EXHIBIT 99.2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MPG Transco, Ltd.:
We have audited the accompanying balance sheets of MPG Transco, Ltd. as of
July 31, 1997 and 1998, and the related statements of operations, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MPG Transco, Ltd. as of July
31, 1997 and 1998, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
/S/ KPMG LLP
Detroit, Michigan
December 11, 1998
MPG TRANSCO, LTD.
BALANCE SHEETS
JULY 31, OCTOBER 31,
ASSETS 1997 1998 1998
----- ---- ----
(UNAUDITED)
Current assets:
Cash and cash equivalents........................................ $ 88,927 1,074,291 347,593
Trade accounts receivable, net of allowance for doubtful
accounts of $100,000 in 1997 and 1998......................... 1,368,797 1,986,064 1,957,619
Accounts receivable from employees............................... 12,016 52,853 42,073
Income tax receivable (note 7)................................... 152,991 -- --
Prepaid and other current assets (note 2)........................ 344,503 158,569 111,853
Deferred income taxes (note 7)................................... 101,824 208,225 171,418
----------- --------- ----------
Total current assets........................................ 2,069,058 3,480,002 2,630,556
Property and equipment, net (notes 3 and 5)........................... 11,504,108 9,655,810 10,630,088
Cash surrender value of officer's life insurance...................... 246,065 302,734 320,045
Other assets 28,200 27,700 27,700
----------- --------- ----------
Total assets................................................ $13,847,431 13,466,246 13,608,389
=========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit (note 5).......................................... $ 1,125,000 999,580 986,224
Current installments of notes payable (note 5)................... 3,170,821 1,799,544 2,004,499
Accounts payable................................................. 759,029 879,062 818,074
Due to related party (note 9).................................... 95,982 894,794 23,936
Income taxes payable (note 7).................................... -- 625,665 739,706
Other accrued liabilities (note 4)............................... 689,317 920,460 891,820
----------- --------- ----------
Total current liabilities................................... 5,840,149 6,119,105 5,464,259
Long-term liabilities:
Notes payable, excluding current installments (note 5)........... 2,526,498 846,588 1,421,428
Deferred income taxes (note 7)................................... 1,360,324 1,460,514 1,462,047
----------- --------- ----------
Total liabilities........................................... 9,726,971 8,426,207 8,347,734
----------- --------- ----------
Stockholders' equity:
Common stock, no par value. 10,000 shares authorized; 1,000
shares issued and outstanding................................. 1,000 1,000 1,000
Paid-in capital in excess of stated value........................ 1,417,234 1,417,234 1,417,234
Retained earnings................................................ 2,702,226 3,621,805 3,842,421
----------- --------- ----------
Total stockholders' equity.................................. 4,120,460 5,040,039 5,260,655
----------- --------- ----------
Total liabilities and stockholders' equity.................. $13,847,431 13,466,246 13,608,389
=========== ========== ==========
See accompanying notes to financial statements.
MPG TRANSCO, LTD.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
YEARS ENDED JULY 31, OCTOBER 31,
-------------------- -----------
1997 1998 1997 1998
---- ---- ---- ----
(UNAUDITED)
Net revenue $20,469,778 23,471,030 5,813,482 5,816,476
Cost of revenue.............................. 14,503,066 16,093,952 3,991,915 4,136,818
----------- ---------- --------- ---------
Gross profit....................... 5,966,712 7,377,078 1,821,567 1,679,658
Selling, general and administrative expenses. 5,224,312 5,225,129 1,245,141 1,222,955
----------- ---------- --------- ---------
Income from operations............. 742,400 2,151,949 576,426 456,703
Other income (expense):
Interest expense........................ (472,981) (487,295) (157,336) (76,608)
Interest income......................... 19,736 17,453 69 2,457
Other (13,257) (10,731) (1,867) 679
Loss on sale of assets.................. (250,767) (132,343) (127,490) (10,234)
----------- ---------- --------- ---------
Income before income taxes......... 25,131 1,539,033 289,802 372,997
Income tax expense (note 7).................. 39,683 619,454 122,578 152,381
----------- ---------- --------- ---------
Net income (loss).................. $ (14,552) 919,579 167,224 220,616
=========== ========== ========= =========
See accompanying notes to financial statements.
MPG TRANSCO, LTD.
STATEMENTS OF STOCKHOLDERS' EQUITY
PAID-IN
CAPITAL IN TOTAL
COMMON EXCESS OF RETAINED STOCKHOLDERS'
STOCK STATED VALUE EARNINGS EQUITY
----- ------------ -------- ------
Balance at July 31, 1996................................... $ 1,000 1,417,234 2,716,778 4,135,012
Net loss--Year ended July 31, 1997......................... -- -- (14,552) (14,552)
------- --------- --------- ---------
Balance at July 31, 1997................................... 1,000 1,417,234 2,702,226 4,120,460
Net income--Year ended July 31, 1998....................... -- -- 919,579 919,579
------- --------- --------- ---------
Balance at July 31, 1998................................... 1,000 1,417,234 3,621,805 5,040,039
Net income--
Three months ended October 31, 1998 (unaudited)....... -- -- 220,616 220,616
------- --------- --------- ---------
Balance at October 31, 1998 (unaudited).................... $ 1,000 1,417,234 3,842,421 5,260,655
======= ========= ========= =========
See accompanying notes to financial statements.
MPG TRANSCO, LTD.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
YEARS ENDED JULY 31, OCTOBER 31,
-------------------- -----------
1997 1998 1997 1998
---- ---- ---- ----
(UNAUDITED)
Cash flows from operating activities:
Net income (loss)............................................... $ (14,552) 919,579 167,224 220,616
Adjustments to reconcile net income (loss) to net cash provided
by (used in)operating activities:
Depreciation and amortization............................... 1,392,177 1,526,643 405,590 404,264
Deferred income taxes....................................... 192,674 (6,211) -- 38,340
Loss on sale of property and equipment...................... 250,767 132,343 127,490 10,234
(Increase) decrease in trade accounts
receivable................................................ (111,392) (617,267) (461,594) 28,445
(Increase) decrease in accounts receivable from employees... (12,016) (40,837) (15,616) 10,780
(Increase) decrease in income tax receivable................ (152,991) 152,991 152,991 --
(Increase) decrease in prepaid and other
assets.................................................... (139,705) 129,765 (356,312) 29,405
Increase (decrease) in accounts payable..................... 178,135 120,033 719,500 (60,988)
Increase in income taxes payable............................ -- 625,665 122,578 114,041
Increase (decrease) in other accrued
liabilities............................................... 450,143 231,143 221,578 (28,640)
--------- --------- --------- -------
Net cash provided by (used in) operating activities..... 2,033,240 3,173,847 1,083,429 766,497
--------- --------- --------- -------
Cash flows from investing activities:
Purchases of property and equipment............................. (4,517,395) (227,568) (40,214) (1,450,467)
Proceeds from sale of equipment................................. 400,144 416,880 322,193 61,691
--------- --------- --------- ----------
Net cash provided by (used in) investing activities..... (4,117,251) 189,312 281,979 (1,388,776)
--------- --------- --------- ----------
Cash flows from financing activities:
Net borrowings (repayment) on line of credit.................... 1,125,000 (125,420) 277,835 (13,356)
Proceeds from long-term debt.................................... 1,051,227 -- -- 1,367,170
Principal payments on long-term debt............................ (973,590) (3,051,187) (1,087,873) (587,375)
Increase (decrease) in due to related party..................... 719,699 798,812 319,095 (870,858)
--------- --------- --------- --------
Net cash provided by (used in) financing activities..... 1,922,336 (2,377,795) (490,943) (104,419)
--------- --------- --------- -------
Net change in cash and cash equivalents............................. (161,675) 985,364 874,465 (726,698)
Cash and cash equivalents at beginning of period.................... 250,602 88,927 88,927 1,074,291
--------- --------- --------- ---------
Cash and cash equivalents at end of period.......................... $ 88,927 1,074,291 963,392 347,593
======== ========= ======= ========
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest.................................................... $ 472,981 487,296 157,336 76,608
========= ======= ======= =======
Income taxes................................................ $ -- (152,991) -- --
========= ======= ======= =======
See accompanying notes to financial statements.
MPG TRANSCO, LTD.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1997 AND 1998
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
MPG Transco, Ltd.'s (MPG) primary business is transporting vehicles for
automotive manufacturers and transporting consumer merchandise for major retail
manufacturers. MPG's automotive operations utilize three terminals in Toledo,
Boston and Newark, while the consumer merchandise operation uses a terminal in
Allen Park, Michigan. MPG operates approximately 140 vehicles.
(b) Revenue Recognition
MPG operates as one segment related to the transportation of vehicles and
consumer merchandise for customers.
MPG's revenue is derived from customers who require transportation of
vehicles and consumer merchandise. Transport revenue is recognized upon the
delivery of the vehicles and consumer merchandise to their final destination.
Expenses related to the generation of revenue are recognized as incurred.
(c) Cash and Cash Equivalents
For purposes of the statement of cash flows, MPG considers all highly
liquid debt instruments with original maturities of three months or less to be
cash equivalents.
(d) Property and Equipment
Property and equipment are stated at cost. Depreciation is determined for
financial statement purposes using the straight-line method over the estimated
useful lives of the individual assets or, for leasehold improvements, over the
terms of the related leases if shorter. Accelerated methods of depreciation have
been used for income tax purposes. For financial statement purposes, MPG
provides for depreciation of property and equipment over the following estimated
useful lives.
Transportation equipment.............................. 10 years
Furniture and fixtures................................ 5 years
Office equipment...................................... 5 years
Automobiles........................................... 5 years
Leasehold improvements................................ 3-5 years
(e) Fair Value of Financial Instruments
Due to the short-term nature of various financial instruments and the
current incremental borrowing rates available to MPG on bank loans with similar
terms and maturities, the fair value of MPG's financial instruments approximates
their carrying values.
(f) 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 credit 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 or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
MPG TRANSCO, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(g) Use of Estimates
Management of MPG 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 financial statements in conformity with
generally accepted accounting principles. Actual results could differ from those
estimates.
(h) Interim Financial Statements
The interim financial information included in these financial statements is
unaudited but reflects all adjustments (consisting of only normal recurring
accruals) which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented.
(2) PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets consist of the following:
JULY 31, OCTOBER 31,
1997 1998 1998
----- ----- ----
(UNAUDITED)
Prepaid insurance..................................................................... $235,245 17,609 13,484
Prepaid vehicle registration.......................................................... 77,552 82,185 47,442
Other................................................................................. 31,706 58,775 50,927
------ ------ ------
$344,503 158,569 111,853
======== ======= =======
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
JULY 31, OCTOBER 31,
1997 1998 1998
----- ---- ----
(UNAUDITED)
Transportation equipment....................................................... $13,430,048 12,555,659 13,850,320
Office equipment and furniture................................................. 186,782 186,782 190,578
Computer equipment............................................................. 781,133 897,094 936,670
Automobiles.................................................................... 320,454 235,317 214,543
Leasehold improvements......................................................... 82,005 104,805 104,805
----------- ---------- ----------
Total.......................................................................... 14,800,422 13,979,657 15,296,916
Less accumulated depreciation and amortization................................. 3,296,314 4,323,847 4,666,828
----------- ---------- ----------
$11,504,108 9,655,810 10,630,088
=========== ========= ==========
(4) OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
JULY 31, OCTOBER 31,
1997 1998 1998
----- ---- ----
(UNAUDITED)
Accrued payroll................................................................ $ 554,247 237,000 386,000
Accrued bonus.................................................................. -- 212,000 212,000
Accrued vacation............................................................... 50,000 55,000 55,000
Accrued lease termination...................................................... -- 132,257 88,172
Accrued customer damage claims................................................. -- 90,146 49,000
Other.......................................................................... 85,070 194,057 101,648
--------- ------- -------
$ 689,317 920,460 891,820
========= ======= =======
MPG TRANSCO, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) INDEBTEDNESS
Long-term debt consists of the following:
JULY 31, OCTOBER 31,
1997 1998 1998
---- ---- ----
(UNAUDITED)
Note payable to Associates Commercial Corporation, payable in monthly
installments of $59,816, including interest at 7.75%, maturing January
2000. Secured by transportation equipment........................................ $1,577,222 960,087 798,206
Note payable to Michigan National Bank, payable in monthly installments
of $28,023, including interest at 7.65%, maturing January 2000. Secured
by transportation equipment...................................................... 762,993 475,346 399,665
Note payable to Financial Federal Credit, Inc., payable in monthly
installments of $18,546, including interest at 9.25%, maturing July 2000.
Secured by transportation equipment.............................................. 565,945 404,325 357,885
Note payable to Concord Commercial Corporation, payable in monthly
installments of $21,016, including interest at 8.20%, maturing October
1998. Secured by transportation equipment........................................ 298,649 62,196 --
Note payable to Associates Commercial Corporation, payable in monthly
installments of $26,601, including interest at 8.00%, maturing October
1998. Secured by transportation equipment........................................ 402,434 78,751 --
Note payable to Navistar Financial Corporation, payable in monthly
installments of $51,043, including interest at 8.00%, scheduled to mature
August 1998. Secured by transportation equipment................................. 563,629 81,499 35,309
Note payable to Concord Commercial Corporation, payable in monthly
installments of $24,728, including interest at 8.00%, maturing October
1997. Secured by transportation equipment.................................. 73,079 -- --
Note payable to NBD Equipment Finance, Inc., payable in monthly
installments of $9,557, including interest at 8.57%, scheduled to mature
April 1998. Secured by transporation equipment............................. 85,633 -- --
Note payable to Michigan National Bank, payable in monthly installments
of $14, 945, including interest at 8.85%, maturing March 1998. Secured
by transportion equipment.................................................. 115,686 -- --
Note payable to Michigan National Bank, payable in monthly installments
of $11,614, including interest at 8.85%, maturing August 1997. Secured
by transportation equipment................................................ 185,924 -- --
Note payable to General Electric Capital Corporation, payable in monthly
installments of $30,471, including interest at 7.45%, maturing January
2000. Secured by transportation equipment.................................. 849,010 535,070 453,140
MPG TRANSCO, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, OCTOBER 31,
1997 1998 1998
---- ---- ----
(UNAUDITED)
Note payable to General Electric Capital Corporation, payable in monthly
installments of $20,082 until October 2001 and $1,521 thereafter, including
interest at 6.6%, maturing July 2003. Secured by
transportation equipment.................................................. $ -- -- 682,265
Note payable to General Electric Capital Corporation, payable in monthly
installments of $20,454 until September 2001 and $1,541 thereafter,
including interest at 7.5%, maturing September 2003. Secured by
transportation equipment.................................................. -- -- 668,732
Various other notes payable secured by transportation equipment.............. 104,686 --
Various other notes payable secured by automobile equipment.................. 112,429 48,858 30,725
--------- --------- ---------
Total long-term debt............................................ 5,697,319 2,646,132 3,425,927
Less current installments.................................................... 3,170,821 1,799,544 2,004,499
--------- --------- ---------
Long-term debt, excluding current installments.................. $2,526,498 846,588 1,421,428
========== ========= =========
Annual maturities of long-term as of July 31, 1998 are as follows:
1999........................................... $1,799,544
2000........................................... 846,588
----------
$2,646,132
==========
(6) LEASES
MPG leases its operating facility and other equipment from third parties
under noncancelable operating leases. Rent expense in 1997 and 1998 was $789,315
and $719,851, respectively.
Future minimum operating lease payments as of July 31, 1998 are:
1999................................................. $ 598,199
2000................................................. 625,334
2001................................................. 584,010
2002................................................. 297,131
2003................................................. 63,369
----------
Total........................................ $2,168,043
==========
MPG TRANSCO, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) INCOME TAXES
Income tax expense (benefit) for the years ended July 31, 1997 and 1998
consists of the following:
1997 1998
---- ----
Current:
Federal.................................................. $(152,991) 511,665
State.................................................... -- 114,000
--------- -------
(152,991) 625,665
Deferred--federal............................................. 192,674 (6,211)
--------- -------
$ 39,683 619,454
======== =======
The following table reconciles the expected tax expense at the federal
statutory tax rate to the effective tax rate.
YEARS ENDED JULY 31,
--------------------
1997 1998
---- ----
Computed expected tax......................................... $ 8,545 523,271
Non-deductible expenses....................................... 31,138 20,943
State income taxes, net of federal tax benefit................ -- 75,240
--------- -------
$ 39,683 619,454
======== =======
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities as of July 31, 1997 and 1998 are presented
below:
1997 1998
---- ----
Deferred tax assets:
Allowance for doubtful accounts.......................... $ 34,000 34,000
Accrued expenses not currently deductible............... 67,824 174,225
-------- ------
Gross deferred tax assets........................... 101,824 208,225
-------- ------
Deferred tax liabilities--property and equipment, due to
differences in depreciation lives and methods.............. 1,360,324 1,460,514
-------- ------
Net deferred tax liability.......................... $1,258,500 1,252,289
========== =========
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 during the periods in
which those temporary differences become deductible. Management considers the
projected future taxable income and tax planning strategies, as well as
carryback opportunities, in making this assessment. Based upon the level of
historical taxable income, projections for future taxable income and carryback
opportunities over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not that MPG will realize the
benefits of these deductible differences. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income are reduced.
MPG TRANSCO, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(8) EMPLOYEE BENEFITS
All employees of MPG are employed by Translesco, a related entity owned by
the same shareholders of MPG, and leased by MPG.
Translesco has a retirement savings plan pursuant to section 401(k) of the
Internal Revenue Code that is available to all employees with at least 90 days
of service to Translesco and who are at least 18 years of age. Eligible
participants may contribute up to 20% of their compensation. MPG does not make
contributions to the plan. The accompanying financial statements include all
payroll and related costs associated with the employees serving MPG.
(9) RELATED PARTY TRANSACTIONS
MPG and Translesco maintain a combined cash management system. As a result
of this arrangement, approximately $96,000 and $895,000 were due to Translesco
at July 31, 1997 and 1998, respectively. For the years ended July 31, 1997 and
1998, average balances due Translesco were less than $100,000 except for a
borrowing in June, 1998, of $1,250,000 and repayments of approximately $355,000
in July, 1998.
(10) CONTINGENT LIABILITIES
Various legal claims arise against MPG during the normal course of
business. In the opinion of management, liabilities, if any, arising from
proceedings would not have a material effect on the financial statements.
(11) SUBSEQUENT EVENTS
The stockholders of the Company entered into a definitive agreement on
November 12, 1998 to sell MPG Transco, Ltd. to United Road Services, Inc.
(12) CONCENTRATION OF BUSINESS RISKS
Sales to the Company's three largest customers, General Motors, Volkswagen
and Mercedes-Benz, amounted to 22%, 10% and 10%, respectively, of total revenues
for the year ended July 31, 1997 and 43%, 14% and 8%, respectively, for the year
ended July 31, 1998. The loss of one or all of these customers could
significantly affect MPG's performance.