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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(MARK)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
Commission File Number 000-24019
United Road Services, Inc.
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-3278455
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17 Computer Drive West
Albany, New York 12205
---------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518) 446-0140
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes X No ___
---
As of May 12, 2000, the registrant had 1,785,125 shares of common stock issued
and outstanding.
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UNITED ROAD SERVICES, INC.
Form 10-Q For The Quarterly Period Ended March 31, 2000
Index Page
Part I. - Financial Information
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations
For the Three Months Ended
March 31, 2000 and March 31, 1999 4
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 2000 and March 31, 1999 5
Notes to Condensed Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3 Quantitative and Qualitative Disclosures about Market Risk 21
Part II. - Other Information
Item 2 Changes in Securities and Use of Proceeds 22
Item 3 Defaults under Senior Securities 22
Item 5 Other Information 23
Item 6 Exhibits and Reports on Form 8-K 23
Signatures 25
2
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS March 31, 2000 December 31, 1999
--------------- ------------------
Current assets: (Unaudited)
Cash and cash equivalents $ 6,586 4,115
Trade receivables, net of allowance for doubtful
accounts of $2,333 at March 31, 2000
and $2,539 December 31, 1999 21,131 23,709
Other receivables, net of allowance for doubtful accounts
of $262 at March 31, 2000 and December 31, 1999 1,279 1,161
Prepaid income taxes 2,656 3,534
Prepaid expenses and other current assets 2,573 2,274
Current portion of rights to equipment under finance contracts 480 435
-------- -------
Total current assets 34,705 35,228
Vehicles and equipment, net 76,321 78,212
Rights to equipment under finance contracts, excluding current portion 1,075 1,480
Deferred financing costs, net 3,949 4,109
Goodwill, net 205,107 203,337
Other non-current assets 307 79
-------- -------
Total assets $321,464 322,445
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of obligations under capital leases $ 262 268
Current installments of obligations for equipment under
finance contracts 480 435
Borrowings under credit facility 50,650 50,650
Accounts payable 6,832 7,464
Accrued expenses 9,179 9,489
Due to related parties 1,176 1,130
-------- -------
Total current liabilities 68,579 69,436
Obligations under capital leases, excluding current installments 351 402
Obligations for equipment under finance contracts, excluding
current installments 1,075 1,480
Long-term debt 82,494 80,876
Deferred tax liability 1,657 2,666
Other long-term liabilities 818 1,172
-------- -------
Total liabilities 154,974 156,032
-------- -------
Stockholders' equity:
Preferred stock; 5,000,000 shares authorized; no shares
issued or outstanding - -
Common stock, $0.01 par value; 35,000,000 shares
authorized; 1,785,125 and 1,759,416
shares issued and outstanding at March 31, 2000
and December 31, 1999, respectively 18 18
Additional paid-in capital 194,807 191,877
Accumulated deficit (28,335) (25,482)
-------- -------
Total stockholders' equity 166,490 166,413
-------- -------
Total liabilities and stockholders' equity $321,464 322,445
======== =======
See accompanying notes to condensed consolidated financial statements.
3
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three months ended
March 31,
2000 1999
---- ----
Net revenue $65,463 59,453
Cost of revenue 52,350 42,843
Amortization of goodwill 1,339 1,279
Depreciation 2,499 1,891
Selling, general and administrative expenses 9,665 7,564
------- ------
Income (loss) from operations (390) 5,876
Other income (expense):
Interest income 63 11
Interest expense (3,275) (2,023)
Other (includes $212 of loss on sale of
division for the period ended March 31, 2000) (250) (70)
------- ------
Income (loss) before income taxes (3,852) 3,794
Income tax (benefit) expense (999) 1,784
------- ------
Net income (loss) $(2,853) 2,010
======= ======
Per share amounts:
Basic earnings (loss) $(1.61) 1.22
======= ======
Diluted earnings (loss) $(1.61) 1.16
======= ======
See accompanying notes to condensed consolidated financial statements.
4
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three months ended
March 31,
2000 1999
------- -------
Net income (loss) $(2,853) 2,010
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation 2,499 1,891
Amortization of goodwill 1,339 1,279
Amortization of deferred financing costs 218 207
Provision for doubtful accounts 229 219
Deferred income taxes (1,009) 451
Interest expense, paid-in-kind 1,618 980
Loss on sale of vehicles and equipment, net 10 -
Loss on sale of division 212 -
Changes in operating assets and liabilities, net of effects of
acquisitions:
Decrease (increase) in trade receivables 2,255 (5,322)
Decrease in other receivables 82 1,254
Decrease in prepaid income taxes 878 -
Increase in prepaid expenses and
other current assets (734) (680)
Decrease in other non-current assets 61 118
Decrease in accounts payable (767) (869)
Increase (decrease) in accrued expenses (243) 367
Increase in long-term liabilities (316) -
Increase in income taxes payable - 1,085
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Net cash provided by operating activities 3,479 2,990
------- -------
Investing activities:
Acquisitions, net of cash acquired - (24,824)
Deposit on vehicles - (1,691)
Purchases of vehicles and equipment (857) (5,174)
Proceeds from sale of vehicles and equipment 239 100
Proceeds received from sale of division 450 -
Amounts payable to related parties (711) (1,626)
------- -------
Net cash used in investing activities (879) (33,215)
------- -------
Financing activities:
Proceeds from issuance of convertible subordinated debentures - 31,500
Borrowings on revolving credit facility - 42,900
Repayments of revolving credit facility - (30,000)
Payments of deferred financing costs (58) (1,367)
Payments on long-term debt and capital leases assumed
in acquisitions (71) (14,698)
------- -------
Net cash (used) provided by financing activities (129) 28,335
------- -------
Increase (decrease) in cash and cash equivalents 2,471 (1,890)
Cash and cash equivalents at beginning of period 4,115 3,381
------- -------
Cash and cash equivalents at end of period $ 6,586 1,491
======= =======
(continued)
5
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(In thousands)
(Unaudited)
Three months ended
March 31,
2000 1999
---- ----
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ 1,373 665
======= =====
Income taxes, net of refunds $ (868) 79
======= =====
Supplemental disclosure of non-cash investing and financing
activity:
Issuance of common stock for acquisitions $ -- 24,821
======= =====
See accompanying notes to condensed consolidated financial statements.
6
UNITED ROAD SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2000
(1) Summary of Significant Accounting Policies
(a) Interim Financial Statements
The unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Certain information and footnote
disclosures, normally included in annual consolidated financial
statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made
are adequate to make the information presented not misleading. In the
opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to fairly present the financial
position, results of operations and cash flows have been included. The
results of operations for the interim periods are not necessarily
indicative of the results for the entire fiscal year.
It is suggested that these condensed consolidated financial statements
be read in conjunction with the audited consolidated financial
statements and notes thereto included in United Road Services, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1999, as
filed with the SEC.
(b) Organization and Business
United Road Services, Inc., a Delaware corporation (the "Company"),
was formed in July 1997 to become a leading national provider of motor
vehicle and equipment towing, recovery and transport services. From
inception through May 5, 1999, the Company acquired 56 businesses (the
"Acquisitions"), seven of which (the "Founding Companies") were
acquired simultaneously with the consummation of an initial public
offering of the Company's common stock. 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. Both segments operate under a
common management structure that evaluates each of the Company's 61
service locations located in 22 states.
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 include
automobile dealers, repair shops and fleet operators, law enforcement
agencies, municipalities and individual motorists.
7
UNITED ROAD SERVICES, INC.
Notes to Condensed Consolidated Financial Statements, continued
(Unaudited)
(1) Continued
(c) Basis of Presentation
The accompanying condensed consolidated financial statements include
the accounts of the Company and its subsidiaries. The results of
operations of the Acquisitions have been included in the Company's
results of operations from their respective acquisition dates. All
significant intercompany transactions have been eliminated in
consolidation.
(d) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
unaudited interim consolidated financial statements in conformity with
generally accepted accounting principles. Actual results could differ
from those estimates.
(e) Per Share Amounts
Basic earnings (loss) per share is computed by dividing income (loss)
available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings (loss) 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
shared in the earnings (loss) of the Company (such as stock options,
warrants and convertible subordinated debentures).
The following table provides calculations of both basic and diluted
earnings (loss) per share:
Three months ended March 31, 2000
---------------------------------
Weighted Per
average share
Net loss shares amounts
------------- --------- --------
Basic $(2,853,000) 1,768,966 $(1.61)
=========== ========= ======
Diluted $(2,853,000) 1,768,966 $(1.61)
=========== ========= ======
Three months ended March 31, 1999
---------------------------------
Weighted Per
Net average share
income shares amounts
------------ --------- -------
Basic $ 2,010,000 1,649,835 $ 1.22
=========== ========= ======
Diluted $ 2,010,000 1,737,841 $ 1.16
=========== ========= ======
The impact of the Company's outstanding stock options, warrants,
convertible subordinated debentures and shares held in escrow has been
excluded at March 31, 2000, as the effect would be antidilutive.
Additionally, shares issuable upon conversion of the convertible
subordinated debentures have been excluded at March 31, 1999, as the
effect would be antidilutive due to the adjustment (increase in net
income) for interest expense.
8
(f) Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, which established accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. Statement No.
133 has subsequently been amended by Financial Accounting Standards
Board Statement No. 137 which delays the effective date for
implementation of Statement No. 133 until fiscal quarters of fiscal
years beginning after June 15, 2000. Management is currently
evaluating the impact of Statement No. 133 on the Company's
consolidated financial statements.
(g) Reclassifications
Certain reclassifications of the prior period unaudited interim
condensed consolidated financial statements have been made to conform
to the current period presentation.
(2) Stockholders' Equity
On January 1, 2000, 3,077 shares representing a fair value of $50,000 were
granted to the Company's Chief Executive Officer, as required under his
employment agreement. On May 4, 2000, the Company effected a one for ten
reverse stock split of its common stock. All share and per-share amounts
in the accompanying unaudited interim condensed consolidated financial
statements have been restated to give effect to the stock split.
(3) Due to Related Parties
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 will be 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,
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 March 31, 2000 and
December 31, 1999, the Company recorded additional goodwill and a liability
within accrued expenses on the accompanying condensed consolidated balance
sheets in the amount of $450,000 to reflect earn-out payments due.
(4) Debt
As of March 31, 2000, the Company had a total of $54.0 million, including
letters of credit of $3.4 million, outstanding under its revolving credit
facility (the "Credit Facility") with various banks, for which Bank of
America, N.A. ("Bank of America") acts as agent. As of September, 30,
1999, the Company was in violation of the covenants in the Credit Facility
relating to minimum consolidated net income and the ratio of net income
plus interest, tax and rental expense (EBITR) to interest expense plus
rental expense. In November 1999, the Company received a temporary waiver
of these defaults through February 29, 2000 pursuant to a Second Amendment
to the Credit Facility. The Second Amendment also strengthened certain
financial covenants in the Credit Facility. These amended financial
covenants require the Company to (i) maintain a specified minimum level of
EBITDA during the period from October 1, 1999 through February 28, 2000,
(ii) obtain the prior written consent of the bank group in order to pay
cash consideration for any acquisition, (iii) refrain from entering into
operating leases providing for aggregate rental payments in excess of $8.6
million in 1999, and (iv) refrain from having greater than $1.5 million of
cash in bank accounts outside the Bank of America. In connection with this
Amendment the Company and the banks also agreed to decrease the commitment
amount of the Credit Facility to $65.0 million and to decrease the amount
available for borrowing to $55.0 million after January 1, 2000.
In November 1999, the Company failed to meet the minimum EBITDA requirement
imposed by the Second Amendment to the Credit Facility. As a result, the
Company and the banks entered into a Third Amendment to
9
the Credit Facility dated January 31, 2000, which waived the existing
covenant defaults through March 31, 2000. The Third Amendment also set a
new minimum EBITDA requirement (not including certain one-time charges) of
$500,000 per month, limits the amount of cash equivalents that the Company
is entitled to have to $2.5 million and allows the banks to withdraw any
excess over $2.5 million to reduce the outstanding borrowings, prohibits
certain sales of assets other than for cash without the banks' consent, and
requires certain proceeds of asset sales to be used to permanently reduce
the commitment amount under the Credit Facility (which requires the Company
to make mandatory prepayments of any amounts outstanding in excess of the
commitment amount, as so reduced). The Third Amendment also permanently
reduced the commitment amount of the Credit Facility to $58.0 million and
the amount available for borrowing to $55.0 million (unless the banks
otherwise consent).
On March 29, 2000, the Company and the banks entered into a letter
agreement which extended the waiver of the existing defaults through April
28, 2000. On April 27, 2000, the banks extended the temporary waivers of
the existing defaults under the Credit Facility until May 31, 2000, at
which time there will be an immediate event of default and, absent a
further waiver or amendment, all amounts due thereunder will be subject to
acceleration at the banks' discretion. Consequently, the total amount
outstanding under the Credit Facility at March 31, 2000 has been classified
as a current liability. If the banks elect to accelerate amounts due 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 outstanding amounts under the Credit Facility, such
acceleration would cause a default under the Company's 8.0% convertible
subordinated notes due 2008 ("Charterhouse Debentures") issued to
Charterhouse URS LLC ("Charterhouse") and Charterhouse could accelerate
repayment of all amounts outstanding under the Charterhouse Debentures,
subject to the Credit Facility banks' priority. In such event, repayment
of amounts outstanding under the Charterhouse Debentures could only be made
if the Credit Facility was first paid in full or the bank group gave its
express prior written consent to such repayment.
(5) 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 services for motor
vehicles, 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.
The accounting policies of each of the segments are the same as those of
the Company, as outlined in note 1 of the Company's Annual Report on Form
10-K for the year ended December 31, 1999. Certain amounts have been
reclassified for consistent presentation. 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 before income taxes.
During 1999, management determined that a more appropriate measure of the
performance of its operating segments may be made through an evaluation of
the Company's income from operations. Accordingly, the Company's summarized
segment financial information is presented below on the basis of income
from operations for the three month periods ended March 31, 2000 and 1999.
Inter-segment revenues and transfers are not significant.
10
Summarized financial information concerning the Company's reportable segments is
shown in the following tables:
Three months ended March 31, 2000
- ---------------------------------
Towing and
Transport Recovery Other Total
--------- -------- ----- -----
Net revenues from external customers $40,521 24,942 -- 65,463
Cost of revenue, including depreciation 33,751 21,098 -- 54,849
Income (loss) from operations 2,450 164 (3,004) (390)
Three months ended March 31, 1999
- ---------------------------------
Towing and
Transport Recovery Other Total
--------- -------- ----- -----
Net revenues from external customers $36,102 23,351 -- 59,453
Cost of revenue, including depreciation 27,432 17,302 -- 44,734
Income from operations 5,542 2,614 (2,280) 5,876
The following are reconciliations of the information used by the chief operating
decision-maker to the Company's consolidated totals.
Three months ended
March 31,
Reconciliation of income (loss) before income taxes: 2000 1999
---- ----
Total profit from reportable segments $ 2,614 8,156
Unallocated amounts:
Interest expense, net (3,212) (2,012)
Other selling, general and administrative costs (3,004) (2,280)
Other expense (250) (70)
------- -------
Income (loss) before income taxes $(3,852) 3,794
======= =======
(6) Disposition
On February 11, 2000, the Company sold, for a loss on sale of division of
$212,000, 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, which has been discounted at 8.0% and is payable in
installments through 2004. Northshore was a division within the Company's
towing and recovery segment.
(7) Stock Purchase Agreement
On April 14, 2000, the Company entered into a Stock Purchase Agreement
(the "KPS Agreement") with Blue Truck Acquisition, L.L.C., a Delaware
limited liability company ("Blue Truck") and an affiliate of KPS Special
Situations Fund, L.P. ("KPS"), for the sale of shares of Series A
Participating Convertible Preferred Stock (the "Series A Preferred
Stock") to KPS for an aggregate purchase price of $25.0 million (the "KPS
Transaction"). Holders of Series A Preferred Stock are entitled to
cumulative dividends of 5.5% per annum for six years after the closing
date of the KPS Transaction and 5% per annum thereafter payable, until
2005, either in cash or in shares of the Company's Series B Participating
Convertible Preferred Stock (the "Series B Preferred Stock") at the
option of the Company. After 2005, dividends are payable only in cash.
The obligation to pay dividends terminates in 2008, or earlier if the
Company's common stock trades above a specified price level.
The Series A Preferred Stock and Series B Preferred Stock (collectively,
the "Preferred Stock") are both convertible into the Company's common
stock at any time at the option of the holder. The per share
11
conversion price for the Series A Preferred Stock is generally the lesser
of $20 or the average closing price of the common stock for the 30
trading days prior to closing of the KPS Transaction (the "Thirty Day
Average"). However, if the Thirty Day Average is greater than or equal to
$8.40 and less than or equal to $10, the conversion price will be $10,
and if the Thirty Day Average is less than $8.40, the conversion price
will be 120% of the Thirty Day Average. The Series B Preferred Stock is
identical in all respects to the Series A Preferred Stock except that its
conversion price is 15% lower than the conversion price of the Series A
Preferred Stock. The Preferred Stock automatically converts into common
stock upon the occurrence of certain business combinations, unless the
holders elect to exercise their liquidation preference rights.
Upon consummation of the KPS Transaction, the Company has agreed to pay
KPS Management LLC, an entity affiliated with KPS, a one-time transaction
fee of $2.5 million and to reimburse KPS for its actual reasonable fees
and expenses in connection with negotiation and performance of the KPS
Agreement. The Company has also agreed to pay KPS Management LLC an
annual management fee of $1 million initially, which may be lowered to
$500,000 and then to zero based upon the amount of Preferred Stock held
by Blue Truck and its permitted transferees. The holders of Preferred
Stock have the right to designate 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 Preferred
Stock. At lower levels of ownership, holders of Preferred Stock will be
entitled to appoint three directors, one director, or no directors.
In connection with the KPS Transaction, the Company and Charterhouse have
agreed that the Charterhouse Debentures will be redeemable by the Company
at par plus accrued interest under certain circumstances. Charterhouse
also agreed to waive its right to require the Company to redeem the
Debentures at 106.25% of the aggregate principal amount of the Debentures
upon consummation of the KPS Transaction in return for a transaction fee
of $750,000. Charterhouse has also agreed to waive certain corporate
governance rights that existed under its Investor's Agreement with the
Company in connection with the KPS Transaction.
Consummation of the KPS Transaction is subject to a number of conditions,
including approval of the Company's stockholders and the availability at
closing of a refinancing or replacement of the Company's Credit Facility
providing for at least $25 million of borrowing capacity in addition to
the amounts currently outstanding under the Credit Facility. There can
be no assurance that these conditions will be satisfied, or that the KPS
Transaction, the refinancing of the Credit Facility, or the restructuring
of the Charterhouse Debentures will be consummated.
12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included in Item 1
of this Quarterly Report.
On May 4, 2000, the Company effected a one for ten reverse stock split of its
common stock. All share and per-share amounts in the following discussion and
analysis have been restated to give effect to the stock split.
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 equipment, risks related to the
Company's limited operating history, risks related to the Company's ability to
successfully implement its revised business strategy, 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 Company's ability to integrate acquired companies, 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,
changes in the general level of demand for towing, recovery and transport
services, price changes in response to competitive factors, seasonal and other
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 offers a broad range of towing, recovery and transport services.
These services include: towing, impounding and storing motor vehicles;
conducting lien sales and auctions of abandoned vehicles; recovering heavy-duty
commercial and recreational vehicles; towing heavy equipment; and transporting
new and used vehicles. The Company's customers include commercial entities, such
as automobile leasing companies, insurance companies, automobile auction
companies, automobile dealers, repair shops and fleet operators; law enforcement
agencies such as police, sheriff and highway patrol departments; and individual
motorists.
The Company derives revenue from towing, 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
13
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.
At the time of its initial public offering in May 1998, the Company acquired the
seven Founding Companies. Between May 6, 1998 and May 5, 1999, the Company
acquired a total of 49 additional motor vehicle and equipment 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 the 56 businesses it had acquired within its first year of
operations. The goal of the Company's revised business strategy is to improve
the operational efficiency and profitability of its existing businesses in order
to build a stable platform for future growth, which may or may not include
additional acquisitions. Key elements of the Company's revised business strategy
include providing high quality service, expanding the Company's scope of
services and customer base and improving operating performance and
profitability. The Company has not completed any acquisitions since May 5, 1999.
The Company's ability to complete acquisitions in the future will depend, to a
great degree, upon its success in implementing operational improvements and the
availability of capital.
Management's discussion and analysis addresses the Company's historical results
of operations as shown in its unaudited condensed consolidated financial
statements for the three months ended March 31, 2000 and 1999. The historical
results for each of the three months ended March 31, 2000 and 1999 include the
results of all businesses acquired prior to March 31of the relevant year from
their respective dates of acquisition.
Results of Operations
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.
For the three months ended March 31, 2000, the Company's results of operations
were derived from 22 transport businesses and 33 towing and recovery businesses.
For the three months ended March 31, 1999, the Company's results of operations
were derived from 21 transport businesses and 33 towing and recovery businesses
acquired prior to March 31, 1999. In the first quarter of 1999, the Company
acquired nine transport businesses (four of which were acquired in the last half
of such quarter) and three towing and recovery businesses (all of which were
acquired in the last half of such quarter). For the three months ended March 31,
1999, the Company evaluated the performance of its operating segments based on
income (loss) before income taxes. Subsequently in 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 three months ended March 31, 2000 and 1999.
14
The following tables set forth selected statement of operations data by segment
and for the Company as a whole, as well as such data as a percentage of net
revenue, for the periods indicated:
Three months ended March 31, 2000
(Dollars in thousands)
Transport Towing and Recovery Total
--------- ------------------- -----
Net revenue ............................... $ 40,521 100.0% $ 24,942 100.0% $ 65,463 100.0%
Cost of revenue, including
depreciation ............................. 33,751 83.3 21,098 84.6 54,849 83.8
Selling, general and administrative
expenses (1) ............................. 3,549 8.8 3,112 12.5 9,665 14.8
Amortization of goodwill .................. 771 1.9 568 2.3 1,339 2.0
-------- -------- -------- -------- -------- --------
Income (loss) from operations ............. $ 2,450 6.0% $ 164 0.6% (390) (0.6)
======== ======== ======== ========
Interest expense, net ..................... 3,212 4.9
Other expenses, net ....................... 250 0.4
-------- --------
Loss before income taxes .................. (3,852) (5.9)
Income tax benefit ........................ (999) (1.5)
-------- --------
Net loss .................................. $ (2,853) (4.4)%
======== ========
Three months ended March 31, 1999
(Dollars in thousands)
Transport Towing and Recovery Total
----------------------- ----------------------- -----------------------
Net revenue...................................... $36,102 100.0% $23,351 100.0% $59,453 100.0%
Cost of revenue, including depreciation.......... 27,432 76.0 17,302 74.1 44,734 75.2
Selling, general and administrative
expenses (1).................................. 2,473 6.9 2,811 12.0 7,564 12.7
Amortization of goodwill......................... 655 1.8 624 2.7 1,279 2.2
------- ----- ------- ----- ------- -----
Income from operations........................... $ 5,542 15.3% $ 2,614 11.2% 5,876 9.9
======= ===== ======= =====
Interest expense, net............................ 2,012 3.4
Other expenses, net.............................. 70 0.1
------- -----
Income before income taxes....................... 3,794 6.4
Income tax expense............................... 1,784 3.0
------- -----
Net income....................................... $ 2,010 3.4%
======= =====
(1) Total selling, general and administrative expenses include corporate
selling, general and administrative expenses of $3,004 and $2,280 for the
three months ended March 31, 2000 and 1999, respectively.
Three months ended March 31, 2000 Compared to Three months ended March 31, 1999
Net Revenue. Net revenue increased $6.0 million, or 10.1%, from $59.5 million
for the three months ended March 31, 1999 to $65.5 million for the three months
ended March 31, 2000. Of the net revenue for the three months ended March 31,
2000, 61.9% related to transport services and 38.1% related to towing and
recovery services. Transport net revenue increased $4.4 million, or 12.2%, from
$36.1 million for the three months ended March 31, 1999 to $40.5 million for the
three months ended March 31, 2000. The increase in transport net revenue was
largely due to the impact of the nine transport businesses acquired during the
first quarter of 1999 and an increase in new car transport revenue at one
division of $1.4 million. 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
$1.6 million, or 6.8%, from $23.4 million for the three months ended March 31,
1999 to $24.9 million for the three months ended March 31, 2000. The increase in
towing and recovery net revenue was largely due to the impact of the three
towing and recovery businesses acquired during the first quarter 1999. 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.
15
Cost of Revenue. Cost of revenue, including depreciation, increased $10.1
million, or 22.6%, from $44.7 million for the three months ended March 31, 1999
to $54.8 million for the three months ended March 31, 2000. Transport cost of
revenue increased $6.3 million, or 23.0%, from $27.4 million for the three
months ended March 31, 1999 to $33.7 million for the three months ended March
31, 2000. The increase in transport cost of revenue was primarily due to the
transport business acquired in the first quarter of 1999 and fuel costs
associated with operating transport vehicles. The principal components of the
increase in transport cost of revenue consisted of an increase in transport
operating labor costs of $2.0 million; an increase in costs of independent
contractors, brokers and subcontractors of $1.7 million; an increase in fuel
costs of $1.2 million; and increased depreciation costs of $445,000. Towing and
recovery cost of revenue increased $3.8 million, or 22.0%, from $17.3 million
for the three months ended March 31, 1999 to $21.1 million for the three months
ended March 31, 2000. The increase in towing and recovery cost of revenue was
primarily due to the towing and recovery business acquired in the first quarter
of 1999 and fuel costs associated with operating towing and recovery vehicles.
The principal components of the increase in towing and recovery cost of revenue
consisted of an increase in towing operating labor costs of $1.2 million; an
increase in independent contractor, broker and subcontractor costs of $1.2
million; an increase in fuel costs of $525,000; and an increase in insurance
casualty claims (that individually did not meet insurance deductibles) of
$586,000.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $2.1 million, or 27.6%, from $7.6 million for
the three months ended March 31, 1999 to $9.7 million for the three months ended
March 31, 2000. Transport selling, general and administrative expenses increased
$1.1 million, or 44.0%, from $2.5 million for the three months ended March 31,
1999 to $3.6 million for the three months ended March 31, 2000. The increase in
transport selling, general and administrative expenses was primarily due to the
transport business acquired in the first quarter of 1999 and costs associated
with managing and integrating the acquired companies. The principal components
of the increase in the Company's transport selling, general and administrative
expenses for the three months ended March 31, 2000 as compared to the three
months ended March 31, 1999, consisted of an increase in wages and benefits
expense of $202,000; an increase in bad debt expense of $136,000; and an
increase in computer and telecommunication expenses of $107,000. Towing and
recovery selling, general and administrative expenses increased $301,000, or
10.7%, from $2.8 million for the three months ended March 31, 1999 to $3.1
million for the three months ended March 31, 2000. The increase in towing and
recovery selling, general and administrative expenses was primarily due to the
towing and recovery business acquired in the first quarter of 1999 and costs
associated with managing and integrating the acquired companies. The principal
components of the increase in the Company's towing and recovery selling, general
and administrative expenses for the three months ended March 31, 2000 as
compared to the three months ended March 31, 1999, consisted of an increase in
advertising expense of $93,000; an increase in bad debt expense of $67,000; and
an increase in employee benefit expenses of $64,000.
Corporate selling, general and administrative expenses increased $724,000, or
31.8%, from $2.3 million for the three months ended March 31, 1999 to $3.0
million for the three months ended March 31, 2000. The increase in corporate
selling, general and administrative expenses was primarily due to costs
associated with legal and consulting services and costs associated with
integrating and managing acquired businesses, offset by a decline in acquisition
related costs resulting from the significant decline in the acquisition program.
The principal components of the increase in corporate selling, general and
administrative costs for the three months ended March 31, 2000 as compared to
the three months ended March 31, 1999, consisted of an increase in professional
fees expense of $808,000 and an increase in salary and wage expense of $178,000,
offset by a decline in acquisition related costs of $270,000
Amortization of Goodwill. Amortization of goodwill increased $60,000, or 4.6%,
from $1.28 million for the three months ended March 31, 1999 to $1.34 million
for the three months ended March 31, 2000. This increase in goodwill
amortization was the result of higher intangible asset balances resulting from
the acquisitions described above offset by a December 31, 1999 impairment charge
of $28.3 million associated with a review of the recorded value of long-lived
assets and the recoverability of goodwill. The excess purchase price over the
fair value of the assets acquired, including direct costs associated with the
acquisitions, was $215.1 million at March 31, 1999 and $213.5 million at March
31, 2000.
Income (loss) from Operations. Income from operations decreased $6.3 million,
from income of $5.9 million for the three months ended March 31, 1999 to a loss
of $390,000 for the three months ended March 31, 2000. Transport income from
operations decreased $3.1 million, or 56.4%, from $5.5 million for the three
months ended March 31, 1999 to $2.5 million for the three months ended March 31,
2000. The decrease in transport income from operations was primarily due to
increased labor and fuel expenses associated with transport cost of revenue,
increased goodwill amortization, and increased administrative wages, bad debt
and computer and telecommunication expenses related to the operation of the
transport business segment. Towing and recovery income from
16
operations decreased $2.5 million, or 96.2%, from $2.6 million for the three
months ended March 31, 1999 to $164,000 for the three months ended March 31,
2000. The decrease in towing and recovery income from operations was primarily
due to increased labor, insurance and fuel expense, increased advertising, bad
debt and employee benefit expenses.
Interest Expense, net. Interest expense increased $1.2 million, or 60%, from
interest expense of $2.0 million for the three months ended March 31, 1999 to
interest expense of $3.2 million for the three months ended March 31, 2000.
Interest income increased $52,000 from interest income of $11,000 for the three
months ended March 31, 1999 to interest income of $63,000 for the three months
ended March 31, 2000. The increase in interest expense, net was related to an
interest rate increase of approximately 2.5% in the first quarter of 2000 as
compared to the first quarter of 1999 and higher levels of debt incurred to
finance the acquisitions which occurred during 1999.
Income Tax Expense (benefit). Income tax expense (benefit) decreased $2.8
million, from an income tax expense of $1.8 million for the three months ended
March 31, 1999 to an income tax benefit of $1.0 million for the three months
ended March 31, 2000. The decrease in income tax expense was largely due to the
net operating loss generated by the Company during the first quarter of 2000.
Net Income (loss). Net income (loss) decreased $4.9 million, from net income
of $2.0 million for the three months ended March 31, 1999 to a net loss of $2.9
million for the three months ended March 31, 2000. The decrease in net income
was primarily due to the decrease in income from operations of $6.3 million and
increased net interest expense of $1.2 million, offset in part by a decline in
income tax effect on pretax earnings of $2.8 million for the three months ended
March 31, 2000 compared to the three months ended March 31, 1999.
Liquidity and Capital Resources
As of March 31, 2000, the Company had approximately:
. $6.6 million of cash and cash equivalents,
. a working capital deficit of approximately $33.9 million, and
. $83.9 million of outstanding indebtedness, excluding current
installments.
During the three months ended March 31, 2000, the Company generated $3.5 million
of cash from operations. Cash provided by operations consisted primarily of a
decrease in trade receivables of $2.3 million and an income the refund of $1.0
million. During the three months ended March 31, 2000, the Company used $879,000
of cash in investing activities and $129,000 of cash in financing activities.
Financing activities consisted of payments on long-term debt and capital lease
obligations assumed in acquisitions of $71,000 and payments of deferred
financing costs of $58,000.
As of March 31, 2000, the Company has a revolving credit facility (the "Credit
Facility") with a group of banks that currently has an amount available for
borrowing of $55.0 million. Approximately $54.0 million, including letters of
credit of $3.4 million, was outstanding under the Credit Facility as of such
date. The Credit Facility terminates in October 2001, at which time all
outstanding indebtedness will be due. Borrowings under the Credit Facility bear
interest at the base rate (which is equal to the greater of (i) the federal
funds rate plus 0.5% and (ii) Bank of America's reference rate), plus an
applicable margin (resulting in a total interest rate of approximately 10.25% at
March 31, 2000).
Obligations under the Credit Facility are guaranteed by the Company's
subsidiaries. The Company's obligations and the obligations of the Company's
subsidiaries under the Credit Facility and related guarantees are secured by
substantially all of the assets of the Company and its subsidiaries. Under the
Credit Facility, the Company must comply with various loan covenants, including
maintenance of certain financial ratios, restrictions on additional
indebtedness, limits on operating leases, limits on amounts of cash and cash
equivalents, restrictions on liens, guarantees, advances and dividends, and
prior bank group approval of certain acquisitions and divestitures. The Credit
Facility also contains provisions requiring bank group approval of the
successors to certain members of management and requiring that certain proceeds
of asset sales be used to permanently reduce the commitment amount under the
Credit Facility.
17
As of September, 30, 1999, the Company was in violation of the covenants in the
Credit Facility relating to minimum consolidated net income and the ratio of net
income plus interest, tax and rental expense (EBITR) to interest expense plus
rental expense. In November 1999, the Company received a temporary waiver of
these defaults through February 29, 2000 pursuant to a Second Amendment to the
Credit Facility. The Second Amendment also strengthened certain financial
covenants in the Credit Facility. These amended financial covenants require the
Company to (i) maintain a specified minimum level of EBITDA during the period
from October 1, 1999 through February 28, 2000, (ii) obtain the prior written
consent of the bank group in order to pay cash consideration for any
acquisition, (iii) refrain from entering into operating leases providing for
aggregate rental payments in excess of $8.6 million in 1999, and (iv) refrain
from having greater than $1.5 million of cash in bank accounts outside the Bank
of America. In connection with this Amendment the Company and the banks also
agreed to decrease the commitment amount of the Credit Facility to $65.0 million
and to decrease the amount available for borrowing to $55.0 million after
January 1, 2000.
In November 1999, the Company failed to meet the minimum EBITDA requirement
imposed by the Second Amendment to the Credit Facility. As a result, the Company
and the banks entered into a Third Amendment to the Credit Facility dated
January 31, 2000, which waived the existing covenant defaults through March 31,
2000. The Third Amendment also set a new minimum EBITDA requirement (not
including certain one-time charges) of $500,000 per month, limits the amount of
cash equivalents that the Company is entitled to have to $2.5 million and allows
the banks to withdraw any excess over $2.5 million to reduce the outstanding
borrowings, prohibits certain sales of assets other than for cash without the
banks' consent, and requires certain proceeds of asset sales to be used to
permanently reduce the commitment amount under the Credit Facility (which
requires the Company to make mandatory prepayments of any amounts outstanding in
excess of the commitment amount, as so reduced). The Third Amendment also
permanently reduced the commitment amount of the Credit Facility to $58.0
million and the amount available for borrowing to $55.0 million (unless the
banks otherwise consent). On March 29, 2000, the Company and the banks entered
into a letter agreement which extended the waiver of the Company's non-
compliance with certain financial covenants through April 28, 2000. On April 27,
2000, the banks extended the temporary waivers of the existing defaults under
the Credit Facility until May 31, 2000, at which time there will be an immediate
event of default and, absent a further waiver or amendment, all amounts due
thereunder will be subject to acceleration at the banks' discretion.
Consequently, the total amount outstanding under the Credit Facility at March
31, 2000 has been classified as a current liability. If the banks elect to
accelerate amounts due 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 outstanding amounts under the Credit Facility, such
acceleration would cause a default under the Charterhouse Debentures, and
Charterhouse could accelerate repayment of all amounts outstanding under the
Charterhouse Debentures, subject to the Credit Facility banks' priority. In such
event, repayment of amounts outstanding under the Charterhouse Debentures could
only be made if the Credit Facility was first paid in full or the bank group
gave its express prior written consent to such repayment.
The Company spent $857,000 on purchases of vehicles and equipment (including
$125,000 spent in connection with installation of information systems) during
the three months ended March 31, 2000. Other than expenditures relating to the
information systems, these expenditures were primarily for the purchase of and
capitalized repairs on transport and towing and recovery vehicles. During the
three months ended March 31, 2000, the Company made expenditures of $166,000 on
towing and recovery vehicles and $446,000 on transport vehicles. These
expenditures were financed primarily through cash flow from operations.
During the first quarter of 1999, the Company committed to purchase up to 100
transport vehicles, for delivery at various times throughout the year 2000, and
in connection therewith made a deposit of approximately $1.6 million to the
vehicle manufacturer. In March 2000, the Company amended the contract with the
vehicle manufacturer to reduce the commitment to 60 vehicles, to be delivered at
various times throughout 2000, and to apply $1.5 million of the $1.6 million
deposit toward the first 40 vehicles delivered. The Company's ability to take
delivery of these vehicles will depend upon the availability of sufficient
capital. If the Company is unable to take delivery of any vehicles, it may lose
the entire $1.6 million deposit.
As of March 31, 2000, the Company had cash on hand of approximately $6.6
million. The Company is in the process of implementing programs to decrease
operating and administrative costs and to reduce receivable balances and
expedite billing for services rendered. While there can be no assurance,
management expects that these initiatives will serve to strengthen the Company's
cash position. In the meantime, the Company believes that it will be able to
fund its near-term working capital needs through cash flow from operations as
long as it does not experience significant
18
decreases in revenues or increases in costs. In the event the Company is unable
to fund its near-term working capital needs from cash flow from operations, it
will be required to secure alternative sources of capital through issuances of
debt or equity securities or sales of assets. There can be no assurance that
additional capital will be available to the Company on satisfactory terms, or at
all.
While the Company currently expects that its cash flow from operations will be
sufficient to fund its near-term working capital needs as long as it does not
experience significant decreases in revenues or increases in costs, the current
level of cash flow from operations is not expected to be sufficient to fund the
Company's medium or long-term working capital needs or its growth strategy.
Thus, in order to be able to successfully implement its revised business
strategy, it will be necessary for the Company to raise additional capital,
through issuances of debt or equity securities, additional bank debt or sales of
assets, which may not be possible on satisfactory terms, or at all.
Due to the temporary nature of the waivers of the existing defaults under the
Company's Credit Facility, the total amount outstanding under the Credit
Facility at March 31, 2000 has been classified as a current liability.
On April 14, 2000, the Company entered into a Stock Purchase Agreement (the "KPS
Agreement") with Blue Truck, an affiliate of KPS, pursuant to which the Company
agreed to issue and sell, and Blue Truck agreed to purchase, $25.0 million of
the Company's Series A Preferred Stock. Holders of Series A Preferred Stock are
entitled to cumulative dividends of 5.5% per annum for six years after the
closing date of the KPS Transaction and 5% per annum thereafter payable, until
2005, either in cash or in shares of the Company's Series B Preferred Stock at
the option of the Company. After 2005, dividends are payable only in cash. The
obligation to pay dividends terminates in 2008, or earlier if the Company's
common stock trades above a specified price level.
The Preferred Stock is convertible into the Company's common stock at any time
at the option of the holder. The per share conversion price for the Series A
Preferred Stock is generally the lesser of $20.00 or the average closing price
of the common stock for the 30 trading days prior to closing of the KPS
Transaction (the "Thirty Day Average"). However, if the Thirty Day Average is
greater than or equal to $8.40 and less than or equal to $10.00, the conversion
price will be $10.00, and if the Thirty Day Average is less than $8.40, the
conversion price will be 120% of the Thirty Day Average. The Series B Preferred
Stock is identical in all respects to the Series A Preferred Stock except that
its conversion price is 15% lower than the conversion price of the Series A
Preferred Stock. The Preferred Stock automatically converts into common stock
upon the occurrence of certain business combinations, unless the holders elect
to exercise their liquidation preference rights.
Upon consummation of the KPS Transaction, the Company has agreed to pay KPS
Management LLC, an entity affiliated with KPS, a one-time transaction fee of
$2.5 million and to reimburse KPS for its actual reasonable fees and expenses in
connection with negotiation and performance of the KPS Agreement. The Company
has also agreed to pay KPS Management LLC an annual management fee of $1 million
initially, which may be lowered to $500,000 and then to zero based upon the
amount of Preferred Stock held by Blue Truck and its permitted transferees. The
holders of Preferred Stock have the right to designate a majority of the
Company's Board of Directors for so long as Blue Truck and its permitted
transferees continue to own specified amounts of Preferred Stock. At lower
levels of ownership, holders of Preferred Stock will be entitled to appoint
three directors, one director, or no directors.
In connection with the KPS Transaction, the Company and Charterhouse have agreed
that the Charterhouse Debentures will be redeemable at par plus accrued interest
under certain circumstances. Charterhouse also agreed to waive its right to
require the Company to redeem the Debentures at 106.5% of the aggregate
principal amount of the Debentures upon consummation of the KPS Transaction in
return for a transaction fee of $750,000. Charterhouse has also agreed to waive
certain corporate governance rights that existed under its Investor's Agreement
with the Company in connection with the KPS Transaction.
Consummation of the KPS Transaction is subject to a number of conditions,
including approval of the Company's stockholders and the availability at closing
of a refinancing or replacement of the Company's Credit Facility providing for
at least $25 million of borrowing capacity in addition to the amounts currently
outstanding under the Credit Facility. There can be no assurance that these
conditions will be satisfied, or that the KPS Transaction, the refinancing of
the Credit Facility, or the restructuring of the Charterhouse Debentures will be
consummated. If the KPS Transaction is consummated, management believes that it
will provide the Company with sufficient working capital to absorb any
19
unanticipated decreases in revenues or increases in costs in the near term as
well as working capital to help fund the Company's growth strategy.
The Company's existing Credit Facility matures on October 31, 2001. If the
Company is not successful in replacing the Credit Facility before maturity, its
ability to refinance the Credit Facility upon maturity will depend to a great
degree on improved operating performance, particularly with respect to the
Company's cash flow to interest coverage ratio. If the Company cannot
successfully refinance the Credit Facility upon maturity, it will be required to
raise capital through the issuance of additional debt or equity securities or
sales of assets in order to meet its repayment obligations under the Credit
Facility.
The Company currently has a negative net tangible book value. Accordingly, based
upon the current market price of the Common stock, if the Company were required
to issue additional equity securities at this time, such issuance would result
in immediate and substantial dilution in net tangible book value to existing
investors.
Disposition of Division
On February 11, 2000, the Company sold, for a loss on sale of division of
$212,000, 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, which has been
discounted at 8.0% and is payable in installments through 2004. 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.
General Economic Conditions and Inflation
The Company's future operating results may be adversely affected by (i) the
availability of capital to fund operations, including expenditures for new and
replacement equipment, (ii) the Company's success in improving operating
efficiency and profitability and in integrating its acquired business (iii) the
loss of significant customers or contracts, (iv) the timing of expenditures for
new equipment and the disposition of used equipment (v) changes in applicable
regulations, including but not limited to, various federal, state and local laws
and regulations regarding equipment, driver certification, training,
recordkeeping and workplace safety, (vi) changes in the general level of demand
for towing and transport services, (vii) price changes in response to
competitive factors, (viii) event-driven variations in the demand for towing and
transport services, (ix) risks related to the adequacy, functionality,
sufficiency and cost of the Company's information systems and (x) general
economic conditions. 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.
Year 2000 Disclosure
The Company's information systems and facilities successfully completed the
"roll-over" to the year 2000. The Company's transition to the year 2000 during
the first week of business in January 2000 resulted in no adverse or negative
impacts associated with the use of date sensitive software and equipment. The
Company believes that with its successful transition to the year 2000, the
preponderance of the risk associated with the year 2000 problem has been
identified and eliminated.
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ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes there have been no material changes in the Company's
interest rate risk position since December 31, 1999. Other types of market risk,
such as foreign exchange rate risk and commodity price risk, do not arise in the
normal course of the Company's business activities.
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PART II OTHER INFORMATION
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ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
On January 1, 2000, the Company issued 3,077 shares of its common stock (on a
post reverse split adjusted basis) to Gerald R. Riordan pursuant to Mr.
Riordan's employment agreement with the Company.
The issuance of these securities was deemed to be exempt from registration under
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 his 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.
On March 31, 1999, the Company issued approximately $1.6 million aggregate
principal amount of Charterhouse Debentures to Charterhouse which represented
the quarterly payment-in-kind interest payment due with respect to $80.8 million
aggregate principal amount of Charterhouse Debentures previously issued to
Charterhouse.
The issuance of these securities was deemed to be exempt from registration under
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.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
As of September, 30, 1999, the Company was in violation of the covenants in the
Credit Facility relating to minimum consolidated net income and the ratio of net
income plus interest, tax and rental expense (EBITR) to interest expense plus
rental expense. In November 1999, the Company received a temporary waiver of
these defaults through February 29, 2000 pursuant to a Second Amendment to the
Credit Facility. The Second Amendment also strengthened certain financial
covenants in the Credit Facility. These amended financial covenants require the
Company to (i) maintain a specified minimum level of EBITDA during the period
from October 1, 1999 through February 28, 2000, (ii) obtain the prior written
consent of the bank group in order to pay cash consideration for any
acquisition, (iii) refrain from entering into operating leases providing for
aggregate rental payments in excess of $8.6 million in 1999, and (iv) refrain
from having greater than $1.5 million of cash in bank accounts outside the Bank
of America. In connection with the Second Amendment the Company and the banks
also agreed to decrease the commitment amount of the Credit Facility to $65.0
million and to decrease the amount available for borrowing to $55.0 million
after January 1, 2000.
In November 1999, the Company failed to meet the minimum EBITDA requirement
imposed by the Second Amendment to the Credit Facility. As a result, the Company
and the banks entered into a Third Amendment to the Credit Facility dated
January 31, 2000, which waived the existing covenant defaults through March 31,
2000. The Third Amendment also set a new minimum EBITDA requirement (not
including certain one-time charges) of $500,000 per month, limits the amount of
cash equivalents that the Company is entitled to have to $2.5 million and allows
the banks to withdraw any excess over $2.5 million to reduce the outstanding
borrowings, prohibits certain sales of assets other than for cash without the
banks' consent, and requires certain proceeds of asset sales to be used to
permanently reduce the commitment amount under the Credit Facility (which
requires the Company to make mandatory prepayments of any amounts outstanding in
excess of the commitment amount, as so reduced). The Third Amendment also
permanently reduced the commitment amount of the Credit Facility to $58.0
million and the amount available for borrowing to $55.0 million (unless the
banks otherwise consent). On March 29, 2000, the Company and the banks entered
into a letter agreement which extended the waiver of the Company's non-
compliance with certain financial covenants through April 28, 2000. On April 27,
2000, the banks extended the temporary waivers of the existing defaults under
the Credit Facility until May 31, 2000, at which time there will be an immediate
event of default and, absent a further waiver or amendment, all amounts due
thereunder will be subject to acceleration at the banks' discretion.
Consequently, the total amount outstanding under the Credit Facility at March
31, 2000 has been classified as a current liability. If the banks elect to
accelerate amounts due 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
22
obligations, which may not be possible. If the banks were to accelerate
repayment of outstanding amounts under the Credit Facility, such acceleration
would cause a default under the Charterhouse Debentures, and Charterhouse could
accelerate repayment of all amounts outstanding under the Charterhouse
Debentures, subject to the Credit Facility banks' priority. In such event,
repayment of amounts outstanding under the Charterhouse Debentures could only be
made if the Credit Facility was first paid in full or the bank group gave its
express prior written consent to such repayment.
ITEM 5 OTHER EVENTS
On January 17, 2000, the Company appointed Michael A. Wysocki as President of
the Company's transport business unit. On January 21, 2000 the Company appointed
Harold W. Borhauer II as President of the Company's towing and recovery business
unit.
On February 11, 2000, the Company sold, for a loss on sale of division of
$212,000, 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, which has been
discounted at 8.0% and is payable in installments through 2004. Northshore was a
division within the Company's towing and recovery segment.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 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).
10.2 Executive Employment Agreement, dated as of January 21, 2000, between
the Company and Harold W. Borhauer II (incorporated by reference to
Exhibit 10.39 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999).
10.3 Third Amendment, dated as of January 31, 2000, to Amended and Restated
Credit Agreement, dated as of November 2, 1998, by and among the
Company, various financial institutions and Bank of America, N.A., as
Agent (incorporated by reference to Exhibit 10.40 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1999).
10.4 Letter Agreement, dated as of February 21, 2000, relating to the
Amended and Restated Credit Agreement, dated as of November 2, 1998,
by and among the Company, various financial institutions and Bank of
America, N.A., as Agent (incorporated by reference to Exhibit 10.41 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1999).
10.5 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).
10.6 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).
10.7 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).
10.8 Letter Agreement (Fourth Amendment and Waiver), dated as of March 29,
2000, to the Amended and Restated Credit Agreement, dated as of
November 2, 1998, by and among the Company, various financial
institutions and Bank of America, N.A. as Agent (filed herewith).
10.9 Letter Agreement, dated as of April 12, 2000, relating to the Amended
and Restated Credit Agreement, dated as of November 2, 1998, by and
among the Company, various financial institutions and Bank of America,
N.A. as Agent (filed herewith).
10.10 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).
10.11 Letter Agreement dated as of April 27, 2000, relating to the Amended
and Restated Credit Agreement, dated as of November 2, 1998, by and
among the Company, various financial institutions and Bank of America,
N.A. as Agent (filed herewith).
11.1 Statement of Computation of Earnings per Share (filed herewith).
27.1 Financial Data Schedule (filed herewith).
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(b) Reports on Form 8-K
The Company filed the following report on Form 8-K during the quarterly period
ended March 31, 2000:
Current Report on Form 8-K, dated January 5, 2000 and filed January 12, 2000, to
report under Item 5 that Allan D. Pass, Ph.D. had resigned as the Company's
President and Chief Operating Officer and that Robert J. Adams, Jr. would no
longer serve as the Company's Senior Vice President and Chief Acquisition
Officer but would continue serving the Company as a consultant.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED ROAD SERVICES, INC.
Registrant
Date: May 15, 2000 /s/ Gerald R. Riordan
---------------------------------
Chief Executive Officer
/s/ Donald J. Marr
---------------------------------
Donald J. Marr
Chief Financial Officer
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INDEX OF EXHIBITS FILED HEREWITH*
Number Description of Document
- ------- -----------------------
10.8 Letter Agreement (Fourth Amendment and Waiver), dated as of March 29,
2000, to the Amended and Restated Credit Agreement, dated as of November 2,
1998, by and among the Company, various financial institutions and Bank of
America, N.A. as Agent.
10.9 Letter Agreement, dated as of April 12, 2000, relating to the Amended
and Restated Credit Agreement, dated as of November 2, 1998, by and among the
Company, various financial institutions and Bank of America, N.A. as Agent.
10.11 Letter Agreement dated as of April 27, 2000, relating to the Amended as
Restated Credit Agreement, dated as of November 2, 1998, by and among the
Company, various financial institutions and Bank of America, N.A. as Agent.
11.1 Statement regarding Computation of Earnings per Share.
27.1 Financial Data Schedule.
* For a complete list of Exhibits to this Report, see Item 6(b).