
decrease 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 recovery
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. The Company's cash flow from
27
operations may continue to decrease as a result of a number of factors relating
to the Company's operations, including a decrease in demand for the Company's
transport and/or towing and recovery services, the Company's inability to reduce
its costs or improve the profitability of its operating divisions, increased
fuel, insurance or other costs of operations and increased expenditures required
by changes in applicable regulations. In addition, as described above in "--
Revolving Credit Facility," the Company's inability to meet the financial or
other covenants contained in the revolving credit facility, or decreases in the
net orderly liquidation value of the Company's vehicles, could result in
limitations on the Company's borrowing ability, which would negatively affect
the Company's cash flow. The Company's ability to meet the financial covenants
contained in the revolving credit facility is directly related to the Company's
operating performance, and therefore could be affected by the factors relating
to the Company's operations described above.
Acquisition of Auction Transport, Inc.
On January 16, 2002, the Company acquired ATI from a subsidiary of Manheim
in a stock purchase transaction. ATI provides automobile transport services to
various Manheim auction locations and on a for hire basis. The results of ATI's
operations will be included in the Company's 2002 consolidated financial
statements from the date of acquisition.
The Company did not make any cash payments to Manheim upon the closing of
the ATI acquisition, but assumed certain operating lease payments relating to
ATI's operations. The value of the net assets acquired by the Company, excluding
contingent consideration relating to a five year service agreement and the
assumption of $6,952,000 of future operating lease payments, was $822,000. In
connection with the transaction, Manheim has provided revenue guarantees to the
Company over the duration of the operating lease payments assumed by the
Company. In addition, Manheim is required to pay the Company a
transaction-related fee of $1.0 million, $500,000 of which was paid upon the
closing of the transaction and the remainder of which is payable no later than
December 31, 2003. The full $1.0 million payment has been included in the
calculation of the net assets acquired by the Company.
The following table shows, as of January 16, 2002, the future minimum lease
payments the Company is required to make under the noncancelable operating
leases the Company assumed in the ATI acquisition:
ATI
Operating
Year ended December 31, Leases
----------------------- ---------
2002............................ $ 3,068
2003............................ 1,653
2004............................ 1,049
2005............................ 1,014
2006............................ 168
--------
Future minimum lease payments... $ 6,952
========
Recently Issued Accounting Standards
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001 as well as all purchase method business combinations
completed after June 30, 2001. SFAS No. 141 also specifies criteria that
intangible assets acquired in a purchase method business combination must meet
to be recognized and reported apart from goodwill, noting that any purchase
price allocable to an assembled workforce may not be accounted for separately.
SFAS No. 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets
28
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121.
The Company is required to adopt the provisions of SFAS No. 141 immediately
and SFAS No. 142 effective January 1, 2002. Furthermore, any goodwill or
intangible asset determined to have an indefinite useful life that is acquired
in a purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of SFAS No. 142.
Upon adoption of SFAS No. 142, the Company is required to evaluate its
existing intangible assets and goodwill that were acquired in purchase business
combinations, and make any necessary reclassifications in order to conform with
the new criteria in SFAS No. 141 for recognition apart from goodwill. The
Company will be required to reassess the useful lives and residual values of all
intangible assets acquired in purchase business combinations, and make any
necessary amortization period adjustments by the end of the first interim period
after adoption. In addition, to the extent an intangible asset is identified as
having an indefinite useful life, the Company will be required to test the
intangible asset for impairment in accordance with the provisions of SFAS No.
142 within the first interim period. Any impairment loss will be measured as of
the date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period. Under SFAS No. 142, the
Company will cease to amortize approximately $75,582,000 of goodwill. The
Company had recorded approximately $2,063,000 of amortization on these amounts
during 2001 and would have recorded approximately $2,000,000 of amortization
during 2002. In lieu of amortization the Company will be required to perform an
impairment review of its goodwill balance upon the initial adoption of SFAS No.
142. The impairment review will involve a two-step process as follows:
Step 1 - the Company will compare the fair value of its reporting units to
the carrying value, including goodwill of each of those units. For
each reporting unit where the fair value, including goodwill, exceeds
the carrying value, no further work will be performed and no
impairment charge will be recorded. The Company will then have up to
six months from the date of adoption of SFAS No. 142 to determine the
fair value of each reporting unit and compare it to the carrying
amount of the reporting unit.
Step 2 - the Company will perform an allocation of the fair value of the
reporting unit to its identifiable tangible and non-goodwill
intangible assets and liabilities. This will derive an implied fair
value for the reporting unit's goodwill. The Company will then compare
the implied fair value of the reporting unit's goodwill with the
carrying amount of the reporting unit's goodwill. If the carrying
amount of the reporting unit's goodwill is greater than the implied
fair value of its goodwill, an impairment loss must be recognized for
the excess. The second step is required to be completed as soon as
possible, but no later than the end of the year in which SFAS No. 142
is adopted. Any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in the Company's
consolidated statement of operations.
Because of the extensive effort needed to comply with adopting SFAS No. 141
and SFAS No. 142, it is not practicable to reasonably estimate the impact of
adopting these Statements on the Company's consolidated financial statements at
the date of this report, including whether the Company will be required to
recognize any transitional impairment losses as the cumulative effect of a
change in accounting principle.
In June 2001, the 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 has determined that the adoption of SFAS No. 143
will not have a material impact on the Company's financial statements. The
Company will continue to evaluate its assets that may effect this conclusion.
In August 2001, FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
requires that long-lived assets be reviewed for impairment whenever events or
changes in
29
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value of the asset. SFAS
No. 144 requires companies to separately report discontinued operations and
extends that reporting to a component of an entity that either has been disposed
of (by sale, abandonment, or in a distribution to owners) or is classified as
held for sale. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. The Company adopted SFAS No.
144 on January 1, 2002.
Seasonality
The Company may experience significant fluctuations in its quarterly
operating results due to seasonal and other variations in the demand for towing,
recovery and transport services. Specifically, the demand for towing and
recovery 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
The Company's future operating results may be adversely affected by (i) the
availability of capital to fund the Company's 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) price changes in response to competitive factors, (vi) changes in the
general level of demand for towing, recovery and transport services, (vii)
event-driven variations in the demand for towing, recovery and transport
services, (viii) 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, (ix)
fluctuations in fuel, insurance, labor and other operating costs, and (x)
general economic conditions. As a result, operating results for any one quarter
should not be relied upon as an indication or guarantee of performance in the
future quarters.
Inflation
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.
ITEM 7A. Quantitative and Qualitative Discussions about Market Risk.
The table below provides information about the Company's market sensitive
financial instruments and constitutes a "forward-looking statement." The
Company's major market risk exposure is changing interest rates. The Company's
policy is to manage interest rates through the use of floating rate debt. The
Company's objective in managing its exposure to interest rate changes is to
limit the impact of interest rate changes on earnings and cash flow and to lower
its overall borrowing costs. The table below provides information about the
Company's financial instruments that are sensitive to interest rate changes. The
table presents principal cash flows by expected maturity dates. There were no
derivative financial instruments at December 31, 2001.
Fair
2002 2003 2004 2005 2006 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
30
Variable rate debt .... $37,436 -- -- -- -- -- $37,436 $37,436
For the year ended December 31, 2001, the effective interest rate under the
Company's revolving credit facility was 7.3%.
ITEM 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements included in this Report
beginning at page F-1 are incorporated in this Item 8 by reference.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
31
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The Company's Amended and Restated Certificate of Incorporation provides
that the Company's Board of Directors shall be divided into three classes, as
nearly equal in number as possible (including vacancies in any class), with one
class being elected each year for a three-year term. The Board of Directors has
fixed the number of directors at eleven persons.
The following table sets forth the name, age and position of the Company's
current directors and executive officers:
Director
Name Age Position Class
---- --- -------- -----
Michael G. Psaros...... 34 Chairman of the Board, Director I
Gerald R. Riordan...... 53 Chief Executive Officer, Secretary and Director I
Edward W. Morawski..... 53 Vice President and Director III
Kenneth K. Fisher...... 49 Director III
A. Lawrence Fagan...... 71 Director I
Joseph S. Rhodes....... 31 Director II
Stephen W. Presser..... 42 Director I
Eugene J. Keilin....... 59 Director III
David P. Shapiro....... 40 Director II
Raquel V. Palmer....... 29 Director II
Brian J. Riley......... 32 Director III
Michael A. Wysocki..... 48 President, Transport Business Unit --
Harold W. Borhauer..... 52 President, Towing and Recovery Business Unit --
Patrick J. Fodale...... 39 Vice President and Chief Financial Officer --
Michael G. Psaros has been the Chairman of the Board of Directors of the
Company since July 20, 2000. Mr. Psaros co-founded KPS in 1998, and is currently
a Managing Principal of KPS and of Keilin & Co. LLC ("K&Co."), an investment
banking firm specializing in providing financial advisory services in connection
with mergers, acquisitions and turnaround transactions. Mr. Psaros joined K&Co.
in 1991. Mr. Psaros serves on the Boards of Directors of the following
privately-held companies: Blue Ridge Paper Products, Inc., a manufacturer of
envelope grade paper and board used in liquid packaging ("Blue Ridge"); Blue
Heron Paper Company, a manufacturer of newsprint and groundwood paper products
("Blue Heron"); DeVlieg Bullard II, Inc., a machine tool manufacturer
("DeVlieg"); Curtis Papers, Inc., a producer of specialty and premium papers
("Curtis"); and Golden Northwest Aluminum Corp., a producer of primary and
extruded aluminum products.
Gerald R. Riordan has served as the Company's Chief Executive Officer and a
director since October 11, 1999 and as the Company's Secretary since November 2,
1999. Between December 1997 and October 1999, Mr. Riordan was a
consultant/entrepreneur engaged in private investment opportunities. From
October 1996 to December 1997, Mr. Riordan was President and Chief Operating
Officer of Ryder TRS, Inc. (not owned by Ryder System, Inc.). From 1993 to 1996,
Mr. Riordan served as President of Ryder Consumer Truck Rental, and obtained the
additional responsibility of President of Ryder Student Transportation Services
in 1995, holding both positions until October 1996.
Edward W. Morawski has served as a Vice President and director of the
Company since May 1998. In 1977, Mr. Morawski founded Northland Auto
Transporters, Inc. and Northland Fleet Leasing, Inc. (collectively, "Northland")
one of the businesses acquired by the Company in connection with its initial
public offering, and served as the President of Northland from inception until
its acquisition by the Company in May 1998.
Kenneth K. Fisher has been a director of the Company since November 2001.
Mr. Fisher has been an attorney in private practice since 1978, concentrating in
the areas of health care, insurance, labor and employment and real estate
litigation. He has been a partner at the law firm of Phillips Nizer Benjamin
Krim & Ballon LLP since January
32
2002. From 1991 to 2001, Mr. Fisher was a member of the New York City Council
representing the 33rd District (Brooklyn).
A. Lawrence Fagan has served as a director since June 2001. Mr. Fagan joined
Charterhouse Group International, Inc., a private equity investment firm
("Charterhouse International"), in 1983 and currently serves as its Vice
Chairman. Mr. Fagan served as President and Chief Operating Officer of
Charterhouse International from December 1996 until June 2001. Prior to joining
Charterhouse International, Mr. Fagan had over 25 years of experience in
corporate and investment banking positions. He is a director of Cross Country,
Inc., a healthcare staffing services provider, Top Image Systems, Ltd., a
developer of automated information collection, processing and recognition
systems, and numerous privately-held companies.
Joseph S. Rhodes has served as a director since May 2001. Mr. Rhodes joined
Charterhouse International in 1997 and currently serves as a Vice President.
From 1995 to 1997, Mr. Rhodes was employed in the Mergers & Acquisitions Group
of the Union Bank of Switzerland.
Stephen W. Presser has served as a director since July 20, 2000. Mr. Presser
joined KPS and K&Co. in 1998 and is currently a Principal of KPS and K&Co. Mr.
Presser is a member of the Boards of Directors of Blue Ridge, Blue Heron and
DeVlieg. From 1985-1997, Mr. Presser was an attorney in the law firm of Cohen,
Weiss and Simon of New York, New York.
Eugene J. Keilin has served as a director since July 20, 2000. Mr. Keilin
founded K&Co. in 1990, and co-founded KPS in 1998. He is currently a Managing
Principal of KPS and K&Co. Mr. Keilin is Chairman of the Board of Directors of
Blue Ridge and serves on the boards of directors of Blue Heron, DeVlieg and
Curtis. Prior to founding K&Co., Mr. Keilin was a General Partner of Lazard
Freres & Co.
David P. Shapiro has served as a director since July 20, 2000. Mr. Shapiro
co-founded KPS and is currently a Managing Principal of KPS and K&Co. Mr.
Shapiro joined K&Co. in 1991. Mr. Shapiro is Chairman of the Board of Directors
of Blue Heron and serves on the Boards of Directors of Blue Ridge, DeVlieg and
Curtis. Prior to joining K&Co., Mr. Shapiro was an investment banker at Drexel
Burnham Lambert Incorporated and Dean Witter Reynolds, Inc.
Raquel V. Palmer has served as a director since July 20, 2000. Ms. Palmer is
a Vice President of KPS and K&Co. Ms. Palmer joined K&Co. in 1994 and has been
with KPS since the fund's inception. Ms. Palmer serves on the Boards of
Directors of Blue Heron, Blue Ridge and DeVlieg. Prior to joining K&Co., Ms.
Palmer was an investment banker with Kidder Peabody & Co.
Brian J. Riley has served as a director since July 20, 2000. Mr. Riley is a
Vice President of KPS and K&Co. Mr. Riley joined K&Co. in 1994 and has been with
KPS since the fund's inception. Mr. Riley serves on the Boards of Directors of
Blue Ridge, Blue Heron and DeVlieg. Prior to joining K&Co., Mr. Riley was an
investment banker in the Mergers and Acquisitions Department of Smith Barney,
Harris & Upham.
Michael A. Wysocki has been President of the Company's Transport Business
Unit since January 2000. Mr. Wysocki founded MPG Transco, Ltd., a Livonia,
Michigan based auto transport company ("MPG") in 1973, and served as its
President and Chief Executive Officer from inception until MPG was acquired by
the Company in January 1999. From January 1999 until January 2000, Mr. Wysocki
served as general manager of the Company's MPG division. Since 1985, Mr. Wysocki
has been the Chief Executive Officer of Translesco, Inc., a corporation that
leases employees to MPG ("Translesco").
Harold W. Borhauer has been President of the Company's Towing and Recovery
Business Unit since January 2000. In 1983, Mr. Borhauer founded Arizona's Towing
Professionals, Inc., which does business as Shamrock Towing ("Shamrock"), a
Phoenix, Arizona based towing and recovery company that was acquired by the
Company in March 1999. Mr. Borhauer served as Shamrock's Chief Executive Officer
from 1983 until its acquisition by the Company. From March 1999 until January
2000, Mr. Borhauer served as general manager of the Company's Shamrock division.
33
Patrick J. Fodale has been Vice President and Chief Financial Officer of the
Company since April 2001. Between December 1999 and March 2001, Mr. Fodale was
the Vice President and Chief Financial Officer of Global Technologies, Ltd.
("Global"), a technology incubator investing in emerging growth companies. Prior
to his employment by Global, Mr. Fodale was a workout specialist recruited by
companies in or contemplating bankruptcy under Chapter 11 of the U.S. Bankruptcy
Code. He served as Chief Financial Officer of Homeplace, Inc., a housewares
retailer, from March 1998 to September 1999 and as Chief Financial Officer of
Color Tile, Inc., a specialty retailer of floor covering products, from November
1995 to February 1998. From 1985 to October 1995, Mr. Fodale was employed by
Arthur Andersen, LLC.
Director Resignations and Appointments
On May 3, 2001, Robert L. Berner, III resigned as a director of the Company.
On May 14, 2001, the Board of Directors appointed Joseph S. Rhodes, the designee
of Charterhouse pursuant to the Amended and Restated Investors' Agreement
between the Company and Charterhouse (the "Charterhouse Investors' Agreement"),
as a Class II director to fill the vacancy resulting from Mr. Berner's
resignation.
On June 1, 2001, Michael S. Pfeffer resigned as a director of the Company.
On June 26, 2001, the Board of Directors appointed A. Lawrence Fagan, the
designee of Charterhouse pursuant to the Charterhouse Investors' Agreement, as a
Class I director to fill the vacancy resulting from Mr. Pfeffer's resignation.
On June 18, 2001, Todd Q. Smart resigned as a director of the Company. At
the Annual Meeting of the Company's stockholders held on November 29, 2001,
Kenneth K. Fisher was elected as a Class III director to fill the vacancy
resulting from Mr. Smart's resignation.
Designation and Election of Certain Directors
Pursuant to the terms of Certificate of Designations for the Series A
Preferred Stock and the KPS Investors' Agreement, persons holding a majority of
the Series A Preferred Stock (the "Majority Holders") are currently entitled to
designate and elect six of the eleven members of the Company's Board of
Directors. An independent committee of the Board, consisting of one of the
directors designated or elected to the Board by the Majority Holders and all of
the members of the Board who were not designated or elected to the Board by the
Majority Holders (the "Independent Committee") is entitled to nominate the
remaining five members of the Board, provided that, as long as Charterhouse is
entitled to nominate member(s) of the Board of Directors pursuant to the
Charterhouse Investors' Agreement, the Charterhouse nominee(s) must be included
among the nominees of the Independent Committee. Under the Charterhouse
Investors' Agreement, Charterhouse currently has the right to nominate two
persons for election to the Company's Board of Directors. Currently, the
Majority Holders' designees on the Board are Michael G. Psaros, Stephen W.
Presser, Eugene J. Keilin, David P. Shapiro, Raquel V. Palmer, and Brian J.
Riley, and the Charterhouse nominees on the Board are Joseph S. Rhodes and A.
Lawrence Fagan.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who beneficially own more than ten
percent of the Company's common stock, to file with the SEC initial reports of
ownership and reports of changes in ownership of common stock and other equity
securities of the Company. Officers, directors and stockholders beneficially
holding greater than ten percent of the common stock are also required by SEC
regulations to furnish the Company with copies of all Section 16(a) reports that
they file with the SEC.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and representations that no other reports were
required, during the fiscal year ended December 31, 2001, all Section 16(a)
filing requirements applicable to the Company's officers, directors and greater
than ten percent stockholders were complied with, except that each of Mr. Rhodes
and Mr. Fagan was late in filing an initial report of ownership in connection
with his appointment as a director of the Company.
34
ITEM 11. Executive Compensation
Summary Compensation Table
The following table presents summary information concerning the compensation
of the Company's Chief Executive Officer ("CEO") and its three other most highly
compensated executive officers (together, the "Named Executive Officers") for
services rendered to the Company and its subsidiaries during 1999, 2000 and
2001. Other than the Named Executive Officers, no executive officer of the
Company received salary and bonus payments exceeding $100,000 in the aggregate
during fiscal year 2000. All share amounts have been adjusted to give effect to
the Reverse Stock Split.
Securities
Underlying All Other
Name & Principal Position Year Salary Bonus Options Compensation
- ------------------------- ---- ------ ----- ------- ------------
Gerald R. Riordan (1) .................................. 2001 $350,000 $ -- -- $ 300,000(2)
(Chief Executive Officer) .............................. 2000 319,551 -- 87,500(3) 600,000(2)
1999 61,539 100,000(4) 475,000(5) --
Patrick J. Fodale (6) .................................. 2001 199,927 -- -- --
(Chief Financial Officer)
Michael A. Wysocki (7) ................................. 2001 200,000 -- -- 37,500(2)
(President, Transport Business Unit) ................... 2000 167,290 -- 36,250(8) 75,000(2)
1999 110,000 -- -- --
Harold W. Borhauer II (9) .............................. 2001 160,000 -- -- 31,250(2)
(President, Towing and Recovery Business Unit) ......... 2000 134,956 -- 34,000(10) 62,500(2)
1999 52,343 780 -- --
(1) Mr. Riordan's employment with the Company began as of October 11, 1999.
(2) Consists entirely of a payment in lieu of the change in control payment due
this executive officer under his former employment agreement.
(3) Includes options to purchase 37,500 shares granted in replacement of the
37,500 cancelled options described in footnote (5) below.
(4) Consists of $50,000 in cash and 3,077 shares of Common Stock with a market
value of $50,000 as of January 1, 2000.
(5) Includes options to purchase 37,500 shares that were cancelled as of July
20, 2000.
(6) Mr. Fodale's employment with the Company began as of April 2, 2001.
(7) Mr. Wysocki's employment with the Company began as of January 11, 1999.
(8) Includes options to purchase 3,750 shares that were cancelled as of July
20, 2000 and options to purchase 3,750 shares granted on July 20, 2000 in
replacement of such cancelled options.
(9) Mr. Borhauer's employment with the Company began as of March 5, 1999.
(10) Includes options to purchase 3,000 shares that were cancelled as of July
20, 2000 and options to purchase 3,000 shares granted as of July 20, 2000
in replacement of such cancelled options.
35
Option Grants in 2001
No stock options were granted to any of the Named Executive Officers during
2001.
Fiscal Year-End Option Values
The following table sets forth information concerning the number of shares
of the Company's common stock underlying exercisable and unexercisable options
held by the Named Executive Officers as of December 31, 2001. As of such date,
the exercise price for each of these options exceeded the fair market value of
such options based on the last reported sale price of the common stock on
December 31, 2001 ($0.25 per share) and, therefore, the options had no value. No
options were exercised by any of the Named Executive Officers during 2001. Mr.
Fodale does not own any options. All share amounts have been adjusted to give
effect to the Reverse Stock Split.
Shares Shares
Underlying Underlying
Exercisable Unexercisable
Name Options Options
- ---- ----------- -------------
Gerald R. Riordan............................... 66,666 58,334
Michael Wysocki................................. 13,333 19,167
Harold Borhauer II.............................. 12,333 18,667
Employment Agreements
The Company had an employment agreement with Mr. Riordan, effective as of
October 11, 1999, that provided Mr. Riordan with an annual base salary of
$300,000. The agreement also provided that, upon a "change of control" of the
Company (as defined in the agreement), Mr. Riordan was entitled to receive a
change of control payment in the amount of $1.2 million plus accelerated vesting
of all stock options then held by him. On July 20, 2000, in connection with the
KPS Transaction, the Company and Mr. Riordan entered into a new employment
agreement which replaced his former employment agreement. The new employment
agreement has a term of three years, and provides for automatic one year
extensions unless either party gives the other six months prior notice of an
intention to terminate the agreement. Under the new agreement, Mr. Riordan is
entitled to receive an annual base salary of $350,000, subject to increase at
the discretion of the Compensation Committee of the Board of Directors (the
"Compensation Committee"). In lieu of the change of control payment provided for
under his former employment agreement, Mr. Riordan received a cash payment of
$600,000 at the closing of the KPS Transaction, a stay bonus of $300,000 on July
20, 2001 and, as long as he remains employed by the Company, Mr. Riordan will be
entitled to receive a stay bonus of $300,000 on July 20, 2002. In the event of
the termination of Mr. Riordan's employment agreement prior to the expiration of
the term thereof for any reason other than (i) a termination for "cause" by the
Company (as defined in the agreement), or (ii) a termination by Mr. Riordan
other than for "good reason" (as defined in the agreement), any unpaid portion
of the stay bonus as of the date of such termination, plus interest at an annual
rate of 8% computed from July 20, 2000, will be immediately due and payable to
Mr. Riordan. Under the terms of the employment agreement, Mr. Riordan is also
entitled to an annual bonus, which bonus may not exceed 140% of his base salary,
upon the Company's achievement of certain target earnings established by the
Compensation Committee.
In lieu of the full acceleration of options provided for under Mr.
Riordan's former employment agreement, upon the closing of the KPS Transaction
and pursuant to the new employment agreement, (i) unvested stock options to
purchase 37,500 shares of common stock held by Mr. Riordan became vested and
fully exercisable on July 20, 2000, and options to purchase an additional 37,500
shares held by Mr. Riordan were cancelled, (ii) Mr. Riordan was granted an
option to purchase 37,500 shares of common stock at the fair market value of the
common stock on July 20, 2000, which option vests in equal installments on each
of the first, second and third anniversaries of July 20, 2000, provided that
such option will vest and become fully exercisable upon Mr. Riordan's death or
disability or a termination of Mr. Riordan's employment (a) by the Company other
than for "cause," or (b) by Mr. Riordan for "good reason." In addition, under
the new employment agreement, Mr. Riordan received (i) an option to purchase
16,666 shares of common stock at an exercise price of $6.12 per share (equal to
1.5 times the Conversion Price of
36
the Series A Preferred Stock on July 20, 2000, which option vested in full on
July 20, 2001, (ii) an option to purchase 16,667 shares of common stock at an
exercise price of $10.20 per share (equal to 2.5 times the Conversion Price),
which option will vest in full on July 20, 2002 and (iii) an option to purchase
16,667 shares of common stock at an exercise price of $14.28 per share (equal to
3.5 times the Conversion Price), which option will vest in full on July 20,
2003.
The Company entered into an employment agreement with Mr. Wysocki in January
2000, pursuant to which Mr. Wysocki served as President of the Transport
Business Unit at an annual salary of $150,000. In connection with this
employment agreement, the Company granted Mr. Wysocki an option to purchase
7,500 shares of common stock at an exercise price equal to fair market value of
the common stock on the date of grant. The agreement also provided that upon a
"change of control" of the Company (as defined in the agreement), Mr. Wysocki
was entitled to receive a change of control payment in the amount of $150,000,
plus accelerated vesting of all stock options then held by him. On July 20,
2000, in connection with the KPS Transaction, Mr. Wysocki entered into a new
employment agreement with the Company that replaced his former employment
agreement. The new employment agreement has a term of three years. Under the new
agreement, Mr. Wysocki is entitled to receive an annual base salary of $200,000,
subject to increase at the Compensation Committee's discretion. In lieu of the
change of control payment provided for under his former employment agreement,
Mr. Wysocki received a cash payment of $75,000 at the closing of the KPS
Transaction, a stay bonus of $37,500 on July 20, 2001 and, as long as he remains
employed by the Company, Mr. Wysocki will be entitled to a stay bonus of $37,500
on July 20, 2002. In the event of the termination of Mr. Wysocki's employment
agreement prior to the expiration of the term thereof for any reason other than
(i) a termination for "cause" by the Company (as defined in the new agreement),
or (ii) a termination by Mr. Wysocki other than for "good reason" (as defined in
the new agreement), any unpaid portion of the stay bonus as of the date of such
termination, plus interest at an annual rate of 8% computed from July 20, 2000
will be immediately due and payable to Mr. Wysocki. Under the terms of the
employment agreement, Mr. Wysocki is also entitled to an annual bonus, which
bonus may not exceed 100% of his base salary, upon the Company's achievement of
certain target earnings established by the Compensation Committee.
In lieu of full acceleration of the options provided for under Mr.
Wysocki's old employment agreement, upon the closing of the KPS Transaction and
pursuant to the new agreement (i) unvested stock options to purchase 3,750
shares of common stock became vested and fully exercisable on July 20, 2000, and
options to purchase an additional 3,750 shares were cancelled, and (ii) Mr.
Wysocki was granted an option to purchase 3,750 shares of common stock at the
fair market value of the common stock on July 20, 2000, which option vests in
equal installments on each of the first, second and third anniversaries of July
20, 2000, provided that such option will vest and become fully exercisable upon
Mr. Wysocki's death or disability or a termination of Mr. Wysocki's employment
(a) by the Company other than for "cause," or (b) by Mr. Wysocki for "good
reason." In addition, under the new agreement, Mr. Wysocki received (i) an
option to purchase 8,333 shares of common stock at an exercise price of $6.12
per share (equal to 1.5 times the Conversion Price), which option vested in full
on July 20, 2001, (ii) an option to purchase 8,333 shares of common stock at an
exercise price of $10.20 per share (equal to 2.5 times the Conversion Price),
which option will vest in full on July 20, 2002 and (iii) an option to purchase
8,334 shares of common stock at an exercise price of $14.28 per share (equal to
3.5 times the Conversion Price), which option will vest in full on July 20,
2003.
The Company entered into an employment agreement with Mr. Borhauer in
January 2000, pursuant to which Mr. Borhauer served as President of the
Company's Towing and Recovery Business Unit at an annual salary of $125,000. In
connection with this employment agreement, the Company granted Mr. Borhauer an
option to purchase 6,000 shares of Common Stock at an exercise price equal to
the fair market value of the Common Stock on the date of grant. The agreement
also provided that upon a "change of control" of the Company (as defined in the
agreement), Mr. Borhauer was entitled to receive a change of control payment in
the amount of $125,000, plus accelerated vesting of all stock options then held
by him. On July 20, 2000, in connection with the KPS Transaction, Mr. Borhauer
entered into a new employment agreement that replaced his former agreement. The
new employment agreement has a term of two years. Under the new agreement, Mr.
Borhauer is entitled to receive an annual base salary of $160,000, subject to
increase at the Compensation Committee's discretion. In lieu of the change of
control payment provided for under his former agreement, Mr. Borhauer received a
cash payment of $62,500 at the closing of the KPS Transaction, a stay bonus of
$31,250 on July 20, 2001 and, as long as he remains
37
employed by the Company, Mr. Borhauer will be entitled to a stay bonus of
$31,250 on July 20, 2002. In the event of the termination of Mr. Borhauer's
employment agreement prior to the expiration of the term thereof for any reason
other than (i) a termination for "cause" by the Company (as defined in the new
agreement), or (ii) a termination by Mr. Borhauer other than for "good reason"
(as defined in the new agreement), any unpaid portion of the stay bonus as of
the date of such termination, plus interest at an annual rate of 8% computed
from July 20, 2000 will be immediately payable to Mr. Borhauer. Under the terms
of the new employment agreement, Mr. Borhauer is also entitled to an annual
bonus, which bonus may not exceed 100% of his base salary, upon the Company's
achievement of certain target earnings established by the Compensation
Committee.
In lieu of full acceleration of the options provided for under Mr.
Borhauer's former employment agreement, upon the closing of the KPS Transaction
and pursuant to the new employment agreement, (i) unvested stock options to
purchase 3,000 shares of the Company's common stock became vested and fully
exercisable on July 20, 2000, and options to purchase an additional 3,000 shares
were cancelled, and (ii) Mr. Borhauer was granted an option to purchase 3,000
shares of common stock at the fair market value of the common stock on July 20,
2000, which option vests in equal installments on each of the first, second and
third anniversaries of July 20, 2000, provided that such option will vest and
become fully exercisable upon Mr. Borhauer's death or disability or a
termination of Mr. Borhauer's employment (a) by the Company other than for
"cause," or (b) by Mr. Borhauer for "good reason." In addition, under the new
agreement, Mr. Borhauer received (i) an option to purchase 8,333 shares of
common stock at an exercise price of $6.12 per share (equal to 1.5 times the
Conversion Price), which option vested in full on July 20, 2001, (ii) an option
to purchase 8,333 shares of common stock at an exercise price of $10.20 per
share (equal to 2.5 times the Conversion Price), which option will vest in full
on July 20, 2002 and (iii) an option to purchase 8,334 shares of common stock at
an exercise price of $14.28 per share (equal to 3.5 times the Conversion Price),
which option will vest in full on July 20, 2003.
The employment agreements between the Company and Messrs. Riordan, Wysocki
and Borhauer each provide that upon a "change of control" of the Company (as
defined in the new employment agreement), the executive has the option,
exercisable for one year following such change of control, to terminate the
agreement and to continue to receive his base salary and to participate in all
employee benefit plans, to the extent permitted by such plans, through the later
of (a) the end of the term of the agreement (without regard to the termination
thereof) and (b) one year from the date of such termination. In addition, if the
executive terminates the new agreement as described in the foregoing sentence,
all of his stock options that are unvested upon the change of control giving
rise to such termination will vest as of the date of such change of control. If
the Company terminates the new agreement without "cause", the executive is
entitled to continue to receive his base salary and to participate in all
employee benefit plans, to the extent permitted by such plans, through the later
of (a) the end of the term of the new agreement (without regard to the
termination thereof) and (b) one year from the date of such termination. The new
agreement contains covenants that prohibit the executive from competing with the
Company and from soliciting its employees during the employment term and until
the later of (a) the last day of the term of the agreement (without regard to
any termination thereof) and (b) one year from the date of termination. The new
employment agreements also provide for customary perquisites and benefits.
The Company entered into an employment agreement with Mr. Fodale in March
2001, pursuant to which Mr. Fodale's employment as Vice President and Chief
Financial Officer of the Company commenced on April 2, 2001. The agreement has a
one year term expiring on April 2, 2002 (the "Expiration Date"), and can be
extended by mutual agreement of the Company and Mr. Fodale. Under the agreement,
Mr. Fodale receives an annual salary of $275,000 and is eligible to receive a
performance bonus in an amount not to exceed 50% of his salary based upon
criteria established by the Compensation Committee, or the full Board of
Directors in the absence of the Compensation Committee. The agreement provides
that at or prior to the Expiration Date, the Company and Mr. Fodale will
negotiate in good faith an equity compensation arrangement satisfactory to each
party, provided that Mr. Fodale is not guaranteed to receive any equity
compensation. If the Company (i) terminates the agreement without "cause " (as
defined in the agreement) or (ii) fails to enter into a new agreement prior to
the Expiration Date providing for Mr. Fodale's continued employment subsequent
to the Expiration Date or fails to renew the agreement on the Expiration Date,
Mr. Fodale is entitled to receive his salary for a period of six months
following such event. The agreement contains covenants that prohibit Mr. Fodale
from competing with the Company and from soliciting
38
its employees during Mr. Fodale's employment with the Company and for a period
of one year thereafter. The agreement also provides for customary perquisites
and benefits.
COMPENSATION OF THE BOARD OF DIRECTORS
As compensation for service as a director of the Company, each director who
is not an officer or employee of the Company is entitled to receive $2,500 in
cash for each Board of Directors meeting attended by such director in person and
$750 in cash for each Board of Directors meeting lasting more than 30 minutes
attended by such director by telephone. Each director who is not an officer or
employee of the Company and who serves on a committee of the Board of Directors
is also entitled to receive $500 in cash (the "Committee Fee") for each
committee meeting attended by such director; provided, however, that no
Committee Fee shall be payable to any director unless and until the closing
price of the Common Stock exceeds $50.00 per share for five consecutive trading
days following the date of the meeting to which the Committee Fee relates. All
directors are reimbursed for their out-of-pocket expenses incurred in connection
with attending meetings of the Board and committees thereof.
In addition, each director who is neither an officer nor an employee of the
Company nor affiliated with KPS or Charterhouse is entitled to receive (i) upon
joining the Board and at each annual meeting of the Board thereafter, a grant of
options to purchase 2,000 shares of the Company's common stock with an exercise
price equal to the fair market value of the Common Stock on the date of grant,
and (ii) upon accepting the position of chairman of a committee of the Board, a
grant of options to purchase 250 shares of common stock with an exercise price
equal to the fair market value of the common stock on the date of grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2001, the full Board of Directors performed the duties of the
Compensation Committee of the Board. No current or former officer or employee of
the Company or any of its subsidiaries participated in deliberations of the
Board of Directors concerning executive officer compensation. During 2001, no
executive officer of the Company served as a director or member of the
compensation committee (or other board committee performing similar functions,
or in the absence of any such committee, the entire board of directors) of
another entity, one of whose executive officers served as a director of the
Company.
39
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial ownership of the Company's
common stock as of March 20, 2002 by (i) each stockholder known by the Company
to be the beneficial owner of more than 5% of the outstanding shares of common
stock, (ii) each director of the Company, (iii) each Named Executive Officer,
and (iv) all current directors and executive officers as a group. Unless
otherwise indicated, each such person (alone or with family members) has sole
voting and dispositive power with respect to the shares listed opposite such
person's name. Except as otherwise indicated, the address of each such person is
c/o United Road Services, Inc., 17 Computer Drive West, Albany, New York 12205.
Number of
Beneficially Percent
Owned of
Name Shares Class(1)
- ---- ------------ --------
Michael G. Psaros(2) ......................................................... -- --
Gerald R. Riordan ............................................................ 69,743(3) 3.2
Edward W. Morawski ........................................................... 69,227 3.3
A. Lawrence Fagan(4) ......................................................... -- --
Joseph S. Rhodes(4) .......................................................... -- --
Stephen W. Presser(2) ........................................................ -- --
Eugene J. Keilin(2) .......................................................... -- --
David P. Shapiro(2) .......................................................... -- --
Raquel V. Palmer(2) .......................................................... -- --
Brian J. Riley(2) ............................................................ -- --
Kenneth K. Fisher(5) ......................................................... -- --
Patrick J. Fodale ............................................................ -- --
Michael A. Wysocki ........................................................... 100,009(6) 4.8
Harold W. Borhauer ........................................................... 26,527(7) 1.3
John David Floyd(8) .......................................................... 127,921 6.1
Charter URS LLC .............................................................. 815,922(9) 30.0
Blue Truck Acquisition, LLC .................................................. 6,818,405(10) 76.6
GE Capital CFE, Inc. ......................................................... 545,474(11) 20.7
All current directors and executive officers as a group (14 persons)...... 265,506(12) 11.2
- ----------
* Less than one percent.
(1) The applicable percentage of ownership is based on 2,086,475 shares of
common stock outstanding as of March 20, 2002.
(2) The address of this director is c/o KPS Special Situations Fund, L.P., 200
Park Avenue, 58th Floor, New York, NY 10166.
(3) Includes 66,666 shares issuable pursuant to options exercisable within 60
days.
(4) The address of this director is c/o Charterhouse Group International, Inc.,
535 Madison Avenue, New York, NY 10022.
(5) The address of this director is c/o Phillips Nizer LLP, 666 Fifth Avenue,
New York, NY 10103.
(6) Includes 13,333 shares issuable pursuant to options exercisable within 60
days and 14,841 shares held by Translesco, Inc., of which Mr. Wysocki is
the majority owner.
(7) Includes 12,333 shares issuable pursuant to options exercisable within 60
days.
(8) The address of this stockholder is 219 Granite Court, Boulder City, NV
89005.
(9) Includes 631,912 shares issuable upon conversion of the Charterhouse
debentures. According to a Schedule 13D, dated as of December 7, 1998 and
amended as of March 16, 1999, Charterhouse Equity Partners III, L.P., a
Delaware limited partnership ("CEP III"), is the principal member of
Charterhouse. The general partner of CEP III is CHUSA Equity Investors III,
L.P., whose general partner is Charterhouse Equity III, Inc., a
wholly-owned subsidiary of Charterhouse International. Each of Charterhouse
and CEP III has shared voting and dispositive power over the shares held of
record by Charterhouse and may be deemed to
40
beneficially own these shares. Mr. Fagan serves as Vice Chairman of
Charterhouse International. Mr. Rhodes serves as Vice President of
Charterhouse International. Messrs. Fagan and Rhodes disclaim beneficial
ownership with respect to the shares held of record by Charterhouse. The
address of Charterhouse is c/o Charterhouse Group International, Inc., 535
Madison Avenue, New York, New York 10022.
(10) Consists entirely of shares issuable upon conversion of the Company's
Series A Preferred Stock (including dividends accumulated thereon as of
March 20, 2002) held by Blue Truck. According to a Schedule 13D dated as of
July 28, 2000, KPS is the controlling member of Blue Truck. The general
partner of KPS is KPS Investors, LLC, a Delaware limited liability company
("KPS Investors"). KPS has shared voting and dispositive power over the
shares held of record by Blue Truck and may be deemed to beneficially own
those shares. Mr. Psaros is the President of Blue Truck, a Principal of KPS
and a member and manager of KPS Investors. Mr. Keilin is a Vice President
of Blue Truck, a Principal of KPS and a member and manager of KPS
Investors. Mr. Shapiro is the Treasurer of Blue Truck, a Principal of KPS
and a member and manager of KPS Investors. Each of KPS Investors and
Messrs. Psaros, Keilin and Shapiro disclaim beneficial ownership with
respect to the shares held of record by Blue Truck. The address of Blue
Truck is c/o KPS Special Situations Fund, L.P., 200 Park Avenue, 58th
Floor, New York, NY 10166. (11) Consists entirely of shares issuable upon
conversion of the Company's Series A Preferred Stock (including dividends
accumulated thereon as of March 20, 2002) held by CFE. According to a
Schedule 13D dated as of July 28, 2000 and amended as of February 14, 2002,
CFE is a wholly-owned subsidiary of GE Capital, which is a wholly-owned
subsidiary of General Electric Capital Services, Inc., a Delaware
corporation ("GECS"), which, in turn, is a wholly owned subsidiary of
General Electric Company, a New York corporation ("GE"). Each of GE
Capital, GECS and GE disclaims beneficial ownership of the shares held by
CFE. The address of CFE is 201 High Ridge Road, Stamford, CT 06927. (12)
Includes 92,322 shares issuable pursuant to options exercisable within 60
days.
ITEM 13. Certain Relationships and Related Transactions
The Company has an employment agreement with Mr. Morawski pursuant to which
he serves as one of the Company's vice presidents and the general manager of the
Company's Northland division. The agreement provides for an annual base salary
of $150,000 and expires in May 2002. The agreement contains a covenant not to
compete for one year after termination of the agreement.
Mr. Wysocki is the majority owner of Translesco, Inc., a corporation from
which the Company leases employees to provide services to the Company's MPG
division. During the year ended December 31, 2001, the Company paid Translesco
approximately $12.5 million in connection with the lease of such employees.
During the year ended December 31, 2001, the Company was a party to two
lease agreements with Mr. Borhauer and his wife, Lynda Borhauer, pursuant to
which the Company leases property used to conduct the Shamrock business. During
2001, Mr. and Mrs. Borhauer received aggregate lease payments of $177,295 under
these leases.
As of December 31, 2001, the Company had issued approximately $94.8 million
aggregate principal amount of its debentures to Charterhouse pursuant to the
Amended Charterhouse Purchase Agreement. The debentures bear interest at a rate
of 8% annually, payable in kind in the form of additional debentures for the
first five years following the closing of the KPS Transaction, and thereafter in
kind or in cash, at the Company's option. During 2001, the Company issued to
Charterhouse approximately $7.2 million aggregate principal amount of debentures
as in-kind interest payments on outstanding debentures. Charterhouse Equity
Partners III, L.P., a Delaware limited partnership ("CEP III"), is the principal
member of Charterhouse. The general partner of CEP III is CHUSA Equity Investors
III, L.P., whose general partner is Charterhouse Equity III, Inc., a
wholly-owned subsidiary of Charterhouse International. Mr. Fagan serves as Vice
Chairman of Charterhouse International. Mr. Rhodes serves as Vice President of
Charterhouse International.
41
In accordance with the terms of the stock purchase agreement relating to the
KPS Transaction, the Company is required to pay KPS Management an annual
management fee of (a) $1 million, payable quarterly, for so long as holders of
the Series A Preferred Stock have the right under the KPS Investors' Agreement
or the Certificate of Designations to elect a majority of the Company's
directors, or (b) $500,000, payable quarterly, for so long as holders of the
Series A Preferred Stock have the right under the KPS Investors' Agreement or
the Certificate of Designations to elect at least three of the Company's
directors. As of December 31, 2001, the Company had not paid KPS Management the
2001 fee of $1.0 million. Such fee is payable to KPS upon its request. Messrs.
Shapiro, Keilin and Psaros beneficially own, in the aggregate, approximately 90%
of KPS Management indirectly through other KPS affiliated entities.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Operations for the years ended December 31,
2001, 2000 and 1999
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule II-Valuation and Qualifying Accounts
Other schedules have been omitted as they are not applicable or the required
or equivalent information has been included in the consolidated financial
statements or the notes thereto.
42
(3) Exhibits
Number Description of Document
- ------ -----------------------
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to the same numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 333-
46925)).
3.2 Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of the Company (incorporated by reference to Exhibit 3.1
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2000).
3.3 Amended and Restated Bylaws of the Company (incorporated by reference
to the Exhibit 3.2 to the Company's Registration Statement on Form S-1
(Registration No. 333-46925)).
3.4 Amendment to Amended and Restated Bylaws of the Company (incorporated
by reference to Exhibit 3.2 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2000).
4.1 Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to Amendment No. 3 to the Company's Registration Statement
on Form S-1 (Registration No. 33-46925)).
4.2 Form of 8% Convertible Subordinated Debenture due 2008 (incorporated
by reference to Exhibit 4.4 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2000).
4.3 Certificate of Powers, Designations, Preferences and Rights of the
Company's Series A Participating Convertible Preferred Stock
(incorporated by reference to Exhibit 3 to the Schedule 13-D of Blue
Truck Acquisition, LLC and KPS Special Situations Fund, L.P. filed
with the SEC on July 28, 2000).
4.4 Certificate of Correction of Certificate of Powers, Designations,
Preferences and Rights of the Company's Series A Participating
Convertible Preferred Stock (incorporated by reference to Exhibit 4 to
the Schedule 13D of Blue Truck Acquisition, LLC and KPS Special
Situations Fund, L.P. filed with the SEC on July 28, 2000).
4.5 Form of Stock Certificate for the Company's Series A Participating
Convertible Preferred Stock (incorporated by reference to Exhibit 4.3
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2000).
10.1 United Road Services, Inc. 1998 Stock Option Plan (incorporated by
reference to the same-numbered Exhibit to the Company's Registration
Statement on Form S-1 (Registration No. 333-46925)).*
10.2 Employment Agreement between the Company and Edward W. Morawski
(incorporated by reference to Exhibit 10.8 to Amendment No. 1 to the
Company's Registration Statement on Form S-1 (Registration No.
333-46925)).*
10.3 Form of Indemnification Agreement between the Company and each of the
Company's executive officers and directors (incorporated by reference
to Exhibit 10.14 to Amendment No. 2 to the Company's Registration
Statement on Form S-1 (Registration No. 333-46925)).*
10.4 Stock Purchase Warrant, dated as of June 16, 1998, issued by the
Company to Bank of America National Trust and Savings Association
(incorporated by reference to Exhibit 10.21 to the Company's
Registration Statement on Form S-1 (Registration No. 333-65563)).
43
10.5 Stock Purchase Agreement, dated as of April 14, 2000, between the
Company and Blue Truck Acquisition, LLC (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K dated April
14, 2000 and filed with the SEC on April 18, 2000).
10.6 Amendment No. 1, dated as of May 26, 2000, to Stock Purchase
Agreement, dated as of April 14, 2000, by and between the Company and
Blue Truck Acquisition, LLC (incorporated by reference to Appendix F
to the Company's Definitive Proxy Statement on Schedule 14A dated June
13, 2000).
10.7 Investors' Agreement, dated as of July 20, 2000, between the Company
and Blue Truck Acquisition, LLC (incorporated by reference to Exhibit
5 to the Schedule 13D of Blue Truck Acquisition, LLC and KPS Special
Situations Fund, L.P. filed with the SEC on July 28, 2000).
10.8 Registration Rights Agreement, dated as of July 20, 2000, by and among
the Company, Blue Truck Acquisition, LLC and CFE, Inc. (incorporated
by reference to Exhibit 6 to the Schedule 13D of Blue Truck
Acquisition, LLC and KPS Special Situations Fund, L.P. filed with the
SEC on July 28, 2000).
10.9 Amended and Restated Purchase Agreement, dated as of April 14, 2000,
between the Company and Charter URS, LLC (incorporated by reference to
Appendix D to the Company's Definitive Proxy Statement on Schedule 14A
dated June 13, 2000).
10.10 Amended and Restated Investors' Rights Agreement, dated as of April
14, 2000, between the Company and Charter URS, LLC (incorporated by
reference to Exhibit 10.6 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2000).
10.11 Amended and Restated Registration Rights Agreement, dated as of April
14, 2000, between the Company and Charter URS, LLC (incorporated by
reference to Exhibit 10.7 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2000).
10.12 Amendment, dated as of May 26, 2000, to Amended and Restated Purchase
Agreement and Amended and Restated Investors' Agreement, each dated as
of April 14, 2000, by and between the Company and Charter URS, LLC
(incorporated by reference to Appendix G to the Company's Definitive
Proxy Statement on Schedule 14A dated June 13, 2000).
10.13 Second Amendment, dated as of July 20, 2000, to Amended and Restated
Purchase Agreement and Amended and Restated Registration Rights
Agreement, each dated as of April 14, 2000, by and between the Company
and Charter URS, LLC (incorporated by reference to Exhibit 10.9 to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2000).
10.14 Stock Purchase Agreement, dated as of July 20, 2000, by and between
the Company and CFE, Inc. (incorporated by reference to Exhibit 10.10
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2000).
10.15 Credit Agreement, dated as of July 20, 2000, by and among the Company,
each of its subsidiaries, various financial institutions, General
Electric Capital Corporation, as Agent, and Fleet Capital Corporation,
as Documentation Agent (incorporated by reference to Exhibit 10.11 to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2000).
10.16 Amendment to United Road Services, Inc. 1998 Stock Option Plan
(incorporated by reference to Exhibit 10.12 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2000).*
10.17 Employment Agreement, dated July 20, 2000, by and between the Company
and Gerald R. Riordan (incorporated by reference to Exhibit 10.13 to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2000).*
10.18 Employment Agreement, dated July 20, 2000, by and between the Company
and Michael A. Wysocki (incorporated by reference to Exhibit 10.14 to
the Company's Quarterly Report on Form 10-Q for the
44
quarterly period ended September 30, 2000).*
10.19 Employment Agreement, dated July 20, 2000, by and between the Company
and Harold W. Borhauer II (incorporated by reference to Exhibit 10.15
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2000).*
10.20 Amendment No. 1, dated as of September 25, 2000, to Credit Agreement,
dated as of July 20, 2000, by and among the Company, each of its
subsidiaries, various financial institutions, General Electric Capital
Corporation, as Agent and Fleet Capital Corporation, as Documentation
Agent (incorporated by reference to Exhibit 10.16 to the Company's
quarterly report on Form 10-Q for the quarterly period ended September
30, 2000).
10.21 Employment Agreement, dated March 15, 2001, by and between the Company
and Patrick J. Fodale (incorporated by reference to Exhibit 10.30 to
the Company's Annual Report on Form 10-K for the year ended December
31, 2000).*
10.22 Amendment No. 2, dated as of March 30, 2001, to Credit Agreement,
dated as of July 20, 2000, by and among the Company, each of its
subsidiaries, various financial institutions, General Electric Capital
Corporation, as Agent and Fleet Capital Corporation, as Documentation
Agent (incorporated by reference to Exhibit 10.31 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000).
10.23 Amendment No. 3, dated as of February 14, 2002, to Credit Agreement,
dated as of July 20, by and among the Company, each of its
subsidiaries, various financial institutions, General Electric Capital
Corporation, as Agent and Fleet Capital Corporation, as Documentation
Agent (filed herewith). 10.24 Stock Purchase Agreement, dated as of
January 16, 2002, by and among the Company, Auction Transport, Inc.
and Manheim Services Corporation (filed herewith).
10.24 Stock Purchase Agreement, dated as of January 16, 2002, by and among
the Company, Auction Transport, Inc. and Manheim Services Corporation
(filed herewith)
21.1 Subsidiaries of the Registrant (filed herewith).
23.1 Consent of KPMG LLP (filed herewith).
99.1 Agreement for Auto Pound Management and Towing Services, dated as of
August 1, 2000 by and between the City of Chicago and Environmental
Auto Removal, Inc. (incorporated by reference to Exhibit 99.1 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2000).
- ---------------
* Indicates management agreement or compensatory plan or arrangement.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarterly period
ended December 31, 2002.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Gerald R. Riordan
---------------------------------
Gerald R. Riordan
Chief Executive Officer and
Secretary
Date: March 28, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Gerald R. Riordan
- --------------------------------- Chief Executive March 28, 2002
Gerald R. Riordan Officer and Secretary
(principal executive
officer)
/s/ Patrick J. Fodale
- --------------------------------- President and March 28, 2002
Patrick J. Fodale Chief Financial
Officer (principal
accounting and
financial officer)
/s/ Michael G. Psaros
- --------------------------------- Chairman of the Board March 28, 2002
Michael G. Psaros of Directors
- --------------------------------- Vice President and March __, 2002
Edward W. Morawski Director
/s/ Kenneth K. Fisher
- --------------------------------- Director March 28, 2002
Kenneth K. Fisher
- --------------------------------- Director March __, 2002
Joseph S. Rhodes
46
- --------------------------------- Director March __, 2002
A. Lawrence Fagan
/s/ Eugene J. Keilin
- --------------------------------- Director March 28, 2002
Eugene J. Keilin
/s/ David P. Shapiro
- --------------------------------- Director March 28, 2002
David P. Shapiro
/s/ Stephen W. Presser
- --------------------------------- Director March 28, 2002
Stephen W. Presser
/s/ Raquel V. Palmer
- --------------------------------- Director March 28, 2002
Raquel V. Palmer
/s/ Brian J. Riley
- --------------------------------- Director March 28, 2002
Brian J. Riley
47
INDEX OF EXHIBITS FILED HEREWITH*
10.23 Amendment No. 3, dated as of February 14, 2002, to Credit Agreement,
dated as of July 20, 2000, by and among the Company, each of its
subsidiaries, various financial institutions, General Electric Capital
Corporation, as Agent and Fleet Capital Corporation, as Documentation
Agent.
10.24 Stock Purchase Agreement, dated as of January 16, 2002, by and among the
Company, Auction Transport, Inc. and Manheim Services Corporation.
11.1 Statement regarding Computation of Earnings per Share.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
* For a complete list of the Exhibits to this Report, see Item 14(a)(3).
48
Independent Auditors' Report
The Board of Directors and Stockholders
United Road Services, Inc.:
We have audited the consolidated financial statements of United Road Services,
Inc. and subsidiaries as listed in the index appearing under Item 14(a)(1). In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the index appearing
under item 14(a)(2). These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Road
Services, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company's outstanding indebtedness under
its revolving credit facility, $37,436,000, is reflected as a current liability
because of the payment requirements of the related credit agreement.
Consequently, current liabilities exceed current assets by approximately
$32,390,000. In addition, the Company has had recurring losses from operations,
including impairment charges of $157,736,000, and has an accumulated deficit of
$200,289,000 at December 31, 2001. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ KPMG LLP
Albany, New York
March 8, 2002
F-1
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(In thousands, except share amounts)
2001 2000
--------- ---------
Assets
Current assets:
Cash and cash equivalents ................................................................... $ 1,696 2,615
Trade receivables, net of allowance for doubtful accounts of $1,581 in 2001 and
$2,686 in 2000 ............................................................................ 18,219 18,981
Other receivables, net of allowance for doubtful accounts of $0 in 2001 and
$9 in 2000 ................................................................................ 1,293 903
Prepaid licenses and fees ................................................................... 681 473
Prepaid expenses and other current assets ................................................... 3,012 1,874
--------- --------
Total current assets .................................................................... 24,901 24,846
Vehicles and equipment, net ................................................................... 66,111 69,419
Deferred financing costs, net ................................................................. 4,800 5,570
Goodwill, net ................................................................................. 75,582 78,020
Other non-current assets ...................................................................... 396 538
--------- --------
Total assets ............................................................................ $ 171,790 178,393
========= ========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of obligations under capital leases .................................... $ 144 203
Borrowings under credit facility ............................................................ 37,436 32,163
Accounts payable ............................................................................ 7,367 8,722
Accrued expenses and other current liabilities .............................................. 11,271 11,370
Due to related parties ...................................................................... 1,073 589
--------- --------
Total current liabilities ............................................................... 57,291 53,047
Obligations for equipment under capital leases, excluding
current installments ........................................................................ 68 262
Long-term debt ................................................................................ 94,787 87,568
Deferred income taxes, net .................................................................... -- 3,371
Other long-term liabilities ................................................................... 2,422 1,539
--------- --------
Total liabilities ....................................................................... 154,568 145,787
--------- --------
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 662,119 shares
issued and outstanding .................................................................... 1 1
Common stock, $0.01 par value; 35,000,000 shares authorized; and 2,086,475
shares issued and outstanding at December 31, 2001 and 2,091,652 shares
issued and outstanding at December 31, 2000 ............................................... 21 21
Additional paid-in capital .................................................................. 217,489 217,661
Accumulated deficit ....................................................................... (200,289) (185,077)
--------- --------
Total stockholders' equity .............................................................. 17,222 32,606
--------- --------
Total liabilities and stockholders' equity .............................................. $ 171,790 178,393
========= ========
See accompanying notes to consolidated financial statements.
F-2
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2001, 2000 and 1999
(In thousands, except per share amounts)
Year ended December 31,
-----------------------------------------
2001 2000 1999
----------- ---------- ---------
Net revenue ................................ $ 226,529 246,566 255,112
Cost of revenue ............................ 193,503 212,651 202,588
----------- ---------- ---------
Gross profit ........................... 33,026 33,915 52,524
Selling, general and administrative expenses 36,129 43,514 42,139
Amortization of goodwill ................... 2,063 3,710 5,439
Impairment charge .......................... -- 129,455 28,281
----------- ---------- ---------
Loss from operations ................... (5,166) (142,764) (23,335)
Other income (expense):
Interest income ........................ 40 284 77
Interest expense ....................... (11,530) (14,234) (11,419)
Other expense, net ..................... (76) (372) (181)
----------- ---------- ---------
Loss before income taxes ............... (16,732) (157,086) (34,858)
Income tax expense (benefit) ............... (3,073) 1,846 (5,158)
----------- ---------- ---------
Net loss ................................ $ (13,659) (158,932) (29,700)
----------- ---------- ---------
Share Amounts:
Basic and fully diluted loss per share ..... $ (6.52) (81.95) (17.54)
=========== ========== =========
Weighted average shares outstanding ........ 2,096,284 1,939,337 1,693,311
=========== ========== =========
See accompanying notes to consolidated financial statements.
F-3
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the years ended December 31, 2001, 2000 and 1999
(In thousands, except share amounts)
Additional Retained Total
Preferred Common paid-in earnings stockholders'
Stock Stock capital (deficit) equity (deficit)
--------- ------ ---------- --------- ---------------
Balance at January 1, 1999 ............................. $ -- 16 159,532 4,218 163,766
Stock issued in connection with:
1999 acquisitions, net of certain registration costs
(188,317 shares) ................................... -- 2 28,988 -- 28,990
Holdback shares issued for 1998 acquisitions (19,626
shares) ............................................ -- -- 3,129 -- 3,129
Exercise of options (100 shares) ..................... -- -- 5 -- 5
Earnout payments (4,773 shares) ...................... -- -- 223 -- 223
Net loss--1999 ......................................... -- -- -- (29,700) (29,700)
--------- ------ ---------- --------- ---------------
Balance at December 31, 1999 ........................... -- 18 191,877 (25,482) 166,413
Stock issued in connection with:
Series A convertible preferred stock issuance, net of
issuance costs (662,119 shares) .................... 1 -- 21,679 -- 21,680
Debenture closing fee (183,922 shares) ............... -- 2 748 -- 750
Holdback shares issued for 1999 acquisitions (17,455
shares) ............................................ -- -- 2,885 -- 2,885
Executive compensation (3,077 shares) ................ -- -- 50 -- 50
Earnout payments (127,868 shares) .................... -- 1 422 -- 423
Accrued dividends on preferred stock ................. -- -- -- (663) (663)
Net loss--2000 ......................................... -- -- -- (158,932) (158,932)
--------- ------ ---------- --------- ---------------
Balance at December 31, 2000 ........................... 1 21 217,661 (185,077) 32,606
Stock issued related to earnout payments (10,545 shares) -- -- 4 -- 4
Cancellation of certain earnout shares (15,722 shares) . -- -- (52) -- (52)
Issuance cost related to preferred stock ............... -- -- (124) -- (124)
Accrued dividends on preferred stock ................... -- -- -- (1,553) (1,553)
Net loss--2001 ......................................... -- -- -- (13,659) (13,659)
--------- ------ ---------- --------- ---------------
Balance at December 31, 2001 ........................... $ 1 21 217,489 (200,289) 17,222
========= ====== ========== ========= ===============
See accompanying notes to consolidated financial statements.
F-4
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2001, 2000 and 1999
(In thousands)
Year ended December 31,
2001 2000 1999
---------- --------- --------
Net (loss) income ........................................................................... $ (13,659) (158,932) (29,700)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation .............................................................................. 10,032 10,163 9,287
Amortization of goodwill .................................................................. 2,063 3,710 5,439
Impairment charge ......................................................................... -- 129,455 28,281
Amortization of deferred financing costs .................................................. 985 895 901
Write off of deferred financing costs ..................................................... -- 818 1,029
Provision for doubtful accounts ........................................................... 621 2,882 2,413
Deferred income taxes ..................................................................... (3,371) 705 (3,541)
Accrued management fee .................................................................... 1,000 250 --
Debenture closing fee ..................................................................... -- 750 --
Interest expense, paid-in-kind ............................................................ 7,219 6,692 5,644
Loss (gain) on sale of vehicles and equipment ............................................. (5) 290 304
Loss on sale of division .................................................................. -- 212 --
Changes in operating assets and liabilities, net of effects of acquisitions:
Decrease (increase) in trade receivables ................................................ 141 1,752 (3,681)
Decrease (increase) in other receivables ................................................ (390) 458 791
Decrease (increase) in prepaid income taxes ............................................. -- 3,061 (5,322)
Decrease (increase) in prepaid expenses and other current assets ........................ (1,560) 220 105
Decrease in other non-current assets .................................................... (81) 115 229
Increase (decrease) in accounts payable ................................................. (1,355) 1,123 (2,587)
Increase (decrease) in accrued expenses ................................................. 115 1,783 2,317
Increase (decrease) in other long-term liabilities ...................................... (445) (543) 640
---------- --------- --------
Net cash provided by operating activities ............................................. 1,310 5,859 12,549
---------- --------- --------
Investing activities:
Acquisitions, net of cash acquired ........................................................ -- -- (36,008)
Purchases of vehicles and equipment ....................................................... (8,089) (7,850) (20,188)
Proceeds from sale of vehicles and equipment .............................................. 1,370 1,559 1,141
Proceeds received from sale of division ................................................... -- 450 --
Amounts payable to related parties ........................................................ (191) (1,317) (1,837)
---------- --------- --------
Net cash used in investing activities ................................................. (6,910) (7,158) (56,892)
---------- --------- --------
Financing activities:
Proceeds from issuance of stock, net ...................................................... (124) 21,680 5
Proceeds from issuance of convertible subordinated debentures ............................. -- -- 31,500
Borrowings on revolving credit facility ................................................... 280,873 32,163 65,850
Repayments on revolving credit facility ................................................... (275,600) (50,650) (34,000)
Payments of deferred financing costs ...................................................... (215) (3,175) (2,487)
Payments on long-term debt and capital leases assumed in acquisitions ..................... (253) (219) (15,791)
---------- --------- --------
Net cash provided by (used in) financing activities ................................... 4,681 (201) 45,077
---------- --------- --------
Increase (decrease) in cash and cash equivalents ............................................ (919) (1,500) 734
Cash and cash equivalents at beginning of year .............................................. 2,615 4,115 3,381
---------- --------- --------
Cash and cash equivalents at end of year .................................................... $ 1,696 2,615 4,115
========== ========= ========
Supplemental disclosures of cash flow information:\
Cash paid during the year for:
Interest ................................................................................ $ 3,322 3,995 3,671
========== ========= ========
Income taxes, net of refunds ............................................................ $ (55) (2,236) 2,074
========== ========= ========
Supplemental disclosure of non-cash investing and financing activity:
Increase in accumulated deficit and other long-term liabilities for unpaid ................
cumulative dividend on preferred stock .................................................. $ 1,552 663 --
========== ========= ========
Issuance of common stock for acquisitions ................................................. $ -- 409 32,870
========== ========= ========
See accompanying notes to consolidated financial statements.
F-5
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(1) Summary of Significant Accounting Policies
(a) Organization and Business
United Road Services, Inc. (the "Company"), a Delaware corporation, was
formed in July 1997 to become a national provider of motor vehicle and equipment
towing, recovery and transport services. From inception through May 5, 1999, the
Company acquired 56 businesses (the "Acquired Companies"), seven of which (the
"Founding Companies") were acquired simultaneously with the consummation of an
initial public offering of the Company's common stock on May 6, 1998.
Consideration for these businesses consisted of cash, common stock and the
assumption of indebtedness. All of these acquisitions were accounted for
utilizing the purchase method of accounting.
The Company operates in two reportable operating segments: (1) transport
and (2) towing and recovery. 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 and recovery segment provides towing, impounding and storing
services, lien sales and auctions of abandoned vehicles. In addition, the towing
and recovery segment provides recovery and relocation services for heavy-duty
commercial vehicles and construction equipment. Revenue from towing and recovery
services is principally derived from rates based on distance, time or fixed
charges, and any related impound and storage fees. Customers of the towing and
recovery division include automobile dealers, repair shops and fleet operators,
law enforcement agencies, municipalities and individual motorists.
Since 1999, the Company has experienced a significant decline in the
market price of its common stock. As a result, its ability to complete
acquisitions using its common stock as currency in a manner that was not
dilutive to current stockholders was adversely affected. Accordingly, 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 the 56 businesses it had acquired within its first year of operations.
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 and sold a number of operating locations. At
December 31, 2001, the Company operated a network of 12 transport divisions and
17 towing and recovery divisions located in a total of 20 states. During 2001,
approximately 60.8% of the Company's net revenue was derived from the provision
of transport services and approximately 39.2% of its net revenue was derived
from the provision of towing and recovery services.
(b) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
F-6
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(c) Revenue Recognition
The Company's revenue is derived from the provision of motor vehicle and
equipment towing, recovery and transport services and fees related to vehicles
towed, such as impound, storage and repair fees and abandoned car purchases and
auction fees. Transport revenue is recognized upon the delivery of vehicles or
equipment to their final destination, towing revenue is recognized at the
completion of each towing engagement and revenues from impounding, storage, lien
sales, repairs and auctions are recorded when the service is performed or when
title to the vehicles has been transferred. Expenses related to the generation
of revenue are recognized as incurred.
(d) Cash Equivalents
Cash equivalents of $1,243 and $288 at December 31, 2001 and 2000,
respectively, consisted of money market funds and interest-bearing certificates
of deposit. For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
(e) Vehicles and Equipment
Vehicles and equipment are recorded at the lower of cost or fair value as
of the date of purchase under purchase accounting. Vehicles and equipment under
capital leases are stated at the present value of minimum lease payments.
Replacements of engines and certain other significant costs are capitalized.
Expenditures for maintenance and repairs are expensed as costs are incurred.
Depreciation is determined using the straight-line method over the
remaining estimated useful lives of the individual assets. Accelerated methods
of depreciation have been used for income tax purposes. Vehicles and equipment
held under capital leases and leasehold improvements are amortized straight-line
over the shorter of the remaining lease term or estimated useful life of the
asset.
The Company provides for depreciation and amortization of vehicles and
equipment over the following estimated useful lives:
Transportation and towing equipment .................. 10-15 years
Machinery and other equipment ........................ 5-10 years
Computer software and related equipment .............. 3-7 years
Furniture and fixtures ............................... 5 years
Leasehold improvements ............................... 3-10 years
(f) Long-Lived Assets
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Long-lived assets acquired as part of a business combination
accounted for using the purchase method are evaluated along with the allocated
goodwill in the determination of recoverability. Goodwill is allocated based on
the proportion of the fair value of the long-lived assets acquired to the
purchase price of the business acquired. Recoverability of assets, including
allocated goodwill, to be held and used is determined by a comparison of the
carrying amount of those assets to the undiscounted future operating cash flows
expected to be generated by those assets. If the carrying value of such assets
is greater than the sum of the estimated future undiscounted operating cash
flows, then impairment is measured based upon the fair value of the assets.
F-7
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(g) Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally 40 years. The Company considers 40 years as a
reasonable life for goodwill in light of characteristics of the towing, recovery
and transport industry, such as the lack of dependence on technological change,
the many years that the industry has been in existence, the current trend
towards outsourcing and the stable nature of the customer base. In addition, the
Company has acquired well established businesses that have generally been in
existence for many years.
In accordance with Accounting Principles Board ("APB") Opinion No. 17,
Intangible Assets, the Company continually evaluates whether events and
circumstances, that may affect the characteristics or comparable data discussed
above, warrant revised estimates of the useful lives or recognition of a
charge-off of the carrying amounts of the associated goodwill.
The Company performs an analysis of the recoverability of goodwill using
a cash flow approach consistent with the Company's analysis of impairment of
long-lived assets under SFAS No. 121. This approach considers the estimated
undiscounted future operating cash flows of the Company. The amount of goodwill
impairment, if any, is measured on estimated fair value based on the best
information available. The Company generally estimates fair value by discounting
estimated future cash flows using a discount rate reflecting the Company's
average cost of funds.
Accumulated amortization at December 31, 2001 and 2000 was $12,768 and
$10,811, respectively.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and tax loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered in
income in the period that includes the enactment date. Deferred tax assets and
liabilities are subject to a valuation allowances based upon management estimate
of the realizability.
(i) Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. The Company does not presently have any elements of other
comprehensive income as outlined in SFAS No. 130, and consequently, there is no
difference between net income (loss) and comprehensive income (loss).
(j) Stock-Based Compensation
The Company applies the intrinsic value-based method of accounting
prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations, in accounting for its fixed plan stock options. As
such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price.
F-8
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(k) Per Share Amounts
Basic earnings per share excludes dilution and is computed by dividing
income (loss) available to common stockholders 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 were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the Company
(such as stock options and warrants).
The effect of options, warrants, convertible preferred stock, earnout
shares and holdback shares have been excluded at December 31, 2001, 2000 and
1999, as the effect would be antidilutive. Additionally, shares issuable upon
conversion of the convertible subordinated debentures have been excluded at
December 31, 2001, 2000 and 1999, as the effect would be antidilutive due to the
adjustment (decrease in net loss) for interest expense.
At December 31, 2001, the Company had outstanding preferred stock
convertible into 6,221,190 shares of common stock, stock options exercisable to
purchase 300,913 shares of common stock, warrants exercisable to purchase 48,028
shares of common stock and subordinated debentures convertible into 613,913
shares of common stock. At December 31, 2000, the Company had outstanding
preferred stock convertible into 6,221,190 shares of common stock, stock options
exercisable to purchase 314,443 shares of common stock, warrants exercisable to
purchase 47,919 shares of common stock and subordinated debentures convertible
into 583,787 shares of common stock. At December 31, 1999, the Company had stock
options exercisable to purchase 192,935 shares of common stock, warrants
exercisable to purchase 11,779 shares of common stock and subordinated
debentures convertible into 539,173 shares of common stock.
(l) Advertising Costs
Advertising costs are expensed as incurred and amounted to $1,555, $1,342
and $1,398 in 2001, 2000 and 1999, respectively.
(m) 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 consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America. Actual results could differ from those estimates.
(n) Concentrations of Credit Risk
The financial instruments which potentially subject the Company to credit
risk consist primarily of cash, cash equivalents, and trade receivables.
The Company maintains cash and cash equivalents with various financial
institutions. Cash equivalents include investments in money market securities
and certificates of deposit. At times, such amounts may exceed the Federal
Deposit Insurance Corporation limits. The Company attempts to limit the amount
of credit exposure with any one financial institution and believes that no
significant concentration of credit risk exists with respect to cash
investments.
F-9
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
Concentrations of credit risk with respect to receivables are limited due
to the wide variety of customers and markets in which the Company's services are
provided, as well as their dispersion across many different geographic areas. To
mitigate credit risk, the Company applies credit approvals and credit limits,
and performs ongoing evaluations of its customers' financial condition. At
December 31, 2001, the City of Chicago owed the Company $3,503 or 19% of total
receivables. No other customer accounted for greater than 10% of trade
receivables at December 31, 2001. No single customer accounted for greater than
10% of trade receivables at December 31, 2000.
(o) Impact of Recently Issued Accounting Standards
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria
that intangible assets acquired in a purchase method business combination must
meet to be recognized and reported apart from goodwill. SFAS No. 142 will
require that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that
intangible assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121.
The Company is required to adopt the provisions of SFAS No. 141
immediately, and SFAS No. 142 effective January 1, 2002. Furthermore, any
goodwill or intangible asset determined to have an indefinite useful life that
is acquired in a purchase business combination completed after June 30, 2001
will not be amortized, but will continue to be evaluated for impairment in
accordance with the appropriate pre-SFAS No. 142 accounting literature. Goodwill
and intangible assets acquired in business combinations completed before July 1,
2001 will continue to be amortized prior to the adoption of SFAS No. 142.
Upon adoption of SFAS No. 142, the Company is required to evaluate its
existing intangible assets and goodwill that were acquired in purchase business
combinations, and make any necessary reclassifications in order to conform with
the new criteria in SFAS No. 141 for recognition apart from goodwill. The
Company will be required to reassess the useful lives and residual values of all
intangible assets acquired in purchase business combinations, and make any
necessary amortization period adjustments by the end of the first interim period
after adoption. In addition, to the extent an intangible asset is identified as
having an indefinite useful life, the Company will be required to test the
intangible asset for impairment in accordance with the provisions of SFAS No.
142 within the first interim period. Any impairment loss will be measured as of
the date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period. Under SFAS No. 142, the
Company will cease to amortize approximately $75,582 of goodwill. The Company
recorded approximately $2,063 of amortization on these amounts during 2001 and
would have recorded approximately $2,000 of amortization, during 2002. In lieu
of amortization the Company will be required to perform an impairment review of
its goodwill balance upon the initial adoption of SFAS No. 142. The impairment
review will involve a two-step process as follows:
Step 1 - the Company will compare the fair value of its reporting
units to the carrying value, including goodwill, of each of those
units. For each reporting unit where the carrying value, including
goodwill, exceeds the carrying value, no further work is performed
and no impairment. The Company will then have up to six months from
the date of adoption to determine the fair value of each reporting
unit and compare it to the carrying amount of the reporting unit.
F-10
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
Step 2 - the Company will perform an allocation of the fair value of
the reporting unit to its identifiable tangible assets and
liabilities. This will derive an implied fair value for the
reporting unit's goodwill. The Company will then compare the implied
fair value of the reporting unit's goodwill with the carrying amount
of the reporting unit's goodwill. If the carrying amount of the
reporting unit's goodwill is greater than the implied fair value of
its goodwill, an impairment loss must be recognized for the excess.
This second step is required to be completed as soon as possible,
but no later than the end of the year of adoption. Any transitional
impairment loss will be recognized as the cumulative effect of a
change in accounting principle in the Company's consolidated
statement of operations.
Because of the extensive effort needed to comply with adopting SFAS No's.
141 and 142, it is not practicable to reasonably estimate the impact of adopting
these Statements on the Company's consolidated financial statements at the date
of this report, including whether it will be required to recognize any
transitional impairment losses as the cumulative effect of a change in
accounting principle. The Company expects to complete the initial review during
the second quarter of 2002.
In June 2001, the 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 the adoption of
SFAS No. 143 to have a material financial impact on the Company's consolidated
financial statements. The Company will continue to evaluate this conclusion.
In August 2001, FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value of the asset. SFAS
No. 144 requires companies to separately report discontinued operations and
extends that reporting to a component of an entity that either has been disposed
of (by sale, abandonment, or in a distribution to owners) or is classified as
held for sale. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. The Company is required to
adopt SFAS No. 144 on January 1, 2002. Management does not expect the adoption
of SFAS No. 144 to have a material impact on the Company's consolidated
financial statements because the impairment assessment under SFAS No. 144 is
largely unchanged from SFAS No. 121.
(p) Reclassifications
Certain reclassifications of the prior year consolidated financial
statements have been made to conform to current year presentation.
F-11
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(2) Liquidity
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As discussed in
note 8(a), in July 2000, the Company entered into a new revolving credit
agreement. Under the structure of this agreement, all cash receipts are to be
forwarded to the lending institution to pay down the revolver balance and all
working capital and capital expenditure needs are funded through daily
borrowings. This type of arrangement is required to be classified as a current
liability in the Company's consolidated balance sheet. As a result of this
classification, current liabilities exceed current assets by $32,390 at December
31, 2001. The revolver balance is secured by all the assets of the Company and
the borrowing capacity is based on the value of certain vehicles and accounts
receivable. At December 31, 2001, the Company had a borrowing capacity of
$55,453, $40,913 of which related to vehicles and $14,540 of which related to
accounts receivable. At December 31, 2001, $37,436 was outstanding under the
revolving credit facility, excluding letters of credit of $13,649, and an
additional $4,368 was available for borrowing.
During the year ended December 31, 2001, the Company incurred a loss from
operations of $5,166 and net loss of $13,659, and as of December 31, 2001, had
an accumulated deficit of $200,289 and net equity of $17,222. During the year
ended December 31, 2000, the Company incurred a loss from operations of $142,764
and a net loss of $158,932, and as of December 31, 2000, had an accumulated
deficit of $185,077. The significant component of the loss from operations in
2000 consisted of an impairment charge, as discussed in note 3, relating to the
write off of the recorded value of long-lived assets, specifically goodwill, and
of fixed assets at certain underperforming divisions. Excluding the effect of
this impairment charge, the Company incurred a loss from operations of $13,309.
For the year ended December 31, 2001, the Company generated positive cash flow
of $1,310, as compared to $5,859 and $12,549 for the years ended December 31,
2000 and 1999, respectively.
The Company continues to explore opportunities 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 recovery and transport services to new customers in strategic market
locations in order to improve its cash flow from operations. This Company
expects to be able to fund its liquidity needs for at least the next twelve
months through cash flow from operations and borrowings under its credit
facility.
(3) Impairment Charge
The Company periodically reviews the recorded value of its long-lived
assets to determine if the carrying amount of those assets may not be
recoverable based upon the future operating cash flows expected to be generated
by those assets. During the fourth quarter of 2001, the Company performed a
review of the Company's long-lived assets and determined that the future
undiscounted operating cash flows supported the carrying value of these assets.
Accordingly no impairment charge was recorded in 2001.
In accordance with SFAS No. 121, during the second quarter of 2000, the
Company recorded a non-cash impairment charge of $11,445 related to the
write-down of a portion of certain recorded asset values, including allocated
goodwill. The impairment charge recorded under SFAS No. 121 included impairment
expenses of $2,526 on the recorded value of vehicles and equipment at several of
the Company's transport divisions and $2,105 on the recorded value of vehicles
and equipment at several of the Company's towing and recovery divisions and
impairment charges of $2,909 on the recoverability of allocated goodwill at
several of the Company's transport divisions and $3,905 on the recoverability of
allocated goodwill at several of the Company's towing and recovery divisions.
The impairment charge was recognized when the future undiscounted cash flows of
these divisions were estimated to be insufficient to recover their related
carrying values. As such, the carrying values of these assets were written down
to the Company's estimates of fair value.
F-12
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
Additionally, in connection with its analysis of the recoverability of
goodwill as described in note 1(g), the Company recorded an impairment charge of
$118,010. This non-cash impairment charge included $75,716 related to the
recoverability of goodwill at the Company's transport divisions and $42,294
related to the recoverability of goodwill at the Company's towing and recovery
divisions.
Impairment charges were $28,281 for the year ended December 31, 1999. The
impairment charges consisted of a non-cash charge of $21,722 related to
recoverability of goodwill under APB Opinion No. 17 and a non-cash charge of
$6,559 related to the Company's comprehensive review of its long-lived assets in
accordance with SFAS No. 121. The 1999 impairment charge recorded under APB
Opinion No. 17 included $10,053 related to the recoverability of goodwill at two
of the Company's transport divisions and $11,669 related to the recovery of
goodwill at seven of the Company's towing and recovery divisions. The 1999
impairment charge recorded under SFAS No. 121 included impairment expenses of
$2,603 on the recoverability of vehicles and equipment and impairment expenses
of $3,956 on the recoverability of goodwill at six of the Company's towing and
recovery divisions (four of which were included in the seven divisions noted
above).
(4) Stockholders' Equity
On May 4, 2000, the Company effected a one-for-ten reverse stock split for
all outstanding common shares. All share and per-share amounts in the
accompanying consolidated financial statements and related notes have been
restated to give effect to the 2000 reverse stock split.
On April 7, 1999, 4,773 shares of common stock were issued as earnout
payments to the former owners of certain Founding Companies and one other
acquired company. These earnout payments were based on the achievement of
certain net revenue targets (see note 14(a)).
At various dates during 1999, an additional 19,626 shares of common stock
were issued as additional consideration for certain 1998 acquisitions. These
shares represented the withheld purchase price that was released based upon the
achievement of certain financial ratios, or other contingencies, by certain
acquired companies after a contractually defined period of time. The recorded
consideration for these issuances was $3,129.
As part of the consideration for certain 1999 acquisitions discussed in
note 11, the Company issued an additional 188,317 shares of common stock at
various dates. The net consideration for these issuances, after deducting
applicable registration costs of $528, was $28,990, which has been recorded as
purchase price for the applicable acquisitions.
During 1998, the United Road Services, Inc. 1998 Stock Option Plan was
adopted by the Company. Under the plan, options to purchase common stock may be
granted to directors, executive officers, key employees and consultants of the
Company. The maximum number of shares of common stock that may be subject to
options granted under the plan may not exceed, in the aggregate, 127,885 shares.
Shares of common stock that are attributable to grants that have expired or been
terminated, cancelled or forfeited are available for issuance in connection with
future grants. Stock options expire after ten years from the date granted and
are generally exercisable in one-third increments per year beginning one year
from the date of grant. Outstanding options may be canceled and reissued under
terms specified in the plan. During 1999, 100 shares of common stock were issued
upon exercise of options under the plan.
F-13
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
On September 23, 1998, the United Road Services, Inc. 1998 Non-Qualified
Stock Option Plan was adopted by the Company. Under the plan, options to
purchase common stock may be granted to key employees and consultants who are
neither directors nor executive officers of the Company. The maximum number of
shares of common stock that may be subject to options granted under the plan may
not exceed, in the aggregate, 50,000 shares. Shares of common stock that are
attributable to grants that have expired or been terminated, cancelled or
forfeited are available for issuance in connection with future grants. Stock
options expire after ten years from the date granted and are generally
exercisable in one-third increments per year beginning one year from the date of
grant. Outstanding options may be canceled and reissued under terms specified in
the plan.
On October 11, 1999, 75,000 options to purchase common stock were granted
to the Company's Chief Executive Officer under an executive option agreement.
The stock options expire after ten years from the date granted and are
exercisable in one-third increments per year beginning one year from the date of
grant.
On January 1, 2000, 3,077 shares of the Company's common stock,
representing a fair value of $50, were granted to the Company's Chief Executive
Officer, as required under his employment agreement. On May 15, 2000, 127,868
shares of common stock were issued as earnout payments to the former owners of
certain Founding Companies. These earnout payments were based on the achievement
of certain net revenue targets (see note 14(a)). Included in due to related
parties at December 31, 1999, was $450 representing the fair value of 27,723
shares of common stock, payable pursuant to these earnout arrangements, based
upon the December 31, 1999 closing price of the Company's common stock. The
additional 100,145 shares were issued as a result of the decline in the
Company's common stock price subsequent to December 31, 1999 that resulted in
additional shares of common stock being issued under the contractual provisions
of the earnout agreements.
At various dates during 2000, an additional 17,455 shares of common stock
were issued as additional consideration for certain 1999 acquisitions. These
shares represented the withheld purchase price that was released based upon the
achievement of certain financial ratios, or other contingencies, by certain
acquired companies after a contractually defined period of time. The recorded
consideration for these issuances was $2,885.
On July 20, 2000, the Company sold 613,073.27 shares of its Series A
Participating Convertible Preferred Stock, par value $.001 per share (the
"Series A Preferred Stock") to Blue Truck Acquisition, LLC a Delaware limited
liability company ("Blue Truck") which is controlled by KPS Special Situations
Fund, L.P. ("KPS"), for $25, 000 in cash consideration (the "KPS Transaction").
In addition, on July 20, 2000, the Company sold 49,045.86 shares of its Series A
Preferred Stock to CFE, Inc. ("CFE"), an affiliate of General Electric Capital
Corporation ("GE Capital") for $2,000 in cash consideration (the "CFE
Transaction"). If Blue Truck and CFE had converted all of their Series A
Participating Convertible Preferred Stock into common stock on July 20, 2000,
they would have held 70.4% and 5.6% of the Company's common stock, respectively,
as of such date.
Holders of the Series A Preferred Stock are entitled to vote together with
the holders of the Company's Common Stock as a single class on matters submitted
to the Company's stockholders for a vote (other than with respect to certain
elections of directors). The holder of each share of Series A Preferred Stock is
entitled to the number of votes equal to the number of full shares of Common
Stock into which such share of Series A Preferred Stock could be converted on
the record date for such vote. The holders of Series A Preferred Stock have the
right to designate and elect six members of the Company's Board of Directors,
which constitutes a majority, for so long as Blue Truck and its permitted
transferees continue to own specified amounts of Series A Preferred Stock. At
lower levels of ownership, the holders of Series A Preferred Stock will be
entitled to appoint three directors, one director, or no directors, depending
upon the amount of Series A Preferred Stock then held by Blue Truck and its
permitted transferees, as set forth in the Investors' Agreement relating to the
KPS Transaction.
F-14
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
Prior to July 20, 2008, holders of the outstanding Series A Preferred
Stock are entitled to receive cumulative dividends on the Series A Preferred
Stock each quarter at the rate per annum of (i) 5.5% until July 20, 2006, and
(ii) 5.0% thereafter, of the Series A Preferred Base Liquidation Amount (as
defined below) per share of Series A Preferred Stock. The "Series A Preferred
Base Liquidation Amount" is equal to the purchase price per share of the Series
A Preferred Stock ($40.778), subject to certain adjustments. The dividends are
payable in cash at the end of each quarter or, at the election of the Company,
will cumulate to the extent unpaid. In the event that the Company elects to
cumulate such dividends, dividends also accrue on the amount cumulated at the
same rate. Once the election to cumulate a dividend has been made, the Company
may no longer pay such dividend in cash, other than in connection with a
liquidation, dissolution or winding up of the Company. In addition, holders of
the Series A Preferred Stock are entitled to participate in all dividends
payable to holders of the Common Stock. The Company's obligation to pay
dividends terminates on July 20, 2008, or earlier if the Company's Common Stock
trades above a specified price level. At December 31, 2001 and 2000, the Company
had recorded $2,215 and $663, respectively within other long-term liabilities on
the accompanying consolidated balance sheet representing dividends payable to
the holders of the Series A Preferred Stock.
Each share of Series A Preferred Stock is convertible at any time by its
holder into a number of shares of Common Stock equal to the sum of (i) the
quotient obtained by dividing (x) the Series A Preferred Base Liquidation Amount
by (y) the conversion price per share for the Series A Preferred Stock
(currently $4.0778, subject to certain adjustments) (the "Conversion Price")
plus (ii) the quotient obtained by dividing (x) the amount, if any, by which the
Series A Preferred Liquidation Preference Amount (as defined below) that has
accrued at any time prior to July 20, 2005 exceeds the Series A Preferred Base
Liquidation Amount by (y) the product of the Conversion Price and 0.85. The
"Series A Preferred Liquidation Preference Amount" is the sum of the Series A
Preferred Base Liquidation Amount and the amount of any and all unpaid dividends
on the Series A Preferred Stock. The Series A Preferred Stock automatically
converts into Common Stock upon the occurrence of certain business combinations,
unless the holders elect to exercise their liquidation preference rights.
On July 20, 2000, the Company issued 183,922 shares of Common Stock as
consideration for a $750 closing fee pursuant to an Amended and Restated
Purchase Agreement relating to agreement of restructuring of the convertible
subordinate debentures (see note 8(b)).
At various dates during 2001, an additional 10,545 shares of common stock
were issued as consideration for certain 1998 acquisitions. These shares
represented withheld purchase price that was based upon the achievement of
certain financial ratios, or other contingencies, by certain acquired companies
after a contractually defined period of time as discussed in note 14(a). The
recorded consideration for these issuances and cancellations was $4. Also in
2001, 15,722 shares of common stock previously issued as earnout consideration
were cancelled resulting in a $52 reduction of additional paid-in capital.
The following table summarizes activity under the Company's stock option
plans:
Year ended December 31, 2001
Number of Weighted-average
shares exercise price
--------- ----------------
Options outstanding at beginning of year ................... 314,443 $ 45.19
Granted .................................................... 2,000 0.29
Forfeited .................................................. 15,530 126.20
-------
Options outstanding at end of year ......................... 300,913 41.20
=======
Options exercisable at December 31, 2001 ................... 191,717
=======
Weighted-average fair value of options granted during the
Year ..................................................... 0.29
F-15
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
Year ended December 31, 2000
Number of Weighted-average
shares exercise price
--------- ----------------
Options outstanding at beginning of year .................. 197,935 $ 77.05
Granted ................................................... 258,810 28.93
Forfeited ................................................. 142,302 62.74
-------
Options outstanding at end of year ........................ 314,443 45.19
=======
Options exercisable at December 31, 2000 .................. 120,048
=======
Weighted-average fair value of options granted during the
Year .................................................... 6.87
Year ended December 31, 1999
Number of Weighted-average
shares exercise price
--------- ----------------
Options outstanding at beginning of year ................. 107,790 $ 122.18
Granted .................................................. 113,415 41.37
Exercised ................................................ (100) 46.90
Forfeited ................................................ (23,170) 112.48
Options outstanding at end of year ....................... 197,935 77.05
Options exercisable at December 31, 1999 ................. 41,066
Weighted-average fair value of options granted during the
Year ................................................... 38.16
The per share weighted-average fair values of stock options granted during
2001, 2000 and 1999 were determined using the Black-Scholes option-pricing model
with the following weighted average assumptions: (i) risk-free interest rate of
approximately 1.7%, 5.8% and 6.3%, respectively, (ii) expected life of 8, 8 and
5 years, respectively, (iii) volatility of approximately, 145%, 127% and 108%,
respectively, and (iv) expected dividend yield of 0%.
The following table summarizes information about stock options outstanding
as of December 31, 2001:
Options outstanding
- -----------------------------------------------------------------------------
Weighted-average
Range of Number Weighted-average Remaining
exercise prices outstanding exercise price Contractual life
- --------------- ----------- ---------------- ----------------
$ 0.29-10.00 88,582 $ 4.24 8.6 years
10.01-30.00 123,285 8.31 8.5 years
30.01-100.00 49,881 77.48 6.8 years
100.01-230.00 39,165 150.73 6.9 years
-------
300,913
=======
F-16
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
Following are the shares of common stock reserved for issuance and the
related exercise prices for the outstanding stock options, convertible
subordinated debentures and warrants at December 31, 2001:
Number of Exercise price
Shares Per share
--------- --------------
1998 Stock Option Plan ............................ 187,358 $3.00-201.25
1998 Non-Qualified Stock Option Plan .............. 38,555 0.28-183.13
Executive option agreement ........................ 75,000 16.03
Convertible subordinated debentures ............... 631,912 150.00
Warrants .......................................... 48,028 30.29
---------
Shares reserved for issuance .................... 980,853
=========
The Company applies APB Opinion No. 25 in accounting for its stock option
plans and, since the exercise price of stock options granted under the Company's
stock option plans is not less than the market price of the underlying stock on
the date of grant, no compensation cost has been recognized for such grants.
Under SFAS No. 123, Accounting for Stock Based Compensation, compensation cost
for stock option grants would be based on the fair value at the grant date, and
the resulting compensation expense would be shown as an expense on the
consolidated statements of operations. Had compensation cost for these plans
been determined consistent with SFAS No. 123, the Company's pro forma net income
(loss) and earnings (loss) per share for the years ended December 31, 2001, 2000
and 1999 would have resulted in the following pro forma amounts:
2001 2000 1999
--------- --------- ---------
Net loss:
As reported ...................... $ (13,659) (158,932) (29,700)
========= ========= =========
Pro forma ........................ $ (13,949) (165,331) (33,930)
========= ========= =========
Per share amounts:
Basic loss per share:
As reported .................... $ (6.52) (81.95) (17.54)
========= ========= =========
Pro forma ...................... $ (6.65) (84.56) (20.04)
========= ========= =========
Diluted loss per share:
As reported .................... $ (6.52) (81.95) (17.54)
========= ========= =========
Pro forma ...................... $ (6.65) (84.56) (20.04)
========= ========= =========
The effects of applying SFAS No. 123 in the pro forma disclosure may not
be indicative of future amounts as additional awards in future years are
anticipated.
(5) Vehicles and Equipment
Vehicles and equipment at December 31, 2001 and 2000 consisted of the
following:
2001 2000
-------- -------
Transportation and towing equipment ................. $ 79,770 75,413
Machinery and other equipment ....................... 1,709 1,761
Computer software and related equipment ............. 10,053 9,775
Furniture and fixtures .............................. 1,129 1,002
Leasehold improvements .............................. 2,246 1,909
-------- -------
94,907 89,860
Less accumulated depreciation and amortization ...... (28,796) (20,441)
-------- -------
$ 66,111 69,419
======== =======
F-17
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
Depreciation and amortization expense of vehicles and equipment was
$10,032, $10,163 and $9,287 in 2001, 2000 and 1999, respectively.
Included in vehicles and equipment at December 31, 2001 and 2000 are costs
of $627 and $797, respectively, and accumulated amortization of $195 and $174,
respectively, relating to certain transport and towing equipment recorded as
capital leases. Amortization expense of $80, $100 and $129 relating to transport
and towing equipment capital leases was included in depreciation and
amortization expense for the years ended December 31, 2001, 2000 and 1999,
respectively.
(6) Deferred Financing Costs
Deferred financing costs at December 31, 2001 and 2000 were associated
with the Company's revolving credit facilities and the convertible subordinated
debentures, and consisted of the following:
2001 2000
------ -----
GE Capital credit facility, net of accumulated amortization
of $790 and $229 in 2001 and 2000, respectively ................. $2,267 2,613
Convertible subordinated debentures, net of accumulated amortization
of $1,164 and $740 in 2001 and 2000, respectively ................ 2,533 2,957
------ -----
$4,800 5,570
====== =====
As discussed in note 8(a) during 2000, the Company entered into a new
revolving credit facility with a group of banks led by GE Capital and repaid and
terminated its Bank of America credit facility. As a result of this transaction,
the Company recorded a write-off of deferred financing costs of $415 related to
the Bank of America credit facility and recorded deferred financing costs of
$2,842 related to the GE Capital credit facility.
The Company's allowable outstanding principal, plus the stated amount of
all letters of credit, under the Bank of America credit facility was reduced
from $90,000 to $58,000 on November 12, 1999 and was further reduced to $55,000
effective January 1, 2000. As a result of these reductions in borrowing
capacity, the Company recorded a write-off of previously recorded deferred
financing costs in the amount of $405. In addition, the Company wrote off costs
of $624 representing deferred financing costs related to an increase of the Bank
of America credit facility which was terminated during 1999. These amounts were
included in interest expense on the consolidated statement of operations for the
year ended December 31, 1999.
(7) Accrued Expenses
Accrued expenses at December 31, 2001 and 2000 consisted of:
2001 2000
------ -----
Accrued payroll and related costs ............... $4,696 4,994
Accrued insurance ............................... 5,095 4,046
Other accrued liabilities ....................... 1,480 2,330
------ ------
$1,271 11,370
====== ======
F-18
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(8) Debt
Debt obligations at December 31, 2001 and 2000 consisted of the following:
2001 2000
-------- -------
GECapital credit facility, interest at the Index rate,
as defined (4.75% at December 31, 2001), secured by
substantially all of the assets of the Company (a) ..... $ 37,436 32,163
Convertible subordinated debentures bearing interest at 8%
annually, maturing in 2008 (b) ......................... 94,787 87,568
-------- ------
Total debt obligations ............................... $132,223 119,731
======== =======
(a) Revolving Credit Facility
On July 20, 2000, in connection with the KPS Transaction, the Company and
its subsidiaries entered into a senior secured revolving credit facility with a
group of banks led by GE Capital (the "GE Capital Credit Facility"). On the same
date, the Company terminated its credit facility with Bank of America and repaid
all amounts outstanding thereunder (approximately $54,900, including letter
credit obligations of approximately $4,700).
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 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 and 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 strait line base over a period of five to
seven years. As of December 31, 2001, $37,436 was outstanding under the GE
Capital Credit Facility, excluding letters of credit of $13,649, and an
additional $4,368 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 Agreement) plus an applicable margin or the reserve adjusted LIBOR Rate
(as defined in the GE Capital Credit Agreement) plus an applicable margin. The
effective interest rate for the year ended December 31, 2001 was 7.3%, excluding
the amortization of associated deferred financing costs described in note 6. 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 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 GE Capital Credit Facility provides for payment by the Company of
customary fees and expenses. On May 19, 2000, the Company paid a commitment fee
of $581 relating to the GE Capital Credit Facility. On July 20, 2000, in
connection with the closing of the GE Capital Credit Facility, the Company paid
a closing fee of $581, a monitoring fee of $150 and approximately $1,301 for
legal and other expenses incurred by the Company, GE Capital and CFE in
connection with the GE Capital Credit Facility and the CFE Transaction. These
fees were recorded as deferred financing costs and are being amortized over the
five year term of the GE Capital Credit Facility.
F-19
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
The GE Capital Credit Facility contains covenants requiring the Company,
among other things and subject to specified exceptions, to (a) make certain
prepayments against principal, (b) maintain specified cash management systems,
(c) maintain specified insurance protection, (d) refrain from commercial
transactions, management agreements, service agreements and borrowing
transactions with certain related parties, (e) refrain form making payments of
cash dividends and other distributions to equity holders, payments in respect of
subordinated debt, payments of management fees to certain affiliates and
redemption of capital stock, (f) refrain from mergers, acquisitions or sales of
capital stock or a substantial portion of the assets of the Company or its
subsidiaries, (g) refrain from direct or indirect changes in control, (h) limit
capital expenditures and (i) meet certain financial covenants.
The GE Capital Credit Facility requires the Company, among other things,
to comply with certain financial covenants, including minimum levels of earnings
before income taxes, depreciation and amortization ("EBITDA"), minimum ratios of
EBITDA to fixed charges and minimum levels of liquidity. In October 2001, 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 period
ended September 30, 2001. In December 2001, the Company notified GE Capital that
the Company would fail to meet the minimum level of EBITDA and minimum ratio of
EBITDA to fixed charges for the period ended December 31, 2001, and that the
Company would not meet the minimum liquidity requirement in the first quarter of
2002. On February 14, 2002, the Company entered into an amendment to the GE
Capital Credit Facility under which the banks waived the financial covenant
violations, waived certain covenant violations regarding the banks' consent to
the Auction Transport, Inc. ("ATI") acquisition and made certain provisions for
the addition of ATI, which was acquired by the Company on January 16, 2002, as a
borrower under the credit facility. The amendment reduces the minimum levels of
EBITDA and increases the minimum ratios of EBITDA to fixed charges the Company
is required to meet. Additionally, the amendment reduced the minimum liquidity
requirement for the period beginning February 15, 2002 and ending March 15,
2002. In addition, the amendment increases the maximum amount of annual
operating lease payments the Company and its subsidiaries may make in fiscal
years 2002 through 2004. If the Company fails to comply with these amended
provisions or violates other covenants in the GE Capital Credit Facility, 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.
(b) Convertible Subordinated Debentures
On July 20, 2000, in connection with the KPS Transaction, the Company
cancelled all of the 1998 Debentures issued to Charterhouse pursuant to the
Purchase Agreement entered into between Charterhouse and the Company in November
1998, an in lieu thereof, issued to Charterhouse $84,500 aggregate principal
amount of new Debentures
F-20
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(the "Debentures") which aggregate principal amount was equal to the aggregate
principal amount of the 1998 Debentures then outstanding plus accrued interest
thereon to July 20, 2000. In connection with this transaction, Charterhouse
waived its right to require the Company to redeem the 1998 Debentures at 106.5%
of the aggregate principal amount of the 1998 Debentures upon consummation of
the KPS Transaction and waived certain corporate governance rights that existed
under its Investor's Agreement with the Company. In addition, the Company paid
Charterhouse a closing fee of 183,922 shares of Common Stock, and reimbursed
Charterhouse for its fees and expenses incurred in connection with the
transaction, which totaled approximately $200.
The Debentures are convertible into Common Stock at any time, at
Charterhouse's option, at an initial exercise price of $150.00 per share,
subject to adjustment as provided in the Amended and Restated Purchase Agreement
entered into between the Company and Charterhouse (the " Amended Charterhouse
Purchase Agreement"). Under the Amended Charterhouse Purchase Agreement, the
Debentures are redeemable at par plus accrued interest under certain
circumstances. The Debentures bear interest at a rate of 8% annually, payable in
kind for the first five years following issuance, and thereafter either in kind
or in cash, at the Company's discretion. As of December 31, 2001, $94,787 of
Debentures were outstanding. For the years ended December 31, 2001 and 2000, the
Company recorded $7,592 and $7,643 in interest expense, closing fees and the
amortization of deferred financing costs related to the Debentures,
respectively.
At December 31, 2001, debt maturities were as follows:
2002........................................................ $ 37,436
2003-2006................................................... --
Thereafter.................................................. 94,787
---------
$ 132,223
=========
(9) Leases
The Company leases both facilities and equipment used in its operations
and classifies those leases as either operating or capital leases following the
provisions of SFAS No. 13, Accounting for Leases. Concurrent with certain
acquisitions, the Company entered into various noncancelable agreements with the
former owners/shareholders of the companies acquired to lease facilities used in
the acquired companies' operations. The terms of the Company's operating leases
range from one to twenty years and certain lease agreements provide for price
escalations. Rent expense incurred by the Company was $8,425, $9,067 and $8,386
in 2001, 2000, and 1999, respectively. Included within rent expense was $2,485,
$2,720 and $2,542 in 2001, 2000 and 1999, respectively, that was paid to the
former owners/shareholders.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of December 31, 2001 were as follows:
Operating Leases
--------------------------------------------------
Capital lease
Year ending December 31, obligations Related Party Other Total
------------------------ ------------- ------------- ----- ------
2002 .......................................... $ 155 2,245 3,924 6,169
2003 .......................................... 51 1,571 2,488 4,059
2004 .......................................... 15 487 1,879 2,366
2005 .......................................... 10 297 1,115 1,412
2006 .......................................... -- 208 249 457
Thereafter .................................... -- 1,402 50 1,452
------- ----- ----- ------
Future minimum lease payments ................. 231 6,210 9,705 15,915
======= ===== ===== ======
Less: imputed interest ........................ (19)
-------
Present value of minimum lease payments ....... $ 212
=======
F-21
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(10) Income Taxes
Income tax expense (benefit) at December 31, 2001, 2000 and 1999 consisted
of the following:
2001 2000 1999
-------- ------ -------
Current:
Federal ............. $ -- (113) (1,501)
State ............... 298 1,254 (116)
-------- ------ -------
298 1,141 (1,617)
-------- ------ -------
Deferred:
Federal ............. (3,128) 635 (3,287)
State ............... (243) 70 (254)
-------- ------ -------
(3,371) 705 (3,541)
-------- ------ -------
$(3,073) 1,846 (5,158)
======= ====== =======
The following table reconciles the expected tax expense (benefit) at the
Federal statutory rate to the effective tax rate for the years ended December
31, 2001, 2000 and 1999:
2001 2000 1999
--------------------- --------------------- ----------------------
Amount % Amount % Amount %
-------- ------- --------- ------ --------- -------
Expected tax expense (benefit) at
statutory rate .................... $(5,690) (34.0)% $(56,045) (34.0) $(11,852) (34.0)%
State taxes, net of federal benefit . 54 0.3 1,310 0.7 (372) (1.1)
Non-deductible goodwill ............. 417 2.5 902 0.6 1,344 4.1
Impairment of non-deductible goodwill - - 38,914 23.6 5,634 15.9
Net operating losses limited under
IRC Section 382 ..................... - - 13,473 8.2 - -
Valuation allowance ................. 1,643 9.8 3,414 2.1 - -
Adjustment to opening deferred tax
balance ............................. 381 2.3 - - - -
Other ............................... 122 0.7 (122) (0.1) 88 0.3
-------- ------- --------- ------- --------- -------
$(3,073) (18.4)% $ (1,846) (1.1)% $ (5,158) (14.8)%
======== ======= ========= ======= ========= =======
F-22
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities were as follows
at December 31, 2001 and 2000:
2001 2000
-------- --------
Deferred tax assets:
Accounts receivable, due to allowance for doubtful accounts .......................... $ 582 987
Non-deductible accruals .............................................................. 1,426 1,763
Intangible assets .................................................................... 67 85
Goodwill /acquisition costs .......................................................... 2,674 1,727
Net operating loss carryforwards ..................................................... 15,087 8,998
Other, net ........................................................................... 410 334
-------- --------
Total gross deferred tax assets .................................................... 20,246 13,894
Less valuation allowance ........................................................... (5,451) (3,680)
-------- --------
14,795 10,214
Deferred tax liabilities:
Vehicles and equipment, due to differences in
depreciation lives and methods ..................................................... (13,640) (12,328)
Computer software, due to differences in amortization lives and methods .............. (989) (839)
Other taxable temporary differences, due to differences in basis of
accounting for companies acquired .................................................. (166) (418)
Total gross deferred tax liabilities ................................................. (14,795) (13,585)
-------- --------
Net deferred tax liability ......................................................... $ - (3,371)
======== ========
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income and the
taxable income in the two previous tax years to which tax loss carryback can be
applied. Management considers the scheduled reversal of deferred tax
liabilities, projected future income, taxable income in the carryback period and
tax planning strategies in making this assessment. Management has recorded an
increase in the valuation allowance with respect to the future tax benefits and
the net operating loss reflected as a deferred tax asset in the amount of $1,771
and $3,680 during the years ended December 31, 2001 and 2000, respectively, due
to the uncertainty of their ultimate realization.
Under Section 382 of the Internal Revenue Code, the use of loss
carryforwards may be limited if a change in ownership of the Company occurs. The
KPS Transaction constituted an ownership change under IRC Section 382 and
resulted in the 100% limitation of net operating loss carryforwards amounting to
$35,909 generated from the Company's inception through July 20, 2000, the date
of the KPS Transaction.
For the period July 20, 2000 through December 31, 2001 the Company has
generated net operating loss carryforwards of $41,118. These carryforwards, if
not used, will expire as follows:
2020 $ 19,013
2021 22,105
----------
$ 41,118
==========
F-23
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(11) Acquisitions
On May 6, 1998, the Company acquired seven businesses, referred to as the
"Founding Companies," for aggregate consideration (excluding assumed
indebtedness) of $27,809 in cash and 237,574 shares of common stock valued at
$24,708. Between May 7, 1998 and May 5, 1999, the Company acquired 49 other
businesses, referred to as the "Acquired Companies," for aggregate consideration
(excluding assumed indebtedness) of $110,074 in cash and 498,368 shares of
common stock valued at $77,294. The Company has not completed any acquisitions
since May 5, 1999. The Founding Companies and acquired companies are located
throughout the United States, with the majority located in the Western Region of
the country. The acquisitions have been accounted for using the purchase method
of accounting and, accordingly, the assets and liabilities of the Acquired
Companies have been recorded at their estimated fair values at the dates of
acquisition. The excess of the purchase price over the fair value of the net
assets acquired, including certain direct costs associated with the
acquisitions, has been recorded as goodwill and is being amortized on a
straight-line basis over 40 years. The results of operations of the Founding
Companies and the Acquired Companies have been included in the Company's results
of operations from their respective acquisition dates.
As discussed in note 14(a), contingent consideration is due in connection
with the acquisitions of certain Founding Companies and Acquired Companies. In
some cases, consideration is based on specific net revenue goals over each of
the five years subsequent to acquisition. In other cases, contingent
consideration is determined from the Company's evaluation of certain financial
ratios or other contingencies, for a specific period of time subsequent to
acquisition. Contingent purchase price consideration is capitalized when earned
and amortized over the remaining life of the goodwill associated with the
respective acquisition.
The following unaudited pro forma financial information presents the
combined results of operations as if all the acquisitions that were made by the
Company through December 31, 1999, had occurred as of January 1, 1999, after
giving effect to certain adjustments including amortization of goodwill,
additional depreciation expense, agreed-upon reductions in salaries and bonuses
to former owners/shareholders and related income tax effects. This pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had a single entity operated during such periods.
Year ended December 31, 1999
--------------------------------------------
(Unaudited)
Proforma
United Combined
Road Acquired
Services, Inc. Companies Total
-------------- ----------- ---------
Net revenue $ 255,112 10,743 265,855
========= ====== ========
Net income (loss) $ (29,700) 634 (29,066)
========= ====== ========
Diluted income (loss) per
common share $ (16.31)
========
F-24
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(12) 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 and
Recovery. 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 and Recovery segment
provides towing, impounding and storing, lien sales and auto auctions of
abandoned vehicles. In addition, the Towing and Recovery segment provides
recovery and relocation services for heavy-duty commercial vehicles and
construction equipment. Information regarding the company's operating segments
is also described in note 1(a).
Net revenue from one customer was in excess of 10% of the Company's
consolidated net revenue for the years ended December 31, 2001, 2000 and 1999.
Net revenue generated from this customer was $23,354 (10.3% of net revenue),
$27,817 (11.3% of net revenue) and $26,701 (10.5% of net revenue) for the years
ended December 31, 2001, 2000 and 1999, respectively, and is attributable to the
Company's Transport segment.
The accounting policies of each of the segments are the same as those
described in the summary of significant accounting policies, as outlined in note
1. Management has determined that an appropriate measure of the performance of
its operating segments would be made through an evaluation of each segment's
income (loss) from operations. Accordingly, the Company's summarized financial
information regarding the Company's reportable segments is presented through
income (loss) from operations for the years ended December 31, 2001, 2000 and
1999. Intersegment revenues and transfers are not significant.
Summarized financial information for the years ended December 31, 2001,
2000 and 1999 concerning the Company's reportable segments is shown in the
following table:
Year ended December 31, 2001
Towing
Transport and Recovery Other Total
--------- ------------ -------- -------
Net revenue from external customers .... $ 137,675 88,854 -- 226,529
Cost of revenue (including depreciation) 120,762 72,741 -- 193,503
Income (loss) from operations .......... 1,967 3,303 (10,436) (5,166)
Interest income ........................ 3 1 36 40
Interest expense ....................... 12 8 11,510 11,530
Total assets ........................... 94,454 65,704 11,632 171,790
Capital expenditures ................... 4,019 3,909 161 8,089
Depreciation and amortization .......... 6,365 4,975 1,740 13,080
Year ended December 31, 2000
Towing
Transport and Recovery Other Total
--------- ------------ -------- -------
Net revenue from external customers .... $ 151,313 95,253 -- 246,566
Cost of revenue (including depreciation) 131,497 81,154 -- 212,651
Impairment charge ...................... 81,151 48,304 -- 129,455
Loss from operations ................... (78,454) (50,008) (14,302) (142,764)
Interest income ........................ 11 6 267 284
Interest expense ....................... 32 20 14,182 14,234
Total assets ........................... 102,125 66,548 9,720 178,393
Capital expenditures ................... 6,139 1,611 100 7,850
Depreciation and amortization .......... 7,637 5,594 1,537 14,768
F-25
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
Year ended December 31, 1999
Towing
Transport and Recovery Other Total
--------- ------------ -------- -------
Net revenue from external customers .... $ 155,333 99,779 -- 255,112
Cost of revenue (including depreciation) 122,774 79,814 -- 202,588
Impairment charge ...................... 10,053 18,228 -- 28,281
Income (loss) from operations .......... 5,281 (14,571) (14,045) (23,335)
Interest income ........................ 19 -- 58 77
Interest expense ....................... 51 11 11,357 11,419
Total assets ........................... 190,506 119,272 12,667 322,445
Capital expenditures ................... 10,064 4,127 5,997 20,188
Depreciation and amortization .......... 7,789 6,590 1,248 15,627
The following are reconciliations of the information used by the chief
operating decision maker for the years ended December 31, 2001, 2000 and 1999 to
the Company's consolidated totals:
2001 2000 1999
--------- -------- --------
Reconciliation of income (loss) before income taxes:
Total profit (loss) from reportable segments ....... $ 5,270 (128,462) (9,290)
Unallocated amounts:
Interest income .................................. 40 284 77
Interest expense ................................. (11,530) (14,234) (11,419)
Depreciation and amortization .................... (755) (593) (1,248)
Other selling, general and administrative expenses (9,681) (13,709) (12,797)
Other expense, net ............................... (76) (372) (181)
--------- ------- -------
Loss before income taxes ....................... $ (16,732) (157,086) (34,858)
========= ======== =======
Reconciliation of total assets:
Total assets from reportable segments .............. $ 160,158 168,673 309,778
Unallocated amounts:
Prepaid income taxes and other current assets .... 3,779 473 3,534
Vehicles and equipment, net ...................... 2,657 3,424 4,945
Deferred financing costs, net .................... 4,800 5,570 4,109
Other non-current assets ......................... 396 253 79
--------- ------- -------
Total assets ................................... $ 171,790 178,393 322,445
========= ======== =======
(13) Commitments and Contingencies
(a) Purchase Commitments
As of December 31, 2001, the Company had entered into commitments to
purchase 14 transport vehicles and 14 towing and recovery vehicles for
approximately $2,940. In March 2000, the Company committed to purchase 60
vehicles from a vehicle manufacturer. As of December 31, 2001, 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. The Company is currently in discussions with the manufacturers
regarding the remaining 19 vehicles.
F-26
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(b) Employment Contracts
During 2001, 2000 and 1999, the Company entered into certain employment
agreements with members of senior management, as well as previous owners or key
employees of companies acquired. Certain of these agreements represent
noncancelable contracts whereby, if the individual is discharged, severance
payments are required to be made throughout the remaining term of the agreement.
The terms of these noncancelable agreements range through 2003.
(c) Claims and Lawsuits
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 the claims. In the opinion of management, uninsured losses, if
any, resulting from the ultimate resolution of these matters will not have
material effect on the Company's consolidated financial position or results of
operations.
On October 17, 2001, David J. Floyd, the former owner of Falcon Towing and
Auto Delivery, Inc. ("Falcon") one of the businesses acquired by the Company in
connection with the Company's initial public offering, filed suit against the
Company in the United States District Court, Northern District of New York. Mr.
Floyd is a beneficial owner of greater than 5% of the Company's common stock. In
his complaint, Mr. Floyd claims that the Company failed to pay earnout payments
Mr. Floyd alleges are owed to him under the merger agreement entered into with
respect to the Falcon acquisition. The complaint seeks unspecified damages. In
November 2001, the Company filed an answer to the complaint, denying Mr. Floyd's
claims. In February 2002, the case was transferred to the United States District
Court, Southern District of New York. No amount of damages was claimed in the
complaint and discovery has not yet commenced. Therefore, the Company has not
determined the potential to be claimed by the plaintiff. The Company intends to
defend this action vigorously.
(d) Employee Benefit Plans
The Company maintains certain 401(k) plans that enable eligible employees
to defer a portion of their income through contributions to the plans. The
Company contributed $187, $660 and $863 to these plans during the years ended
December 31, 2001, 2000 and 1999, respectively.
(14) Related Party Transactions
(a) Earnout Payments
The Company is obligated to make certain earnout payments to the former
owners of the Founding Companies and one other acquired company. For each of the
years 1998 through 2002, the Company is required to make an earnout payment to
the former owners of each of these companies that achieves certain net revenue
targets. Upon achievement of the net revenue target for a particular year,
subsequent and equal payments will also be due for each year through 2002,
provided that the actual net revenue for the respective subsequent year exceeds
the actual net revenue for the year that the net revenue target was first
achieved. Payments are to be made in shares of the Company's stock. Total
payments shall not exceed the number of shares paid to the former owner at the
date of acquisition. At December 31, 2001, former owners of three founding
companies have met their maximum payment amount.
F-27
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
At December 31, 2001, there is no liability related to these earnout
arrangements based upon the actual net revenue for the year ended December 31,
2001. At December 31, 2000, the Company recorded a liability within due to
related parties on the accompanying consolidated balance sheets in the amount of
$339 related to these earnout arrangements. The accrued amount represented the
fair value of the estimated shares of common stock payable pursuant to such
arrangements at that date.
(b) Management Fee
In connection with the KPS Transaction, the Company entered into a
Management Services Agreement pursuant to which the Company is required to pay
KPS a management fee of $250 per fiscal quarter payable within 30 days after the
end of each fiscal quarter. At December 31, 2001 and 2000, the Company recorded
a liability in due to related parties on the accompanying consolidated balance
sheet in the amount of $1,000 and $250, respectively representing unpaid
management fees. For the years ended December 31, 2001 and 2000, $1,000 and
$446, respectively, is included in selling, general and administrative expenses
related to management fees.
(c) Employment and Consultant Agreements with Directors
The Company entered into an employment agreement, in 1998, with a
director pursuant to which the director serves as a Vice President of the
Company for a term of three years, with an annual base salary of $150. In 2000
the Company renewed this employee agreement for a period of one year. The
employment agreement also contains covenants not to compete with the company for
one year after the termination of the agreement.
(d) Employment and Consultant Agreements With Former Owners
Upon consummation of certain acquisitions, the Company entered into
employment or consultant agreements with certain former owners of the companies
acquired. The terms of these agreements range from one to five years, and the
agreements vary with respect to compensation and duties. Under certain
agreements, the company has committed to compensation amounts in excess of the
current market value. The Company recorded amounts determined to be over the
current market value ("Excess Compensation") as additional purchase price
consideration and will amortize these amounts over the remaining life of the
goodwill associated with the companies acquired. Amounts not considered to be
Excess Compensation are expensed as incurred. For the year ended December 31,
2000, $462 of Excess Compensation was recorded as goodwill.
(e) Lease Agreements
As described in note 9, concurrent with the acquisition of certain
companies, the Company entered into various agreements with former owners to
lease land and buildings used in the acquired companies' operations. In the
opinion of management, these agreements were entered into at the fair market
values of the property being leased.
(f) Employee Lease Agreement
During 2001, 2000 and 1999, the Company paid $12,533, $11,215 and $10,500,
respectively, to Translesco, Inc. ("Translesco") in connection with an agreement
whereby the Company leases employees from Translesco to provide services to one
of the divisions within the Company's Transport segment. The President of the
Company's Transport Division is the majority owner of Translesco. The Company
will continue to lease employees from Translesco until such time as the Company
determines otherwise.
F-28
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(15) Financial Instruments
(a) Fair Value
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of information about the fair value of certain financial
instruments for which it is practicable to estimate that value. For purposes of
the following disclosure, the fair value of a financial instrument is the amount
at which the instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation.
The following methods and assumptions were used to estimate fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Cash Equivalents, Receivables, and Accounts Payable--The
carrying amount approximates fair value due to the short maturity of
these instruments.
Long-term Debt--The carrying amount of the Company's bank borrowings
under its revolving credit facility approximate fair value because
the interest rates are based on floating rates identified by
reference to market rates. At December 31, 2001 and 2000, management
estimates that the fair value of the convertible subordinated
debentures approximated $89,067 and $68,720. This amount was
estimated based upon rates currently available to the Company for
indebtedness with similar terms and maturities.
Letters of Credit--The letters of credit reflect fair value as a
condition of their underlying purpose and are subject to fees
competitively determined in the marketplace. The contract value and
fair value of the letters of credit at December 31, 2001 and 2000
was $13,649 and $12,038, respectively.
(b) Off-Balance Sheet Risk
In the normal course of business, the Company is a party to letters of
credit which are not reflected in the accompanying consolidated balance sheets.
Such financial instruments are to be valued based on the amount of exposure
under the instrument and the likelihood of performance being requested. No
claims have been made against these letters of credit and management does not
expect any material losses to result from these off-balance sheet instruments.
At December 31, 2001 and 2000, the Company had letters of credit outstanding
totaling $13,649 and $12,038, respectively.
(16) Quarterly Consolidated Financial Data (Unaudited)
The table below sets forth the unaudited consolidated operating results by
quarter for the years ended December 31, 2001, 2000 and 1999:
2001 quarterly period ended
----------------------------------------------------
March 31 June 30 September 30 December 31
-------- ---------- ------------ -----------
Net revenue .............................. $ 58,868 57,870 55,923 53,868
Loss from operations ..................... (1,151) (292) (1,266) (2,457)
Net income (loss) ........................ (4,134) (3,388) (2,886) (3,251)
Basic and diluted loss per common share(a) (1.98) (1.62) (1.37) (1.55)
F-29
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
2000 quarterly period ended
-----------------------------------------------------
March 31 June 30 September 30 December 31
-------- ---------- ------------ -----------
Net revenue ............................... $ 65,463 62,717 61,346 57,040
Income (loss) from operations ............. (390) (129,294) (1,989) (11,091)
Net income (loss) ......................... (2,853) (140,494) (7,425) (8,160)
Basic and diluted loss per common share (a) (1.61) (76.23) (3.73) (3.90)
1999 quarterly period ended
-----------------------------------------------------
March 31 June 30 September 30 December 31
-------- ---------- ------------ -----------
Net revenue ................................. 59,453 65,482 64,150 66,027
Income (loss) from operations................ 5,876 4,009 (1,643) (31,577)
Net income (loss)............................ 2,010 470 (3,687) (28,493)
Basic earnings (loss) per common share (a)... 1.22 .28 (2.16) (16.64)
Diluted earnings (loss) per common share (a). 1.16 .26 (2.16) (16.64)
(a) Earnings per share are computed independently for each of the quarters
presented. The sum of the quarterly earnings (loss) per common share does
not equal the total computed for the year as a result of the increase in
outstanding common shares due to shares issued in conjunction with certain
acquisitions as discussed in note 11.
(17) Subsequent Event
(a) Acquisition of Auction Transport, Inc.
On January 16, 2002 the Company acquired the stock of Auction Transport,
Inc. ("ATI"), formerly a subsidiary of Manheim Services Corporation. ATI
provides automobile transport services to various Manheim Auction, Inc.
("Manheim") auction locations and on a for hire basis. The results of ATI's
operations will be included in the 2002 consolidated financial statements
beginning with the date of acquisition.
The net assets acquired, excluding contingent consideration relating to a
five year service agreement and the assumption of $6,952 of future operating
lease payments, totaled $822. In connection with the transition, Manheim has
provided revenue guarantees to the Company over the duration of the operating
leases assumed by the Company. Included in net assets acquired is $1,000 to be
paid to the Company by Manheim, $500 of which was paid at closing with, the
remaining payable no later than December 31, 2003.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition. ATI is in the
process of obtaining third-party valuation of certain acquired assets thus, the
allocation of the purchase price is subject to adjustment.
Current assets $ 1,246
Property and equipment 265
Other long-term assets 500
Goodwill -
-------
Total assets acquired 2,011
-------
Current liabilities 1,189
Other long-term liabilities -
-------
Total liabilities assumed 1,189
-------
Net assets acquired $ 822
=======
F-30
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
The following unaudited pro forma financial information presents the
combined results of operations as if the acquisition of ATI, had occurred as of
January 1, 2001, after giving effect to certain adjustments including additional
depreciation expense, facility rental expense, bonuses to former management, and
related income tax effects. This pro forma financial information does not
necessarily reflect the results of operations that would have occurred had a
single entity operated during such periods.
Year ended December 31, 2001
-----------------------------------------
(Unaudited)
United Road ATI
Services, Inc. Proforma Total
-------------- ----------- --------
Net revenue ........................ $ 226,529 42,462 268,991
========= ======= ========
Net loss ........................... $ (13,659) (493) (14,152)
========= ======= ========
Diluted loss per common share ...... $(6.75)
========
The following are future minimum ATI lease payments under noncancelable
operating leases assumed by the Company as of January 16, 2002: Year ending
December 31,
ATI
Year ending December 31, Operating Leases
------------------------ ----------------
2002 ................................... $ 3,068
2003 ................................... 1,653
2004 ................................... 1,049
2005 ................................... 1,014
2006 ................................... 168
--------
Future minimum lease payments........... $ 6,952
========
(b) GE Capital Credit Facility
On February 14, 2002, the Company entered into an amendment to the GE
Capital Credit Facility under which the banks waived financial covenant
violations related to required EBITDA levels and fixed charge coverage ratios
existing at September 30, 2001 and December 31, 2001 and granted approval for
the acquisition of ATI. The amendment reduces the minimum levels of EBITDA,
maximum levels of capital expenditures and minimum fixed charge coverage ratios
the Company is required to meet under the GE Capital Credit Facility and
requires the Company to maintain minimum levels of liquidity.
F-31
SCHEDULE II
UNITED ROAD SERVICES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to
Beginning of Costs and Balance at
Period Expenses Other Deductions End of Period
------------ ---------- ---------- ---------- -------------
Allowance for Doubtful Accounts:
December 31, 2001 ............ $2,694,565 621,946 -- 1,735,902 1,580,609
December 31, 2000 ............ 2,800,703 2,882,252 -- 2,988,390 2,694,565
December 31, 1999 ............ 1,131,788 2,413,000 568,370(a) 1,312,455 2,800,703
Income Tax Valuation Allowance:
December 31, 2001 ............ $3,680,400 1,770,600 -- -- 5,451,000
December 31, 2000 ............ -- 3,680,400 -- -- 3,680,400
December 31, 1999 ............ -- -- -- -- --
(a) Represents allowance for doubtful accounts recorded through purchase
accounting adjustments related to acquisitions.
F-32