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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the transition period from ______ to ________
Commission file number: 000-24010
________________
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 12205
Albany, New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(518) 446-0140
________________
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
________________
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 such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Act). Yes [_] No [X]
The registrant estimates that the aggregate market value of the
registrant's Common Stock held by non-affiliates on April 14, 2002 was $267,807*
The following documents are incorporated into this Form 10-K by reference:
None.
As of April 14, 2003, 2,086,475 shares of the registrant's Common Stock
were outstanding.
_______
* Without acknowledging that any individual director or executive officer of
the Company is an affiliate, the shares over which they have voting control
have been included as owned by affiliates solely for the purposes of this
computation.
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PART I
ITEM 1. Business
General
United Road Services, Inc. (the "Company") provides automobile transport
and motor vehicle and equipment towing services. As of December 31, 2002, the
Company operated a network of 11 transport divisions and 17 towing divisions
located in a total of 25 states. During 2002, approximately 66.1% of the
Company's net revenue was derived from the provision of transport services and
approximately 33.9% of its net revenue was derived from the provision of towing
services. Further information with respect to these segments of the Company's
business may be found below in "Operations and Services Provided" and in note 11
to the Company's Consolidated Financial Statements included elsewhere herein.
The Company provides transport services for new and used vehicles
throughout the United States. The Company's transport customers include
commercial entities, such as automobile leasing companies, insurance companies,
automobile manufacturers, automobile auction companies and automobile dealers,
and individual motorists.
The Company offers a broad range of towing services in its local markets,
including towing, impounding and storing motor vehicles, conducting lien sales
and auctions of abandoned vehicles, towing heavy equipment and towing heavy-duty
commercial and recreational vehicles. The Company's towing customers include
commercial entities, such as automobile leasing companies, insurance companies,
automobile dealers, repair shops and fleet operators, municipalities, law
enforcement agencies such as police, sheriff and highway patrol departments, and
individual motorists.
On January 16, 2002, the Company acquired Auction Transport, Inc. ("ATI")
from a subsidiary of Manheim Auction, Inc. ("Manheim") in a stock purchase
transaction. ATI provides automobile transport services to various Manheim
auction locations and on a for hire basis. At the date of acquisition ATI
operated a fleet of approximately 104 company vehicles and 81 owner operated
vehicles, and also provides integrated vehicle logistics management services.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Acquisition of ATI."
Operations and Services Provided
Transport
The Company provides new and used automobile transport services for a wide
range of customers, including leasing companies, automobile manufacturers,
automobile dealers, automobile auction companies, insurance companies, brokers
and individuals. With respect to new automobiles, transport services typically
begin with a telephone call or other communication from an automobile
manufacturer or dealer requesting the transportation of a specified number of
vehicles between specified locations. A large percentage of the Company's used
automobile transport business is derived from automobile auctions, where an
on-site Company representative negotiates with individual dealers and auction
representatives to transport vehicles to and from the auction. In each case, the
dispatcher or auction sales representative records the relevant information,
checks the location and status of the Company's vehicle fleet and assigns the
job to a particular vehicle. The automobiles are then collected and transported
to the requested destination, or an intermediate location for pick up by another
Company vehicle.
The Company typically provides services as needed by a customer and charges
the customer according to pre-set rates based on mileage or negotiated flat
rates. The Company transports large numbers of new vehicles for automobile
manufacturers from ports and railheads to individual dealers pursuant to
contracts. During the year ended December 31, 2002, one such customer, a big
three automobile manufacturer, represented approximately 10% of the Company's
total consolidated net revenue. The loss of this customer could have a material
adverse effect on the Company's business, financial condition and results of
operations if the Company were not able to replace the lost revenue with revenue
from other sources. The Company's contracts with vehicle manufacturers typically
have terms
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of three years or less and may be terminated at any time for material breach.
Upon expiration of the initial term, the manufacturer may renew the contract on
a year-to-year basis if it is satisfied with the Company's performance.
Otherwise, a new contract is awarded pursuant to competitive bidding. The
Company's other transport services, which include transporting large numbers of
used vehicles from automobile auctions (where off-lease vehicles are sold) to
individual dealers, transporting automobiles for dealers who transfer new cars
from one region to another, and local collection and delivery support to
long-haul automobile transporters, are typically not subject to contracts.
Towing
The Company provides a broad range of towing services for a diverse group
of commercial, government and individual customers in its local markets. Towing
services typically begin with a telephone call requesting assistance. The call
may come from a law enforcement officer, a commercial fleet dispatcher, a
private business or an individual. The dispatcher records the relevant
information regarding the vehicle or equipment to be towed or recovered, checks
the location and status of the division's vehicle fleet (at times using a
computerized positioning system) and assigns the job to a particular vehicle.
The vehicle or equipment is then collected and towed to one of several
locations, depending on the nature of the customer.
Municipality and Law Enforcement Agency Towing. The Company provides towing
services to various municipalities and law enforcement agencies. In this market,
vehicles are typically towed to one of the Company's facilities where the
vehicle is impounded and placed in storage. The vehicle remains in storage until
its owner pays the Company the towing fee (which is typically based on an hourly
charge or mileage) and any daily storage fees, and pays any fines due to the
municipality or law enforcement agency. If the vehicle is not claimed within a
period prescribed by law (typically between 30 and 90 days), the Company
completes lien proceedings and sells the vehicle 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 of the proceeds from vehicle sales, or keep
proceeds up to the amount of towing and storage fees and pay the remainder to
the municipality or law enforcement agency. The Company provides services in
some cases under contracts with municipalities or police, sheriff and highway
patrol departments, typically for terms of five years or less. Such contracts
often may be terminated for material breach and are typically subject to
competitive bidding upon expiration. In other cases, the Company provides these
services to municipalities or law enforcement agencies without a long-term
contract. Whether pursuant to a contract or an ongoing relationship, the Company
generally provides these services for a designated geographic area, which may be
shared with one or more other companies.
Private Impound Towing. The Company provides impound towing services to
private customers, such as shopping centers, retailers and hotels, which engage
the Company to tow vehicles that are parked illegally on their property. As in
law enforcement agency towing, the Company generates revenues through the
collection of towing and storage fees from vehicle owners, and from the sale of
vehicles that are not claimed.
Insurance Salvage Towing. The Company provides insurance salvage towing
services to insurance companies and automobile auction companies for a
per-vehicle fee based on the towing distance. This business involves secondary
towing, since the vehicles involved typically have already been towed to a
storage facility. For example, after an accident, a damaged or destroyed vehicle
is usually towed to a garage or impound yard. The Company's insurance salvage
towing operations collect these towed vehicles and deliver them to repair shops,
automobile auction companies or scrap metal facilities as directed by the
customer.
Commercial Road Service. The Company provides road services to a broad
range of commercial customers, including automobile dealers and repair shops.
The Company typically charges a flat fee and mileage premium for these towing
services. Commercial road services also include towing of heavy-duty trucks,
recreational vehicles, buses and other large vehicles, typically for commercial
fleet operators. The Company charges an hourly rate based on the towing vehicle
used for these specialized services.
Heavy Equipment Towing. The Company provides heavy equipment towing
services to construction companies, contractors, municipalities and equipment
leasing companies. The Company bases its fees for these services on the vehicle
used and the distance traveled.
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Consumer Road Service. The Company also tows disabled vehicles for
individual motorists and national motor clubs. The Company generally tows such
vehicles to repair facilities for a flat fee paid by either the individual
motorist or the motor club.
Safety and Training
The Company uses a variety of programs to improve safety and promote an
accident-free environment. These programs include regular driver training and
certification, drug testing and safety bonuses. These programs are designed to
ensure that all employees comply with the Company's safety standards, the
Company's insurance carriers' safety standards and federal, state and local laws
and regulations. The Company believes that its emphasis on safety and training
helps it attract and retain quality employees.
Competition
The markets for towing and transport services are extremely competitive.
Competition is based primarily on quality, service, timeliness, price and
geographic proximity. The Company competes with certain large transport
companies on a national and regional basis and with certain large towing
companies on a regional and local basis, some of which may have greater
financial and marketing resources than the Company. The Company also competes
with thousands of smaller local companies, which may have lower overhead cost
structures than the Company and may, therefore, be able to provide their
services at lower rates than the Company. The Company believes that it is able
to compete effectively because of its commitment to high quality service,
geographic scope, broad range of services offered, experienced management and
operational economies of scale.
Sales and Marketing
The Company's sales and marketing strategy is to expand market penetration
through strategically oriented direct sales techniques. The Company currently
focuses its sales and marketing efforts on large governmental and commercial
accounts, including automobile manufacturers, leasing companies, insurance
companies and governmental entities, with the goal of fostering long-term
relationships with these customers.
Dispatch and Information Systems
The Company currently relies on a combination of common operating systems
and systems used by acquired divisions prior to their acquisition for its
transport and towing divisional dispatch and other administrative functions.
Each of the operating systems used by the Company's divisions are linked with
the Company's enterprise system. The Company has an information systems services
agreement, which expires in June 2004, with Syntegra (USA) Inc. ("Syntegra")
pursuant to which Syntegra provides data center, desktop and help desk support
services to the Company. The Syntegra agreement is terminable by the Company
upon 90 days notice and the payment by the Company of an early termination fee
of the lessor of six times the monthly service fee or the monthly service fee
times the number of months remaining in the initial term of the agreement. The
Company anticipates that it will need to update and expand its information
systems, or develop or purchase and implement new systems in the future. The
Company expects that any such upgrade, expansion of existing systems or
development, purchase or implementation of new systems will require substantial
capital expenditures. In conjunction with Syntegra, the Company intends to
continue to re-evaluate its information system needs and take appropriate action
to improve the utility and cost-effectiveness of its information systems,
subject to available funds.
Government Regulation and Environmental Matters
Towing and transport services are subject to various federal, state and
local laws and regulations regarding equipment, driver certification, training,
recordkeeping and workplace safety. The Company's vehicles and facilities are
subject to periodic inspection by the United States Department of Transportation
and similar state and local agencies to monitor compliance with such laws and
regulations. The Company's failure to comply with such laws and regulations
could subject the Company to substantial fines and could lead to the closure of
operations that are not in compliance. Companies providing towing and transport
services are required to have numerous federal, state
3
and local licenses and permits. Failure by the Company to obtain or maintain
such licenses and permits could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's operations are subject to a number of federal, state and
local laws and regulations relating to the storage of petroleum products,
hazardous materials and impounded vehicles, as well as safety regulations
relating to the upkeep and maintenance of the Company's vehicles. In particular,
the Company's operations are subject to federal, state and local laws and
regulations governing leakage from salvage vehicles, waste disposal, the
handling of hazardous substances, environmental protection, remediation,
workplace exposure and other matters. The Company believes that it is in
substantial compliance with all such laws and regulations. The Company does not
currently expect to spend any substantial amounts in the foreseeable future in
order to meet current environmental or workplace health and safety requirements.
It is possible that an environmental claim could be made against the Company or
that the Company could be identified by the Environmental Protection Agency, a
state agency or one or more third parties as a potentially responsible party
under federal or state environmental law. If the Company is subject to such a
claim or is so identified, the Company may incur substantial investigation,
legal and remediation costs. Such costs could have a material adverse effect on
the Company's business, financial condition and results of operations.
Seasonality
The demand for towing and transport services is subject to seasonal and
other variations. Specifically, the demand for towing 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.
Employees
As of December 31, 2002, the Company had approximately 1,726 employees,
leased an additional 237 employees and used approximately 523 independent
contractors. The Company believes that it has a satisfactory relationship with
its employees. None of the Company's employees are currently members of unions.
Available Information
The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and any amendments to those reports pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 filed with the
Securities and Exchange Commission ("SEC") are available without charge through
the Internet, at our website: www.unitedroad.com. A hyperlink to the SEC
archives for the Company is located at the investor information section of our
website. These same reports are also available free of charge by written request
to:
Investor Relations
United Road Services, Inc.
17 Computer Drive West
Albany, NY 12205
Factors Influencing Future Results and Accuracy of Forward-Looking Statements
In the normal course of its business, the Company, in an effort to help
keep its stockholders and the public informed about the Company's operations,
may from time to time issue or make certain statements, either in writing or
orally, that are or contain forward-looking statements, as that term is defined
in the federal securities laws. 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.
4
The words "expect," "believe," "anticipate," "project," "estimate," "intend,"
and similar expressions, and their opposites, are intended to identify
forward-looking statements. The Company cautions readers that such statements
are not guarantees of future performance or events and are subject to a number
of factors that may tend to influence the accuracy of the statements and the
projections upon which the statements are based, including but not limited to
those discussed below. As noted elsewhere in this Report, all phases of the
Company's operations are subject to a number of uncertainties, risks, and other
influences, many of which are outside the control of the Company, and any one of
which, or a combination of which, could materially affect the financial
condition and results of operations of the Company and whether forward-looking
statements made by the Company ultimately prove to be accurate.
The following discussion outlines certain factors that could affect the
Company's financial condition and results of operations for 2003 and beyond and
cause them to differ materially from those that may be set forth in
forward-looking statements made by or on behalf of the Company.
Limited Combined Operating History; Risks of Integrating and Operating Acquired
Companies
The Company conducted no operations and generated no net revenue prior to
its initial public offering in May 1998. At the time of its initial public
offering, the Company purchased seven towing, recovery and transport businesses.
Between May 6, 1998 and May 5, 1999, the Company acquired a total of 49
additional businesses. On January 16, 2002, the Company acquired ATI in a stock
purchase transaction. Prior to their acquisition by the Company, such companies
were operated as independent entities. A number of these businesses, now
operating as divisions of the Company, have experienced performance difficulties
since being acquired by the Company. As a result, a number of those divisions
have been sold or closed since their acquisition by the Company. There can be no
assurance that the Company will be able to improve the profitability of its
underperforming businesses or that it will be able to operate the combined
enterprise on a profitable basis.
Risks Related to Improving Profitability
A key element of the Company's business strategy is to increase the revenue
and improve the profitability of the companies it has acquired. The Company
seeks to enhance its revenue by increasing asset utilization, deploying new
equipment and drivers if and when appropriate and expanding both the scope of
services the Company offers and its customer base. The Company's ability to
increase revenue will be affected by various factors, including the availability
of capital to invest in new equipment, the demand for towing and transport
services, the level of competition in the industry, and the Company's ability to
attract and retain a sufficient number of qualified personnel.
The Company is also seeking to improve its profitability by various means,
including eliminating duplicative operating costs and overhead, decreasing
unnecessary administrative, systems and other costs, and capitalizing on its
purchasing power. The Company's ability to improve profitability will be
affected by various factors, including without limitation unexpected increases
in operating or administrative costs, the Company's ability to benefit from the
elimination of redundant operations and the strength of the Company's management
on a national, regional and local level. Many of these factors are beyond the
Company's control. There can be no assurance that the Company will be successful
in increasing revenue or improving its profitability.
Availability of Capital
The Company's ability to execute its business strategy will depend to a
great extent on the availability of capital. In the past three years, the
Company has experienced, and may continue to experience, a reduced level of
operating cash flow. While management continues to explore opportunities to
improve the Company's liquidity through, among other things, the divestiture of
certain operating divisions, the closure or divestiture of unprofitable
divisions, consolidation of operating locations, reduction of operating costs
and the marketing of towing and transport services to new customers in strategic
market locations, there can be no assurance that such efforts will be successful
in improving the Company's cash flow. The Company's cash flow may continue to
decrease as a result of a number of factors relating to the Company's
operations, including a decrease in demand for the Company's transport and/or
towing services, the Company's inability to reduce its costs or improve the
profitability of its operating divisions,
5
increased fuel, insurance or other costs of operations and increased
expenditures required by changes in applicable regulations.
The Company's senior revolving 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. The revolving credit facility also contains covenants requiring the
Company, among other things and subject to specified exceptions, to (a) make
certain prepayments against principal, (b) maintain specified cash management
systems, (c) maintain specified insurance protection, (d) refrain from
commercial transactions, management agreements, service agreements and borrowing
transactions with certain related parties, (e) refrain from making payments of
cash dividends and other distributions to equity holders, payments in respect of
subordinated debt, payments of management fees to certain affiliates and
redemption of capital stock, (f) refrain from mergers, acquisitions or sales of
capital stock or a substantial portion of the assets of the Company or its
subsidiaries, and (g) refrain from direct or indirect changes in control.
In December 2002, the Company notified its banks that the Company would
fail to meet the minimum level of EBITDA and minimum ratio of EBITDA to fixed
charge covenants in the credit facility for the period ended December 31, 2002.
While the Company intends to request a waiver of such violations from its bank
group, there can be no assurance that such waiver will be granted. The failure
by the Company to obtain a waiver would result in an immediate obligation to
repay all amounts outstanding under the credit facility. In such event, it would
be necessary for the Company to raise additional capital, through the issuance
of debt or equity securities, refinancing of its debt or sales of assets, which
may not be possible on satisfactory terms, or at all. If the banks were to
accelerate repayment of amounts due under the credit facility, it would cause a
default under the debentures issued to Charter 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 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources." If a waiver of the existing covenant violations is granted, the
Company may be required to enter into an amendment to the credit facility which
contains more stringent conditions on the Company's borrowing capability or its
activities or requires the Company to pay substantial fees to the banks.
The Company's inability to meet the financial or other covenants contained
in the revolving credit facility in the future, or decreases in the net orderly
liquidation value of the Company's vehicles, could result in limitations on the
Company's borrowing ability, which would negatively affect the Company's cash
flow. The Company's ability to meet the financial covenants contained in the
revolving credit facility is directly related to the Company's operating
performance, and therefore could be affected by the factors relating to the
Company's operations described elsewhere herein.
Unless it is successful in improving its cash flow from operations, the
Company may not be able to fund its working capital needs and thus may not be
able to continue as a going concern or invest in its longer-term growth
strategy. In the event that the Company is not able to fund its liquidity needs
from cash flow from operations and/or borrowings under its credit facility, it
would be necessary for the Company to raise additional capital, through the
issuance of debt or equity securities, refinancing of its debt or sales of
assets, which may not be possible on satisfactory terms, or at all.
Competition
The market for towing and transport services is extremely competitive. Such
competition is based primarily on quality, service, timeliness, price and
geographic proximity. The Company competes with certain large transport
companies on a national and regional basis and certain large towing companies on
a regional and local basis, some of which may have greater financial and
marketing resources than the Company. The Company also competes with thousands
of smaller local companies, which may have lower overhead cost structures than
the Company and may, therefore, be able to provide their services at lower rates
than the Company.
Information Systems
The Company currently relies on a combination of common operating systems
and systems used by acquired divisions prior to their acquisition for its
transport and towing divisional dispatch and other administrative functions. The
Company anticipates that it will need to update and expand its information
systems, or develop or purchase and implement new systems in the future. The
Company expects that any update or expansion of its existing systems or any
development, purchase or implementation of new systems will require the Company
to make substantial capital
6
expenditures, which could have a material adverse effect on the Company's
financial condition and results of operations. In addition, the Company could
encounter unexpected delays in developing and implementing new systems, which
could interfere with its business. Any significant interruption in the Company's
operations could have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence on Customer Relationships and Contracts
The Company provides transport services to certain automobile manufacturers
and other commercial customers under contracts, which typically have terms of
three years or less and may be terminated at any time for material breach. Upon
expiration of the initial term of these contracts, the manufacturer typically
may renew the contract on a year-to-year basis if it is satisfied with the
Company's performance. Otherwise, a new contract is awarded pursuant to
competitive bidding. The Company also provides towing services to certain
municipalities and a number of law enforcement agencies under contracts. These
towing contracts usually have terms of five years or less, may be terminated at
any time for material breach, and typically are subject to competitive bidding
upon expiration. The Company has towing and transport contracts representing
approximately $24.5 million in annual revenue that are scheduled to expire
during 2003. It is possible that some or all of these transport or towing
contracts may not be renewed upon expiration or may be renewed on terms less
favorable to the Company based upon prevailing economic conditions at the time
of renewal. It is also possible that at some future time more of the Company's
customers may implement a competitive bidding process for the award of transport
or towing contracts. The Company has no formal contract with a large number of
its customers, and it is possible that one or more customers could elect, at any
time, to stop utilizing the Company's services.
During the year ended December 31, 2002, one of the Company's transport
customers, a big three automobile manufacturer, represented approximately 10% of
the Company's total consolidated net revenue. The loss of this customer could
have a material adverse effect on the Company's business, financial condition
and results of operations if the Company were not able to replace the lost
revenue with revenue from other sources.
Regulation
Towing and transport services are subject to various federal, state and
local laws and regulations regarding equipment, driver certification, training,
recordkeeping and workplace safety. The Company's vehicles and facilities are
subject to periodic inspection by the United States Department of Transportation
and similar state and local agencies to monitor compliance with such laws and
regulations. The Company's failure to comply with such laws and regulations
could subject the Company to substantial fines and could lead to the closure of
operations that are not in compliance. Companies providing towing and transport
services are required to have numerous federal, state and local licenses and
permits. Failure by the Company to obtain or maintain such licenses and permits
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Potential Exposure to Environmental Liabilities
The Company's operations are subject to a number of federal, state and
local laws and regulations relating to the storage of petroleum products,
hazardous materials and impounded vehicles, as well as safety regulations
relating to the upkeep and maintenance of vehicles. In particular, the Company's
operations are subject to federal, state and local laws and regulations
governing leakage from salvage vehicles, waste disposal, the handling of
hazardous substances, environmental protection, remediation, workplace exposure
and other matters. It is possible that an environmental claim could be made
against the Company or that the Company could be identified by the Environmental
Protection Agency, a state agency or one or more third parties as a potentially
responsible party under federal or state environmental laws. In such event, the
Company could be forced to incur substantial investigation, legal and
remediation costs. Such costs could have a material adverse effect on the
Company's business, financial condition and results of operations.
Potential Liabilities Associated with Acquired Businesses
The businesses that the Company has acquired could have liabilities that
the Company did not discover during its pre-acquisition due diligence
investigations. Such liabilities may include, but are not limited to,
liabilities arising
7
from environmental contamination or non-compliance by prior owners with
environmental laws or regulatory requirements. As a successor owner or operator,
the Company may be responsible for such liabilities. Any such liabilities or
related investigations could have a material adverse effect on the Company's
business, financial condition and results of operations.
Labor Relations
Although currently none of the Company's employees are members of unions,
it is possible that some employees could unionize in the future. If the
Company's employees were to unionize, the Company could incur higher ongoing
labor costs and could experience a significant disruption of its operations in
the event of a strike or other work stoppage. Any of these possibilities could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Liability and Insurance
From time to time, the Company is subject to various claims relating to its
operations, including (i) claims for personal injury or death caused by
accidents involving the Company's vehicles and service personnel, (ii) workers'
compensation claims and (iii) other employment related claims. Although the
Company maintains insurance (subject to deductibles), such insurance may not
cover certain types of claims, such as claims under specified dollar thresholds
or claims for punitive damages or for damages arising from intentional
misconduct (which are often alleged in third-party lawsuits). In the future, the
Company may not be able to maintain adequate levels of insurance on reasonable
terms. In addition, it is possible that existing or future claims may exceed the
level of the Company's insurance or that the Company may not have sufficient
capital available to pay any uninsured claims.
New Vehicle Manufacturers
A significant percentage of the Company's transport business is derived
from new vehicle manufacturers. A decrease in production rates of new vehicles
by such manufacturers may cause a decrease in the amount of new vehicle
transport business conducted by the Company. In addition, decreasing financial
performance by such new vehicle manufacturers may cause them to seek price and
other concessions from the Company. Any decrease in new vehicle transport
business conducted by the Company or any price or other concessions granted by
the Company to such manufacturers could have a material adverse effect on the
Company's business, financial condition and results of operations.
Fuel Prices
Fuel costs constitute a significant portion of the Company's operating
expenses. Although the Company attempts to pass fuel price increases onto its
customers in the form of fuel surcharges, the Company may not always be
successful in mitigating the effects of fuel price increases on its operations.
In addition, the cost of fuel is subject to many economic and political factors
which are beyond the Company's control. Significant fuel shortages or increases
in fuel prices could have a material adverse effect on the Company's business,
financial condition and results of operations.
Quarterly Fluctuations of Operating Results
The Company has experienced, and may continue to experience, significant
fluctuations in quarterly operating results due to a number of factors. These
factors could include: (i) the Company's success in improving operating
efficiency and profitability, and in integrating its acquired businesses; (ii)
the loss of significant customers or contracts; (iii) the timing of expenditures
for new equipment and the disposition of used equipment; (iv) price changes in
response to competitive factors; (v) changes in the general level of demand for
towing and transport services; (vi) event-driven variations in the demand for
towing and transport services; (vii) the availability of capital to fund
operations, including expenditures for new and replacement equipment; (viii)
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; (ix) fluctuations in fuel,
insurance, labor and other
8
operating costs; and (x) general economic conditions. As a result, operating
results for any one quarter should not be relied upon as an indication or
guarantee of performance in future quarters.
Seasonality
The demand for towing and transport services is subject to seasonal and
other variations. Specifically, the demand for towing 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.
Reliance on Key Personnel
The Company is highly dependent upon the experience, abilities and
continued efforts of its senior management. The loss of the services of one or
more of the key members of the Company's senior management could have a material
adverse effect on the Company's business, financial condition and results of
operations if the Company is unable to find a suitable replacement in a timely
manner. The Company does not presently maintain "key man" life insurance with
respect to members of its senior management.
The Company's operating facilities are managed by regional and local
managers who have substantial experience and knowledge of the local towing and
transport markets served by the Company. Such managers include former owners and
employees of businesses the Company has acquired. The loss of one or more of
these managers could have a material adverse effect on the Company's business,
financial condition and results of operations if the Company is unable to find a
suitable replacement in a timely manner.
The timely, professional and dependable service demanded by towing and
transport customers requires an adequate supply of skilled dispatchers, drivers
and support personnel. Accordingly, the Company's success will depend on its
ability to employ, train and retain the personnel necessary to meet its service
requirements. From time to time, and in particular areas, there are shortages of
skilled personnel. In the future, the Company may not be able to maintain an
adequate skilled labor force necessary to operate efficiently, the Company's
labor expenses may increase as a result of a shortage in supply of skilled
personnel, or the Company may have to curtail its operations as a result of
labor shortages.
OTC Bulletin Board Listing
Since the Company's common stock was delisted from the Nasdaq National
Market ("Nasdaq") on May 22, 2000, the common stock has been traded
over-the-counter and quoted on the Over-the-Counter Electronic Bulletin Board
(the "OTC Bulletin Board"). Trading of securities on the OTC Bulletin Board is
generally limited and trades are effected on a less regular basis than on other
exchanges or quotation systems (such as Nasdaq). Accordingly, investors who own
or purchase the Company's common stock will find that its liquidity or
transferability is limited. Investors may find it difficult to purchase or
dispose of, or obtain accurate quotations as to the market value of, the
Company's common stock. Additionally, the listing of the Company's common stock
on the OTC Bulletin Board may negatively affect the Company's ability to sell
additional securities or to secure additional financing.
Control by Principal Stockholder
Blue Truck Acquisition, LLC ("Blue Truck"), a Delaware limited liability
company controlled by KPS Special Situations Fund, L.P. ("KPS"), owns shares of
the Company's Series A Convertible Preferred Stock (the "Series A Preferred
Stock") convertible into approximately 77.7% of the Company's common stock. Blue
Truck is entitled to vote the shares of Series A Preferred Stock on an
as-converted basis on all matters submitted to a vote of the Company's
stockholders, except elections of directors. In addition, Blue Truck currently
has the right to designate and elect a majority of the Board of Directors. As a
result, Blue Truck has effective control of the Company, including the power to
direct the Company's policies and to determine the outcome of all matters
submitted to a vote
9
of the Company's stockholders. This concentration of ownership may have the
effect of delaying or preventing a change in control of the Company, including
transactions in which stockholders might otherwise receive a premium over
current market prices for their shares.
ITEM 2. Properties
As of December 31, 2002, the Company operated 28 divisions, consisting of
79 facilities located in 25 states. These properties consisted of 38 facilities
used to garage, repair and maintain towing vehicles, impound and store towed
vehicles, conduct lien sales and auctions and house administrative and dispatch
operations for the Company's towing operations, and 41 facilities used as
marshalling sites and to garage, repair and maintain transport vehicles and
house administrative and dispatch operations for the Company's transport
operations. All of the Company's facilities are leased from other parties. As of
December 31, 2002, the Company's headquarters consisted of approximately 12,500
square feet of leased space in Albany, New York.
As of December 31, 2002, the Company operated a fleet of approximately 641
towing vehicles and approximately 717 transport vehicles. The Company believes
that its vehicles are generally well-maintained and adequate for its current
operations.
ITEM 3. Legal Proceedings
On October 17, 2001, David J. Floyd, the former owner of Falcon Towing and
Auto Delivery, Inc. ("Falcon"), one of the businesses acquired by the Company in
connection with the Company's initial public offering, filed suit against the
Company in the United States District Court, Northern District of New York. Mr.
Floyd is a beneficial owner of greater than 5% of the Company's common stock.
See "Security Ownership of Certain Beneficial Owners and Management." In his
complaint, Mr. Floyd claims that the Company failed to pay earnout payments
allegedly owed to Mr. Floyd under the merger agreement entered into with respect
to the Falcon acquisition. In November 2001, the Company filed an answer to the
complaint, denying Mr. Floyd's claims. In February 2002, the case was
transferred to the United States District Court, Southern District of New York.
After the close of discovery, Mr. Floyd has asserted that his damages as of
November 2002 were $328,000. The Company intends to defend this action
vigorously.
From time to time the Company is a party to litigation arising in the
ordinary course of its business (most of which involves claims for personal
injury or property damage incurred in connection with the Company's operations).
The Company does not believe that any such litigation in which the Company is
currently involved will have a material adverse effect on its business,
financial condition or results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) None
10
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock was quoted on the Nasdaq National Market under
the symbol "URSI" from May 1, 1998 through May 22, 2000 when the Company was
delisted from Nasdaq. On May 22, 2000, the common stock began to be traded
over-the-counter and quoted on the OTC Bulletin Board under the symbol "URSI."
The table below sets forth the high and low sale prices for the Common Stock on
the Nasdaq National Market or the OTC Bulletin Board, as applicable, for the
periods indicated. All share prices have been adjusted to give effect to the
one-for-ten reverse split of the outstanding common stock effected as of May 4,
2000 (the "Reverse Stock Split"). The prices presented for the period from
January 1, 2000 through December 31, 2002 reflect inter-dealer prices without
retail mark-ups, mark-downs or commissions, and may not reflect actual
transactions.
2000 High Low
---- ---- ---
First Quarter...................................... 29.6875 12.50
Second Quarter..................................... 18.125 3.0625
Third Quarter...................................... 3.50 1.81
Fourth Quarter..................................... 2.23 0.45
2001 High Low
---- ---- ---
First Quarter...................................... 0.81 0.41
Second Quarter..................................... 0.53 0.24
Third Quarter...................................... 0.51 0.25
Fourth Quarter..................................... 0.45 0.23
2002 High Low
---- ---- ---
First Quarter...................................... 0.62 0.27
Second Quarter..................................... 0.62 0.32
Third Quarter...................................... 0.50 0.30
Fourth Quarter..................................... 0.40 0.15
As of March 12, 2003, there were 234 record holders of the Company's common
stock.
The Company has never paid any cash dividends on its common stock and does
not intend to pay any such dividends in the foreseeable future. Any future
determination as to the payment of cash dividends will depend upon such factors
as earnings, capital requirements, the Company's financial condition,
restrictions in financing agreements and other factors deemed relevant by the
Company's Board of Directors. The payment of dividends by the Company is
restricted by the Company's revolving credit facility, the Certificate of
Designations for its Series A Preferred Stock and the Amended and Restated
Purchase Agreement between the Company and Charterhouse (the "Amended
Charterhouse Purchase Agreement").
Sale of Unregistered Securities
On December 31, 2002, the Company issued approximately $2.0 million
aggregate principal amount of debentures to Charterhouse, which represented the
quarterly payment-in-kind interest payment due with respect to $100.6 million
aggregate principal amount of debentures previously issued to Charterhouse.
The sale of the securities listed above 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 promulgated
thereunder as a transaction by an issuer not involving a public offering. The
recipient of the securities was an accredited investor and represented its
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were attached to the certificate issued in such transaction.
11
ITEM 6. Selected Financial Data
The following selected consolidated financial data as of December 31, 2002,
2001, 2000, 1999, and 1998 and for the years ended December 31, 2002, 2001,
2000, 1999 and 1998, have been taken from the consolidated financial statements
of the Company.
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the consolidated financial statements and the related notes
included elsewhere in this Report. The "Overview" included within "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
includes a description of acquisition, closure, consolidation and disposition
activity that has had an impact on the following selected financial data.
Year Ended December 31,
-----------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(In thousands, except per share amounts and share data)
Consolidated Statement of Operations
Data--United Road Services, Inc.:
Net revenue....................................... $ 248,695 $ 226,529 $ 246,566 $ 255,112 $ 87,919
Cost of revenue................................... 213,989 193,503 212,651 202,588 64,765
----------- ----------- ----------- ------------- -----------
Gross profit...................................... 34,706 33,026 33,915 52,524 23,154
Selling, general and administrative expenses...... 35,452 36,129 43,514 42,139 12,428
Goodwill amortization............................. -- 2,063 3,710 5,439 1,745
Impairment charge................................. 28,605 -- 129,455 28,281 --
----------- ----------- ----------- ------------- -----------
Income (loss) from operations..................... (29,351) (5,166) (142,764) (23,335) 8,981
Interest income (expense) and other, net.......... (11,659) (11,566) (14,322) (11,523) (1,086)
----------- ----------- ----------- ------------- -----------
Income (loss) before income taxes and
cumulative effect of change in accounting
principle......................................... (41,012) (16,732) (157,086) (34,858) 7,895
Income tax expense (benefit)...................... 276 (3,073) 1,846 (5,158) 3,503
----------- ----------- ----------- ------------- -----------
Income (loss) before cumulative effect of
change in accounting principle.................... (41,288) (13,659) (158,932) (29,700) 4,392
Cumulative effect of change in accounting
principle......................................... (43,364) -- -- -- --
----------- ----------- ----------- ------------- -----------
Net income (loss)................................. $ (84,652) $ (13,659) $ (158,932) $ (29,700) $ 4,392
=========== =========== =========== ============= ===========
Basic net income (loss) per share................. $ (40.57) $ (6.52) $ (81.95) $ (17.54) $ 4.30
=========== =========== =========== ============= ===========
Diluted net income (loss) per share............... $ (40.57) $ (6.52) $ (81.95) $ (17.54) $ 4.23
=========== =========== =========== ============= ===========
Shares used in computing basic net income
(loss) per share.................................. 2,086,475 2,096,248 1,939,337 1,693,311 1,022,181
=========== =========== =========== ============= ===========
Shares used in computing diluted net income
(loss) per share.................................. 2,086,475(1) 2,096,248(1) 1,939,337(1) 1,693,311(1) 1,038,991(2)
=========== =========== =========== ============= ===========
At December 31,
---------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Balance Sheet Data -- United Road
Services, Inc.:
Working capital (deficit)......................... $ (138,744) $ (32,390) $ (28,201) $ (34,208) $ 9,330
Total assets...................................... 97,767 171,790 178,393 322,445 248,732
Long-term obligations, excluding current
installments................................... 81 94,855 88,115 82,758 65,255
Stockholders' equity (deficit).................... (69,069) 17,222 32,606 166,413 163,766
12
- ----------
(1) Represents actual weighted average shares outstanding. The effect of
options, warrants, shares withheld in connection with acquisitions or
earn-out shares payable to the former owners of the businesses the Company
acquired in connection with its initial public offering and one other
acquired company have been excluded, as the effect would be anti-dilutive.
(2) Represents actual weighted average outstanding shares, adjusted for any
incremental effect of options, warrants, shares withheld in connection with
acquisitions and 1998 earn-out shares payable to the former owners of the
businesses the Company acquired in connection with its initial public
offering and one other acquired company.
13
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Report.
All share and per-share amounts in the discussion below and in the
accompanying consolidated financial statements have been restated to give effect
to the one-for-ten reverse stock split effected by the Company on May 4, 2000.
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, record- keeping 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 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 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 herein and in other reports filed by the Company 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. 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 segment, the Company provides a variety of
towing services in its local markets, including towing, impounding and storage
of motor vehicles, conducting lien sales and auctions of abandoned vehicles,
towing heavy equipment 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.
14
The Company derives revenue from towing 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 contracts
with towing and transport customers. In other cases, services are provided to
towing 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 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.
Management's discussion and analysis addresses the Company's historical
results of operations and financial condition as shown in its consolidated
financial statements for the years ended December 31, 2002, 2001 and 2000.
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 the
near term in order to allow the Company to focus primarily on integrating and
profitably operating its acquired businesses. Prior to the Company's acquisition
of Auction Transport, Inc. ("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 December 31, 2002, the Company operated a
network of 11 transport divisions and 17 towing divisions located in a total of
25 states. During 2002, approximately 66.2% of the Company's net revenue was
derived from the provision of transport services and approximately 33.8% of its
net revenue was derived from the provision of towing services.
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 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 $7.0 million of
future operating lease payments, was $1.3 million. 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.
15
All of the acquisitions completed by the Company were accounted for using
the purchase method of accounting. As a result, the amount by which the fair
value of the consideration paid exceeded the fair value of the net assets
purchased by the Company was recorded as goodwill. From the respective
acquisition dates to December 31, 2001, this goodwill was amortized, using its
estimated useful life of 40 years, as a non-cash charge to operating income.
Upon adopting Statement of Financial Accounting Standards ("SFAS") No. 142
"Goodwill and Other Intangible Assets", the Company ceased to amortize goodwill
related to its prior acquisitions. In lieu of amortization, the Company
performed an initial impairment review of its goodwill in January 2002 and an
annual impairment review as of December 31, 2002. See "Critical Accounting
Policies and Estimates -- Valuation of Long-Lived Assets and Goodwill".
Upon adoption of SFAS No. 142, the Company recorded an impairment loss of
$43.4 million ($25.4 million relating to the transport operating segment and
$18.0 million relating to the towing 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 criteria for classification of reporting
units. During the fourth quarter of 2002, in connection with its analysis under
SFAS No. 142, the Company performed a review of its long-lived assets related to
the recoverability of goodwill, and as described in note 3 of the consolidated
financial statements, recorded an impairment charge of $28.6 million.
In the second quarter of 2000, based upon a comprehensive review of the
Company's long-lived assets in accordance with SFAS No. 121 and an analysis of
the recoverability of goodwill under Accounting Principles Board ("APB") Opinion
No. 17, the Company recorded impairments of long-lived assets and goodwill of
$129.5 million.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles and related disclosures 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 the Company's 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 financial statements and related
disclosures 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 the estimates. To the extent that
actual outcomes differ from management's estimates, or additional facts and
circumstances cause management to revise its estimates, the Company's financial
position as reflected in its 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 following are the Company's most critical
accounting policies affected by the estimates and assumptions the Company must
make in the preparation of its financial statements and related disclosures:
Revenue Recognition. The Company derives revenue from towing and transport
services based on distance, time or fixed charges and from related impounding,
storage and other fees. Transport revenue is recognized upon the delivery of
vehicles or equipment to their final destination, towing revenue is recognized
at the completion of each towing engagement and revenue from impounding,
storage, lien sales, repairs and auctions is recorded when the service is
performed or when title to the vehicle has been transferred. Expenses related to
the generation of revenue are recognized as incurred.
16
Allowance for doubtful accounts. Management must make estimates regarding
the uncollectibility of accounts receivable. Management specifically analyzes
historical bad debt trends, customer concentrations, customer credit-worthiness
and current economic trends when evaluating the adequacy of the allowance for
doubtful accounts. The Company's accounts receivable balance as of December 31,
2002 was $15.1 million, net of an allowance for doubtful accounts of $949,000.
Accrued insurance. The Company is self-insured up to a certain stop-loss
limit for employee health, accident liability and workers' compensation
insurance. Therefore, management must make estimates of potential insurance
losses related to the then-current accounting period. Significant management
judgements and estimates must be made and used in connection with establishing
such insurance accruals. Management analyzes historical claim trends and current
economic conditions in evaluating the adequacy of the insurance accruals.
Material differences could result in the amount and timing of insurance expenses
for any period if management were to make different judgements or utilize
different estimates. The Company's reserves for health insurance, workers
compensation and cargo losses at December 31, 2002 was $6.5 million.
Accounting for income taxes. As part of the process of preparing its
consolidated financial statements, the Company is required to estimate income
taxes for each of the jurisdictions in which it operates. This process involves
estimation of the actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as depreciation,
goodwill and allowance for doubtful accounts, for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included within the consolidated balance sheet. The Company must then assess the
likelihood that any deferred tax assets will be recovered from future taxable
income and, to the extent the Company believes that recovery is not likely, a
valuation allowance must be established. To the extent a valuation allowance is
established or increased in a period, expense is recorded within the tax
provision in the Company's consolidated statement of operations.
Significant management judgment is required in determining the provision
for income taxes, deferred tax assets and liabilities and any valuation
allowance recorded against net deferred tax assets. At December 31, 2002, the
Company had a valuation allowance of $21.5 million, due to uncertainties related
to the Company's ability to utilize certain deferred tax assets (consisting
primarily of certain net operating losses carried forward) before they expire.
The valuation allowance is based on estimates of taxable income by jurisdiction
and the period over which the Company's deferred tax assets will be recoverable.
In the event that actual results differ from these estimates or the Company
adjusts these estimates in future periods, the Company may need to establish an
additional valuation allowance which could materially impact the Company's
financial position and results of operations. The Company's deferred tax assets
at December 31, 2002 were $37.2 million, which were offset by deferred tax
liabilities of $15.7 million and a valuation allowance of $21.5 million,
resulting in a net deferred tax asset of zero at December 31, 2002.
Valuation of long-lived assets and goodwill. The Company evaluates its
long-lived assets in accordance with SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets". The Company reviews long-lived assets, primarily
vehicles and equipment, for impairment whenever events or changes in
circumstances indicate that the carrying value of such assets may not be
recoverable. In valuation, assets held and used are measured by a comparison of
the carrying amount of an asset to undiscounted pre-tax future net cash flows.
An impairment would be recognized based on the difference between the fair value
of the asset and its carrying value. Future events could cause the Company to
conclude that impairment indicators exist and that long-lived assets may be
impaired. Any resulting impairment loss could have a material adverse impact on
the Company's financial condition and results of operations.
Effective January 1, 2002, the Company adopted 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 will 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.
17
accounted for using the purchase method, were evaluated along with the allocated
goodwill in the determination of recoverability. Under purchase accounting,
goodwill was allocated based on the proportion of the fair value of the
long-lived assets acquired to the purchase price of the business acquired.
Vehicles are recorded at the lower of cost or fair value as of the date of
purchase under purchase accounting. Recoverability of assets, including
allocated goodwill, to be held and used was measured by a comparison of the
carrying amount of those assets to the undiscounted future operating cash flows
expected to be generated by those assets.
Results of Operations
In the first quarter of 2000, the Company sold one towing division. In the
second quarter of 2000, the Company closed two transport divisions and one
towing division, and in some cases allocated certain equipment to other
divisions. In the third quarter of 2000, the Company closed one towing division
and allocated certain equipment to other divisions. In the fourth quarter of
2000, the Company closed two towing divisions and allocated certain equipment to
other divisions. In the second quarter of 2001, the Company sold one towing
division and closed three transport divisions and allocated certain equipment to
other divisions. In the third quarter of 2001, the Company closed one towing
division. In the fourth quarter of 2001, the Company sold one towing division.
In the third quarter of 2002, the Company closed two transport divisions and
allocated certain equipment to other divisions. The transport closures were
designed to combine certain management dispatch and administrative functions,
while maintaining existing vehicle fleets. The results of the towing and
transport divisions closed or sold in 2002, 2001 and 2000 are included in the
Company's results of operations for the period prior to sale or closure. In the
first quarter of 2002 the Company acquired ATI, a transport business. The
Company's operating results for the year ended December 31, 2002 include the
operating results of ATI from the date of acquisition. The Company's revenue,
cost of revenue and selling, general and administrative expenses were also
affected by the sales, closures, reallocations and acquisition described above,
as described more fully below.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Net Revenue. Net revenue increased $22.2 million, or 9.8%, from $226.5
million for the year ended December 31, 2001 to $248.7 million for the year
ended December 31, 2002. Of the net revenue for the year ended December 31,
2002, 66.1% related to transport services and 33.9% related to towing services.
Transport net revenue increased $26.9 million, or 19.5%, from $137.6 million for
the year ended December 31, 2001 to $164.5 million for the year ended December
31, 2002. The increase in transport net revenue was primarily due to the
acquisition of ATI in the first quarter 2002, offset, in part, by the closure of
two transport divisions in the third quarter of 2002, 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 these vehicle transport services as compared to
the prior year. Towing net revenue decreased $4.7 million, or 5.3%, from $88.9
million for the year ended December 31, 2001 to $84.2 million for the year ended
December 31, 2002. The decrease in towing net revenue was primarily due to the
closure of one towing division and the sale of two other towing divisions during
2001 offset, in part, by the improved performance of several of the Company's
towing divisions due to increased demand for towing services as compared to the
prior year.
Cost of Revenue. Cost of revenue, including depreciation, increased $20.5
million, or 10.6%, from $193.5 million for the year ended December 31, 2001 to
$214.0 million for the year ended December 31, 2002. Transport cost of revenue
increased $26.2 million, or 21.7%, from $120.8 million for the year ended
December 31, 2001 to $147.0 million for the year ended December 31, 2002. The
principal components of the increase in transport cost of revenue consisted of
an increase in costs of subcontractors and brokers of $12.0 million, an increase
in transport operating labor costs of $7.3 million and an increase in equipment
rental costs of $2.1 million (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 divisions
in 2002 and 2001) and an increase in insurance expense of $2.0 million. Towing
cost of revenue decreased $5.7 million, or 7.8%, from $72.7 million for the year
ended December 31, 2001 to $67.0 million for the year ended December 31, 2002.
The principal components of the decrease in towing cost of revenue consisted of
a decrease in costs of independent contractors, brokers and subcontractors of
$5.1 million, a decrease in vehicle maintenance expense of
18
$902,000, a decrease in fuel costs of $502,000, and a decrease in occupancy
costs of $277,000, each of which was due, in part, to the sale of two towing
divisions and the closure of another towing division during 2001, offset, in
part, by an increase in scrap car purchases of $683,000 and an increase in
insurance expense of $424,000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $677,000, or 1.9%, from $36.1 million for the
year ended December 31, 2001 to $35.5 million for the year ended December 31,
2002. Transport selling, general and administrative expenses increased $1.5
million, or 10.8%, from $13.9 million for the year ended December 31, 2001 to
$15.4 million for the year ended December 31, 2002. The principal components of
the increase in transport selling, general and administrative expenses consisted
of an increase in wages and benefits of $506,000, an increase in computer and
telecommunication expenses of $517,000, an increase in advertising expense of
$223,000, and an increase in travel related expenses of $196,000 (each of which
was due, in part, to the acquisition of ATI in the first quarter of 2002).
Towing selling, general and administrative expenses decreased $1.0 million, or
8.5%, from $11.8 million for the year ended December 31, 2001 to $10.8 million
for the year ended December 31, 2002. The principal components of the decrease
in towing selling, general and administrative expenses consisted of a decrease
in wages and benefits of $1.2 million and a decrease in advertising expense of
$67,000, each of which was due, in part, to the sale of two towing divisions and
the closure of another towing division during 2001, offset, in part, by an
increase in professional fees of $257,000.
Corporate selling, general and administrative expenses decreased $1.3
million, or 12.4%, from $10.5 million for the year ended December 31, 2001 to
$9.2 million for the year ended December 31, 2002. The decrease in corporate
selling, general and administrative expenses was primarily due to a decrease in
professional fees of $523,000, a decrease in computer and telecommunication
expense of $293,000 and a decrease in bank service charges of $309,000.
Amortization of Goodwill. Amortization of goodwill decreased $2.1 million,
or 100.0%, from $2.1 million for the year ended December 31, 2001 to $0 for the
year ended December 31, 2002. The decrease was due to the adoption of SFAS No.
142, on January 1, 2002. The Company's goodwill is no longer subject to
amortization under the provisions of SFAS No. 142.
Impairment Charge. Impairment charges were $28.6 million for the year ended
December 31, 2002. These impairment charges represented a non-cash charge
related to recoverability of goodwill under the Company's comprehensive review
of its long-lived assets in accordance with SFAS No. 142. The 2002 impairment
charge included $11.9 million related to the recoverability of goodwill at the
Company's transport divisions and $16.7 million related to the recoverability of
goodwill at the Company's towing divisions. There was no impairment charge
recorded for the year ended December 31, 2001.
Income (Loss) from Operations. Loss from operations increased $24.2
million, from a loss of $5.2 million for the year ended December 31, 2001 to a
loss of $29.4 million for the year ended December 31, 2002. Excluding the effect
of impairment charges of $28.6 million in 2002, loss from operations decreased
$4.5 million, or 86.5%, from a loss of $5.2 million for the year ended December
31, 2001 to a loss of $745,000 for the year ended December 31, 2002. Transport
income from operations decreased $11.8 million, from income of $2.0 million for
the year ended December 31, 2001 to a loss of $9.8 million for the year ended
December 31, 2002. Excluding the effect of transport impairment charges of $11.9
million in 2002, transport income from operations increased $172,000, or 8.6%,
from $2.0 million for the year ended December 31, 2001 to $2.1 million for the
year ended December 31, 2002. The increase in transport income from operations
was primarily due to a decrease in costs resulting from closure of two transport
divisions during 2002 and three transport divisions in 2001, offset, in part, by
an increase in labor and fuel expenses related to the acquisition of ATI. Towing
income from operations decreased $13.6 million, from income of $3.3 million for
the year ended December 31, 2001 to a loss of $10.3 million for the year ended
December 31, 2002. Excluding the effect of towing impairment charges of $16.7
million in 2002, towing income from operations increased $3.1 million, or 93.9%,
from income of $3.3 million for the year ended December 31, 2001 to income of
$6.4 million for the year ended December 31, 2002. The increase in towing income
from operations was primarily due to a decrease in labor, fuel and maintenance
expenses offset, in part, by the decline in revenue from the closure of one
towing division and sale of two other towing divisions during 2001.
19
Interest Expense, Net. Interest expense increased $353,000, or 3.1%, from
interest expense of $11.5 million for the year ended December 31, 2001 to
interest expense of $11.9 million for the year ended December 31, 2002. Interest
income increased $81,000 from interest income of $40,000 for the year ended
December 31, 2001 to interest income of $121,000 for the year ended December 31,
2002. The increase in interest expense, net was primarily related to the
write-off of deferred financing costs of $438,000 related to a decline in the
Company's maximum borrowing capacity, offset by a decrease in the effective
interest rate which was approximately 8.1% for the year ended December 31, 2002
compared to approximately 8.4% for the year ended December 31, 2001.
Income Tax Expense. Income tax expense increased $3.4 million, from an
income tax benefit of $3.1 million for the year ended December 31, 2001 to an
income tax expense of $276,000 for the year ended December 31, 2002.
The increase in income tax expense was largely due to an increase in the
valuation allowance during 2002. In assessing the deferred tax assets, the
Company considered whether it is more likely than not that some portion or all
of the deferred tax assets would not be realized. The increase in the valuation
allowance related to future tax benefits and the net operating loss reflected as
a deferred tax asset was $16.1 million and $1.8 million during the years ended
December 31, 2002 and 2001, respectively.
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 year ended December 31, 2002. Of the total
cumulative effect of change in accounting principle, $26.0 million was related
to the transport operating segment and $17.4 million was related to the towing
operating segment.
Net Loss. Net loss increased $71.0 million from $13.7 million for the year
ended December 31, 2001 to $84.7 million for the year ended December 31, 2002.
The increase in net loss resulted from the cumulative effect of change in
accounting principle of $43.4 million and increased loss from operations of
$24.2 million as discussed above.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net Revenue. Net revenue decreased $20.1 million, or 8.2%, from $246.6
million for the year ended December 31, 2000 to $226.5 million for the year
ended December 31, 2001. Of the net revenue for the year ended December 31,
2001, 60.8% related to transport services and 39.2% related to towing services.
Transport net revenue decreased $13.7 million, or 9.1%, from $151.3 million for
the year ended December 31, 2000 to $137.6 million for the year ended December
31, 2001. The decrease in transport net revenue was primarily due to the closure
of two transport divisions in the second quarter of 2000 and 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
net revenue decreased $6.4 million, or 6.7%, from $95.3 million for the year
ended December 31, 2000 to $88.9 million for the year ended December 31, 2001.
The decrease in towing net revenue was primarily due to the closure of three
towing divisions during the last six months of 2000, the sale of two towing
divisions and the closure of another towing division during 2001 and the weak
performance of many of the Company's towing businesses due to decreased demand
for towing 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.
Cost of Revenue. Cost of revenue, including depreciation, decreased $19.2
million, or 9.0%, from $212.7 million for the year ended December 31, 2000 to
$193.5 million for the year ended December 31, 2001. Transport cost of revenue
decreased $10.7 million, or 8.1%, from $131.5 million for the year ended
December 31, 2000 to
20
$120.8 million for the year ended December 31, 2001. The principal components of
the decrease in transport cost of revenue consisted of a decrease in the costs
of transport independent contractors, brokers and subcontractors of $5.0
million, a decrease in costs of transport operating salaries and wages of $2.7
million and a decrease in fuel costs of $2.6 million (each of which was due, in
part, to the closure of two transport divisions in the second quarter of 2000
and the closure of three transport divisions in 2001 and the effect of the
decrease in demand for transport services discussed above), offset, in part, by
an increase in insurance expense of $833,000. Towing cost of revenue decreased
$8.5 million, or 10.5%, from $81.2 million for the year ended December 31, 2000
to $72.7 million for the year ended December 31, 2001. The principal components
of the decrease in towing cost of revenue consisted of a decrease in towing
operating labor costs of $2.0 million, a decrease in vehicle maintenance expense
of $1.0 million, a decrease in fuel costs of $958,000, a decrease in costs of
towing independent contractors, brokers and subcontractors of $834,000, a
decrease in insurance expense of $741,000 and a decrease in facility, occupancy
and related costs of $693,000 (each of which was due, in part, to the sale of
one towing division and the closure of four other towing divisions during 2000,
the sale of two towing divisions and the closure of another towing division
during 2001 and the effect of the decreased demand for towing services discussed
above), combined with a decrease in the cost of scrap vehicle purchases of $1.6
million.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $7.4 million, or 17.0%, from $43.5 million for
the year ended December 31, 2000 to $36.1 million for the year ended December
31, 2001. Transport selling, general and administrative expenses decreased $1.2
million, or 7.9%, from $15.1 million for the year ended December 31, 2000 to
$13.9 million for the year ended December 31, 2001. The principal components of
the decrease in transport selling, general and administrative expenses consisted
of a decrease in bad debt expense of $912,000, a decrease in other miscellaneous
administration costs of $449,000 and a decrease in computer and
telecommunications expenses of $266,000 (each of which was due, in part, to the
closure of two transport divisions in the second quarter of 2000 and the closure
of three transport divisions in 2001), offset, in part, by an increase in salary
and wages of $260,000 and an increase in professional fees of $192,000. Towing
selling, general and administrative expenses decreased $2.4 million, or 17.0%,
from $14.1 million for the year ended December 31, 2000 to $11.7 million for the
year ended December 31, 2001. The principal components of the decrease in towing
selling, general and administrative expenses consisted of a decrease in bad debt
expense of $1.3 million, a decrease in professional fees of $631,000 and a
decrease in miscellaneous administrative expenses of $356,000 (each of which was
due, in part, to the sale of one towing division and the closure of four other
towing divisions during 2000 and the sale of two towing divisions and the
closure of another towing division during 2001), offset, in part, by an increase
in salary and wages expense of $262,000.
Corporate selling, general and administrative expenses decreased $3.8
million, or 26.6%, from $14.3 million for the year ended December 31, 2000 to
$10.5 million for the year ended December 31, 2001. The decrease in corporate
selling, general and administrative expenses was primarily due to a 2000
non-recurring charge of $2.1 million related to contractual change of control
payments to certain members of management, a decrease in wages and benefits
expense of $700,000, a decrease in professional fees of $805,000 and a decrease
in travel and entertainment expenses of $249,000.
Amortization of Goodwill. Amortization of goodwill decreased $1.6 million,
or 44.4%, from $3.7 million for the year ended December 31, 2000 to $2.1 million
for the year ended December 31, 2001. The decrease in goodwill amortization was
the result of impairment charges 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.
Impairment Charge. Impairment charges were $129.5 million for the year
ended December 31, 2000. These 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 2000
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 recoverability of goodwill at the Company's
towing divisions. The 2000 impairment charge recorded under SFAS No. 121
included impairment charges of $2.5 million on the recorded value of vehicles
and equipment at the Company's transport divisions and $2.1 million on the
recorded value of vehicles and equipment at the Company's towing divisions and
impairment charges of $2.9 million on the recoverability of allocated goodwill
21
at the Company's transport divisions and $3.9 million on the recoverability of
allocated goodwill at the Company's towing divisions. No impairment charges were
recorded in the year ended December 31, 2001.
Income (Loss) from Operations. Loss from operations decreased $137.6
million, or 96.4%, from a loss of $142.8 million for the year ended December 31,
2000 to a loss of $5.2 million for the year ended December 31, 2001. Excluding
the effect of impairment charges of $129.5 million in 2000, loss from operations
decreased $8.1 million, or 60.9%, from a loss of $13.3 million for the year
ended December 31, 2000 to a loss of $5.2 million for the year ended December
31, 2001. Transport income from operations increased $80.5 million, or 102.5%,
from a loss of $78.5 million for the year ended December 31, 2000 to income of
$2.0 million for the year ended December 31, 2001. Excluding the effect of
transport impairment charges of $81.1 million in 2000, transport income from
operations decreased $630,000, or 24.2%, from $2.6 million for the year ended
December 31, 2000 to $2.0 million the year ended December 31, 2001. The 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 income from operations increased $53.3
million, from a loss of $50.0 million for the year ended December 31, 2000 to
income of $3.3 million for the year ended December 31, 2001. Excluding the
effect of towing impairment charges of $48.4 million in 2000, towing income from
operations increased $5.3 million, from a loss of $1.6 million for the year
ended December 31, 2000 to income of $3.7 million for the year ended December
31, 2001. The increase in towing income from operations was primarily due to
decreased cost of revenue and selling, general and administrative expenses
related to the operation of the towing business segment, as described above.
Interest Expense, Net. Interest expense decreased $2.7 million, or 19.0%,
from interest expense of $14.2 million for the year ended December 31, 2000 to
interest expense of $11.5 million for the year ended December 31, 2001. Interest
income decreased $244,000 from $284,000 for the year ended December 31, 2000 to
$40,000 for the year ended December 31, 2001. The decrease in interest expense,
net was related to a non-recurring charge of $1.7 million relating to the
refinancing of the Company's credit facility with a new group of lenders in
2000, a decrease in the effective interest rate for credit facility borrowings
of approximately 1.0% in the year ended December 31, 2001 as compared to the
year ended December 31, 2000 and lower levels of debt during the first six
months of 2001 as compared to the first six months of 2000.
Income Tax Expense (Benefit). Income tax expense decreased $4.9 million,
from an income tax expense of $1.8 million for the year ended December 31, 2000
to an income tax benefit of $3.1 million for the year ended December 31, 2001.
The decrease in income tax expense was largely due to an ownership change on
July 20, 2000 under Internal Revenue Code Section 382, resulting in the
limitation of all net operating losses generated by the Company from inception
through July 20, 2000. As a result of such limitation, the Company wrote off the
tax effect of net operating losses generated prior to 2000 in the amount of $7.1
million and did not record the tax benefit of net operating losses generated
from January 1, 2000 through July 20, 2000 in the amount of $6.9 million. During
2000, the Company generated net operating losses subsequent to the July 20, 2000
ownership change resulting in a tax benefit of $8.9 million. In addition, during
2000, the Company established a valuation allowance of $3.7 million against the
deferred tax assets. In the year ended December 31, 2001, the Company recorded a
tax benefit of $4.8 million, offset, in part, by an increase in the valuation
allowance of $1.8 million.
Net Income (Loss). Net loss decreased $145.2 million, from a net loss of
$158.9 million for the year ended December 31, 2000 to a net loss of $13.7
million for the year ended December 31, 2001. The decrease in net loss related
largely to the increase in income from operations of $137.6 million and the
decrease in income tax expense of $4.9 million for the year ended December 31,
2001 as compared to the year ended December 31, 2000.
Liquidity and Capital Resources
General
As of December 31, 2002, the Company had approximately:
22
. $315,000 of cash and cash equivalents (representing deposits in transit
to GE Capital, as agent under the Company's revolving credit facility)
and another $6.7 million available for borrowing under the revolving
credit facility,
. a working capital deficit of approximately $138.7 million (including
$102.6 million of convertible subordinated debentures and $35.4 million
outstanding under the Company's revolving credit facility which, due to
the factors described in note 2 to the Company's Consolidated Financial
Statements included elsewhere herein, are reflected as current
liabilities), and
. $81,000 of outstanding long-term indebtedness, excluding current
installments.
During the year ended December 31, 2002, the Company provided $12.2 million
in cash from operations and used $11.5 million of cash in investing activities.
Cash provided by operating activities consisted primarily of a net loss of $84.7
million, offset by $43.3 million related to the cumulative effect of change in
accounting principle, impairment of goodwill of $28.6 million and $20.2 million
of non-cash depreciation, amortization and interest charges, a decrease in
accounts receivable of $2.4 million and an increase in accounts payable of $1.7
million. Of the cash used in investing activities, $13.0 million related to
purchases of new vehicles and equipment, offset by proceeds of $1.1 million from
the sale of vehicles and equipment and $500,000 received as part of the ATI
acquisition. During the year ended December 31, 2002, the Company used $2.1
million in cash for financing activities. Financing activities consisted of
net repayments under the Company's revolving credit facility of $2.1 million and
payments on capital leases of $56,000.
Revolving Credit Facility
On July 20, 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
"GE Capital Credit Facility"). On the same date, the Company terminated its
prior credit facility and repaid all amounts outstanding thereunder.
The GE Capital Credit Facility has a term of five years. In September 2002,
as provided in the GE Capital Credit Facility, the Company exercised the option
to reduce the amount of maximum borrowing capacity under the GE Capital Credit
Facility from $100.0 million to $75.0 million. The facility includes a letter of
credit subfacility of up to $15.0 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. The amount of availability based on
vehicles amortizes on a straight line basis over a period of five to seven
years. Under the GE Capital 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
December 31, 2002, approximately $35.4 million was outstanding under the GE
Capital Credit Facility (excluding letters of credit of $13.8 million) and an
additional $6.7 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 facility)
plus an applicable margin or the reserve adjusted LIBOR Rate (as defined in the
facility) plus an applicable margin. The effective interest rate under the GE
Capital Credit Facility for the year ended December 31, 2002 was 8.1%. 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 obligations of the Company and its subsidiaries under the 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
23
subsidiaries.
As a result of the reduction in maximum borrowing capacity under the GE
Capital Credit Facility in September 2002, the Company recorded a write-off of
previously recorded deferred financing costs in the amount of $438,000. This
amount was included in interest expense for the year ended December 31, 2002.
The GE Capital Credit Facility provides for payment by the Company of
customary fees and expenses, including an annual monitoring fee of $150,000. In
the year ended December 31, 2000, the Company paid approximately $3.0 million in
fees (including the monitoring fee) and expenses related to the facility and the
Company's sale of Series A Preferred Stock to CFE, Inc. (now known as GE Capital
CFE, Inc.), an affiliate of GE Capital ("CFE"). In the year ended December 31,
2001, the Company paid the monitoring fee of $150,000 and paid $212,000 in other
fees and expenses related to the facility. At December 31, 2002, $3.1 million of
the fees and expenses paid in connection with the facility were recorded as
deferred financing costs and will continue to be amortized over the remaining
term of the facility.
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. The facility also
contains covenants requiring the Company, among other things and subject to
specified exceptions, to (a) make certain prepayments against principal, (b)
maintain specified cash management systems, (c) maintain specified insurance
protection, (d) refrain from commercial transactions, management agreements,
service agreements and borrowing transactions with certain related parties, (e)
refrain from making payments of cash dividends and other distributions to equity
holders, payments in respect of subordinated debt, payments of management fees
to certain affiliates and redemption of capital stock, (f) refrain from mergers,
acquisitions or sales of capital stock or a substantial portion of the assets of
the Company or its subsidiaries, and (g) refrain from direct or indirect changes
in control.
On February 14, 2002, the Company entered into an amendment to the GE
Capital Credit Facility under which the banks waived certain 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
facility. The amendment reduced the minimum required levels of EBITDA and the
minimum required ratios of EBITDA to fixed charges under the 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 increased the maximum amount of annual operating lease payments the
Company and its subsidiaries may make in fiscal years 2002 through 2004. In
October 2002, 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
covenants in the GE Capital Credit Facility for the nine months ended September
30, 2002. On November 13, 2002, the Company entered into an amendment to the
credit facility under which the banks waived the financial covenant violations.
In December 2002, the Company notified its banks that the Company would
fail to meet the minimum level of EBITDA and minimum ratio of EBITDA to fixed
charges covenants in the GE Capital Credit Facility for the period ended
December 31, 2002. Although, the Company intends to request a waiver of such
violations from its bank group, there can be no assurance that such waiver will
be granted. The failure by the Company to obtain a waiver would result in an
immediate obligation to repay all amounts outstanding under the facility. In
such event, it would be necessary for the Company to raise additional capital,
through the issuance of debt or equity securities, refinancing of its debt or
sale of assets, which may not be possible on satisfactory terms, or at all. If
the banks were to accelerate repayment of amounts due under the GE Capital
Credit Facility, it would cause a default under the debentures issued to Charter
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 GE Capital Credit
Facility granted their express written consent. If a waiver is granted, the
Company may be required to enter into an amendment to the credit facility which
contains more stringent conditions on the Company's borrowing capability or its
activities or requires the Company to pay substantial fees to the banks.
24
The Company's inability to meet the financial or other covenants contained
in the GE Capital Credit Facility in the future or decreases in the net orderly
liquidation value of the Company's vehicles, in the future could result in
limitations on the Company's borrowing ability, which would negatively affect
the Company's cash flow. The Company's ability to meet the financial covenants
contained in the facility is directly related to the Company's operating
performance, and therefore could be affected by the factors relating to the
Company's operations described elsewhere herein.
In June 2002, the Company renewed its property and casualty insurance
programs. This renewal was funded through a premium financing arrangement
requiring a payment of $1.4 million at signing and $3.2 million over the
succeeding nine months. At December 31, 2002, the Company has recorded prepaid
insurance of $1.8 million and accrued expenses and other current liabilities of
$724,000 in connection therewith.
Lease Arrangements
The Company finances a portion of its operations through operating leases.
These leases relate to transport and towing vehicles, equipment (including
information systems) and real property used by the Company to conduct its
business. The terms of the Company's operating leases range from one to twenty
years and certain lease agreements provide for price escalations.
Certain of the operating lease agreements are with the former
owners/shareholders of the businesses the Company has acquired, and cover the
facilities used in the acquired business' operations. The Company does not
believe that the terms of these lease arrangements with such former owners
differ from those which would likely be negotiated with clearly independent
third parties.
The following table shows, as of December 31, 2002, the Company's future
minimum lease payments under noncancelable operating leases (with initial or
remaining lease terms in excess of one year).
Operating leases
----------------
($ in thousands)
Year ending December 31, Related Party Other Total
------------------------ ------------- ----- -----
2003 .......................................... $ 1,556 4,106 5,662
2004 .......................................... 499 3,400 3,899
2005 .......................................... 357 2,498 2,855
2006 .......................................... 263 872 1,135
2007 .......................................... 118 323 441
Thereafter .................................... 1,360 2 1,362
------- ------- ------
Future minimum lease payments ................. $ 4,153 11,201 15,354
======= ======= ======
Preferred Stock Dividends and Debenture Interest
The terms of the Company's Series A Preferred Stock provide that, prior to
July 20, 2008, holders of outstanding Series A Preferred Stock are entitled to
receive cumulative dividends on each share of Series A Preferred Stock each
quarter at the annual rate of (i) 5.5% until July 20, 2006, and (ii) 5.0%
thereafter, of the Series A Preferred Base Liquidation Amount (as defined
below). The "Series A Preferred Base Liquidation Amount" is equal to the
purchase price per share of the Series A Preferred Stock ($40.778), subject to
certain adjustments. The dividends are payable in cash at the end of each
quarter or, at the election of the Company, will cumulate to the extent unpaid.
In the event that the Company elects to cumulate such dividends, dividends will
also cumulate on the amount cumulated at the same rate. Once the election to
cumulate a dividend has been made, the Company may no longer pay such dividend
in cash, other than in connection with a liquidation, dissolution or winding up
of the Company. The Company has never paid cash dividends on the Series A
Preferred Stock and, as a result, aggregate
25
dividends of approximately $3.9 million had accumulated on the Series A
Preferred Stock as of December 31, 2002. Holders of the Series A Preferred Stock
are entitled to participate in all dividends payable to holders of the Company's
common stock. The Company's obligation to pay dividends terminates on July 20,
2008, or earlier if the Company's common stock trades above a specified price
level.
The debentures issued to Charterhouse bear interest at a rate of 8%
annually, payable in-kind for the first five years following issuance, and
thereafter either in kind or in cash, at the Company's discretion. As of
December 31, 2002, $102.6 million of debentures (including debentures issued as
in-kind interest) were outstanding. During the year ended December 31, 2002, the
Company recorded $8.2 million in interest expense and deferred financing fees
related to the debentures.
Vehicle and Equipment Expenditures
The Company spent approximately $13.0 million on purchases of vehicles and
equipment during the year ended December 31, 2002. These expenditures were
primarily for the purchase of, and capitalized service life extension of,
transport and towing vehicles. During the year ended December 31, 2002, the
Company made expenditures of $3.7 million on towing vehicles and $8.3 million on
transport vehicles. These expenditures were financed primarily with cash flow
from operations and borrowings under the GE Capital Credit Facility. As of
December 31, 2002, the Company is under a commitment to pay approximately $4.7
million for the purchase of 27 transport and 10 towing vehicles.
Information Systems Expenditures
During 2002, the Company spent approximately $1.9 million for the
management of its data center and the maintenance of its financial and
information systems. Pursuant its agreement with Syntegra, the Company expects
to pay Syntegra approximately $2.0 million for these services during 2003.
Although it is expected that the Company will need to upgrade and expand its
financial and information systems in the future, or develop or purchase and
implement new systems, the Company cannot currently quantify the amount that
will need to be spent to do so.
Contractual Obligations
The following table discloses the Company's obligations and commitments to
make future payments under contracts:
Payments Due by Period
----------------------
($ in thousands)
Total Less than 1 1-3 Years 4-5 Years After 5 Years
----- ----------- --------- --------- -------------
Borrowings under Credit Facility..... $ 35,352 35,352 -- -- --
Long-Term Debt....................... 102,600 102,600 -- -- --
Capital Lease Obligations............ 156 75 81 -- --
Operating Leases..................... 15,354 5,662 6,754 1,576 1,362
IT Outsourcing....................... 2,997 1,968 1,029 -- --
Capital Expenditures ................ 4,681 4,681 -- -- --
--------- --------- --------- --------- --------
Total................................ $ 161,140 150,338 7,864 1,576 1,362
========= ========= ========= ========= ========
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 December 31,
2002, the Company had letters of credit outstanding in the aggregate amount of
$13.8 million. As of December 31, 2002, no claims had been made
26
against such letters of credit, and management does not expect any material
losses resulting from these off-balance sheet instruments.
Management Fee
In connection with the KPS Transaction, the Company agreed to pay KPS
Management, LLC, an affiliate of KPS ("KPS Management"), an annual management
fee of $1.0 million, which may be lowered to $500,000 and then to zero based on
the amount of Series A Preferred Stock held by Blue Truck and its permitted
transferees. The fee is payable on a quarterly basis. As of December 31, 2002,
the Company had not paid KPS Management the 2002 and 2001 fees aggregating $2.0
million. Such fees are payable to KPS Management upon its request. The Company
has recorded the amount of these fees as due to the related party at December
31, 2002.
Future Liquidity Needs
During the past three years, the Company has experienced, and may continue
to experience, a reduced level of operating cash flow. While Management
continues to explore opportunities to improve the Company's liquidity, through,
among other things, the divestiture of certain operating divisions, the closure
or divestiture of unprofitable divisions, consolidation of operating locations,
reduction of operating costs and the marketing of towing and transport services
to new customers in strategic market locations, there can be no assurance that
such efforts will be successful in improving the Company's cash flow. The
Company's cash flow may continue to decrease as a result of a number of factors
relating to the Company's operations, including a decrease in demand for the
Company's transport and/or towing services, the Company's inability to reduce
its costs or improve the profitability of its operating divisions, increased
fuel, insurance or other costs of operations and increased expenditures required
by changes in applicable regulations. In addition, the Company's inability to
meet the financial or other covenants contained in the GE Capital Credit
Facility, or decreases in the net orderly liquidation value of the Company's
vehicles, could result in limitations on the Company's borrowing ability, which
would negatively affect the Company's cash flow. The Company's ability to meet
the financial covenants contained in the revolving credit facility is directly
related to the Company's operating performance, and therefore could be affected
by the factors relating to the Company's operations described elsewhere herein.
Unless it is successful in improving its cash flow from operations, the
Company may not be able to fund its working capital needs and thus may not be
able to continue as a going concern or invest in its longer-term growth
strategy. In the event that the Company is not able to fund its liquidity needs
from cash flow from operations and/or borrowings under its credit facility, it
would be necessary for the Company to raise additional capital, through the
issuance of debt or equity securities, refinancing of its debt or sales of
assets, which may not be possible on satisfactory terms, or at all.
Recently Issued Accounting Standards
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses accounting for
restructuring and similar costs. SFAS No. 146 nullifies previous accounting
guidance, principally EITF Issue No. 94-3. SFAS No. 146 requires that the
liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF Issue No. 94-3, a liability for an
exit cost was recognized at the date of the Company's commitment to an exit
plan. SFAS No. 146 also establishes that the liability should initially be
measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the
timing of recognizing future restructuring costs as well as the amounts
recognized. The Company is required to adopt the provisions of SFAS No. 146 for
exit or disposal activities initiated after December 31, 2002.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB
27
Statements No. 5, 57, and 107 and a rescission of FASB Interpretation No. 34
("FIN 45"). This Interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under guarantees issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement
provisions of FIN 45 are applicable to guarantees issued or modified after
December 31, 2002 and the disclosure requirements are effective for financial
statement periods ending after December 15, 2002. To date, the Company has not
entered into any transactions whereby it has guaranteed, either directly or
indirectly, any indebtedness. Management anticipates that the adoption of this
Interpretation will not have a material effect on the Company's consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123", to provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation.
Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both the annual and interim financial
statements. Certain of the disclosure modifications are required for fiscal
years ending on or after December 31, 2002 and have been included in the notes
within the accompanying consolidated financial statements.
Seasonality
The Company may experience significant fluctuations in its quarterly
operating results due to seasonal and other variations in the demand for towing
and transport services. Specifically, the demand for towing 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
The Company's future operating results may be adversely affected by (i) the
availability of capital to fund the Company's 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) price changes in response to competitive factors, (vi) changes in the
general level of demand for towing and transport services, (vii) event-driven
variations in the demand for towing and transport services, (viii) 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, (ix) fluctuations in fuel, insurance, labor
and other operating costs, and (x) general economic conditions. As a result,
operating results for any one quarter should not be relied upon as an indication
or guarantee of performance in the future quarters.
Inflation
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.
28
ITEM 7A. Quantitative and Qualitative Disclosure about Market Risk.
The table below provides information about the Company's market sensitive
financial instruments and constitutes a "forward-looking statement." The
Company's major market risk exposure is changing interest rates. The Company's
policy is to manage interest rates through the use of floating rate debt. The
Company's objective in managing its exposure to interest rate changes is to
limit the impact of interest rate changes on earnings and cash flow and to lower
its overall borrowing costs. The table below provides information about the
Company's financial instruments that are sensitive to interest rate changes. The
table presents principal cash flows by expected maturity dates. There were no
derivative financial instruments at December 31, 2002.
Expected Maturity Date
----------------------------------------------------------------------------
Fair
----
2003 2004 2005 2006 2007 Thereafter Total Value
------- ---- ---- ---- ---- ---------- ------- -----
Variable rate debt................ $35,352 -- -- -- -- -- $35,352 $35,352
For the year ended December 31, 2002, the effective interest rate under the
Company's revolving credit facility was 8.1%.
ITEM 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements included in this Report
beginning at page F-1 are incorporated in this Item 8 by reference.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
29
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The Company's Amended and Restated Certificate of Incorporation provides
that the Company's Board of Directors shall be divided into three classes, as
nearly equal in number as possible (including vacancies in any class), with one
class being elected each year for a three-year term. The Board of Directors has
fixed the number of directors at eleven persons.
The following table sets forth the name, age and position of the persons
serving as directors and executive officers of the Company as of the date of the
filing of this report:
Director
Name Age Position Class
----- --- --------- -----
Michael G. Psaros................. 35 Chairman of the Board, Director I
Michael A. Wysocki................ 49 Chief Executive Officer and Director I
Edward W. Morawski................ 54 Director III
Kenneth K. Fisher................. 50 Director III
A. Lawrence Fagan................. 72 Director I
Joseph S. Rhodes.................. 32 Director II
Stephen W. Presser................ 43 Director I
Eugene J. Keilin.................. 60 Director III
David P. Shapiro.................. 41 Director II
Raquel V. Palmer.................. 30 Director II
Brian J. Riley.................... 33 Director III
Gerald J. Corcoran................ 52 President, Towing Business Unit --
Harold W. Borhauer II............. 53 Vice President, Corporate Development --
Patrick J. Fodale................. 40 Vice President and Chief Financial Officer --
Michael G. Psaros has been the Chairman of the Board of Directors of the
Company since July 20, 2000. Mr. Psaros co-founded KPS in 1998, and is currently
a Managing Principal of KPS and of Keilin & Co. LLC ("K&Co."), an investment
banking firm specializing in providing financial advisory services in connection
with mergers, acquisitions and turnaround transactions. Mr. Psaros joined K&Co.
in 1991. Mr. Psaros serves on the Boards of Directors of the following
privately-held companies: Blue Ridge Paper Products, Inc., a manufacturer of
envelope grade paper and board used in liquid packaging ("Blue Ridge"); Republic
Engineered Products, Inc., North American's leading manufacturer of special bar
quality steel ("Republic"); New Flyer Industries, the leading transit bus
manufacturer in North America ("New Flyer"); Blue Heron Paper Company, a
manufacturer of newsprint and groundwood paper products ("Blue Heron"); DeVlieg
Bullard II, Inc., a machine tool manufacturer ("DeVlieg"); Curtis Papers, Inc.,
a producer of specialty and premium papers ("Curtis"); and Genesis World Wide
II, a manufacturer of high-quality metal coil processing, roll coating and
electrostatic equipment ("Genesis").
Edward W. Morawski has served as a director of the Company since May 1998.
Mr. Morawski was a Vice President of the Company from May 1998 to May 2002. In
1977, Mr. Morawski founded Northland Auto Transporters, Inc. and Northland Fleet
Leasing, Inc. (collectively, "Northland"), one of the businesses acquired by the
Company in connection with its initial public offering, and served as the
President of Northland from inception until its acquisition by the Company in
May 1998.
Kenneth K. Fisher has been a director of the Company since November 2001.
Mr. Fisher has been an attorney in private practice since 1978, concentrating in
the areas of health care, insurance, labor and employment and real estate
litigation. He has been a partner at the law firm of Phillips Nizer, LLP since
January 2002. From 1991 to 2001, Mr. Fisher was a member of the New York City
Council representing the 33rd District (Brooklyn).
A. Lawrence Fagan has served as a director since June 2001. Mr. Fagan
joined Charterhouse Group International, Inc., a private equity investment firm
("Charterhouse International"), in 1983 and currently serves as a
30
Partner. Mr. Fagan served as President and Chief Operating Officer of
Charterhouse International from December 1996 until June 2001. Prior to joining
Charterhouse International, Mr. Fagan had over 25 years of experience in
corporate and investment banking positions. He is a director of Cross Country,
Inc., a healthcare staffing services provider, Top Image Systems, Ltd., a
developer of automated information collection, processing and recognition
systems, and numerous privately-held companies.
Joseph S. Rhodes has served as a director since May 2001. Mr. Rhodes joined
Charterhouse International in 1997 and currently serves as a Partner. From 1995
to 1997, Mr. Rhodes was employed in the Mergers & Acquisitions Group of the
Union Bank of Switzerland.
Stephen W. Presser has served as a director since July 20, 2000. Mr.
Presser joined KPS and K&Co. in 1998 and is currently a Principal of KPS and
K&Co. Mr. Presser is a member of the Boards of Directors of Blue Ridge,
Republic, Blue Heron and DeVlieg. From 1985-1997, Mr. Presser was an attorney in
the law firm of Cohen, Weiss and Simon of New York, New York.
Eugene J. Keilin has served as a director since July 20, 2000. Mr. Keilin
founded K&Co. in 1990, and co-founded KPS in 1998. He is currently a Managing
Principal of KPS and K&Co. Mr. Keilin is Chairman of the Boards of Directors of
Blue Ridge and DeVlieg and serves on the Boards of Directors of Republic, New
Flyer, Blue Heron, Curtis and Genesis. Prior to founding K&Co., Mr. Keilin was a
General Partner of Lazard Freres & Co.
David P. Shapiro has served as a director since July 20, 2000. Mr. Shapiro
co-founded KPS and is currently a Managing Principal of KPS and K&Co. Mr.
Shapiro joined K&Co. in 1991. Mr. Shapiro is Chairman of the Board of Directors
of Blue Heron and serves on the Boards of Directors of Blue Ridge, Republic, New
Flyer, DeVlieg, Curtis and Genesis. Prior to joining K&Co., Mr. Shapiro was an
investment banker at Drexel Burnham Lambert Incorporated and Dean Witter
Reynolds, Inc.
Raquel V. Palmer has served as a director since July 20, 2000. Ms. Palmer
is a Principle of KPS and K&Co. Ms. Palmer joined K&Co. in 1994 and has been
with KPS since the fund's inception. Ms. Palmer serves on the Boards of
Directors of Blue Heron, New Flyer, Blue Ridge and DeVlieg. Prior to joining
K&Co., Ms. Palmer was an investment banker with Kidder Peabody & Co.
Brian J. Riley has served as a director since July 20, 2000. Mr. Riley is a
Senior Vice President of KPS and K&Co. Mr. Riley joined K&Co. in 1994 and has
been with KPS since the fund's inception. Mr. Riley serves on the Boards of
Directors of Blue Ridge, Blue Heron and DeVlieg. Prior to joining K&Co., Mr.
Riley was an investment banker in the Mergers and Acquisitions Department of
Smith Barney, Harris & Upham.
Michael A. Wysocki was appointed Chief Executive Officer and a Director of
the Company in April 2003. From January 2000 to April 2003, Mr. Wysocki served
as President of the Company's Transport Business Unit. Mr. Wysocki founded MPG
Transco, Ltd., a Livonia, Michigan based auto transport company ("MPG") in 1973,
and served as its President and Chief Executive Officer from inception until MPG
was acquired by the Company in January 1999. From January 1999 until January
2000, Mr. Wysocki served as general manager of the Company's MPG division. Since
1985, Mr. Wysocki has been the Chief Executive Officer of Translesco, Inc., a
corporation that leases employees to MPG ("Translesco").
Harold W. Borhauer II was named Senior Vice President, Corporate
Development of the Company in April 2003. From January 2000 to April 2003 Mr.
Borhauer served as President of the Company's Towing Business Unit since January
2000. In 1983, Mr. Borhauer founded Arizona's Towing Professionals, Inc., which
does business as Shamrock Towing ("Shamrock"), a Phoenix, Arizona based towing
company that was acquired by the Company in March 1999. Mr. Borhauer served as
Shamrock's Chief Executive Officer from 1983 until its acquisition by the
Company. From March 1999 until January 2000, Mr. Borhauer served as general
manager of the Company's Shamrock division.
Gerald J. Corcoran was named President of the Company's Towing Business
Unit in April 2003. From July 1989 to August 1998, Mr. Corcoran served as Vice
President of E&R Towing and Garage, Inc. ("E&R") and President of Environmental
Auto Removal, Inc. ("EAR"). From August 1998, when E&R and EAR were acquired by
the
31
Company, to October 2001, Mr. Corcoran served as General Manager of E&R and EAR
and from October 2001 to April 2003 he served as Regional Manager of the
Company's Chicago and Las Vegas towing operations.
Patrick J. Fodale has been Vice President and Chief Financial Officer of
the Company since April 2001. Between December 1999 and March 2001, Mr. Fodale
was the Vice President and Chief Financial Officer of Global Technologies, Ltd.
("Global"), a technology incubator investing in emerging growth companies. Prior
to his employment by Global, Mr. Fodale was a workout specialist recruited by
companies in or contemplating bankruptcy under Chapter 11 of the U.S. Bankruptcy
Code. He served as Chief Financial Officer of Homeplace, Inc., a housewares
retailer, from March 1998 to September 1999 and as Chief Financial Officer of
Color Tile, Inc., a specialty retailer of floor covering products, from November
1995 to October 1997. From 1985 to October 1995, Mr. Fodale was employed by
Arthur Andersen, LLC.
Recent Management Changes
In April 2003, Michael A. Wysocki was appointed as Chief Executive Officer
and a Director of the Company to replace Gerald Riordan who resigned as Chief
Executive Officer, Secretary and a Director of the Company effective as of April
1, 2003. Also, in April 2003, Gerald Corcoran was named President of the
Company's Towing Business Unit to replace Mr. Borhauer who was named Senior Vice
President, Corporate Development.
Designation and Election of Certain Directors
Pursuant to the terms of Certificate of Designations for the Series A
Preferred Stock and the KPS Investors' Agreement, persons holding a majority of
the Series A Preferred Stock (the "Majority Holders") are currently entitled to
designate and elect six of the eleven members of the Company's Board of
Directors. An independent committee of the Board, consisting of one of the
directors designated or elected to the Board by the Majority Holders and all of
the members of the Board who were not designated or elected to the Board by the
Majority Holders (the "Independent Committee") is entitled to nominate the
remaining five members of the Board, provided that, as long as Charterhouse is
entitled to nominate member(s) of the Board of Directors pursuant to the
Charterhouse Investors' Agreement, the Charterhouse nominee(s) must be included
among the nominees of the Independent Committee. Under the Charterhouse
Investors' Agreement, Charterhouse currently has the right to nominate two
persons for election to the Company's Board of Directors. Currently, the
Majority Holders' designees on the Board are Michael G. Psaros, Stephen W.
Presser, Eugene J. Keilin, David P. Shapiro, Raquel V. Palmer, and Brian J.
Riley, and the Charterhouse nominees on the Board are Joseph S. Rhodes and A.
Lawrence Fagan.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who beneficially own more than ten
percent of the Company's common stock, to file with the SEC initial reports of
ownership and reports of changes in ownership of common stock and other equity
securities of the Company. Officers, directors and stockholders beneficially
holding greater than ten percent of the common stock are also required by SEC
regulations to furnish the Company with copies of all Section 16(a) reports that
they file with the SEC.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and representations that no other reports were
required, during the fiscal year ended December 31,2002 all Section 16(a) filing
requirements applicable to the Company's officers, directors and greater than
ten percent stockholders were complied with.
32
ITEM 11. Executive Compensation
Summary Compensation Table
The following table presents summary information concerning the
compensation of the Company's Chief Executive Officer ("CEO") and its three
other most highly compensated executive officers (together, the "Named Executive
Officers") for services rendered to the Company and its subsidiaries during
2000, 2001 and 2002. Other than the Named Executive Officers, no executive
officer of the Company received salary and bonus payments exceeding $100,000 in
the aggregate during fiscal year 2002. All share amounts have been adjusted to
give effect to the Reverse Stock Split.
Securities
Underlying All Other
Name & Principal Position Year Salary Bonus Options Compensation
- ------------------------- ---- --------- ----- ------- ------------
Gerald R. Riordan (1)............................. 2002 $ 369,326 -- -- $ 300,000(2)
(Chief Executive Officer) 2001 350,000 -- -- 300,000(2)
2000 319,551 -- 87,500(3) 600,000(2)
Patrick J. Fodale (4)............................. 2002 275,000 93,770 -- --
(Chief Financial Officer) 2001 199,927 -- -- --
Michael A. Wysocki (5)............................ 2002 243,462 -- -- 37,500(2)
(President, Transport Business Unit) 2001 200,000 -- -- 37,500(2)
2000 167,290 -- 36,250(6) 75,000(2)
Harold W. Borhauer II (7)......................... 2002 181,597 -- -- 31,250(2)
(President, Towing Business Unit) 2001 160,000 -- -- 31,250(2)
2000 134,956 -- 34,000(8) 62,500(2)
______
(1) Mr. Riordan served as Chief Executive Officer of the Company from October
1999 to April 2003.
(2) Consists entirely of a payment in lieu of the change in control payment due
this executive officer under his former employment agreement.
(3) Includes options to purchase 37,500 shares granted in replacement of
37,500 options cancelled as of July 20, 2000.
(4) Mr. Fodale's employment with the Company began as of April 2, 2001.
(5) Mr. Wysocki served as President of the Company's Transport Business Unit
from January 2000 to April 2003, when he became Chief Executive Officer of
the Company.
(6) Includes options to purchase 3,750 shares that were cancelled as of July
20, 2000 and options to purchase 3,750 shares granted on July 20, 2000 in
replacement of such cancelled options.
(7) Mr. Borhauer served as President of the Company's Towing Business Unit from
January 2000 to April 2003.
(8) Includes options to purchase 3,000 shares that were cancelled as of July
20, 2000 and options to purchase 3,000 shares granted as of July 20, 2000
in replacement of such cancelled options.
33
Option Grants in 2002
No stock options were granted to any of the Named Executive Officers during
2002.
Fiscal Year-End Option Values
The following table sets forth information concerning the number of shares
of the Company's common stock underlying exercisable and unexercisable options
held by the Named Executive Officers as of December 31, 2002. As of such date,
the exercise price for each of these options exceeded the fair market value of
such options based on the last reported sale price of the common stock on
December 31, 2002 ($0.15 per share) and, therefore, the options had no value. No
options were exercised by any of the Named Executive Officers during 2002. Mr.
Fodale does not own any options.
Shares Underlying Shares Underlying
Exercisable Unexercisable
Name Options Options
---- ------- -------
Gerald R. Riordan................................. 95,833 29,167
Michael Wysocki................................... 22,916 9,584
Harold Borhauer II................................ 21,666 9,334
Employment Agreements
The Company had an employment agreement with Mr. Riordan, effective as of
October 11, 1999, that provided Mr. Riordan with an annual base salary of
$300,000. The agreement also provided that, upon a "change of control" of the
Company (as defined in the agreement), Mr. Riordan was entitled to receive a
change of control payment in the amount of $1.2 million plus accelerated vesting
of all stock options then held by him. On July 20, 2000, in connection with the
KPS Transaction, the Company and Mr. Riordan entered into a new employment
agreement which replaced his former employment agreement. The new employment
agreement had a term of three years, and provided for automatic one year
extensions unless either party gave the other six months prior notice of an
intention to terminate the agreement. Under the new agreement, Mr. Riordan was
entitled to receive an annual base salary of $350,000, subject to increase at
the discretion of the Company. On September 1, 2002, Mr. Riordan's annual base
salary was increased to $400,000. Under the terms of the employment agreement,
Mr. Riordan was also entitled to an annual performance-based bonus, not to
exceed 140% of his base salary.
In lieu of the change of control payment provided for under Mr. Riordan's
former employment agreement, Mr. Riordan received a cash payment of $600,000 at
the closing of the KPS Transaction, a stay bonus of $300,000 on July 20, 2001
and a stay bonus of $300,000 on July 20, 2002. In lieu of the full acceleration
of options provided for under his former employment agreement, upon the closing
of the KPS Transaction and pursuant to the new employment agreement, (i)
unvested stock options to purchase 37,500 shares of common stock held by Mr.
Riordan became vested and fully exercisable on July 20, 2000, and options to
purchase an additional 37,500 shares held by Mr. Riordan were cancelled, (ii)
Mr. Riordan was granted an option to purchase 37,500 shares of common stock at
the fair market value of the common stock on July 20, 2000, which option was to
vest in equal installments on each of the first, second and third anniversaries
of July 20, 2000, provided that such option would vest and become fully
exercisable upon Mr. Riordan's death or disability or a termination of Mr.
Riordan's employment (a) by the Company other than for "cause," or (b) by Mr.
Riordan for "good reason." In addition, under the new employment agreement, Mr.
Riordan received (i) an option to purchase 16,666 shares of common stock at an
exercise price of $6.12 per share (equal to 1.5 times the Conversion Price of
the Series A Preferred Stock on July 20, 2000, which option vested in full on
July 20, 2001), (ii) an option to purchase 16,667 shares of common stock at an
exercise price of $10.20 per share (equal to 2.5 times the Conversion Price),
which option vested in full on July 20, 2002 and (iii) an option to purchase
16,667 shares of common stock at
34
an exercise price of $14.28 per share (equal to 3.5 times the Conversion Price),
which option would have vested in full on July 20, 2003.
Effective April 1, 2003, Mr. Riordan resigned as Chief Executive Officer,
Secretary and a Director of the Company in order to pursue other opportunities,
resulting in termination of his employment agreement.
The Company entered into an employment agreement with Mr. Wysocki in
January 2000, providing for an annual salary of $150,000. In connection with
this employment agreement, the Company granted Mr. Wysocki an option to purchase
7,500 shares of common stock at an exercise price equal to fair market value of
the common stock on the date of grant. The agreement also provided that upon a
"change of control" of the Company (as defined in the agreement), Mr. Wysocki
was entitled to receive a change of control payment in the amount of $150,000,
plus accelerated vesting of all stock options then held by him. On July 20,
2000, in connection with the KPS Transaction, Mr. Wysocki entered into a new
employment agreement with the Company that replaced his former employment
agreement. The new employment agreement has a term of three years. Under the new
agreement, Mr. Wysocki is entitled to receive an annual base salary of $200,000,
subject to increase at the discretion of the Company. In lieu of the change of
control payment provided for under his former employment agreement, Mr. Wysocki
received a cash payment of $75,000 at the closing of the KPS Transaction, a stay
bonus of $37,500 on July 20, 2001, and a stay bonus of $37,500 on July 20, 2002.
Under the terms of the employment agreement, Mr. Wysocki is also entitled to an
annual performance-based bonus, which bonus may not exceed 100% of his base
salary. On October 26, 2002, Mr. Wysocki's base pay was increased to $260,000.
In lieu of full acceleration of the options provided for under Mr.
Wysocki's old employment agreement, upon the closing of the KPS Transaction and
pursuant to the new agreement (i) unvested stock options to purchase 3,750
shares of common stock became vested and fully exercisable on July 20, 2000, and
options to purchase an additional 3,750 shares were cancelled, and (ii) Mr.
Wysocki was granted an option to purchase 3,750 shares of common stock at the
fair market value of the common stock on July 20, 2000, which option vests in
equal installments on each of the first, second and third anniversaries of July
20, 2000, provided that such option will vest and become fully exercisable upon
Mr. Wysocki's death or disability or a termination of Mr. Wysocki's employment
(a) by the Company other than for "cause," or (b) by Mr. Wysocki for "good
reason." In addition, under the new agreement, Mr. Wysocki received (i) an
option to purchase 8,333 shares of common stock at an exercise price of $6.12
per share (equal to 1.5 times the Conversion Price), which option vested in full
on July 20, 2001, (ii) an option to purchase 8,333 shares of common stock at an
exercise price of $10.20 per share (equal to 2.5 times the Conversion Price),
which option vested in full on July 20, 2002 and (iii) an option to purchase
8,334 shares of common stock at an exercise price of $14.28 per share (equal to
3.5 times the Conversion Price), which option will vest in full on July 20,
2003. In April 2003, Mr. Wysocki was appointed Chief Executive Officer of the
Company.
The Company entered into an employment agreement with Mr. Borhauer in
January 2000 providing for an annual salary of $125,000. In connection with this
employment agreement, the Company granted Mr. Borhauer an option to purchase
6,000 shares of Common Stock at an exercise price equal to the fair market value
of the Common Stock on the date of grant. The agreement also provided that upon
a "change of control" of the Company (as defined in the agreement), Mr. Borhauer
was entitled to receive a change of control payment in the amount of $125,000,
plus accelerated vesting of all stock options then held by him. On July 20,
2000, in connection with the KPS Transaction, Mr. Borhauer entered into a new
employment agreement that replaced his former agreement. The new employment
agreement had a term of two years. Under the new agreement, Mr. Borhauer was
entitled to receive an annual base salary of $160,000, subject to increase at
the Company's discretion. In September 2002, the Company entered into an
amendment to the agreement dated July 20, 2000, which among other things
increased Mr. Borhauer's base salary to $185,000 and extended the term of his
employment until July 31, 2004. In lieu of the change of control payment
provided for under his former agreement, Mr. Borhauer received a cash payment of
$62,500 at the closing of the KPS Transaction, a stay bonus of $31,250 on July
20, 2001, and a stay bonus of $31,250 on July 20, 2002. Under the terms of the
new employment agreement, Mr. Borhauer is also entitled to an annual
performance-based bonus, which bonus may not exceed 100% of his base salary.
35
In lieu of full acceleration of the options provided for under Mr.
Borhauer's former employment agreement, upon the closing of the KPS Transaction
and pursuant to the new employment agreement, (i) unvested stock options to
purchase 3,000 shares of the Company's common stock became vested and fully
exercisable on July 20, 2000, and options to purchase an additional 3,000 shares
were cancelled, and (ii) Mr. Borhauer was granted an option to purchase 3,000
shares of common stock at the fair market value of the common stock on July 20,
2000, which option vests in equal installments on each of the first, second and
third anniversaries of July 20, 2000, provided that such option will vest and
become fully exercisable upon Mr. Borhauer's death or disability or a
termination of Mr. Borhauer's employment (a) by the Company other than for
"cause," or (b) by Mr. Borhauer for "good reason." In addition, under the new
agreement, Mr. Borhauer received (i) an option to purchase 8,333 shares of
common stock at an exercise price of $6.12 per share (equal to 1.5 times the
Conversion Price), which option vested in full on July 20, 2001, (ii) an option
to purchase 8,333 shares of common stock at an exercise price of $10.20 per
share (equal to 2.5 times the Conversion Price), which option vested in full
on July 20, 2002 and (iii) an option to purchase 8,334 shares of common stock at
an exercise price of $14.28 per share (equal to 3.5 times the Conversion Price),
which option will vest in full on July 20, 2003. In April 2003, Mr. Borhauer
was named Senior Vice President, Corporate Development.
The employment agreements between the Company and Messrs. Riordan, Wysocki
and Borhauer each provide that upon a "change of control" of the Company (as
defined in the new employment agreement), the executive has the option,
exercisable for one year following such change of control, to terminate the
agreement and to continue to receive his base salary and to participate in all
employee benefit plans, to the extent permitted by such plans, through the later
of (a) the end of the term of the agreement (without regard to the termination
thereof) and (b) one year from the date of such termination. In addition, if the
executive terminates the agreement as described in the foregoing sentence, all
of his stock options that are unvested upon the change of control giving rise to
such termination will vest as of the date of such change of control. The
September 2002 amendment to Mr. Borhauer's employment agreement amended the
exercise period during which Mr. Borhauer can exercise his right to terminate
the agreement upon a change of control from one year following such change of
control to a period commencing upon the one year anniversary of the effective
date of the change of control and ending ninety days after such first
anniversary. Further, pursuant of the amendment, if Mr. Borhauer exercises his
right to terminate his employment agreement upon a change of control, he will
continue to receive his base salary and will participate in all employee benefit
plans, to the extent permitted by such plans, for a period of one year from the
date of termination. If the Company terminates any of the agreements without
"cause", the executive is entitled to continue to receive his base salary and to
participate in all employee benefit plans, to the extent permitted by such
plans, through the later of (a) the end of the term of the agreement (without
regard to the termination thereof) and (b) one year from the date of such
termination. The agreements contain covenants that prohibit the executives from
competing with the Company and from soliciting its employees during the
employment term and until the later of (a) the last day of the term of the
agreement (without regard to any termination thereof) and (b) one year from the
date of termination. The employment agreements also provide for customary
perquisites and benefits.
The Company entered into an employment agreement with Mr. Corcoran
effective August 21, 2000. The agreement has a three year term which expires on
August 21, 2003. At the end of the initial term of the employment agreement (and
any subsequent renewal term), the agreement will automatically renew for an
additional one year period, unless terminated by either Mr. Corcoran or the
Company upon 90 days notice prior to the end of such term. Under the agreement,
Mr. Corcoran is entitled to receive an annual salary of $220,000 and is eligible
to participate in bonus programs maintained by the Company. In addition,
pursuant to the agreement, Mr. Corcoran was paid a performance bonus of $100,000
in 2001 for his performance during 2000 and is entitled to use of a Company car.
On each of the first, second and third anniversaries of the employment
agreement, the Company is required to grant to Mr. Corcoran an option to
purchase 10,000 shares of common stock at an exercise price equal to the fair
market value of the common stock on the date of grant, which options will vest
in equal installments over a three year period from the date of grant. The
agreement also provides for customary benefits and perquisites. If the Company
terminates the agreement not "for cause" (as defined in the agreement), or if
Mr. Corcoran terminates the agreement due to death, disability, a "change of
control" (as defined in the agreement) or "good reason" (as defined in the
agreement), subject to certain exceptions, Mr. Corcoran is entitled to receive
severance pay in an amount equal to the greater of (i) his salary for the
remaining term of the agreement or (ii) three months of salary. The agreement
contains covenants
36
that prohibit Mr. Corcoran from competing with the Company and from soliciting
its employees until August 21, 2005.
The Company entered into an employment agreement with Mr. Fodale in March
2001, pursuant to which Mr. Fodale's employment as Vice President and Chief
Financial Officer of the Company commenced on April 2, 2001. The agreement had
an initial term of one year, which was later extended to October 2, 2002 (the
"Expiration Date"). Under the agreement, Mr. Fodale receives an annual salary of
$275,000 and is eligible to receive a performance bonus in an amount not to
exceed 50% of his salary. The agreement provides that at or prior to the
Expiration Date, the Company and Mr. Fodale will negotiate in good faith an
equity compensation arrangement satisfactory to each party, provided that Mr.
Fodale is not guaranteed to receive any equity compensation. If the Company (i)
terminates the agreement without "cause " (as defined in the agreement) or (ii)
fails to enter into a new agreement prior to the Expiration Date providing for
Mr. Fodale's continued employment subsequent to the Expiration Date or fails to
renew the agreement on the Expiration Date, Mr. Fodale is entitled to receive
his salary for a period of six months following such event. The agreement
contains covenants that prohibit Mr. Fodale from competing with the Company and
from soliciting its employees during Mr. Fodale's employment with the Company
and for a period of one year thereafter. The agreement also provides for
customary perquisites and benefits.
COMPENSATION OF THE BOARD OF DIRECTORS
As compensation for service as a director of the Company, each director who
is not an officer or employee of the Company is entitled to receive $2,500 in
cash for each Board of Directors meeting attended by such director in person and
$750 in cash for each Board of Directors meeting lasting more than 30 minutes
attended by such director by telephone. Each director who is not an officer or
employee of the Company and who serves on a committee of the Board of Directors
is also entitled to receive $500 in cash (the "Committee Fee") for each
committee meeting attended by such director; provided, however, that no
Committee Fee shall be payable to any director unless and until the closing
price of the Common Stock exceeds $50.00 per share for five consecutive trading
days following the date of the meeting to which the Committee Fee relates. All
directors are reimbursed for their out-of-pocket expenses incurred in connection
with attending meetings of the Board and committees thereof.
In addition, each director who is neither an officer nor an employee of the
Company nor affiliated with KPS or Charterhouse is entitled to receive (i) upon
joining the Board and at each annual meeting of the Board thereafter, a grant of
options to purchase 2,000 shares of the Company's common stock with an exercise
price equal to the fair market value of the Common Stock on the date of grant,
and (ii) upon accepting the position of chairman of a committee of the Board, a
grant of options to purchase 250 shares of common stock with an exercise price
equal to the fair market value of the common stock on the date of grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2002, the full Board of Directors performed the duties of the
Compensation Committee of the Board. No current or former officer or employee of
the Company or any of its subsidiaries participated in deliberations of the
Board of Directors concerning executive officer compensation except that Mr.
Riordan made recommendations regarding compensation of executive officers other
than himself. During 2002, no executive officer of the Company served as a
director or member of the compensation committee (or other board committee
performing similar functions, or in the absence of any such committee, the
entire board of directors) of another entity. One of the Company's executive
officers serves as a director of the Company.
37
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Equity Compensation Plan Information
The following table provides information as of December 31, 2002 with
respect to shares of Common Stock that may be issued under the Company's 1998
Stock Option Plan, its 1998 Non-Qualified Stock Option Plan, the Executive
Option Agreement entered into with Gerald Riordan as an inducement to the
commencement of his employment ("the "Executive Option Agreement") and a Warrant
Agreement entered into with Bank of America in 1998 in connection with the
Company's initial revolving Credit Facility (the "Warrant Agreement"). See Note
4 to the accompanying consolidated financial statements for a description of the
equity compensation plans.
Number of Securities
Number of Remaining Available for
Securities to be Future Issuance Under
Issued upon Weighted Average Equity Compensation
Plan Category Exercise Exercise Price Plans
- ------------- --------------------- ---------------------------------------------
Equity Compensation Plans approved by
shareholders/(1)/ 181,408 $ 43.31 146,481
Equity Compensation Plans not approved by
shareholders/(2)/ 158,149 $ 28.17 14,700
/(1)/ Consists of 1998 Stock Option Plan
/(2)/ Consists of 1998 Non Qualified Stock Option Plan, Executive Option
Agreement and Warrant Agreement
Beneficial Ownership
The following table sets forth the beneficial ownership of the Company's
common stock as of April 11, 2003 by (i) each stockholder known by the Company
to be the beneficial owner of more than 5% of the outstanding shares of common
stock, (ii) each director of the Company, (iii) each Named Executive Officer,
and (iv) all current directors and executive officers as a group. Unless
otherwise indicated, each such person (alone or with family members) has sole
voting and dispositive power with respect to the shares listed opposite such
person's name. Except as otherwise indicated, the address of each such person is
c/o United Road Services, Inc., 17 Computer Drive West, Albany, New York 12205.
Common Stock
Number of
Beneficially- Percent
Owned of
Name Shares Class(1)
- ---- ------ --------
Michael G. Psaros(2)................................................................. -- --
Gerald R. Riordan.................................................................... 69,743(3) 4.6
Edward W. Morawski................................................................... 69,227 3.3
A. Lawrence Fagan(4)................................................................. -- --
Joseph S. Rhodes(4).................................................................. -- --
Stephen W. Presser(2)................................................................ -- --
Eugene J. Keilin(2).................................................................. -- --
David P. Shapiro(2).................................................................. -- --
38
Raquel V. Palmer(2).................................................................. -- --
Brian J. Riley(2).................................................................... -- --
Kenneth K. Fisher(5)................................................................. -- --
Patrick J. Fodale.................................................................... -- --
Michael A. Wysocki................................................................... 100,009(6) 5.2
Harold W. Borhauer II................................................................ 26,527(7) 1.7
John David Floyd(8).................................................................. 127,921 6.1
Charter URS, LLC..................................................................... 815,922(9) 24.7
Blue Truck Acquisition, LLC.......................................................... 6,818,405(10) 77.7
GE Capital CFE, Inc. ................................................................ 545,474(11) 21.8
All current directors and executive officers as a group (15 persons)................. 265,506(12) 13.1
Preferred Stock
Number of
Beneficially- Percent
Owned of
Name Shares Class(1)
- ---- ------ --------
Blue Truck Acquisition, LLC.......................................................... 613,073(10) 92.6
GE Capital CFE, Inc.................................................................. 49,046(11) 7.4
______
* Less than one percent.
(1) The applicable percentage of ownership is based on 2,086,475 shares of
common stock outstanding as of April 11, 2003.
(2) The address of this director is c/o KPS Special Situations Fund, L.P., 200
Park Avenue, 58th Floor, New York, NY 10166.
(3) Includes 95,883 shares issuable pursuant to options exercisable within 60
days.
(4) The address of this director is c/o Charterhouse Group International, Inc.,
535 Madison Avenue, New York, NY 10022.
(5) The address of this director is c/o Phillips Nizer LLP, 666 Fifth Avenue,
New York, NY 10103.
(6) Includes 22,916 shares issuable pursuant to options exercisable within 60
days and 14,841 shares held by Translesco, Inc., of which Mr. Wysocki is
the majority owner.
(7) Includes 21,666 shares issuable pursuant to options exercisable within 60
days.
(8) The address of this stockholder is 219 Granite Court, Boulder City, NV
89005.
(9) Includes 684,002 shares issuable upon conversion of the Charterhouse
debentures. According to a Schedule 13D, dated as of December 7, 1998 and
amended as of March 16, 1999, Charterhouse Equity Partners III, L.P., a
Delaware limited partnership ("CEP III"), is the principal member of
Charterhouse. The general partner of CEP III is CHUSA Equity Investors III,
L.P., whose general partner is Charterhouse Equity III, Inc., a
wholly-owned subsidiary of Charterhouse International. Each of Charterhouse
and CEP III has shared voting and dispositive power over the shares held of
record by Charterhouse and may be deemed to beneficially own these shares.
Mr. Fagan and Mr. Rhodes both serve as Partners of Charterhouse
International. Messrs. Fagan and Rhodes disclaim beneficial ownership with
respect to the shares held of record by Charterhouse. The address of
Charterhouse is c/o Charterhouse Group International, Inc., 535 Madison
Avenue, New York, New York 10022.
(10) Consists entirely of shares issuable upon conversion of the Company's
Series A Preferred Stock (including dividends accumulated thereon as of
March 20, 2002) held by Blue Truck. According to a Schedule 13D dated as of
July 28, 2000, KPS is the controlling member of Blue Truck. The general
partner of KPS is KPS Investors, LLC, a Delaware limited liability company
("KPS Investors"). KPS has shared voting and dispositive power over the
shares held of record by Blue Truck and may be deemed to beneficially own
those shares. Mr. Psaros is the President of Blue Truck, a Principal of KPS
and a member and manager of KPS Investors. Mr. Keilin is a Vice President
of Blue Truck, a Principal of KPS and a member and manager of KPS
Investors. Mr. Shapiro is the Treasurer of Blue Truck, a Principal of KPS
and a member and manager of
39
KPS Investors. Each of KPS Investors and Messrs. Psaros, Keilin and Shapiro
disclaim beneficial ownership with respect to the shares held of record by
Blue Truck. The address of Blue Truck is c/o KPS Special Situations Fund,
L.P., 200 Park Avenue, 58th Floor, New York, NY 10166.
(11) Consists entirely of shares issuable upon conversion of the Company's
Series A Preferred Stock (including dividends accumulated thereon as of
March 20, 2002) held by CFE. According to a Schedule 13D dated as of July
28, 2000 and amended as of February 14, 2002, CFE is a wholly-owned
subsidiary of GE Capital, which is a wholly-owned subsidiary of General
Electric Capital Services, Inc., a Delaware corporation ("GECS"), which, in
turn, is a wholly owned subsidiary of General Electric Company, a New York
corporation ("GE"). Each of GE Capital, GECS and GE disclaims beneficial
ownership of the shares held by CFE. The address of CFE is 201 High Ridge
Road, Stamford, CT 06927.
(12) Includes 140,465 shares issuable pursuant to options exercisable within 60
days.
ITEM 13. Certain Relationships and Related Transactions
On May 15, 2002, the Company entered into an agreement with Mr. Morawski to
serve a senior advisor the Company for a monthly rate of $1,000 cancelable on
30-days notice. Prior to May 15, 2002, the Company had an employment agreement
with Mr. Morawski pursuant to which he served as one of the Company's vice
presidents and the general manager of the Company's Northland division. The
agreement provided for an annual base salary of $150,000 and expired in May
2002. The agreement contained a covenant not to compete for one year after
termination of the agreement.
Mr. Wysocki is the majority owner of Translesco, Inc., a corporation from
which the Company leases employees to provide services to the Company's MPG
division. During the year ended December 31, 2002, the Company paid Translesco
approximately $15.2 million in connection with the lease of such employees.
The Company is a party to a lease with Mr. Edward Corcoran and his wife,
Sylvia Corcoran pursuant to which the Company leases property used by E&R Towing
and Garage, Inc. and Environmental Auto Removal, Inc. Edward Corcoran is Gerald
Corcoran's brother. Edward and Sylvia Corcoran received aggregate lease payments
of $72,000 under this lease during 2002.
During the year ended December 31, 2002, the Company was a party to two
lease agreements with Mr. Borhauer and his wife, Lynda Borhauer, pursuant to
which the Company leases property used to conduct the Shamrock business. During
2002, Mr. and Mrs. Borhauer received aggregate lease payments of $185,000 under
these leases.
As of December 31, 2002, the Company had issued approximately $102.6
million aggregate principal amount of its debentures to Charterhouse pursuant to
the Amended Charterhouse Purchase Agreement. The debentures bear interest at a
rate of 8% annually, payable in kind in the form of additional debentures for
the first five years following the closing of the KPS Transaction, and
thereafter in kind or in cash, at the Company's option. During 2002, the Company
issued to Charterhouse approximately $7.8 million aggregate principal amount of
debentures as in-kind interest payments on outstanding debentures. Charterhouse
Equity Partners III, L.P., a Delaware limited partnership ("CEP III"), is the
principal member of Charterhouse. The general partner of CEP III is CHUSA Equity
Investors III, L.P., whose general partner is Charterhouse Equity III, Inc., a
wholly-owned subsidiary of Charterhouse International. Mr. Fagan and Mr. Rhodes
serve as Partners of Charterhouse International.
40
In accordance with the terms of the stock purchase agreement relating to
the KPS Transaction, the Company is required to pay KPS Management an annual
management fee of (a) $1 million, payable quarterly, for so long as holders of
the Series A Preferred Stock have the right under the KPS Investors' Agreement
or the Certificate of Designations to elect a majority of the Company's
directors, or (b) $500,000, payable quarterly, for so long as holders of the
Series A Preferred Stock have the right under the KPS Investors' Agreement or
the Certificate of Designations to elect at least three of the Company's
directors. As of December 31, 2002, the Company had not paid KPS Management the
2002 and 2001 Management fees totaling $2.0 million. Such fees are payable to
KPS upon its request. Messrs. Shapiro, Keilin and Psaros beneficially own, in
the aggregate, approximately 90% of KPS Management indirectly through other KPS
affiliated entities.
ITEM 14. Control Procedures
Our Chief Executive Officer and Chief Financial Officer have concluded,
based on their evaluation within 90 days of the filing date of this report, that
our disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange Commission's
rules and forms. There have been no significant changes in our internal controls
or in other factors that could significantly affect these controls subsequent to
the date of the previously mentioned evaluation.
41
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Operations for the years ended December 31,
2002, 2001 and 2000
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule II-Valuation and Qualifying Accounts
Other schedules have been omitted as they are not applicable or the
required or equivalent information has been included in the consolidated
financial statements or the notes thereto.
42
(3) Exhibits
Number Description of Document
------ -----------------------
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to the same numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 333-
46925)).
3.2 Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of the Company (incorporated by reference to Exhibit 3.1
to the Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2000).
3.3 Amended and Restated Bylaws of the Company (incorporated by reference
to the Exhibit 3.2 to the Company's Registration Statement on Form S-1
(Registration No. 333-46925)).
3.4 Amendment to Amended and Restated Bylaws of the Company (incorporated
by reference to Exhibit 3.2 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2000).
4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit
4.1 to Amendment No. 3 to the Company's Registration Statement on Form
S-1 (Registration No. 33-46925)).
4.2 Form of 8% Convertible Subordinated Debenture due 2008 (incorporated by
reference to Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2000).
4.3 Certificate of Powers, Designations, Preferences and Rights of the
Company's Series A Participating Convertible Preferred Stock
(incorporated by reference to Exhibit 3 to the Schedule 13-D of Blue
Truck Acquisition, LLC and KPS Special Situations Fund, L.P. filed with
the SEC on July 28, 2000).
4.4 Certificate of Correction of Certificate of Powers, Designations,
Preferences and Rights of the Company's Series A Participating
Convertible Preferred Stock (incorporated by reference to Exhibit 4 to
the Schedule 13D of Blue Truck Acquisition, LLC and KPS Special
Situations Fund, L.P. filed with the SEC on July 28, 2000).
4.5 Form of Stock Certificate for the Company's Series A Participating
Convertible Preferred Stock (incorporated by reference to Exhibit 4.3
to the Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2000).
10.1 United Road Services, Inc. 1998 Stock Option Plan (incorporated by
reference to the same-numbered Exhibit to the Company's Registration
Statement on Form S-1 (Registration No. 333-46925)).*
10.2 Employment Agreement between the Company and Edward W. Morawski
(incorporated by reference to Exhibit 10.8 to Amendment No. 1 to the
Company's Registration Statement on Form S-1 (Registration No.
333-46925)).*
10.3 Form of Indemnification Agreement between the Company and each of the
Company's executive officers and directors (incorporated by reference
to Exhibit 10.14 to Amendment No. 2 to the Company's Registration
Statement on Form S-1 (Registration No. 333-46925)).*
10.4 Stock Purchase Warrant, dated as of June 16, 1998, issued by the
Company to Bank of America National Trust and Savings Association
(incorporated by reference to Exhibit 10.21 to the Company's
Registration Statement on Form S-1 (Registration No. 333-65563)).
43
10.5 Stock Purchase Agreement, dated as of April 14, 2000, between the
Company and Blue Truck Acquisition, LLC (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K dated April
14, 2000 and filed with the SEC on April 18, 2000).
10.6 Amendment No. 1, dated as of May 26, 2000, to Stock Purchase Agreement,
dated as of April 14, 2000, by and between the Company and Blue Truck
Acquisition, LLC (incorporated by reference to Appendix F to the
Company's Definitive Proxy Statement on Schedule 14A dated June 13,
2000).
10.7 Investors' Agreement, dated as of July 20, 2000, between the Company
and Blue Truck Acquisition, LLC (incorporated by reference to Exhibit
5 to the Schedule 13D of Blue Truck Acquisition, LLC and KPS Special
Situations Fund, L.P. filed with the SEC on July 28, 2000).
10.8 Registration Rights Agreement, dated as of July 20, 2000, by and among
the Company, Blue Truck Acquisition, LLC and CFE, Inc. (incorporated
by reference to Exhibit 6 to the Schedule 13D of Blue Truck
Acquisition, LLC and KPS Special Situations Fund, L.P. filed with the
SEC on July 28, 2000).
10.9 Amended and Restated Purchase Agreement, dated as of April 14, 2000,
between the Company and Charter URS, LLC (incorporated by reference to
Appendix D to the Company's Definitive Proxy Statement on Schedule 14A
dated June 13, 2000).
10.10 Amended and Restated Investors' Rights Agreement, dated as of April
14, 2000, between the Company and Charter URS, LLC (incorporated by
reference to Exhibit 10.6 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2000).
10.11 Amended and Restated Registration Rights Agreement, dated as of April
14, 2000, between the Company and Charter URS, LLC (incorporated by
reference to Exhibit 10.7 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2000).
10.12 Amendment, dated as of May 26, 2000, to Amended and Restated Purchase
Agreement and Amended and Restated Investors' Agreement, each dated as
of April 14, 2000, by and between the Company and Charter URS, LLC
(incorporated by reference to Appendix G to the Company's Definitive
Proxy Statement on Schedule 14A dated June 13, 2000).
10.13 Second Amendment, dated as of July 20, 2000, to Amended and Restated
Purchase Agreement and Amended and Restated Registration Rights
Agreement, each dated as of April 14, 2000, by and between the Company
and Charter URS, LLC (incorporated by reference to Exhibit 10.9 to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2000).
10.14 Stock Purchase Agreement, dated as of July 20, 2000, by and between
the Company and CFE, Inc. (incorporated by reference to Exhibit 10.10
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2000).
10.15 Credit Agreement, dated as of July 20, 2000, by and among the Company,
each of its subsidiaries, various financial institutions, General
Electric Capital Corporation, as Agent, and Fleet Capital Corporation,
as Documentation Agent (incorporated by reference to Exhibit 10.11 to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2000).
10.16 Amendment to United Road Services, Inc. 1998 Stock Option Plan
(incorporated by reference to Exhibit 10.12 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2000).*
10.17 Employment Agreement, dated July 20, 2000, by and between the Company
and Gerald R. Riordan (incorporated by reference to Exhibit 10.13 to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2000).*
10.18 Employment Agreement, dated July 20, 2000, by and between the Company
and Michael A. Wysocki
44
(incorporated by reference to Exhibit 10.14 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September 30,
2000).*
10.19 Employment Agreement, dated July 20, 2000, by and between the Company
and Harold W. Borhauer II (incorporated by reference to Exhibit 10.15
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2000).*
10.20 Amendment No. 1, dated as of September 25, 2000, to Credit Agreement,
dated as of July 20, 2000, by and among the Company, each of its
subsidiaries, various financial institutions, General Electric Capital
Corporation, as Agent and Fleet Capital Corporation, as Documentation
Agent (incorporated by reference to Exhibit 10.16 to the Company's
quarterly report on Form 10-Q for the quarterly period ended September
30, 2000).
10.21 Employment Agreement, dated March 15, 2001, by and between the Company
and Patrick J. Fodale (incorporated by reference to Exhibit 10.23 to
the Company's Annual Report on Form 10-K for the year ended December
31, 2000).*
10.22 Amendment No. 2, dated as of March 30, 2001, to Credit Agreement,
dated as of July 20, 2000, by and among the Company, each of its
subsidiaries, various financial institutions, General Electric Capital
Corporation, as Agent and Fleet Capital Corporation, as Documentation
Agent (incorporated by reference to Exhibit 10.31 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000).
10.23 Amendment No. 3, dated as of February 14, 2002, to Credit Agreement,
dated as of July 20, by and among the Company, each of its
subsidiaries, various financial institutions, General Electric Capital
Corporation, as Agent and Fleet Capital Corporation, as Documentation
Agent (incorporated by reference to Exhibit 10.23 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2001).*
10.24 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).
10.25 Agreement for Auto Pound Management and Towing Services, dated as of
August 1, 2000 by and between the City of Chicago and Environmental
Auto Removal, Inc. (incorporated by reference to Exhibit 99.1 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2000).
10.26 Amendment No. 4, dated as of August 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 (filed herewith).
10.27 Amendment No. 5, dated as of November 13, 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 10.1 to the
Company's quarterly report for the quarter ended September 30, 2002).
10.28 United Road Services, Inc. 1998 Non-Qualified Stock Option Plan (filed
herewith).
10.29 Amendment No. 1, dated as of September 3, 2002, to the Employment
Agreement dated as of July 20, 2000 by and between the Company and
Harold W. Borhauer II (filed herewith).*
10.30 Amendment No. 1, dated as of April 11, 2002, to Employment Agreement
dated as of March 15, 2001 by and between the Company and Patrick J.
Fodale (filed herewith).*
21.1 Subsidiaries of the Registrant (filed herewith).
45
23.1 Consent of KPMG LLP (filed herewith).
99.1 Executive Certification
__________
* Indicates management agreement or compensatory plan or arrangement.
(b) Reports on Form 8-K
None
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ Michael A. Wysocki
By: -------------------------------
Michael A. Wysocki
Chief Executive Officer
Date: April 14, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Michael A. Wysocki Chief Executive Officer April 14, 2003
- -------------------------------------------- and Director
Michael A. Wysocki (principal executive officer)
/s/ Patrick J. Fodale Vice President and Chief April 14, 2003
- -------------------------------------------- Financial Officer (principal
Patrick J. Fodale accounting and financial officer)
/s/ Michael G. Psaros
- -------------------------------------------- Chairman of the Board of April 14, 2003
Michael G. Psaros Directors
- -------------------------------------------- Director April 14, 2003
Edward W. Morawski
/s/ Kenneth K. Fisher
- -------------------------------------------- Director April 14, 2003
Kenneth K. Fisher
/s/ Joseph S. Rhodes
- -------------------------------------------- Director April 14, 2003
Joseph S. Rhodes
/s/ A. Lawrence Fagan
- -------------------------------------------- Director April 14, 2003
A. Lawrence Fagan
/s/ Eugene J. Keilin
- -------------------------------------------- Director April 14, 2003
Eugene J. Keilin
47
/s/ David P. Shapiro
- -------------------------------------------- Director April 14, 2003
David P. Shapiro
/s/ Stephen W. Presser
- -------------------------------------------- Director April 14, 2003
Stephen W. Presser
/s/ Raquel V. Palmer
- -------------------------------------------- Director April 14, 2003
Raquel V. Palmer
/s/ Brian J. Riley
- -------------------------------------------- Director April 14, 2003
Brian J. Riley
48
INDEX OF EXHIBITS FILED HEREWITH*
10.26 Amendment No. 4, dated as of August 14, 2002, to Credit Agreement,
dated as of July 20, 2000, by and among the Company, each of its
subsidiaries, various financial institutions, General Electric Capital
Corporation, as Agent and Fleet Capital Corporation, as Documentation
Agent.
10.28 United Road Services, Inc. 1998 Non-Qualified Stock Option Plan.
10.29 Amendment No. 1, dated as of September 3, 2002, to the Employment
Agreement dated as of July 20, 2000 by and between the Company and
Harold W. Borhauer II.
10.30 Amendment No. 1, dated as of April 11, 2002, to Employment Agreement
dated as of March 15, 2001 by and between the Company and Patrick J.
Fodale.
21.1 Subsidiaries
23.1 Consent of KPMG LLP.
99.1 Executive Certification
. For a complete list of the Exhibits to this Report, see Item 15(a)(3).
49
SIGNATURES
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Michael A. Wysocki, Chief Executive Officer of United Road Services, Inc.,
(the "Company") certify that:
1) I have reviewed this annual report on Form 10-K of the Company;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements and other financial
information included in this annual report, fairly present in all material
respects, the financial condition, results of operations and cash flows of
the Company as of, and for, the period presented in this annual report;
4) The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a -14 and 15d - 14) for the Company and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) Evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5) The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit
committee of the Company's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls;
and
6) The Company's other certifying officers and I have indicated in this annual
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 14, 2003 /s/ Michael A. Wysocki
-----------------------------------
Chief Executive Officer
50
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Patrick J. Fodale, Senior Vice President and Chief Financial Officer of
United Road Services, Inc., (the "Company") certify that:
1) I have reviewed this annual report on Form 10-K of the Company;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements and other financial
information included in this annual report, fairly present in all material
respects, the financial condition, results of operations and cash flows of
the Company as of, and for, the period presented in this annual report;
4) The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a -14 and 15d - 14) for the Company and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) Evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the controls and procedures based on our evaluation as of the Evaluation
Date;
5) The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee
of the registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls;
and
6) The Company's other certifying officers and I have indicated in this annual
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 14, 2003 /s/ Patrick J. Fodale
-----------------------------------
Chief Financial Officer
51
Independent Auditors' Report
The Board of Directors and Stockholders
United Road Services, Inc.:
We have audited the consolidated financial statements of United Road Services,
Inc. and subsidiaries as listed in the index appearing under Item 15(a)(1). In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the index appearing
under item 15(a)(2). These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Road
Services, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
As discussed in note 1(g) to the consolidated financial statements, the Company
changed its method of accounting for goodwill in 2002.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company's outstanding indebtedness under
its revolving credit facility, $35,352,000, is reflected as a current liability
because of the payment requirements of the related credit agreement, and the
outstanding indebtedness associated with its convertible subordinated
debentures, $102,600,000, is reflected as a current liability because of the
Company's noncompliance with certain covenants associated with the revolving
credit facility. Consequently, current liabilities exceed current assets by
approximately $138,744,000. In addition, the Company has had recurring losses
from operations and has an accumulated deficit of $286,580,000 and stockholders'
deficit of $69,069,000 at December 31, 2002. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ KPMG LLP
Albany, New York
March 14, 2003
F-1
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
(In thousands, except share and per share amounts)
2002 2001
---- ----
Assets
Current assets:
Cash and cash equivalents ....................................................... $ 315 1,696
Trade receivables, net of allowance for doubtful accounts of $949 in 2002 and
$1,581 in 2001 ........................................................... 15,104 18,219
Other receivables, net of allowance accounts of $66 in 2002 and $0 in 2001 ...... 1,116 1,293
Prepaid licenses and fees ....................................................... 1,244 681
Prepaid insurance ............................................................... 2,325 --
Prepaid expenses and other current assets ....................................... 3,118 3,012
--------- ---------
Total current assets ....................................................... 23,222 24,901
Vehicles and equipment, net .......................................................... 67,524 66,111
Deferred financing costs, net ........................................................ 3,408 4,800
Goodwill, net ........................................................................ 3,613 75,582
Other non-current assets ............................................................. -- 396
--------- ---------
Total assets ............................................................... $ 97,767 171,790
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of obligations under capital leases ........................ $ 75 144
Borrowings under credit facility ................................................ 35,352 37,436
Convertible subordinated debentures.............................................. 102,600 --
Accounts payable ................................................................ 9,053 7,367
Accrued expenses and other current liabilities .................................. 12,886 11,271
Due to related parties .......................................................... 2,000 1,073
--------- ---------
Total current liabilities .................................................. 161,966 57,291
Obligations for equipment under capital leases, excluding
current installments .............................................................. 81 68
Long-term debt ....................................................................... -- 94,787
Deferred income taxes, net ........................................................... 85 --
Other long-term liabilities .......................................................... 4,704 2,422
Total liabilities .......................................................... 166,836 154,568
--------- ---------
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 662,119 shares
issued and outstanding at December 31, 2002 and 2001 .................... 1 1
Common stock, $0.01 par value; 35,000,000 shares authorized;
2,086,475 shares issued and outstanding at December 31, 2002 and 2001 ... 21 21
Additional paid-in capital ...................................................... 217,489 217,489
Accumulated deficit ............................................................. (286,580) (200,289)
--------- ---------
Total stockholders' equity (deficit) ....................................... (69,069) 17,222
--------- ---------
Total liabilities and stockholders' equity ................................. $ 97,767 171,790
========= =========
See accompanying notes to consolidated financial statements.
F-2
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2002, 2001 and 2000
(In thousands, except share and per share amounts)
Year ended December 31,
2002 2001 2000
----------- ---------- ----------
Net revenue ............................................................ $ 248,695 226,529 246,566
Cost of revenue ........................................................ 213,989 193,503 212,651
----------- ---------- ----------
Gross profit ...................................................... 34,706 33,026 33,915
Selling, general and administrative expenses ........................... 35,452 36,129 43,514
Amortization of goodwill ............................................... -- 2,063 3,710
Impairment charge ...................................................... 28,605 -- 129,455
----------- ---------- ----------
Loss from operations .............................................. (29,351) (5,166) (142,764)
Other income (expense):
Interest income ................................................... 121 40 284
Interest expense .................................................. (11,883) (11,530) (14,234)
Other income (expense), net ....................................... 101 (76) (372)
----------- ---------- ----------
Loss before income taxes and cumulative effect of change
in accounting principle ...................................... (41,012) (16,732) (157,086)
Income tax expense (benefit) ........................................... 276 (3,073) 1,846
----------- ---------- ----------
Loss before cumulative effect of change in accounting principle ... (41,288) (13,659) (158,932)
Cumulative effect of change in accounting principle ............... (43,364) -- --
----------- ---------- ----------
Net loss .......................................................... $ (84,652) (13,659) (158,932)
=========== ========== ==========
Share Amounts:
Basic and fully diluted loss per share:
Loss before cumulative effect of change in accounting principle ... $ (19.79) (6.52) (81.95)
Cumulative effect of change in accounting principle ............... (20.78) -- --
----------- ---------- ----------
Net loss .......................................................... $ (40.57) (6.52) (81.95)
=========== ========== ==========
Weighted average shares outstanding ............................... 2,086,475 2,096,284 1,939,337
=========== ========== ==========
See accompanying notes to consolidated financial statements.
F-3
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the years ended December 31, 2002, 2001 and 2000
(In thousands, except share amounts)
Additional Retained Total
Preferred Common paid-in earnings stockholders'
Stock Stock capital (deficit) equity (deficit)
----- ----- ------- --------- ----------------
Balance at January 1, 2000 ................................ $ -- 18 191,877 (25,482) 166,413
Stock issued in connection with:
Series A convertible preferred stock issuance, net of
issuance costs (662,119 shares) ............... 1 -- 21,679 -- 21,680
Debenture closing fee (183,922 shares) ............... -- 2 748 -- 750
Holdback shares issued for 1999 acquisitions (17,455
shares) ........................................... -- -- 2,885 -- 2,885
Executive compensation (3,077 shares) ................ -- -- 50 -- 50
Earnout payments (127,868 shares) .................... -- 1 422 -- 423
Accrued dividends on preferred stock ................. -- -- -- (663) (663)
Net loss--2000 ............................................ -- -- -- (158,932) (158,932)
-------- ------- ------- -------- ---------------
Balance at December 31, 2000 .............................. 1 21 217,661 (185,077) 32,606
Stock issued related to earnout payments (10,545 shares) .. -- -- 4 -- 4
Cancellation of certain earnout shares (15,722 shares) .... -- -- (52) -- (52)
Issuance cost related to preferred stock .................. -- -- (124) -- (124)
Accrued dividends on preferred stock ...................... -- -- -- (1,553) (1,553)
Net loss--2001 ............................................ -- -- -- (13,659) (13,659)
-------- ------- ------- -------- ---------------
Balance at December 31, 2001 .............................. 1 21 217,489 (200,289) 17,222
Accrued dividends on preferred stock ...................... -- -- -- (1,639) (1,639)
Net loss--2002 ............................................ -- -- -- (84,652) (85,652)
-------- ------- ------- -------- ---------------
Balance at December 31, 2002 .............................. $ 1 21 217,489 (286,580) (69,069)
======== ======= ======= ======== ===============
See accompanying notes to consolidated financial statements.
F-4
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2002, 2001 and 2000
(In thousands)
Year ended December 31,
2002 2001 2000
---- ---- ----
Net loss .............................................................................. $ (84,652) (13,659) (158,932)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation ...................................................................... 11,020 10,032 10,163
Amortization of goodwill .......................................................... -- 2,063 3,710
Impairment charge ................................................................. 28,605 -- 129,455
Amortization of deferred financing costs .......................................... 954 985 895
Cumulative effect of change in accounting principle ............................... 43,364 -- --
Write off of deferred financing costs ............................................. 438 -- 818
Provision for doubtful accounts and notes receivable .............................. 740 621 2,882
Deferred income taxes ............................................................. 106 (3,371) 705
Accrued management fee ............................................................ 1,000 1,000 250
Debenture closing fee ............................................................. -- -- 750
Interest expense, paid-in-kind .................................................... 7,813 7,219 6,692
Loss (gain) on sale of vehicles and equipment ..................................... (234) (5) 502
Changes in operating assets and liabilities, net of effects of acquisitions:
Decrease in trade receivables ................................................... 2,441 141 1,752
Decrease (increase) in other receivables ........................................ 233 (390) 458
Decrease (increase) in prepaid expenses and other current assets ................ (106) (1,560) 3,281
Decrease in other non-current assets ............................................ 896 (81) 115
Increase (decrease) in accounts payable ......................................... 1,686 (1,355) 1,123
Increase (decrease) in accrued expenses ......................................... (1,412) 115 1,783
Decrease in other long-term liabilities ......................................... (683) (445) (543)
--------- --------- ---------
Net cash provided by operating activities ..................................... 12,209 1,310 5,859
--------- --------- ---------
Investing activities:
Cash acquired in acquisition ...................................................... 500 -- --
Purchases of vehicles and equipment ............................................... (13,008) (8,089) (7,850)
Proceeds from sale of vehicles and equipment ...................................... 1,131 1,370 2,009
Amounts payable to related parties ................................................ (73) (191) (1,317)
--------- --------- ---------
Net cash used in investing activities ......................................... (11,450) (6,910) (7,158)
--------- --------- ---------
Financing activities:
Proceeds from issuance of stock, net .............................................. -- (124) 21,680
Borrowings on revolving credit facility ........................................... 299,753 280,873 32,163
Repayments on revolving credit facility ........................................... (301,837) (275,600) (50,650)
Payments of deferred financing costs .............................................. -- (215) (3,175)
Payments on capital leases ........................................................ (56) (253) (219)
--------- --------- ---------
Net cash provided by (used in) financing activities ........................... (2,140) 4,681 (201)
--------- --------- ---------
Decrease in cash and cash equivalents ................................................. (1,381) (919) (1,500)
Cash and cash equivalents at beginning of year ........................................ 1,696 2,615 4,115
--------- --------- ---------
Cash and cash equivalents at end of year .............................................. $ 315 1,696 2,615
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ........................................................................ $ 2,676 3,322 3,995
========= ========= =========
Income taxes, net of refunds .................................................... $ (148) (55) (2,236)
========= ========= =========
Supplemental disclosure of non-cash investing and financing activity:
Increase in accumulated deficit and other long-term liabilities
for unpaid cumulative dividend on preferred stock ................................. $ 1,639 1,552 663
========= ========= =========
Issuance of common stock for acquisitions ......................................... $ -- -- 409
========= ========= =========
Acquired net assets, net of cash .................................................. $ 793 -- --
========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(1) Summary of Significant Accounting Policies
(a) Organization and Business
United Road Services, Inc. (the "Company"), a Delaware corporation, was
formed in July 1997 to become a national provider of motor vehicle and equipment
towing, recovery and transport services. From inception through May 5, 1999, the
Company acquired 56 businesses (the "Acquired Companies"), seven of which (the
"Founding Companies") were acquired simultaneously with the consummation of an
initial public offering of the Company's common stock on May 6, 1998.
Consideration for these businesses consisted of cash, common stock and the
assumption of indebtedness. All of these acquisitions were accounted for
utilizing the purchase method of accounting.
The Company operates in two reportable operating segments: (1) transport
and (2) towing. 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 segment provides towing, impounding and storing services, lien
sales and auctions of abandoned vehicles. In addition, the towing segment
provides recovery and relocation services for heavy-duty commercial vehicles and
construction equipment. Revenue from towing services is principally derived from
rates based on distance, time or fixed charges, and any related impound and
storage fees. Customers of the towing division include automobile dealers,
repair shops and fleet operators, law enforcement agencies, municipalities and
individual motorists.
Since 1999, the Company has experienced a significant decline in the market
price of its common stock. As a result, its ability to complete acquisitions
using its common stock as currency in a manner that was not dilutive to current
stockholders was adversely affected. Accordingly, 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 the 56 businesses it had
acquired within its first year of operations. The goal of the Company's revised
business strategy is to improve the operational efficiency and profitability of
its existing businesses in order to build a stable platform for future growth.
As part of this business strategy the Company has closed, consolidated and sold
a number of operating locations. At December 31, 2002, the Company operated a
network of 11 transport divisions and 17 towing divisions located in a total of
25 states. During 2002 approximately 66.1% of the Company's net revenue was
derived from the provision of transport services and approximately 33.9% of its
net revenue was derived from the provision of towing services.
(b) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
(c) Revenue Recognition
The Company's revenue is derived from the provision of motor vehicle and
equipment towing and transport services and fees related to vehicles towed,
such as impound, storage and repair fees and abandoned car purchases and auction
fees. Transport revenue is recognized upon the delivery of vehicles or equipment
to their final destination, towing revenue is recognized at the completion of
each towing engagement and revenues from impounding, storage, lien sales,
repairs and auctions are recorded when the service is performed or when title to
the vehicles has been transferred. Expenses related to the generation of revenue
are recognized as incurred.
F-6
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(d) Cash Equivalents
Cash equivalents of $1,243 at December 31, 2001, consisted of money market
funds. At December 31, 2002 the Company had no cash equivalents. For purposes of
the consolidated statements of cash flows, the Company considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents.
(e) Vehicles and Equipment
Vehicles and equipment are recorded at the lower of cost or fair value as
of the date of purchase under purchase accounting. Vehicles and equipment under
capital leases are stated at the present value of minimum lease payments.
Replacements of engines and certain other significant costs are capitalized.
Expenditures for maintenance and repairs are expensed as costs are incurred.
Depreciation is determined using the straight-line method over the
remaining estimated useful lives of the individual assets. Accelerated methods
of depreciation have been used for income tax purposes. Vehicles and equipment
held under capital leases and leasehold improvements are amortized straight-line
over the shorter of the remaining lease term or estimated useful life of the
asset.
The Company provides for depreciation and amortization of vehicles and
equipment over the following estimated useful lives:
Transportation and towing equipment............... 10-15 years
Machinery and other equipment..................... 5-10 years
Computer software and related equipment........... 3-7 years
Furniture and fixtures............................ 5 years
Leasehold improvements............................ 3-10 years
(f) Long-Lived Assets
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 by 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 Company adopted SFAS No. 144 on January 1, 2002.
Prior to January 1, 2002, the Company accounted for long-lived assets in
accordance with the provisions of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 121
required that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Long-lived assets acquired
as part of a business combination accounted for using the purchase method were
evaluated along with the allocated goodwill in the determination of
recoverability. Goodwill was allocated based on the proportion of the fair value
of the long-lived assets acquired to the purchase price of the business
acquired. Recoverability of assets, including allocated goodwill, to be held and
used was determined by a comparison of the carrying amount of those assets to
the undiscounted future operating cash flows expected to be generated by those
assets. If the carrying value of such assets was greater than the sum of the
estimated future undiscounted operating cash flows, then impairment was measured
based upon the fair value of the assets.
F-7
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(g) Cumulative Effect of Change in Accounting Principle
Effective January 1, 2002, the Company adopted 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.
Prior to January 1, 2002, goodwill was amortized on a straight-line basis
over the expected periods to be benefited, generally 40 years. The Company
considered 40 years as a reasonable life for goodwill in light of
characteristics of the towing and transport industry, such as the lack of
dependence on technological change, the many years that the industry has been in
existence, the current trend towards outsourcing and the stable nature of the
customer base. In addition, the Company had acquired well established businesses
that had generally been in existence for many years. The Company performed the
analysis of the recoverability of goodwill using a cash flow approach consistent
with the Company's analysis of impairment of long-lived assets under SFAS No.
121. This approach considered the estimated undiscounted future operating cash
flows of the Company. The amount of goodwill impairment, if any, was measured on
estimated fair value based on the best information available. The Company
generally estimated fair value by discounting estimated future cash flows using
a discount rate reflecting the Company's average cost of funds.
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 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 for the
years ended December 31, 2002, 2001 and 2000 adjusted for the cumulative effect
of a change in accounting principle upon adoption of SFAS No. 142.
Year ended December 31,
2002 2001 2000
---- ---- ----
Reported net loss .................................................. $ (84,652) (13,659) (158,932)
Amortization of goodwill, net of tax ............................... - 1,753 3,322
Cumulative effect of change in accounting principle ................ 43,364 - -
---------- -------- ---------
Adjusted net loss .................................................. $ (41,288) (11,906) (155,610)
========== ======== =========
Loss per share:
Reported net loss .................................................. $ (40.57) (6.52) (81.95)
Amortization of goodwill, net of tax ............................... - 0.84 1.71
Cumulative effect of change in accounting principle ................ 20.78 - -
---------- -------- ---------
Adjusted loss per share ............................................ $ (19.79) (5.68) (80.24)
========== ======== =========
F-8
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(h) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and tax loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered in
income in the period that includes the enactment date. Deferred tax assets and
liabilities are subject to valuation allowances based upon managements estimate
of the realizability.
(i) Stock-Based Compensation
The Company applies the intrinsic value-based method of accounting
prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations, in accounting for its fixed plan stock options. As
such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price.
Under SFAS No. 123, "Accounting for Stock Based Compensation", compensation
cost for stock option grants would be based on the fair value at the grant date,
and the resulting compensation expense would be shown as an expense on the
consolidated statements of operations. As allowed by SFAS No. 123, the Company
has elected to continue to apply the intrinsic value-based method of accounting
described above, and has adopted the disclosure requirements of SFAS No. 123.
Had compensation cost for these plans been determined consistent with SFAS No.
123, the Company's pro forma net loss and loss per share for the years ended
December 31, 2002, 2001 and 2000 would have resulted in the following pro forma
amounts:
2002 2001 2000
---- ---- ----
Net loss: as reported $ (84,652) (13,659) (158,932)
Add: Stock-based employee compensation expense included in reported
net loss -- -- --
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards (35) (290) (6,399)
--------- -------- ---------
Pro forma net loss $ (84,687) (13,949) (165,331)
========= ======== =========
Loss per share:
Basic and diluted - as reported $ (40.57) (6.52) (81.95)
========= ======== =========
Basic and diluted - pro forma $ (40.59) (6.65) (84.56)
========= ======== =========
The per share weighted-average fair values of stock options granted during
2002, 2001 and 2000 were determined using the Black-Scholes option-pricing model
with the following weighted average assumptions: (i) risk-free interest rate of
approximately 1.2%, 1.7% and 5.8%, respectively, (ii) expected life of 7, 8 and
8 years, respectively, (iii) volatility of approximately, 138%, 145% and 127%,
respectively, and (iv) expected dividend yield of 0%. The effects of applying
SFAS No. 123 in the pro forma disclosure may not be indicative of future amounts
as additional awards in future years are anticipated.
(j) Per Share Amounts
Basic earnings per share excludes dilution and is computed by dividing
income (loss) available to common stockholders 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 were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the Company
(such as stock options and warrants).
F-9
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
The effect of options, warrants, convertible preferred stock, earnout
shares and holdback shares have been excluded at December 31, 2002, 2001 and
2000, as the effect would be antidilutive. Additionally, shares issuable upon
conversion of the convertible subordinated debentures have been excluded at
December 31, 2002, 2001 and 2000, as the effect would be antidilutive due to the
adjustment (decrease in net loss) for interest expense.
At December 31, 2002, the Company had outstanding preferred stock
convertible into 6,221,190 shares of common stock, stock options exercisable to
purchase 291,538 shares of common stock, warrants exercisable to purchase 48,030
shares of common stock and subordinated debentures convertible into 684,002
shares of common stock. At December 31, 2001, 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 613,913 shares of common stock. At December 31, 2000, 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 583,787 shares of common stock.
(k) Advertising Costs
Advertising costs are expensed as incurred and amounted to $1,694, $1,555
and $1,342 in 2002, 2001 and 2000, respectively.
(l) 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 consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America. Actual results could differ from those estimates.
(m) Concentrations of Credit Risk
The financial instruments which potentially subject the Company to credit
risk consist primarily of cash, cash equivalents, and trade receivables.
The Company maintains cash and cash equivalents with various financial
institutions. Cash equivalents include investments in money market securities
and certificates of deposit. At times, such amounts may exceed the Federal
Deposit Insurance Corporation limits. The Company attempts to limit the amount
of credit exposure with any one financial institution and believes that no
significant concentration of credit risk exists with respect to cash
investments.
Concentrations of credit risk with respect to receivables are limited due
to the wide variety of customers and markets in which the Company's services are
provided, as well as their dispersion across many different geographic areas. To
mitigate credit risk, the Company applies credit approvals and credit limits,
and performs ongoing evaluations of its customers' financial condition. At
December 31, 2002 and 2001, the City of Chicago owed the Company $2,562 and
$3,503, respectively, or 19% and 17% of total trade receivables, respectively.
No other customer accounted for greater than 10% of trade receivables at
December 31, 2002 and 2001.
(n) Impact of Recently Issued Accounting Standards
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses accounting for
restructuring and similar costs. SFAS No. 146 nullifies previous accounting
guidance, principally EITF Issue No. 94-3. SFAS No. 146 requires that the
liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF Issue No. 94-3, a liability for an
exit cost was recognized at the date of the Company's commitment to an exit
plan. SFAS No. 146 also
F-10
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
establishes that the liability should initially be measured and recorded at fair
value. Accordingly, SFAS No. 146 may affect the timing of recognizing future
restructuring costs as well as the amounts recognized. The Company is required
to adopt the provisions of SFAS No. 146 for exit or disposal activities
initiated after December 31, 2002.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57, and 107 and a rescission of FASB Interpretation No. 34" ("FIN 45"). This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of FIN
45 are applicable to guarantees issued or modified after December 31, 2002 and
the disclosure requirements are effective for financial statement periods ending
after December 15, 2002. To date, the Company has not entered into any
transactions whereby it has guaranteed, either directly or indirectly, any
indebtedness. Management anticipates that the adoption of this Interpretation
will not have a material effect on the Company's consolidated financial
statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123", to provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation.
Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both the annual and interim financial
statements. Certain of the disclosure modifications are required for fiscal
years ending after December 15, 2002 and have been included in the notes to the
consolidated financial statements.
(o) Reclassifications
Certain reclassifications of the prior year consolidated financial
statements have been made to conform to current year presentation.
(2) Liquidity
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As discussed in
note 8(a), in July 2000, the Company entered into a new revolving credit
agreement. Under the structure of this agreement, all cash receipts are to be
forwarded to the lending institution to pay down the revolver balance and all
working capital and capital expenditure needs are funded through daily
borrowings. This type of arrangement is required to be classified as a current
liability in the Company's consolidated balance sheet. At December 31, 2002 the
Company's outstanding indebtedness associated with its convertible subordinated
debentures is reflected as a current liability because of the Company's
non-compliance with certain covenants associated with the revolving credit
facility. As a result of this classification, current liabilities exceed current
assets by $138,744 at December 31, 2002. The revolver balance is secured by all
the assets of the Company and the borrowing capacity is based on the value of
certain vehicles and accounts receivable. At December 31, 2002, the Company had
a borrowing capacity of $55,810, $42,828 of which related to vehicles and
$12,982 of which related to accounts receivable. At December 31, 2002, $35,352
was outstanding under the revolving credit facility, excluding letters of credit
of $13,758, and an additional $6,700 was available for borrowing.
During the year ended December 31, 2002, the Company incurred a loss from
operations of $29,351 and a net loss of $84,652, and as of December 31, 2002,
had an accumulated deficit of $286,580 and a stockholders' deficit of $69,069.
During the year ended December 31, 2001, the Company incurred a loss from
operations of $5,166 and a net loss of $13,659, and as of December 31, 2001, had
an accumulated deficit of $200,289 and net stockholders' equity of $17,222. The
significant component of the net loss in 2002 consisted of the cumulative effect
of a change in accounting principle, as discussed in note 1(g), relating to the
write-off of the recorded value of long-lived assets,
F-11
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
specifically goodwill. For the year ended December 31, 2002, the Company
generated positive operating cash flow of $12,209, as compared to $1,310 and
$5,859 for the years ended December 31, 2001 and 2000, respectively.
During the past three years, the Company has experienced, and may continue
to experience, a reduced level of operating cash flow. While Management
continues to explore opportunities to improve the Company's liquidity, through,
among other things, the divestiture of certain operating divisions, the closure
or divestiture of unprofitable divisions, consolidation of operating locations,
reduction of operating costs and the marketing of towing and transport services
to new customers in strategic market locations, there can be no assurance that
such efforts will be successful in improving the Company's cash flow. The
Company's cash flow may continue to decrease as a result of a number of factors
relating to the Company's operations, including a decrease in demand for the
Company's transport and/or towing services, the Company's inability to reduce
its costs or improve the profitability of its operating divisions, increased
fuel, insurance or other costs of operations and increased expenditures required
by changes in applicable regulations. In addition, the Company's inability to
meet the financial or other covenants contained in the revolving credit
facility, or decreases in the net orderly liquidation value of the Company's
vehicles, could result in limitations on the Company's borrowing ability, which
would negatively affect the Company's cash flow. The Company's ability to meet
the financial covenants contained in the revolving credit facility is directly
related to the Company's operating performance, and therefore could be affected
by the factors relating to the Company's operations described elsewhere herein.
Unless it is successful in improving its cash flow from operations, the Company
may not be able to fund its working capital needs and thus may not be able to
continue as an going concern or invest in its longer-term growth strategy. In
the event that the Company is not able to fund its liquidity needs from cash
flow from operations and/or borrowings under its credit facility, it would be
necessary for the Company to raise additional capital, through the issuance of
debt or equity securities, refinancing of its debt or sales of assets,
which may not be possible on satisfactory terms, or at all.
(3) Goodwill and Long-Lived Assets
The changes in the carrying amount of goodwill for the year ended December
31, 2002, are as follows:
Transport Towing Total
--------- ------ -----
Balance as of December 31, 2001.................................. $ 37,269 38,313 75,582
Cumulative effect of change in accounting principle.............. (25,354) (18,010) (43,364)
Impairment losses................................................ (11,915) (16,690) (28,605)
-------- --------- --------
Balance as of December 31, 2002.................................. $ -- 3,613 3,613
======== ========= ========
The Company periodically reviews the recorded value of its long-lived
assets to determine if the carrying amount of those assets may not be
recoverable based upon the future operating cash flows expected to be generated
by those assets. Upon adoption of SFAS No. 142, and as noted in note 1(g), the
Company wrote-off goodwill in the amount of $43,364 as the cumulative effect of
a change in accounting principle.
During the fourth quarter of 2002, the Company recorded a non-cash
impairment charge of $28,605 related to goodwill. The impairment charge recorded
under SFAS No. 142 included impairment charges of $11,915 related to the
recoverability of goodwill at the Company's transport divisions and $16,690
related to the recoverability of goodwill at the Company's towing divisions. The
impairment charge was recognized when it became evident that the estimated fair
values of the reportable segments was insufficient to recover their related
carrying values. This impairment charge resulted from operating profits and cash
flows being lower than expected during the second half of 2002. Based on this
trend, the earnings forecasts of the Company have been revised and the carrying
values were written down to the Company's estimates of fair value.
During the fourth quarter of 2001, the Company performed a review of the
Company's long-lived assets and determined that the future undiscounted
operating cash flows supported the carrying value of these assets. Accordingly,
no impairment charge was recorded in 2001.
F-12
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
In accordance with SFAS No. 121, during the second quarter of 2000, the
Company recorded a non-cash impairment charge of $11,445 related to the
write-down of a portion of certain recorded asset values, including allocated
goodwill. The impairment charge recorded under SFAS No. 121 included impairment
expenses of $2,526 on the recorded value of vehicles and equipment at several of
the Company's transport divisions and $2,105 on the recorded value of vehicles
and equipment at several of the Company's towing divisions and impairment
charges of $2,909 on the recoverability of allocated goodwill at several of the
Company's transport divisions and $3,905 on the recoverability of allocated
goodwill at several of the Company's towing divisions. The impairment charge was
recognized when the future undiscounted cash flows of these divisions were
estimated to be insufficient to recover their related carrying values. As such,
the carrying values of these assets were written down to the Company's estimates
of fair value. Additionally, in connection with its analysis of the
recoverability of goodwill, the Company recorded an impairment charge of
$118,010. This non-cash impairment charge included $75,716 related to the
recoverability of goodwill at the Company's transport divisions and $42,294
related to the recoverability of goodwill at the Company's towing divisions.
(4) Stockholders' Equity
Common Stock
At various dates during 2001, an additional 10,545 shares of common stock
were issued as consideration for certain 1998 acquisitions. These shares
represented withheld purchase price that was based upon the achievement of
certain financial ratios, or other contingencies, by certain acquired companies
after a contractually defined period of time as discussed in note 13(a). The
recorded consideration for these issuances and cancellations was $4. Also in
2001, 15,722 shares of common stock previously issued as earnout consideration
were cancelled resulting in a $52 reduction of additional paid-in capital.
At various dates during 2000, an additional 17,455 shares of common stock
were issued as additional consideration for certain 1999 acquisitions. These
shares represented the withheld purchase price that was released based upon the
achievement of certain financial ratios, or other contingencies, by certain
acquired companies after a contractually defined period of time. The recorded
consideration for these issuances was $2,885.
On July 20, 2000, the Company issued 183,922 shares of Common Stock as
consideration for a $750 closing fee pursuant to an Amended and Restated
Purchase Agreement relating to a restructuring of the convertible subordinated
debentures (see note 8(b)).
On May 4, 2000, the Company effected a one-for-ten reverse stock split for
all outstanding common shares. All share and per-share amounts in the
accompanying consolidated financial statements and related notes have been
restated to give effect to the 2000 reverse stock split.
On January 1, 2000, 3,077 shares of the Company's common stock,
representing a fair value of $50, were granted to the Company's Chief Executive
Officer, as required under his employment agreement. On May 15, 2000, 127,868
shares of common stock were issued as earnout payments to the former owners of
certain Founding Companies. These earnout payments were based on the achievement
of certain net revenue targets (see note 13(a)).
Preferred Stock
On July 20, 2000, the Company sold 613,073.27 shares of its Series A
Participating Convertible Preferred Stock, par value $.001 per share (the
"Series A Preferred Stock") to Blue Truck Acquisition, LLC a Delaware limited
liability company ("Blue Truck") which is controlled by KPS Special Situations
Fund, L.P. ("KPS"), for $25, 000 in cash consideration (the "KPS Transaction").
In addition, on July 20, 2000, the Company sold 49,045.86 shares of its Series A
Preferred Stock to CFE, Inc. ("CFE"), an affiliate of General Electric Capital
Corporation ("GE Capital") for $2,000 in cash consideration (the "CFE
Transaction"). If Blue Truck and CFE had converted all
F-13
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
of their Series A Participating Convertible Preferred Stock into common stock on
July 20, 2000, they would have held 70.4% and 5.6% of the Company's common
stock, respectively, as of such date.
Holders of the Series A Preferred Stock are entitled to vote together with
the holders of the Company's Common Stock as a single class on matters submitted
to the Company's stockholders for a vote (other than with respect to certain
elections of directors). The holder of each share of Series A Preferred Stock is
entitled to the number of votes equal to the number of full shares of Common
Stock into which such share of Series A Preferred Stock could be converted on
the record date for such vote. The holders of Series A Preferred Stock have the
right to designate and elect six members of the Company's Board of Directors,
which constitutes a majority, for so long as Blue Truck and its permitted
transferees continue to own specified amounts of Series A Preferred Stock. At
lower levels of ownership, the holders of Series A Preferred Stock will be
entitled to appoint three directors, one director, or no directors, depending
upon the amount of Series A Preferred Stock then held by Blue Truck and its
permitted transferees, as set forth in the Investors' Agreement relating to the
KPS Transaction.
Prior to July 20, 2008, holders of the outstanding Series A Preferred Stock
are entitled to receive cumulative dividends on the Series A Preferred Stock
each quarter at the rate per annum of (i) 5.5% until July 20, 2006, and (ii)
5.0% thereafter, of the Series A Preferred Base Liquidation Amount (as defined
below) per share of Series A Preferred Stock. The "Series A Preferred Base
Liquidation Amount" is equal to the purchase price per share of the Series A
Preferred Stock ($40.778), subject to certain adjustments. The dividends are
payable in cash at the end of each quarter or, at the election of the Company,
will cumulate to the extent unpaid. In the event that the Company elects to
cumulate such dividends, dividends also accrue on the amount cumulated at the
same rate. Once the election to cumulate a dividend has been made, the Company
may no longer pay such dividend in cash, other than in connection with a
liquidation, dissolution or winding up of the Company. In addition, holders of
the Series A Preferred Stock are entitled to participate in all dividends
payable to holders of the Common Stock. The Company's obligation to pay
dividends terminates on July 20, 2008, or earlier if the Company's Common Stock
trades above a specified price level. At December 31, 2002 and 2001, the Company
had recorded $3,854 and $2,215, respectively within other long-term liabilities
on the accompanying consolidated balance sheet representing dividends payable to
the holders of the Series A Preferred Stock.
Each share of Series A Preferred Stock is convertible at any time by its
holder into a number of shares of Common Stock equal to the sum of (i) the
quotient obtained by dividing (x) the Series A Preferred Base Liquidation Amount
by (y) the conversion price per share for the Series A Preferred Stock
(currently $4.0778, subject to certain adjustments) (the "Conversion Price")
plus (ii) the quotient obtained by dividing (x) the amount, if any, by which the
Series A Preferred Liquidation Preference Amount (as defined below) that has
accrued at any time prior to July 20, 2005 exceeds the Series A Preferred Base
Liquidation Amount by (y) the product of the Conversion Price and 0.85. The
"Series A Preferred Liquidation Preference Amount" is the sum of the Series A
Preferred Base Liquidation Amount and the amount of any and all unpaid dividends
on the Series A Preferred Stock. The Series A Preferred Stock automatically
converts into Common Stock upon the occurrence of certain business combinations,
unless the holders elect to exercise their liquidation preference rights.
Stock Option Plans
During 1998, the United Road Services, Inc. 1998 Stock Option Plan was
adopted by the Company. Under the plan, options to purchase common stock may be
granted to directors, executive officers, key employees and consultants of the
Company. The maximum number of shares of common stock that may be subject to
options granted under the plan may not exceed, in the aggregate, 127,885 shares.
Shares of common stock that are attributable to grants that have expired or been
terminated, cancelled or forfeited are available for issuance in connection with
future grants. Stock options expire after ten years from the date granted and
are generally exercisable in one-third increments per year beginning one year
from the date of grant. Outstanding options may be canceled and reissued under
terms specified in the plan.
On September 23, 1998, the United Road Services, Inc. 1998 Non-Qualified
Stock Option Plan was adopted by the Company. Under the plan, options to
purchase common stock may be granted to key employees and consultants
F-14
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
who are neither directors nor executive officers of the Company. The maximum
number of shares of common stock that may be subject to options granted under
the plan may not exceed, in the aggregate, 50,000 shares. Shares of common stock
that are attributable to grants that have expired or been terminated, cancelled
or forfeited are available for issuance in connection with future grants. Stock
options expire after ten years from the date granted and are generally
exercisable in one-third increments per year beginning one year from the date of
grant. Outstanding options may be canceled and reissued under terms specified in
the plan.
On October 11, 1999, 75,000 options to purchase common stock were granted
to the Company's Chief Executive Officer under an executive option agreement.
The stock options expire after ten years from the date granted and are
exercisable in one-third increments per year beginning one year from the date of
grant.
The following table summarizes activity under the Company's stock option
plans:
Year ended December 31, 2002
Number of Weighted-average
shares exercise price
--------- ----------------
Options outstanding at beginning of year........................... 300,913 $ 41.20
Granted............................................................ 2,000 0.15
Forfeited.......................................................... 11,375 113.91
--------
Options outstanding at end of year................................. 291,538 37.24
========
Options exercisable at December 31, 2002........................... 235,691
========
Weighted-average fair value of options granted during the
year .......................................................... 0.15
Year ended December 31, 2001
Number of Weighted-average
shares exercise price
--------- ----------------
Options outstanding at beginning of year........................... 314,443 $ 45.19
Granted............................................................ 2,000 0.29
Forfeited.......................................................... 15,530 126.20
--------
Options outstanding at end of year................................. 300,913 41.20
========
Options exercisable at December 31, 2001........................... 191,717
========
Weighted-average fair value of options granted during the
year........................................................... 0.29
Year ended December 31, 2000
Number of Weighted-average
shares exercise price
--------- ----------------
Options outstanding at beginning of year..................... 197,935 $ 77.05
Granted...................................................... 258,810 28.93
Forfeited.................................................... 142,302 62.74
--------
Options outstanding at end of year........................... 314,443 45.19
========
Options exercisable at December 31, 2000..................... 120,048
========
Weighted-average fair value of options granted during the
year..................................................... 6.87
F-15
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
The following table summarizes information about stock options outstanding
as of December 31, 2002:
Options outstanding
---------------------------------------------------------------------------------
Weighted-average
Range of Number Weighted-average Remaining
exercise prices outstanding exercise price Contractual life
--------------- ----------- -------------- ----------------
$ 0.15-10.00 89,682 $ 4.15 7.55 years
10.01-30.00 122,385 18.31 7.52 years
30.01-100.00 47,806 78.58 5.81 years
100.01-230.00 31,665 149.56 5.98 years
---------
291,538
=========
Following are the shares of common stock reserved for issuance and the
related exercise prices for the outstanding stock options, convertible
subordinated debentures and warrants at December 31, 2002:
Number of Exercise price
Shares Per share
--------- --------------
1998 Stock Option Plan................................... 181,408 $3.00-201.25
1998 Non-Qualified Stock Option Plan..................... 35,130 0.15-180.00
Executive option agreement............................... 75,000 3.00-29.06
Convertible subordinated debentures...................... 684,002 150.00
Warrants................................................. 48,030 30.29
----------
Shares reserved for issuance........................ 1,023,570
==========
(5) Vehicles and Equipment
Vehicles and equipment at December 31, 2002 and 2001 consisted of the
following:
2002 2001
-------- --------
Transportation and towing equipment......................... $ 89,499 79,770
Machinery and other equipment............................... 1,936 1,709
Computer software and related equipment..................... 10,265 10,053
Furniture and fixtures...................................... 1,267 1,129
Leasehold improvements...................................... 2,388 2,246
-------- --------
105,355 94,907
Less accumulated depreciation and amortization.............. (38,831) (28,796)
-------- --------
$ 67,524 66,111
======== ========
Depreciation and amortization expense of vehicles and equipment was
$11,020, $10,032 and $10,163 in 2002, 2001 and 2000, respectively.
Included in vehicles and equipment at December 31, 2002 and 2001 are costs
of $705 and $627, respectively, and accumulated amortization of $252 and $195,
respectively, relating to certain transport and towing equipment recorded as
capital leases. Amortization expense of $93, $80 and $100 relating to transport
and towing equipment capital leases was included in depreciation and
amortization expense for the years ended December 31, 2002, 2001 and 2000,
respectively.
F-16
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(6) Deferred Financing Costs
Deferred financing costs at December 31, 2002 and 2001 were associated with
the Company's revolving credit facilities and the convertible subordinated
debentures, and consisted of the following:
2002 2001
--------- ---------
GE Capital credit facility, net of accumulated amortization
of $1,859 and $790 in 2002 and 2001, respectively.................... $ 1,198 2,267
Convertible subordinated debentures, net of accumulated amortization
of $1,487 and $1,164 in 2002 and 2001, respectively................... 2,210 2,533
------- --------
$ 3,408 4,800
======= ========
As discussed in note 8(a), as a result of the reduction in maximum
borrowing capacity under the GE Capital Credit Facility in September 2002, the
Company recorded a write-off of previously recorded deferred financing costs in
the amount of $438. This amount was included in interest expense in the
consolidated statement of operations for the year ended December 31, 2002.
During 2000, the Company entered into a revolving credit facility with a
group of banks led by GE Capital and repaid and terminated its Bank of America
credit facility. As a result of this transaction, the Company recorded a
write-off of deferred financing costs of $415 related to the Bank of America
credit facility and recorded deferred financing costs of $2,842 related to the
GE Capital credit facility.
(7) Accrued Expenses
Accrued expenses at December 31, 2002 and 2001 consisted of the following:
2002 2001
------- --------
Accrued payroll and related costs............................... $ 3,236 4,696
Accrued insurance............................................... 6,958 5,095
Other accrued liabilities....................................... 2,692 1,480
------- --------
$12,886 11,271
======= ========
In June 2002, the Company renewed its property and casualty insurance
programs and funded this renewal through a premium financing arrangement
requiring a payment of $1,400 at signing and $3,200 over the succeeding nine
months. At December 31, 2002, the Company has recorded prepaid insurance of $724
and accrued expenses and other current liabilities of $1,805 related to this
arrangement.
(8) Debt
Debt obligations at December 31, 2002 and 2001 consisted of the following:
2002 2001
-------- ---------
GE Capital credit facility, interest at the Index rate, as
defined (8.1% at December 31, 2002), secured by
substantially all of the assets of the Company (a)........... $ 35,352 37,436
Convertible subordinated debentures bearing interest at 8%
annually, maturing in 2008 (b).................................. 102,600 94,787
-------- ---------
Total debt obligations....................................... $137,952 132,223
======== =========
(a) Revolving Credit Facility
On July 20, 2000, the Company and its subsidiaries entered into a revolving
credit facility with a group of banks for which GE Capital acts as agent. On the
same date, the Company terminated its prior credit facility and repaid all
amounts outstanding thereunder.
F-17
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
The revolving credit facility has a term of five years. In September 2002,
as provided in the GE Capital Credit Facility, the Company exercised the option
to reduce the amount of maximum borrowing capacity under the GE Capital Credit
Facility from $100,000 to $75,000. The facility includes a letter of credit
subfacility of up to $15,000. 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
December 31, 2002, approximately $35,352 was outstanding under the revolving
credit facility (excluding letters of credit of $13,758) and an additional
$6,700 was available for borrowing.
Interest accrues on amounts borrowed under the revolving credit facility,
at the Company's option, at either the Index Rate (as defined in the credit
facility) plus an applicable margin or the reserve adjusted LIBOR Rate (as
defined in the credit facility) plus an applicable margin. The effective
interest rate under the GE Capital Credit Facility for the year ended December
31, 2002 was 8.1%. 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 obligations of the Company and its subsidiaries under the revolving
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 earnings before interest, taxes, depreciation and amortization
("EBITDA"), minimum ratios of EBITDA to fixed charges and minimum levels of
liquidity. The revolving credit facility also contains covenants requiring the
Company, among other things and subject to specified exceptions, to (a) make
certain prepayments against principal, (b) maintain specified cash management
systems, (c) maintain specified insurance protection, (d) refrain from
commercial transactions, management agreements, service agreements and borrowing
transactions with certain related parties, (e) refrain from making payments of
cash dividends and other distributions to equity holders, payments in respect of
subordinated debt, payments of management fees to certain affiliates and
redemption of capital stock, (f) refrain from mergers, acquisitions or sales of
capital stock or a substantial portion of the assets of the Company or its
subsidiaries, and (g) refrain from direct or indirect changes in control. The
Company's inability to meet the financial or other covenants contained in the
revolving credit facility, or decreases in the net orderly liquidation value of
the Company's vehicles, could result in limitations on the Company's borrowing
ability, which would negatively affect the Company's cash flow. The Company's
ability to meet the financial covenants contained in the revolving credit
facility is directly related to the Company's operating performance, and
therefore could be affected by the factors relating to the Company's operations
described above.
The revolving credit facility also contains covenants requiring the
Company, among other things and subject to specified exceptions, to (a) make
certain prepayments against principal, (b) maintain specified cash management
systems, (c) maintain specified insurance protection, (d) refrain from
commercial transactions, management agreements, service agreements and borrowing
transactions with certain related parties, (e) refrain from making payments of
cash dividends and other distributions to equity holders, payments in respect of
subordinated debt, payments of management fees to certain affiliates and
redemption of capital stock, (f) refrain from mergers, acquisitions or sales of
capital stock or a substantial portion of the assets of the Company or its
subsidiaries, and (g) refrain from direct or indirect changes in control.
F-18
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
On February 14, 2002, the Company entered into an amendment to the
revolving credit facility under which the banks waived certain 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 reduced the minimum required
levels of EBITDA and 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 increased the maximum amount of
annual operating lease payments the Company and its subsidiaries may make in
fiscal years 2002 through 2004. In October 2002, 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 covenants in the revolving credit facility for
the nine months ended September 30, 2002. On November 13, 2002, the Company
entered into an amendment to the credit facility under which the banks waived
the financial covenant violations.
In December 2002, the Company notified its banks that the Company would
fail to meet the minimum level of EBITDA and minimum ratio of EBITDA to fixed
charges covenants in the credit facility for the period ended December 31, 2002.
Although, the Company intends to request a waiver of such violations from its
bank group, there will be no assurance that such waiver will be granted. The
failure by the Company to obtain a waiver would result in an immediate
obligation to repay all amounts outstanding under the credit facility. In such
event, it would be necessary for the Company to raise additional capital,
through the issuance of debt or equity securities, refinancing of its bank debt
or sale of assets, which may not be possible on satisfactory terms, or at all.
If the banks were to accelerate repayment of amounts due under the credit
facility, it would cause a default under the debentures issued to Charter 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 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. If a waiver is granted, the Company may be required to enter
into an amendment to the credit facility which contains more stringent
conditions on the Company's borrowing capability or its activities or requires
the Company to pay substantial fees to the banks.
(b) Convertible Subordinated Debentures
On July 20, 2000, in connection with the KPS Transaction, the Company
cancelled all of the 1998 Debentures issued to Charterhouse pursuant to the
Purchase Agreement entered into between Charterhouse and the Company in November
1998, an in lieu thereof, issued to Charterhouse $84,500 aggregate principal
amount of new Debentures (the "Debentures") which aggregate principal amount was
equal to the aggregate principal amount of the 1998 Debentures then outstanding
plus accrued interest thereon to July 20, 2000. In connection with this
transaction, Charterhouse waived its right to require the Company to redeem the
1998 Debentures at 106.5% of the aggregate principal amount of the 1998
Debentures upon consummation of the KPS Transaction and waived certain corporate
governance rights that existed under its Investor's Agreement with the Company.
In addition, the Company paid Charterhouse a closing fee of 183,922 shares of
Common Stock, and reimbursed Charterhouse for its fees and expenses incurred in
connection with the transaction, which totaled approximately $200.
The Debentures are convertible into Common Stock at any time, at
Charterhouse's option, at an initial exercise price of $150.00 per share,
subject to adjustment as provided in the Amended and Restated Purchase Agreement
entered into between the Company and Charterhouse (the "Amended Charterhouse
Purchase Agreement"). Under the Amended Charterhouse Purchase Agreement, the
Debentures are redeemable at par plus accrued interest under certain
circumstances. The Debentures bear interest at a rate of 8% annually, payable in
kind for the first five years following issuance, and thereafter either in kind
or in cash, at the Company's discretion. As of December 31, 2002, $102,600 of
Debentures were outstanding. For the years ended December 31, 2002, 2001 and
2000, the Company recorded $8,136, $7,592 and $7,643 in interest expense,
closing fees and the amortization of deferred financing costs related to the
Debentures, respectively.
As discussed in Note 2, at December 31, 2002 the Company's outstanding
indebtedness
F-19
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
associated with the Debentures is reflected as a current liability because of
the Company's previously noted noncompliance with certain covenants associated
with the revolving credit facility.
(9) Leases
The Company leases both facilities and equipment used in its operations and
classifies those leases as either operating or capital leases following the
provisions of SFAS No. 13, "Accounting for Leases". Concurrent with certain
acquisitions, the Company entered into various noncancelable agreements with the
former owners/shareholders of the companies acquired to lease facilities used in
the acquired companies' operations. The terms of the Company's operating leases
range from one to twenty years and certain lease agreements provide for price
escalations. Rent expense incurred by the Company was $8,437, $8,425 and $9,067
for the years ended December 31, 2002, 2001, and 2000, respectively. Included
within rent expense was $2,240, $2,485 and $2,720 for the years ended December
31, 2002, 2001 and 2000, respectively, that was paid to the former
owners/shareholders.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of December 31, 2002 were as follows:
Operating Leases
-------------------------------------
Capital lease
Year ending December 31, obligations Related Party Other Total
------------------------ ------------- -------------- --------- ---------
2003........................................... $ 93 1,556 4,106 5,662
2004........................................... 57 499 3,400 3,899
2005........................................... 41 357 2,498 2,855
2006........................................... -- 263 872 1,135
2007........................................... -- 118 323 441
Thereafter..................................... -- 1,360 2 1,362
------------- -------------- --------- ---------
Future minimum lease payments.................. 191 4,153 11,201 15,354
Less: imputed interest......................... (35) ============== ========= =========
-------------
Present value of minimum lease payments........ $ 156
=============
(10) Income Taxes
Income tax expense (benefit) at December 31, 2002, 2001 and 2000 consisted
of the following:
2002 2001 2000
---------- ---------- ----------
Current:
Federal...................................... $ -- -- (113)
State........................................ 171 298 1,254
---------- ---------- ----------
171 298 1,141
---------- ---------- ----------
Deferred:
Federal...................................... 97 (3,128) 635
State........................................ 8 (243) 70
---------- ---------- ----------
105 (3,371) 705
---------- ---------- ----------
$ 276 (3,073) 1,846
========== ========== ==========
F-20
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
The following table reconciles the expected tax benefit at the Federal
statutory rate to the effective tax rate for the years ended December 31, 2002,
2001 and 2000:
2002 2001 2000
------------------ ------------------ ------------------
Amount % Amount % Amount %
-------- ------- -------- ------ --------- -----
Expected tax benefit at statutory rate..... $(28,688) (34.0)% $ (5,690) (34.0)% $ (56,045) (34.0)
State taxes, net of federal benefit........ 178 0.2 54 0.3 1,310 0.7
Non-deductible goodwill.................... - - 417 2.5 902 0.6
Impairment of non-deductible goodwill...... 13,687 16.2 - - 38,914 23.6
Net operating losses limited under
IRC Section 382........................ - - - - 13,473 8.2
Valuation allowance........................ 14,884 17.6 1,643 9.8 3,414 2.1
Adjustment to opening deferred tax
balance.................................. 77 0.1 381 2.3 - -
Other...................................... 138 0.2 122 0.7 (122) (0.1)
-------- ------- -------- ------ --------- -----
$ 276 0.3% $ (3,073) (18.4)% $ (1,846) (1.1)%
======== ======== ======== ====== ========= =====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities were as follows
at December 31, 2002 and 2001:
2002 2001
---------- ----------
Deferred tax assets:
Accounts receivable, due to allowance for doubtful accounts................... $ 350 582
Non-deductible accruals....................................................... 2,382 1,426
Intangible assets............................................................. 45 67
Goodwill /acquisition costs................................................... 12,914 2,674
Net operating loss carryforwards.............................................. 21,282 15,087
Other, net.................................................................... 199 410
---------- ----------
Total gross deferred tax assets............................................. 37,172 20,246
Less valuation allowance.................................................... (21,491) (5,451)
---------- ----------
15,681 14,795
Deferred tax liabilities:
Vehicles and equipment, due to differences in
depreciation lives and methods............................................... (14,777) (13,640)
Computer software, due to differences in amortization lives and methods....... (989) (989)
Other taxable temporary differences, due to differences in basis of
accounting for companies acquired............................................ -- (166)
---------- ----------
Total gross deferred tax liabilities........................................ (15,766) (14,795)
---------- ----------
Net deferred tax liability.................................................. $ (85) --
========== ==========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income and the taxable income in
the two previous tax years to which tax loss carryback can be applied.
Management considers the scheduled reversal of deferred tax liabilities,
projected future income, taxable income in the carryback period and tax planning
strategies in making this assessment. Management has recorded an increase in the
valuation allowance with respect to the future tax benefits and the net
operating loss reflected as a deferred tax asset in the amount of $16,040 and
$1,771 during the years ended December 31, 2002 and 2001, respectively, due to
the uncertainty of their ultimate realization.
Under Section 382 of the Internal Revenue Code, the use of loss
carryforwards may be limited if a change in ownership of the Company occurs. The
KPS Transaction constituted an ownership change under IRC Section 382 and
resulted in the 100% limitation of net operating loss carryforwards amounting to
$35,909 generated from the Company's inception through July 20, 2000, the date
of the KPS Transaction.
F-21
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
For the period July 20, 2000 through December 31, 2002 the Company has
generated net operating loss carryforwards of $58,074. These carryforwards, if
not used, will expire as follows:
2020 $ 19,013
2021 22,105
2022 16,956
---------
$ 58,074
=========
(11) 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. 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 segment provides
towing, impounding and storing, lien sales and auto auctions of abandoned
vehicles. In addition, the Towing segment provides recovery and relocation
services for heavy-duty commercial vehicles and construction equipment.
Information regarding the company's operating segments is also described in note
1(a).
Net revenue from one customer was in excess of 10% of the Company's
consolidated net revenue for the years ended December 31, 2002, 2001 and 2000.
Net revenue generated from this customer was $25,081 (10.1% of net revenue),
$23,351 (10.3% of net revenue) and $27,817 (11.3% of net revenue) for the years
ended December 31, 2002, 2001 and 2000, respectively, and is attributable to the
Company's Transport segment.
The accounting policies of each of the segments are the same as those
described in the summary of significant accounting policies, as outlined in note
1. Management has determined that an appropriate measure of the performance of
its operating segments would be made through an evaluation of each segment's
income (loss) from operations. Accordingly, the Company's summarized financial
information regarding the Company's reportable segments is presented through
income (loss) from operations for the years ended December 31, 2002, 2001 and
2000. Intersegment revenues and transfers are not significant.
Summarized financial information for the years ended December 31, 2002,
2001 and 2000 concerning the Company's reportable segments is shown in the
following table:
Year ended December 31, 2002
Transport Towing Other Total
--------- ----------- ----- -----
Net revenue from external customers.................... $164,510 84,185 -- 248,695
Cost of revenue (including depreciation)............... 146,957 67,032 -- 213,989
Impairment charge...................................... 11,915 16,690 -- 28,605
Loss from operations................................... (9,777) (10,293) (9,281) (29,351)
Interest income........................................ 8 2 111 121
Interest expense....................................... 5 15 11,863 11,883
Total assets........................................... 59,653 30,310 7,804 97,767
Capital expenditures................................... 8,502 4,348 158 13,008
Depreciation and amortization.......................... 6,307 3,946 1,721 11,974
F-22
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Year ended December 31, 2001
Transport Towing Other Total
--------- ----------- ----- -----
Net revenue from external customers.................... $137,675 88,854 -- 226,529
Cost of revenue (including depreciation)............... 120,762 72,741 -- 193,503
Income (loss) from operations.......................... 1,967 3,303 (10,436) (5,166)
Interest income........................................ 3 1 36 40
Interest expense....................................... 12 8 11,510 11,530
Total assets........................................... 94,454 65,704 11,632 171,790
Capital expenditures................................... 4,019 3,909 161 8,089
Depreciation and amortization.......................... 6,365 4,975 1,740 13,080
Year ended December 31, 2000
Transport Towing Other Total
--------- ----------- ----- -----
Net revenue from external customers.................... $151,313 95,253 -- 246,566
Cost of revenue (including depreciation)............... 131,497 81,154 -- 212,651
Impairment charge...................................... 81,151 48,304 -- 129,455
loss from operations................................... (78,454) (50,008) (14,302) (142,764)
Interest income........................................ 11 6 267 284
Interest expense....................................... 32 20 14,182 14,234
Total assets........................................... 102,125 66,548 9,720 178,393
Capital expenditures................................... 6,139 1,611 100 7,850
Depreciation and amortization.......................... 7,637 5,594 1,537 14,768
The following are reconciliations of the information used by the chief
operating decision maker for the years ended December 31, 2002, 2001 and 2000 to
the Company's consolidated totals:
2002 2001 2000
--------- --------- --------
Reconciliation of income (loss) before income taxes:
Total profit (loss) from reportable segments............ $ (20,069) 5,270 (128,462)
Unallocated amounts:
Interest income...................................... 121 40 284
Interest expense..................................... (11,883) (11,530) (14,234)
Depreciation and amortization........................ (766) (755) (593)
Other selling, general and administrative expenses... (8,515) (9,681) (13,709)
Other expense, net................................... 103 (76) (372)
--------- ------- --------
Loss before income taxes and cumulative effect of
change in accounting principle .................. $ (41,009) (16,732) (157,086)
========= ======= ========
Reconciliation of total assets:
Total assets from reportable segments................... $ 89,963 160,158 168,673
Unallocated amounts:
Prepaid income taxes and other current assets........ 2,912 3,779 473
Vehicles and equipment, net.......................... 1,667 2,657 3,424
Deferred financing costs, net........................ 3,408 4,800 5,570
Other non-current assets............................. -- 396 253
--------- ------- --------
Total assets.................................... $ 97,950 171,790 178,393
========= ======= ========
F-23
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(12) Commitments and Contingencies
(a) Purchase Commitments
As of December 31, 2002, the Company had entered into commitments to
purchase 27 transport vehicles and 10 towing vehicles for approximately $4,681.
(b) Employment Contracts
During 2002, 2001 and 2000, the Company entered into certain employment
agreements with members of senior management, as well as previous owners or key
employees of companies acquired. Certain of these agreements represent
noncancelable contracts whereby, if the individual is discharged, severance
payments are required to be made throughout the remaining term of the agreement.
The terms of these noncancelable agreements range through 2003.
(c) Claims and Lawsuits
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 the 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 of
operations.
On October 17, 2001, David J. Floyd, the former owner of Falcon Towing and
Auto Delivery, Inc. ("Falcon") one of the businesses acquired by the Company in
connection with the Company's initial public offering, filed suit against the
Company in the United States District Court, Northern District of New York. Mr.
Floyd is a beneficial owner of greater than 5% of the Company's common stock. In
his complaint, Mr. Floyd claims that the Company failed to pay earnout payments
Mr. Floyd alleges are owed to him under the merger agreement entered into with
respect to the Falcon acquisition. The complaint seeks unspecified damages. In
November 2001, the Company filed an answer to the complaint, denying Mr. Floyd's
claims. In February 2002, the case was transferred to the United States District
Court, Southern District of New York. After close of discovery, Mr. Floyd has
asserted that his damages as of November 2002 were $328,000. The Company intends
to defend this action vigorously and does not expect the ultimate resolution of
this matter to have a material effect on the Company's consolidated financial
position or results of operations.
(d) Employee Benefit Plans
The Company maintains a 401(k) plan that enables eligible employees to
defer a portion of their income through contributions to the plan. The Company
contributed $87, $187 and $660 to the 401(k) plans during the years ended
December 31, 2002, 2001 and 2000, respectively.
(13) Related Party Transactions
(a) Earnout Payments
The Company is obligated to make certain earnout payments to the former
owners of the Founding Companies and one other acquired company. For each of the
years 1998 through 2002, the Company is required to make an earnout payment to
the former owners of each of these companies that achieves certain net revenue
targets. Upon achievement of the net revenue target for a particular year,
subsequent and equal payments will also be due for each year through 2002,
provided that the actual net revenue for the respective subsequent year exceeds
the actual net revenue for the year that the net revenue target was first
achieved. Payments are to be made in shares of the Company's stock. Total
payments shall not exceed the number of shares paid to the former owner at the
date of
F-24
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
acquisition. At December 31, 2002, former owners of three founding companies
have met their maximum payment amount. At December 31, 2002 and 2001, there was
no liability related to these earnout arrangements.
(b) Management Fee
In connection with the KPS Transaction, the Company entered into a
Management Services Agreement pursuant to which the Company is required to pay
KPS a management fee of $250 per fiscal quarter payable within 30 days after the
end of each fiscal quarter. At December 31, 2002 and 2001, the Company recorded
a liability in due to related parties on the accompanying consolidated balance
sheets in the amount of $2,000 and $1,000, respectively, representing unpaid
management fees. For the years ended December 31, 2002, 2001 and 2000, selling,
general and administrative expenses included $1,000, $1,000 and $446,
respectively, related to management fees.
(c) Employment and Consultant Agreements with Directors
The Company entered into an employment agreement, in 1998, with a director
pursuant to which the director served as a Vice President of the Company for a
term of three years, with an annual base salary of $150. In 2001 the Company
renewed this employment agreement for a period of one year. In May 2002, the
Company entered into an agreement pursuant to which the director serves a senior
advisor for a monthly rate of $1 cancelable on 30-day notice. The employment
agreement also contains covenants not to compete with the Company for one year
after the termination of the agreement.
(d) Lease Agreements
As described in note 9, concurrent with the acquisition of certain
companies, the Company entered into various agreements with former owners to
lease land and buildings used in the acquired companies' operations. In the
opinion of management, these agreements were entered into at the fair market
values of the property being leased.
(e) Employee Lease Agreement
During 2002, 2001 and 2000, the Company paid $15,244, $12,533 and $11,215,
respectively, to Translesco, Inc. ("Translesco") in connection with an agreement
whereby the Company leases employees from Translesco to provide services to one
of the divisions within the Company's Transport segment. The President of the
Company's Transport Division is the majority owner of Translesco. The Company
will continue to lease employees from Translesco until such time as the Company
determines otherwise.
(14) Financial Instruments
(a) Fair Value
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of information about the fair value of certain financial
instruments for which it is practicable to estimate that value. For purposes of
the following disclosure, the fair value of a financial instrument is the amount
at which the instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation.
The following methods and assumptions were used to estimate fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Cash Equivalents, Receivables, and Accounts Payable--The
carrying amount approximates fair value due to the short maturity of
these instruments.
F-25
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Long-term Debt--The carrying amount of the Company's bank borrowings
under its revolving credit facility approximate fair value because the
interest rates are based on floating rates identified by reference to
market rates. At December 31, 2002 and 2001, management estimates that
the fair value of the convertible subordinated debentures approximated
$96,192 and $89,067. This amount was estimated based upon rates
currently available to the Company for indebtedness with similar terms
and maturities.
Letters of Credit--The letters of credit reflect fair value as a
condition of their underlying purpose and are subject to fees
competitively determined in the marketplace. The contract value and
fair value of the letters of credit at December 31, 2002 and 2001 was
$13,758 and $13,649, respectively.
(b) Off-Balance Sheet Risk
In the normal course of business, the Company is a party to letters of
credit which are not reflected in the accompanying consolidated balance sheets.
Such financial instruments are to be valued based on the amount of exposure
under the instrument and the likelihood of performance being requested. No
claims have been made against these letters of credit and management does not
expect any material losses to result from these off-balance sheet instruments.
At December 31, 2002 and 2001, the Company had letters of credit outstanding
totaling $13,758 and $13,649, respectively.
(15) Quarterly Consolidated Financial Data (Unaudited)
The table below sets forth the unaudited consolidated operating results by
quarter for the years ended December 31, 2002, 2001 and 2000:
2002 quarterly period ended
---------------------------------------------------------
March 31 June 30 September 30 December 31
--------- ------- ------------ -----------
Net revenue........................................ $ 61,109 64,455 62,899 60,233
Income (loss) from operations...................... 525 1,278 (1,197) (29,956)
Net loss........................................... (46,057) (1,538) (4,636) (32,421)
Basic and diluted loss per common share (a)........ (22.07) (0.74) (2.22) (15.54)
2001 quarterly period ended
---------------------------------------------------------
March 31 June 30 September 30 December 31
--------- ------- ------------ -----------
Net revenue........................................ $ 58,868 57,870 55,923 53,868
Loss from operations............................... (1,151) (292) (1,266) (2,457)
Net loss........................................... (4,134) (3,388) (2,886) (3,251)
Basic and diluted loss per common share (a)........ (1.98) (1.62) (1.37) (1.55)
2000 quarterly period ended
---------------------------------------------------------
March 31 June 30 September 30 December 31
--------- ------- ------------ -----------
Net revenue........................................ $ 65,463 62,717 61,346 57,040
Loss from operations............................... (390) (129,294) (1,989) (11,091)
Net loss........................................... (2,853) (140,494) (7,425) (8,160)
Basic and diluted loss per common share (a)........ (1.61) (76.23) (3.73) (3.90)
(a) Earnings per share are computed independently for each of the quarters
presented. The sum of the quarterly earnings (loss) per common share does
not equal the total computed for the year as a result of the increase in
outstanding common shares due to shares issued in conjunction with certain
acquisitions as discussed.
F-26
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(16) Acquisition of Auction Transport, Inc.
On January 16, 2002 the Company acquired the stock of Auction Transport,
Inc. ("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 $1,293. 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 $500 payable no later than December 31, 2003. This amount is included
in prepaid expenses and other current assets on the accompanying December 31,
2002 consolidated balance sheet.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition.
Current assets $ 1,194
Property and equipment 323
Other long-term assets 521
-------
Total assets acquired 2,038
-------
Current liabilities 713
Other long-term liabilities 32
-------
Total liabilities assumed 745
-------
Net assets acquired $ 1,293
=======
The following unaudited pro forma financial information presents the
combined results of operations as if the acquisition of ATI, had occurred as of
January 1, 2002, after giving effect to certain adjustments including additional
depreciation expense, facility rental expense, bonuses to former management, and
related income tax effects. This pro forma financial information does not
necessarily reflect the results of operations that would have occurred had a
single entity operated during such periods.
Year ended December 31, 2002
----------------------------
(Unaudited)
United Road ATI
Services, Inc Proforma Total
------------- -------- -----
Net revenue..................................... $ 226,529 42,462 268,991
=========== ======== =======
Net loss........................................ $ (13,659) (493) (14,152)
=========== ======== =======
Diluted loss per common share................... $ (6.75)
=======
F-27
SCHEDULE II
UNITED ROAD SERVICES, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to
Beginning of Costs and Balance at
Period Expenses Other Deductions End of Period
------ -------- ----- ---------- -------------
Allowance for Doubtful Accounts:
December 31, 2002.............. $1,580,609 674,608 -- 1,306,023 949,194
December 31, 2001.............. 2,694,565 621,946 -- 1,735,902 1,580,609
December 31, 2000.............. 2,800,703 2,882,252 -- 2,988,390 2,694,565
Income Tax Valuation Allowance:
December 31, 2002.............. $5,451,000 16,040,000 -- -- 21,491,000
December 31, 2001.............. 3,680,400 1,770,600 -- -- 5,451,000
December 31, 2000.............. -- 3,680,400 -- -- 3,680,400
F-28