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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
MARCH 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
Commission File Number 000-24019
United Road Services, Inc.
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-3278455
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17 Computer Drive West
Albany, New York 12205
---------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518) 446-0140
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes X No ___
---
As of May 15, 2002, the registrant had 2,086,475 shares of common stock
issued and outstanding.
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UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
Form 10-Q For The Three Months Ended March 31, 2002
Index Page
Part I. - Financial Information
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2002 and December 31, 2001 3
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2002 and March 31, 2001 4
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 2002 and March 31, 2001 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 20
Part II. - Other Information
Item 2 Changes in Securities and Use of Proceeds 21
Item 6 Exhibits and Report on Form 8-K 21
Signatures 22
Page 2
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts and per share data)
ASSETS March 31, 2002 December 31, 2001
-------------- -----------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 50 1,696
Trade receivables, net of allowance for doubtful
accounts of $1,580 at March 31, 2002
and $1,581 at December 31, 2001 20,264 18,219
Other receivables 1,274 1,293
Prepaid licenses and fees 1,012 681
Prepaid expenses and other current assets 3,533 3,012
------------ -----------
Total current assets 26,133 24,901
Vehicles and equipment, net 66,799 66,111
Deferred financing costs, net 4,551 4,800
Goodwill, net 32,218 75,582
Other non-current assets 909 396
------------ -----------
Total assets $ 130,610 171,790
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of obligations for capital leases $ 123 144
Borrowings under credit facility 36,733 37,436
Accounts payable 8,358 7,367
Accrued expenses 12,399 11,271
Due to related parties 1,313 1,073
------------ -----------
Total current liabilities 58,926 57,291
Obligations for capital leases, excluding current installments 43 68
Long-term debt 96,682 94,787
Other long-term liabilities 3,616 2,422
Deferred tax liabilities 578 --
------------ -----------
Total liabilities 159,845 154,568
------------ -----------
Stockholders' equity (deficit):
Preferred stock; $ 0.001 par value; 5,000,000 shares authorized;
662,119 shares issued and outstanding at March 31, 2002
and December 31, 2001 1 1
Common stock; $0.01 par value; 35,000,000 shares
authorized; 2,086,475 shares issued and outstanding
at March 31, 2002 and December 31, 2001 21 21
Additional paid-in capital 217,489 217,489
Accumulated deficit (246,746) (200,289)
------------ -----------
Total stockholders' equity (deficit) (29,235) 17,222
------------ -----------
Total liabilities and stockholders' equity (deficit) $ 130,610 171,790
============ ===========
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
March 31,
2002 2001
---- ----
Net revenue $ 61,109 58,868
Cost of revenue, excluding depreciation 49,107 47,322
Selling, general and administrative expenses 9,030 9,818
Amortization of goodwill -- 517
Depreciation 2,447 2,362
----------- -----------
Income (loss) from operations 525 (1,151)
Other income (expense):
Interest income 81 13
Interest expense (2,705) (2,876)
Other 146 25
----------- -----------
Loss before income taxes and cumulative effect of change in
accounting principle (1,953) (3,989)
Income tax expense 740 145
----------- -----------
Loss before cumulative effect of change in accounting principle (2,693) (4,134)
Cumulative effect of change in accounting principle (43,364) --
----------- -----------
Net loss $ (46,057) (4,134)
=========== ===========
Share amounts:
Basic and fully diluted loss per share:
Loss before cumulative effect of change
in accounting principle $ (1.29) (1.98)
=========== ===========
Net loss $ (22.07) (1.98)
=========== ===========
Weighted average shares outstanding 2,086,475 2,091,652
=========== ===========
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)
Three months ended
March 31,
2002 2001
---- ----
Net loss $(46,057) (4,134)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 2,696 3,121
Cumulative effect of change in accounting principle 43,364 -
Provision for doubtful accounts 263 300
Deferred income taxes 599 -
Interest expense, paid-in-kind 1,895 1,752
Gain on sale of vehicles and equipment, net (81) (32)
Changes in operating assets and liabilities, net of effects of acquisitions:
Increase in trade receivables (2,308) (2,133)
Decrease in other receivables 141 228
Increase in prepaid licenses and fees (87) (721)
Decrease in prepaid expenses and other current assets 2,173 349
Increase in other non-current assets (13) (5)
Increase (decrease) in accounts payable 713 (1,090)
Decrease in accrued expenses (2,374) (89)
Decrease in other long-term liabilities (114) (18)
-------- --------
Net cash provided by (used in) operating activities 810 (2,472)
-------- --------
Investing activities:
Purchases of vehicles and equipment (3,008) (2,985)
Proceeds from sale of vehicles and equipment 283 354
Amounts payable to related parties 240 -
Cash acquired in acquisition 500 -
-------- --------
Net cash used in investing activities (1,985) (2,631)
-------- --------
Financing activities:
Convertible preferred stock offering costs - (81)
Payments to be presented for funding, net 278 -
Net borrowings (repayment) on revolving credit facility (703) 3,626
Payments of deferred financing costs - (98)
Payments on capital leases (46) (58)
-------- --------
Net cash provided by (used in) financing activities (471) 3,389
-------- --------
Decrease in cash and cash equivalents (1,646) (1,714)
Cash and cash equivalents at beginning of period 1,696 2,615
-------- --------
Cash and cash equivalents at end of period $ 50 901
======== ========
(continued)
Page 5
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(In thousands)
(Unaudited)
Three months ended
March 31,
2002 2001
---- ----
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ 484 939
===== =====
Income tax expense, net of refunds $(405) (24)
===== =====
Supplemental disclosure of non-cash investing and financing activity:
Increase in accumulated deficit for unpaid
cumulative dividend on preferred stock $ 400 380
===== =====
Acquired net assets, net of cash $ 407 -
===== =====
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, 2001, 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.
(e) Share and Per Share Amounts
Basic earnings per share excludes dilution and is computed by dividing
net loss by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue
common stock (such as stock options and warrants) were exercised or
converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company.
Page 7
The effect of options, warrants, convertible preferred stock, earnout
shares and holdback shares have been excluded at March 31, 2002 and
2001, as the effect would be antidilutive. Additionally, shares
issuable upon conversion of the convertible subordinated Debentures
have been excluded at March 31, 2002 and 2001, as the effect would be
antidilutive due to the adjustment (decrease in net loss) for interest
expense.
At March 31, 2002, the Company had outstanding preferred stock
convertible into 6,221,190 shares of common stock, stock options
exercisable to purchase 300,913 shares of common stock, warrants
exercisable to purchase 48,028 shares of common stock and subordinated
Debentures convertible into 644,547 shares of common stock. At March
31, 2001, the Company had outstanding preferred stock convertible into
6,221,190 shares of common stock, stock options exercisable to
purchase 314,443 shares of common stock, warrants exercisable to
purchase 47,919 shares of common stock and subordinated Debentures
convertible into 595,466 shares of common stock.
(f) Goodwill
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets". Under the provisions of SFAS No. 142, goodwill and intangible
assets with indefinite useful lives are no longer amortized. Rather,
goodwill and intangible assets with indefinite useful lives are
subject to a periodic impairment test. If the carrying value of
goodwill or an intangible asset exceeds its fair value, an impairment
loss shall be recognized. A discounted cash flow model based upon the
Company's weighted average cost of capital was used to determine the
fair value of the Company's reporting units for purposes of testing
goodwill for impairment. SFAS No. 142 defines a reporting unit as a
business for which discrete financial information is available which
management regularly reviews and has economic characteristics that
differentiate it from other components of the Company. The Company has
determined the reporting units within the towing operating segment to
be each individual division and within the transport operating segment
to be the new vehicle, used vehicle, combined new/used vehicle, and
specialty vehicle transport businesses.
Upon adoption of SFAS No. 142, the Company recorded an impairment loss
of $43,364 ($25,354 relating to the transport operating segment and
$18,010 relating to the towing and recovery operating segment) as the
cumulative effect of a change in accounting principle. This impairment
primarily resulted from a change in the criteria for the measurement
of impairment from an undiscounted to a discounted cash flow method
and the classification on a reporting unit basis.
The following table presents reported net loss and loss per share
exclusive of the goodwill impairment for the three months ended March
31, 2002 and 2001.
Three months ended
March 31,
2002 2001
---- ----
Reported net loss ........................................... $ (46,057) (4,134)
Amortization of goodwill, net of tax ........................ - 569
Cumulative effect of change in accounting principle ......... 43,364 -
---------- --------
Adjusted net loss ........................................... $ (2,693) (3,565)
========== ========
Loss per share:
Reported net loss ........................................... $ (22.07) (1.98)
Amortization of goodwill .................................... - 0.27
Cumulative effect of change in accounting principle ......... 20.78 -
---------- --------
Adjusted loss per share ..................................... $ (1.29) (1.71)
========== ========
Page 8
(g) Impact of Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations", which 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. The Company has adopted the provisions of SFAS
No. 141.
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. Other than vehicles and
equipment, the Company does not maintain significant tangible
long-lived assets. Therefore, management does not anticipate that the
adoption of SFAS No. 143 to have a material financial impact on the
Company's consolidated financial statements. The Company will continue
to evaluate this conclusion.
In August 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This Statement requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized of the amount by which the carrying amount of the asset
exceeds the fair value of the asset. SFAS No. 144 requires companies
to separately report discontinued operations and extends that
reporting to a component of an entity that either has been disposed of
(by sale, abandonment, or in a distribution to owners) or is
classified as held for sale. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell. The
adoption of SFAS No. 144 did not have a material impact on the
Company's condensed consolidated financial statements.
(h) Reclassifications
Certain reclassifications of the prior year's condensed consolidated
financial statements have been made to conform to the current year
presentation.
(2) Debt
In July 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 or the invoiced purchase
price of new vehicles purchased by the Company for which GE Capital has
received title certificates and other requested documentation, and (iv)
either 60% of the purchase price 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. The amount of borrowing capacity based on vehicles amortizes
quarterly on a straight line basis over a period of 5 to 7 years. As of
March 31, 2002, $36,733 was outstanding under the GE Capital Credit
Facility, excluding letters of credit of $11,445, and an additional $8,322
was available for borrowing.
Page 9
The GE Capital Credit Facility requires the Company, among other things, to
comply with certain financial covenants, including minimum levels of
earnings before interest, taxes, depreciation and amortization ("EBITDA"),
minimum ratios of EBITDA to fixed charges and minimum levels of liquidity.
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. In December 2001,
the Company notified GE Capital that the Company would fail to meet the
minimum level of EBITDA and minimum ratio of EBITDA to fixed charges for
the period ended December 31, 2001, and that the Company would not meet the
minimum liquidity requirement in the first quarter of 2002. On February 14,
2002, the Company entered into an amendment to the GE Capital Credit
Facility under which the banks waived the financial covenant violations,
waived certain covenant violations regarding the banks' consent to the
Auction Transport, Inc. ("ATI") acquisition and made certain provisions for
the addition of ATI. The amendment reduces the minimum levels of EBITDA and
increases the minimum ratios of EBITDA to fixed charges the Company is
required to meet. Additionally, the amendment reduced the minimum liquidity
requirement for the period beginning February 15, 2002 and ending March 15,
2002. In addition, the amendment increases the maximum amount of annual
operating lease payments the Company and its subsidiaries may make in
fiscal years 2002 through 2004.
If the Company fails to comply with these amended provisions or violates
other covenants in the GE Capital Credit Facility, the Company will be
required to seek additional waivers, which may not be granted by the banks,
or to enter into amendments to the GE Capital Credit Facility, which may
contain more stringent conditions on the Company's borrowing capability or
its activities, and may require the Company to pay substantial fees to the
banks. If such future waivers were not granted and the banks were to elect
to accelerate repayment of outstanding balances under the GE Capital Credit
Facility, the Company would be required to refinance its debt or obtain
capital from other sources, including sales of additional debt or equity
securities or sales of assets, in order to meet its repayment obligations,
which may not be possible. If the banks were to accelerate repayment of
amounts due under the GE Capital Credit Facility, it would cause a default
under the Company's 8% Convertible Subordinated Debentures ("Debentures")
issued to Charterhouse URS LLC ("Charterhouse"). In the event of a default
under the Debentures, Charterhouse could accelerate repayment of all
amounts outstanding under the Debentures, subject to the GE Capital Credit
Facility banks' priority. In such event, repayment of the Debentures would
be required only if the GE Capital Credit Facility was paid in full or the
banks under the credit facility granted their express written consent.
On March 31, 2002, the Company issued approximately $1.9 million aggregate
principal amount of Debentures to Charterhouse, which represented the
quarterly payment-in-kind interest payment due with respect to $94.8
million aggregate principal amount of the Debentures previously issued to
Charterhouse.
(3) 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, 2001. 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 month periods ended March 31, 2002 and 2001.
Inter-segment revenues and transfers are not significant.
Page 10
Summarized financial information concerning the Company's reportable
segments is shown in the following tables:
Three months ended March 31, 2002
---------------------------------
Towing and
Transport Recovery Other Total
--------- -------- ---------- -----
Net revenues from external customers $ 40,300 20,809 - 61,109
Cost of revenue, including depreciation 35,441 16,113 - 51,554
Income (loss) from operations 995 1,902 (2,372) 525
Three months ended March 31, 2001
---------------------------------
Towing and
Transport Recovery Other Total
--------- ---------- ----- -----
Net revenues from external customers $ 35,487 23,381 - 58,868
Cost of revenue, including depreciation 30,954 18,730 - 49,684
Income (loss) from operations 693 1,312 (3,156) (1,151)
The following are reconciliations of the information used by the chief
operating decision-maker to the Company's consolidated totals:
Three months ended
March 31,
Reconciliation of loss before income taxes and cumulative effect
of change in accounting principle: 2002 2001
---- ----
Total profit (loss) from reportable segments:
Transport $ 995 693
Towing and Recovery 1,902 1,312
Interest expense, net (2,624) (2,863)
Other selling, general and administrative costs (2,372) (3,156)
Other income (expense) 146 25
------------ -------
Loss before income taxes and cumulative effect of change in
accounting principle $ (1,953) (3,989)
============ =======
(4) 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.
(5) Acquisition of Auction Transport, Inc.
On January 16, 2002 the Company acquired the stock of ATI, formerly a
subsidiary of Manheim Services Corporation. ATI provides automobile
transport services to various Manheim Auction, Inc. ("Manheim") auction
locations and on a for hire basis. The results of ATI's operations are
included in the 2002 consolidated financial statements beginning with
the date of acquisition.
The net assets acquired, excluding contingent consideration relating to
a five-year service agreement and the assumption of $6,952 of future
operating lease payments, totaled $907. In connection with the
transaction, Manheim has provided revenue guarantees to the Company
over the duration of the operating leases assumed by the Company.
Included in net assets acquired is $1,000 to be paid to the Company by
Manheim, $500 of which was paid at closing with the remaining payable
no later than December 31, 2003.
Page 11
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition. The
Company is in the process of determining the fair values of certain
acquired assets and assumed liabilities, thus the allocation of the
purchase price is subject to adjustment.
Current assets $ 1,246
Property and equipment 329
Other long-term assets 521
Goodwill -
-------
Total assets acquired 2,096
-------
Current liabilities 1,189
Other long-term liabilities -
-------
Total liabilities assumed 1,189
-------
Net assets acquired $ 907
=======
The following are future minimum ATI lease payments under noncancelable
operating leases assumed by the Company as of January 16, 2002:
ATI
Year ending December 31, Operating Leases
----------------------- ----------------
2002 ............................... $ 3,068
2003 ............................... 1,653
2004 ............................... 1,049
2005 ............................... 1,014
2006 ............................... 168
--------
Future minimum lease payments ...... $ 6,952
========
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.
Forward-Looking Statements
From time to time, in written reports and oral statements, management may
discuss its expectations regarding the Company'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, 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
availability of capital to fund operations, including expenditures for new and
replacement equipment, risks related to the adequacy, functionality, sufficiency
and cost of the Company's information systems, 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, 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 loss of key personnel and the Company's ability to maintain
an adequate skilled labor force, seasonal and other event-driven variations in
the demand for towing, recovery and transport services, risks resulting from the
over-the-counter trading of the Company's common stock, 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. All written
forward-looking statements by or attributable to management in this Report are
expressly qualified in their entirety by the Risk Factors. Investors must
recognize that events could turn out to be significantly different from what
management currently expects.
Overview
The Company operates in two reportable operating segments: (1) transport and (2)
towing and recovery. Through its transport segment, the Company provides
transport services for new and used vehicles to a broad range of customers
throughout the United States. Through its towing and recovery segment, the
Company provides a variety of towing and recovery services in its local markets,
including towing, impounding and storing motor vehicles, conducting lien sales
and auctions of abandoned vehicles, towing heavy equipment and recovering and
towing heavy-duty commercial and recreational vehicles. The Company's customers
include commercial entities, such as automobile manufacturers, automobile
leasing companies, insurance companies, automobile auction companies, automobile
dealers, repair shops and fleet operators; law enforcement agencies such as
police, sheriff and highway patrol departments; and individual motorists.
The Company derives revenue from towing, recovery and transport services based
on distance, time or fixed charges and from related impounding and storage fees.
If an impounded vehicle is not claimed within a period prescribed by law
(typically between 30 and 90 days), the Company initiates and completes lien
proceedings and the vehicle is sold at auction or to a scrap metal facility,
depending on the value of the vehicle. Depending on the jurisdiction, the
Company may either keep all the proceeds from the vehicle sales, or keep the
proceeds up to the amount of the towing and storage fees and pay the remainder
to the municipality or law enforcement agency. Services are provided in some
cases under
Page 13
contracts with towing, recovery and transport customers. In other cases,
services are provided to towing, recovery and transport customers without a
long-term contract. The prices charged for towing and storage of impounded
vehicles for municipalities or law enforcement agencies are limited by
contractual provisions or local regulation.
In the case of law enforcement and private impound towing, payment is obtained
either from the owner of the impounded vehicle when the owner claims the vehicle
or from the proceeds of lien sales, scrap sales or auctions. In the case of the
Company's other operations, customers are billed upon completion of services
provided, with payment generally due within 30 days. Revenue is recognized as
follows: towing and recovery revenue is recognized at the completion of each
engagement; transport revenue is recognized upon the delivery of the vehicle or
equipment to its final destination; revenue from lien sales or auctions is
recognized when title to the vehicle has been transferred; and revenue from
scrap sales is recognized when the scrap metal is sold. Expenses related to the
generation of revenue are recognized as incurred.
Cost of revenue consists primarily of the following: salaries and benefits of
drivers, dispatchers, supervisors and other employees; fees charged by
subcontractors; fuel; depreciation, repairs and maintenance; insurance; parts
and supplies; other vehicle expenses; and equipment rentals.
Selling, general and administrative expenses consist primarily of the following:
compensation and benefits to sales and administrative employees; fees for
professional services; computer costs; 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. Prior to the Company's acquisition of ATI in
January 2002, the Company had not completed any acquisitions since May 5, 1999.
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. As part of this business strategy,
the Company has closed, consolidated or sold several operating locations. As of
March 31, 2002, the Company operated a network of 13 transport divisions and 17
towing and recovery divisions located in a total of 20 states.
Management's discussion and analysis addresses the Company's historical results
of operations as shown in its unaudited condensed consolidated financial
statements for the three months ended March 31, 2002 and 2001.
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. In the fourth quarter of 2001 the Company sold a 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. In the first quarter of
2002 the Company acquired ATI, a transport business. The Company's operating
results for the three months ended March 31, 2002 include the operating results
of ATI from the date of acquisition and do not include the operating results of
the divisions sold or closed in 2001. The results of the divisions sold and
closed during 2001 are included for the three months ended March 31, 2001. The
Company's revenue, cost of revenue and selling, general and administrative
expenses were also affected by the closures, reallocations and acquisition
described above that occurred during 2001 and 2002, as described more fully
below.
Critical Accounting Policies and Estimates
The preparation of condensed consolidated financial statements in conformity
with generally accepted accounting principles and related disclosure requires
management to make estimates and assumptions that affect:
... the amounts reported for assets and liabilities;
... the disclosure of contingent assets and liabilities at the date of the
financial statements; and
... the amounts reported for revenues and expenses during the reporting period.
Specifically, management must use estimates in determining the economic useful
lives of assets, provisions for uncollectable accounts receivable, exposures
under self-insurance plans and various other recorded or disclosed amounts.
Therefore, the Company's condensed consolidated financial statements and related
disclosure are necessarily affected by these estimates. Management evaluates
these estimates on an ongoing basis, utilizing historical experience and other
methods considered reasonable in the particular circumstances. Nevertheless,
actual results may differ significantly from
Page 14
estimates. To the extent that actual outcomes differ from estimates, or
additional facts and circumstances cause management to revise estimates, the
Company's financial position as reflected in its condensed consolidated
financial statements will be affected. Any effects on business, financial
position or results of operations resulting from revisions to these estimates
are recorded in the period in which the facts that give rise to the revision
become known.
Management believes that the critical accounting policies affected by the
estimates and assumptions the Company must make in the preparation of its
condensed consolidated financial statements and related disclosures relate to
revenue recognition, allowance for doubtful accounts, accrued insurance, income
taxes and the valuation of long-lived assets and goodwill.
Results of Operations
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Net Revenue. Net revenue increased $2.2 million, or 3.7%, from $58.9 million for
the three months ended March 31, 2001 to $61.1 million for the three months
ended March 31, 2002. Of the net revenue for the three months ended March 31,
2002, 66.0% related to transport services and 34.0% related to towing and
recovery services. Transport net revenue increased $4.8 million, or 13.5%, from
$35.5 million for the three months ended March 31, 2001 to $40.3 million for the
three months ended March 31, 2002. The increase in transport net revenue was
primarily due to the acquisition of one transport division in the first quarter
2002, offset, in part, by the closure of three transport divisions in the second
quarter of 2001 and the weak performance of the majority of the Company's used
and specialty vehicle transport businesses due to the decreased demand for
vehicle transport services as compared to the prior year. Towing and recovery
net revenue decreased $2.6 million, or 11.1%, from $23.4 million for the three
months ended March 31, 2001 to $20.8 million for the three months ended March
31, 2002. The decrease in towing and recovery net revenue was primarily due to
the closure of one towing and recovery division during 2001, the sale of two
towing and recovery divisions during 2001 and the weak performance of certain 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 an unseasonably mild winter and the events of September 11,
2001. The events of September 11, 2001 resulted in a reduction in impound
activity in certain metropolitan areas and reduced towing activity as a result
of the reduction of tourism.
Cost of Revenue. Cost of revenue, including depreciation, increased $1.9
million, or 3.8%, from $49.7 million for the three months ended March 31, 2001
to $51.6 million for the three months ended March 31, 2002. Transport cost of
revenue increased $4.5 million, or 14.5%, from $30.9 million for the three
months ended March 31, 2001 to $35.4 million for the three months ended March
31, 2002. The principal components of the increase in transport cost of revenue
consisted of an increase in transport operating salaries and wages of $1.3
million, an increase in costs of subcontractors and brokers of $2.8 million and
an increase in equipment rental of $527,000 (each of which was due, in part, to
the acquisition of ATI in the first quarter of 2002, offset, in part, by 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 $2.6 million, or 13.9%, from $18.7
million for the three months ended March 31, 2001 to $16.1 million for the three
months ended March 31, 2002. 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 $332,000, a decrease in costs of independent
contractors, brokers and subcontractors of $1.3 million, a decrease in damage
losses of $111,000, a decrease in fuel costs of $359,000, a decrease in vehicle
maintenance expense of $345,000 and a decrease in occupancy costs of $96,000
(each of which was due, in part, to the sale of two towing and recovery
divisions and the closure of another towing and recovery division during the
last nine months of 2001 and the effect of the decreased demand for towing and
recovery services discussed above).
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $788,000, or 8.0%, from $9.8 million for the
three months ended March 31, 2001 to $9.0 million for the three months ended
March 31, 2002. Transport selling, general and administrative expenses increased
$24,000, or 0.6%, from $3.8 million for the three months ended March 31, 2001 to
$3.9 million for the three months ended March 31, 2002. The principal components
of the increase in transport selling, general and administrative expenses
consisted of an increase in wages and benefits of $38,000, an increase in travel
related expenses of $64,000 and an increase in computer and telecommunication
expenses of $101,000 (each of which was due, in part, to the acquisition of ATI
in the first quarter of 2002, offset, in part, by 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 $545,000, or 16.5%, from $3.3 million for
the three months ended
Page 15
March 31, 2001 to $2.8 million for the three months ended March 31, 2002. The
principal components of the decrease in towing and recovery selling, general and
administrative expenses consisted of a decrease in wages and benefits of
$230,000 and a decrease in bad debt expense of $64,000 (each of which was due,
in part, to the sale of two towing and recovery divisions and the closure of
another towing and recovery division during 2001).
Corporate selling, general and administrative expenses decreased $784,000, or
24.5%, from $3.2 million for the three months ended March 31, 2001 to $2.4
million for the three months ended March 31, 2002. The decrease in corporate
selling, general and administrative expenses was primarily due to a decrease in
professional fees of $391,000, a decrease in computer and telecommunication
expense of $229,000, a decrease in wages and benefits expense of $77,000 and a
decrease in other miscellaneous administrative expenses of $87,000.
Amortization of Goodwill. Amortization of goodwill decreased $517,000, or
100.0%, from $517,000 for the three months ended March 31, 2001 to $0 for the
three months ended March 31, 2002. The decrease is due to the adoption of SFAS
No. 142, "Goodwill and Other Intangible Assets" on January 1, 2002. The
Company's goodwill is no longer subject to amortization under the provisions of
SFAS No. 142.
Income (Loss) from Operations. Income from operations increased $1.7 million,
from a loss of $1.2 million for the three months ended March 31, 2001 to income
of $525,000 for the three months ended March 31, 2002. Transport income from
operations increased $302,000, from $693,000 for the three months ended March
31, 2001 to $995,000 for the three months ended March 31, 2002. The increase in
transport income from operations was primarily due to an increase in transport
revenue and a decrease in amortization of goodwill, offset, in part, by
increased 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 $590,000, from $1.3 million
for the three months ended March 31, 2001 to $1.9 million for the three months
ended March 31, 2002. The increase in towing and recovery income from operations
was primarily due to a decline in cost of revenue, amortization of goodwill and
selling, general and administrative expenses, offset, in part, by a decline in
towing and recovery revenue.
Interest Expense, net. Interest expense decreased $171,000, or 5.9%, from $2.9
million for the three months ended March 31, 2001 to $2.7 million for the three
months ended March 31, 2002. Interest income increased $68,000, from $13,000 for
the three months ended March 31, 2001 to $81,000 for the three months ended
March 31, 2002. The decrease in interest expense, net was primarily related to
an effective interest rate of approximately 8.7% in the first quarter of 2001 as
compared to an effective rate of approximately 8.2% in the first quarter of 2002
and lower average borrowings in the first quarter of 2002 as compared to the
first quarter of 2001.
Income Tax Expense. Income tax expense increased $595,000, from $145,000 for the
three months ended March 31, 2001 to $740,000 for the three months ended March
31, 2002. The increase in income tax expense was primarily due to the increase
in the valuation allowance relating to the Company's net operating loss carry
forwards as a result of the non-amortization of goodwill under SFAS No. 142.
Cumulative Effect of Change in Accounting Principle. The cumulative effect of
change in accounting principle related to the impairment of goodwill under SFAS
No. 142 was $43.4 million for the three months ended March 31, 2002. Of the
total cumulative effect of change in accounting principle, $25.4 million was
related to the transport operating segment and $18.0 million was related to the
towing and recovery operating segment.
Net Loss. Net loss increased $41.9 million from $4.1 million for the three
months ended March 31, 2001 to $46.0 million for the three months ended March
31, 2002. The increase in net loss related to the cumulative effect of change in
accounting principle of $43.4 million, offset, in part, by increased income from
operations of $1.7 million.
Page 16
Liquidity and Capital Resources
As of March 31, 2002, the Company had approximately:
. $50,000 of cash and cash equivalents (representing deposits in transit
to GE Capital, as agent under the Company's revolving credit facility)
and another $8.3 million available for borrowing under the revolving
credit facility,
. a working capital deficit of approximately $32.8 million (including the
$36.7 million outstanding under the Company's credit facility which,
due to the factors described in note 2 to the Company's consolidated
financial statements included with the 2001 Annual Report on Form 10-K,
is reflected as a current liability), and
. $96.7 million of outstanding long-term indebtedness, excluding current
installments.
During the three months ended March 31, 2002, the Company provided $810,000 in
cash from operations. Cash provided by operating activities consisted primarily
of a loss from operations of $46.1 million (offset by $43.4 million related to
the cumulative effect of change in accounting principle and $4.6 million of
non-cash depreciation, amortization and interest charges), an increase in trade
receivables of $2.3 million and an increase in accounts payable of $713,000.
During the three months ended March 31, 2002, the Company used $2.0 million of
cash in investing activities and used $471,000 of cash from financing
activities. Investing activities consisted primarily of $3.0 million of
purchases of vehicles and equipment, offset by $283,000 in proceeds from the
sale of vehicles and equipment and $500,000 received in connection with the ATI
acquisition. Financing activities consisted primarily of net repayment under the
GE Capital Credit Facility of $703,000.
In July 2000, the Company and its subsidiaries entered into a revolving credit
facility with a group of banks for which GE Capital acts as agent. The revolving
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 revolving 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. The amount of availability based on vehicles amortizes on a straight
line basis over a period of five to seven years. Under the revolving credit
facility, the banks have the right to conduct an annual appraisal of the
Company's vehicles. All cash receipts are forwarded to GE Capital on a daily
basis to pay down the revolver balance, and all working capital and expenditure
needs are funded through daily borrowings. As of March 31, 2002, approximately
$36.7 million was outstanding under the revolving credit facility (excluding
letters of credit of $11.4 million) and an additional $8.3 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 revolving credit facility requires the Company, among other things, to
comply with certain financial covenants, including minimum levels of EBITDA,
minimum ratios of EBITDA to fixed charges and minimum levels of liquidity. 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. In December 2001, the Company notified
GE Capital that the Company would fail to meet the minimum level of EBITDA and
minimum ratio of EBITDA
Page 17
to fixed charges for the period ended December 31, 2001, and that the Company
was not expected to meet the minimum liquidity requirement in the first quarter
of 2002.
On February 14, 2002, the Company entered into an amendment to the revolving
credit facility under which the banks waived these financial covenant
violations, waived a covenant violation with respect to the banks' consent to
the ATI acquisition and provided for the addition of ATI as a borrower under the
credit facility. The amendment reduces the minimum required levels of EBITDA and
increases the minimum required ratios of EBITDA to fixed charges under the
revolving credit facility. The amendment also reduced the minimum liquidity
requirement for the period beginning February 15, 2002 and ending March 15,
2002. In addition, the amendment increases the maximum amount of annual
operating lease payments the Company and its subsidiaries may make in fiscal
years 2002 through 2004.
If the Company fails to comply with these amended provisions or violates other
covenants in the revolving credit facility, the Company will be required to seek
additional waivers, which may not be granted by the banks, or to enter into
amendments to the credit facility which may contain more stringent conditions on
the Company's borrowing capability or its activities, and may require the
Company to pay substantial fees to the banks. If such future waivers were not
granted and the banks were to elect to accelerate repayment of outstanding
balances under the credit facility, the Company would be required to refinance
its debt or obtain capital from other sources, including sales of additional
debt or equity securities or sales of assets, in order to meet its repayment
obligations, which may not be possible. If the banks were to accelerate
repayment of amounts due under the credit facility, it would cause a default
under the Debentures issued to Charterhouse. In the event of a default under the
Debentures, Charterhouse could accelerate repayment of all amounts outstanding
under the Debentures, subject to the credit facility banks' priority. In such
event, repayment of the Debentures would be required only if the credit facility
was paid in full or the banks under the credit facility granted their express
written consent.
The Company finances a portion of its operations through operating leases. These
leases relate to transport and towing and recovery vehicles, equipment
(including information systems) and real property used by the Company to conduct
its business. The terms of the Company's operating leases range from one to
twenty years and certain lease agreements provide for price escalations.
In the normal course of its business, the Company is a party to letters of
credit which are not reflected in the Company's consolidated balance sheets.
Such letters of credit are valued based on the amount of exposure under the
instrument and the likelihood of performance being requested. At March 31, 2002,
the Company had letters of credit outstanding in the aggregate amount of $11.4
million. As of March 31, 2002, no claims had been made against such letters of
credit, and management does not expect any material losses resulting from these
off-balance sheet instruments.
The Company spent approximately $3.0 million on purchases of vehicles and
equipment during the three months ended March 31, 2002. These expenditures were
primarily for the purchase of transport and towing and recovery vehicles. During
the three months ended March 31, 2002, the Company made expenditures of $1.1
million on towing and recovery vehicles and $1.8 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 March 31, 2002, 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 three years, the Company has experienced decreases 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
Page 18
transport services to new customers in strategic market locations. The Company
currently expects to be able to fund its liquidity needs for the next twelve
months through cash flow from operations and borrowings of amounts available
under its revolving credit facility.
Acquisition of Auction Transport, Inc.
On January 16, 2002, the Company acquired ATI from a subsidiary of Manheim in a
stock purchase transaction. ATI provides automobile transport services to
various Manheim auction locations and on a for hire basis. The results of ATI's
operations are included in the Company's 2002 consolidated financial statements
from the date of acquisition.
The Company did not make any cash payments to Manheim upon the closing of the
ATI acquisition, but assumed certain operating lease payments relating to ATI's
operations. The value of the net assets acquired by the Company, excluding
contingent consideration relating to a five-year service agreement and the
assumption of $6,952,000 of future operating lease payments, was $907,000. In
connection with the transaction, Manheim has provided revenue guarantees to the
Company over the duration of the operating lease payments assumed by the
Company. In addition, Manheim is required to pay the Company a
transaction-related fee of $1.0 million, $500,000 of which was paid upon the
closing of the transaction and the remainder of which is payable no later than
December 31, 2003. The full $1.0 million payment has been included in the
calculation of the net assets acquired by the Company.
The following table shows, as of January 16, 2002, the future minimum lease
payments the Company is required to make under the noncancelable operating
leases the Company assumed in the ATI acquisition:
ATI
Year ending December 31, Operating Leases
------------------------ ----------------
2002 ............................... $ 3,068
2003 ............................... 1,653
2004 ............................... 1,049
2005 ............................... 1,014
2006 ............................... 168
--------
Future minimum lease payments ...... $ 6,952
========
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 (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.
Page 19
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, 2001. 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.
Page 20
PART II OTHER INFORMATION
-----------------
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
On March 31, 2002, the Company issued approximately $1.9 million aggregate
principal amount of Debentures to Charterhouse, which represented the quarterly
payment-in-kind interest payment due with respect to $96.7 million aggregate
principal amount of the Debentures previously issued to Charterhouse.
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 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amendment No. 3, dated as of February 14, 2002, to
Credit Agreement dated as of July 30, 2000 by and
among the Company, each of its subsidiaries, various
financial institutions, General Electric Capital
Corporation, as Agent and Fleet Financial
Corporation, as Documentation Agent (incorporated by
reference to Exhibit 10.23 to the Company's Annual
Report on Form 10-K for the year ended December 31,
2001).
10.2 Stock Purchase Agreement, dated as of January 16,
2002, by and among the Company, Auction Transport,
Inc. and Manheim Services Corporation (incorporated
by reference to Exhibit 10.24 to the Company's Annual
Report on Form 10-K for the year ended December 31,
2001).
(b) Reports on Form 8-K
The Company filed the following report on Form 8-K during the quarterly
period ended March 31, 2002.
Current Report on Form 8-K, dated January 16, 2002 and filed January
19, 2002, to report under Item 5 that the Company had acquired the
stock of Auction Transport, Inc., (formerly a subsidiary of Manheim
Services Corporation).
Page 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED ROAD SERVICES, INC.
Registrant
Date: May 15, 2002 /s/ Gerald R. Riordan
------------------------------------------
Chief Executive Officer
/s/ Patrick J. Fodale
------------------------------------------
Chief Financial Officer
Page 22