EXHIBIT 99.7
INDEPENDENT AUDITORS' REPORT
The Stockholder
Keystone Towing, Inc.:
We have audited the accompanying balance sheets of Keystone Towing, Inc.
("Keystone") as of December 31, 1996 and 1997, and the related statements of
operations, stockholder's equity, and cash flows for the years then ended.
These financial statements are the responsibility of Keystone's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Keystone Towing, Inc. as
of December 31, 1996 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Albany, New York
January 16, 1998,
except as to note 13(b),
which is as of May 6, 1998
1
KEYSTONE TOWING, INC.
BALANCE SHEETS
DECEMBER 31
------------------- JUNE 30,
1996 1997 1998
-------- ---------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash......................................... $193,165 $ 71,634 $ 100,312
Trade accounts receivable.................... 97,368 167,192 151,677
Accounts receivable from employees........... 3,443 2,989 3,640
Inventory.................................... 15,000 60,990 60,510
Note receivable--other....................... -- 5,000 87,110
Prepaid and other current assets (note 2).... 47,684 98,111 82,958
-------- ---------- ----------
Total current assets....................... 356,660 405,916 486,207
Property and equipment, net (notes 3, 6 and
7)............................................ 598,850 1,038,776 1,044,167
Other non-current assets (note 4).............. -- 82,256 84,858
-------- ---------- ----------
Total assets............................... $955,510 $1,526,948 $1,615,232
======== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current installments of notes payable (note
6).......................................... $ 94,782 $ 278,765 $ 337,181
Borrowings under lines of credit (note 6).... 7,558 73,297 96,847
Current installment of note payable to
stockholder (notes 6 and 10)................ 31,724 35,046 33,337
Accounts payable............................. 88,176 200,779 215,401
Accrued payroll and related costs............ 53,309 52,157 61,787
Payable to affiliate (note 10)............... -- 40,909 --
Other liabilities (note 5)................... 301,965 326,778 367,220
-------- ---------- ----------
Total current liabilities.................. 577,514 1,007,731 1,111,773
Long-term liabilities:
Notes payable, excluding current installments
(note 6).................................... 156,940 349,982 349,492
Note payable to stockholder, excluding
current installments (notes 6 and 10)....... 50,314 15,268 --
-------- ---------- ----------
Total liabilities.......................... 784,768 1,372,981 1,461,265
-------- ---------- ----------
Stockholder's equity:
Common stock, $2.00 par value. Authorized
100,000 shares; issued and outstanding
10,000 shares in 1996 and 1997.............. 20,000 20,000 20,000
Retained earnings............................ 150,742 133,967 133,967
-------- ---------- ----------
Total stockholder's equity................. 170,742 153,967 153,967
-------- ---------- ----------
Total liabilities and stockholder's
equity.................................... $955,510 $1,526,948 $1,615,232
======== ========== ==========
See accompanying notes to financial statements.
2
KEYSTONE TOWING, INC.
STATEMENTS OF OPERATIONS
SIX-MONTHS
YEAR ENDED DECEMBER 31 ENDED JUNE 30
------------------------ ----------------------
1996 1997 1997 1998
----------- ----------- ---------- ----------
(UNAUDITED)
Net revenue.................. $ 3,369,354 $ 3,943,073 $1,926,852 $1,998,098
Cost of revenue.............. 2,132,646 2,606,452 1,204,688 1,329,626
----------- ----------- ---------- ----------
Gross profit............. 1,236,708 1,336,621 722,164 668,472
Selling, general and
administrative expenses..... 934,105 1,140,252 592,958 651,884
----------- ----------- ---------- ----------
Income from operations... 302,603 196,369 129,206 16,588
----------- ----------- ---------- ----------
Other income (expense):
Interest expense........... (28,067) (71,451) (29,178) (26,110)
Interest income............ 2,534 1,556 -- --
Gain on sale of assets..... -- 36,275 36,275 --
Other (note 10)............ -- 76,312 38,156 94,244
----------- ----------- ---------- ----------
Net income............... $ 277,070 $ 239,061 $ 174,459 $ 84,722
=========== =========== ========== ==========
See accompanying notes to financial statements.
3
KEYSTONE TOWING, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
TOTAL
COMMON RETAINED STOCKHOLDER'S
STOCK EARNINGS EQUITY
------- --------- -------------
Balance at December 31, 1995.................. $20,000 $ 88,465 $ 108,465
Net income--1996.............................. -- 277,070 277,070
Owner Distribution............................ -- (214,793) (214,793)
------- --------- ---------
Balance at December 31, 1996.................. 20,000 150,742 170,742
Net income--1997.............................. -- 239,061 239,061
Owner distribution............................ -- (255,836) (255,836)
------- --------- ---------
Balance at December 31, 1997.................. 20,000 133,967 153,967
Net income--six-months ended June 30, 1998
(unaudited).................................. -- 84,722 84,722
Owner distribution--six-months ended June 30,
1998 (unaudited)............................. -- (84,722) (84,722)
------- --------- ---------
Balance at June 30, 1998 (unaudited).......... $20,000 $ 133,967 $ 153,967
======= ========= =========
See accompanying notes to financial statements.
4
KEYSTONE TOWING, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED SIX-MONTHS
DECEMBER 31 ENDED JUNE 30
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
(UNAUDITED)
Cash flows from operating
activities:
Net income....................... $ 277,070 $ 239,061 $ 174,459 $ 84,722
Adjustments to reconcile net
income to net cash provided by
operating activities, net of
effects of acquisitions:
Depreciation and amortization.. 155,367 280,075 86,914 148,311
Gain on sale of assets......... -- (36,275) (275) --
Decrease (increase) in trade
accounts receivable........... (11,892) (69,824) (26,251) 15,515
Decrease (increase) in accounts
receivable from employees..... (2,015) 454 35 (651)
Increase in inventory.......... (5,000) (45,990) -- --
Decrease (increase) in prepaid
and other current assets...... 10,619 (50,427) (138,568) 13,031
Increase (decrease) in accounts
payable....................... 48,580 112,603 (62,126) 14,622
Increase (decrease) in accrued
payroll and related costs..... 16,970 (1,152) 65,642 9,630
Increase (decrease) in payable
to affiliate.................. -- 40,909 -- (40,909)
Increase (decrease) in other
liabilities................... 44,984 24,813 (45,334) 40,442
--------- --------- --------- ---------
Net cash provided by
operating activities........ 534,683 494,247 54,496 284,713
--------- --------- --------- ---------
Cash flows from investing
activities:
Purchases of property and
equipment....................... (97,818) (396,324) (402,678) (153,702)
Proceeds from sale of assets..... -- 40,000 4,000 --
Decrease (increase) in note
receivable--other............... 24,351 (5,000) (185,196) (82,110)
--------- --------- --------- ---------
Net cash used in investing
activities.................. (73,467) (361,324) (583,874) (235,812)
--------- --------- --------- ---------
Cash flows from financing
activities:
Proceeds from long-term debt..... -- 13,289 494,677 171,117
Principal payments on long-term
debt............................ (146,768) (77,646) (87,141) (130,168)
Borrowings on line of credit,
net............................. 7,557 65,739 90,002 23,550
Owner distributions.............. (214,793) (255,836) (150,094) (84,722)
--------- --------- --------- ---------
Net cash (used in) provided
by financing activities..... (354,004) (254,454) 347,444 (20,223)
--------- --------- --------- ---------
Net increase (decrease) in cash.... 107,212 (121,531) (181,934) 28,678
Cash at beginning of period........ 85,953 193,165 193,165 71,634
--------- --------- --------- ---------
Cash at end of period.............. $ 193,165 $ 71,634 $ 11,231 $ 100,312
========= ========= ========= =========
Supplemental disclosure of cash
flow information:
Cash paid during the period for:
Interest....................... $ 28,067 $ 71,451 $ 29,178 $ 26,387
========= ========= ========= =========
See accompanying notes to financial statements.
5
KEYSTONE TOWING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Keystone Towing, Inc. ("Keystone") was founded in 1991. Keystone's primary
business is towing, impounding and storing vehicles for municipal,
governmental and commercial customers in Southern California. Keystone has one
facility in Los Angeles. It operates approximately 20 vehicles. Keystone
became an S-corporation under California law on June 3, 1993.
(b) Revenue Recognition
Keystone operates as one segment related to transportation of vehicles and
equipment for customers.
Keystone's revenue is derived from customers who require a towing service,
fees related to the storage of vehicles that have been towed, and auction
sales of unclaimed vehicles. Towing revenue is recognized at the completion of
each towing engagement, storage fees are accrued over the period the vehicles
are held in the impound facility, and revenue from auction sales are recorded
when title to the vehicles has been transferred. Expenses related to the
generation of revenue are recognized as incurred.
(c) Inventories
Inventories consist primarily of spare parts used for repair and maintenance
of transportation equipment. Inventories are stated at the lower of cost or
market.
(d) Property and Equipment
Property and equipment are stated at cost. Depreciation is determined for
financial statement and tax purposes using the double-declining balance method
over the estimated useful lives of the individual assets or, for leasehold
improvements, over the terms of the related leases if shorter. For financial
statement purposes, Keystone provides for depreciation of property and
equipment over the following estimated useful lives:
Automobiles and transportation equipment.......................... 5 years
Furniture and fixtures............................................ 5-7 years
Machinery and equipment........................................... 5-7 years
Leasehold improvements............................................ 7-39 years
(e) Fair Value of Financial Instruments
Due to the short-term nature of various financial instruments and the
current incremental borrowing rates available to Keystone on bank loans with
similar terms and maturities, the fair value of Keystone's financial
instruments approximates their carrying values.
(f) Income Taxes
Effective June 3, 1993, Keystone elected to file its Federal income tax
returns under the S-corporation provisions of the Internal Revenue Code and
was granted S-corporation status for California state tax purposes. In
accordance with the Federal provisions, corporate earnings flow through and
are taxed solely at the stockholder level.
Under the provisions of the California franchise tax law, S-corporation
earnings are assessed a 1.5% surtax at the corporate level and flow through to
the stockholder to be taxed at the individual level. Accordingly, no income
tax expense has been recorded for the years ended December 31, 1996 and 1997.
6
KEYSTONE TOWING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(g) Use of Estimates
Management of Keystone 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 financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(h) Interim Financial Statements
The interim financial information included in these financial statements is
unaudited but reflects all adjustments (consisting of only normal accruals)
which are, in the opinion of management, necessary for a fair presentation of
the results for the interim periods presented.
(2) PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets consists of:
DECEMBER 31
---------------
1996 1997
------- -------
Prepaid insurance........................................... $ 6,750 $13,549
Prepaid vehicle registration................................ -- 22,010
Miscellaneous deposits...................................... 32,304 39,657
Prepaid property taxes...................................... 3,432 2,631
Other....................................................... 5,198 20,264
------- -------
$47,684 $98,111
======= =======
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31
----------------------
1996 1997
---------- ----------
Automobiles and transportation equipment............. $ 578,891 $1,025,234
Furniture and fixtures............................... 129,592 144,361
Machinery and equipment.............................. 240,653 270,163
Leasehold improvements............................... 273,137 460,641
---------- ----------
Total.............................................. 1,222,273 1,900,399
Less accumulated depreciation and amortization....... (623,423) (861,623)
---------- ----------
$ 598,850 $1,038,776
========== ==========
Depreciation and amortization of property and equipment in 1996 and 1997
totaled $155,367 and $274,259, respectively.
(4) OTHER NON-CURRENT ASSETS
Other non-current assets consists of the following (see note 8):
DECEMBER 31,
1997
------------
Goodwill........................................................ $85,572
Covenant-not-to-compete......................................... 2,500
-------
Total......................................................... 88,072
Less accumulated amortization................................... (5,816)
-------
$82,256
=======
7
KEYSTONE TOWING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Goodwill, which represents the excess of purchase price over the fair value
of net assets acquired, and covenant-not-to-compete are amortized on a
straight-line basis over fifteen and five years, respectively. Amortization
expense for other non-current assets totaled $5,816 in 1997.
(5) OTHER LIABILITIES
Other liabilities consists of:
DECEMBER 31
-----------------
1996 1997
-------- --------
Retirement savings plan payable........................... $ 70,964 $125,261
Parking and other taxes payable(a)........................ 123,647 107,734
Lien sale payable(b)...................................... 75,299 87,938
Insurance premiums payable................................ 3,745 4,220
Other..................................................... 28,310 1,625
-------- --------
$301,965 $326,778
======== ========
- --------
(a) Parking and other taxes payable consist primarily of obligations to remit
standard parking fees to the City of Los Angeles.
(b) Lien sale payables arise from Keystone's obligation to remit to the state
a portion of proceeds generated by the sale of cars impounded by Keystone
but left unclaimed.
(6) INDEBTEDNESS
Keystone has available a $75,000 line of credit with a bank, expiring
January 16, 1998. Interest is payable at 10.5%. Total borrowings under this
unsecured line of credit as of December 31, 1996 and 1997 amounted to $7,558
and $73,297, respectively.
Keystone's long-term debt consists of:
DECEMBER 31
--------------------
1996 1997
--------- ---------
Note payable to stockholder, payable in monthly
installments of $3,208, including interest at 10.06%,
maturing May 1999.................................... $ 82,038 $ 50,314
Notes payable to banks for various property and
equipment, payable in monthly installments ranging
from $427 to $5,527, including interest ranging from
8 1/2% to 11%, and maturing at dates ranging from
January, 1998 to April, 2002. Secured by the related
assets............................................... 209,136 599,407
Borrowings under a capital lease agreement, payable in
monthly installments of $1,492, including interest at
11%, maturing October 1999. Secured by the related
asset ............................................... 42,586 29,340
--------- ---------
Total long-term debt.............................. 333,760 679,061
Less installments due within one year............... (126,506) (313,811)
--------- ---------
Long-term debt, excluding current installments.... $ 207,254 $ 365,250
========= =========
8
KEYSTONE TOWING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Annual maturities for the next five years are as follows:
1998................................................................ $313,811
1999................................................................ 176,125
2000................................................................ 109,042
2001................................................................ 72,782
2002................................................................ 7,301
--------
$679,061
========
(7) LEASES
Keystone leases the building used for its operations under a non-cancelable
lease agreement. The lease is classified as an operating lease. The agreement
provides for monthly rental payment of $39,630 through January 2002. Keystone
is responsible for all operating costs related to the property. Total rent
expense, including common area maintenance charges, for 1996 and 1997 was
$488,000 and $504,000, respectively.
Keystone is obligated under a capital lease for transportation equipment
that expires in October 1999. The capital lease obligation is included in the
long-term debt table and schedule of maturities in note 6.
Future minimum lease payments under noncancellable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31,
1997 are:
1998.............................................................. $ 475,560
1999.............................................................. 475,560
2000.............................................................. 475,560
2001.............................................................. 475,560
2002.............................................................. 39,630
----------
$1,941,870
==========
(8) NON-CASH TRANSACTIONS
During March 1997, Keystone acquired, under the purchase method of
accounting, certain assets of a competitor for consideration of $203,702 in
the form of assumed liabilities of the selling party. The assets acquired were
recorded at their estimated fair value of $115,000. In addition, Keystone
secured a five year non-competition agreement from the selling party valued at
$2,500. The difference between the consideration given and the fair value of
assets acquired was recorded as goodwill in the amount of $85,572 (see note
4).
During 1997, Keystone leased $205,956 of various automobile and
transportation equipment through several lending institutions (see note 6).
(9) EMPLOYEE BENEFITS
Keystone has a retirement savings and disability plan pursuant to section
414(i) of the Internal Revenue Code that is available to all employees who
have at least 1,000 hours of service to Keystone during the plan year and are
employed on the last day of the year. This discretionary contribution plan
allows the employer discretion as to the amount to be contributed each year.
Keystone's contribution payable, included in other accrued liabilities on the
accompanying balance sheet, amounted to $70,964 and $125,261 as of December
31, 1996 and 1997, respectively (see note 5).
9
KEYSTONE TOWING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(10) RELATED PARTY TRANSACTIONS
Keystone is indebted to the sole stockholder under an unsecured note,
bearing interest at 10.06% per annum (see note 6).
In the normal course of business Keystone performs subcontract towing
services for a related party company owned by another related party. Keystone
recognizes revenue on the towing services performed on behalf of the related
party net of subcontract expenses. The net revenue, recognized on subcontract
towing services performed amounted to approximately $17,000 and $19,000 for
1996 and 1997, respectively, and is included in net revenue on the statements
of operations. Additionally, Keystone recognized management fee income for
services performed on behalf of the related party company. Management fee
income amounted to approximately $0 and $16,000 for 1996 and 1997,
respectively.
The owner of Keystone is also a 10% owner of an Official Police Garage
("OPG"). Keystone recognizes management fee income for services performed on
behalf of the related party company. Management fee income amounted to
approximately $0 and $60,000 for 1996 and 1997, respectively.
The payable to related party of $40,909 on the accompanying balance sheet as
of December 31, 1997 represents miscellaneous obligations to the OPG discussed
above.
(11) CONTINGENT LIABILITIES
Various legal claims arise against Keystone during the normal course of
business. In the opinion of management, liabilities, if any, arising from
proceedings would not have a material effect on the financial statements.
(12) CONCENTRATION OF BUSINESS RISKS
Revenue generated from Keystone's exclusive agreement with the LAPD
discussed in note 1 represented approximately 30% of total revenues in 1996
and 27% in 1997. The loss of such business could significantly effect
Keystone's performance.
(13) SUBSEQUENT EVENT
(a) During February 1998, the stockholder entered into a definitive
agreement to sell Keystone to United Road Services, Inc. The sales
transaction, affected through a combination of cash and common stock of United
Road Services, Inc., is contingent upon the initial public offering of the
common stock of United Road Services, Inc., and the consent of the Los Angeles
City Council under Keystone's contract to provide police towing for a
specified police district in Los Angeles. The anticipated selling price of
Keystone exceeds its net assets as of December 31, 1997. Prior to the sale of
Keystone, the stockholder intends to take a distribution of not more than
$150,000.
(b) On May 1, 1998, United Road Services, Inc. successfully completed the
initial public offering of its common stock.
10