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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(MARK)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE PERIOD ENDED
JUNE 30, 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 August 14, 2000, the registrant had 1,912,593 shares of common stock
issued and outstanding.
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UNITED ROAD SERVICES, INC.
Form 10-Q For The Three and Six Months Ended June 30, 2000
Index Page
Part I. - Financial Information
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999 2
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended
June 30, 2000 and June 30, 1999 3
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 2000 and June 30, 1999 4
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3 Quantitative and Qualitative Disclosures about Market Risk 25
Part II. - Other Information
Item 2 Changes in Securities and Use of Proceeds 26
Item 3 Defaults upon Senior Securities 26
Item 4 Submission of Matters to a Vote of Security Holders 26
Item 5 Other Information 26
Item 6 Exhibits and Reports on Form 8-K 27
Signatures 29
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS June 30, 2000 December 31, 1999
------------- -----------------
Current assets: (Unaudited)
Cash and cash equivalents $ 8,075 4,115
Trade receivables, net of allowance for doubtful
accounts of $1,946 at June 30, 2000
and $2,539 December 31, 1999 19,660 23,709
Other receivables, net of allowance for doubtful accounts
of $342 at June 30, 2000 and $262 at December 31, 1999 1,316 1,161
Prepaid income taxes 1,707 3,534
Prepaid expenses and other current assets 2,217 2,274
Current portion of rights to equipment under finance contracts 355 435
----------- ----------
Total current assets 33,330 35,228
Vehicles and equipment, net 70,687 78,212
Rights to equipment under finance contracts, excluding current portion 1,123 1,480
Deferred financing costs, net 3,730 4,109
Goodwill, net 78,783 203,337
Other non-current assets 3,069 79
----------- ----------
Total assets $ 190,722 322,445
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of obligations under capital leases $ 234 268
Current installments of obligations for equipment under
finance contracts 355 435
Borrowings under credit facility - 50,650
Accounts payable 8,568 7,464
Accrued expenses 9,489 9,489
Due to related parties - 1,130
----------- ----------
Total current liabilities 18,646 69,436
Obligations under capital leases, excluding current installments 302 402
Obligations for equipment under finance contracts, excluding
current installments 1,123 1,480
Long-term debt 134,294 80,876
Deferred tax liability 9,439 2,666
Other long-term liabilities 513 1,172
----------- ----------
Total liabilities 164,317 156,032
----------- ----------
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; 1,912,593 and 1,759,416
shares issued and outstanding at June 30, 2000
and December 31, 1999, respectively 19 18
Additional paid-in capital 195,215 191,877
Accumulated deficit (168,829) (25,482)
----------- ----------
Total stockholders' equity 26,405 166,413
----------- ----------
Total liabilities and stockholders' equity $ 190,722 322,445
=========== ==========
See accompanying notes to condensed consolidated financial statements.
-2-
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
Net revenue $ 62,717 65,482 128,180 124,935
Cost of revenue, excluding depreciation 49,584 47,548 101,934 90,390
Amortization of goodwill 1,340 1,515 2,679 2,794
Depreciation 2,538 2,072 5,037 3,964
Selling, general and administrative expenses 9,094 10,338 18,759 17,902
Impairment charge 129,455 -- 129,455 --
--------- --------- --------- ---------
Income (loss) from operations (129,294) 4,009 (129,684) 9,885
Other income (expense):
Interest income 106 1 169 9
Interest expense (3,398) (2,610) (6,673) (4,631)
Other (includes $212 of loss on sale of
division for the six months ended June 30, 2000) (124) (62) (374) (130)
--------- --------- --------- ---------
Income (loss) before income taxes (132,710) 1,338 (136,562) 5,133
Income tax expense 7,784 868 6,785 2,653
--------- --------- --------- ---------
Net income (loss) $(140,494) 470 (143,347) 2,480
========= ========= ========= =========
Per share amounts:
Basic earnings (loss) $ (76.23) .28 (79.37) 1.48
========= ========= ========= =========
Diluted earnings (loss) $ (76.23) .26 (79.37) 1.41
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
-3-
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended
June 30,
2000 1999
----- ----
Net income (loss) $(143,347) 2,480
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation 5,037 3,964
Amortization of goodwill 2,679 2,794
Impairment charge 129,455 --
Amortization of deferred financing costs 437 409
Provision for doubtful accounts 461 793
Deferred income taxes 6,773 1,479
Interest expense, paid-in-kind 3,268 2,504
Loss on sale of vehicles and equipment, net 66 (8)
Loss on sale of division 212 --
Changes in operating assets and liabilities, net of effects of
acquisitions:
Decrease (increase) in trade receivables 3,494 (4,756)
Decrease (increase) in other receivables 45 1,250
Decrease in prepaid income taxes 1,827 --
Increase in prepaid expenses and
other current assets (378) (496)
Decrease in other non-current assets (2,701) (140)
Increase (decrease) in accounts payable 969 (3,145)
Increase (decrease) in accrued expenses 85 201
Decrease in long-term liabilities (621) --
Increase in income taxes payable -- 82
--------- --------
Net cash provided by operating activities 7,761 7,411
--------- --------
Investing activities:
Acquisitions, net of cash acquired -- (35,722)
Deposit on vehicles -- (1,691)
Purchases of vehicles and equipment (2,666) (10,203)
Proceeds from sale of vehicles and equipment 457 278
Proceeds received from sale of division 450 --
Amounts payable to related parties (1,336) (1,521)
--------- --------
Net cash used in investing activities (3,095) (48,859)
--------- --------
Financing activities:
Proceeds from issuance of convertible subordinated debentures -- 31,500
Borrowings on revolving credit facility -- 59,700
Repayments of revolving credit facility (500) (34,000)
Payments of deferred financing costs (58) (2,058)
Payments on debt and capital leases assumed
in acquisitions (148) (14,785)
--------- --------
Net cash (used) provided by financing activities (706) 40,357
--------- --------
Increase (decrease) in cash and cash equivalents 3,960 (1,091)
Cash and cash equivalents at beginning of period 4,115 3,381
--------- --------
Cash and cash equivalents at end of period $ 8,075 2,290
========= ========
(continued)
-4-
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(In thousands)
(Unaudited)
Six months ended
June 30,
2000 1999
---- ----
Supplemental disclosures of cash flow information
Cash paid (received) during the period for:
Interest $ 2,426 1,543
========= ======
Income taxes, net of refunds $ (1,718) 1,096
========= ======
Supplemental disclosure of non-cash investing and financing activity
Issuance of common stock related to acquisitions, net $ 409 24,602
========= ======
See accompanying notes to condensed consolidated financial statements.
-5-
UNITED ROAD SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 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 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
"Acquired Companies"), seven of which (the "Founding Companies") were
acquired simultaneously with the consummation of an initial public
offering of the Company's common stock. 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 40
divisions located in 19 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 of the
towing and recovery division include automobile dealers, repair shops
and fleet operators, law enforcement agencies, municipalities and
individual motorists.
(c) Basis of Presentation
The accompanying condensed consolidated financial statements include
the accounts of the Company and its subsidiaries. The results of
operations of the Acquired Companies have been included in the
Company's results of operations from their respective acquisition
dates. All significant intercompany transactions have been eliminated
in consolidation.
-6-
UNITED ROAD SERVICES, INC.
Notes to Condensed Consolidated Financial Statements, continued
(Unaudited)
(1) Continued
(d) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
unaudited condensed consolidated financial statements in conformity
with 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 June 30, 2000
--------------------------------
Weighted
average Per share
Net loss shares (1) amounts (1)
---------------- ----------- ------------
Basic $(140,494,000) 1,843,048 $(76.23)
============= ========= =======
Diluted $(140,494,000) 1,843,048 $(76.23)
============= ========= =======
Three months ended June 30, 1999
--------------------------------
Weighted
average Per share
Net income shares (1) amounts (1)
---------------- ----------- ------------
Basic $ 470,000 1,706,695 $ .28
============= ========= =======
Diluted $ 470,000 1,783,695 $ .26
============= ========= =======
Six months ended June 30, 2000
------------------------------
Weighted
average Per share
Net loss shares (1) amounts (1)
--------------- ---------- -----------
Basic $(143,347,000) 1,805,987 $(79.37)
============= ========= =======
Diluted $(143,347,000) 1,805,987 $(79.37)
============= ========= =======
-7-
Six months ended June 30, 1999
- ------------------------------
Weighted
average Per share
Net income shares (1) amounts (1)
---------- ----------- ------------
Basic $2,480,000 1,677,694 $1.48
========== ========= =====
Diluted $2,480,000 1,757,586 $1.41
========== ========= =====
(1) Gives effect to a one-for-ten reverse stock split effected on
May 4, 2000.
The impact of the Company's outstanding stock options, warrants,
convertible subordinated debentures and shares held in escrow has been
excluded at June 30, 2000, as the effect would be antidilutive.
Additionally, shares issuable upon conversion of the convertible
subordinated debentures have been excluded at June 30, 1999, as the
effect would be antidilutive due to the adjustment (increase in net
income) for interest expense.
(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 ("SFAS") 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) Goodwill
In accordance with Accounting Principles Board Opinion No. 17,
Intangible Assets, the Company continually evaluates whether events
and circumstances that may affect the characteristics of, comparable
data discussed above warrant revised estimates of the useful lives or
recognition of a charge-off of the carrying amounts of the associated
goodwill.
The Company performs an analysis of the recoverability of goodwill
using a cash flow approach consistent with the Company's analysis of
impairment of long-lived assets under SFAS No. 121. This approach
considers the estimated undiscounted future operating cash flows of
the Company. The amount of goodwill impairment, if any, is measured on
estimated fair value based on the best information available. The
Company generally estimates fair value by discounting estimated future
cash flows using a discount rate reflecting the Company's average cost
of funds.
(2) Stockholders' Equity
On January 1, 2000, 3,077 shares of the Company's common stock,
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
condensed consolidated financial statements have been restated to give
effect to the reverse 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. Upon achievement of the net revenue target for a
particular year, subsequent and equal payments will also be due for each
year through 2002, provided that the actual net revenue for the respective
subsequent year exceeds the actual net revenue for the year that the net
revenue target was first achieved. At December 31, 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. There were no earnout payments
due as of June 30, 2000.
-8-
(4) Debt
As of June 30, 2000, the Company had a total of $54.9 million, including
letters of credit of $4.7 million, outstanding under its revolving credit
facility with various banks, for which Bank of America, N.A. ("Bank of
America") acts as agent (the "Bank of America Credit Facility"). As of
September, 30, 1999, the Company was in violation of the covenants in the
Bank of America 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 Bank of America Credit Facility. The
Second Amendment also strengthened certain financial covenants in the Bank
of America Credit Facility. These amended financial covenants required 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 Bank of America. In connection with the Second Amendment,
the Company and the banks also agreed to decrease the commitment amount of
the Bank of America 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 Bank of America Credit Facility. As
a result, the Company and the banks entered into a Third Amendment to the
Bank of America 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, limited the amount of cash equivalents that
the Company was entitled to have to $2.5 million, prohibited certain sales
of assets other than for cash without the banks' consent, and required
certain proceeds of asset sales to be used to permanently reduce the
commitment amount under the Bank of America Credit Facility (which required
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 Bank of America Credit
Facility to $58.0 million and the amount available for borrowing to $55.0
million.
On March 29, 2000, the Company and the banks entered into a letter
agreement which extended the waiver of the existing defaults under the Bank
of America Credit Facility through April 28, 2000. On April 27, 2000, May
31, 2000 and June 29, 2000 the banks further extended the temporary waivers
of the existing defaults until May 31, 2000, June 30, 2000 and July 31,
2000, respectively. Upon the expiration of such waivers, there would have
been an immediate event of default and, absent a further waiver or
amendment, all amounts due thereunder would have been subject to
acceleration at the banks' discretion. However, as a result of the
refinancing described below and in accordance with generally accepted
accounting principles, the total amount outstanding under the Bank of
America Credit Facility as of June 30, 2000 has been reclassified as long-
term debt in the accompanying financial statements.
On July 20, 2000, the Company and its subsidiaries entered into a new
senior secured revolving credit facility (the "GE Capital Credit Facility")
with a group of banks for which General Electric Capital Corporation ("GE
Capital") acts as agent. On the same date, the Company terminated the Bank
of America Credit Facility and repaid all amounts outstanding thereunder
(approximately $54.9 million, including letters of credit of $4.7 million).
The GE Capital Credit Facility has a term of five years and a maximum
borrowing capacity of $100 million. The facility includes a letter of
credit subfacility of up to $10 million. The Company's borrowing capacity
under the GE Capital Credit Facility is limited to the sum of (i) 85% of
the Company's eligible accounts receivable, (ii) 80% of the net orderly
liquidation value of the Company's existing vehicles for which GE Capital
has received title certificates and other requested documentation, (iii)
85% of the lesser of the actual purchase price and the invoiced purchase
price of new vehicles purchased by the Company for which GE Capital has
received title certificates and other requested documentation, and (iv)
either 60% of the purchase price or 80% of the net orderly liquidation
value of used vehicles purchased by the Company for which GE Capital has
received title certificates, depending upon whether an appraisal of such
vehicles has been performed, in each case less reserves. As of August 11,
2000, approximately $35.0 million was outstanding under the GE Capital
Credit Facility (including letters of credit of $8.3 million) and an
additional $13.8 million was available for borrowing.
Interest accrues on amounts borrowed under the GE Capital Credit Facility,
at the Company's option, at either the Index Rate (as defined in the GE
Capital Credit Agreement) plus an applicable margin or the reserve adjusted
LIBOR Rate (as defined in the GE Capital Credit Agreement) plus an
applicable margin.
-9-
The rate is subject to adjustment based upon the performance of the
Company, the occurrence of an event of default or certain other events. The
GE Capital Credit Facility provides for payment by the Company of customary
fees and expenses.
The obligations of the Company and its subsidiaries under the GE Capital
Credit Facility are secured by a first priority security interest in
the existing and after-acquired real and personal, tangible and intangible
assets of the Company and its subsidiaries.
The GE Capital Credit Facility contains additional covenants requiring the
Company, among other things and subject to certain agreed-upon exceptions
contained in the GE Capital Credit Facility, to (a) make certain
prepayments against principal, (b) maintain specified cash management
systems, (c) maintain specified insurance protection, (d) refrain from
commercial transactions, management agreements, service agreements and
borrowing transactions with certain related parties, (e) refrain from
making payments of cash dividends and other distributions to equity
holders, payments in respect of subordinated debt, payments of management
fees to certain affiliates and redemption of capital stock, (f) refrain
from mergers, acquisitions or sales of capital stock or a substantial
portion of the assets of the Company or its subsidiaries, (g) refrain from
direct or indirect changes in control, (h) limit capital expenditures and
(i) meet certain financial covenants.
(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 storage 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. The Company evaluates the
performance of its operating segments through an evaluation of the
Company's income (loss) from operations. Accordingly, the Company's
summarized segment financial information is presented below on the basis of
income (loss) from operations for the three and six month periods ended
June 30, 2000 and 1999. Inter-segment revenues and transfers are not
significant.
Summarized financial information concerning the Company's reportable segments is
shown in the following tables:
Three months ended June 30, 2000
- --------------------------------
Towing and
Transport Recovery Other Total
--------- -------- ----- -----
Net revenues from external customers $ 39,150 23,567 - 62,717
Cost of revenue, including depreciation 32,728 19,394 - 52,122
Impairment charge 81,151 48,304 - 129,455
Loss from operations (79,079) (47,970) (2,245) (129,294)
-10-
Three months ended June 30, 1999
- --------------------------------
Towing and
Transport Recovery Other Total
--------- -------- ----- -----
Net revenues from external customers $40,568 24,914 - 65,482
Cost of revenue, including depreciation 30,257 19,363 - 49,620
Income from operations 6,298 1,557 (3,846) 4,009
The following are reconciliations of the information used by the chief
operating decision-maker to the Company's consolidated totals.
Three months ended
June 30,
Reconciliation of income (loss) before income taxes: 2000 1999
---- ----
Total profit (loss) from reportable segments $(127,049) 7,855
Unallocated amounts:
Interest expense, net (3,292) (2,609)
Depreciation and amortization (147) (163)
Other selling, general and administrative costs (2,098) (3,683)
Other expense (124) (62)
--------- ---------
Income (loss) before income taxes $(132,710) 1,338
========= =========
Six months ended June 30, 2000
- ------------------------------
Towing and
Transport Recovery Other Total
--------- -------- ----- -----
Net revenues from external customers $ 79,671 48,509 - 128,180
Cost of revenue, including depreciation 66,479 40,492 - 106,971
Impairment charge 81,151 48,304 - 129,455
Loss from operations (76,728) (47,707) (5,249) (129,684)
Six months ended June 30, 1999
- ------------------------------
Towing and
Transport Recovery Other Total
--------- -------- ----- -----
Net revenues from external customers $ 76,671 48,264 - 124,935
Cost of revenue, including depreciation 57,689 36,665 - 94,354
Income from operations 11,985 4,316 (6,416) 9,885
-11-
The following are reconciliations of the information used by the chief operating
decision-maker to the Company's consolidated totals
Six months ended
June 30,
Reconciliation of income (loss) before income taxes: 2000 1999
---- ----
Total profit (loss) from reportable segments $(124,435) 16,301
Unallocated amounts:
Interest expense, net (6,504) (4,622)
Depreciation and amortization (294) (224)
Other selling, general and administrative costs (4,955) (6,192)
Other expense (374) (130)
--------- ------
Income (loss) before income taxes $(136,562) 5,133
========= ======
(6) Disposition
On February 11, 2000, the Company sold the capital stock of Northshore
Towing, Inc., North Shore Recycling, Inc. and Evanston Reliable
Maintenance, Inc. (collectively "Northshore") located in Chicago, Illinois,
for cash proceeds of $450,000 and a secured non-interest bearing promissory
note in the principal amount of $500,000. Northshore was a division within
the Company's towing and recovery segment.
(7) Sale of Series A Preferred Stock
On July 20, 2000, the Company sold 613,073.27 shares of its Series A
Participating Convertible Preferred Stock, par value $.001 per share (the
"Series A Preferred Stock") to Blue Truck Acquisition, LLC, a Delaware
limited liability company ("Blue Truck") which is controlled by KPS Special
Situations Fund, L.P. ("KPS"), for $25.0 million in cash consideration (the
"KPS Transaction"). In addition, on July 20, 2000, the Company sold
49,045.86 shares of its Series A Preferred Stock to CFE, Inc. ("CFE"), an
affiliate of General Electric Capital Corporation ("GE Capital") for $2.0
million in cash consideration (the "CFE Transaction").
Holders of the Series A Preferred Stock are entitled to vote together with
the holders of the Common Stock as a single class on matters submitted to
the Company's stockholders for a vote (other than with respect to certain
elections of directors). The holder of each share of Series A Preferred
Stock is entitled to the number of votes equal to the number of full shares
of Common Stock into which such share of Series A Preferred Stock could be
converted on the record date for such vote. The holders of Series A
Preferred Stock have the right to designate six members of the Company's
Board of Directors, which constitutes a majority, for so long as Blue Truck
and its permitted transferees continue to own specified amounts of Series A
Preferred Stock. At lower levels of ownership, the holders of Series A
Preferred Stock will be entitled to appoint three directors, one director,
or no directors, depending upon the amount of Series A Preferred Stock then
held by Blue Truck and its permitted transferees, as set forth in the
Investors' Agreement relating to the KPS Transaction.
Prior to July 20, 2008, holders of the outstanding Series A Preferred Stock
are entitled to receive cumulative dividends on the Series A Preferred
Stock each quarter at the rate per annum of (i) 5.5% until July 20, 2006,
and (ii) 5.0% thereafter, of the Series A Preferred Base Liquidation Amount
(as defined below) per share of Series A Preferred Stock. The "Series A
Preferred Base Liquidation Amount" is equal to the purchase price per share
of the Series A Preferred Stock ($40.778), subject to certain adjustments.
The dividends are payable in cash at the end of each quarter or, at the
election of the Company, will cumulate to the extent unpaid. In the event
that the Company does not make a scheduled dividend payment (an
"arrearage"), dividends also accrue on such arrearage at the same rate.
Once an arrearage occurs, the Company may no longer pay such dividend in
cash, other than in connection with a liquidation, dissolution or winding
up of the Company. In addition, holders of the Series A Preferred Stock
are entitled to participate in all dividends payable to holders of the
Common Stock. The Company's obligation to pay dividends terminates on July
20, 2008, or earlier if the Company's Common Stock trades above a specified
price level.
-12-
Each share of Series A Preferred Stock is convertible at any time by its
holder into a number of shares of Common Stock equal to the sum of (i) the
quotient obtained by dividing (x) the Series A Preferred Base Liquidation
Amount by (y) the conversion price per share for the Series A Preferred
Stock (currently $4.0778 and subject to certain adjustments) (the
"Conversion Price") plus (ii) the quotient obtained by dividing (x) the
amount, if any, by which the Series A Preferred Liquidation Preference
Amount (as defined below) that has accrued at any time prior to July 20,
2005 exceeds the Series A Preferred Base Liquidation Amount by (y) the
product of the Conversion Price and 0.85. The "Series A Preferred
Liquidation Preference Amount" is the sum of the Series A Preferred Base
Liquidation Amount and the amount of any and all unpaid dividends on the
Series A Preferred Stock. The Series A Preferred Stock automatically
converts into Common Stock upon the occurrence of certain business
combinations, unless the holders elect to exercise their liquidation
preference rights.
On July 20, 2000, in connection with the KPS Transaction, the Company
cancelled all of its 8% Convertible Subordinated Debentures due 2008 (the
"1998 Debentures") issued to Charter URS LLC ("Charterhouse") pursuant to
the Purchase Agreement entered into between Charterhouse and the Company in
November 1998, and in lieu thereof, issued to Charterhouse $84.5 million
aggregate principal amount of new 8% Convertible Subordinated Debentures
due 2008 (the "Debentures") (which aggregate principal amount was equal to
the aggregate principal amount of the 1998 Debentures then outstanding plus
accrued interest thereon to July 20, 2000). Under the terms of the Amended
and Restated Purchase Agreement entered into between the Company and
Charterhouse (the "Amended Charterhouse Purchase Agreement"), the
Debentures are redeemable at par plus accrued interest under certain
circumstances. Charterhouse also waived its right to require the Company to
redeem the 1998 Debentures at 106.5% of the aggregate principal amount of
the 1998 Debentures upon consummation of the KPS Transaction and waived
certain corporate governance rights that existed under its Investor's
Agreement with the Company. In connection with these transactions, the
Company paid Charterhouse a fee of 183,922 shares of Common Stock, and
reimbursed Charterhouse approximately $200,000 for its fees and expenses
incurred in connection with the transaction.
(8) Impairment Charge
The Company periodically reviews the recorded value of its long-lived
assets to determine if the carrying amount of those assets may not be
recoverable based upon the future operating cash flows expected to be
generated by those assets. In accordance with SFAS No. 121, during the
second quarter of 2000, based upon a comprehensive review of the Company's
long-lived assets, the Company recorded a non-cash impairment charge of
$11.4 million related to the write-down of a portion of the recorded asset
values, including allocated goodwill. The impairment charge recorded under
SFAS No. 121 included impairment charges of $2.5 million on the
recoverability of vehicles and equipment at the Company's transport
divisions and $2.1 million on the recoverability of vehicles and equipment
at the Company's towing and recovery divisions and impairment charges of
$2.9 million on the recoverability of allocated goodwill at the Company's
transport divisions and $3.9 million on the recoverability of allocated
goodwill at the Company's towing and recovery divisions. The impairment
charge was recognized when the future undiscounted cash flows of these
divisions were estimated to be insufficient to recover their related
carrying values. As such, the carrying values of these assets were written
down to the Company's estimates of fair value.
Additionally, in connection with its analysis of the recoverability of
goodwill as described in note 1(g), the Company recorded an impairment
charge of $118.1 million. The non-cash impairment charge recorded included
$75.7 million related to the recoverability of goodwill at the Companys
transport divisions and $42.4 million related to the recoverability of
goodwill at the Company's towing and recovery divisions.
(9) Income Taxes
The use of loss carryforwards may be limited if a change in ownership of
the Company occurs under Section 382 of the Internal Revenue code. As
described in note 7, on July 20, 2000, the Company sold shares of its
Series A participating convertible preferred stock. This sale caused an
Internal Revenue Code section 382 ownership change resulting in the $5.6
million write off of the 1999 net operating loss carryforward.
Additionally, in determining the realizability of the deferred tax assets
at June 30, 2000, the company established a valuation allowance of $4.0M.
-13-
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
interim 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 accompanying unaudited
condensed consolidated financial statements have been restated to give effect to
the reverse 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
-14-
fees and pay the remainder to the municipality or law enforcement agency.
Services are provided in some cases under contracts with towing, recovery and
transport customers. In other cases, services are provided to towing, recovery
and transport customers without a long-term contract. The prices charged for
towing and storage of impounded vehicles for municipalities or law enforcement
agencies are limited by contractual provisions or local regulation.
In the case of law enforcement and private impound towing, payment is obtained
either from the owner of the impounded vehicle when the owner claims the vehicle
or from the proceeds of lien sales, scrap sales or auctions. In the case of the
Company's other operations, customers are billed upon completion of services
provided, with payment generally due within 30 days. Revenue is recognized as
follows: towing and recovery revenue is recognized at the completion of each
engagement; transport revenue is recognized upon the delivery of the vehicle or
equipment to its final destination; revenue from lien sales or auctions is
recognized when title to the vehicle has been transferred; and revenue from
scrap sales is recognized when the scrap metal is sold. Expenses related to the
generation of revenue are recognized as incurred.
Cost of revenue consists primarily of the following: salaries and benefits of
drivers, dispatchers, supervisors and other employees; fees charged by
subcontractors; fuel; depreciation, repairs and maintenance; insurance; parts
and supplies; other vehicle expenses; and equipment rentals.
Selling, general and administrative expenses consist primarily of the following:
compensation and benefits to sales and administrative employees; fees for
professional services; depreciation of administrative equipment and software;
advertising; and other general office expenses.
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 and six months ended June 30, 2000 and 1999. The
historical results for each of the three and six months ended June 30, 1999
include the results of all businesses acquired prior to June 30, 1999 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.
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). In the second quarter of 1999, the Company acquired one transport
business and one towing and recovery business. In the first quarter of 2000, the
Company divested a towing division acquired in June of 1998. During the second
quarter of 2000, the Company closed two transport divisions and one towing and
recovery division, and in some cases allocated certain equipment to other
divisions.
-15-
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 June 30, 2000
(Dollars in thousands)
Transport Towing and Recovery Total
-------------------- --------------------- ----------------------
Net revenue................................. $ 39,150 100.0% $ 23,567 100.0% $ 62,717 100.0%
Cost of revenue, including
depreciation.............................. 32,728 83.6 19,394 82.3 52,122 83.1
Selling, general and administrative
expenses (1)............................... 3,574 9.1 3,275 13.9 9,094 14.5
Amortization of goodwill.................... 776 2.0 564 2.4 1,340 2.1
Impairment.................................. 81,151 207.3 48,304 205.0 129,455 206.4
charge..................................... -------- ------ -------- ------- --------- -------
Loss from operations........................ $(79,079) (202.0) $(47,970) (203.5)% (129,294) (206.2)%
======== ====== ======== =======
Interest expense, net....................... 3,292 5.2
Other expenses, net......................... 124 0.2
--------- -------
Loss before income taxes.................... (132,710) (211.6)
Income tax expense.......................... 7,784 12.4
--------- -------
Net loss.................................... $(140,494) (224.0)%
========= =======
Three months ended June 30, 1999
(Dollars in thousands)
Transport Towing and Recovery Total
----------------------- ----------------------- -----------------------
Net revenue................................. $40,568 100.0% $24,914 100.0% $65,482 100.0%
Cost of revenue, including depreciation..... 30,257 74.6 19,363 77.7 49,620 75.8
Selling, general and administrative
Expenses (1)............................. 3,138 7.7 3,378 13.6 10,338 15.8
Amortization of goodwill.................... 875 2.2 616 2.5 1,515 2.3
------- ----- ------- ----- ------- -----
Income from operations...................... $ 6,298 15.5% $ 1,557 6.2% 4,009 6.1
======= ===== ======= =====
Interest expense, net....................... 2,609 4.0
Other expenses, net......................... 62 0.1
------- -----
Income before income taxes.................. 1,338 2.0
Income tax expense.......................... 868 1.3
------- -----
Net income.................................. $ 470 0.7%
======= =====
(1) Total selling, general and administrative expenses include corporate
selling, general and administrative expenses of $2,245 and $3,846 for the
three months ended June 30, 2000 and 1999, respectively.
Three months ended June 30, 2000 compared to three months ended June 30, 1999
Net Revenue. Net revenue decreased $2.8 million, or 4.3%, from $65.5 million
for the three months ended June 30, 1999 to $62.7 million for the three months
ended June 30, 2000. Of the net revenue for the three months ended June 30,
2000, 62.4% related to transport services and 37.6% related to towing and
recovery services. Transport net revenue decreased $1.4 million, or 3.4%, from
$40.6 million for the three months ended June 30, 1999 to $39.2 million for the
three months ended June 30, 2000. The decrease in transport net revenue was due
to weak performance of certain transport businesses subsequent to the Company's
consolidation of divisions. Towing and recovery net revenue decreased $1.3
million, or 5.2%, from $24.9 million for the three months ended June 30, 1999 to
$23.6 million for the three months ended June 30, 2000. The decrease in towing
and recovery net revenue was due to weak performance of certain towing and
recovery
-16-
businesses subsequent to acquisition, which performance was, in some cases, also
negatively affected by the Company's consolidation of divisions.
Cost of Revenue. Cost of revenue, including depreciation, increased $2.5
million, or 5.0%, from $49.6 million for the three months ended June 30, 1999 to
$52.1 million for the three months ended June 30, 2000. Transport cost of
revenue increased $2.4 million, or 7.9%, from $30.3 million for the three months
ended June 30, 1999 to $32.7 million for the three months ended June 30, 2000.
The principal components of the increase in transport cost of revenue consisted
of an increase in transport labor costs of $436,000, an increase in costs of
independent contractors, brokers and subcontractors of $493,000, an increase in
depreciation costs of $265,000, an increase in parts and supplies of $204,000
and an increase in fuel costs of $188,000. Towing and recovery cost of revenue
increased $31,000, from $19.36 million for the three months ended June 30, 1999
to $19.39 million for the three months ended June 30, 2000. The principal
components of the increase in towing and recovery cost of revenue consisted of
an increase in towing operating labor costs of $284,000 and an increase in fuel
costs of $252,000, offset by a decrease in broker and subcontractor costs of
$414,000 and a decrease in parts and supplies of $86,000.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $1.2 million, or 11.7%, from $10.3 million for
the three months ended June 30, 1999 to $9.1 million for the three months ended
June 30, 2000. Transport selling, general and administrative expenses increased
$436,000, or 14.0%, from $3.1 million for the three months ended June 30, 1999
to $3.6 million for the three months ended June 30, 2000. The principal
components of the increase in the Company's transport selling, general and
administrative expenses for the three months ended June 30, 2000 as compared to
the three months ended June 30, 1999, consisted of an increase in computer and
telecommunications expenses of $72,000, an increase in advertising expense of
$52,000 and an increase in wages and benefits expense of $49,000. Towing and
recovery selling, general and administrative expenses decreased $103,000, or
3.0%, from $3.4 million for the three months ended June 30, 1999 to $3.3 million
for the three months ended June 30, 2000. The principal components of the
decrease in the Company's towing and recovery selling, general and
administrative expenses for the three months ended June 30, 2000 as compared to
the three months ended June 30, 1999, consisted of a decrease in salary and wage
expense of $234,000, offset in part by an increase in advertising expense.
Corporate selling, general and administrative expenses decreased $1.6 million,
or 42.1%, from $3.8 million for the three months ended June 30, 1999 to $2.2
million for the three months ended June 30, 2000. The decrease in corporate
selling, general and administrative expenses was primarily due to a non-
recurring charge of $735,000 in 1999 related to the departure of the Company's
former chairman and chief executive officer, a decline in computer costs
associated with integrating and managing acquired businesses, and the absence of
acquisition related costs as a result of the curtailment of the acquisition
program in the third quarter of 1999. The other principal components of the
decrease in corporate selling, general and administrative expenses for the three
months ended June 30, 2000 as compared to the three months ended June 30, 1999
consisted of a decrease in computer and telecommunications expense of $280,000,
a decrease in salary and wage expense of $129,000, a decline in travel expenses
of $114,000 and a decrease in acquisition-related costs of $105,000.
Amortization of Goodwill. Amortization of goodwill decreased $175,000, or
11.7%, from $1.5 million for the three months ended June 30, 1999 to $1.3
million for the three months ended June 30, 2000. This decrease in goodwill
amortization was the result of 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 and the sale of a towing and recovery division in
the first quarter of 2000.
Impairment Charge. Impairment charges were $129.5 million for the three months
ended June 30, 2000. The impairment charges consisted of a non-cash charge of
$118.1 million related to recoverability of goodwill under Accounting Principles
Board ("APB") Opinion No. 17 and a non-cash charge of $11.4 million related to
the Company's comprehensive review of its long-lived assets in accordance with
Statement of Financial Accounting Standards("SFAS") No. 121. The impairment
charge recorded under APB Opinion No.17 included $75.7 million related to the
recoverability of goodwill at the Company's transport divisions and $42.4
million related to the recovery of goodwill at the Company's towing and recovery
divisions. The impairment charge recorded under SFAS No. 121 included impairment
charges of $2.5 million on the recoverability of vehicles and equipment at the
Company's transport divisions and $2.1 million on the recoverability of vehicles
and equipment at the Company's towing and recovery divisions and impairment
charges of $2.9 million on the recoverability of allocated goodwill at the
Company's transport divisions and $3.9 million on the recoverability of
allocated goodwill at the Company's towing and recovery divisions.
-17-
Income (loss) from Operations. Income from operations decreased $133.3 million,
from income of $4.0 million for the three months ended June 30, 1999 to a loss
of $129.3 million for the three months ended June 30, 2000. Excluding the effect
of the impairment charge of $129.5 million, income from operations decreased
$3.8 million, or 95.0%, from $4.0 million for the three months ended June 30,
1999 to $161,000 for the three months ended June 30, 2000. Transport income from
operations decreased $85.3 million, from income of $6.3 million for the three
months ended June 30, 1999 to a loss of $79.1 million for the three months ended
June 30, 2000. Excluding the effect of the transport impairment charge of $81.3
million, transport income from operations decreased $4.2 million, or 66.7%, from
$6.3 million for the three months ended June 30, 1999 to $2.1 million for the
three months ended June 30, 2000. This decrease in transport income from
operations was primarily due to a decline in revenue, increased labor, broker
and subcontractor costs associated with transport cost of revenue and increased
administrative wages and computer and telecommunication expenses related to the
operation of the transport business segment. Towing and recovery income from
operations decreased $49.5 million, from income of $1.6 million for the three
months ended June 30, 1999 to a loss of $47.9 million for the three months ended
June 30, 2000. Excluding the effect of the towing and recovery impairment charge
of $48.2 million, towing and recovery income from operations decreased $1.3
million, or 81.3%, from $1.6 million for the three months ended June 30, 1999 to
$334,000 for the three months ended June 30, 2000. The decrease in towing and
recovery income from operations was primarily due to increased labor, insurance
and fuel expenses and increased advertising expenses.
Interest Expense, net. Interest expense increased $683,000, or 26.3%, from
interest expense of $2.6 million for the three months ended June 30, 1999 to
interest expense of $3.3 million for the three months ended June 30, 2000.
Interest income increased $105,000 from interest income of $4,000 for the three
months ended June 30, 1999 to interest income of $106,000 for the three months
ended June 30, 2000. The increase in interest expense, net was related to an
interest rate increase of approximately 3.0% in the second quarter of 2000 as
compared to the second quarter of 1999 and higher levels of debt incurred to
finance the acquisitions which occurred during the first half of 1999.
Income Tax Expense. Income tax expense increased $6.9 million, from $868,000
for the three months ended June 30, 1999 to $7.8 million for the three months
ended June 30, 2000. The increase in income tax expense was largely due to the
Company's write off of the 1999 net operating loss carry forward of $5.6 million
and the establishment of a valuation allowance of $4.0 million against the
deferred tax asset offset by a tax benefit of $1.7 million in the three months
ended June 30, 2000.
Net Income (loss). Net income decreased $141.0 million, from net income of
$470,000 for the three months ended June 30, 1999 to a net loss of $140.5
million for the three months ended June 30, 2000. The decrease in net income
related largely to the decrease in income from operations of $133.3 million and
an increase in income tax expense of $6.9 million for the three months ended
June 30, 2000 as compared to the three months ended June 30, 1999.
Six months ended June 30, 2000
(Dollars in thousands)
Transport Towing and Recovery Total
------------------- --------------------- --------------------
Net revenue................................. $ 79,671 100.0% $ 48,509 100.0% $ 128,180 100.0%
Cost of revenue, including depreciation..... 66,479 83.4 40,492 83.5 106,971 83.5
Selling, general and administrative
expenses (1)............................. 7,122 8.9 6,388 13.2 18,759 14.6
Amortization of goodwill.................... 1,547 1.9 1,132 2.3 2,679 2.1
Impairment charge........................... 81,151 102.0 48,304 100.0 129,455 101.0
-------- ------ -------- ------ --------- -------
Loss from operations........................ $(76,728) (96.3)% $(47,807) (98.6)% (129,684) (101.2)
======== ====== ======== ======
Interest expense, net....................... 6,504 5.1
Other expenses, net......................... 374 0.3
--------- -------
Income (loss) before income taxes........... (136,562) (106.5)
Income tax expense.......................... 6,785 5.3
--------- -------
Net loss.................................... $(143,347) (111.8)%
========= =======
-18-
Six months ended June 30, 1999
(Dollars in thousands)
Transport Towing and Recovery Total
------------------------ ----------------------- ------------------------
Net revenue........................................ $76,671 100.0% $48,264 100.0% $124,935 100.0%
Cost of revenue, including depreciation............ 57,689 75.2 36,665 76.0 94,354 75.5
Selling, general and administrative
expenses (1).................................... 5,479 7.1 6,057 12.5 17,902 14.3
Amortization of goodwill........................... 1,518 2.0 1,226 2.5 2,794 2.2
------- ----- ------- ----- -------- -----
Income from operations............................. $11,985 15.6% $ 4,316 8.9% 9,885 7.9
======= ===== ======= =====
Interest expense, net.............................. 4,622 3.7
Other expenses, net................................ 130 0.1
-------- -----
Income before income taxes......................... 5,133 4.1
Income tax expense................................. 2,653 2.1
-------- -----
Net income......................................... $ 2,480 2.0%
======== =====
(1) Total selling, general and administrative expenses include corporate
selling, general and administrative expenses of $5,249 and $6,366 for the
six months ended June 30, 2000 and 1999, respectively.
Six months ended June 30, 2000 compared to six months ended June 30, 1999
Net Revenue. Net revenue increased $3.3 million, or 2.6%, from $124.9 million
for the six months ended June 30, 1999 to $128.2 million for the six months
ended June 30, 2000. Of the net revenue for the six months ended June 30, 2000,
62.2% related to transport services and 37.8% related to towing and recovery
services. Transport net revenue increased $3.0 million, or 3.9%, from $76.7
million for the six months ended June 30, 1999 to $79.7 million for the six
months ended June 30, 2000. The increase in transport net revenue was largely
due to the impact of the ten transport businesses acquired during the first half
of 1999 offset, in part, by weak performance of certain transport businesses
subsequent to the Company's consolidation of certain divisions. Towing and
recovery net revenue increased $245,000, or 0.5%, from $48.3 million for the six
months ended June 30, 1999 to $48.5 million for the six months ended June 30,
2000. The increase in towing and recovery net revenue was largely due to the
impact of the four towing and recovery businesses acquired during the first half
of 1999. The increase in towing and recovery net revenue was offset, in part, by
the sale of a towing division in the first quarter of 2000 and by weak
performance of certain towing and recovery businesses subsequent to acquisition,
which performance was, in some cases, also negatively affected by the Company's
consolidation of divisions.
Cost of Revenue. Cost of revenue, including depreciation, increased $12.6
million, or 13.3%, from $94.4 million for the six months ended June 30, 1999 to
$107.0 million for the six months ended June 30, 2000. Transport cost of revenue
increased $8.8 million, or 15.3%, from $57.7 million for the six months ended
June 30, 1999 to $66.5 million for the six months ended June 30, 2000. The
increase in transport cost of revenue was primarily due to the impact of the ten
transport businesses acquired during the first half of 1999. The principal
components of the increase in transport cost of revenue consisted of an increase
in transport operating labor costs of $2.5 million; an increase in fuel costs of
$1.4 million; an increase in costs of independent contractors, brokers and
subcontractors of $1.1 million; and increased depreciation costs of $720,000.
Towing and recovery cost of revenue increased $3.8 million, or 10.4%, from $36.7
million for the six months ended June 30, 1999 to $40.5 million for the six
months ended June 30, 2000. The increase in towing and recovery cost of revenue
was primarily due to the impact of the four towing and recovery businesses
acquired during the first half of 1999. The principal components of the increase
in towing and recovery cost of revenue consisted of an increase in towing and
recovery operating labor costs of $1.5 million; an increase in independent
contractor, broker and subcontractor costs of $1.2 million; an increase in
insurance casualty claims (that individually did not meet insurance deductibles)
of $916,000 and an increase in fuel costs of $777,000.
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Selling, general and administrative expenses. Selling, general and
administrative expenses increased $857,000, or 4.8%, from $17.9 million for the
six months ended June 30, 1999 to $18.8 million for the six months ended June
30, 2000. Transport selling, general and administrative expenses increased $1.6
million, or 29.1%, from $5.5 million for the six months ended June 30, 1999 to
$7.1 million for the six months ended June 30, 2000. The increase in transport
selling, general and administrative expenses was primarily due to the impact of
the ten transport businesses acquired during the first half 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 six months ended June 30, 2000 as compared to
the six months ended June 30, 1999, consisted of an increase in salary and wages
expense of $1.2 million and an increase in computer and telecommunication
expenses of $178,000 and an increase in travel expenses at $122,000. Towing and
recovery selling, general and administrative expenses increased $331,000, or
5.4%, from $6.1 million for the six months ended June 30, 1999 to $6.4 million
for the six months ended June 30, 2000. The increase in towing and recovery
selling, general and administrative expenses was primarily due to the impact of
the four towing & recovery businesses acquired during the first half 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 six months ended June 30,
2000 as compared to the six months ended June 30, 1999, consisted of an increase
in advertising expense of $211,000 and an increase in bad debt expense of
$71,000.
Corporate selling, general and administrative expenses decreased $1.2 million,
or 18.8%, from $6.4 million for the six months ended June 30, 1999 to $5.2
million for the six months ended June 30, 2000. The decrease in corporate
selling, general and administrative expenses was primarily due to a non-
recurring charge of $735,000 in 1999 relating to the departure of the Company's
former chairman and chief executive officer, a decrease in salary and wages at
$482,000 million a decrease in computer and telecommunications expense of
$251,000 and a decrease in travel and travel related expense of $385,000, a
decrease in acquisition-related expenses of $102,000 offset by an increase in
professional fees of $1.0 million.
Amortization of Goodwill. Amortization of goodwill decreased $115,000, or
4.1%, from $2.8 million for the six months ended June 30, 1999 to $2.7 million
for the six months ended June 30, 2000. This decrease in goodwill amortization
was the result of 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 and the sale of a towing and recovery division in the
first quarter of 2000.
Impairment Charge. Impairment charges were $129.5 million for the six months
ended June 30, 2000. The impairment charges consisted of a non-cash charge of
$118.1 million related to recoverability of goodwill under APB Opinion No. 17
and a non-cash charge of $11.4 million related to the Company's comprehensive
review of its long-lived assets in accordance with SFAS No. 121. The impairment
charge recorded under APB Opinion No.17 included $75.7 million related to the
recoverability of goodwill at the Company's transport divisions and $42.4
million related to the recovery of goodwill at the Company's towing and recovery
divisions. The impairment charge recorded under SFAS No. 121 included impairment
charges of $2.5 million on the recoverability of vehicles and equipment at the
Company's transport divisions and $2.1 million on the recoverability of vehicles
and equipment at the Company's towing and recovery divisions and impairment
charges of $2.9 million on the recoverability of allocated goodwill at the
Company's transport divisions and $3.9 million on the recoverability of
allocated goodwill at the Company's towing and recovery divisions.
Income (loss) from Operations. Income from operations decreased $139.6
million, from income of $9.9 million for the six months ended June 30, 1999 to a
loss of $129.7 million for the six months ended June 30, 2000. Excluding the
effect of the impairment charge of $129.5 million, income from operations
decreased $10.1 million, or 102.3%, from income of $9.9 million for the six
months ended June 30, 1999 to a loss of $229,000 for the six months ended June
30, 2000. Transport income from operations decreased $88.7 million, from income
of $12.0 million for the six months ended June 30, 1999 to a loss of $76.7
million for the six months ended June 30, 2000. Excluding the effect of the
transport impairment charge of $81.3 million, transport income from operations
decreased $7.5 million, or 62.5%, from $12.0 million for the six months ended
June 30, 1999 to $4.5 million for the six months ended June 30, 2000. This
decrease in transport income from operations was primarily due to increased
labor and fuel expenses associated with transport cost of revenue, and increased
administrative wages and computer and telecommunication expenses related to the
operation of the transport business segment offset, in part, by the impact of
the ten transport businesses acquired during the first half of 1999. Towing and
recovery income from operations decreased $52.0 million, from income of $4.3
million for the six months ended June 30, 1999 to a loss of $47.7 million for
the six months ended June 30, 2000. Excluding the effect of the towing and
recovery impairment charge of $48.3 million, towing and recovery income from
operations decreased $3.8 million, or 88.4%, from $4.3 million for the three
months ended June
-20-
30, 1999 to $498,000 for the three months ended June 30, 2000. The decrease in
towing and recovery income from operations was primarily due to increased labor,
insurance and fuel expenses, increased advertising and bad debt expenses
offset, in part, by the impact of the four towing and recovery businesses
acquired during the first half of 1999.
Interest Expense, net. Interest expense increased $1.9 million, or 41.3%, from
interest expense of $4.6 million for the six months ended June 30, 1999 to
interest expense of $6.7 million for the six months ended June 30, 2000.
Interest income increased $160,000 from interest income of $9,000 for the six
months ended June 30, 1999 to interest income of $169,000 for the six months
ended June 30, 2000. The increase in interest expense, net was related to an
interest rate increase of approximately 3.0% in the first half of 2000 as
compared to the first half of 1999 and higher levels of debt incurred to finance
the acquisitions which occurred during the first half of 1999.
Income Tax Expense. Income tax expense increased $4.1 million, from $2.7 million
for the six months ended June 30, 1999 to $6.8 million for the six months ended
June 30, 2000. The increase in income tax expense was largely due to the
Company's write off of the 1999 net operating loss carry forward of $5.6 million
and the establishment of a valuation allowance of $4.0 million against the
deferred tax asset offset by a tax benefit of $2.7 million in the six months
ended June 30, 2000.
Net Income (loss). Net income decreased $145.8 million, from net income of
$2.5 million for the six months ended June 30, 1999 to a net loss of $143.3
million for the six months ended June 30, 2000. The decrease in net income
related largely to the decrease in income from operations of $139.6 million and
an increase in income tax expense of $4.1 million for the six months ended June
30, 2000 as compared to the six months ended June 30, 1999.
Liquidity and Capital Resources
As of June 30, 2000, the Company had approximately:
o $8.1 million of cash and cash equivalents,
o working capital of $14.7 million, and
o $134.3 million of outstanding indebtedness, excluding current installments.
During the six months ended June 30, 2000, the Company generated $7.8 million
of cash from operations. Cash provided by operations consisted primarily of a
decrease in trade receivables of $3.5 million and an income tax refund of $1.8
million. During the six months ended June 30, 2000, the Company used $3.1
million of cash in investing activities and $706,000 of cash in financing
activities. Financing activities consisted of payments under the Company's
revolving credit facility of $500,000, payments on long-term debt and capital
lease obligations assumed in acquisitions of $148,000 and payments of deferred
financing costs of $58,000.
As of June 30, 2000, the Company had a revolving credit facility with a group of
banks for which Bank of America, N.A. ("Bank of America") acted as agent (the
"Bank of America Credit Facility") that had $55.0 million of total borrowing
availability. As of June 30, 2000, approximately $54.9 million, including
letters of credit of $4.7 million, was outstanding under the Bank of America
Credit Facility. Borrowings under the Bank of America Credit Facility bore
interest at the base rate (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 10.5% at June 30, 2000).
Obligations under the Bank of America Credit Facility were guaranteed by the
Company's subsidiaries. The Company's obligations and the obligations of the
Company's subsidiaries under the Bank of America Credit Facility and related
guarantees were secured by substantially all of the assets of the Company and
its subsidiaries. The Bank of America Credit Facility contained 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
Bank of America Credit Facility also contained 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 facility.
-21-
As of September 30, 1999, the Company was in violation of the covenants in the
Bank of America 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 Bank of America Credit Facility. The Second Amendment
also strengthened certain financial covenants in the Bank of America Credit
Facility. These amended financial covenants required 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 Bank of America. In connection with
this Amendment (the "Second Amendment") the Company and the banks also agreed to
decrease the commitment amount of the Bank of America 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 Bank of America Credit Facility. As a
result, the Company and the banks entered into a Third Amendment to the Bank of
America 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, limited the amount of cash equivalents that the Company was entitled
to have to $2.5 million, prohibited certain sales of assets other than for cash
without the banks' consent, and required certain proceeds of asset sales to be
used to permanently reduce the commitment amount under the Bank of America
Credit Facility (which required 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 Bank of
America Credit Facility to $58.0 million and the amount available for borrowing
to $55.0 million.
On March 29, 2000, the Company and the banks entered into a letter agreement
which extended the waiver of the Company's covenant violations through April 28,
2000. On April 27, 2000, May 31, 2000 and June 29, 2000, the banks further
extended the waiver of the covenant violations until May 31, 2000, June 30, 2000
and July 31, 2000, respectively. Due to the temporary nature of such waivers,
the total amount outstanding under the Bank of America Credit Facility had
previously been classified as a current liability in the Company's financial
statements. However, as a result of the refinancing described below and in
accordance with generally accepted accounting principles, the total
amount outstanding under the Bank of America Credit Facility as of June 30, 2000
has been reclassified as long-term debt in the accompanying financial
statements.
On July 20, 2000, in connection with the KPS Transaction (as described below),
the Company and its subsidiaries entered into a new senior secured revolving
credit facility (the "GE Capital Credit Facility") with a group of banks for
which General Electric Capital Corporation ("GE Capital") acts as agent. On the
same date, the Company terminated the Bank of America Credit Facility and repaid
all amounts outstanding thereunder (approximately $54.9 million, including $4.7
million of letter of credit obligations).
The GE Capital Credit Facility has a term of five years and a maximum borrowing
capacity of $100 million. The facility includes a letter of credit subfacility
of up to $10 million. The Company's borrowing capacity under the GE Capital
Credit Facility is limited to the sum of (i) 85% of the Company's eligible
accounts receivable, (ii) 80% of the net orderly liquidation value of the
Company's existing vehicles for which GE Capital has received title certificates
and other requested documentation, (iii) 85% of the lesser of the actual
purchase price and the invoiced purchase price of new vehicles purchased by the
Company for which GE Capital has received title certificates and other requested
documentation, and (iv) either 60% of the purchase price or 80% of the net
orderly liquidation value of used vehicles purchased by the Company for which GE
Capital has received title certificates and other requested documentation,
depending upon whether an appraisal of such vehicles has been performed, in each
case less reserves. As of August 11, 2000, approximately $35.0 million was
outstanding under the GE Capital Credit Facility (including letters of credit of
$8.3 million) and an additional $13.8 million was available for borrowing.
Interest accrues on amounts borrowed under the GE Capital Credit Facility, at
the Company's option, at either the Index Rate (as defined in the GE Capital
Credit Agreement) plus an applicable margin or the reserve adjusted LIBOR Rate
(as defined in the GE Capital Credit Agreement) plus an applicable margin. The
rate is subject to adjustment based upon the performance of the Company, the
occurrence of an event of default or certain other events. The GE Capital Credit
Facility provides for payment by the Company of customary fees and expenses.
The obligations of the Company and its subsidiaries under the GE Capital Credit
Facility are secured by a first priority security interest in the existing and
after-acquired real and personal, tangible and intangible assets of the Company
and its subsidiaries.
-22-
On May 19, 2000, the Company paid a commitment fee of $581,250 relating to the
GE Capital Credit Facility. In connection with the closing of the GE Capital
Credit Facility, the Company paid a closing fee of $581,000 and approximately
$850,000 for out-of-pocket expenses incurred in connection with the GE Capital
Credit Facility and the CFE Transaction (as described below).
The GE Capital Credit Facility contains additional covenants requiring the
Company, among other things and subject to agreed-upon exceptions contained in
the GE Capital Credit Facility, to (a) make certain prepayments against
principal, (b) maintain specified cash management systems, (c) maintain
specified insurance protection, (d) refrain from commercial transactions,
management agreements, service agreements and borrowing transactions with
certain related parties, (e) refrain from making payments of cash dividends and
other distributions to equity holders, payments in respect of subordinated debt,
payments of management fees to certain affiliates and redemption of capital
stock, (f) refrain from mergers, acquisitions or sales of capital stock or a
substantial portion of the assets of the Company or its subsidiaries, (g)
refrain from direct or indirect changes in control, (h) limit capital
expenditures and (i) meet certain financial covenants.
The Company spent $3.1 million on purchases of vehicles and equipment during the
six months ended June 30, 2000. These expenditures were primarily for the
purchase of, and capitalized repairs on, transport and towing and recovery
vehicles. During the six months ended June 30, 2000, the Company made
expenditures of $277,000 on towing and recovery vehicles and $2.4 million on
transport vehicles. These expenditures were financed primarily with 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 paid a deposit of approximately $1.6
million to the vehicle manufacturer. In March 2000, the Company amended its
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. During the
three months ended June 30, 2000, ten vehicles were delivered (with a total
purchase price of $1.5 million) pursuant to this commitment.
On July 20, 2000, the Company sold 613,073.27 shares of its Series A
Participating Convertible Preferred Stock, par value $.001 per share (the
"Series A Preferred Stock") to Blue Truck Acquisition, LLC, a Delaware limited
liability company ("Blue Truck") which is controlled by KPS Special Situations
Fund, L.P. ("KPS"), for $25.0 million in cash consideration (the "KPS
Transaction"). In addition, on July 20, 2000, the Company sold 49,045.86
shares of its Series A Preferred Stock to CFE, Inc. ("CFE"), an affiliate of
General Electric Capital Corporation ("GE Capital") for $2.0 million in cash
consideration (the "CFE Transaction").
Holders of the Series A Preferred Stock are entitled to vote together with the
holders of the Common Stock as a single class on matters submitted to the
Company's stockholders for a vote (other than with respect to certain elections
of directors). The holder of each share of Series A Preferred Stock is entitled
to the number of votes equal to the number of full shares of Common Stock into
which such share of Series A Preferred Stock could be converted on the record
date for such vote. The holders of Series A Preferred Stock have the right to
designate six members of the Company's Board of Directors, which constitutes a
majority, for so long as Blue Truck and its permitted transferees continue to
own specified amounts of Series A Preferred Stock. At lower levels of ownership,
the holders of Series A Preferred Stock will be entitled to appoint three
directors, one director, or no directors, depending upon the amount of Series A
Preferred Stock then held by Blue Truck and its permitted transferees, as set
forth in the Investors' Agreement relating to the KPS Transaction.
Prior to July 20, 2008, holders of the outstanding Series A Preferred Stock are
entitled to receive cumulative dividends on the Series A Preferred Stock each
quarter at the rate per annum of (i) 5.5% until July 20, 2006, and (ii) 5.0%
thereafter, of the Series A Preferred Base Liquidation Amount (as defined below)
per share of Series A Preferred Stock. The "Series A Preferred Base Liquidation
Amount" is equal to the purchase price per share of the Series A Preferred Stock
($40.778), subject to certain adjustments. The dividends are payable in cash at
the end of each quarter or, at the election of the Company, will cumulate to the
extent unpaid. In the event that the Company does not make a scheduled
dividend payment (an "arrearage"), dividends also accrue on such arrearage at
the same rate. Once an arrearage occurs, the Company may no longer pay such
dividend in cash, other than in connection with a liquidation, dissolution or
winding up of the Company. In addition, holders of the Series A Preferred
Stock are entitled to participate in all dividends payable to holders of the
Common Stock. The Company's obligation to pay dividends terminates on July 20,
2008, or earlier if the Company's Common Stock trades above a specified price
level.
-23-
Each share of Series A Preferred Stock is convertible at any time by its holder
into a number of shares of Common Stock equal to the sum of (i) the quotient
obtained by dividing (x) the Series A Preferred Base Liquidation Amount by (y)
the conversion price per share for the Series A Preferred Stock (currently
$4.0778 and subject to certain adjustments) (the "Conversion Price") plus (ii)
the quotient obtained by dividing (x) the amount, if any, by which the Series A
Preferred Liquidation Preference Amount (as defined below) that has accrued at
any time prior to July 20, 2005 exceeds the Series A Preferred Base Liquidation
Amount by (y) the product of the Conversion Price and 0.85. The "Series A
Preferred Liquidation Preference Amount" is the sum of the Series A Preferred
Base Liquidation Amount and the amount of any and all unpaid dividends on the
Series A Preferred Stock. The Series A Preferred Stock automatically converts
into Common Stock upon the occurrence of certain business combinations, unless
the holders elect to exercise their liquidation preference rights.
In connection with the KPS Transaction the Company agreed to pay KPS Management
LLC, an entity affiliated with KPS, a transaction fee of $2.5 million ($1.25
million of which was paid in cash at closing and the remainder of which is
expected to be paid in cash in the third quarter of 2000). The Company also
reimbursed KPS for its fees and expenses incurred in connection with the KPS
Transaction, which totalled approximately $750,000. In addition, the Company
agreed to pay KPS Management LLC an annual management fee of $1.0 million, which
may be lowered to $500,000 and then to zero based upon the amount of Series A
Preferred Stock held by Blue Truck and its permitted transferees. The Company
also paid its financial advisor, Donaldson Lufkin and Jenrette Securities
Corporation, a fee of $1.35 million in cash upon closing of the KPS Transaction
closing.
On July 20, 2000, in connection with the KPS Transaction, the Company cancelled
all of its 8% Convertible Subordinated Debentures due 2008 (the "1998
Debentures") issued to Charter URS LLC ("Charterhouse") pursuant to the Purchase
Agreement entered into between Charterhouse and the Company in November 1998,
and in lieu thereof, issued to Charterhouse $84.5 million aggregate principal
amount of new 8% Convertible Subordinated Debentures due 2008 (the "Debentures")
(which aggregate principal amount was equal to the aggregate principal amount of
the 1998 Debentures then outstanding plus accrued interest thereon to July 20,
2000). Under the terms of the Amended and Restated Purchase Agreement entered
into between the Company and Charterhouse (the "Amended Charterhouse Purchase
Agreement"), the Debentures are redeemable at par plus accrued interest under
certain circumstances. Charterhouse also waived its right to require the Company
to redeem the 1998 Debentures at 106.5% of the aggregate principal amount of the
1998 Debentures upon consummation of the KPS Transaction and waived certain
corporate governance rights that existed under its Investor's Agreement with the
Company. In connection with these transactions, the Company paid Charterhouse a
fee of 183,922 shares of Common Stock, and reimbursed Charterhouse for its fees
and expenses incurred in connection with the transaction, which totalled
approximately $200,000.
In connection with the closing of the KPS Transaction, the Company also paid an
aggregate amount equal to approximately $1.15 million to five of its senior
executives pursuant to the change of control provisions of each executive's
employment agreement with the Company. The Company is obligated to pay these
executives an additional aggregate amount of $1.15 million under such change of
control provisions, which amount is expected to be paid prior to July 20, 2002.
As of June 30, 2000, the Company had cash on hand of approximately $8.1 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 continue to strengthen the Company's cash position. The
Company expects to be able to fund its liquidity needs through proceeds from the
sale of its Series A Preferred Stock, cash flow from operations and borrowings
of amounts available under the GE Capital 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 book value to existing
investors.
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.
-24-
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 businesses, (iii)
the loss of significant customers or contracts, (iv) the timing of expenditures
for new equipment and the disposition of used equipment (v) changes in
applicable regulations, including but not limited to, various federal, state and
local laws and regulations regarding equipment, driver certification, training,
recordkeeping and workplace safety, (vi) changes in the general level of demand
for towing and transport services, (vii) price changes in response to
competitive factors, (viii) event-driven variations in the demand for towing and
transport services, (ix) 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.
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.
-25-
PART II OTHER INFORMATION
-----------------
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
Reverse Stock Split
On May 4, 2000, the Company amended its Amended and Restated Certificate of
Incorporation to effect a 1-for-10 reverse split of its common stock. Pursuant
to such amendment, each ten shares of the Company's common stock, par value
$.001 per share, issued and outstanding as of May 4, 2000 were automatically
combined and reclassified as one share of issued and outstanding Common Stock.
Any fractional shares resulting from such split were cancelled and holders of
such fractional shares were entitled to receive a cash amount equal to the
market value of the fractional shares.
Recent Sales of Unregistered Securities
On June 30, 2000, the Company issued approximately $1.6 million aggregate
principal amount of 1998 Debentures to Charterhouse, which represented the
quarterly payment-in-kind interest payment due with respect to $84.1 million
aggregate principal amount of 1998 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 June 30, 2000, the Company was in violation of certain covenants in the
Bank of America Credit Facility relating to minimum consolidated net income,
minimum EBITDA, and the ratio of net income plus interest, tax and rental
expense (EBITR) to interest expense plus rental expense. Such defaults under
the Bank of America Credit Facility were temporarily waived by the banks through
July 31, 2000. On July 20, 2000, in connection with the KPS Transaction and the
GE Capital Credit Facility, the Company terminated the Bank of America Credit
Facility and repaid all amounts outstanding thereunder. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of the stockholders of the Company was held on May 4, 2000
(the "Special Meeting"). At the Special Meeting, the stockholders considered a
proposal by the Company to amend the Company's Amended and Restated Certificate
of Incorporation to effect a 1-for-10 reverse split of the Company's common
stock. The proposal was approved, and the voting results were as follows:
11,697,628 shares voting in favor; 776,597 shares voting against; no shares
withheld; and 16,080 shares abstaining.
ITEM 5 OTHER EVENTS
Effective as of May 19, 2000, the Company's common stock was delisted from the
Nasdaq Stock Market. The Common Stock is now traded over-the-counter and quoted
on the OTC Bulletin Board under the symbol "URSI."
On July 20, 2000, pursuant to the Investors' Agreement entered into in
connection with the closing of the KPS Transaction, Richard A. Molyneux, Grace
M. Hawkins, Mark J. Henninger and Merril M. Halpern resigned from the Company's
Board of Directors. Six persons nominated by Blue Truck pursuant to the terms
of the Investors' Agreement (Michael G. Psaros, Eugene J. Keilin, David Shapiro,
Stephen Presser, Brian Riley and Raquel Palmer) were appointed to the Board of
Directors to fill the vacancies created by such resignations.
-26-
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Amendment to Amended and Restated Certificate of
Incorporation (filed herewith).
3.2 Amendment to Amended and Restated Bylaws of the Company (filed
herewith).
4.1 Certificate of Powers, Designations, Preferences and Rights of
Series A Participating Convertible Preferred Stock of the
Company (incorporated by reference to Exhibit 3 to the Schedule
13D of Blue Truck Acquisition, LLC and KPS Special Situations
Fund, L.P. filed with the SEC on July 28, 2000).
4.2 Certificate of Correction of Certificate of Powers,
Designations, Preferences and Rights of Series A Participating
Convertible Preferred Stock of the Company (incorporated by
reference to Exhibit 4 to the Schedule 13D of Blue Truck
Acquisition, LLC and KPS Special Situations Fund, L.P. filed
with the SEC on July 28, 2000).
10.1 Stock Purchase Agreement, dated as of April 14, 2000, by and
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).
10.2 Amendment No. 1, dated as of May 26, 2000, to Stock Purchase
Agreement, dated as of April 14, 2000, by and between the
Company and Blue Truck Acquisition, LLC (incorporated by
reference to Appendix F to the Company's Definitive Proxy
Statement on Schedule 14A dated June 13, 2000).
10.3 Investors' Agreement, dated as of July 20, 2000, between the
Company and Blue Truck Acquisition, LLC (incorporated by
reference to Exhibit 5 to the Schedule 13D of Blue Truck
Acquisition, LLC and KPS Special Situations Fund, L.P. filed
with the SEC on July 28, 2000).
10.4 Registration Rights Agreement, dated as of July 20, 2000, by and
among the Company, Blue Truck Acquisition, LLC and CFE, Inc.
(incorporated by reference to Exhibit 6 to the Schedule 13D of
Blue Truck Acquisition, LLC and KPS Special Situations Fund,
L.P. filed with the SEC on July 28, 2000).
10.5 Amended and Restated Purchase Agreement, dated as of April 14,
2000, between the Company and Charter URS LLC (incorporated by
reference to Appendix D to the Company's Definitive Proxy
Statement on Schedule 14A dated June 13, 2000).
10.6 Amended and Restated Investors' Agreement, dated as of April 14,
2000, between the Company and Charter URS LLC (filed herewith).
10.7 Amended and Restated Registration Rights Agreement, dated as of
April 14, 2000, between the Company and Charter URS LLC (filed
herewith).
10.8 Amendment, dated as of May 26, 2000, to Amended and Restated
Purchase Agreement and Amended and Restated Investors'
Agreement, each dated as of April 14, 2000, by and between the
Company and Charter URS LLC (incorporated by reference to
Appendix G to the Company's Definitive Proxy Statement on
Schedule 14A dated June 13, 2000).
10.9 Second Amendment, dated as of July 20, 2000, to Amended and
Restated Purchase Agreement and Amended and Restated
Registration Rights Agreement, each dated as of April 14, 2000,
by and between the Company and Charter URS LLC (filed herewith).
10.10 Stock Purchase Agreement, dated as of July 20, 2000, by and
between the Company and CFE, Inc. (filed herewith).
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10.11 Credit Agreement, dated as of July 20, 2000, by and among the
Company, each of its subsidiaries, various financial
institutions, General Electric Capital Corporation, as Agent and
Fleet Capital Corporation, as Documentation Agent (filed
herewith).
10.12 Amendment to United Road Services, Inc. 1998 Stock Option Plan
(filed herewith).
11.1 Statement of Computation of Earnings per Share (filed herewith).
27.1 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K
The Company filed the following report on Form 8-K during the quarterly period
ended June 30, 2000:
Current Report on Form 8-K, dated April 14, 2000 and filed April 18, 2000, to
report under Item 5 that the Company had entered into a Stock Purchase
Agreement with Blue Truck providing for the sale of $25.0 million of the
Company's Series A Preferred Stock to Blue Truck, and in connection therewith
agreed to amend the terms of the 1998 Debentures issued to Charterhouse.
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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: August 14, 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 FILLED HEREWITH*
Number Description of Document
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3.1 Certificate of Amendment to Amended and Restated Certificate of
Incorporation.
3.2 Amendment to Amended and Restated Bylaws of the Company.
10.6 Amended and Restated Investors' Agreement, dated as of April 14,
2000, between the Company and Charter URS LLC.
10.7 Amended and Restated Registration Rights Agreement, dated as of
April 14, 2000, between the Company and Charter URS LLC.
10.9 Second Amendment, dated as of July 20, 2000, to Amended and
Restated Purchase Agreement and Amended and Restated
Registration Rights Agreement, each dated as of April 14, 2000,
by and between the Company and Charter URS LLC.
10.10 Stock Purchase Agreement, dated as of July 20, 2000 by and
between the Company and CFE, Inc.
10.11 Credit Agreement, dated as of July 20, 2000, by and among the
Company, each of its subsidiaries, various financial
institutions, General Electric Capital Corporation, as Agent and
Fleet Capital Corporation, as Documentation Agent.
10.12 Amendment to United Road Services, Inc. 1998 Stock Option Plan.
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).