UNITED ROAD SERVICES, INC.
[United Road Logo]
2000 Annual Report
TO OUR SHAREHOLDERS
For United Road Services the year 2000 was one of addressing past problems and
facing new and onerous challenges. At the beginning of the year the Company was
faced with the need to turnaround numerous under-performing divisions and to
reinvigorate our management team. In January, we held a national management
conference and introduced several major initiatives to improve our results
including:
o The reorganization of the Company into two operating divisions,
"Transport" and "Towing and Recovery". Michael Wysocki, former owner of
MPG Transco, Ltd., was appointed President of the Transport Division
and Hal Borhauer, former President of Arizona's Towing Professionals,
Inc. dba Shamrock Towing Professionals, Inc., was appointed President
of the Towing and Recovery Division. Four top Towing Division Managers
were promoted to Regional Managers each with the responsibility of
improving the results of up to five additional divisions.
o A renewed emphasis on safety and risk management with the expansion of
our Safety Department, investments in safety training and materials,
bonus programs for improved performance and internal audits and
training for DOT compliance.
o The implementation of comprehensive programs to contain and/or reduce
the purchasing costs of fuel, tires, parts and supplies,
communications, and over twenty other areas of operating and
administrative costs.
o Efforts to increase pricing for daily services and long term
contractual arrangements that had not been adjusted, in some cases for
several years, to reflect current operating realities.
o The development of specific operating statistics to better evaluate and
manage individual division performance and cross-reference that
performance with other divisions.
o An investment in and a refocus of our financial and accounting
expertise to assist the divisions in strengthening the control of daily
operations and the collection of accounts receivable, and determining
service line profitability.
o Steady replacement and expansion of management personnel in the areas
of operations, marketing and sales to lead the Company towards a
stronger future.
While implementing these strategies and actions, our new Presidents and their
staffs also evaluated each of their Divisions for strategic fit, management
capability, equipment utilization, profitability and strength of marketing and
sales. Throughout the year several operating locations that were deemed unable
to satisfactorily contribute to the long-term benefit of the company, were sold,
consolidated or closed.
In July of 2000, KPS Special Situations Fund ("KPS"), an investor group focused
on challenged companies and General Electric Credit Corporation ("GECC")
invested $25 million and $2 million, respectively, in the Company. This
transaction allowed us to enter into a new line of credit ("Credit Facility")
provided by a group of banks, with GECC as agent, in an amount, based on
eligible assets, up to $100 million, thereby providing us with capital needed to
position the Company for short-term improvements and long-term growth.
Additionally, after considerable planning and review, in early 2001 we entered
into a multi-year agreement with Syntegra (a Minneapolis based technology
company) to replace Holland Systems as our Information Technology provider.
Syntegra has been charged with improving our communications systems and will be
a key player in helping us develop operational synergies and technology for the
future.
The Company was gaining momentum throughout the first half of 2000 despite
having to absorb severely rising fuel costs, along with the high costs of
closures and consolidations and having to address outstanding problems from the
past. With the KPS transaction completed and progress made on several other
fronts, the Company's results were beginning to show consistent improvement.
However, as early as August, the automobile market and overall economy started
to show the first signs of weakness. This weakness would accelerate at an
increasing pace each month through the end of the year and stall the turnaround
that was in progress. It is apparent that the slowdown in the automotive market
has had, and will continue to have, a profound effect on the composition,
alliances and operations of the car hauling industry. Despite the setbacks, the
Company suffered in 2000, I expect United Road to be a key player in this
industry in the future.
In considering the Company's financials for the year 2000, two areas require
additional explanation. In 2000, we reported revenues of $246.6 million, with a
net loss of $158.9 million. A large portion of this loss, $129.5 million, was
the direct result of a non-cash impairment charge recorded on June 30, 2000.
This non-cash impairment charge, consisting primarily of a write off of
goodwill, was an important step to properly reflect the value of our assets
based upon the performance of our individual divisions. In addition, the
structure of our lending arrangement with GECC, unlike our previous credit
arrangement, requires us to record the five-year Credit Facility as a current
liability, which has had a negative impact on our working capital and current
ratio calculations.
Our success in retaining and expanding service to the vast majority of our most
valued customers, in both Towing and Transport, as well as adding a number of
new service contracts during this challenging year, reinforces my belief that
the Company will maintain a strong revenue base. As we continue our efforts to
streamline operations and improve profitability, I believe that we are better
positioned for success today than ever before. While we are challenged with new
market realities, particularly in our Transport market, we continue to be
proactive in looking for ways to improve our operations and position the Company
for long term profitability and success.
I would like to thank our shareholders for their support through this time of
transition. I also offer my gratitude to all our employees for their positive
contributions in the year 2000 and their continued efforts in the future.
Sincerely,
/s/ Gerald R. Riordan
Gerald R. Riordan
Chief Executive Officer
================================================================================
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, 2000
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
----------------------------
UNITED ROAD SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------------------
DELAWARE 94-3278455
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER 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
----------------------------
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
----------------------------
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 |_|
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. |X|
The registrant estimates that the aggregate market value of the
registrant's Common Stock held by non-affiliates on March 20, 2001 was
$745,625.*
The following documents are incorporated into this Form 10-K by reference:
None.
As of March 20, 2001, 2,091,652 shares of the registrant's Common Stock
were outstanding.
- ----------------
* 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.
================================================================================
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,
2000, the Company operated a network of 15 transport divisions and 20 towing and
recovery divisions located in a total of 20 states. During 2000, approximately
61.4% of the Company's net revenue was derived from the provision of transport
services and approximately 38.6% 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 13 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 July 20, 2000, the Company sold 613,073 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 $25.0 million in cash consideration (the "KPS
Transaction"). On the same date, the Company also sold 49,046 shares of its
Series A Preferred Stock to CFE, Inc. ("CFE"), an affiliate of General Electric
Capital Corporation ("GE Capital") for $2.0 million in cash consideration (the
"CFE Transaction"). If Blue Truck and CFE had converted all of their shares of
Series A Preferred Stock into common stock on March 20, 2001, they would have
held 71.1 % and 5.7% of the Company's common stock, respectively, on such date.
In connection with the KPS Transaction, Richard A. Molyneux, Grace M.
Hawkins, Mark J. Henninger and Merril M. Halpern resigned from the Board of
Directors of the Company and six individuals designated by a majority of the
holders of the Series A Preferred Stock (the "Majority Holders"), consisting of
Eugene J. Keilin, Michael G. Psaros, David P. Shapiro, Stephen P. Presser, Brian
J. Riley and Raquel V. Palmer, were appointed to fill the vacancies then
existing on the Board. As a result, effective as of the closing of the KPS
Transaction, the designees of the Majority Holders comprise a majority of the
Board of Directors.
As part of the KPS Transaction, the Company entered into a new senior
secured revolving credit facility with a group of banks led by GE Capital (the
"GE Capital Credit Facility") and repaid all amounts outstanding under its
former credit facility with Bank of America. The Company also cancelled all of
its 8% Convertible Subordinated Debentures due 2008 (the "1998 Debentures")
issued to Charter URS LLC ("Charterhouse"), and in lieu thereof, issued to
Charterhouse $84.5 million aggregate principal amount of new 8% Convertible
Subordinated Debentures due 2008 (the "Debentures").
For further information about the KPS Transaction, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
1
MANAGEMENT CHANGE
On September 30, 2000, Donald J. Marr resigned as Chief Financial Officer
of the Company. In March, the Company and Patrick J. Fodale executed an
employment agreement pursuant to which Mr. Fodale will serve as the Company's
Chief Financial Officer effective April 2, 2001.
OPERATIONS AND SERVICES PROVIDED
Transport
The Company provides new and used automobile transport services for a wide
range of commercial customers. 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 provides new and used automobile transport to leasing
companies, automobile manufacturers, automobile dealers, automobile auction
companies, insurance companies, brokers and individuals. 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, 2000, one such customer, a big three automobile manufacturer,
represented approximately 11% 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. 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. In addition, the Company transports
large numbers of used vehicles from automobile auctions (where off-lease
vehicles are sold) to individual dealers. The Company also provides transport
services for dealers who transfer new cars from one region to another and local
collection and delivery support to long-haul automobile transporters. These
services 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. 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 Company'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
2
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.
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.
3
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. The Company recently terminated its
information systems services agreement with Holland Systems and, effective as of
December 15, 2000, entered into a new information systems services agreement
with Syntegra (USA) Inc. The Syntegra agreement is terminable by either party
upon 90 days notice or upon 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 upgrade 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. 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.
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
4
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, 2000, the Company had approximately 2,071 employees,
leased an additional 181 employees and used approximately 326 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 2001 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.
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. 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.
5
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 a
significant decrease in its cash flow from operations and is currently exploring
opportunities to improve its cash flow from operations 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, recovery and transport services to new customers in strategic market
locations. 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. 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 growth strategy in the longer-term. 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 GE Capital Credit Facility requires the Company, among other things, to
comply with certain cash management requirements and financial covenants,
including minimum levels of earnings before income taxes, depreciation and
amortization ("EBITDA") and minimum ratios of EBITDA to fixed charges. In
December 2000, the banks notified the Company that they considered the Company
out of compliance with the minimum EBITDA and fixed charge coverage ratio
covenants of the GE Capital Credit Facility as of September 30 and December 31,
2000. In addition, the banks noted that the Company had not fully implemented a
required cash management system. On March 30, 2001, the Company entered into an
amendment to the GE Capital Credit Facility under which the banks waived the
financial covenant violations and agreed to extend to April 30, 2001 the date by
which the Company must fully implement the cash management system. 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, and
requires the Company to maintain minimum levels of liquidity. 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 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.
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
6
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 upgrade 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 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 typically have terms of five years or less,
may be terminated at any time for material breach, and in some cases are subject
to competitive bidding upon expiration. The Company has towing, recovery and
transport contracts representing approximately $9.9 million in annual revenue
that are scheduled to expire during 2001. 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, 2000, one of the Company's transport
customers, a big three automobile manufacturer, represented approximately 11% 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. Any failure by the Company
to comply with these laws and regulations could subject it 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. Any 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.
7
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 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
8
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 availability of capital to fund operations,
including expenditures for new and replacement equipment; (ii) the Company's
success in improving 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 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.
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.
Effects of Nasdaq Delisting
The Company's common stock was delisted from the Nasdaq National Market
("Nasdaq") on May 22, 2000, and on that date, the common stock began to be
traded over-the-counter and quoted on the Over-the-Counter Electronic Bulletin
Board (the "OTC Bulletin Board"). The Company's delisting from Nasdaq may have a
negative impact on the liquidity and price of the common stock and investors may
9
find it more difficult to purchase or dispose of, or to obtain accurate
quotations as to the market value of, the common stock. In addition, the
delisting could result in reduced coverage of the Company by securities analysts
and members of the news media, and may result in decreased investor interest in
the common stock. The delisting could also adversely affect the Company's
ability to sell additional securities or to secure additional financing.
Control by Principal Stockholder
Blue Truck (which is controlled by KPS) owns shares of Series A Preferred
Stock convertible into approximately 75.4% 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.
10
ITEM 2. PROPERTIES
As of December 31, 2000, the Company operated 35 divisions, consisting of
86 facilities located in 20 states. These properties consisted of 56 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 30
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, 2000, the Company's headquarters consisted of
approximately 14,100 square feet of leased space in Albany, New York.
As of December 31, 2000, the Company operated a fleet of approximately 690
towing and recovery vehicles and approximately 610 transport vehicles. The
Company believes that its vehicles are generally well-maintained and adequate
for its current operations.
ITEM 3. LEGAL PROCEEDINGS
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 is not currently involved in any litigation that it believes 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 17, 2000.
(b) At the annual meeting, David P. Shapiro, Raquel V. Palmer and Robert L.
Berner were elected as Class II directors of the Company for terms expiring at
the Company's 2003 annual meeting. Edward W. Morawski, Todd Q. Smart, Eugene J.
Keilin and Brian J. Riley continue to serve as Class III directors with terms
expiring at the Company's 2001 annual meeting. Gerald R. Riordan, Michael S.
Pfeffer, Michael G. Psaros, and Stephen P. Presser continue to serve as Class I
directors with terms expiring at the Company's 2002 annual meeting.
(c) Set forth below is the tabulation of the votes at the annual meeting
with respect to the election of the Class II directors:
Director Votes For Votes Withheld
- -------- --------- --------------
Robert L. Berner 1,434,823 (1) 19,358 (1)
David P. Shapiro 662,119 (2) 0 (2)
Raquel V. Palmer 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 May
23 through December 31, 2000 reflect inter-dealer prices without retail
mark-ups, mark-downs or commissions, and may not reflect actual transactions.
1998 HIGH LOW
---- ---- ---
Second Quarter (beginning May 1).................................................... 190 151- 1/4
Third Quarter....................................................................... 260 95
Fourth Quarter...................................................................... 192-1/2 57-1/2
1999 HIGH LOW
---- ---- ---
First Quarter....................................................................... 195 42-1/2
Second Quarter...................................................................... 80 45-5/8
Third Quarter....................................................................... 51-1/4 25
Fourth Quarter...................................................................... 36-1/4 10
2000 HIGH LOW
---- ---- ---
First Quarter....................................................................... 29-11/16 12-1/2
Second Quarter...................................................................... 18-1/8 3-1/16
Third Quarter....................................................................... 3-1/2 1-13/16
Fourth Quarter...................................................................... 2-1/4 7/16
As of March 20, 2001, there were 209 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 credit facility, the
Certificate of Designations for the 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, 2000, the Company issued approximately $1.7 million
aggregate principal amount of Debentures to Charterhouse, which represented the
quarterly payment-in-kind interest payment due with respect to $85.9 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, 2000,
1999, 1998 and 1997 and for the years ended December 31, 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 1996 and for
each of the years in the two-year period 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
JULY 25, 1997
YEAR ENDED YEAR ENDED YEAR ENDED (INCEPTION) TO
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ----------------- ----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SHARE DATA)
Consolidated Statement of Operations
Data--United Road Services, Inc.:
Net revenue.......................................... $ 246,566 $ 255,112 $ 87,919 $ --
Cost of revenue...................................... 212,651 202,588 64,765 --
----------- ----------- ---------- --------
Gross profit......................................... 33,915 52,524 23,154 --
Selling, general and administrative expenses......... 43,514 42,139 12,428 174
Goodwill amortization................................ 3,710 5,439 1,745 --
Impairment charge.................................... 129,455 28,281 -- --
----------- ----------- ---------- --------
Income (loss) from operations........................ (142,764) (23,335) 8,981 (174)
Interest income (expense) and other, net)............ (14,322) (11,523) (1,086) --
----------- ----------- ---------- --------
Income (loss) before income taxes.................... (157,086) (34,858) 7,895 (174)
Income tax expense (benefit)......................... 1,846 (5,158) 3,503 --
----------- ----------- ---------- --------
Net income (loss).................................... $ (158,932) $ (29,700) $ 4,392 $ (174)
=========== ========== ========= ========
Basic net income (loss) per share............... $ (81.95) $ (17.54) $ 4.30 $ (0.84)
=========== ========== ========= ========
Diluted net income (loss) per share.................. $ (81.95) $ (17.54) $ 4.23 $ (0.84)
=========== ========== ========= ========
Shares used in computing basic net income
(loss) per share..................................... 1,939,337 1,693,311 1,022,181 205,530
=========== ========== ========= ========
Shares used in computing diluted net income
(loss) per share..................................... 1,939,337(1) 1,693,311(1) 1,038,991(2) 205,530(2)
=========== ========== ========= ========
AT DECEMBER 31,
-------------------------------------------------------
2000 1999 1998 1997
-------- -------- -------- --------
(IN THOUSANDS)
Balance Sheet Data--United Road Services, Inc.:
Working capital (deficit)............................ $ (28,201) $ (34,208) $ 9,330 $ (104)
Total assets........................................ 178,393 322,445 248,732 50
Long-term obligations, excluding current
Installments...................................... 88,115 82,758 65,255 --
Stockholders' equity (deficit)....................... 32,606 166,413 163,766 (104)
13
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996
-------- --------
(IN THOUSANDS)
Historical Statement of Operations
Data--Northland:
Net revenue.......................................... $ 10,159 $ 6,353
Operating income..................................... 1,438 346
Other expense, net................................... (49) --
Net income........................................... 1,054 346
AT DECEMBER 31,
------------------------------
1997 1996
-------- --------
(IN THOUSANDS)
Historical Balance Sheet Data--Northland:
Working Capital....................................... $ 399 $ 235
Total assets.......................................... 5,465 3,268
Long-term obligations, excluding current installments. 1,074 331
Stockholders' equity.................................. 3,045 1,991
- ------------------
(1) Represents actual weighted average shares outstanding. The effect of
options, warrants, shares withheld in connection with acquisitions or 1999
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.
CAUTIONARY STATEMENTS
From time to time, in written reports and oral statements, management may
discuss its expectations regarding United Road Services, Inc.'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, the availability of capital to fund
operations, including expenditures for new and replacement equipment, 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 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,
risks related to the adequacy, functionality, sufficiency and cost of the
Company's information systems, 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 resulting from the over-the-counter
trading of the Company's common stock, seasonal and other event-driven
variations in the demand for towing, recovery and transport services, 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 ("Cautionary 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 Cautionary 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
15
dealers, repair shops and fleet operators; law enforcement agencies such as
police, sheriff and highway patrol departments; and individual motorists.
The Company derives revenue from towing, 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; 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. The Company has not completed any
acquisitions since May 5, 1999.
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, 2000, 1999 and 1998. The
historical results for each of the years ended December 31, 1999 and 1998
include the results of all businesses acquired prior to December 31 of the
relevant year from their respective dates of acquisition. The Company did not
acquire any businesses in the year ending December 31, 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. This goodwill
will be amortized over its estimated useful life of 40 years as a non-cash
charge to operating income.
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.
16
RESULTS OF OPERATIONS
For the years ended December 31, 2000 and December 31, 1999, the Company's
results of operations were derived from 22 transport businesses and 34 towing
and recovery businesses acquired prior to December 31, 1999. For year ended
December 31, 1998, the Company's results of operations were derived from 12
transport businesses and 29 towing and recovery businesses acquired prior to
December 31, 1998.
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 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.
For the year ended December 31, 1998, the Company's first year of
operations, the Company evaluated the performance of its operating segments
based on income (loss) before income taxes. During the year ended December 31,
1999, management determined that a more appropriate measure of the performance
of its operating segments may be made through an evaluation of each segment's
income (loss) from operations. Accordingly, the Company's selected statement of
operations data regarding the Company's reportable segments is presented through
income (loss) from operations for the years ended December 31, 2000, 1999 and
1998.
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 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
17
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 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.
18
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, 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.
19
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.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net Revenue. Net revenue increased $167.2 million, or 190.2%, from $87.9
million for the year ended December 31, 1998 to $255.1 million for the year
ended December 31, 1999. Of the net revenue for the year ended December 31,
1999, 60.9% related to transport services and 39.1% related to towing and
recovery services. Transport net revenue increased $108.4 million, or 231.1%,
from $46.9 million for the year ended December 31, 1998 to $155.3 million for
the year ended December 31, 1999. The increase in transport net revenue was
largely due to the impact of the ten transport businesses acquired during the
first half of 1999 and the inclusion of a full year of operating results of the
nine transport businesses acquired during 1998 (eight of which were acquired in
the second half of 1998). During the year ended December 31, 1999, $103.4
million of the Company's total net revenue was generated from the transport
businesses acquired in 1998. The increase in transport net revenue was offset,
in part, by weak performance of certain transport businesses subsequent to the
Company's consolidation of divisions. Towing and recovery net revenue increased
$58.8 million, or 143.3%, from $41.0 million for the year ended December 31,
1998 to $99.8 million for the year ended December 31, 1999. The increase in
towing and recovery net revenue was largely due to the impact of the five towing
and recovery businesses acquired during the first half of 1999 and the inclusion
of a full year of operating results of the 29 towing and recovery businesses
acquired during 1998 (22 of which were acquired in the second half of 1998).
During the year ended December 31, 1999, $88.3 million of the Company's towing
and recovery net revenue was generated from towing and recovery businesses
acquired in 1998. The increase in towing and recovery net revenue was offset, in
part, by 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.
Cost of Revenue. Cost of revenue, including depreciation, increased $137.8
million, or 212.8%, from $64.8 million for the year ended December 31, 1998 to
$202.6 million for the year ended December 31, 1999. Transport cost of revenue
increased $87.8 million, or 251.2%, from $35.0 million for the year ended
December 31, 1998 to $122.8 million for the year ended December 31, 1999. The
increase in transport cost of revenue was primarily due to the increase in the
size of the Company's transport operations for the year ended December 31, 1999
as compared to the year ended December 31, 1998. The principal components of the
increase in transport cost of revenue consisted of an increase in transport
operating labor costs of $31.1 million, an increase in costs of independent
contractors, brokers and subcontractors of $22.0 million, an increase in fuel
costs of $9.8 million, an increase in vehicle maintenance costs of $6.7 million
and increased depreciation costs of $3.7 million. Towing and recovery cost of
revenue increased $50.0 million, or 167.7%, from $29.8 million for the year
ended December 31, 1998 to $79.8 million for the year ended December 31, 1999.
The increase in towing and recovery cost of revenue was primarily due to the
increase in the size of the Company's towing and recovery operations for the
year ended December 31, 1999 as compared to the year ended December 31, 1998.
The principal components of the increase in towing and recovery cost of revenue
consisted of an increase in towing operating labor costs of $21.8 million, an
increase in independent contractor, broker and subcontractor costs of $8.2
million, an increase in abandoned car purchases of $4.8 million, an increase in
vehicle maintenance costs of $4.4 million and an increase in facility and
occupancy expenses of $2.7 million.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $29.7 million, or 239.1%, from $12.4 million
for the year ended December 31, 1998 to $42.1 million for the year ended
December 31, 1999. Transport selling, general and administrative expenses
increased $10.9 million, or 322.8%, from $3.4 million for the year ended
December 31, 1998 to $14.3 million for the year ended December 31, 1999. The
increase in transport selling, general and administrative expenses was primarily
due to costs associated with the Company's acquisitions of transport businesses
during the first half of 1999, as described above, and costs associated with
managing and integrating the acquired companies. The principal components of the
increase in transport selling, general and administrative expenses for the year
ended December 31, 1999 as compared to the year ended December 31, 1998,
consisted of an increase in wages and benefits expense of $7.3 million, an
increase in bad debt expense of $1.5 million and an increase in computer and
telecommunications expenses of $596,000. Towing and recovery selling, general
20
and administrative expenses increased $8.4 million, or 154.6%, from $5.4 million
for the year ended December 31, 1998 to $13.8 million for the year ended
December 31, 1999. The increase in towing and recovery selling, general and
administrative expense was primarily due to costs associated with the Company's
acquisitions of towing and recovery businesses during the first half of 1999, as
described above, and costs associated with managing and integrating the acquired
companies. The principal components of the increase in towing and recovery
selling, general and administrative expenses for the year ended December 31,
1999 as compared to the year ended December 31, 1998, consisted of an increase
in wages and benefits expense of $4.8 million, an increase in bad debt expense
of $726,000, an increase in office and supplies costs of $488,000 and an
increase in computer and telecommunications expenses of $383,000.
Corporate selling, general and administrative expenses increased $10.4
million, or 289.0%, from $3.6 million for the year ended December 31, 1998 to
$14.0 million for the year ended December 31, 1999. The increase in corporate
selling, general and administrative expenses was primarily due to costs
associated with integrating and managing acquired businesses and the write-off
of costs associated with the termination of certain pending acquisitions and
management severance arrangements. The principal components of the increase in
corporate selling, general and administrative costs for the year ended December
31, 1999 as compared to the year ended December 31, 1998 consisted of an
increase in wages and benefits expense of $2.2 million, an increase in computer
and telecommunications expense of $2.1 million and an increase in professional
fees of $1.4 million. Additionally, the Company recorded special charges of $2.8
million for the year ended December 31, 1999. These special charges consisted of
$1.1 million for professional fees and compensation contractually required to be
paid in connection with the termination of certain acquisition consultants as a
result of the Company's strategic decision not to pursue its acquisition program
in the near term, and $1.7 million associated with the June 1999 departure of
the Company's former Chairman and Chief Executive Officer and the December 1999
departures of the Company's former President and Chief Operating Officer and
former Chief Acquisition Officer.
Amortization of Goodwill. Amortization of goodwill increased $3.7 million,
or 211.7%, from $1.7 million for the year ended December 31, 1998 to $5.4
million for the year ended December 31, 1999. This increase in goodwill
amortization was the result of higher intangible asset balances resulting from
the acquisitions described above. The excess purchase price over the fair value
of the assets acquired, including direct costs associated with the acquisitions,
was $173.7 million at December 31, 1998 and $235.0 million at December 31, 1999.
Impairment Charge. Impairment charges were $28.3 million for the year ended
December 31, 1999. The 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 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 impairment charge recorded under SFAS No. 121 included
impairment expenses of $2.6 million on the recoverability 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. Income from operations decreased $32.3
million, from income of $9.0 million for the year ended December 31, 1998 to a
loss of $23.3 million for the year ended December 31, 1999. Transport income
from operations decreased $2.6 million, or 33.0%, from $7.9 million for the year
ended December 31, 1998 to $5.3 million for the year ended December 31, 1999.
The decrease in transport income from operations was primarily due to increased
labor and vehicle costs, increased goodwill amortization, impairment charges and
increased administrative wages, bad debt and computer and telecommunication
expenses related to the operation of the transport business segment offset, in
part, by the increase in the size of the Company's transport operations in the
year ended December 31, 1999 as compared to the year ended December 31, 1998.
Towing and recovery income from operations decreased $19.3 million, from income
of $4.7 million for the year ended December 31, 1998 to a loss of $14.6 million
for the year ended December 31, 1999. The decrease in towing and recovery income
from operations was primarily due to increased labor, vehicle maintenance and
facility expense, increased goodwill amortization, impairment charges and
increased administrative wages, bad debt, office and computer and
21
telecommunication expenses offset, in part, by the increase in the size of the
Company's towing and recovery operations for the year ended December 31, 1999 as
compared to the year ended December 31, 1998.
Interest Expense, Net. Interest expense increased $9.8 million, from
interest expense of $1.6 million for the year ended December 31, 1998 to
interest expense of $11.4 million for the year ended December 31, 1999. Interest
income decreased $581,000 from interest income of $658,000 for the year ended
December 31, 1998 to interest income of $77,000 for the year ended December 31,
1999. The increase in interest expense, net was related to higher levels of debt
incurred to finance the acquisitions described above, a decline in offsetting
interest income in 1999 as compared to 1998 (1998 interest income included
interest income received on cash proceeds from the Company's initial public
offering), a charge of $624,000 in the year ended December 31, 1999 relating to
the termination of the Company's $225.0 million credit agreement and a charge of
$405,000 in the year ended December 31, 1999 relating to the reduction of the
commitment amount under the Company's existing revolving credit facility.
Income Tax Expense (Benefit). Income tax expense (benefit) decreased $8.7
million, from an income tax expense of $3.5 million for the year ended December
31, 1998 to an income tax benefit of $5.2 million for the year ended December
31, 1999. The decrease in income tax expense was largely due to the net
operating loss generated by the Company during 1999, along with the impairment
charge described above, the utilization of tax credits for software development
and tax deductions for computer conversion costs.
Net Income (Loss). Net income (loss) decreased $34.1 million, from net
income of $4.4 million for the year ended December 31, 1998 to a net loss of
$29.7 million for the year ended December 31, 1999. The decrease in net income
related to the decrease in income from operations of $32.3 million and increased
net interest expense of $10.4 million, offset in part by a decline in income tax
effect on pretax earnings of $8.7 million for the year ended December 31, 1999
compared to the year ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, the Company had approximately:
o $2.6 million of cash and cash equivalents,
o a working capital deficit of approximately $28.2 million (including
the $32.2 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
o $88.1 million of outstanding long-term indebtedness, excluding current
installments.
During the year ended December 31, 2000, the Company generated $5.1 million
of cash from operations and used $7.2 million of cash in investing activities.
Of the cash used in investing activities, $7.9 million related to purchases of
new vehicles and equipment, offset by proceeds of $1.6 million from the sale of
vehicles and equipment. During the year ended December 31, 2000, the Company
generated $567,000 of cash from financing activities. Financing activities
consisted of the repayment of the Company's previous revolving credit facility
of $50.7 million, net borrowings under its current credit facility of $32.2
million, the issuance of preferred stock, net of offering costs, of $22.4
million, payments on long-term debt and payments of deferred financing costs of
$3.4 million.
On July 20, 2000, in connection with the KPS Transaction, the Company and
its subsidiaries entered into 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 $54.9 million, including letter of
credit obligations of approximately $4.7 million).
The GE Capital 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 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
22
the Company's existing vehicles for which GE Capital has received title
certificates and other requested (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. Under the GE Capital Credit Facility, the banks have the
right to conduct an annual appraisal of the Company's vehicles. As of December
31, 2000, approximately $44.2 million was outstanding under the GE Capital
Credit Facility (including letters of credit of $12.0 million) and an additional
$12.6 million was available for borrowing.
Interest accrues on amounts borrowed under the GE Capital Credit Facility,
at the Company's option, at either the Index Rate (as defined in the GE Capital
Credit 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 at December 31, 2000 was 11.0%. 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 $581,000 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 $581,000, a monitoring fee of $150,000 and approximately $1.3
million 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. At
December 31, 2000, $2.8 million of these fees were recorded as deferred
financing costs and will be amortized over the five year term of the GE Capital
Credit Facility.
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 from 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 cash management requirements and financial covenants,
including minimum levels of EBITDA and minimum ratios of EBITDA to fixed
charges. In December 2000, the banks notified the Company that they considered
the Company out of compliance with the minimum EBITDA and fixed charge coverage
ratio covenants of the GE Capital Credit Facility as of September 30 and
December 31, 2000. In addition, the banks noted that the Company had not fully
implemented a required cash management system. On March 30, 2001, the Company
entered into an amendment to the GE Capital Credit Facility under which the
banks waived the financial covenant violations and agreed to extend to April 30,
2001 the date by which the Company must fully implement the cash management
system. 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, and requires the Company to maintain minimum levels of
liquidity.
On July 20, 2000, the Company sold 613,073 shares of its Series A Preferred
Stock to Blue Truck for $25.0 million in cash consideration, and on the same
date sold 49,046 shares of its Series A Preferred Stock to CFE for $2.0 million
in cash consideration.
23
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 cumulate such dividends, dividends will
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 Company's
common stock. The Company's obligation to pay dividends terminates on July 20,
2008, or earlier if the common stock trades above a specified price level.
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 (a) the Series A Preferred Base Liquidation Amount
by (b) 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.
In connection with the KPS Transaction, the Company agreed to pay KPS
Management LLC, an entity affiliated with KPS, a transaction fee of $2.5 million
($1.25 million of which was paid at closing and the remainder of which was paid
on October 31, 2000). The Company also reimbursed KPS for its fees and expenses
incurred in connection with the KPS Transaction, which totaled approximately
$750,000. In addition, the Company agreed to pay KPS Management LLC an annual
management fee of $1.0 million, which may be lowered to $500,000 and then to
zero based upon the amount of Series A Preferred Stock held by Blue Truck and
its permitted transferees. The Company also paid its financial advisor,
Donaldson, Lufkin & Jenrette Securities Corporation, a fee of $1.35 million in
cash upon closing of the KPS Transaction.
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, and in lieu thereof, issued to Charterhouse $84.5 million aggregate
principal amount of new 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 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 $200,000.
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 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, 2000, $87.6 million of Debentures were
outstanding. During the year ended December 31, 2000, the Company recorded $7.8
million in interest expense and deferred financing fees related to the
Debentures.
In connection with the KPS Transaction, the Company also paid an aggregate
amount equal to approximately $1.15 million to five of its senior executives
pursuant to the change of control provisions of each executive's employment
agreement with the Company. In addition, on September 30, 2000, the Company paid
its former Chief Financial Officer approximately $129,000 (in addition to the
24
$293,000 he received upon closing of the KPS Transaction) pursuant to the change
of control provisions of his employment agreement. Subject to their continued
employment, the Company is also obligated under such change of control
provisions to pay its executives an additional aggregate amount of approximately
$430,000 on each of the first and second anniversaries of the closing of the KPS
Transaction.
During 2000, the Company spent approximately $2.1 million for the
management of its data center and the development of its financial and
information systems. Pursuant to an agreement between the Company and Syntegra
(USA) Inc., dated as of December 15, 2000, the Company expects to pay Syntegra
approximately $2.6 million during 2001 to manage its data center and to assist
in the development of the Company's financial and information systems. 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.
The Company spent $7.9 million on purchases of vehicles and equipment
during the year ended December 31, 2000. These expenditures were primarily for
the purchase of, and capitalized repairs on, transport and towing and recovery
vehicles. During the year ended December 31, 2000, the Company made expenditures
of $1.0 million on towing and recovery vehicles and $6.0 million on transport
vehicles. These expenditures were financed primarily with cash flow from
operations and debt. During the year ended December 31, 2000, 40 vehicles were
delivered (with a total purchase price of $6.6 million) pursuant to the
Company's March 2000 commitment to purchase 60 vehicles from a vehicle
manufacturer. Approximately $1.6 million of the Company's $1.7 million deposit
previously paid to the vehicle manufacturer was applied to the purchase of these
vehicles. As of December 31, 2000, 41 of the 60 vehicles subject to the
commitment had been delivered (with a total purchase price of $6.8 million) and
$1.6 million of the deposit had been applied to such purchases. The Company
expects to pay approximately $3.2 million for the purchase of the 19 vehicles
remaining under the commitment.
The Company has experienced a significant decrease in its cash flow from
operations and is currently exploring opportunities to improve its cash flow
from operations, 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 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.
DISPOSITION OF DIVISION
On February 11, 2000, the Company sold the capital stock of Northshore
Towing, Inc., North Shore Recycling, Inc. and Evanston Reliable Maintenance,
Inc. (collectively "Northshore") located in Chicago, Illinois, for cash proceeds
of $450,000 and a secured non-interest bearing promissory note in the principal
amount of $500,000. Northshore was a division within the Company's towing and
recovery segment.
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.
25
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, 2000.
EXPECTED MATURITY DATE
---------------------------------------------------------------------------------
FAIR
2001 2002 2003 2004 2005 THEREAFTER TOTAL VALUE
-------- ---- ---- ---- ---- ---------- --------- -----
Variable rate debt............... $32,731 -- -- -- -- -- $32,731 $32,731
As of December 31, 2000, the effective interest rate under the GE Capital
Credit Facility was 11.0%.
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.
26
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................. 33 Chairman of the Board, Director I
Gerald R. Riordan................. 52 Chief Executive Officer, Secretary and Director I
Edward W. Morawski................ 52 Vice President and Director III
Todd Q. Smart..................... 36 Director III
Robert L. Berner.................. 39 Director II
Michael S. Pfeffer................ 37 Director I
Stephen P. Presser................ 41 Director I
Eugene J. Keilin.................. 58 Director III
David P. Shapiro.................. 39 Director II
Raquel V. Palmer.................. 28 Director II
Brian J. Riley.................... 31 Director III
Michael A. Wysocki................ 47 President, Transport Business Unit --
Harold W. Borhauer................ 52 President, Towing and Recovery Business Unit --
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 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 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. ("Curtis"), a
producer of specialty and premium papers 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. 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.
TODD Q. SMART has been a director of the Company since May 1998. Mr. Smart
also provided the Company with acquisition-related consulting services from May
1998 through September 1999. In 1987, Mr. Smart founded Absolute Towing and
Transporting, Inc. ("Absolute"), one of the businesses acquired by the Company
in connection with its initial public offering and served as the President of
27
Absolute from inception until its acquisition by the Company in May 1998. Since
June 1998, Mr. Smart has also operated an official police garage in Los Angeles,
California.
ROBERT L. BERNER, III has served as a director since December 1998. Mr.
Berner is a Managing Director of Charterhouse Group International, Inc. and a
member of its Investment Committee. Mr. Berner joined Charterhouse Group
International, Inc. in January 1997. From 1986 through December 1996, Mr. Berner
was a Principal in the Mergers and Acquisitions Department at Morgan Stanley &
Co., Incorporated.
MICHAEL S. PFEFFER has served as a director since March 1999. Mr. Pfeffer
has been a Senior Vice President of Charterhouse Group International, Inc. since
May 1998. From September 1996 to May 1998, Mr. Pfeffer served in executive
positions in the equity capital group of General Electric Capital Corporation,
most recently as Senior Vice President. From August 1993 to September 1996, Mr.
Pfeffer was Vice President of Charterhouse Environmental Capital Group.
STEPHEN P. 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.
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.
Pursuant to the terms of Certificate of Designations for the Series A
Preferred Stock and the KPS Investors' Agreement, the Majority Holders are
28
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 Amended and Restated Investors' Agreement between Charterhouse
and the Company (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 P. Presser, Eugene J. Keilin, David P. Shapiro, Raquel V. Palmer, and
Brian J. Riley, and the Charterhouse nominees on the Board are Robert L. Berner,
III and Michael S. Pfeffer.
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, 2000, all Section 16(a)
filing requirements applicable to the Company's officers, directors and greater
than ten percent stockholders were complied with.
29
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
1998, 1999 and 2000. 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)...................................2000 $319,551 $ -- 87,500(2) $600,000(3)
(Chief Executive Officer) 1999 61,539 100,000(4) 75,000(5) --
Donald J. Marr(6)......................................2000 155,141 15,000 -- 421,303(7)
(Former Chief Financial Officer) 1999 74,827 66,042 5,000 --
1998 75,000 50,000 12,500 --
Michael A. Wysocki (8) ................................2000 167,290 -- 36,250(9) 75,000(3)
(President, Transport Business Unit) 1999 110,000 -- -- --
Harold W. Borhauer II (10) ............................2000 134,956 -- 34,000(11) 62,500(3)
(President, Towing and Recovery Business Unit) 1999 52,343 780 -- --
- ---------------
(1) Mr. Riordan's employment with the Company began as of October 11, 1999.
(2) Includes options to purchase 37,500 shares granted in replacement of the
37,500 cancelled options described in footnote (5) below.
(3) Consists entirely of a payment in lieu of the change in control payment due
this executive officer under his former employment agreement.
(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. Marr terminated his employment agreement with the Company as of
September 30, 2000.
(7) Consists of a change in control payment pursuant to Mr. Marr's employment
agreement.
(8) Mr. Wysocki's employment with the Company began as of January 11, 1999.
(9) 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.
(10) Mr. Borhauer's employment with the Company began as of March 5, 1999.
(11) 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.
30
OPTION GRANTS IN 2000
The following table sets forth information concerning stock option grants
to Mr. Riordan, Mr. Wysocki and Mr. Borhauer during 2000. No stock options were
granted to Mr. Marr during 2000. All share amounts and per share exercise prices
have been adjusted to give effect to the Reverse Stock Split.
NUMBER OF PERCENTAGE OF
SHARES TOTAL OPTIONS VALUE AT ASSUMED ANNUAL
UNDERLYING GRANTED TO RATES OF STOCK PRICE
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION APPRECIATION FOR OPTION
NAME GRANTED FISCAL YEAR (PER SHARE) DATE TERM(1)
- ---- --------- ----------- ---------- ---- ----------------------------
5% 10%
-------------- ----------
Gerald R. Riordan................ 37,500 (2) 14.49 $ 3.00 7/20/2010 $ 70,751 $ 179,296
16,666 (3) 6.44 6.12 7/20/2010 (20,554) 27,686
16,667 (4) 6.44 10.20 7/20/2010 (88,557) (40,314)
16,667 (5) 6.44 14.28 7/20/2010 (156,558) (108,315)
Michael Wysocki.................. 3,750 (6) 1.45 20.00 1/17/2010 47,167 119,531
3,750 (7) 1.45 20.00 -- -- --
3,750 (8) 1.45 3.00 7/20/2010 7,075 17,923
8,333 (3) 3.22 6.12 7/20/2010 (10,277) 13,843
8,333 (4) 3.22 10.20 7/20/2010 (44,276) (20,156)
8,334 (5) 3.22 14.28 7/20/2010 (78,284) (54,161)
Harold Borhauer II............... 3,000 (9) 1.16 23.75 1/21/2010 44,809 113,554
3,000(10) 1.16 23.75 -- -- --
3,000(11) 1.16 3.00 7/20/2010 5,660 14,344
8,333 (3) 3.22 6.12 7/20/2010 (10,277) 13,843
8,333 (4) 3.22 10.20 7/20/2010 (44,276) (20, 156)
8,334 (5) 3.22 14.28 7/20/2010 (78,284) (54,161)
- ------------
(1) Represents the potential realizable value of each grant of options assuming
that the market price of the underlying securities appreciates in value
from the date of grant to the end of the option term at the rates of 5% and
10% compounded annually.
(2) All of these options were issued at fair market value on July 20, 2000
pursuant to the Company's 1998 Stock Option Plan (the "1998 Plan") and vest
over a period of three years at a rate of 33-1/3% per year beginning on
July 20, 2001.
(3) These options were issued pursuant to the Company's 1998 Stock Option Plan
and vest on July 20, 2001. The exercise price of these options is equal to
1.5 times the Conversion Price of the Series A Preferred Stock on July 20,
2000.
(4) These options were issued pursuant to the Company's 1998 Stock Option Plan
and vest on July 20, 2002. The exercise price of these options is equal to
2.5 times the Conversion Price of the Series A Preferred Stock on July 20,
2000.
(5) These options were issued pursuant to the Company's 1998 Stock Option Plan
and vest on July 20, 2003. The exercise price of these options is equal to
3.5 times the Conversion Price of the Series A Preferred Stock on July 20,
2000.
(6) These options were issued at fair market value on January 17, 2000 pursuant
to the Company's 1998 Stock Option Plan. On July 20, 2000, all of these
options became fully vested pursuant to the terms of Mr. Wysocki's
employment agreement.
(7) These options were issued at fair market value on January 17, 2000 pursuant
to the Company's 1998 Stock Option Plan. All of these options were
cancelled on July 20, 2000 pursuant to the terms of Mr. Wysocki's
employment agreement.
31
(8) These options were issued at fair market value on July 20, 2000 pursuant to
the Company's 1998 Stock Option Plan and vest over a period of three years
at a rate of 33-1/3% per year beginning on July 20, 2000. These options
were issued in replacement of the 3,750 cancelled options described in
footnote (7) above.
(9) These options were issued at fair market value on January 21, 2000 pursuant
to the Company's 1998 Stock Option Plan. On July 20, 2000, all of these
options became fully vested pursuant to the terms of Mr. Borhauer's
employment agreement.
(10) These options were issued at fair market value on January 21, 2000 pursuant
to the Company's 1998 Stock Option Plan. All of these options were
cancelled on July 20, 2000 pursuant to the terms of Mr. Borhauer's
employment agreement.
(11) These options were issued at fair market value on July 20, 2000 pursuant to
the Company's 1998 Stock Option Plan and vest over a period of three years
at a rate of 33-1/3% per year beginning on July 20, 2001. These options
were issued in replacement of the 3,000 cancelled options described in
footnote (10) above.
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, 2000. 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 29, 2000 ($0.50 per share) and, therefore, the options had no value.
No options were exercised by any of the Named Executive Officers during 2000.
All share amounts have been adjusted to give effect to the Reverse Stock Split.
SHARES UNDERLYING SHARES UNDERLYING
EXERCISABLE UNEXERCISABLE
NAME OPTIONS OPTIONS
---- ------- -------
Gerald R. Riordan...................................................... 37,500 87,500
Michael Wysocki........................................................ 3,750 28,750
Harold Borhauer II..................................................... 3,000 28,000
Donald J. Marr......................................................... 12,500 0
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 and, as long as he remains
employed by the Company, Mr. Riordan will be entitled to receive a stay bonus of
$300,000 on each of July 20, 2001 and July 20, 2002. In the event of the
termination of Mr. Riordan's new 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. Riordan
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. Riordan. Under the terms of the new 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.
32
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 expired, (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 the Series A Preferred Stock on July 20, 2000,
which option will vest 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 and, as long as he remains employed by the Company, Mr. Wysocki will
be entitled to a stay bonus of $37,500 on each of July 20, 2001 and 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 new
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 expired, 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 will vest 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
33
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 and, as long as he
remains employed by the Company, Mr. Borhauer will be entitled to a stay bonus
of $31,250 on each of July 20, 2001 and 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
expired, 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 will vest 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 new 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 had an employment agreement with Mr. Marr, which was terminated
as of September 30, 2000. The agreement provided Mr. Marr with a base salary of
$180,000 and an annual bonus at the discretion of the Compensation Committee. In
connection with the termination of Mr. Marr's agreement pursuant to the "change
of control" provisions thereof, the Company paid Mr. Marr a lump sum payment
equal to approximately $421,300. In addition, pursuant to the "change of
control" provisions of Mr. Marr's Agreement, all of his options that were
unvested as of the consummation of the KPS Transaction became immediately vested
34
and exercisable. The agreement prohibits Mr. Marr from competing with the
Company for a period of one year following its termination.
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
Prior to consummation of the KPS Transaction, the members of the
Compensation Committee were Grace M. Hawkins, Richard A. Molyneux and Mark J.
Henninger. None of such individuals was an officer or employee of the Company or
any of its subsidiaries during 2000. Neither Mr. Molyneux nor Ms. Hawkins was an
officer of the Company or any of its subsidiaries at any time prior to 2000. Mr.
Henninger was an officer of one of the Company's subsidiaries prior to its
acquisition by the Company in 1998. Between the date of consummation of the KPS
Transaction and December 31, 2000, 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 2000, none
of the Named Executive Officers served as a director or member of the
Compensation Committee of another entity, one of whose executive officers served
as a director or member of the Compensation Committee of the Company.
35
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 14, 2001 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 executive officer named in
the Summary Compensation Table, 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..................................................................... 40,577(3) 1.9
Edward W. Morawski.................................................................... 69,227 3.3
Todd Q. Smart......................................................................... 34,511(4) 1.7
Robert L. Berner(5)................................................................... -- --
Michael S. Pfeffer(5)................................................................. -- --
Stephen P. Presser(2)................................................................. -- --
Eugene J. Keilin(2)................................................................... -- --
David P. Shapiro(2)................................................................... -- --
Raquel V. Palmer(2)................................................................... -- --
Brian J. Riley(2)..................................................................... -- --
Donald J. Marr(6)..................................................................... 12,500(7) *
Michael A. Wysocki.................................................................... 90,426(8) 4.3
Harold W. Borhauer.................................................................... 17,194(9) *
John David Floyd(10).................................................................. 128,554(11) 6.1
Charter URS LLC....................................................................... 777,830(12) 30.0
Blue Truck Acquisition, LLC........................................................... 6,396,191(13) 75.4
CFE, Inc. ............................................................................ 511,697(14) 19.7
All current directors and executive officers as a group (13 persons).................. 251,935(15) 11.8
- -----------
* Less than one percent.
(1) The applicable percentage of ownership is based on 2,091,652 shares of
common stock outstanding as of March 14, 2001
(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 37,500 shares issuable pursuant to options exercisable within 60
days.
(4) Includes 4,250 shares issuable pursuant to options exercisable within 60
days.
(5) The address of this director is c/o Charterhouse Group International,
Inc., 535 Madison Avenue, New York, NY 10022.
(6) The address of this stockholder is 5B Saratoga Court, Albany, NY 12110.
(7) Consists entirely of shares issuable pursuant to options exercisable
within 60 days.
(8) Includes 3,750 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.
(9) Includes 3,000 shares issuable pursuant to options exercisable within 60
days.
(10) The address of this stockholder is 219 Granite Court, Boulder City, NV
89005.
(11) Includes 633 shares issuable pursuant to options exercisable with 60
days.
36
(12) Includes 593,908 shares issuable upon conversion of the 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 Group International, Inc., a Delaware
corporation ("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 beneficially own these
shares. Mr. Berner serves as Managing Director of Charterhouse
International. Mr. Pfeffer serves as Senior Vice President of
Charterhouse International. Messrs. Berner and Pfeffer 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.
(13) Consists entirely of shares issuable upon conversion of the Company's
Series A Preferred Stock (including dividends accumulated thereon as of
March 20, 2001) 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.
(14) Consists entirely of shares issuable upon conversion of the Company's
Series A Preferred Stock (including dividends accumulated thereon as of
March 20, 2001) held by CFE, Inc., a Delaware corporation ("CFE").
According to a Schedule 13D dated as of July 28, 2000, 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.
(15) Includes 48,500 shares issuable pursuant to options exercisable within 60
days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Company's acquisition of Northland, the Company
entered into an employment agreement with Mr. Morawski pursuant to which he
serves as one of the Company's vice presidents. The agreement has a term of
three years expiring on May 5, 2001, and provides for an annual base salary of
$150,000. Mr. Morawski's employment agreement contains a covenant not to compete
for one year after termination of the agreement.
In June 1998, Mr. Smart was awarded a contract for police towing in a
police district in Los Angeles. Mr. Smart conducts these operations through a
business that he controls. The Company has the option, exercisable until May 1,
2001, to buy Mr. Smart's business. The purchase price under this option is equal
to 13 times the after-tax income of the business for the 12 month period prior
to the exercise of the option.
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, 2000, the Company paid Translesco
approximately $11.2 million in connection with the lease of such employees.
During the year ended December 31, 2000, the Company was a party to three
lease agreements with Mr. Borhauer and his wife, Lynda Borhauer, pursuant to
which the Company leases property used to conduct the Shamrock business. One of
these lease agreements was terminated in October 2000. During 2000, Mr. and Mrs.
Borhauer received aggregate lease payments of $183,186 under these leases.
37
As of December 31, 2000, the Company had issued approximately $87.6 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. In connection with the closing of the
transactions under the Amended Charterhouse Purchase Agreement, the Company paid
Charterhouse a fee of 183,992 shares of the Company's common stock, and
reimbursed Charterhouse for its fees and expenses incurred in connection with
the transactions, which totaled approximately $200,000. 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. Berner serves as
Managing Director of Charterhouse International. Mr. Pfeffer serves as Senior
Vice President of Charterhouse International.
In connection with the KPS Transaction, the Company agreed to pay KPS
Management a transaction fee in the amount of $2.5 million, $1.25 million of
which was paid at closing of the KPS Transaction and the remainder of which was
paid in October 2000. The Company also reimbursed KPS for its fees and expenses
incurred in connection with the KPS Transaction, which totaled approximately
$750,000. In addition, 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. 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, 2000 and 1999
Consolidated Statements of Operations for the years ended December 31,
2000, 1999 and 1998
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998
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.
38
(3) Exhibits
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
2.1 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Northland Auto Transporters, Inc. and the
Stockholder named therein (incorporated by reference to the
same-numbered Exhibit to the Company's Registration Statement on Form
S-1 (Registration No. 333-46925)).
2.2 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Northland Fleet Leasing, Inc. and the
Stockholder named therein (incorporated by reference to the
same-numbered Exhibit to the Company's Registration Statement on Form
S-1 (Registration No. 333- 46925)).
2.3 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Falcon Towing and Auto Delivery, Inc. and the
Stockholder named therein (incorporated by reference to the
same-numbered Exhibit to the Company's Registration Statement on Form
S-1 (Registration No. 333-46925)).
2.4 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Smith-Christensen Enterprises, Inc., City
Towing, Inc. and the Stockholders named therein (incorporated by
reference to the same-numbered Exhibit to the Company's Registration
Statement on Form S-1 (Registration No. 333-46925)).
2.5 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Caron Auto Works, Inc. and the Stockholders
named therein (incorporated by reference to the same- numbered Exhibit
to the Company's Registration Statement on Form S-1 (Registration No.
333- 46925)).
2.6 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Caron Auto Brokers, Inc. and the Stockholder
named therein (incorporated by reference to the same- numbered Exhibit
to the Company's Registration Statement on Form S-1 (Registration No.
333- 46925)).
2.7 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Absolute Towing and Transporting, Inc. and the
Stockholder named therein (incorporated by reference to the
same-numbered Exhibit to the Company's Registration Statement on Form
S-1 (Registration No. 333-46925)).
2.8 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Keystone Towing, Inc. and the Stockholder named
therein (incorporated by reference to the same- numbered Exhibit to
the Company's Registration Statement on Form S-1 (Registration No.
333- 46925)).
2.9 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, ASC Transportation Services, Auto Service
Center and the Stockholder named therein (incorporated by reference to
the same-numbered Exhibit to the Company's Registration Statement on
Form S-1 (Registration No. 333-46925)).
2.10 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Silver State Tow & Recovery, Inc. and the
Stockholder named therein (incorporated by reference to the
39
same-numbered Exhibit to the Company's Registration Statement on
Form S-1 (Registration No. 333- 46925)).
2.11 Form of Amendment Number One to Agreement and Plan of Reorganization
dated as of February 23, 1998, by and among the Company, Keystone
Towing, Inc. and the Stockholder named therein (incorporated by
reference to the same-numbered Exhibit to Amendment No. 3 to the
Company's Registration Statement on Form S-1 (Registration No.
333-46925)).
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 Lease between the Company and Edward W. Morawski (incorporated by
reference to Exhibit 10.15 to Amendment No. 1 to the Company's
Registration Statement on Form S-1(Registration No. 333-46925)).
40
10.5 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)).
10.6 Employment Termination Agreement and Release Agreement, dated as of
June 21, 1999, by and between the Company and Edward T. Sheehan
(incorporated by reference to Exhibit 10.6 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1999).*
10.7 Executive Employment Agreement, dated as of October 11, 1999, by and
between the Company and Gerald R. Riordan (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999).*
10.8 Amended and Restated Executive Employment Agreement, dated as of
September 8, 1999, by and among the Company and Donald J. Marr
(incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1999).*
10.9 Executive Employment Agreement, dated as of January 17, 2000, between
the Company and Michael A. Wysocki (incorporated by reference to
Exhibit 10.38 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999).*
10.10 Executive Employment Agreement, dated as of January 21, 2000, between
the Company and Harold W. Borhauer (incorporated by reference to
Exhibit 10.39 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999).*
10.11 Amendment, effective as of March 9, 2000, to Executive Employment
Agreement, dated as of October 11, 1999, by and between the Company
and Gerald R. Riordan (incorporated by reference to Exhibit 10.42 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1999).*
10.12 Amendment, effective as of March 9, 2000, to Executive Employment
Agreement, dated as of January 17, 2000, by and between the Company
and Michael A. Wysocki (incorporated by reference to Exhibit 10.43 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1999).*
10.13 Amendment, effective as of March 9, 2000, to Executive Employment
Agreement, dated as of January 21, 2000, by and between the Company
and Harold W. Borhauer (incorporated by reference to Exhibit 10.44 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1999).*
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
41
10.19 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).
10.20 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).
10.21 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).
10.22 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).
10.23 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).
10.24 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).
10.25 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).*
10.26 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).*
10.27 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 quarterly period
ended September 30, 2000).*
10.28 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).*
10.29 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).
10.30 Employment Agreement, dated March 15, 2001, by and between the Company
and Patrick J. Fodale (filed herewith).*
10.31 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 (filed herewith).
42
11.1 Statement regarding Computation of Earnings per Share (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. (filed herewith).
- -------------
* 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, 2000.
43
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 30, 2001
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 Officer and March 30, 2001
- ------------------------------------- Secretary (principal executive
Gerald R. Riordan officer)
/s/ Michael T. Moscinski Corporate Controller and Acting March 30, 2001
- ------------------------------------ Chief Accounting Officer
Michael T. Moscinski (principal accounting officer)
/s/ Michael G. Psaros Chairman of the Board of March 30, 2001
- ------------------------------------ Directors
Michael G. Psaros
Vice President and Director March 30, 2001
- ------------------------------------
Edward W. Morawski
/s/ Todd Q. Smart Director March 30, 2001
- ------------------------------------
Todd Q. Smart
Director March 30, 2001
- ------------------------------------
Robert L. Berner III
44
/s/ Michael S. Pfeffer Director March 30, 2001
- ------------------------------------
Michael S. Pfeffer
/s/ Eugene J. Keilin Director March 30, 2001
- ------------------------------------
Eugene J. Keilin
/s/ David P. Shapiro Director March 30, 2001
- ------------------------------------
David P. Shapiro
/s/ Stephen P. Presser Director March 30, 2001
- ------------------------------------
Stephen P. Presser
/s/ Raquel V. Palmer Director March 30, 2001
- ------------------------------------
Raquel V. Palmer
/s/ Brian J. Riley Director March 30, 2001
- ------------------------------------
Brian J. Riley
45
INDEX OF EXHIBITS FILED HEREWITH*
10.30 Employment Agreement, dated March 15, 2001, by and between the Company
and Patrick Fodale**
10.31 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.
11.1 Statement regarding Computation of Earnings per Share.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
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.
* For a complete list of the Exhibits to this Report, see Item 14(a)(3).
** Indicates management agreement or compensatory plan or arrangement.
46
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, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000 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, $32,163,000, is reflected as a current liability
because of the payment requirements of the related credit agreement.
Consequently, current liabilities exceed current assets by approximately
$28,201,000. In addition, the Company has had recurring losses from operations,
including impairment charges of $157,736,000, and has an accumulated deficit of
$185,077,000 at December 31, 2000. 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 22, 2001, except as
to Note 18, which is as of
March 30, 2001
F-1
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2000 1999
---- ----
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 2,615 4,115
Trade receivables, net of allowance for doubtful accounts of $2,686 in 2000 and
$2,539 in 1999 ......................................................... 18,981 23,709
Other receivables, net of allowance for doubtful accounts of $9 in 2000 and
$262 in 1999 ........................................................... 903 1,161
Prepaid income taxes .......................................................... 473 3,534
Prepaid expenses and other current assets ..................................... 1,619 2,274
Current portion of rights to equipment under finance contracts ................ 255 435
--------- ---------
Total current assets ..................................................... 24,846 35,228
Vehicles and equipment, net ........................................................ 69,419 78,212
Rights to equipment under finance contracts, excluding current portion ............. 285 1,480
Deferred financing costs, net ...................................................... 5,570 4,109
Goodwill, net ...................................................................... 78,020 203,337
Other non-current assets ........................................................... 253 79
--------- ---------
Total assets ............................................................. $ 178,393 322,445
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of obligations under capital leases ...................... $ 203 268
Current installments of obligations for equipment under finance contracts ..... 255 435
Borrowings under credit facility .............................................. 32,163 50,650
Accounts payable .............................................................. 8,722 7,464
Accrued expenses .............................................................. 11,115 9,489
Due to related parties ........................................................ 589 1,130
--------- ---------
Total current liabilities ................................................ 53,047 69,436
Obligations under capital leases, excluding current portion ........................ 262 402
Obligations for equipment under finance contracts, excluding
current installments ............................................................ 285 1,480
Long-term debt ..................................................................... 87,568 80,876
Deferred income taxes .............................................................. 3,371 2,666
Other long-term liabilities ........................................................ 1,254 1,172
--------- ---------
Total liabilities ........................................................ 145,787 156,032
--------- ---------
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 662,119 shares
issued and outstanding ................................................ 1 --
Common stock, $0.01 par value; 35,000,000 shares authorized; and 2,091,652
shares issued and outstanding at December 31, 2000 and 1,759,416 shares
issued and outstanding at December 31, 1999 ................................ 21 18
Additional paid-in capital .................................................... 217,661 191,877
Accumulated deficit ........................................................... (185,077) (25,482)
--------- ---------
Total stockholders' equity ............................................... 32,606 166,413
--------- ---------
Total liabilities and stockholders' equity ............................... $ 178,393 322,445
========= =========
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, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
2000 1999 1998
--------- --------- ---------
Net revenue ................................ $ 246,566 255,112 87,919
Cost of revenue ............................ 212,651 202,588 64,765
--------- --------- ---------
Gross profit .......................... 33,915 52,524 23,154
Selling, general and administrative expenses 43,514 42,139 12,428
Amortization of goodwill ................... 3,710 5,439 1,745
Impairment charge .......................... 129,455 28,281 -
--------- --------- ---------
Income (loss) from operations ......... (142,764) (23,335) (8,981)
Other income (expense):
Interest income ....................... 284 77 658
Interest expense ...................... (14,234) (11,419) (1,588)
Other expense, net .................... (372) (181) (156)
--------- --------- ---------
Income (loss) before income taxes ..... (157,086) (34,858) 7,895
Income tax expense (benefit) ............... 1,846 (5,158) 3,503
--------- --------- ---------
Net income (loss) ..................... $(158,932) (29,700) 4,392
========= ========= =========
Per share amounts:
Basic earnings (loss) ................. $ (81.95) (17.54) 4.30
========= ========= =========
Diluted earnings (loss) ............... $ (81.95) (17.54) 4.23
========= ========= =========
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, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ADDITIONAL RETAINED TOTAL
PREFERRED COMMON PAID-IN EARNINGS STOCKHOLDERS'
STOCK STOCK CAPITAL (DEFICIT) EQUITY (DEFICIT)
----- ----- ------- --------- ----------------
Balance at December 31, 1997 ............................. $ -- 3 67 (174) (104)
Issuance of common stock (21,874 shares) ................. -- -- 735 -- 735
Stock issued in connection with:
Initial public offering, net of offering costs
(759,000 shares) .................................. -- 8 89,492 -- 89,500
Acquisitions, net of certain registration costs
(505,327 shares) ................................. -- 5 68,769 -- 68,774
Issuance of warrant to acquire 11,779 shares of common
Stock ................................................. -- -- 469 -- 469
Net income--1998 ......................................... -- -- -- 4,392 4,392
-------- -------- -------- -------- --------
Balance at December 31, 1998 ............................. -- 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
Earn-out 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
Earn-out 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
======== ======== ======== ======== ========
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, 2000, 1999 AND 1998
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
2000 1999 1998
--------- --------- ---------
Net (loss) income .......................................................... $(158,932) (29,700) 4,392
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation ........................................................... 10,163 9,287 3,292
Amortization of goodwill ............................................... 3,710 5,439 1,745
Impairment charge ...................................................... 129,455 28,281 --
Amortization of deferred financing costs ............................... 895 901 219
Write off of deferred financing costs .................................. 818 1,029 --
Provision for doubtful accounts ........................................ 2,882 2,413 183
Deferred income taxes .................................................. 705 (3,541) 1,659
Accrued management fee ................................................. 250 -- --
Debenture closing fee .................................................. 750 -- --
Interest expense, paid-in-kind ......................................... 6,692 5,644 232
Loss on sale of vehicles and equipment ................................. 290 304 --
Loss on sale of division ............................................... 212 -- --
Changes in operating assets and liabilities, net of effects of
acquisitions:
Decrease (increase) in trade receivables ............................. 1,752 (3,681) (2,427)
Decrease in other receivables ........................................ 458 791 171
Decrease (increase) in prepaid income taxes .......................... 3,061 (5,322) (381)
Decrease in prepaid expenses and other current assets ................ 220 105 724
Decrease in other non-current assets ................................. 115 229 105
Decrease in notes payable ............................................ -- (17) --
Increase (decrease) in accounts payable .............................. 1,123 (2,570) (1,608)
Increase (decrease) in accrued expenses .............................. 1,783 2,317 (242)
Increase (decrease) in other long-term liabilities ................... (543) 640 --
--------- --------- ---------
Net cash provided by operating activities .......................... 5,859 12,549 8,064
--------- --------- ---------
Investing activities:
Acquisitions, net of cash acquired ..................................... -- (36,008) (118,161)
Purchases of vehicles and equipment .................................... (7,850) (20,188) (11,297)
Proceeds from sale of vehicles and equipment ........................... 1,559 1,141 387
Proceeds received from sale of division ................................ 450 -- --
Amounts payable to related parties ..................................... (1,317) (1,837) 2,162
--------- --------- ---------
Net cash used in investing activities .............................. (7,158) (56,892) (126,909)
--------- --------- ---------
Financing activities:
Proceeds from issuance of stock, net ................................... 21,680 5 90,234
Proceeds from issuance of convertible subordinated debentures .......... -- 31,500 43,500
Borrowings on revolving credit facility ................................ 32,163 65,850 59,800
Repayments on revolving credit facility ................................ (50,650) (34,000) (41,000)
Payments of deferred financing costs ................................... (3,175) (2,487) (3,302)
Payments on long-term debt and capital leases assumed in acquisitions .. (219) (15,791) (27,057)
--------- --------- ---------
Net cash provided by (used in) financing activities ................ (201) 45,077 122,176
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ........................... (1,500) 734 3,331
Cash and cash equivalents at beginning of year ............................. 4,115 3,381 50
--------- --------- ---------
Cash and cash equivalents at end of year ................................... 2,615 4,115 3,381
========= ========= =========
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest ............................................................. 3,995 3,671 1,137
========= ========= =========
Income taxes, net of refunds ......................................... (2,236) 2,074 2,309
========= ========= =========
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 ..................... 663 -- --
========= ========= =========
Issuance of common stock for acquisitions .............................. 409 32,870 69,355
========= ========= =========
Warrant issued to lender as partial loan fee ........................... $ -- -- 469
========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
(B) BASIS OF PRESENTATION
The accompanying 2000 and 1999 consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
(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.
F-6
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(D) CASH EQUIVALENTS
Cash equivalents of $288 and $1,651 at December 31, 2000 and 1999,
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 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.
(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, the recent double digit growth rate 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.
F-7
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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, 2000 and 1999 was $10,811 and
$7,184, 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.
(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.
(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).
F-8
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following tables provide calculations of basic and diluted earnings per
share:
YEAR ENDED DECEMBER 31, 2000
WEIGHTED PER SHARE
NET LOSS AVERAGE SHARES AMOUNTS
-------- -------------- -------
Basic loss per share......................... $ (158,932) 1,939,337 $ (81.95)
========== ========= ========
Diluted loss per share....................... $ (158,932) 1,939,337 $ (81.95)
========== ========= ========
YEAR ENDED DECEMBER 31, 1999
WEIGHTED PER SHARE
NET LOSS AVERAGE SHARES AMOUNTS
-------- -------------- -------
Basic loss per share.......................... $ (29,700) 1,693,311 $ (17.54)
========= ========= ========
Diluted loss per share........................ $ (29,700) 1,693,311 $ (17.54)
========= ========= ========
The effect of options and warrants, earnout shares and holdback
shares have been excluded at December 31, 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, 2000
and 1999, as the effect would be antidilutive due to the adjustment
(decrease in net loss) for interest expense.
YEAR ENDED DECEMBER 31, 1998
WEIGHTED PER SHARE
NET LOSS AVERAGE SHARES AMOUNTS
-------- -------------- -------
Basic loss per share.......................... $ 4,392 1,022,181 $ 4.30
========
Effect on dilutive securities:
Options and warrants................... -- 12,357
Earnout shares......................... -- 488
Holdback shares........................ -- 3,965
--------- ---------
Diluted loss per share........................ $ 4,392 1,038,991 $ 4.23
========= ========= ========
Shares issuable upon conversion of the convertible subordinated debentures
have been excluded at December 31, 1998, as the effect would be antidilutive due
to the adjustment (increase in net income) for interest expense.
(L) ADVERTISING COSTS
Advertising costs are expensed as incurred and amounted to $1,342, $1,398
and $490 in 2000, 1999 and 1998, 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.
F-9
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(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.
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. No
single customer accounted for greater than 10% of trade receivables at December
31, 2000 or December 31, 1999.
(O) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133 is required to be adopted in years beginning after June 15, 2000.
The Company will adopt SFAS No. 133 effective January 1, 2001. As the Company is
not active in the use of derivative products or arrangements, management has
determined that adoption of SFAS No. 133 will not have a material financial
impact on the Company's consolidated financial statements. The Company will
continue to evaluate future contractual arrangements entered into that may
affect this determination.
(P) RECLASSIFICATIONS
Certain reclassifications of the prior year consolidated financial
statements have been made to conform to current year presentation.
(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 9(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 $28,201 at December
31, 2000. 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, 2000, the Company had a borrowing capacity of
$56,800, $42,600 of which related to vehicles and $14,200 of which related to
accounts receivable. At December 31, 2000, $32,163 was outstanding under the
revolving credit facility, excluding letters of credit of $12,038, and an
additional $12,600 was available for borrowing.
F-10
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 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, 2000, the Company
generated positive cash flow of $5,859, as compared to $12,549 for the year
ended December 31, 1999.
The Company is currently exploring 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. In accordance with SFAS No. 121, during the second quarter of
2000, based upon a comprehensive review of the Company's long-lived assets, 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.
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).
F-11
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(4) STOCKHOLDERS' EQUITY
The Company effected a 100-for-one stock split on December 18, 1997 for
each share of common stock then outstanding. In addition, the Company increased
its authorized shares of common stock to 1,000,000 shares with a $.001 par
value. Subsequently, and pursuant to an amended and restated certificate of
incorporation of United Road Services, Inc., filed on February 23, 1998, the
authorized number of shares was increased to 40,000,000 (35,000,000 common
shares and 5,000,000 preferred shares). On February 23, 1998, the Company
effected a 3.72 for 1 stock split for all outstanding common shares. 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
1998 stock split and the 2000 reverse stock split.
On December 18, 1997, the Company authorized the issuance of 18,898 shares
pursuant to the terms and conditions of a subscription agreement. These shares
were issued and fully paid on January 1, 1998 for $33.60 per share.
Additionally, during January 1998, the Company issued 2,976 shares of common
stock to a member of the board of directors for a purchase price of $33.60 per
share.
On May 1, 1998, the Company completed the initial public offering of its
common stock by issuing 759,000 shares, 99,000 of which were issued pursuant to
an underwriters' over-allotment provision, at a price of $130.00 per share.
Prior to the offering, there was no public market for the Company's common
stock. The net proceeds of the offering, after deducting applicable offering
costs of $9,170, were $89,500. The net proceeds were used by the Company to
finance acquisitions and for general corporate purposes.
As part of the consideration for certain acquisitions discussed in note 12,
the Company issued 505,327 shares of common stock at various dates during 1998.
The net consideration for these issuances, after deducting applicable
registration costs of $581, was $68,774, which has been recorded as purchase
price for the applicable acquisitions.
On April 7, 1999, 4,773 shares of common stock were issued as earn-out
payments to the former owners of certain Founding Companies and one other
acquired company. These earn-out payments were based on the achievement of
certain net revenue targets (see note 15(a)). Included in due to related parties
at December 31, 1998, was $362 representing the fair value of 1,952 shares of
common stock payable pursuant to these earn-out arrangements, based upon the
December 31, 1998 closing price of the Company's common stock. The additional
2,821 shares were issued as a result of the decline in the Company's common
stock price subsequent to December 31, 1998 that resulted in additional shares
of common stock being issued under the contractual provisions of the earn-out
agreements.
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 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 as discussed in
note 15(e). The recorded consideration for these issuances was $3,129.
As part of the consideration for certain 1999 acquisitions discussed in
note 12, 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.
F-12
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
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 earn-out payments to the former owners of
certain Founding Companies. These earn-out payments were based on the
achievement of certain net revenue targets (see note 15(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 earn-out 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 earn-out 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 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 as discussed in
note 15(e). 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.
F-13
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
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, 2000, the Company had
recorded $663 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 9(b)).
F-14
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table summarizes activity under the Company's stock option
plans:
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
YEAR ENDED DECEMBER 31, 1998
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Options outstanding at beginning of year..................... -- --
Granted...................................................... 108,085 $ 122.26
Forfeited.................................................... 295 151.10
----------
Options outstanding at end of year........................... 107,790 122.18
==========
Options exercisable at December 31, 1998..................... --
==========
Weighted-average fair value of options granted during the
year...................................................... 59.49
The per share weighted-average fair values of stock options granted during
2000, 1999 and 1998 were determined using the Black-Scholes option-pricing model
with the following weighted average assumptions: (i) risk-free interest rate of
approximately 5.8%, 6.3% and 4.5%, respectively, (ii) expected life of 8, 5 and
5 years, respectively, (iii) volatility of approximately 127%, 108% and 50%,
respectively, and (iv) expected dividend yield of 0%.
The following table summarizes information about stock options outstanding
as of December 31, 2000:
OPTIONS OUTSTANDING
-----------------------------------------------------------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER WEIGHTED-AVERAGE REMAINING
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE
--------------- ----------- -------------- ----------------
$ 2.75-10.00 86,852 $ 4.33 9.5 years
10.01-30.00 123,685 18.32 9.5 years
30.01-100.00 57,011 75.33 8.2 years
100.01-230.00 46,565 155.22 8.2 years
-------
314,443
=======
F-15
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, 2000:
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
------ ---------
1998 Stock Option Plan................................... 193,958 $3.00-230.00
1998 Non-Qualified Stock Option Plan..................... 45,485 3.44-183.75
Executive option agreement............................... 75,000 16.03
Convertible subordinated debentures...................... 583,789
Warrants................................................. 11,779
-------
Shares reserved for issuance........................ 910,011
=======
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, 2000, 1999
and 1998 would have resulted in the following pro forma amounts:
2000 1999 1998
------ ------ ------
Net income (loss):
As reported.......................................... $ (158,932) (29,700) 4,392
========== ======= =====
Pro forma............................................ $ (165,331) (33,930) 3,321
========== ======== =====
Per share amounts:
Basic earnings (loss) per share:
As reported.......................................... $ (81.95) (17.54) 4.30
========== ======== =====
Pro forma............................................ $ (84.56) (20.04) 3.25
========== ======== =====
Diluted earnings (loss) per share:
As reported.......................................... $ (81.95) (17.54) 4.23
========== ======== =====
Pro forma............................................ $ (84.56) (20.04) 3.20
========== ======== =====
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, 2000 and 1999 consisted of the
following:
2000 1999
-------- --------
Transportation and towing equipment........................... $ 75,413 74,675
Machinery and other equipment................................. 1,761 1,782
Computer software and related equipment....................... 9,775 10,850
Furniture and fixtures........................................ 1,002 1,071
Leasehold improvements........................................ 1,909 1,982
-------- --------
89,860 90,360
Less accumulated depreciation and amortization................ (20,441) (12,148)
-------- --------
$ 69,419 78,212
======== ========
F-16
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
$10,163, $9,287 and $3,292 in 2000, 1999 and 1998, respectively.
Included in vehicles and equipment at December 31, 2000 and 1999 are costs
of $797 and $1,348, respectively, and accumulated amortization of $174 and $183,
respectively, relating to certain transport and towing equipment recorded as
capital leases. Amortization expense of $100, $129 and $70 relating to transport
and towing equipment capital leases was included in depreciation and
amortization expense for the years ended December 31, 2000, 1999 and 1998,
respectively.
(6) EQUIPMENT UNDER FINANCING CONTRACTS
The Company has guaranteed lease obligations for certain independent
carriers who lease equipment from financing companies. The guarantee includes
payment of the monthly installments should the primary lessee default, as well
as a specified minimum residual value at the end of the lease term. In return
for the lease guarantee, the independent carrier agrees to subcontract the
equipment to the Company for the duration of the lease term. For accounting
purposes, the Company has recorded the rights to the equipment and the
corresponding obligation under the equipment financing contracts. The recorded
value of both the asset and liability related to the financing contracts is
determined based on the present value of the future minimum installment payments
and the guaranteed residual value using the rate implicit in the lease
agreements.
The following is a summary of obligations under equipment financing
contracts at December 31, 2000:
Year ending December 31:
2001................................................................ $ 281
2002................................................................ 142
2003................................................................ 156
-----
Total minimum obligations (includes residual guarantees
of $211)....................................................... 579
Less: imputed interest (at rates from 7.25% to 10.50%).............. (40)
-----
Present value of future minimum obligations, $255 of which is
included in current assets and liabilities at December 31, 2000. $ 539
=====
Installment payments of $399, $670 and $470, related to obligations for
equipment under financing contracts during 2000, 1999 and 1998, respectively,
are included in cost of revenue in the accompanying consolidated statements of
operations. Of these amounts, $105, $153 and $140 represent interest charges in
2000, 1999 and 1998, respectively, which were withheld from the amounts paid to
the independent contractors and remitted directly to the financing companies. At
December 31, 2000 and 1999, restricted amounts of $53 and $73, respectively,
were included in cash and cash equivalents in the accompanying consolidated
balance sheet.
F-17
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(7) DEFERRED FINANCING COSTS
Deferred financing costs at December 31, 2000 and 1999 were associated with
the Company's revolving credit facilities and the convertible subordinated
debentures, and consisted of the following:
2000 1999
-------- --------
GE Capital credit facility, net of accumulated amortization
of $229 in 2000......................................................... $ 2,613 -
Bank of America credit facility, net of accumulated amortization
of $753 in 1999.......................................................... - 778
Convertible subordinated debentures, net of accumulated amortization
of $740 in 2000 and $367 in 1999......................................... 2,957 3,331
------- -----
$ 5,570 4,109
======= =====
As discussed in note 9(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.
Included within the December 31, 1999 deferred financing costs balance is a
non-cash amount of $469 for the issuance of 11,779 warrants at an exercise price
of $130.00 per share as consideration for services rendered in establishing the
Bank of America credit facility. The compensatory amount was determined using
the Black-Scholes option-pricing model.
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.
(8) ACCRUED EXPENSES
Accrued expenses at December 31, 2000 and 1999 consisted of:
2000 1999
-------- --------
Accrued payroll and related costs............................... $ 4,994 3,790
Accrued insurance............................................... 4,046 2,940
Accrued severance............................................... 577 790
Other accrued liabilities....................................... 1,498 1,969
------- -----
$11,115 9,489
======= =====
F-18
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(9) DEBT
Debt obligations at December 31, 2000 and 1999 consisted of the following:
2000 1999
-------- --------
GE Capital credit facility, interest at the Index rate, as
defined (11.00% at December 31, 2000), secured by
substantially all of the assets of the Company (a).......... $ 32,163 -
Bank of America credit facility, interest at the Base rate,
as defined (9.50% at December 31, 1999), secured by
substantially all of the assets of the Company.............. - 50,650
Convertible subordinated debentures bearing interest at 8%
annually, maturing in 2008 (b).............................. 87,876 80,876
--------- ---------
Total debt obligations................................... $ 119,731 131,526
========= =========
(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. As of December 31, 2000, $32,163 was
outstanding under the GE Capital Credit Facility, excluding letters of credit of
$12,038, and an additional $12,600 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 at December 31, 2000 was 11.00%, excluding the
amortization of associated deferred financing costs described in note 7. 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.
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 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. At
December 31, 2000, $2,842 of these fees were recorded as deferred financing
costs and are being amortized over the five year term of the GE Capital Credit
Facility.
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 cash management requirements and financial covenants,
including minimum levels of EBITDA and minimum ratios of EBITDA to fixed
charges. In December 2000, the banks notified the Company that they considered
the Company out of compliance with the minimum EBITDA and fixed charge coverage
ratio covenants of the GE Capital Credit Facility as of September 30 and
December 31, 2000. In addition, the banks noted that the Company had not fully
implemented a required cash management system.
(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 (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,
F-20
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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, 2000, $87,568 of
Debentures were outstanding. As of December 31, 2000, the Company recorded
$7,816 in interest expense, closing fees and the amortization of deferred
financing costs related to the Debentures.
At December 31, 2000 debt maturities were as follows:
2001............................$ 32,163
2002-2005....................... --
Thereafter...................... 87,568
---------
$ 119,731
=========
(10) 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 $9,067, $8,386 and $2,518
in 2000, 1999, and 1998, respectively. Included within rent expense was $2,720,
$2,542 and $1,024 in 2000, 1999 and 1998, respectively, that was paid to the
former owners/shareholders.
F-21
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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, 2000 were as follows:
OPERATING LEASES
----------------
CAPITAL LEASE
YEAR ENDING DECEMBER 31, OBLIGATIONS RELATED PARTY OTHER TOTAL
------------------------ ----------- ------------- ----- -----
2001............................................. $ 230 2,118 4,749 6,867
2002............................................. 190 1,266 2,886 4,152
2003............................................. 64 738 1,743 2,481
2004............................................. 17 320 1,205 1,525
2005............................................. 13 273 708 981
Thereafter....................................... -- 1,595 29 1,624
----- ----- ------ ------
Future minimum lease payments.................... 514 6,310 11,320 17,630
===== ====== ======
Less: imputed interest........................... (49)
-----
Present value of minimum lease payments.......... $ 465
=====
(11) INCOME TAXES
Income tax expense (benefit) at December 31, 2000, 1999 and 1998 consisted
of the following:
2000 1999 1998
---- ---- ----
Current:
Federal...................................... $ (113) (1,501) 1,555
State........................................ 1,254 (116) 289
------- ------ -----
1,141 (1,617) 1,844
------- ------ -----
Deferred:
Federal...................................... 635 (3,287) 1,408
State........................................ 70 (254) 251
------- ------ -----
705 (3,541) 1,659
------- ------ -----
$ 1,846 (5,158) 3,503
======= ======= =====
The following table reconciles the expected tax expense (benefit) at the
Federal statutory rate to the effective tax rate for the year ended December 31,
2000, 1999 and 1998:
2000 1999 1998
-------------------- --------------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
Expected tax expense (benefit) at ... $(56,045) (34.0)% $(11,852) (34.0)% $ 2,684 34.0%
statutory rate
State taxes, net of federal benefit . 1,310 0.7 (372) (1.1) 356 4.5
Non-deductible goodwill ............. 902 0.6 1,344 4.1 431 5.5
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 ................. 3,414 2.1 - - - -
Other ............................... (122) (0.1) 88 0.3 32 0.4
-------- ----- -------- ----- -------- ----
$ 1,846 1.1% $ (5,158) (14.8)% $ 3,503 44.0%
======== ===== ======== ===== ======== ====
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, 2000 and 1999:
2000 1999
---- ----
Deferred tax assets:
Accounts receivable, due to allowance for doubtful accounts .......... $ 987 915
Non-deductible accruals .............................................. 1,763 --
Intangible assets .................................................... 85 658
Goodwill, due to impairment charge associated with tax deductible
portion ............................................................. 7,395 4,291
Net operating loss carryforward ...................................... 8,998 5,572
Other, net ........................................................... 334 191
-------- --------
Total gross deferred tax assets .................................... 19,562 11,627
Less valuation allowance ........................................... (3,680) --
-------- --------
15,882 11,627
Deferred tax liabilities:
Vehicles and equipment, due to differences in
depreciation lives and methods ...................................... (12,328) (8,914)
Computer software, due to acceleration of research and experimentation
credit .............................................................. (839) (1,156)
Goodwill, due to differences in amortization lives associated with tax
deductible portion .................................................. (2,064) (1,633)
Goodwill, due to acceleration of certain acquisition costs for tax
purposes ............................................................ (3,604) (1,872)
Other taxable temporary differences, due to differences in basis of
accounting for companies acquired ................................... (418) (671)
Other, net ........................................................... -- (47)
-------- --------
Net deferred tax liability ......................................... $ (3,371) (2,666)
======== ========
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 a valuation
allowance with respect to the future tax benefits and the net operating loss
reflected as a deferred tax asset in the amount of $3,680 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
$39,614 generated from the Company's inception through July 20, 2000, the date
of the KPS Transaction.
At December 31, 2000, the Company had a net operating loss carryforward of
approximately $24,600. This net operating loss carryforward was generated during
the period July 21, 2000 through December 31, 2000 and will expire in 2020.
F-23
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(12) 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 15(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, 1998, 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 YEAR ENDED DECEMBER 31, 1998
-------------------------------------------- --------------------------------------------
(UNAUDITED)
PROFORMA
COMBINED
(UNAUDITED) FOUNDING
PROFORMA COMPANIES
UNITED COMBINED UNITED AND
ROAD ACQUIRED ROAD ACQUIRED
SERVICES, INC. COMPANIES TOTAL SERVICES, INC. COMPANIES TOTAL
-------------- --------- ----- -------------- --------- -----
Net revenue $ 255,112 10,743 265,855 87,919 195,359 283,278
============ =========== =========== =========== =========== ===========
Net income
(loss) $ (29,700) 634 (29,066) 4,392 10,787 15,179
============ =========== =========== =========== =========== ===========
Diluted income
(loss) per
common share $ (16.31) 8.50
============= ===============
F-24
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(13) 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, 2000, 1999. Net
revenue generated from this customer was $27,817 (11.3% of net revenue), $26,701
(10.5% of net revenue) for the years ended December 31, 2000 and 1999,
respectively, and is attributable to the Company's Transport segment. For the
year ended December 31, 1998, no individual customer represented 10% or more of
the Company's consolidated net revenue.
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. For the year ended December 31, 1998, the Company's first year of operations,
the Company evaluated the performance of its operating segments based on income
(loss) before income taxes. During the year ended December 31, 1999, management
determined that a more appropriate measure of the performance of its operating
segments could 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, 2000, 1999 and 1998.
Intersegment revenues and transfers are not significant.
F-25
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Summarized financial information for the years ended December 31, 2000,
1999 and 1998 concerning the Company's reportable segments is shown in the
following table:
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
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
YEAR ENDED DECEMBER 31, 1998
TOWING
TRANSPORT AND RECOVERY OTHER TOTAL
--------- ------------ ----- -----
Net revenue from external customers.................... $46,908 41,011 -- 87,919
Cost of revenue (including depreciation)............... 34,955 29,810 -- 64,765
Income (loss) from operations.......................... 7,886 4,706 (3,611) 8,981
Interest income........................................ 25 19 614 658
Interest expense....................................... 160 69 1,359 1,588
Total assets........................................... 115,324 126,479 6,929 248,732
Capital expenditures................................... 5,177 3,322 2,798 11,297
Depreciation and amortization.......................... 1,948 2,895 413 5,256
F-26
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following are reconciliations of the information used by the chief
operating decision maker for the years ended December 31, 2000, 1999 and 1998 to
the Company's consolidated totals:
2000 1999 1998
-------- -------- --------
Reconciliation of income (loss) before income taxes:
Total profit (loss) from reportable segments............. $ (128,462) (9,290) 12,592
Unallocated amounts:
Interest income....................................... 284 77 658
Interest expense...................................... (14,234) (11,419) (1,588)
Depreciation and amortization......................... (593) (1,248) (413)
Other selling, general and administrative expenses.... (13,709) (12,797) (3,198)
Other expense, net.................................... (372) (181) (156)
---------- ------- ------
Income (loss) before income taxes................ $ (157,086) (34,858) 7,895
========== ======= ======
Reconciliation of total assets:
Total assets from reportable segments.................... 168,673 309,778 241,803
Unallocated amounts:
Prepaid income taxes.................................. 473 3,534 465
Vehicles and equipment, net........................... 3,424 4,945 2,604
Deferred financing costs, net......................... 5,570 4,109 3,552
Other non-current assets.............................. 253 79 308
---------- ------- ------
Total assets..................................... $ 178,393 322,445 248,732
========== ======= ======
(14) COMMITMENTS AND CONTINGENCIES
(A) PURCHASE COMMITMENTS
As of December 31, 2000, the Company had entered into commitments to
purchase 37 transport vehicles, 2 trailers and 4 towing and recovery vehicles
for approximately $6,105. Of the 37 transport vehicles, 19 vehicles, with a cost
of approximately $3,142, are to be delivered pursuant to an agreement with one
vehicle manufacturer.
(B) EMPLOYMENT CONTRACTS
During 2000, 1999 and 1998, 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 May 2003.
F-27
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(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.
(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 $660, $863 and $35 to these plans during the years ended
December 31, 2000, 1999 and 1998, respectively.
(15) RELATED PARTY TRANSACTIONS
(A) EARN-OUT PAYMENTS
The Company is obligated to make certain earn-out 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 earn-out payment to
the former owners of each of these companies that achieves certain net revenue
targets. The net revenue target for 1998 was generally 110% of 1997 net revenue
of the particular company, and for the years 1999 through 2002 the net revenue
target is 110% of the greater of the prior year's actual net revenue or target
net revenue. If the net revenue target is achieved for a particular year, an
initial payment in shares of common stock, generally equal to 5% of the excess
of actual net revenue over the net revenue target, is due. In addition, 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.
At December 31, 2000 and 1999, the Company recorded additional goodwill and
a liability within due to related parties on the accompanying consolidated
balance sheets in the amount of $339 and $450, respectively, related to these
earn-out arrangements. The accrued amount represents the fair value of 677,018
and 27,723 shares of common stock at December 31, 2000 and 1999, respectively,
payable pursuant to such arrangements. During 1999, earn-out payments were made
in the form of $267 in cash and the issuance of 4,773 shares of the Company's
common stock valued at $223.
(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, 2000, the Company recorded a
liability in due to related parties on the accompanying consolidated balance
sheet in the amount of $250 representing the management fee for the fourth
quarter of 2000. For the year ended December 31, 2000, $446, representing the
2000 management fees, is included in selling, general and administrative
expenses.
F-28
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(C) EMPLOYMENT AND CONSULTANT AGREEMENTS WITH DIRECTORS
In 1998, the Company entered into consultant agreements with two directors.
Pursuant to these agreements, each of the directors were entitled to receive
from the Company a consulting fee equal to two percent of the gross revenue of
each company that the respective director assisted the Company in acquiring,
with the fee being based upon such acquired company's gross revenue for the
twelve months immediately preceding the acquisition. These consultant agreements
were terminated in September 1999. In addition, the Company entered into an
employment agreement, in 1998, with a third 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. The employment and consultant agreements
described above also contain covenants not to compete with the company for one
year after the termination of the agreements.
(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. For the years ended December 31, 2000 and 1999, the
Company recorded $462 and $2,539, respectively, of the excess compensation (over
current market value) as additional purchase price consideration and will
amortize this amount over the remaining life of the goodwill associated with the
company acquired.
(E) HOLDBACK
During 1999 and 1998, the Company withheld consideration in connection with
certain acquisitions in the form of cash and/or common stock that was required
to be released based on the achievement of certain financial ratios, or other
contingencies, after a contractually defined period of time. The Company did not
record a liability for the cash withheld or consider the shares of common stock
issued or outstanding until the satisfaction of the defined contingencies. At
December 31, 2000, the Company had no cash or shares of common stock withheld.
At December 31, 1999, the Company had cash and shares of common stock withheld
of $884 and 22,672, respectively.
(F) LEASE AGREEMENTS
As described in note 10, 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.
(G) EMPLOYEE LEASE AGREEMENT
During 2000 and 1999, the Company paid $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-29
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(16) 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, Notes Payable, 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, 2000 and 1999, management estimates that
the fair value of the convertible subordinated debentures approximated
$68,720 and $59,926. 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, 2000 and 1999 was
$12,038 and $3,388, 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, 2000 and 1999, the Company had letters of credit outstanding
totaling $12,038 and $3,388, respectively.
(17) QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
The table below sets forth the unaudited consolidated operating results by
quarter for the years ended December 31, 2000, 1999 and 1998:
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 loss per common share (a)......................... $ (1.61) (76.23) (3.73) (3.90)
========= ========= ========= =========
Diluted loss per common share (a)....................... $ (1.61) (76.23) (3.73) (3.90)
========= ========= ========= =========
F-30
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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)
========= ========= ========= =========
1998 QUARTERLY PERIOD ENDED
--------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
Net revenue............................................. $ -- 8,468 36,374 43,077
Income (loss) from operations........................... (390) 544 4,167 4,660
Net income (loss)....................................... (232) 457 1,970 2,197
Basic earnings (loss) per common share (a).............. $ (.82) .49 1.40 1.48
========= ========= ========= =========
Diluted earnings (loss) per common share (a)............ $ (.82) .48 1.38 1.46
========= ========= ========= =========
(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 12 and note 15(e).
(18) SUBSEQUENT EVENT
On March 30, 2001, 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, 2000 and December 31, 2000 and agreed to extend to April 30, 2001
the date by which the Company must fully implement a required cash management
system. 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 (a) DEDUCTIONS END OF PERIOD
------ -------- --------- ---------- -------------
Allowance for doubtful accounts:
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 1,362,455 2,800,703
December 31, 1998............... -- 183,000 1,263,006 314,218 1,131,788
- -----------
(a) Represents allowance for doubtful accounts recorded through purchase
accounting adjustments related to acquisitions.
F-32
EXHIBIT 11.1
WEIGHTED AVERAGE SHARES
PERIOD ENDED DECEMBER 31, 2000
SHARES ISSUED THREE MONTHS TWELVE MONTHS
------------- ------------ -------------
Shares outstanding at beginning of period 1,759,416 1,759,416 1,759,416
January 1, 2000............Issuance of shares for executive
compensation 3,077 3,077 3,069
January 28, 2000...........Release of holdback shares 5,175 5,175 4,778
March 5, 2000..............Release of holdback shares 8,194 8,194 6,735
March 7, 2000..............Release of holdback shares 1,164 1,164 950
March 22, 2000.............Release of holdback shares 2,797 2,797 2,169
May 5, 2000................Issuance of earnout shares 127,868 127,868 80,574
June 20, 2000..............Release of holdback shares 84 84 45
July 20, 2000..............Purchase of fractional shares (45) (45) (30)
July 20, 2000..............Issuance of shares for amendment fee 183,922 183,922 81,631
--------- --------- ---------
Weighted average shares outstanding for basic earnings per share 2,091,652 2,091,652 1,939,337
Options outstanding at December 31, 2000: 314,443 shares; total
Exercise proceeds: $14,115,430; average price of option $45.19 -- -- --
Warrants outstanding at December 31, 2000: 47,919 shares;
Exercise price: $30.34 per share; -- -- --
Earnout shares of 677,018 held at December 31, 2000; stock price
$0.50 -- -- --
Total shares outstanding for fully diluted earnings per share 2,091,652 2,091,652 1,939,337
========= ========= =========
The effect of options and warrants, earnout shares and shares held in
escrow have been excluded at December 31, 2000, as the effect would be
antidilutive. Additionally, shares issuable upon conversion of the convertible
subordinated debentures have been excluded at December 31, 2000, as the effect
would be antidilutive due to the adjustment (decrease in net loss) for interest
expense.
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CORPORATE INFORMATION
BOARD OF DIRECTORS EXECUTIVE OFFICERS:
------------------ ------------------
MICHAEL G. PSAROS GERALD R. RIORDAN
Chairman of the Board Chief Executive Officer
Managing Principal,
KPS Special Situations Fund, L.P. MICHAEL WYSOCKI
President of Transport Business Unit
GERALD R. RIORDAN
Chief Executive Officer HAL BORHAUER
President of Towing & Recovery
A. LAWRENCE FAGEN Business Unit
Vice Chairman
Charterhouse Group International, Inc. PATRICK J. FODALE
Chief Financial Officer
EUGENE J. KEILIN
Managing Principal CORPORATE HEADQUARTERS
KPS Special Situations Fund, L.P. United Road Services, Inc.
17 Computer Drive West
ED W. MORAWSKI Albany, NY 12205
Founder & Former President
Northland Auto Transporters, Inc. INFORMATION REQUESTS:
& Northland Fleet Leasing, Inc. United Road Services, Inc.
17 Computer Drive West
RAQUEL V. PALMER Albany, NY 12205
Vice President Attention: Investor Relations
KPS Special Situations Fund, L.P. Phone: (518) 446-0140
Fax: (518) 446-0676
STEPHEN P. PRESSER
Principal COMMON STOCK:
KPS Special Situations Fund, L.P. Shares of the Company's Stock are
traded over the counter and are quoted
JOSEPH S. RHODES on the OTC Bulletin Board
Vice President Trading Symbol: URSI
Charterhouse Group International, Inc.
INDEPENDENT AUDITORS:
BRIAN J. RILEY KPMG LLP
Vice President 515 Broadway
KPS Special Situations Fund, L.P. Albany, NY 12205
DAVID P. SHAPIRO TRANSFER AGENT:
Managing Principal American Stock Transfer & Trust Co,
KPS Special Situations Fund, L.P. 40 Wall Street
New York, NY 10005
INTERNET ADDRESS: Phone: (212) 936-5100
www.unitedroad.com
------------------