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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
SEPTEMBER 30, 2001
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 November 14, 2001, the registrant had 2,102,197 shares of common
stock issued and outstanding.
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UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
Form 10-Q For The Three and Nine Months Ended September 30, 2001
Index Page
Part I. - Financial Information
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2001 and December 31, 2000 3
Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended
September 30, 2001 and September 30, 2000 4
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 2001 and September 30, 2000 5
Notes to Condensed Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3 Quantitative and Qualitative Disclosures about Market Risk 21
Part II. - Other Information
Item 2 Changes in Securities and Use of Proceeds 22
Item 3 Defaults upon Senior Securities 22
Signatures 23
Page 2
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts and per share data)
ASSETS September 30, 2001 December 31, 2000
------------------ -----------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 86 2,615
Trade receivables, net of allowance for doubtful
accounts of $1,858 at September 30, 2001
and $2,686 at December 31, 2000 18,948 18,981
Other receivables, net of allowance for doubtful accounts
of $0 at September 30, 2001 and $9 at December 31, 2000 958 903
Prepaid licenses and fees 657 317
Prepaid expenses and other current assets 2,487 2,030
------------ -------------
Total current assets 23,136 24,846
Vehicles and equipment, net 66,658 69,419
Deferred financing costs, net 5,048 5,570
Goodwill, net 76,149 78,020
Other non-current assets 269 538
----------- -------------
Total assets $ 171,260 178,393
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of obligations for equipment under
finance contracts and capital leases $ 329 458
Borrowings under credit facility 33,651 32,163
Accounts payable 7,790 8,722
Accrued expenses 10,539 11,115
Due to related parties 750 589
----------- -----------
Total current liabilities 53,059 53,047
Obligations for equipment under finance contracts and capital
leases, excluding current installments 192 547
Long-term debt 92,928 87,568
Deferred tax liability 2,278 3,371
Other long-term liabilities 1,880 1,254
----------- -----------
Total liabilities 150,337 145,787
----------- -----------
Stockholders' equity:
Preferred stock; $ 0.001 par value; 5,000,000 shares authorized;
662,119 shares issued and outstanding at September 30, 2001
and December 31, 2000 1 1
Common stock; $0.01 par value; 35,000,000 shares
authorized; 2,102,197 shares issued and outstanding
at September 30, 2001 and December 31, 2000 21 21
Additional paid-in capital 217,541 217,661
Accumulated deficit (196,640) (185,077)
----------- -----------
Total stockholders' equity 20,923 32,606
----------- -----------
Total liabilities and stockholders' equity $ 171,260 178,393
=========== ============
See accompanying notes to condensed consolidated
financial statements.
Page 3
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Net revenue $ 55,923 61,346 172,662 189,526
Cost of revenue, excluding depreciation 45,336 48,796 138,842 150,730
Amortization of goodwill 516 740 1,547 3,419
Depreciation 2,637 2,489 7,393 7,526
Selling, general and administrative expenses 8,700 11,310 27,589 30,069
Impairment charge - - - 129,455
--------- --------- --------- ---------
Loss from operations (1,266) (1,989) (2,709) (131,673)
Other income (expense):
Interest income 13 93 37 262
Interest expense (2,766) (4,669) (8,494) (11,342)
Other 31 (47) (52) (421)
--------- --------- --------- ----------
Loss before income taxes (3,988) (6,612) (11,218) (143,174)
Income tax (benefit) expense (1,102) 813 (810) 7,598
--------- --------- --------- ----------
Net loss $ (2,886) (7,425) (10,408) (150,772)
========= ========= ========= ==========
Share amounts:
Basic and fully diluted loss per share$ (1.37) (3.73) (4.97) (80.73)
========= ========= ========= ==========
Weighted average shares outstanding 2,102,197 1,989,693 2,095,177 1,867,671
========= ========= ========= ==========
See accompanying notes to condensed consolidated
financial statements.
Page 4
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine months ended
September 30,
2001 2000
---- ----
Net loss $ (10,408) (150,772)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 9,675 10,945
Impairment charge - 129,455
Provision for doubtful accounts 662 2,403
Deferred income taxes - 7,212
Interest expense, paid-in-kind 5,360 4,975
Loss on sale of vehicles and equipment, net 38 188
Loss on sale of division - 212
Changes in operating assets and liabilities:
Decrease (increase) in trade receivables (629) 1,915
Decrease in other receivables (55) (167)
Decrease (increase) in prepaid licenses and fees (340) 1,991
Decrease (increase) in prepaid expenses and other
current assets (564) (249)
Decrease in other non-current assets 57 111
Decrease in accounts payable (1,443) (922)
Increase (decrease) in accrued expenses (576) 620
Decrease in other long-term liabilities (1,622) (397)
-------- -------
Net cash provided by (used in) operating activities 155 7,520
-------- -------
Investing activities:
Purchases of vehicles and equipment (5,802) (4,570)
Proceeds from sale of vehicles and equipment 1,133 751
Proceeds received from sale of division - 450
Amounts payable to related parties 486 (1,336)
-------- -------
Net cash used in investing activities (4,183) (4,705)
-------- -------
Financing activities:
Proceeds from issuance of stock, net of offering costs - 22,498
Convertible preferred stock offering costs (120) -
Payments to be presented for funding, net 511 -
Repayments of credit facility - (50,650)
Net borrowings on revolving credit facility 1,488 27,632
Payments of deferred financing costs (215) (3,097)
Payments on capital leases (165) (234)
-------- -------
Net cash provided by (used in) financing activities 1,499 (3,851)
-------- -------
Increase (decrease) in cash and cash equivalents (2,529) (1,036)
Cash and cash equivalents at beginning of period 2,615 4,115
-------- -------
Cash and cash equivalents at end of period $ 86 3,079
======== =======
(continued)
Page 5
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(In thousands)
(Unaudited)
Nine months ended
September 30,
2001 2000
---- ----
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ 2,347 3,120
========= ==========
Income tax expense, net of refunds $ 346 (1,560)
========== ==========
Supplemental disclosure of non-cash investing and financing activity:
Increase in accumulated deficit for unpaid
cumulative dividend on preferred stock $ 1,155 289
========== ==========
Issuance of common stock related to acquisition, net $ 8 409
========== ==========
See accompanying notes to condensed consolidated
financial statements.
Page 6
(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 accounting principles generally accepted in
the United States of America, have been condensed or omitted
pursuant to those rules and regulations, although United Road
Services, Inc. (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 Company's 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 the Company's Annual Report on Form 10-K for the year ended
December 31, 2000, as filed with the SEC.
(b) Organization and Business
The Company operates in two reportable operating segments: (1)
transport and (2) towing and recovery. The transport segment
provides transport services to a broad range of customers in
the new and used vehicle markets. Revenue from transport
services is derived according to pre-set rates based on
mileage or a flat fee. Customers include automobile
manufacturers, leasing and insurance companies, automobile
auction companies, automobile dealers and individual
motorists.
The towing and recovery segment provides towing, impounding,
repossession and storing services, and performs 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,
finance companies, 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 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.
(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 accounting principles
generally accepted in the United States of America. Actual
results could differ from those estimates.
(1) Continued
(e) Share and Per Share Amounts
All share and per share amounts in the accompanying unaudited
condensed consolidated financial statements have been restated
to give effect to the one-for-ten reverse stock split effected
by the Company in May 2000.
Page 7
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 impact
of the Company's outstanding stock options, warrants and
convertible subordinated debentures has been excluded, as the
effect would be antidilutive. At September 30, 2001, the
Company had outstanding preferred stock convertible into
6,221,190 shares of common stock, stock options exercisable to
purchase 306,413 shares of common stock, warrants exercisable
to purchase 48,008 shares of common stock and subordinated
debentures convertible into 619,520 shares of common stock. At
September 30, 2000, the Company had outstanding preferred
stock convertible into 6,221,190 shares of common stock, stock
options exercisable to purchase 397,146 shares of common
stock, warrants exercisable to purchase 47,960 shares of
common stock and subordinated debentures convertible into
572,340 shares of common stock.
(f) 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
Statement of Financial Accounting Standard ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. 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.
(g) Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board
("FASB") issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 is
required to be adopted in years beginning after June 15, 2000.
The Company adopted SFAS No. 133 effective January 1, 2001. At
September 30, 2001, the Company was not active in the use of
derivative products or arrangements and the adoption of SFAS
No. 133 did not have a material financial impact on the
Company's condensed consolidated financial statements. The
Company will continue to evaluate future contractual
arrangements entered into that may affect this determination.
In July 2001, the FASB issued SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated
after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. SFAS No. 141 also
specifies criteria that intangible assets acquired in a
purchase method business combination must meet to be
recognized and reported apart from goodwill, noting that any
purchase price allocable to an assembled workforce may not be
accounted for separately. SFAS No. 142 requires that goodwill
and intangible assets with indefinite useful lives no longer
be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with
definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121.
The Company is required to adopt the provisions of SFAS No.
141 immediately, and SFAS No. 142 effective January 1, 2002.
Furthermore, any goodwill or intangible asset determined to
have an indefinite useful life that is acquired in a purchase
business combination completed after June 30, 2001
Page 8
will not be amortized, but will continue to be evaluated for
impairment in accordance with the appropriate pre-SFAS No. 142
accounting literature. Goodwill and intangible assets acquired
in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of SFAS No.
142.
SFAS No. 141 will require, upon adoption of SFAS No. 142, that
the Company evaluate its existing intangible assets and
goodwill that were acquired in a prior purchase business
combination, and make any necessary reclassifications in order
to conform with the new criteria in SFAS No. 141 for
recognition apart from goodwill. Upon adoption of SFAS No.
142, the Company will be required to reassess the useful lives
and residual values of all intangible assets acquired in
purchase business combinations, and make any necessary
amortization period adjustments by the end of the first
interim period after adoption. In addition, to the extent an
intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible
asset for impairment in accordance with the provisions of SFAS
No. 142 within the first interim period. Any impairment loss
will be measured as of the date of adoption and recognized as
the cumulative effect of a change in accounting principle in
the first interim period. The Company is evaluating SFAS No.
142 and has not made a determination as to the impact of its
adoption.
In June 2001, the FASB issued SFAS No. 143, Accounting for
Asset Retirement Obligations, which addresses financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated
asset retirement costs. The standard applies to legal
obligations associated with the retirement of long-lived
assets that result form the acquisition, construction,
development and (or) normal use of the asset.
SFAS No. 143 requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value
can be made. The fair value of the liability is added to the
carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset. The
liability is accreted at the end of each period through
charges to operating expense. If the obligation is settled for
other than the carrying amount of the liability, the Company
will recognize a gain or loss on settlement.
The Company is required and plans to adopt the provisions of
SFAS No. 143 for the quarter ending March 31, 2003. To
accomplish this, the Company must identify all legal
obligations for asset retirement obligations, if any, and
determine the fair value of these obligations on the date of
adoption. The determination of fair value is complex and will
require the Company to gather market information and develop
cash flow models. Additionally, the Company will be required
to develop processes to track and monitor these obligations.
Because of the effort necessary to comply with the adoption of
SFAS No. 143 it is not practicable for management to estimate
the impact of adopting this Statement at the date of this
report.
In August 2001, FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes
both SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of and the
accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions
(Opinion 30), for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS No. 144 retains the
fundamental provisions in SFAS No. 121 for recognizing and
measuring impairment losses on long-lived assets held for use
and long-lived assets to be disposed of by sale, while also
resolving significant implementation issues associated with
SFAS No. 121.
The Company is required to adopt SFAS No. 144 no later than
the year beginning after December 15, 2001, and plans to adopt
its provisions for the quarter ending March 31, 2002.
Management does not expect the adoption of SFAS No. 144 for
long-lived assets held for use to have a material impact on
the Company's financial statements because the impairment
assessment under SFAS No. 144 is largely unchanged from SFAS
No. 121. The provisions of the SFAS for assets held for sale
or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated
disposal activities. Therefore, management cannot determine
the potential effects that adoption of SFAS No. 144 will have
on the Company's financial statements.
Page 9
(h) Reclassifications
Certain reclassifications of the prior year's condensed
consolidated financial statements have been made to conform to
the current year presentation.
(2) Due to Related Parties
The Company is obligated to make certain earn-out payments, in the form
of common stock, to the former owners of certain acquired companies.
Subject to certain limitations, 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 and 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, subject to certain limitations, 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. The aggregate of all earn-out payments to a former owner may
not exceed the total number of shares received by the former owner at
the date of acquisition. At December 31, 2000, the Company recorded
additional goodwill and a liability within accrued expenses on the
accompanying condensed consolidated balance sheet to reflect earn-out
payments due in the amount of $339. There were no earn-out payments due
as of September 30, 2001. In August 2001, the Company delivered 10,543
shares of common stock related to the 2000 earn-out.
(3) Debt
On July 20, 2000, the Company and its subsidiaries entered into a
senior secured revolving credit facility (the "GE Capital Credit
Facility") with a group of banks led by General Electric Capital
Corporation ("GE Capital").
The GE Capital Credit Facility has a term of five years and a maximum
borrowing capacity of $100,000. The facility includes a letter of
credit sub-facility of up to $15,000. The Company's borrowing capacity
under the GE Capital Credit Facility is limited to the sum of (i) 85%
of the Company's eligible accounts receivable, (ii) 80% of the net
orderly liquidation value of the Company's existing vehicles for which
GE Capital has received title certificates and other requested
documentation, (iii) 85% of the lesser of the actual purchase price 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
September 30, 2001, $33,651 was outstanding under the GE Capital Credit
Facility, excluding letters of credit of $14,256, and an additional
$8,915 was available for borrowing.
The GE Capital Credit Facility requires the Company, among other
things, to comply with certain cash management requirements and
financial covenants. These include minimum levels of EBITDA and minimum
ratios of EBITDA to fixed charges. In October 2001, the Company
notified GE Capital that the Company had failed to meet the minimum
level of EBITDA and minimum ratio of EBITDA to fixed charges for the
period ended September 30, 2001. The Company is currently in
discussions with the banks regarding a waiver of this non-compliance.
If the Company is unable to obtain a waiver, all amounts outstanding
under the GE Capital Credit Facility would be subject to acceleration
at the banks' discretion. If the banks elect to accelerate, the Company
would be required to refinance its debt or obtain capital from other
sources, including sales of additional debt or equity securities or
sales of assets, in order to meet its repayment obligations, which may
not be possible. In addition, such acceleration would cause a default
under the Company's 8% Convertible Subordinated Debentures due 2008
(the "Debentures") issued to Charter URS, LLC ("Charterhouse"), and
Charterhouse could accelerate repayment of all amounts outstanding
under the Debentures, subject to the banks' priority. In such event,
repayment of amounts outstanding under the Debentures could only be
made if the GE Capital Credit Facility were first paid in full or the
bank group gave its express prior written consent to such repayment.
Page 10
On September 30, 2001, the Company issued approximately $1.8 million
aggregate principal amount of Debentures to Charterhouse, which
represented the quarterly payment-in-kind interest payment due with
respect to $91.1 million aggregate principal amount of the Debentures
previously issued to Charterhouse. For the nine months ended September
30, 2001 the Company has issued approximately $5.4 million in
Debentures which represents payment-in-kind interest.
(4) 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 to the consolidated
financial statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 2000. 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 nine month
periods ended September 30, 2001 and 2000. 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 September 30, 2001
-------------------------------------
Towing and
Transport Recovery Other Total
----------- ---------- ----- -----
Net revenues from external customers $ 34,065 21,858 - 55,923
Cost of revenue, including depreciation 29,846 18,127 - 47,973
Income (loss) from operations 708 391 (2,365) (1,266)
Three months ended September 30, 2000
-------------------------------------
Towing and
Transport Recovery Other Total
----------- ---------- ----- -----
Net revenues from external customers $ 37,003 24,343 - 61,346
Cost of revenue, including depreciation 31,322 19,963 - 51,285
Income (loss) from operations 1,681 1,062 (4,732) (1,989)
Page 11
The following are reconciliations of the information used by the chief
operating decision-maker to the Company's consolidated totals:
Three months ended
September 30,
Reconciliation of income before income taxes: 2001 2000
---- ----
Total profit (loss) from reportable segments:
Transport $ 708 1,681
Towing and Recovery 391 1,062
Interest expense, net (2,753) (4,576)
Other selling, general and administrative costs (2,365) (4,732)
Other income (expense) 31 (47)
--------- --------
Loss before income taxes $ (3,988) (6,612)
========= =========
Nine months ended September 30, 2001
------------------------------------
Towing and
Transport Recovery Other Total
----------- ---------- ----- -----
Net revenues from external customers $ 105,232 67,430 - 172,662
Cost of revenue, including depreciation 91,255 54,980 - 146,235
Income (loss) from operations 2,756 2,643 (8,108) (2,709)
Nine months ended September 30, 2000
------------------------------------
Towing and
Transport Recovery Other Total
----------- ---------- ----- -----
Net revenues from external customers $ 116,674 72,852 - 189,526
Cost of revenue, including depreciation 97,802 60,454 - 158,256
Impairment charge 81,151 48,304 - 129,455
Loss from operations (74,951) (46,741) (9,981) (131,673)
The following are reconciliations of the information used by the chief
operating decision-maker to the Company's consolidated totals:
Nine months ended
September 30,
Reconciliation of income before income taxes: 2001 2000
---- ----
Total profit (loss) from reportable segments:
Transport $ 2,756 (74,951)
Towing and Recovery 2,643 (46,741)
Interest expense, net (8,457) (11,080)
Other selling, general and administrative costs (8,108) (9,981)
Other expense (52) (421)
---------- ---------
Income (loss) before income taxes $ (11,218) (143,174)
========== =========
(5) Commitments and Contingencies
The Company is subject to certain claims and lawsuits arising in the
normal course of business, most of which involve claims for personal
injury and property damage incurred in connection with its operations.
The Company maintains various insurance coverages in order to minimize
financial risk associated with these claims. In the opinion of
management, uninsured losses, if any, resulting from the ultimate
resolution of these matters will not have a material effect on the
Company's consolidated financial position or results from operations.
Page 12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the unaudited
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 following discussion and
analysis 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 and replacement equipment, risks
related to the Company's limited operating history and its ability to integrate
acquired companies, risks related to the Company's ability to successfully
improve the profitability of its acquired businesses, the loss of significant
customers and contracts, changes in applicable regulations, including but not
limited to, various federal, state and local laws and regulations regarding
equipment, driver certification, training, recordkeeping and workplace safety,
risks related to the adequacy, functionality, sufficiency and cost of the
Company's information systems, potential exposure to environmental and other
unknown or contingent liabilities, risks associated with the Company's labor
relations, risks related to the adequacy of the Company's insurance, changes in
the general level of demand for towing, recovery and transport services, price
changes in response to competitive factors, risks related to fuel, insurance,
labor and other operating costs, risks related to the over-the-counter trading
of the Company's common stock, seasonal and other event driven variations in the
demand for towing, recovery and transport services, general economic conditions,
and other risk factors described from time to time in the Company's reports
filed with the Securities and Exchange Commission (the "Risk Factors"). All
statements herein that are not statements of historical fact are forward-looking
statements. Although management believes that the expectations reflected in such
forward-looking statements are reasonable, there can be no assurance that those
expectations will prove to have been correct. Certain other important factors
that could cause actual results to differ materially from management's
expectations ("Cautionary Statements") are disclosed in this Report. All written
forward-looking statements by or attributable to management in this Report are
expressly qualified in their entirety by the Risk Factors and the Cautionary
Statements. Investors must recognize that events could turn out to be
significantly different from what management currently expects.
Overview
The Company operates in two reportable operating segments: (1) transport and (2)
towing and recovery. Through its transport segment, the Company provides
transport services for new and used vehicles to a broad range of customers
throughout the United States. Through its towing and recovery segment, the
Company provides a variety of towing and recovery services in its local markets,
including towing, impounding and storing motor vehicles, conducting lien sales
and auctions of abandoned vehicles, towing heavy equipment and recovering and
towing heavy-duty commercial and recreational vehicles. The Company's customers
include commercial entities, such as automobile 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
Page 13
auction or to a scrap metal facility, depending on the value of the vehicle.
Depending on the jurisdiction, the Company may either keep all the proceeds from
the vehicle sales, or keep the proceeds up to the amount of the towing and
storage fees and pay the remainder to the municipality or law enforcement
agency. Services are provided in some cases under contracts with towing,
recovery and transport customers. In other cases, services are provided to
towing, recovery and transport customers without a long-term contract. The
prices charged for towing and storage of impounded vehicles for municipalities
or law enforcement agencies are limited by contractual provisions or local
regulation.
In the case of law enforcement and private impound towing, payment is obtained
either from the owner of the impounded vehicle when the owner claims the vehicle
or from the proceeds of lien sales, scrap sales or auctions. In the case of the
Company's other operations, customers are billed upon completion of services
provided, with payment generally due within 30 days. Revenue is recognized as
follows: towing and recovery revenue is recognized at the completion of each
engagement; transport revenue is recognized upon the delivery of the vehicle or
equipment to its final destination; revenue from lien sales or auctions is
recognized when title to the vehicle has been transferred; and revenue from
scrap sales is recognized when the scrap metal is sold. Expenses related to the
generation of revenue are recognized as incurred.
Cost of revenue consists primarily of the following: salaries and benefits of
drivers, dispatchers, supervisors and other employees; fees charged by
subcontractors; fuel; depreciation, repairs and maintenance; insurance; parts
and supplies; other vehicle expenses; and equipment rentals.
Selling, general and administrative expenses consist primarily of the following:
compensation and benefits to sales and administrative employees; fees for
professional services; depreciation of administrative equipment and software;
advertising; and other general office expenses.
Between May 1998 and May 1999, the Company acquired a total of 56 towing,
recovery and transport service businesses. During the third quarter of 1999, the
Company made the strategic decision not to pursue its acquisition program in
order to allow the Company to focus primarily on integrating and profitably
operating its acquired businesses. The Company has not completed any
acquisitions since May 5, 1999.
Management's discussion and analysis addresses the Company's historical results
of operations as shown in its unaudited condensed consolidated financial
statements for the three and nine months ended September 30, 2001 and 2000.
In the first quarter of 2000, the Company sold one towing and recovery division.
In the second quarter of 2000, the Company closed two transport divisions and
one towing and recovery division, and in some cases allocated certain equipment
to other divisions. In the third quarter of 2000, the Company closed one towing
and recovery division and allocated certain equipment to other divisions. In the
fourth quarter of 2000, the Company closed two towing and recovery divisions and
allocated certain equipment to other divisions. In the second quarter of 2001
the Company sold one towing and recovery division and closed three transport
divisions and allocated certain equipment to other divisions. In the third
quarter of 2001 the Company closed one towing and recovery division. The
transport closures effected in the second quarter of 2001 were designed to
combine certain management dispatch and administrative functions, while
maintaining existing vehicle fleets. The Company's operating results for the
three and nine months ended September 30, 2001 do not include the operating
results of the towing and recovery divisions sold in 2000. The results of the
towing and recovery division sold during the second quarter of 2001 are included
for the period prior to sale. The results of the towing and recovery division
closed during the third quarter of 2001 are included for the period prior to
closure. The Company's revenue, cost of revenue and selling, general and
administrative expenses were also affected by the closures and reallocations
described above that occurred during 2000 and 2001, as described more fully
below.
Results of Operations
Three Months Ended September 30, 2001 Compared to Three Months Ended
September 30, 2000
Net Revenue. Net revenue decreased $5.4 million, or 8.8%, from $61.3 million for
the three months ended September 30, 2000 to $55.9 million for the three months
ended September 30, 2001. Of the net revenue for the three months ended
September 30, 2001, 60.9% related to transport services and 39.1% related to
towing and recovery services. Transport net revenue decreased $2.9 million, or
8.5%, from $37.0 million for the three months ended September 30, 2000 to $34.1
million for the three months ended September 30, 2001. The decrease in transport
net revenue was primarily due to the closure of three transport divisions in the
second quarter of 2001 and the weak performance of the majority of the Company's
transport businesses due to decreased demand for new and used vehicle transport
services as compared to the
Page 14
prior year some of which was attributable to the events of September 11, 2001.
The events' of September 11, 2001 resulted in limited access to the New York
City and Long Island service areas from the Company's Newark, New Jersey
facility, a lack of movement throughout the country of test vehicles by a major
automobile manufacturing customer, reduced activity at certain automobile
auctions due to travel limitations and a slow down in the new and used car
markets associated with the growing sense of uncertainty about the future of the
economy. Towing and recovery net revenue decreased $2.4 million, or 9.9%, from
$24.3 million for the three months ended September 30, 2000 to $21.9 million for
the three months ended September 30, 2001. The decrease in towing and recovery
net revenue was primarily due to the closure of three towing and recovery
divisions during the last six months of 2000, the sale of one towing and
recovery division and the closure of another towing and recovery division during
the first nine months of 2001 and the weak performance of many of the Company's
towing and recovery businesses due to decreased demand for towing and recovery
services as compared to the prior year, some of which was attributable to the
events of September 11, 2001. The events of September 11, 2001 resulted in a
reduction in impound activity in certain metropolitan areas, reduced towing
activity as a result of the substantial reduction in tourism which impacted
certain markets and a reduction of towing activity at the El Paso, Texas border
into Mexico due to increased security.
Cost of Revenue. Cost of revenue, including depreciation, decreased $3.3
million, or 6.4%, from $51.3 million for the three months ended September 30,
2000 to $48.0 million for the three months ended September 30, 2001. Transport
cost of revenue decreased $1.5 million, or 4.8%, from $31.3 million for the
three months ended September 30, 2000 to $29.8 million for the three months
ended September 30, 2001. The principal components of the decrease in transport
cost of revenue consisted of a decrease in transport operating salaries and
wages of $385,000, a decrease in costs of independent contractors, brokers and
subcontractors of $617,000 and a decrease in fuel costs of $697,000 (each of
which was due, in part, to the closure of three transport divisions in the
second quarter of 2001 and the effect of the decrease in demand for transport
services discussed above ), offset, in part, by an increase in employee benefit
expense of $259,000. Towing and recovery cost of revenue decreased $1.8 million,
or 9.0%, from $20.0 million for the three months ended September 30, 2000 to
$18.2 million for the three months ended September 30, 2001. The principal
components of the decrease in towing and recovery cost of revenue consisted of a
decrease in towing and recovery operating labor costs of $484,000, a decrease in
costs of independent contractors, brokers and subcontractors of $128,000, a
decrease in insurance expense of $128,000, a decrease in fuel costs of $318,000
and a decrease in vehicle maintenance expense of $208,000 (each of which was
due, in part, to the closure of three towing and recovery divisions during the
last six months of 2000, the sale of one towing and recovery division and the
closure of another towing and recovery division during the first nine months of
2001, and the effect of the decreased demand for towing and recovery services
discussed above), combined with a decrease in the cost of scrap vehicle
purchases of $319,000.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $2.6 million, or 23.0%, from $11.3 million for
the three months ended September 30, 2000 to $8.7 million for the three months
ended September 30, 2001. Transport selling, general and administrative expenses
decreased $305,000, or 8.3%, from $3.6 million for the three months ended
September 30, 2000 to $3.3 million for the three months ended September 30,
2001. The principal components of the decrease in transport selling, general and
administrative expenses consisted of a decrease in bad debt expense of $227,000,
a decrease in other miscellaneous administration costs of $69,000 and a decrease
in computer and telecommunications expenses of $49,000, offset, in part, by an
increase in professional fees of $28,000 (each of which was due, in part, to the
closure of three transport divisions in the second quarter of 2001). Towing and
recovery selling, general and administrative expenses increased $62,000, or
2.0%, from $3.0 million for the three months ended September 30, 2000 to $3.1
million for the three months ended September 30, 2001. The principal components
of the increase in towing and recovery selling, general and administrative
expenses consisted of an increase in advertising expense of $66,000 and an
increase in salary and wages expense of $84,000, offset, in part, by a decrease
in bad debt expense of $52,000, a decrease in travel and entertainment expenses
of $37,000, a decrease in professional fees of $11,000 and a decrease in
computer and telecommunication expenses of $12,000 (each of which was due, in
part, to the closure of three towing and recovery divisions during the last six
months of 2000 and the sale of one towing and recovery division and the closure
of another towing and recovery division during the first nine months of 2001).
Corporate selling, general and administrative expenses decreased $2.3 million,
or 48.9%, from $4.7 million for the three months ended September 30, 2000 to
$2.4 million for the three months ended September 30, 2001. The decrease in
corporate selling, general and administrative expenses was primarily due to a
non-recurring charge of $2.1 million in the third quarter of 2000 related to
contractual change of control payments to certain members of management, a
decrease in wages and benefits expense of $91,000 and a decrease in professional
fees of $105,000, offset, in part, by an increase in computer and
telecommunication expense of $108,000.
Page 15
Amortization of Goodwill. Amortization of goodwill decreased $224,000, or 30.3%,
from $740,000 for the three months ended September 30, 2000 to $516,000 for the
three months ended September 30, 2001.
Income (loss) from Operations. Loss from operations decreased $723,000, or
36.3%, from a loss of $2.0 million for the three months ended September 30, 2000
to a loss of $1.3 million for the three months ended September 30, 2001.
Transport income from operations decreased $973,000, or 57.9%, from $1.7 million
for the three months ended September 30, 2000 to $708,000 for the three months
ended September 30, 2001. The decrease in transport income from operations was
primarily due to a decline in transport revenue, offset, in part, by decreased
cost of revenue and selling, general and administrative expenses related to the
operation of the transport business segment as described above. Towing and
recovery income from operations decreased $671,000, or 63.2%, from $1.1 million
for the three months ended September 30, 2000 to $391,000 for the three months
ended September 30, 2001. The decrease in towing and recovery income from
operations was primarily due to a decline in towing and recovery revenue,
offset, in part, by a decrease in cost of revenue and selling, general and
administrative expenses related to the operation of the towing and recovery
business segment as discussed above.
Interest Expense, net. Interest expense decreased $1.8 million, or 39.1%, from
$4.6 million for the three months ended September 30, 2000 to $2.8 million for
the three months ended September 30, 2001. Interest income decreased $80,000,
from $93,000 for the three months ended September 30, 2000 to $13,000 for the
three months ended September 30, 2001. The decrease in interest expense, net was
primarily related to refinancing of the Company's credit facility with a new
group of lenders in the third quarter of 2000, an effective interest rate of
approximately 7.9% in the third quarter of 2001 as compared to an effective rate
of approximately 9.3% in the third quarter of 2000 and lower average borrowings
in the third quarter of 2001 as compared to the third quarter of 2000.
Income Tax Expense (Benefit). Income tax expense decreased $1.9 million, from an
expense of $813,000 for the three months ended September 30, 2000 to a benefit
of $1.1 million for the three months ended September 30, 2001. The decrease in
income tax expense was due to the reduction of the valuation allowance relating
to the net operating loss carry forward and a change in estimate of net
operating loss limitations related to the July 20, 2000 ownership change, under
Internal Revenue Code Section 382.
Net Loss. Net loss decreased $4.5 million, or 60.1%, from $7.4 million for the
three months ended September 30, 2000 to $2.9 million for the three months ended
September 30, 2001. The decrease in net loss related largely to the decrease in
loss from operations of $723,000, the decrease in income tax expense of $1.9
million and the decrease in interest expense, net of $1.8 million.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended
September 30, 2000
Net Revenue. Net revenue decreased $16.8 million, or 8.9%, from $189.5 million
for the nine months ended September 30, 2000 to $172.7 million for the nine
months ended September 30, 2001. Of the net revenue for the nine months ended
September 30, 2001, 61.0% related to transport services and 39.0% related to
towing and recovery services. Transport net revenue decreased $11.5 million, or
9.9%, from $116.7 million for the nine months ended September 30, 2000 to $105.2
million for the nine months ended September 30, 2001. The decrease in transport
net revenue was primarily due to the closure of two transport divisions in the
second quarter of 2000, the closure of three transport divisions in the second
quarter of 2001, and the weak performance of the majority of the Company's
transport businesses due to decreased demand for new and used vehicle transport
services as compared to the prior year, some of which was attributable to the
events of September 11, 2001. The events of September 11, 2001 resulted in
limited access to the New York City and Long Island service areas from the
Company's Newark, New Jersey facility, a lack of movement throughout the country
of test vehicles by a major automobile manufacturing customer, reduced activity
at certain automobile auctions due to travel limitations and a slow down in the
new and used car markets associated with the growing sense of uncertainty about
the future of the economy. Towing and recovery net revenue decreased $5.5
million, or 7.5%, from $72.9 million for the nine months ended September 30,
2000 to $67.4 million for the nine months ended September 30, 2001. The decrease
in towing and recovery net revenue was primarily due to the sale of one towing
and recovery division and the closure of four other towing and recovery
divisions during 2000, the sale of one towing and recovery division and the
closure of another towing and recovery division during the first nine months of
2001 and the weak performance of many of the Company's towing and recovery
businesses due to decreased demand for towing and recovery services as compared
to the prior year, some of which was attributable to the events of September 11,
2001. The events of September 11, 2001 resulted in a reduction in impound
activity in certain metropolitan areas, reduced towing activity as a result of
the substantial reduction
Page 16
in tourism which impacted certain markets and a reduction of towing activity at
the El Paso, Texas border into Mexico due to increased security.
Cost of Revenue. Cost of revenue, including depreciation, decreased $12.0
million, or 7.6%, from $158.3 million for the nine months ended September 30,
2000 to $146.3 million for the nine months ended September 30, 2001. Transport
cost of revenue decreased $6.5 million, or 6.7%, from $97.8 million for the nine
months ended September 30, 2000 to $91.3 million for the nine months ended
September 30, 2001. The principal components of the decrease in transport cost
of revenue consisted of a decrease in transport operating labor costs of $2.6
million, a decrease in fuel costs of $1.5 million, and a decrease in costs of
independent contractors, brokers and subcontractors of $2.9 million (each of
which was due, in part, to the closure of two transport divisions during the
second quarter of 2000, the closure of three transport divisions in the second
quarter of 2001, and the effect of the decrease in demand for transport services
discussed above). Towing and recovery cost of revenue decreased $5.5 million, or
9.1%, from $60.5 million for the nine months ended September 30, 2000 to $55.0
million for the nine months ended September 30, 2001. The principal components
of the decrease in towing and recovery cost of revenue consisted of a decrease
in the cost of scrap vehicle purchases of $1.7 million, combined with a decrease
in towing and recovery operating labor costs of $1.4 million, a decrease in
insurance casualty claims (that individually did not meet insurance deductibles)
of $625,000 and a decrease in fuel costs of $543,000 (each of which was due, in
part, to the sale of one towing and recovery division and the closure of four
towing and recovery divisions during 2000, the sale of one towing and recovery
division and the closure of another towing and recovery division during the
first nine months of 2001, and the effect of the decrease in demand for towing
and recovery services discussed above).
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $2.4 million, or 8.0%, from $30.0 million for
the nine months ended September 30, 2000 to $27.6 million for the nine months
ended September 30, 2001. Transport selling, general and administrative expenses
decreased $225,000, or 2.1%, from $10.7 million for the nine months ended
September 30, 2000 to $10.5 million for the nine months ended September 30,
2001. The principal components of the decrease in the Company's transport
selling, general and administrative expenses for the nine months ended September
30, 2001 as compared to the nine months ended September 30, 2000, consisted of a
decrease in bad debt expense of $240,000, a decrease in computer and
telecommunication expenses of $208,000 and a decrease in other miscellaneous
administrative costs of $219,000, offset, in part, by an increase in salary and
wages expense of $414,000, an increase in professional fees of $229,000, and an
increase in advertising expenses of $110,000 (each of which was due, in part, to
the closure of two transport divisions during the second quarter of 2000, the
closure of three transport divisions in the second quarter of 2001, and the
effect of the decrease in demand for transport services discussed above). Towing
and recovery selling, general and administrative expenses decreased $380,000, or
4.0%, from $9.4 million for the nine months ended September 30, 2000 to $9.0
million for the nine months ended September 30, 2001. The principal components
of the decrease in the Company's towing and recovery selling, general and
administrative expenses for the nine months ended September 30, 2001 as compared
to the nine months ended September 30, 2000 consisted of a decrease in
professional fees of $219,000, a decrease in office supply expense of $67,000, a
decrease in other miscellaneous administrative costs of $57,000, a decrease in
computer and telecommunication expense of $63,000 and a decrease in travel and
entertainment expense of $78,000 (each of which was due, in part, to the sale of
one towing and recovery division and the closure of four towing and recovery
divisions during 2000, the sale of one towing and recovery division and the
closure of another towing and recovery division during the first nine months of
2001, and the effect of the decrease in demand for towing and recovery services
discussed above), offset, in part, by an increase in wages and benefits of
$232,000 and an increase in advertising costs of $169,000.
Corporate selling, general and administrative expenses decreased $1.9 million,
or 19.0%, from $10.0 million for the nine months ended September 30, 2000 to
$8.1 million for the nine months ended September 30, 2001. The decrease in
corporate selling, general and administrative expenses was primarily due to a
non-recurring charge of $2.1 million in the third quarter of 2000 related to
contractual charge of control payments to certain members of management, a
decrease in wages and benefits expense of $417,000, a decrease in professional
fees of $489,000 and a decrease in travel and entertainment expenses of
$243,000, offset, in part, by an increase in computer and telecommunications
expenses of $617,000 and an increase in bank service charges of $194,000.
Amortization of Goodwill. Amortization of goodwill decreased $1.5 million, or
44.1%, from $3.4 million for the nine months ended September 30, 2000 to $1.5
million for the nine months ended September 30, 2001. The decrease in goodwill
amortization was the result of the goodwill impairment charge of $118.1 million
as of June 30, 2000 associated with the Company's ongoing review of the recorded
value of its long-lived assets and the recoverability of goodwill.
Page 17
Impairment Charge. Impairment charges were $129.5 million for the nine months
ended September 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. No impairment
charges were recorded in the nine months ended September 30, 2001.
Income (loss) from Operations. Income from operations increased $128.8 million
or 97.8%, from a loss of $131.7 million for the nine months ended September 30,
2000 to a loss of $2.7 million for the nine months ended September 30, 2001.
Excluding the effect of the June 2000 impairment charge of $129.5 million,
income from operations decreased $517,000, or 23.5%, from a loss of $2.2 million
for the nine months ended September 30, 2000 to a loss of $2.7 million for the
nine months ended September 30, 2001. Transport income from operations increased
$77.7 million, from a loss of $75.0 million for the nine months ended September
30, 2000 to income of $3.5 million for the nine months ended September 30, 2001.
Excluding the effect of the June 2000 transport impairment charge of $81.2
million, transport income from operations decreased $2.7 million, or 43.6%, from
income of $6.2 million for the nine months ended September 30, 2000 to income of
$3.5 million for the nine months ended September 30, 2001. This decrease in
transport income from operations was primarily due to decreased transport
revenue, offset, in part, by decreased cost of revenue and selling, general and
administrative expenses related to the operation of the transport business
segment as described above. Towing and recovery income from operations increased
$49.3 million, from a loss of $46.7 million for the nine months ended September
30, 2000 to income of $2.6 million for the nine months ended September 30, 2001.
Excluding the effect of the June 2000 towing and recovery impairment charge of
$48.3 million, towing and recovery income from operations increased $1.1
million, or 73.3%, from income of $1.5 million for the nine months ended
September 30, 2000 to income of $2.6 million for the nine months ended September
30, 2001. The increase in towing and recovery income from operations was
primarily due to decreased cost of revenue and selling, general and
administrative expenses related to the operation of the towing and recovery
business segment, as described above.
Interest Expense, net. Interest expense decreased $2.8 million, or 24.8%, from
$11.3 million for the nine months ended September 30, 2000 to $8.5 million for
the nine months ended September 30, 2001. Interest income decreased $225,000,
from $262,000 for the nine months ended September 30, 2000 to $37,000 for the
nine months ended September 30, 2001. The decrease in interest expense, net was
related to refinancing of the Company's credit facility with a new group of
lenders in the third quarter of 2000, an effective interest rate of
approximately 9.3% in the nine months ended September 30, 2000 as compared to an
effective rate of approximately 8.3% in the nine months ended September 30, 2001
and lower borrowings in the nine months ended September 30, 2001 as compared to
the nine months ended September 30, 2000.
Income Tax Expense (Benefit). Income tax expense decreased $8.4 million, from an
expense of $7.6 million for the nine months ended September 30, 2000 to a
benefit of $810,000 for the nine months ended September 30, 2001. The decrease
in income tax expense was due to the reduction of the valuation allowance
relating to the net operating loss carry forward and a change in estimate of net
operating loss limitations related to the July 20, 2000 ownership change, under
Internal Revenue Code Section 382.
Net Income (loss). Net loss decreased $140.4 million, from $150.8 million for
the nine months ended September 30, 2000 to $10.4 million for the nine months
ended September 30, 2001. The decrease in net loss related largely to the
increase in income from operations of $128.8 million (primarily due to the
effect of the June 2000 impairment charge of $129.5 million), a decrease in
income tax expense of $8.4 million, and a decrease in interest expense, net of
$2.5 million for the nine months ended September 30, 2001 as compared to the
nine months ended September 30, 2000.
Page 18
Liquidity and Capital Resources
As of September 30, 2001, the Company had approximately:
o $86,000 of cash and cash equivalents
o a working capital deficit of $30.0 million (including the $33.7
million outstanding under the GE Capital Credit Facility which is
reflected as a current liability), and
o $93.1 million of outstanding indebtedness, excluding current
installments.
During the nine months ended September 30, 2001, the Company provided $155,000
in cash from operations. Cash provided in operating activities consisted
primarily of a loss from operations of $10.4 million (offset by $15.0 million of
non-cash depreciation, amortization and interest charges), an increase in trade
receivables of $629,000 and a decrease in accounts payable of $1.5 million.
During the nine months ended September 30, 2001, the Company used $4.2 million
of cash in investing activities and provided $1.5 million of cash from financing
activities. Investing activities consisted primarily of $5.8 million in
purchases of vehicles and equipment, offset by $1.1 million in proceeds from the
sale of vehicles and equipment. Financing activities consisted primarily of net
borrowings under the GE Capital Credit Facility of $1.5 million.
On July 20, 2000, the Company and its subsidiaries entered into the GE Capital
Credit Facility. On the same date, the Company terminated its prior revolving
credit facility and repaid all amounts outstanding thereunder.
The GE Capital Credit Facility has a term of five years and a maximum borrowing
capacity of $100 million. The facility includes a letter of credit subfacility
of up to $15 million. The Company's borrowing capacity under the GE Capital
Credit Facility is limited to the sum of (i) 85% of the Company's eligible
accounts receivable, (ii) 80% of the net orderly liquidation value of 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. Under the facility, the banks have the right to conduct an
annual appraisal of the Company's vehicles. As of September 30, 2001,
approximately $33.7 million was outstanding under the GE Capital Credit Facility
(excluding letters of credit of $14.3 million) and an additional $8.9 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 Facility) plus an applicable margin or the reserve adjusted LIBOR Rate
(as defined in the GE Capital Credit Facility) 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.
The GE Capital Credit Facility contains additional covenants requiring the
Company, among other things and subject to specified exceptions to (a) make
certain prepayments against principal, (b) maintain specified insurance
protection, (c) refrain from commercial transactions, management agreements,
service agreements and borrowing transactions with certain related parties, (d)
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, (e) refrain from mergers,
acquisitions or sales of capital stock or a substantial portion of the assets of
the Company or its subsidiaries, (f) refrain from direct or indirect changes in
control, (g) limit capital expenditures and (h) meet certain financial covenants
including minimum levels of EBITDA and minimum ratios of EBITDA to fixed
charges. In October 2001, the Company notified GE Capital that the Company had
failed to meet the minimum level of EBITDA and minimum ratio of EBITDA to fixed
charges for the period ended September 30, 2001. The Company is currently in
discussions with the banks to obtain a waiver. If the Company is unable to
obtain a waiver, all amounts outstanding under the GE Capital Credit Facility
would be subject to acceleration at the banks' discretion. If the banks elect to
accelerate, the
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Company would be required to refinance its debt or obtain capital from other
sources, including sales of additional debt or equity securities or sales of
assets, in order to meet its repayment obligations, which may not be possible.
In addition, such acceleration would cause a default under the Debentures, and
Charterhouse could accelerate repayment of all amounts outstanding under the
Debentures, subject to the banks' priority. In such event, repayment of amounts
outstanding under the Debentures could only be made if the GE Capital Credit
Facility were first paid in full or the bank group gave its express prior
written consent to such repayment.
The Company spent approximately $4.8 million on purchases of vehicles and
equipment during the nine months ended September 30, 2001. These expenditures
were primarily for the purchase of transport and towing and recovery vehicles.
During the nine months ended September 30, 2001, the Company made expenditures
of $1.5 million on towing and recovery vehicles and $3.3 million on transport
vehicles. These expenditures were financed primarily with borrowings under the
GE Capital Credit Facility. In March 2000, the Company committed to purchase 60
vehicles from a vehicle manufacturer. As of September 30, 2001, 41 of the 60
vehicles subject to the commitment had been delivered (with a total purchase
price of $6.8 million) and a deposit of $1.6 million had been applied to such
purchases. The Company is currently in discussions with the manufacturer
regarding the remaining 19 vehicles.
In connection with the Company's July 2000 sale of Series A Convertible
Preferred Stock (the "Series A Preferred Stock") to Blue Truck Acquisition, LLC
("Blue Truck"), an affiliate of KPS Special Situations Fund, L.P. ("KPS") (such
transaction, the "KPS Transaction"), the Company agreed to pay KPS Management
LLC, an affiliate of KPS, 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.
In connection with the KPS Transaction, the Company agreed to pay four of its
senior executives an aggregate amount of approximately $430,000 on each of the
first and second anniversaries of the KPS Transaction as long as the executives
remained employed with the Company on such dates. In July 2001, the Company made
the required payments of $430,000, with an additional payment in the aggregate
amount $430,000 expected to be made in July 2002, subject to the continued
employment of such executives.
During the past two years, the Company has experienced a significant decrease in
its cash flow from operations and is continually exploring opportunities to
improve its profitability, including, but not limited to, the closure or
divestiture of unprofitable divisions, consolidation of operating locations,
reduction of operating costs and the marketing of towing and recovery and
transport services to new customers in strategic market locations. Subject to
obtaining a waiver of its non-compliance under the GE Capital Credit Facility,
the Company currently expects to be able to fund its liquidity needs for the
foreseeable future through cash flow from operations and borrowings of amounts
available under its revolving credit facility.
Seasonality
The Company may experience significant fluctuations in its quarterly operating
results due to seasonal and other variations in the demand for towing, recovery
and transport services. Specifically, the demand for towing and recovery
services is generally highest in extreme or inclement weather, such as heat,
cold, rain and snow. Although the demand for automobile transport tends to be
strongest in the months with the mildest weather, since extreme or inclement
weather tends to slow the delivery of vehicles, the demand for automobile
transport is also a function of the timing and volume of lease originations, new
car model changeovers, dealer inventories and new and used auto sales.
Fluctuations in Operating Results 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 its operating
efficiency and profitability and in integrating its acquired businesses, (iii)
the loss of significant customers or contracts, (iv) the timing of expenditures
for new equipment and the disposition of used equipment, (v) 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, recovery and transport services, (vii) price changes in response to
competitive factors, (viii) event-driven variations in the demand for towing,
recovery and transport services, (ix) fluctuations in fuel, insurance, labor and
other operating costs and
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(x) general economic conditions. As a result, operating results from any one
quarter should not be relied upon as an indication or guarantee of performance
in future quarters.
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, 2000. Other types of market risk,
such as foreign exchange rate risk and commodity price risk, do not arise in the
normal course of the Company's business activities.
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PART II OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
On September 30, 2001, the Company issued approximately $1.8 million aggregate
principal amount of Debentures to Charterhouse, which represented the quarterly
payment-in-kind interest payment due with respect to $91.1 million aggregate
principal amount of the Debentures previously issued to Charterhouse. For the
nine months ended September 30, 2001 the Company has issued approximately $5.4
million aggregate principal amount of Debentures to Charterhouse which
represents payment-in-kind interest payments.
The issuance of these securities was deemed to be exempt from registration under
the Securities Act of 1933, as amended (the "Securities Act") in reliance on
Section 4(2) of the Securities Act or Regulation D 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
certificates issued in such transaction.
ITEM 3 DEFAULT UPON SENIOR SECURITIES
The GE Capital Credit Facility requires the Company, among other things, to
comply with certain cash management requirements and financial covenants. These
include minimum levels of EBITDA and minimum ratios of EBITDA to fixed charges.
In October 2001, the Company notified GE Capital that the Company had failed
meet the minimum level of EBITDA and minimum ratio of EBITDA to fixed charges
for the period ended September 30, 2001. The Company is currently in discussions
with the banks regarding a waiver of this non-compliance. If the Company is
unable to obtain a waiver, all amounts outstanding under the GE Capital Credit
Facility would be subject to acceleration at the banks' discretion. If the banks
elect to accelerate, the Company would be required to refinance its debt or
obtain capital from other sources, including sales of additional debt or equity
securities or sales of assets, in order to meet its repayment obligations, which
may not be possible. In addition, such acceleration would cause a default under
the Debentures issued to Charterhouse, and Charterhouse could accelerate
repayment of all amounts outstanding under the Debentures, subject to the banks'
priority. In such event, repayment of amounts outstanding under the Debentures
could only be made if the GE Capital Credit Facility were first paid in full or
the bank group gave its express prior written consent to such repayment.
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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: November 14, 2001 /s/ Gerald R. Riordan
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Chief Executive Officer
/s/ Patrick J. Fodale
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Chief Financial Officer
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