<PAGE>
As filed with the securities and Exchange Commission on April 21, 1999
Registration No. 333-65563
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE
AMENDMENT NO. 2
To
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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United Road Services, Inc.
(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 7549 94-3278455
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
17 Computer Drive West
Albany, New York 12205
</TABLE>
(518) 446-0140
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Edward T. Sheehan
Chairman and Chief Executive Officer
United Road Services, Inc.
17 Computer Drive West
Albany, New York 12205
(518) 446-0140
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Karen A. Dewis, Esq.
McDermott, Will & Emery
600 13th Street, N.W.
Washington, D.C. 20005-3096
(202) 756-8000
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Approximate date of commencement of proposed sale to the public: From time
to time after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
PROSPECTUS
1,213,944 Shares
United Road Services, Inc.
Common Stock
This is an offering of shares of Common Stock of United Road Services, Inc. by
certain existing stockholders who received shares of Common Stock in
connection with our acquisitions.
Selling stockholders may sell shares at prices related to the prevailing
market prices or at negotiated prices. The Nasdaq National Market lists our
Common Stock under the symbol "URSI". On April 20, 1999, the last reported
sale price of our Common Stock was $6 3/4 per share.
We will not receive any proceeds when stockholders sell their shares. We will
pay all expenses to register the shares, except that the selling stockholders
will pay any underwriting commissions and expenses, brokerage fees, transfer
taxes, and the fees and expenses of their attorneys and other experts.
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Investing in the Common Stock involves certain risks. See "Risk Factors"
beginning on Page 6.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The date of this Prospectus is April 21, 1999
<PAGE>
You should rely only on the information contained in this document or other
documents that we have referred you to. We have not authorized anyone to
provide you with information that is different.
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Table of Contents
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Available Information...................................................... i
Prospectus Summary......................................................... 1
Risk Factors............................................................... 6
Price Range of Common Stock................................................ 12
Dividend Policy............................................................ 12
Capitalization............................................................. 13
Selected Financial Data.................................................... 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 16
Business................................................................... 24
Management................................................................. 31
Certain Transactions....................................................... 37
Principal Stockholders..................................................... 39
Selling Stockholders....................................................... 40
Plan of Distribution....................................................... 41
Description of Capital Stock............................................... 42
Legal Matters.............................................................. 45
Experts.................................................................... 45
Index to Financial Statements.............................................. F-1
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<PAGE>
AVAILABLE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy reports, statements, or other
information at the SEC's public reference rooms in Washington, D.C., New York,
New York or Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. Our SEC filings are also
available to the public from commercial document retrieval services and at the
web site maintained by the SEC at "http://www.sec.gov." You can also review
copies of our SEC filings at the offices of the Nasdaq Stock Market, Inc.,
1735 K Street, N.W., Washington, D.C. 20006.
We have filed with the SEC a registration statement on Form S-1 to register
shares of our Common Stock. This prospectus is part of that registration
statement and, as permitted by the SEC's rules, does not contain all the
information set forth in the registration statement. For further information
with respect to us and the Common Stock, you may refer to the registration
statement and to the exhibits and schedules filed as part of the registration
statement. You can review and copy the registration statement and its exhibits
and schedules at the public reference facilities maintained by the SEC as
described above. The registration statement, including its exhibits and
schedules, is also available on the SEC's web site.
This prospectus may contain summaries of contracts or other documents. Because
they are summaries, they will not contain all of the information that may be
important to you. If you would like complete information about a contract or
other document, you should read the copy filed as an exhibit to the
registration statement.
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This prospectus contains certain forward-looking statements which involve
substantial risks and uncertainties. These forward-looking statements can
generally be identified because the context of the statement includes words
such as "may," "will," "expect," "anticipate," "intend," "project,"
"estimate," "continue," "believe" or other similar words. Similarly,
statements that describe our future plans, objectives and goals are also
forward-looking statements. Our actual results, performance or achievements
could differ materially from those expressed or implied in these forward-
looking statements as a result of certain factors, including those set forth
in "Risk Factors" and elsewhere in this prospectus.
i
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PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. It may not
contain all of the information important to you. To understand this offering
fully, you should read the entire prospectus carefully, including the risk
factors and the financial statements.
Please note that throughout this prospectus we use the terms "Founding
Companies" which means the four towing and recovery businesses and three
transport businesses that we acquired at the time of our initial public
offering in May 1998, and "Selected Acquired Companies" which means the eleven
companies that we have acquired since May 1998 whose separate audited
financial statements are required to be included in this prospectus.
Additionally, references in this prospectus to "we","our" or "us" refer to
United Road Services, Inc., not to any selling stockholders.
The Company
United Road Services, Inc. was formed in July 1997 to become a leading
national provider of motor vehicle and equipment towing, recovery and
transport services. We believe that we are now one of the largest providers of
these services in the United States. As of March 31, 1999, we operated a
network of 35 towing and recovery service locations and 29 transport locations
in a total of 21 states. During 1998, approximately 46.6% of our net revenue
was derived from the provision of towing and recovery services and
approximately 53.4% was derived from the provision of transport services.
Further information with respect to these segments of our business may be
found in Note 11 to our Consolidated Financial Statements included elsewhere
herein.
We offer a broad range of towing and recovery services in our local markets,
including:
. towing, impounding and storing motor vehicles;
. conducting lien sales and auctions of abandoned vehicles;
. towing heavy equipment; and
. recovering and towing heavy-duty commercial and recreational vehicles.
We derive revenue from towing and recovery services based on distance, time or
fixed charges and from related impounding and storage fees. If impounded
vehicles are not claimed by their owners within prescribed time periods, we
are entitled to be paid from the proceeds of lien sales, scrap sales or
auctions.
Our towing and recovery 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.
We provide transport services for new and used vehicles throughout the United
States. We derive revenue from transport services according to pre-set rates
based on mileage or negotiated flat rates.
Our transport customers include:
. commercial entities, such as automobile leasing companies, automobile
manufacturers, automobile auction companies and automobile dealers; and
. individual motorists.
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Strategy
We believe there are significant opportunities for a national provider of
towing, recovery and transport services with high quality service to increase
revenue and profitability by expanding its scope of services and customer
base, achieving operating efficiencies and expanding through acquisitions. As
certain areas within the automobile industry experience growth and
consolidation, such as new and used automobile dealerships, rental car
companies and automobile auction companies, we believe that the demand will
increase for a provider of towing, recovery and transport services with the
resources and geographic coverage to serve the expanding needs of these
businesses. Further, we believe that effective implementation of our operating
and acquisition strategies as described below will position us to secure
operating and competitive advantages over smaller competitors.
We also believe that the fragmented nature of the towing, recovery and
transport markets presents an attractive opportunity for consolidation. Our
management team includes executives with experience in implementing
acquisition programs and effectively integrating acquired businesses as well
as local managers who have significant contacts and experience in towing,
recovery and transport services. We believe that this combination and the
fragmented industry provides us with the capability and opportunity to
implement an effective consolidation strategy, assuming that we have access to
sufficient capital to pursue this strategy.
In order to increase our revenue and profitability, we have developed the
following operating and acquisition strategies:
Operating Strategy:
. provide high quality service
. expand scope of services and customer base
. achieve operating efficiencies
. maintain local expertise
Acquisition Strategy:
. enter new geographic markets
. expand within existing geographic markets
Recent Developments
Between May 6, 1998 when we completed our initial public offering and the
Founding Company acquisitions and December 31, 1998, we acquired 25 additional
towing and recovery businesses and nine additional transport businesses for
aggregate consideration of approximately $79.6 million in cash, 2,918,608
shares of Common Stock and the assumption of approximately $23.2 million of
indebtedness. Among the companies we acquired were E&R Towing and Garage, Inc.
and Environmental Auto Removal, Inc. (collectively "E&R"), which we acquired
on August 21, 1998 for an aggregate purchase price of approximately $26.0
million, and Pilot Transport, Inc. ("Pilot"), which we acquired on December 9,
1998 for an aggregate purchase price of approximately $25.8 million.
From January 1, 1999 through March 31, 1999, we acquired four additional
towing and recovery businesses and nine additional transport businesses for
aggregate consideration of approximately $76.3 million, consisting of
approximately $28.9 million in cash, 2,039,056 shares of Common Stock and the
assumption of approximately $14.9 million of indebtedness. One of the
businesses we acquired was MPG Transco, Ltd. ("MPG"), which we acquired on
January 11, 1999 for an aggregate purchase price of approximately $29.5
million. Financial statements and pro forma financial information for all
acquired companies that are considered significant for financial reporting
purposes are included among the financial information contained in this
prospectus.
2
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On November 19, 1998, we entered into a Purchase Agreement with Charter URS
LLC ("Charterhouse") providing for the issuance to Charterhouse of up to $75
million aggregate principal amount of our 8% Convertible Subordinated
Debentures due 2008. The Debentures are convertible into our Common Stock at
an exercise price of $15.00 per share, subject to adjustment as provided in
the Purchase Agreement. The conversion price exceeded the fair market value of
the Common Stock on the date of execution of the Purchase Agreement. We issued
$43.5 million aggregate principal amount of Debentures to Charterhouse at a
first closing on December 7, 1998, and the remaining $31.5 million aggregate
principal amount of Debentures to Charterhouse at a second closing on March
16, 1999.
You can contact us at the following address and telephone number: United Road
Services, Inc., 17 Computer Drive West, Albany, New York 12205, 518-446-0140.
3
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Summary Pro Forma Combined Financial Data
(Dollars in thousands, except per share data)
The following unaudited pro forma combined statement of operations data
present our historical financial data adjusted to give effect to (i) our
purchases of the Founding Companies and the Selected Acquired Companies as if
they occurred on January 1, 1998, (ii) the sale of $75. 0 million aggregate
principal amount of Debentures to Charterhouse, which includes $43.5 million
that occurred on December 7, 1998 and $31.5 million that occurred on March 16,
1999, as if it occurred on January 1, 1998, and (iii) certain pro forma
adjustments to the historical statement of operations data described below.
The unaudited pro forma combined balance sheet data present our historical
financial data adjusted to give effect to the purchase of MPG and the sale of
$31.5 million aggregate principal amount of Debentures to Charterhouse both of
which occurred after December 31, 1998, as if they occurred on December 31,
1998. The unaudited pro forma data are not necessarily indicative of the
results we would have obtained had these events actually occurred on such
dates or of our future results. You should refer to other sections of this
prospectus for more information, including, "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Unaudited Pro Forma Combined Financial Statements" and the
historical financial statements for the Founding Companies and the Selected
Acquired Companies.
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<CAPTION>
Year Ended
December 31, 1998
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Pro Forma
Actual Combined
(Dollars in
thousands, except
share data)
<S> <C> <C>
Statement of Operations Data:
Net revenue.......................................... $ 87,919 $ 179,200
Cost of revenue...................................... 64,765 127,860
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Gross profit......................................... 23,154 51,340
Selling, general and administrative expenses (1)..... 12,428 26,211
Goodwill amortization (2)............................ 1,745 3,952
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Income from operations............................... 8,981 21,177
Interest expense and other, net (3).................. 1,086 9,409
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Income before income taxes........................... 7,895 11,768
Income tax expense (4)............................... 3,503 5,178
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Net income........................................... $ 4,392 6,590
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Diluted net income per share......................... $ 0.42 0.39
========== ==========
Shares used in computing diluted net income per
share............................................... 10,389,904 16,832,306(5)
========== ==========
</TABLE>
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<CAPTION>
At December 31, 1998
-----------------------
Pro Forma
Actual Combined
(In thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Working capital.................................... $ 9,330 $ 8,957
Total assets....................................... 248,732 283,531
Long-term obligations, excluding current
installments...................................... 65,255 80,119
Stockholders' equity............................... 163,766 178,512
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(1) Includes agreed upon reductions in salaries, bonuses and benefits to the
former owners of the Founding Companies and the Selected Acquired
Companies of $3.5 million for the year ended December 31, 1998.
(2) Consists of amortization, over a 40-year estimated life, of goodwill to
be recorded as a result of the acquisitions of the Founding Companies and
the Selected Acquired Companies.
(3) Includes adjustment for additional interest expense incurred in connection
with the Charterhouse investment and related amortization of deferred
financing costs.
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(4) Assumes an effective income tax rate of 44%.
(5) Shares used in computing diluted net income per share include (i)
15,707,085 shares issued and outstanding, including shares withheld in
connection with acquisitions, at December 31, 1998, (ii) 996,772 shares
issued, including shares withheld, in connection with the acquisition of
MPG; and (iii) 128,449 shares reflecting the incremental effect of
options, warrants and 1998 earn-out shares payable to the former owners
of the Founding Companies and one other acquired company.
5
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RISK FACTORS
Before you buy shares of Common Stock from any selling stockholder, you should
be aware that there are various risks, including those described below. You
should consider carefully these risk factors, together with all other
information in this prospectus, before you decide to purchase shares of our
Common Stock.
Some of the information in this prospectus may 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,
projected or anticipated benefits from acquisitions made by or to be made by
us, or projections involving anticipated revenues, earnings, or other aspects
of operating results. The words "may," "will," "expect," "believe,"
"anticipate," "project," "intend," "estimate," and similar expressions are
intended to identify forward-looking statements. We caution readers that such
statements are not guarantees of future performance or events and are subject
to a number of factors that may influence the accuracy of the statements and
the projections upon which the statements are based, including but not limited
to the factors discussed below. As noted elsewhere in this prospectus, all
phases of our operations are subject to a number of uncertainties, risks and
other influences, many of which are outside of our control. Any one or more of
these uncertainties, risks and other influences could materially affect our
results of operations and whether forward-looking statements made by us
ultimately prove to be accurate.
The following discussion outlines certain factors that could affect our
consolidated results of operations for 1999 and beyond and cause them to
differ materially from those that may be set forth in forward-looking
statements made by us or on our behalf.
Our Combined Operating History Is Limited and the Integration of Acquired
Companies May Adversely Affect Our Business
We conducted no operations and generated no net revenue prior to our initial
public offering in May 1998. At the time of our initial public offering, we
purchased the seven Founding Companies. Between May 6, 1998 and March 31,
1999, we have acquired a total of 47 additional businesses. Prior to their
acquisition by us, the companies we acquired were operated as independent
entities, and we cannot assure you that we will be able to integrate the
operations of these businesses successfully into our operations or to
institute the necessary systems and procedures (including accounting and
financial reporting systems) to manage the combined enterprise on a profitable
basis. Our management group has been assembled only recently, and it may not
be able to successfully manage the combined entity or implement effectively
our operating strategy and acquisition program. The Unaudited Pro Forma
Combined Financial Statements included in this prospectus cover periods when
the companies we acquired were not under common control or management with us
and are not necessarily indicative of our future operating results. Our
inability to integrate these companies successfully would have a material
adverse effect on our business, financial condition and results of operations.
See "Business-Strategy" and "Management."
Our Acquisition Strategy May Not Be Successful
A key component of our growth strategy has been to acquire other towing,
recovery and transport businesses in strategic markets and locations. In the
past, we financed these acquisitions by using a combination of Common Stock,
cash and debt. Recently, we have experienced a significant decline in the
market price of our Common Stock. As a result, our ability to complete
acquisitions using Common Stock as currency in a manner that is not dilutive
to current stockholders has been adversely affected. If our Common Stock does
not maintain a sufficient market value, or if the owners of the businesses we
wish to acquire are unwilling to accept Common Stock as part of the purchase
price, we may be required to use more of our cash resources, if available, or
seek additional financing, in order to pursue our acquisition program. The
consideration for each future acquisition will vary on a case-by-case basis,
with the major factors in establishing the purchase price being the historical
operating results and future prospects of the business to be purchased and the
ability of that business to complement the services we offer. It is possible
that we will not be able to successfully consummate acquisitions in the
future. If
6
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we are unable to pursue an acquisition strategy in the future, we will be
required to rely ~on internal growth to expand our business. See "Management
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
Any acquisitions we make may result in potentially dilutive issuances of
equity securities, the incurrence of additional debt and the amortization of
expenses related to goodwill and other intangible assets, any of which could
have a material adverse effect on our business, financial condition and
results of operations. We may not be able to identify, acquire or manage
profitably additional businesses or integrate successfully any acquired
businesses without substantial costs, delays or other operational or financial
problems. Further, acquisitions involve a number of special risks, including
failure of the acquired business to achieve expected results, diversion of
management's attention, failure to retain key personnel of the acquired
business and risks associated with unanticipated events or liabilities. Some
or all of these additional risks could have a material adverse effect on our
business, financial condition and results of operations. We may also consider
acquiring complementary businesses that provide services that we do not
currently provide. We may not be able to successfully integrate these
complementary businesses. In addition, the companies that we have already
acquired or other companies we may acquire in the future may not achieve
anticipated revenues and earnings.
Our Operating Strategy May Not Be Successful
A key element of our operating strategy is to increase the revenue and improve
the profitability of the companies we acquire. We intend to increase revenue
by continuing to provide high quality service and by expanding both the scope
of services we offer and our customer base. Our ability to increase revenue
will be affected by various factors, including the demand for towing, recovery
and transport services, the level of competition in the industry, our ability
to expand the range of services we offer to existing customers, our ability to
attract new customers and our ability to attract and retain a sufficient
number of qualified personnel.
We intend to improve profitability by various means, including eliminating
duplicative operating costs and overhead, improving our asset utilization and
capitalizing on our enhanced purchasing power. Our ability to improve
profitability will be affected by various factors, including the costs
associated with centralizing our administrative functions, our ability to
benefit from the elimination of redundant operations, and our ability to
benefit from enhanced purchasing power. Many of these factors are beyond our
control, and our operating strategy may not be successful. See "Business--
Strategy."
We May Not Be Able to Successfully Manage Our Growth
Our strategy is to expand our operations through acquisitions and internal
growth. Our systems, procedures and controls may not be adequate to support
our operations as they expand. Any future growth will impose significant added
responsibilities on members of our senior management, including the need to
recruit and integrate new senior level managers and executives. We may not be
able to successfully recruit and retain such additional management. Our
failure to manage our growth effectively or our inability to attract and
retain additional qualified management, could have a material adverse effect
on our business, financial condition and results of operations.
Competition Could Adversely Affect Our Business
The market for towing, recovery and transport services is extremely
competitive. This competition is based primarily on quality, service,
timeliness, price and geographic proximity. We compete with certain large
transport companies on a national and regional basis and certain large towing
and recovery companies on a regional and local basis, some of which may have
greater financial and marketing resources than we have. We also compete with
thousands of smaller local companies, which may have lower overhead cost
structures than we have and may, therefore, be able to provide their services
at lower rates than we can. We may also face competition for acquisition
candidates from companies that are attempting to consolidate towing, recovery
and transport service
7
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providers. Some of our current or future competitors may be better positioned
than we are to finance acquisitions, to pay higher prices for businesses or to
finance their internal operations.
We Rely on Our Information Technology Systems and Significant Costs or
Failures in These Systems Could Adversely Affect Our Business
Our accounting and financial reporting activities are centralized at our
headquarters in Albany, New York. We are in the process of implementing a
proprietary National Transportation Management System at all of our transport
locations and a standardized towing and recovery operating system at
substantially all of our towing and recovery locations. We anticipate that we
will need to upgrade and expand our information technology systems on an
ongoing basis as we expand our operations and complete future acquisitions. We
may encounter unexpected delays and costs in implementing such systems.
Additionally, these systems, when installed, may not function as we expect.
See "Business--Dispatch and Information Systems."
The Loss of Significant Customers Could Adversely Affect Our Business
We provide towing and recovery services to certain municipalities and a number
of law enforcement agencies under contracts. These towing and recovery
contracts typically have terms of five years or less, may be terminated at any
time for material breach and in some cases are subject to competitive bidding
upon expiration. We also provide transport services to 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
customer typically may renew the contract on a year-to-year basis if it is
satisfied with our performance. Otherwise, a new contract is awarded pursuant
to competitive bidding. It is possible that some or all of these towing and
recovery or transport contracts may not be renewed upon expiration or may be
renewed on terms less favorable to us. It is also possible that at some future
time more of our customers may implement a competitive bidding process for the
award of towing and recovery or transport contracts. We have no formal
contract with a large number of our towing, recovery and transport customers,
and it is possible that one or more customers could elect, at any time, to
stop utilizing our services. See "Business--Operations and Services Provided."
Regulatory Conditions Could Adversely Affect Our Business
Towing, recovery and transport services are subject to various federal, state
and local laws and regulations regarding equipment, driver certification,
training, recordkeeping and workplace safety. Our vehicles and facilities are
subject to periodic inspection by the United States Department of
Transportation and similar state and local agencies. Our failure to comply
with these laws and regulations could subject us to substantial fines and
could lead to the closure of operations that are not in compliance. In
addition, certain government contracting laws and regulations may affect our
ability to acquire complementary businesses in a given city or county.
Companies providing towing, recovery and transport services are required to
have numerous federal, state and local licenses and permits. When we acquire
towing, recovery and transport businesses, we must transfer or apply for such
licenses and permits in order to conduct the acquired business. Any failure to
obtain such licenses and permits or any delay in our receipt of such licenses
and permits could have a material adverse effect on our business, financial
condition and results of operations.
We May Be Exposed to Environmental Liabilities
Our 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, our 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 us or that we 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
8
<PAGE>
environmental laws. If that happens, we could be forced to incur substantial
investigation, legal and remediation costs. Such costs could have a material
adverse effect on our business, financial condition and results of operations.
We May Incur Unexpected Liabilities as a Result of Our Acquisitions
The businesses that we have acquired or those that we may acquire in the
future could have liabilities that we did not or may not discover during our
pre-acquisition due diligence investigations. Such liabilities may include
liabilities arising from environmental contamination or non-compliance by
prior owners with environmental laws or regulatory requirements. As a
successor owner or operator, we may be responsible for such liabilities. The
businesses we acquire generally handle and store petroleum and other hazardous
substances at their facilities. There may have been or there may be releases
of these hazardous substances into the soil or groundwater which we may be
required under federal, state or local law to investigate and clean up. Any
such liabilities or related investigations or clean-ups could have a material
adverse effect on our business, financial condition and results of operations.
Changes in Our Relations with Our Employees Could Adversely Affect Our
Business
Although currently none of our employees are members of unions, it is possible
that some employees could unionize in the future or that we could acquire
companies with unionized employees. If our employees were to unionize or we
were to acquire a company with unionized employees, we could incur higher
ongoing labor costs and could experience a significant disruption of our
operations in the event of a strike or other work stoppage. Any of these
possibilities could have a material adverse effect on our business, financial
condition and results of operations.
Uninsured Liabilities May Adversely Affect Our Business
From time to time, we could be subject to various claims relating to our
operations, including (i) claims for personal injury or death caused by
accidents involving our vehicles and service personnel; (ii) worker's
compensation claims and (iii) other employment related claims. Although we
maintain insurance (subject to customary deductibles), our insurance may not
cover certain types of claims, such as claims for punitive damages or for
damages arising from intentional misconduct (which are often alleged in third-
party lawsuits). In the future, we 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 our insurance or that we may not have
sufficient capital available to pay any uninsured claims.
Our Quarterly Results May Fluctuate
We may experience significant fluctuations in quarterly operating results due
to a number of factors. These factors could include: (i) the timing of
acquisitions and related costs; (ii) our success in integrating acquired
companies; (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)
seasonal, cyclical and other variations in the demand for towing, recovery and
transport services and (vii) general economic conditions. As a result, you
should not rely on operating results for any one quarter as an indication or
guarantee of performance in future quarters.
Seasonal and Cyclical Changes in the Demand for Our Services May Affect Our
Results of Operations
The demand for towing, recovery and transport services is subject to seasonal,
cyclical and other variations. Specifically, the demand for towing and
recovery services is generally highest in extreme 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 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, dealer
inventories and new and used auto sales.
9
<PAGE>
We Rely on Key Employees Whose Absence Could Adversely Affect Our Business
We are highly dependent upon the experience, abilities and continued efforts
of our senior management. The loss of the services of one or more key members
of our senior management could have a material adverse effect on our business,
financial condition and results of operations if we are unable to find a
suitable replacement in a timely manner. We do not presently maintain "key
man" life insurance with respect to members of our senior management.
Our operating facilities are managed by regional and local managers who have
substantial knowledge of and experience in the local towing, recovery and
transport markets served by us. Such managers include former owners and
employees of the businesses we have acquired. The loss of one or more of these
managers could have a material adverse effect on our business, financial
condition and results of operations if we are unable to find a suitable
replacement in a timely manner.
The timely, professional and dependable service demanded by towing, recovery
and transport customers requires an adequate supply of skilled dispatchers,
drivers and support personnel. Accordingly, our success will depend on our
ability to employ, train and retain the personnel necessary to meet our
service requirements. From time to time, and in particular areas, there are
shortages of skilled personnel. In the future, we may not be able to maintain
an adequate skilled labor force necessary to operate efficiently, our labor
expenses may increase as a result of a shortage in the supply of skilled
personnel, or we may have to curtail our planned growth as a result of labor
shortages.
Our Senior Management's Lack of Experience in Managing a Towing, Recovery and
Transport Service Business May Adversely Affect Our Business
Our senior management has no prior experience in towing, recovery and
transport services. As a result, our senior management may not be able to
conduct our operations profitably, effectively integrate the operations of
acquired companies or hire and retain personnel with relevant experience. Any
failure by our senior management to accomplish any such things could have a
material adverse effect on our business, financial condition and results of
operations.
Year 2000 Problems May Adversely Affect Our Business
We have identified certain systems, equipment, and applications, including
embedded systems and other "non-information technology," that are utilized in
our towing, recovery and transport operations, or in our finance, payroll and
administration departments and that are necessary to operate our business
without disruption. These mission critical systems include servers, desktop
and notebook computers, data communications equipment, peripherals, network
and desktop operating systems, desktop application suites, payroll and
financial software, towing and transportation applications, and interfaces
with our financial systems.
These mission critical systems include our proprietary National Transportation
Management System, which we intend to install at all of our transport
locations prior to December 31, 1999, and a standard towing and recovery
operating system, which we intend to install at substantially all of our
towing and recovery locations prior to December 31, 1999. With respect to the
remaining towing and recovery locations, we plan to continue to utilize
existing systems and supply an interface to our standardized operating system.
We believe, based upon assurances from third parties, that our mission
critical systems will be Year 2000 ready prior to the end of 1999. However, it
is possible that this will not be the case.
We also utilize certain other hardware and software, operating systems,
relationships and services in day-to-day operations and throughout our various
divisions, which are not necessarily critical to our operations. We are in the
process of identifying and evaluating these systems and functions and will
include in our Year 2000 readiness project any systems that we deem to be
material to our business.
Installation of our information systems may not be completed at all of our
locations before December 31, 1999. In addition, it is possible that the
systems, when installed, may not function properly. In either event, we would
10
<PAGE>
be forced to rely on manual performance of our central administrative
functions along with the local dispatch and operating systems utilized by our
acquired businesses prior to their acquisition by us. There can be no
assurance that such systems will be Year 2000 ready, or that the vendors and
other service providers associated with such businesses will be Year 2000
ready. If the local dispatch and operating systems utilized by our acquired
businesses do not function properly after December 31, 1999, we will be
required to perform critical functions on a manual basis. Any resulting
inefficiency could have a material adverse effect on our business, financial
condition and results of operations.
Because we have not yet received responses to our Year 2000 Questionnaires
from all of our business partners, we are unable to predict the impact that
Year 2000 problems at vendors, customers or financial institutions may have on
us. We intend to continue to address Year 2000 issues with our business
partners, and we will implement contingency plans to the extent necessary.
No one knows the extent of the potential impact of the Year 2000 problem
generally and we cannot predict the likelihood that Year 2000 problems will
cause a significant disruption in the economy as a whole. For additional
information regarding our Year 2000 readiness, see "Management's Discussions
and Analysis of Financial Condition and Results of Operations--Year 2000
Readiness."
The foregoing constitutes a Year 2000 statement and readiness disclosure
subject to the protections afforded it by the federal Year 2000 Information
and Readiness Disclosure Act of 1998.
11
<PAGE>
PRICE RANGE OF COMMON STOCK
Our Common Stock began trading on the Nasdaq National Market on May 1, 1998
under the symbol "URSI." The following table sets forth the high and low sale
prices of our Common Stock since May 1, 1998, as reported by Nasdaq.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
1998
Second Quarter (from May 1)................................... $19 9/16 $15 1/8
Third Quarter................................................. 26 9 1/2
Fourth Quarter................................................ 19 1/4 5 3/4
1999
First Quarter................................................. 19 1/2 4 1/4
Second Quarter (through April 20)............................. 6 7/8 4 9/16
</TABLE>
On April 20, 1999, the last reported sale price of our Common Stock was $6 3/4
per share. As of April 20, 1999, there were approximately 128 holders of
record of our Common Stock.
DIVIDEND POLICY
We have never paid any cash dividends on our Common Stock and intend, for the
foreseeable future, to retain any future earnings for the development of our
business. Our credit facility restricts our ability to pay dividends. Our
future dividend policy will be determined by the Board of Directors on the
basis of various factors, including our results of operations, financial
condition, capital requirements and investment opportunities.
12
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1998, (i) our actual
capitalization and (ii) our capitalization on a pro forma basis adjusted to
give effect to our purchase of MPG, which occurred after December 31, 1998.
You should read this table in conjunction with the Unaudited Pro Forma
Combined Financial Statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
At December 31,
1998
------------------ ---
Actual Pro Forma
(In thousands)
<S> <C> <C> <C>
Short-term obligations, including current installments... $ 902 $ 2,896
======== ========
Long-term obligations, excluding current installments.... $ 65,255 $ 80,119
-------- --------
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares
authorized; no shares issued and outstanding ........... -- --
Common stock, $0.001 par value, 35,000,000 shares
authorized; 15,707,085 shares issued and outstanding
actual; and 16,703,857 shares issued and outstanding
pro forma .............................................. 16 17
Additional paid-in capital .............................. 159,532 174,277
Retained earnings ....................................... 4,218 4,218
-------- --------
Total stockholders' equity ............................ 163,766 178,512
-------- --------
Total capitalization .................................. $229,021 $258,631
======== ========
</TABLE>
13
<PAGE>
SELECTED FINANCIAL DATA
We purchased the Founding Companies simultaneously with our initial public
offering in May 1998. During the remainder of 1998 and through March 31, 1999,
we purchased a total of 47 additional businesses. The following selected
historical financial data as of December 31, 1997 and 1998 and for the period
from July 25, 1997 (inception) to December 31, 1997 and the year ended
December 31, 1998 have been derived from our audited financial statements.
For financial statement presentation purposes, Northland Auto Transporters,
Inc. and Northland Fleet Leasing, Inc., ("Northland"), one of the Founding
Companies, has been designated as our predecessor entity. The following
selected historical financial data for Northland as of December 31, 1996 and
1997 and for each of the years in the three-year period ended December 31,
1997 have been derived from the audited financial statements of Northland.
You should read the following selected financial data in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the "Unaudited Pro Forma Combined Financial Statements" and the
historical financial statements for the Founding Companies and the Selected
Acquired Companies included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Period from July 25,
1997 (inception) to Year Ended
December 31, 1997 December 31, 1998
-------------------- ----------------------------
Pro Forma
Actual Actual Combined
(Dollars in thousands, except share data)
<S> <C> <C> <C>
Statement of Operations
Data--United Road Servic-
es, Inc.:
Net revenue............... $ -- $ 87,919 $ 179,200
Cost of revenue........... -- 64,765 127,860
----------- ------------ ------------
Gross profit.............. -- 23,154 51,340
Selling, general and
administrative expenses.. 174 12,428 26,211
Goodwill amortization..... -- 1,745 3,952
----------- ------------ ------------
Income (loss) from
operations............... (174) 8,981 21,177
Interest income (expense)
and other, net........... -- (1,086) (9,409)
----------- ------------ ------------
Income (loss) before
income tax............... (174) 7,895 11,768
Income tax expense........ -- 3,503 5,178
----------- ------------ ------------
Net income (loss)......... $ (174) $ 4,392 6,590
=========== ============ ============
Diluted net income (loss)
per share ............... $ (0.08) $ 0.42 $ 0.39
=========== ============ ============
Shares used in computing
diluted net income (loss)
per share................ 2,055,300(1) 10,389,904(1) 16,832,306(2)
=========== ============ ============
<CAPTION>
At December 31, 1997 At December 31, 1998
-------------------- ----------------------------
Pro Forma
Actual Actual Combined
(In thousands)
<S> <C> <C> <C>
Balance Sheet Data--United
Road Services, Inc.:
Working capital (deficit). $ (104) $ 9,330 $ 8,957
Total assets.............. 50 248,732 283,531
Long-term obligations,
excluding current
installments............. -- 65,255 80,119
Stockholders' equity
(deficit)................ (104) 163,766 178,512
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1994 1995 1996 1997
------ ------ ------ -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Historical Statement of Operations Data--
Northland
Net revenue................................ $3,769 $4,671 $6,353 $10,159
Operating income (loss).................... (44) 324 346 1,438
Other income (expense), net................ 117 (18) -- (49)
Net income................................. 67 275 346 1,054
<CAPTION>
At December 31,
-----------------------------------
1994 1995 1996 1997
------ ------ ------ -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Historical Balance Sheet Data--Northland
Working capital............................ $ 52 $ 375 $ 235 $ 399
Total assets............................... 2,368 2,653 3,268 5,465
Long-term obligations, excluding current
installments.............................. 205 257 331 1,074
Stockholders' equity....................... 1,369 1,645 1,991 3,045
</TABLE>
- --------
(1) 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 Founding Companies and one other acquired entity.
(2) Shares used in computing diluted net income per share include (i)
15,707,085 shares issued and outstanding, including shares withheld in
connection with acquisitions, at December 31, 1998, (ii) 996,772 shares
issued, including shares withheld, in connection with the acquisition of
MPG; and (iii) 128,449 shares reflecting the incremental effect of
options, warrants and 1998 earn-out shares payable to the former owners of
the Founding Companies and one other acquired company.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with the
Financial Statements and "Selected Financial Data" which we have provided in
this prospectus. In addition to the historical information that we provide,
this discussion contains forward-looking statements that involve risks and
uncertainties, such as statements of our plans, objectives, expectations and
intentions. You should read and consider the cautionary statements made
elsewhere in this prospectus as being applicable to all related forward-
looking statements wherever they appear in this prospectus. Our actual results
could differ materially from those we discuss in this prospectus. Factors that
could cause or contribute to such differences include those discussed below,
as well as those discussed elsewhere in this prospectus.
Introduction
We provide a broad range of towing, recovery, transport and related services.
The services we offer include:
. towing, impounding and storing motor vehicles;
. conducting lien sales and auctions of abandoned vehicles;
. towing and recovering heavy-duty commercial and recreational vehicles;
. towing heavy equipment; and
. transporting new and used vehicles.
We derive revenue from towing, recovery and transport services based on
distance, time or fixed charges and from related impounding and storage fees.
If an impounded vehicle is not collected within a period prescribed by law
(typically between 30 and 90 days), we initiate and complete lien proceedings
and sell the vehicle at auction or to a scrap metal facility, depending on the
value of the vehicle. Depending on the jurisdiction, we 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. We have contracts with some of our customers, but we
provide services to some of our customers without contracts. The prices we
charge for towing and storage of impounded vehicles for municipalities or law
enforcement agencies are limited by contractual provisions or local
regulation.
Our 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.
16
<PAGE>
Our selling, general and administrative expenses consist primarily of the
following:
. compensation and benefits to sales and administrative employees;
. fees for professional services;
. depreciation of administrative equipment and software;
. advertising; and
. other general office expenses.
In the case of law enforcement and private impound towing, we are paid either
by the owner of the impounded vehicle when the owner claims the vehicle or
from the proceeds of lien sales, scrap sales or auctions. With respect to our
other operations, we bill customers upon completion of our services, with
payment generally due within 30 days. We recognize revenue as follows:
. towing and recovery revenue is recognized at the completion of each
engagement;
. transport revenue is recognized upon the delivery of the vehicle or
equipment to its final destination;
. revenue from lien sales or auctions is recognized when title to the
vehicles has been transferred; and
. revenue from scrap sales is recognized when the scrap metal is sold.
We recognize expenses related to the generation of revenue as they are
incurred.
At the time of our initial public offering in May 1998, we acquired the seven
Founding Companies. Between May 6, 1998 and December 31, 1998, we acquired a
total of 34 additional motor vehicle and equipment towing, recovery and
transport service businesses for aggregate consideration of approximately
$79.6 million in cash, 2,918,608 shares of Common Stock and the assumption of
approximately $23.2 million of indebtedness. From January 1, 1999 through
March 31, 1999, we acquired four additional towing and recovery businesses and
nine additional transport businesses for aggregate consideration of
approximately $76.3 million, consisting of approximately $28.9 million in
cash, 2,039,056 shares of Common Stock and the assumption of approximately
$14.9 million of indebtedness.
All of the acquisitions that we have completed to date have been accounted for
using the purchase method of accounting. As a result, the amount by which the
fair value of the consideration we paid in the acquisitions exceeds the fair
value of the net assets we bought ($215.1 million), has been recorded as
goodwill. This goodwill will be amortized over its estimated useful life of 40
years as a non-cash charge to operating income.
Results of Operations
We operate in two reportable operating segments, transport and towing and
recovery. Through our transport segment, we provide transport services for new
and used vehicles to a broad range of customers throughout the United States.
Through our towing and recovery segment, we provide a variety of towing and
recovery services in local markets, including towing, impounding and storage
of vehicles, conducting lien sales and auctions of abandoned vehicles, towing
heavy equipment and recovering and towing heavy-duty commercial and
recreational vehicles.
The discussion of our historical results set forth below addresses our
historical results of operations and financial condition as shown in our
Consolidated Financial Statements for the period from July 25, 1997
(inception) through December 31, 1997 and for the year ended December 31,
1998. The historical results for the year ended December 31, 1998 include the
results of all businesses we acquired prior to December 31, 1998 from their
respective dates of acquisition.
The discussion of our pro forma results set forth below assumes that we
acquired the Founding Companies and the Selected Acquired Companies on January
1, 1998, with certain pro forma adjustments as described elsewhere in this
prospectus. The pro forma results of operations are not necessarily indicative
of the results we would have obtained had we actually acquired these
businesses on January 1, 1998 or of our future results.
17
<PAGE>
Pro Forma Results for Year Ended December 31, 1998
Net Revenue; Cost of Revenue; Gross Profit. Pro forma net revenue was $179.2
million for the year ended December 31, 1998. Pro forma cost of revenue was
$127.9 million for the year ended December 31, 1998, or 71.4% of pro forma net
revenue. Pro forma net revenue reflects the results of all businesses acquired
since their respective dates of acquisition. The most significant component of
pro forma cost of revenue was labor and subcontractor costs. Pro forma gross
profit was $51.3 million for the year ended December 31, 1998, or 28.6% of pro
forma net revenue.
Selling, General and Administrative Expenses and Goodwill Amortization. Pro
forma selling, general and administrative expenses were $26.2 million for the
year ended December 31, 1998, or 14.6% of pro forma net revenue. The most
significant component of pro forma selling, general and administrative
expenses was administrative salaries and benefits. Pro forma amortization of
goodwill was $4.0 million, or 2.2% of pro forma net revenue.
Income From Operations. Pro forma income from operations was $21.1 million, or
11.8% of pro forma net revenue, for the year ended December 31, 1998.
Other Expenses Net. Pro forma other expenses, net were $9.4 million, or 6.6%
of pro forma net revenue, for the year ended December 31, 1998. The most
significant component of pro forma other expenses, net consisted of additional
interest expense relating to the convertible subordinated debentures issued to
Charterhouse.
Income Tax Expenses. Pro forma income tax expense was $6.1 million, or 4.7% of
pro forma net revenue, for the year ended December 31, 1998.
Net Income. Pro forma net income was $6.6 million, or 3.7% of pro forma net
revenue, for the year ended December 31, 1998.
Historical Results for the Year Ended December 31, 1998
Net Revenue. Our net revenue for the year ended December 31, 1998 was $87.9
million, of which $46.9 million, or 53.4% of net revenue, related to transport
services and $41.0 million, or 46.6% of net revenue, related to towing and
recovery services. Transport revenue was derived from three of the Founding
Companies and nine additional transport businesses acquired prior to December
31, 1998. The Founding Companies involved in transport services experienced an
internal growth rate of 24.7% in net revenue in 1998 as compared to 1997 as a
result of incremental business development and enhanced capacity. Towing and
recovery revenue was derived from four of the Founding Companies and 25
additional towing and recovery businesses acquired prior to December 31, 1998.
The Founding Companies involved in towing and recovery services experienced an
internal growth rate of 33.5% in net revenue in 1998 as compared to 1997 as a
result of increased focus on heavy-duty and higher margin services, coupled
with limited price increases.
Gross Profit. Our cost of revenue was $64.8 million, or 73.7% of net revenue,
for the year ended December 31, 1998, resulting in gross profit of $23.1
million, or 26.3% of net revenue. Transport cost of revenue was $35.0 million,
or 74.6% of transport net revenue, resulting in transport gross profit of
$11.9 million. The most significant components of our transport cost of
revenue consisted of labor, subcontractor/broker costs, fuel, tires and other
vehicle service and maintenance costs. Towing and recovery cost of revenue was
$29.8 million, or 72.7% of towing and recovery net revenue, resulting in
towing and recovery gross profit of $11.2 million. The most significant
components of our towing and recovery cost of revenue consisted of labor,
subcontractor/broker costs, fuel and preparation for auctions and lien sales.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses for the year ended December 31, 1998 were $12.4
million, or 14.1% of net revenue. Transport selling, general and
administrative expenses were $3.4 million, or 7.2% of transport net revenue.
The most significant component of transport selling, general and
administrative expenses consisted of administrative salaries and benefits of
$2.4 million. Towing and recovery selling, general and administrative expenses
were $5.4 million, or 13.2% of
18
<PAGE>
towing and recovery net revenue. The most significant component of towing and
recovery selling, general and administrative expenses consisted of
administrative salaries and benefits of $4.1 million. Selling, general and
administrative expenses related to corporate headquarters were $3.6 million,
or 4.1% of net revenue. The most significant components of corporate
headquarters selling, general and administrative expenses consisted of
administrative salaries and benefits, data center operational expenses,
professional fees and travel.
Income from Operations. Our income from operations for the year ended December
31, 1998 was $9.0 million, or 10.2% of net revenue. Of this amount, $7.9
million related to transport services and $4.7 million related to towing and
recovery services, which amounts were offset by corporate headquarters
selling, general and administrative expenses of $3.6 million.
Historical Results for the Year Ended December 31, 1997
We conducted no operations and generated no net revenue or cost of revenue for
the period from July 25, 1997 (inception) through December 31, 1997. Our
selling, general and administrative expenses were $174,000 for this period. No
other income (expense) or tax benefit was generated, resulting in a net loss
of $174,000 for the period.
Liquidity and Capital Resources
As of December 31, 1998, we had approximately:
. $3.4 million of cash and cash equivalents,
. $9.3 million of working capital, and
. $63.2 million of outstanding indebtedness, excluding current
installments.
In the year ended December 31, 1998, we generated $8.1 million of cash from
operations. We believe our cash flow was enhanced by increased utilization of
vehicles, a favorable mix of services toward higher margin activities, savings
related to the centralization of certain services and purchasing economies
such as insurance and fuel. Cash provided by our operations was offset by an
increase in account receivables of $2.4 million and a decrease in accounts
payable of $1.6 million. During 1998, we used $126.9 million of cash in
investing activities ($118.2 million of which related to acquisitions of
businesses and $11.3 million of which related to purchases of new vehicles and
equipment), and generated $122.2 million of cash through financing activities.
Our financing activities consisted of payments on long-term debt and capital
lease obligations assumed in acquisitions of $27.1 million and payment of
deferred financing costs of $3.3 million, offset by net cash proceeds from
issuance of Common Stock and debt of $152.6 million.
We have a credit facility with a group of banks that enables us to borrow up
to $90.0 million on a revolving basis. The credit facility terminates in
October 2001, at which time all outstanding indebtedness will be due.
Borrowings under the credit facility accrue interest, at our option, at either
(a) the base rate (which is equal to the greater of (i) the federal funds rate
plus 0.5% and (ii) Bank of America's reference rate), or (b) the eurodollar
rate (which is equal to Bank of America's reserve adjusted eurodollar rate
plus a margin ranging from 1.5% to 2.5% per annum).
Our obligations under the credit facility are guaranteed by each of our
subsidiaries. Our obligations and the obligations of our subsidiaries under
the credit facility and related guarantees are secured by substantially all of
our assets, the assets of our subsidiaries and the stock of our subsidiaries.
Under the credit facility we must comply with various loan covenants,
including maintenance of certain financial ratios, restrictions on additional
indebtedness, and restrictions on liens, guarantees, advances and dividends.
In addition, our ability to borrow under the credit facility is subject to
customary drawing conditions. The credit facility also requires prior approval
by the banks of certain acquisitions. As we borrow amounts under the credit
facility to finance capital expenditures, our interest expense will increase.
In connection with the credit facility, we issued to Bank of America a warrant
to purchase 117,789 shares of Common Stock at an exercise price of $13.00 per
share, subject to adjustment as provided in the Warrant Agreement. The warrant
expires on June 16, 2003.
19
<PAGE>
On November 19, 1998, we entered into a Purchase Agreement with Charterhouse
providing for the issuance to Charterhouse of up to $75 million aggregate
principal amount of Debentures. The Debentures are convertible into our Common
Stock at any time, at Charterhouse's option, at an initial exercise price of
$15.00 per share, subject to adjustment as provided in the Purchase Agreement.
The conversion price exceeded the fair market value of the Common Stock on the
date of execution of the Purchase Agreement. Following five years after the
date of first issuance, the Debentures are redeemable at our option at 100% of
their principal amount if the average closing price of our Common Stock
exceeds 150% of the conversion price over a thirty day period. We issued $43.5
million aggregate principal amount of Debentures to Charterhouse at a first
closing on December 7, 1998, and the remaining $31.5 million aggregate
principal amount of Debentures to Charterhouse at a second closing on March
16, 1999. 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 our discretion. Pursuant to the Purchase Agreement, we
have agreed to pay Charterhouse a fee of 1% of the principal amount of the
Debentures issued at each closing. We have also agreed to pay certain fees and
expenses incurred by Charterhouse in connection with the transaction.
Our accounting and financial reporting activities are centralized at our
headquarters in Albany, New York. In addition, we are in the process of
implementing our proprietary National Transportation Management System for our
transport operations and a standardized operating system for our towing and
recovery operations. As of December 31, 1998, we had spent approximately $3.9
million to develop and install our integrated financial and information
systems. Although we expect that we will need to upgrade and expand these
systems in the future, we cannot currently quantify the amount that we will
need to spend to do so.
We spent $11.3 million on purchases of vehicles and equipment (including the
$3.9 million spent in connection with the installation of the information
systems) during the year ended December 31, 1998, primarily for transport and
towing and recovery vehicles. During 1998, we spent $2.2 million on towing and
recovery vehicles and $3.7 million on transport vehicles. These expenditures
were financed primarily with cash flow from operations and debt.
Between May 6, 1998, when we completed our initial public offering and the
acquisitions of the Founding Companies and December 31, 1998, we acquired 34
other motor vehicle and equipment towing, recovery and transport businesses
for aggregate consideration of approximately $79.6 million in cash, 2,918,608
shares of Common Stock and the assumption of approximately $23.2 million of
indebtedness. From January 1, 1999 through March 31, 1999, we acquired four
additional towing and recovery businesses and nine additional transport
businesses for aggregate consideration of approximately $76.3 million,
consisting of approximately $28.9 million in cash, 2,039,056 shares of Common
Stock and the assumption of approximately $14.9 million of indebtedness. We
funded the cash portion of these acquisitions through proceeds from the
initial public offering and long-term borrowings.
We expect to fund our ongoing liquidity needs through cash flow from
operations, borrowings, including use of amounts available under our credit
facility and, depending upon market conditions, through the issuance of
additional Common Stock or debt securities. In the past, we have financed
acquisitions through a combination of Common Stock, cash and debt. If our
Common Stock does not maintain a sufficient market value, or if the owners of
the businesses we wish to acquire are unwilling to accept Common Stock as part
of the purchase price, we may be required to use more of our cash resources,
if available, or seek additional financing, in order to pursue future
acquisitions. The consideration for each future acquisition will vary on a
case-by-case basis, primarily determined by the historical operating results
and future prospects of the business to be acquired and the ability of that
business to complement the services we offer.
Year 2000 Readiness
The "Year 2000 problem" exists because many computer programs, embedded
systems and components were designed to refer to a year by the last two digits
of the year, such as "99" for "1999." As a result, certain of these systems
may not properly recognize that the year that follows "1999" is "2000" and not
"1900." If the Year 2000 problems are not corrected, such systems could fail
or produce erroneous results. No one knows the extent of the potential impact
of the Year 2000 problem generally.
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Our State of Readiness.
We have implemented an enterprise-wide Year 2000 readiness project consisting
of the following phases:
Assessment and Impact Analysis
We have identified certain systems, equipment, and applications, including
embedded systems and other "non-information technology," that are utilized in
our towing and transport operations, or in our finance, payroll and
administration departments and that are necessary to operate our business
without disruption (the "Mission Critical Systems"). These Mission Critical
Systems include servers, desktop and notebook computers, data communications
equipment, peripherals, network and desktop operating systems (collectively,
the "IT Infrastructure"), desktop application suites, payroll and financial
software, towing and transport applications, and interfaces with our financial
systems.
We also utilize certain other hardware and software, operating systems,
relationships and services in day-to-day operations and throughout our various
divisions which are not necessarily critical to operations. We are in the
process of identifying and evaluating these systems and functions and will
include in our Year 2000 readiness project systems that we deem to be material
to our business (collectively, "Important Functions").
We are in the process of sending Year 2000 Questionnaires to all of our
significant suppliers, customers, service providers and other business
partners. As the responses are received, they are catalogued and assessed for
possible impact on our operations. We have sent approximately 200
questionnaires to suppliers and have received seven responses as of March 31,
1999. We have also sent approximately 60 questionnaires to customers and have
received no responses as of March 31, 1999.
We have identified and assessed the impact of Year 2000 problems with respect
to all of our Mission Critical Systems. By the end of July 1999, we expect to
have determined which of our other systems and functions should be deemed
Important Functions and included within the Year 2000 readiness project and to
have assessed the impact of all related responses to Year 2000 Questionnaires
that have been returned by that date. With respect to the remaining Year 2000
Questionnaires and any additional acquisitions that we may complete during
1999, this phase is expected to continue throughout the year.
Test Planning
Based on the results of our Impact Analysis, we will identify, with the help
of our outside Year 2000 consultant, the steps necessary to ensure Year 2000
readiness of all Mission Critical Systems and Important Functions. This
analysis will determine whether the system or function will be tested using
Year 2000 scanning software, manually tested or checked through website or
personal letter confirmation. We have completed this process with respect to
our Mission Critical Systems and expect to complete this process with respect
to Important Functions at all of our existing locations by the end of June
1999. With respect to any additional acquisitions that we may complete during
1999, this process is expected to continue throughout the year.
Testing
This phase consists of implementing the testing procedures that were developed
during the Test Planning phase with respect to all Mission Critical Systems
and Important Functions. We are in various stages of completion of this phase
with respect to our Mission Critical Systems, as more fully described below.
With respect to Important Functions at our existing locations, we expect that
this phase will be complete by the end of September 1999. With respect to any
additional acquisitions that we may complete during 1999, this process is
expected to continue throughout the year.
When United Road Services was formed, management assessed the appropriateness
of various computer hardware and software technologies in light of our
strategic objectives. Because this assessment occurred in the latter half of
1998, management was able to select hardware and financial software that was
represented by the vendors to be Year 2000 ready.
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The software that we use to operate our centralized accounting and financial
reporting functions has been tested by the supplier, which has provided us
with preliminary indications that the software will be Year 2000 ready. With
the assistance of our outside Year 2000 consultant, we plan to confirm the
Year 2000 readiness of these systems through additional testing prior to
September 30, 1999.
Our payroll operations are managed by a national payroll processor, which has
provided us with written assurances that its systems are Year 2000 ready.
In order to increase the functionality of our transport operations systems, we
have developed a National Transportation Management System to replace the
local systems that are currently in use at our transport locations. The
software consultant that assisted us in developing the National Transportation
Management System has provided us with written assurances that the system is
designed to be Year 2000 ready and has advised us that it will fully test the
software and provide written certification of Year 2000 readiness by the end
of September 1999. We have begun installing this software at several
locations, and currently expect to install it at all of our existing transport
locations prior to December 31, 1999.
In order to increase the functionality of our towing operations systems, we
intend to replace substantially all of the local operating systems utilized at
our towing locations with standardized operational software. The vendor that
developed this software has provided us with written assurances that this
software is Year 2000 ready. We have completed installation of this software
at several locations, and currently expect to complete installation at
substantially all of our existing towing locations before December 31, 1999.
With respect to the remaining towing locations, we plan to continue to utilize
the existing systems and supply an interface to our standardized operating
system.
We have also installed interfaces between our various software applications
and our financial systems. Our outside Year 2000 consultant will test these
interfaces for Year 2000 readiness and provide written certification of such
readiness by the end of September 1999.
Our IT Infrastructure has both centralized, datacenter elements and remote
elements at each location. Datacenter infrastructure is comprised of equipment
and software that is all less than one year old, and we have received written
assurances from our infrastructure vendors that these systems are Year 2000
ready. In addition, our outside Year 2000 consultant will test our datacenter
infrastructure and provide written certification of Year 2000 readiness by the
end of September 1999.
In order to improve the efficiency of our acquired businesses and to include
their systems within our wide area network, we will upgrade and replace the
remote infrastructure of our acquired entities to meet corporate standards as
soon as reasonably practicable following the acquisition of such entities.
Remote infrastructure upgrades and replacements for all locations acquired on
or before December 31, 1998 are expected to be completed by the end of May
1999.
We plan to survey and, where appropriate, conduct website confirmation of the
Year 2000 readiness of our telecommunications equipment and service vendors.
We expect that this process will be complete by the end of September 1999.
Remediation
During this phase, we intend to develop and implement appropriate corrective
procedures for those Mission Critical Systems and Important Functions that we
determine during the Testing phase are not Year 2000 ready. We will determine,
on a case-by-case basis, whether such systems and functions should be upgraded
or replaced, or whether a custom remediation plan should be implemented. In
the case of our business partners, remediation may involve the designation of
alternative service providers.
Contingency Planning
As part of the Contingency Planning phase of our Year 2000 readiness project,
we intend to develop and test manual contingency plans for our dispatch
operations and for certain of our financial operations. While computerized
systems make us more efficient, we believe we can perform all necessary
functions manually,
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although not as efficiently. In the past, certain of our divisions have
operated successfully on a manual basis. In addition, we have successfully
interacted with certain of our vendors and customers on a manual basis.
In the event that any of our other Mission Critical Systems or Important
Functions will not be Year 2000 ready by December 31, 1999, we will identify,
consider, and determine appropriate alternatives. We expect that such
contingency plans will be implemented during the fourth quarter of 1999.
The Costs to Address Our Year 2000 Issues
Through December 31, 1998, we incurred costs of approximately $3.9 million to
develop and install our information systems described above. Because these
systems were developed and installed during the latter half of 1998,
management was able to take Year 2000 readiness into account in selecting
hardware and software technologies that would meet our objectives. As a
result, we have not incurred, and do not expect to incur, material costs to
upgrade or replace our information systems to address Year 2000 issues. We
currently expect to incur up to $300,000 for consulting fees and other costs
related to our Year 2000 readiness project during 1999.
The Risks of Our Year 2000 Issues
Installation of our information systems may not be completed at all of our
locations before December 31, 1999. In addition, it is possible that the
systems, when installed, may not function properly. If so, we would be forced
to rely on manual performance of our central administrative functions along
with the local dispatch and operating systems utilized by our acquired
businesses prior to their acquisition by us. There can be no assurance that
such systems will be Year 2000 ready, or that the vendors and other service
providers associated with such businesses will be Year 2000 ready. If the
local dispatch and operating systems utilized by our acquired businesses do
not function properly after December 31, 1999, we will be required to perform
all critical functions on a manual basis. Any resulting inefficiency could
have a material adverse effect on our business, financial condition and
results of operations.
Because we have not yet received responses to our Year 2000 Questionnaires
from all of our business partners, we are unable to predict the impact that
any Year 2000 problems of our vendors, customers or financial institutions may
have on us. We intend to continue to address Year 2000 issues with our
business partners, and will implement contingency plans to the extent
necessary.
The foregoing constitutes a Year 2000 statement and readiness disclosure
subject to the protections afforded it by the federal Year 2000 Information
and Readiness Disclosure Act of 1998.
Quantitative and Qualitative Disclosure of Market Risk
The table below provides information about our market sensitive financial
instruments and constitutes a "forward-looking statement." Our major market
risk exposure is changing interest rates. Our policy is to manage interest
rates through the use of floating rate debt. Our objective in managing our
exposure to interest rate changes is to limit the impact of interest rate
changes on earnings and cash flow and to lower our overall borrowing costs.
The table below provides information about our financial instruments that are
sensitive to interest rate changes. The table presents principal cash flows by
expected maturity dates for floating rate debt instruments as of December 31,
1998. We had no floating rate debt or derivative financial instruments at
December 31, 1997.
<TABLE>
<CAPTION>
Expected Maturity Date
---------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total Fair Value
---- ---- ------- ---- ---- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt
Variable rate........ -- -- $18,800 -- -- -- $18,800 $18,800
</TABLE>
Average interest rate will be at the base rate (the higher of the Federal
funds rate plus 0.5% or the reference rate, as defined) plus the base rate
margin, or the bank's Eurodollar rate plus a margin of 1.5% to 2.5%.
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BUSINESS
We were formed in July 1997 to become a leading national provider of motor
vehicle and equipment towing, recovery and transport services. At the time of
our initial public offering in May 1998, we acquired the seven Founding
Companies, three of which provide transport services and four of which provide
towing and recovery services. Between May 6, 1998 and December 31, 1998, we
acquired a total of 34 additional businesses, nine of which provide transport
services and 25 of which provide towing and recovery services. Between January
1, 1999 and March 31, 1999, we acquired a total of thirteen additional
businesses, nine of which provide transport services and four of which provide
towing and recovery services. We believe that we are now one of the largest
providers of motor vehicle and equipment towing, recovery and transport
services in the United States.
We offer a broad range of towing and recovery services in our local markets,
including:
. towing, impounding and storing motor vehicles;
. conducting lien sales and auctions of abandoned vehicles;
. towing heavy equipment; and
. towing and recovering heavy-duty commercial and recreational vehicles.
We derive revenue from towing and recovery services based on distance, time or
fixed charges and from related impounding and storage fees. If impounded
vehicles are not claimed by their owners within prescribed time periods, we
are entitled to be paid from the proceeds of lien sales, scrap sales or
auctions.
Our towing and recovery 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.
We provide transport services for new and used vehicles throughout the United
States. We derive revenue from transport services according to pre-set rates
based on the mileage or negotiated flat rates.
Our transport customers include:
. commercial entities, such as automobile leasing companies, automobile
manufacturers, automobile auction companies and automobile dealers; and
. individual motorists.
The Background of Our Industry
We estimate that motor vehicle and equipment towing and transport services
generated net revenue in excess of $14 billion in the United States in 1997.
Based on available data, we believe that there are over 36,000 motor vehicle
and equipment towing and transport businesses in the United States, most of
which are small, local and owner-operated, with limited access to capital for
modernization and expansion.
We believe that the demand for towing, recovery and transport services has
been impacted by the following factors:
. an increase in the number and average age of registered vehicles, which
increases the demand for all types of towing, recovery and transport
services;
. a rise in government mandates (and increased enforcement of such
mandates) against unlicensed or uninsured drivers and unregistered
vehicles, which results in higher demand for towing and impounding
services;
. the growing popularity of leasing (which, according to the National
Automobile Dealers Association, has risen from 5% of all new auto sales
in 1985 to 30% in 1996) which increases the demand for transport
services to move off-lease vehicles to auctions and dealers for sale;
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. the increasing mobility of the United States workforce, which increases
demand for automobile transport in connection with career-related moves;
and
. rising new and used auto sales, which increases demand for automobile
transport generally.
Strategy
We believe there are significant opportunities for a national provider of
towing, recovery and transport services with high quality service to increase
revenue and profitability by expanding its scope of services and customer
base, achieving operating efficiencies and expanding through acquisitions. As
certain areas within the automobile industry experience growth and
consolidation, such as new and used automobile dealerships, rental car
companies and automobile auction companies, we believe that the demand will
increase for a provider of towing, recovery and transport services with the
resources and geographic coverage to serve the expanding needs of these
businesses. Further, we believe that effective implementation of our operating
and acquisition strategies as described below will position us to secure
operating and competitive advantages over smaller competitors.
We also believe that the fragmented nature of the towing, recovery and
transport markets presents an attractive opportunity for consolidation. Our
management team includes executives with experience in implementing
acquisition programs and effectively integrating acquired businesses as well
as local managers who have significant contacts and experience in towing,
recovery and transport services. We believe that this combination and the
fragmented nature of the towing, recovery and transport markets provides us
with the capability and opportunity to implement an effective consolidation
strategy, assuming that we have access to sufficient capital to pursue this
strategy.
Operating Strategy
. Provide High Quality Service. We believe that timely, professional and
dependable service is the primary generator of repeat towing, recovery and
transport service business. We intend to continue to implement proven
practices throughout our operations in areas such as dispatching
technology, driver training and professionalism, preventive maintenance and
safety. By doing this we intend to continue to offer high quality service
to all of our customers.
. Expand Services and Customer Base. We intend to continue to expand the
scope of our services by introducing certain capabilities of the businesses
we acquire into other markets where we believe such services can be
successfully marketed. We believe that our size and financial and other
resources will permit us to attract customers and contracts that require
greater towing, recovery, transporting and storage capabilities than those
possessed by local owner-operators. We intend to utilize our geographic
diversity to pursue additional business from new and existing customers
that operate on a regional or national basis, such as leasing companies,
insurance companies and automobile auction companies. We will also seek to
develop additional capabilities and services to complement our existing
operations. For example, as part of our development of a national network
of transport operations, we intend to utilize our operating locations as
marshalling yards, which will enable us to collect vehicles in one location
and allocate them to particular transport vehicles and routes to maximize
asset utilization.
. Achieve Operating Efficiencies. We will seek to achieve operating
efficiencies though improved asset utilization by implementing a "hub-and-
spoke" strategy within identified towing markets, with a centralized "hub"
for management, dispatch and maintenance operations that supports multiple
satellite truck and impound yards. We believe that this strategy will allow
us to provide timely service throughout a particular market, while also
enabling us to consolidate certain duplicative dispatch systems and
facilities. Through this practice, we expect to spread certain fixed costs
over a larger vehicle fleet. With respect to our transport operations, we
intend to utilize our proprietary National Transportation Management System
to maximize truck utilization through centralized dispatching and to
perform integrated invoicing and other administrative functions. We also
expect to continue to realize cost savings by continuing to centralize
certain administrative functions at our headquarters in Albany, New York
and by using our purchasing power to seek improved pricing in areas such as
fuel, vehicles and parts.
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. Maintain Local Expertise. We anticipate that management of companies that
we have acquired and companies that we acquire in the future will continue
to maintain local control of their daily operations. We believe that this
strategy allows us to take advantage of the local and regional market
knowledge, name recognition and customer relationships possessed by each
business we acquire.
Acquisition Strategy
A key component of our growth strategy has been to acquire other towing,
recovery and transport businesses in strategic markets and locations.
Depending on market conditions, and the availability of financing, we intend
to continue to pursue our acquisition strategy.
. Enter New Geographic Markets. As part of our "hub-and-spoke" operating
strategy, we intend to acquire established, high-quality towing and
recovery businesses in markets where we can establish a leading market
position to serve as "hubs" into which additional operations may be
consolidated. We also intend to acquire transport businesses with
complementary transport routes and capabilities in markets across North
America in order to support an integrated national transport network. We
further believe that by virtue of our regional towing and storage
operations we will accumulate many vehicles that need to be delivered to
auctions, repair shops or scrap metal facilities, and that these operations
will feed our transport services.
. Expand Within Existing Geographic Markets. Once we have established a core
presence in a market, we will seek to strengthen our market position by
purchasing additional businesses that offer similar services. We will also
pursue "tuck-in" acquisitions of smaller companies, whose businesses can be
integrated into our operations, thereby using our existing infrastructure
over a broader vehicle fleet and revenue base. In addition, we may seek to
vertically integrate our operations by acquiring businesses which offer
complementary services that we do not currently offer. In cases where
acquired companies have developed local and regional goodwill and customer
relationships, we will continue to maintain the existing business names and
identities.
We believe that businesses we seek to purchase will regard us as an attractive
acquirer because of the following factors:
. our strategy for creating a national, comprehensive and professionally
managed towing, recovery and transport service company;
. our decentralized operating strategy, which emphasizes an ongoing role for
owners, management and key personnel of the businesses we acquire, as well
as meaningful equity positions for such individuals which will enable them
to participate in our growth;
. our visibility and access to financial resources as a public company; and
. the potential for increasing the profitability of the acquired businesses
as a result of our centralization of administrative functions, access to
increased marketing resources and purchasing economies.
In the past, we have financed our acquisitions by using a combination of
Common Stock, cash and debt. Recently, we have experienced a significant
decline in the market price of our Common Stock. As a result, our ability to
complete acquisitions using Common Stock as currency has been adversely
affected. If our Common Stock does not maintain a sufficient market value, or
if the owners of the businesses we seek to acquire are unwilling to accept
Common Stock as part of the purchase price, we may be required to use more of
our cash resources, if available, or seek additional financing in order to
pursue our acquisition program. The consideration for each future acquisition
will vary on a case-by-case basis, with the major factors in establishing the
purchase price being the historical operating results and future prospects of
the business to be bought and the ability of that business to complement the
services we offer. It is possible that we will not be able to successfully
consummate acquisitions in the future. If we are unable to pursue an
acquisition strategy in the future, we will be required to rely on internal
growth to expand our business.
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Operations and Services Provided
Towing and Recovery
We provide a broad range of towing and recovery services for a diverse group
of commercial, government and individual customers. Towing and recovery
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 our vehicle fleet (typically using a
computerized positioning system) and assigns the job to a particular vehicle.
The driver collects the vehicle or equipment and tows it to one of several
locations, depending on the nature of the customer.
Municipality and Law Enforcement Agency Towing. We provide towing services to
various municipalities and law enforcement agencies. In this market, vehicles
are typically towed to one of our facilities where the vehicle is impounded
and placed in storage. The vehicle remains in storage until its owner pays us
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), we complete lien proceedings and
sell the vehicle at auction or to a scrap metal facility, depending on the
value of the vehicle. Depending on the jurisdiction, we 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. We provide services in some cases under contracts with municipalities
or police, sheriff and highway patrol departments, typically for terms of five
years or less. These contracts often may be terminated for material breach and
are typically subject to competitive bidding upon expiration. In other cases,
we provide these services to municipalities or law enforcement agencies
without a long-term contract. Whether pursuant to a contract or an ongoing
relationship, we generally provide these services for a designated geographic
area, which may be shared with one or more other companies.
Insurance Salvage Towing. We provide 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. Our 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.
Private Impound Towing. We provide impound towing services to private
customers, such as shopping centers, retailers and hotels, which engage us to
tow vehicles that are parked illegally on their property. As in law
enforcement agency towing, we generate revenues through the collection of
towing and storage fees from vehicle owners, and from the sale of vehicles
that are not claimed.
Commercial Road Service. We provide road services to a broad range of
commercial customers, including automobile dealers and repair shops. We
typically charge a flat fee and a mileage premium for these towing and
recovery services. Commercial road services also include towing and recovery
of heavy-duty trucks, recreational vehicles, buses and other large vehicles,
typically for commercial fleet operators. We generally charge an hourly rate
based on the towing or recovery vehicle used for these specialized services.
Heavy Equipment Transport. We provide heavy equipment transport services to
construction companies, contractors, municipalities and equipment leasing
companies. We generally base our fees for these services on the vehicle used
and the distance traveled.
Consumer Road Service. We also tow disabled vehicles for individual motorists
and national motor clubs. We generally tow such vehicles to repair facilities
for a flat fee paid by either the individual motorist or the motor club.
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Transport
We provide new and used automobile transport services for a wide range of
commercial customers. With respect to new automobiles, transport services
typically begin with a phone 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 our used
automobile transport business derives from automobile auctions, where our on-
site 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 our vehicle fleet and assigns
the job to a particular vehicle. The driver then collects the automobiles and
transports them to the requested destination or to an intermediate location
for pick up by another of our vehicles.
We provide new and used automobile transport services to leasing companies,
automobile manufacturers, automobile dealers, automobile auction companies,
long-distance transporters, brokers and individuals. We typically provide
services as needed by a customer and charge the customer according to pre-set
rates based on mileage or negotiated flat rates. We transport large numbers of
new vehicles for automobile manufacturers from ports and rail yards to
individual dealers pursuant to contracts. These contracts typically have terms
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 our performance. Otherwise, a
new contract is awarded pursuant to competitive bidding. We transport large
numbers of used vehicles from automobile auctions (where off-lease vehicles
are sold) to individual dealers. In addition, we provide transport services
for dealers who transfer new cars from one region to another and local
collection and delivery support to long-haul automobile transporters. These
services are typically not subject to contracts.
Sales and Marketing
We believe that our commitment to consistent high quality service has provided
us with long-term relationships with many customers. We believe that these
relationships position us to expand market penetration through the use of
enhanced sales and marketing efforts. Prior to joining United Road Services,
the businesses we have acquired primarily focused on building and maintaining
personal relationships with customers, while also using limited print
advertising in newspapers and industry periodicals. We currently focus our
marketing efforts on large governmental and commercial accounts, including
leasing companies, insurance companies and law enforcement agencies.
Dispatch and Information Systems
Prior to their acquisition by us, each of the businesses we have acquired
operated a local dispatch system and assigned individual towing, recovery and
transport vehicles to particular service calls, in some cases through the use
of computerized positioning systems which identify and track vehicle location
and status.
We are in the process of implementing our proprietary National Transportation
Management System to maximize truck utilization in our transport operations.
This system performs integrated order entry, dispatching, load composition,
invoicing, payroll and other administrative functions. We are also in the
process of standardizing our towing and recovery operating system at
substantially all of our locations. This system performs order entry,
dispatch, impound vehicle inventory, lien processing and other administrative
functions. We expect these systems to be operational at all of our current
transport locations and substantially all of our current towing and recovery
locations by the end of 1999. However, there can be no assurance that this
will be the case.
Our accounting and financial reporting activities are centralized at our
headquarters in Albany, New York. We anticipate that we will need to upgrade
and expand our information technology systems on an ongoing basis as we expand
our operations and complete acquisitions.
For a discussion of year 2000 issues as they relate to our systems and our
operations, you should read "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Readiness."
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Competition
The market for towing, recovery and transport services is extremely
competitive. This competition is based primarily on quality, service,
timeliness, price and geographic proximity. We compete with certain large
transport companies on a national and regional basis, some of which may have
greater financial and marketing resources than we have. We also compete with
thousands of smaller local companies, which may have lower overhead cost
structures than we have and may, therefore, be able to provide their services
at lower rates than we can.
We may also face competition for businesses we seek to acquire from companies
which are attempting to consolidate towing and recovery or transport service
providers. Some of our competitors may be better positioned than we are to
finance acquisitions, to pay higher prices for the businesses we pursue or to
finance their internal operations.
We believe that we are able to compete effectively because of our high quality
service, geographic scope, broad range of services offered, experienced
management and operational economies of scale. We seek to differentiate
ourselves from our competition in terms of service and quality by investing in
training, systems and equipment and by offering a broad range of products and
services. We also seek to differentiate ourselves in terms of timeliness and
geographic proximity by establishing facilities and vehicles in targeted
geographic markets so that we are positioned to provide timely responses to
service calls.
Government Regulation and Environmental Matters
Towing, recovery and transport services are subject to various federal, state
and local laws and regulations regarding equipment, driver certification,
training, recordkeeping and workplace safety. Our vehicles and facilities are
subject to periodic inspection by the United States Department of
Transportation and similar state and local agencies. Our failure to comply
with such laws and regulations could subject us to substantial fines and could
lead to the closure of operations that are not in compliance. In addition,
certain government contracting laws and regulations may affect our ability to
acquire complementary businesses in a given city or county. Companies
providing towing, recovery and transport services are required to have
numerous federal, state and local licenses and permits. When we acquire such
businesses, we must transfer or apply for such licenses and permits in order
to conduct the business. Any failure to obtain such licenses and permits or
any delay in our receipt of such licenses and permits could have a material
adverse effect on our business, financial condition and results of operations.
Our 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 our vehicles. In particular, our 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. We believe that
we are in substantial compliance with all such laws and regulations. We do 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
us or that we could be identified by the Environmental Protection Agency, a
state agency or one or more third parties as a potentially responsible party.
If we are subject to such a claim or are so identified, we may incur
substantial investigation, legal and remediation costs. Such costs could have
a material adverse effect on our business, financial condition and results of
operations.
Seasonality; Cyclicality
The demand for towing, recovery and transport services is subject to seasonal,
cyclical and other variations. Specifically, the demand for towing and
recovery services is generally highest in extreme 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 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, dealer
inventories, and new and used auto sales.
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Safety and Training
We use 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 our safety standards, our insurance carriers' safety
standards and federal, state and local laws and regulations. We believe that
our emphasis on safety and training will assist us in attracting and retaining
quality employees.
Facilities and Vehicles
As of December 31, 1998, we operated approximately 59 facilities to garage,
repair and maintain towing, recovery and transport vehicles, impound and store
towed vehicles and conduct lien sales and auctions. All of our facilities are
leased from other parties. Many of our facilities can be used at higher
capacities, if necessary. We will seek to consolidate facilities and vehicle
storage capacity in the future where appropriate.
As of December 31, 1998, we operated a fleet of approximately 1,100 towing,
recovery and transport vehicles, which we believe are generally well-
maintained and adequate for our current operations.
Risk Management, Insurance and Litigation
Our primary liability risks include bodily injury, property damage, workers'
compensation claims and, potentially, environmental and land use claims. We
maintain insurance on a company-wide basis, subject to customary deductibles.
Although, from time to time, we are a party to litigation arising in the
ordinary course of business (most of which involves claims for personal injury
or property damage incurred in connection with our operations) we are not
currently involved in any litigation that we believe will have a material
adverse effect on our business, financial condition or results of operations.
Employees
As of December 31, 1998, we had approximately 1,750 employees and used
approximately 400 independent contractors. None of our employees are members
of unions.
30
<PAGE>
MANAGEMENT
Directors and Officers
Our Amended and Restated Certificate of Incorporation provides that our Board
of Directors shall be divided into three classes, as nearly equal in number as
possible, 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
ten individuals identified below are currently serving on the Board of
Directors, with one vacancy which may be filled by the Board of Directors when
a suitable candidate is located.
The following table sets forth the name, age and position of our directors and
officers:
<TABLE>
<CAPTION>
Director
Name Age Position Class
<S> <C> <C> <C>
Edward T. Sheehan....... 56 Chairman of the Board, Chief Executive Officer and Secretary III
Allan D. Pass........... 49 President and Chief Operating Officer --
Donald J. Marr.......... 40 Senior Vice President and Chief Financial Officer --
Robert J. Adams, Jr. ... 36 Senior Vice President and Chief Acquisition Officer --
Edward W. Morawski...... 50 Vice President and Director I
Robert L. Berner, III... 37 Director II
Merril M. Halpern....... 64 Director III
Grace M. Hawkins........ 53 Director II
Richard A. Molyneux..... 48 Director III
Donald F. Moorehead,
Jr. ................... 48 Director II
Michael S. Pfeffer...... 35 Director I
Todd Q. Smart........... 34 Director I
Mark J. Henninger....... 41 Director III
</TABLE>
- --------
Edward T. Sheehan has served as our Chairman of the Board and Chief Executive
Officer since October 1997. Mr. Sheehan was President of United Waste Systems,
Inc. ("United") from December 1992 to August 1997, and Chief Operating Officer
of United from 1994 to August 1997, when United was sold to USA Waste
Services, Inc. ("USA Waste"). Mr. Sheehan currently serves as a director of
Gundle/SLT Environmental, Inc., an environmental products company.
Allan D. Pass, Ph.D has served as our President and Chief Operating Officer
since September 1998. From January 1998 until September 1998, he served as our
Senior Vice President and Chief Operating Officer. From 1986 until February
1998, Dr. Pass served as the Chief Executive Officer and President of National
Behavioral Science Consultants, Inc., a consulting firm specializing in
innovative productivity and profitability enhancement and human resource
programs. From September 1991 until June 1995, Dr. Pass also served as a
Corporate Vice President for Chambers Development Corporation.
Donald J. Marr has served as our Senior Vice President and Chief Financial
Officer since January 1998. From 1986 through 1997, he held a series of
management positions with KeyCorp, most recently as Senior Vice President,
Planning and Analysis.
Robert J. Adams, Jr. has served as our Senior Vice President and Chief
Acquisition Officer since June 1998. From February 1998 through May 1998, Mr.
Adams provided us with acquisition-related consulting services. From April
1996 through January 31, 1998, Mr. Adams served as a Manager of Corporate
Development for Republic Industries, Inc. From October 1995 through March
1996, Mr. Adams was employed by RJA, Inc. and from June 1990 through September
1995 he was employed by Waste Management, Inc. as an operations manager.
Edward W. Morawski has served as a Vice President and director since May 1998.
Mr. Morawski founded Northland, one of the Founding Companies, in 1977 and
served as its President from inception until we acquired Northland in May
1998.
Robert L. Berner, III has served as a director since December 1998. Mr. Berner
is a Managing Director of Charterhouse Group International, Inc.
("Charterhouse International") and a member of its Investment Committee. Mr.
Berner joined Charterhouse International in January 1997. From 1986 through
December 1996, he was a Principal in the Merger and Acquisitions Department at
Morgan Stanley & Co.
31
<PAGE>
Merril M. Halpern has served as a director since December 1998. Mr. Halpern
founded Charterhouse International in 1973 and serves as its Chairman of the
Board and Chief Executive Officer. Mr. Halpern also serves on the Boards of
Directors of Microwave Power Devices, Inc., a manufacturer of highly linear
power amplifiers primarily for the wireless telecommunications market, and
NetCare Health Systems, Inc., an integrated health provider network.
Grace M. Hawkins has served as a director since May 1998. Since 1991, Ms.
Hawkins has been President of Lotus Publications, Inc., a publishing company
specializing in marketing for the transportation industry.
Richard A. Molyneux has served as a director since June 1998. Since March
1998, Mr. Molyneux has been a partner of United Ventures L.L.C. From 1975
through 1997, Mr. Molyneux served in various executive positions with KeyBank,
National Association, and its affiliates, most recently as its Vice
Chairman.
Donald F. Moorehead, Jr. has served as a director since May 1998. Since August
1997, Mr. Moorehead has served as a consultant to USA Waste (now known as
Waste Management, Inc.). Since June 1, 1998, Mr. Moorehead has also served as
Chairman and Chief Executive Officer of EarthCare Co. Group, Inc., a liquid
waste management company. From June 1995 to August 1997, he served as Vice
Chairman and Chief Development Officer of USA Waste. From October 1990 to June
1995, he served as USA Waste's Chairman, and from October 1990 to May 1994, he
also served as its Chief Executive Officer. Mr. Moorehead currently serves as
a director of FYI, Inc., a document reproduction and storage company, and
EarthCare Co. Group, Inc.
Michael S. Pfeffer has served as a director since March 1999. Mr. Pfeffer has
been a Senior Vice President of Charterhouse International since May 1998.
From September 1996 to May 1998, Mr. Pfeffer served in executive positions in
the equity capital group of General Electric Capital Corporation, most
recently as Senior Vice President. From August 1993 to September 1996, Mr.
Pfeffer was Vice President of Charterhouse Environmental Capital Group.
Todd Q. Smart has served as a director since May 1998. Mr. Smart also provides
us with acquisition-related consulting services. In 1987, Mr. Smart founded
Absolute Towing and Transporting, Inc. ("Absolute"), one of the Founding
Companies, and served as its President from inception until we acquired
Absolute in May 1998. Since June 1998, Mr. Smart has also operated an official
police garage in the City of Los Angeles.
Mark J. Henninger has served as a director since August 1998. Mr. Henninger
also provides us with acquisition-related consulting services. Mr. Henninger
founded Keystone Towing, Inc. ("Keystone") in 1991 and served as its President
from inception until we acquired Keystone in August 1998.
In connection with the purchase by Charterhouse of $43.5 million aggregate
principal amount of Debentures in December 1998, the Board of Directors was
expanded from eight members to ten members and Messrs. Berner and Halpern,
both designees of Charterhouse, were appointed to fill the resulting vacancies
on the Board. Further, in connection with the purchase by Charterhouse of an
additional $31.5 million aggregate principal amount of Debentures in March
1999, the Board of Directors was expanded to eleven members and an additional
Charterhouse designee, Mr. Pfeffer, was added to the Board. Pursuant to the
Purchase Agreement with Charterhouse, we will not take any action that would
require stockholder approval without the approval of a majority of the
Charterhouse designees to the Board who are present at the relevant Board
meeting.
Committees of the Board of Directors
Our Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee: (i) makes recommendations to the Board of Directors with
respect to the independent auditors who conduct the annual examination of our
accounts; (ii) reviews the scope of the annual audit and meets periodically
with our independent auditors to review their findings and recommendations;
(iii) approves major accounting policies or changes thereto; and (iv)
periodically reviews our principal internal financial controls. The
Compensation Committee reviews the compensation of our executive officers and
makes recommendations regarding such compensation to the Board of Directors.
32
<PAGE>
Compensation of Directors
Certain directors who are not employees or consultants of United Road Services
are entitled to receive (i) upon their election as a director and on the date
of each annual meeting of the Board of Directors thereafter a grant of options
to purchase 20,000 shares of Common Stock at the fair market value on the date
of grant and (ii) cash compensation of approximately $2,500 for each meeting
attended. Directors who are also employees or consultants of United Road
Services do not receive additional compensation for serving as directors. All
directors are reimbursed for expenses incurred in attending meetings of the
Board or its committees.
Executive Compensation
The following table presents summary information concerning compensation of
the Chief Executive Officer and each of the three other most highly
compensated executive officers of United Road Services as of December 31, 1998
(together, the "Named Executive Officers") during fiscal year 1998 for
services rendered to United Road Services and its subsidiaries. Except for the
Named Executive Officers, no executive officer of United Road Services
received salary and bonus payments exceeding in the aggregate $100,000 during
fiscal year 1998. No compensation was paid to the Named Executive Officers
during fiscal year 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Securities
Underlying All Other
Name and Principal Position Salary Bonus Options Compensation
- --------------------------- ------ ------- ---------- ------------
<S> <C> <C> <C> <C>
Edward T. Sheehan...................... $200,000 $ -- 90,000 $ --
Chairman of the Board and
Chief Executive Officer
Allan D. Pass, Ph.D.................... 125,765 -- 155,000 8,887(2)
President and Chief
Operating Officer(1)
Robert J. Adams, Jr.................... 110,002 -- 110,000 4,554(4)
Senior Vice President and
Chief Acquisition Officer(3)
Donald J. Marr......................... 75,000 50,000 125,000 --
Senior Vice President and
Chief Financial Officer
</TABLE>
- --------
(1) Dr. Pass became employed by United Road Services on April 20, 1998. From
January 1, 1998 through April 19, 1998, Dr. Pass provided consulting
services to United Road Services.
(2) Consists of housing expenses paid by United Road Services on behalf of
the Named Executive Officer.
(3) Mr. Adams became employed by United Road Services on June 1, 1998. From
February 1, 1998 through June 1, 1998, Mr. Adams provided acquisition-
related consulting services to United Road Services.
(4) Consists of relocation expenses paid by United Road Services on behalf of
the Named Executive Officer.
33
<PAGE>
Option Grants in 1998
The following table sets forth information concerning the grant of stock
options during 1998 to the Named Executive Officers:
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
Annual Rates of
Number of Percentage of Stock Price
Shares Total Options Appreciation for
Underlying Granted to Exercise Option Term(2)
Name and Options Employees in Price Expiration -------------------
Date of Grant Granted(1) Fiscal Year (per share) Date 5% 10%
------------- ---------- ------------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Edward T. Sheehan
5/15/98................ 40,000 3.7% $15.875 5/15/08 $399,352 $1,012,040
10/9/98................ 50,000 4.6 9.50 10/9/08 298,735 757,035
Allan D. Pass
1/23/98................ 90,000 8.3 9.00 1/23/08 509,400 1,290,879
5/15/98................ 25,000 2.3 15.875 5/15/08 249,595 632,525
10/9/98................ 40,000 3.7 9.50 10/9/08 238,988 605,628
Robert J. Adams, Jr.
1/23/98................ 25,000 2.3 9.00 1/23/08 141,500 358,595
6/1/98................. 45,000 4.2 15.625 6/1/08 442,197 1,120,608
10/9/98................ 40,000 3.7 9.50 10/9/08 238,988 605,628
Donald J. Marr
1/23/98................ 50,000 4.6 9.00 1/23/08 283,000 717,190
5/15/98................ 35,000 3.2 15.875 5/15/08 349,433 885,535
10/9/98................ 40,000 3.7 9.50 10/9/08 238,988 605,628
</TABLE>
- --------
(1) All of such options were granted pursuant to our 1998 Stock Option Plan,
were issued at fair market value on the date of grant and vest over a
period of three years at a rate of 33 1/3% per year beginning on the
first anniversary of the date of grant.
(2) Represents the potential realizable value of each grant of options
assuming that the market price of the underlying securities appreciates
in value from the date of grant to the end of the option term at the
rates of 5% and 10% compounded annually.
Fiscal Year-End Option Value Table
The following table sets forth information concerning fiscal year-end option
values. No options were exercised by any of the Named Executive Officers
during 1998.
<TABLE>
<CAPTION>
Number of Securities Value of
Underlying Options at In-the-Money Options at
December 31, 1998 December 31, 1998(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Edward T. Sheehan........... -- 90,000 -- $ 543,750
Allan D. Pass............... -- 155,000 -- 1,261,250
Robert J. Adams, Jr......... -- 110,000 -- 713,125
Donald J. Marr.............. -- 125,000 -- 911,250
</TABLE>
- --------
(1) Calculated as the difference between the aggregate fair market value of
such options based on the last reported sale price of the Common Stock on
December 31, 1998 ($18.375 per share) and the aggregate exercise
price.
34
<PAGE>
Employment Agreements
We have employment agreements with each of the Named Executive Officers.
Pursuant to these agreements, each executive officer is entitled to receive a
base salary and is eligible for a performance bonus as determined by the
Compensation Committee of the Board of Directors.
The employment agreements with Mr. Sheehan, Dr. Pass and Mr. Adams have an
initial term of three years with an evergreen extension continuing after the
initial term unless either the Company or the executive officer gives 10 days'
notice of termination. Pursuant to their employment agreements, Mr. Sheehan,
Dr. Pass and Mr. Adams are entitled to receive an annual salary of not less
than $300,000, $250,000 and $200,000, respectively. If any of the agreements
are terminated without "Cause" by the Company, if the Board of Directors
determines in good faith that the executive officer has been assigned duties,
responsibilities or status materially inconsistent with the duties,
responsibilities and status set forth in his employment agreement, or, in the
case of Dr. Pass and Mr. Adams, if such executive officer terminates his
employment with the Company within six months after any termination of Mr.
Sheehan's employment with the Company, the Company is obligated to pay such
executive officer a termination fee equal to approximately two times such
executive officer's base salary and bonus. In addition, all stock options
granted to the executive pursuant to any of the Company's stock option plans
prior to the effective date of termination will continue to vest as if such
termination had not occurred and the executive will be entitled to continue to
receive health, life and disability insurance benefits for a period of two
years after termination. Upon the happening of certain events following a
"Change of Control," including a termination of the executive's officer's
employment for any reason other than "Cause," each executive officer has the
option, exercisable within one year after the Change of Control, to receive a
lump sum payment equal to approximately three times the executive's base
salary and bonus. In addition, all of the executive officer's stock options
that are unvested as of the effective date of the Change of Control will
become immediately vested and the executive officer will be entitled to
continue to receive health, life and disability insurance benefits for a
period of three years after the executive's termination. Each of the
agreements contains a covenant prohibiting the executive officer from
competing with the Company for a period of one year following any expiration
or termination of such agreement. The agreements also provide for customary
benefits and perquisites.
We also have an employment agreement with Mr. Marr effective as of May 1,
1998. Mr. Marr's employment agreement has a term of three years. Pursuant to
his employment agreement, Mr. Marr is entitled to receive an annual salary of
not less than $75,000. If the agreement is terminated without "Cause," or if
Mr. Marr terminates his employment with the Company within six months after
any termination of Mr. Sheehan's employment with the Company, the Company is
obligated to pay Mr. Marr a termination fee (over a period of twelve months)
equal to Mr. Marr's annual salary for a period of one year. In addition, in
the event that Mr. Marr's employment is terminated within ninety days after
the effective date of a "Change of Control," all of Mr. Marr's unvested stock
options will immediately become vested and the Company will be obligated to
pay Mr. Marr an aggregate payment (over a period of 36 months) equal to three
times Mr. Marr's annual salary. The agreement contains a covenant prohibiting
Mr. Marr from competing with the Company for a period of one year following
any expiration or termination of his agreement. The agreement also provides
for customary benefits and perquisites.
1998 Stock Option Plan
Our 1998 Stock Option Plan is intended to provide our directors, officers,
employees and consultants with an opportunity to invest in our Common Stock
and to advance our interests and the interests of our stockholders by enabling
us to attract and retain qualified personnel. The 1998 Stock Option Plan
provides for the grant of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, and nonqualified
stock options. The maximum number of shares of Common Stock that may be
subject to options granted under the 1998 Stock Option Plan may not exceed, in
the aggregate, 1,278,885 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. The Compensation
Committee administers the 1998 Stock Option Plan, makes awards of stock
options to executive officers and establishes the terms and conditions of such
awards.
35
<PAGE>
In September 1998, we adopted a Non-Qualified Stock Option Plan pursuant to
which non-qualified stock options may be granted to our employees and
consultants who are neither directors nor officers of United Road Services or
its subsidiaries. The maximum number of shares of Common Stock that may be
subject to options granted under the Non-Qualified Stock Option Plan may not
exceed, in the aggregate, 500,000 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. The
Chief Executive Officer administers the Non-Qualified Stock Option Plan,
selects the individuals who receive awards and establishes the terms and
conditions of such awards.
As of December 31, 1998, we had granted options to purchase a total of
1,080,850 shares of Common Stock with a weighted average exercise price of
$12.22 per share to our directors, officers, employees and consultants. Of
these options, we granted options exercisable into: 90,000 shares to Mr.
Sheehan, 155,000 shares to Dr. Pass; 125,000 shares to Mr. Marr; 110,000
shares to Mr. Adams; and 20,000 shares to each of Mr. Molyneux, Mr. Moorehead
and Ms. Hawkins. Each of these options was granted at the fair market value on
the date of grant, vests at the rate of 33 1/3% per year, commencing on the
first anniversary of the date of grant, and will expire ten years after the
date of grant.
36
<PAGE>
CERTAIN TRANSACTIONS
In January 1998, we sold an aggregate of 218,736 shares of Common Stock to
private investors for cash consideration of $735,000. Mr. Moorehead purchased
29,760 of these shares for $100,000. All of these investors, including Mr.
Moorehead, have agreed not to sell any shares they bought for the period
ending one year from the date of our initial public offering.
Each of Messrs. Henninger, Morawski and Smart (all of whom are members of our
Board of Directors) is a former owner of a business we acquired during 1998.
The following table sets forth the consideration we paid and the indebtedness
we assumed when we bought Northland (which was formerly owned by Mr.
Morawski), Absolute (which was formerly owned by Mr. Smart) and Keystone
(which was formerly owned by Mr. Henninger):
<TABLE>
<S> <C> <C> <C>
Shares of
Name Cash Common Stock Total Indebtedness
(Dollars in thousands) (Dollars in thousands)
Northland........... $8,307 692,277 $1,433
Absolute............ 3,567 297,267 651
Keystone............ 4,531 377,624 712
</TABLE>
In addition, we must make earn-out payments for each of the years 1998 through
2002 to each of Messrs. Morawski, Smart and Henninger, if their respective
businesses achieve target levels of net revenue. For each business, the 1998
target level of net revenue was 110% of the business' 1997 net revenue. The
target net revenue for each business, for the years 1999 through 2002 is 110%
of the greater of its actual net revenue for the prior year or target net
revenue. If the target net revenue is achieved for a particular year, we must
make an initial payment equal to 5% of the excess of actual net revenue over
the target level. In addition, once the target level of net revenue for a
particular year is met, we must make subsequent and equal payments for each
year through 2002, but only if the actual net revenue for the respective
subsequent year exceeds the actual net revenue for the year that the earn-out
target was first achieved. The earn-out payments to be made to Mr. Morawski
with respect to 1998 net revenue for Northland is expected to be approximately
$95,000. Neither Mr. Smart nor Mr. Henninger is expected to receive an earn-
out payment in excess of $60,000, based upon the performance of their
respective businesses during 1998.
Prior to our acquisition of Absolute, Absolute distributed to Mr. Smart
personal assets not included in the transaction with a book value of $65,000.
Prior to our acquisition of Keystone, Keystone made a cash distribution of
less than $150,000 to Mr. Henninger to pay taxes on S corporation earnings. In
addition, Keystone distributed to Mr. Henninger personal assets not included
in the transaction with a book value of $56,000.
Pursuant to the agreements entered into in connection with our purchases of
Northland, Absolute and Keystone, Messrs. Morawski, Smart and Henninger have
agreed not to compete with us for a period of five years from the date of our
initial public offering in defined business and geographic areas.
In connection with our purchases of Absolute and Keystone, we entered into
consulting agreements with Mr. Smart and Mr. Henninger. Pursuant to these
agreements, Mr. Smart and Mr. Henninger are each entitled to receive a
consulting fee equal to two percent of the gross revenue of each company that
they assist us in buying, with the fee to be based on the acquired company's
gross revenue for the twelve months immediately preceding our purchase of it.
Each consulting agreement is for a term of three years. From February 1998
until June 1998 (when he became our Senior Vice President and Chief
Acquisition Officer), Mr. Adams was a party to a consulting agreement with us.
Mr. Adams' agreement contained terms substantially similar to our consulting
agreements with Messrs. Henninger and Smart.
In addition, in connection with our purchase of Northland, we entered into an
employment agreement with Mr. Morawski pursuant to which he serves as one of
our Vice Presidents for a term of three years, with an annual base salary of
$150,000.
37
<PAGE>
The employment and consulting agreements described above also contain
covenants not to compete for one year after the termination of the agreement.
In June 1998, Mr. Smart was awarded a contract for police towing in a police
district in Los Angeles. Mr. Smart conducts these operations through a newly
formed entity that he controls. We have the option to buy Mr. Smart's company,
beginning 18 months after our purchase of Absolute and ending three years
thereafter. The purchase price under this option is equal to 13 times the
after-tax net income of the entity for the 12-month period prior to the
exercise of the option. Mr. Henninger is also seeking the award of a contract
for police towing in another district in Los Angeles. If Mr. Henninger is
awarded the contract, he will also conduct these operations through a newly
formed entity that he controls. We will have a right to buy Mr. Henninger's
company on the same terms described above, beginning one year after our
purchase of Keystone and ending three years thereafter.
38
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with regard to the
beneficial ownership of our Common Stock as of April 2, 1999, by (a) each
person whom we know to beneficially own more than five percent of the
outstanding shares of Common Stock, (b) each of our directors, (c) each of our
executive officers, and (d) all of our directors and executive officers as a
group. Except as otherwise indicated, we believe that the beneficial owners of
the securities listed below, based on information provided by such owners,
have sole investment and voting power with respect to the Common Stock shown
below as being beneficially owned by them, subject to community property laws
where applicable. Unless otherwise indicated, the address of each beneficial
owner is c/o United Road Services, Inc., 17 Computer Drive West, Albany, New
York 12205.
<TABLE>
<CAPTION>
Number of
Beneficially- Percent of
Owned Shares Class(1)
<S> <C> <C>
Edward T. Sheehan..................................... 728,568(2) 4.1%
Edward W. Morawski.................................... 692,277 3.9
Todd Q. Smart......................................... 297,267 1.7
Donald F. Moorehead, Jr............................... 138,667(3) *
Richard A. Molyneux................................... -- --
Robert J. Adams, Jr................................... 23,333(4) *
Allan D. Pass......................................... 38,333(4) *
Donald J. Marr........................................ 28,333(4) *
Grace M. Hawkins...................................... 6,667(4) *
Mark J. Henninger..................................... 377,624 2.1
Robert L. Berner(5)................................... -- --
Merril H. Halpern(5).................................. -- --
Michael S. Pfeffer(5)................................. -- --
Charter URS LLC....................................... 5,000,000(6) 28.3
Mark McKinney(7)...................................... 930,000 5.3
Ross Berner(8)........................................ 930,000 5.3
All directors and executive officers as a group (13
persons)............................................. 2,331,069 13.1
</TABLE>
- --------
* Less than one percent.
(1) The applicable percentage of ownership is based upon 17,662,225 shares of
Common Stock outstanding as of April 2, 1999.
(2) Includes 11,235 shares held by children of Mr. Sheehan. Mr. Sheehan
disclaims beneficial ownership of such shares. Also includes 704,000
shares held of record by the Edward T. Sheehan 1992 Revocable Trust and
13,333 shares issuable pursuant to options exercisable within sixty days.
(3) Includes 6,667 shares issuable pursuant to options exercisable within
sixty days.
(4) Consists entirely of shares issuable pursuant to options exercisable
within sixty days.
(5) The address of this director is c/o Charterhouse Group International,
Inc., 535 Madison Avenue, New York, NY 10022.
(6) Consists entirely of shares issuable upon conversion of Debentures held
by Charterhouse. According to a Schedule 13D dated as of December 7,
1998, 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 Group International, Inc., a Delaware
corporation ("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. Halpern serves as Chairman of the Board and Chief Executive
Officer of Charterhouse International. Mr. Berner serves as Managing
Director of Charterhouse International. Mr. Pfeffer serves as Senior Vice
President of Charterhouse International. Messrs. Halpern, Berner and
Pfeffer 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, NY 10022.
(7) The address of this stockholder is 2239 Versailles Court, Henderson,
Nevada 89014.
(8) The address of this stockholder is 1360 Lombard #302, San Francisco, CA
94109.
39
<PAGE>
SELLING STOCKHOLDERS
The table below lists the stockholders eligible to sell their shares under
this prospectus, along with the number of shares that each stockholder may
sell. The shares listed below in the first column have been received by the
stockholders as consideration for the sale of their businesses to us. In
connection with the acquisitions, certain stockholders agreed to have a
portion of the consideration for their businesses withheld by us to satisfy
their indemnification obligations under their purchase agreements. The second
column lists the number of shares that are being withheld as of April 2, 1999.
If we do not make any indemnification claims prior to the date specified in
the third column these shares will be released to the appropriate
stockholders. The fourth column lists the total number of shares which may be
sold under this prospectus assuming all withheld shares are released to the
appropriate stockholders.
<TABLE>
<CAPTION>
Number Number of
Of Shares Shares Withheld Total
Issued as of As of Share Number of
Stockholder April 2, 1999 April 2, 1999 Release Date Shares
----------- ------------- --------------- ------------- ---------
<S> <C> <C> <C> <C>
Richard Wallis........... 86,612 -- -- 86,612
Allan R. Schoenenberger.. 39,873 -- -- 39,873
Carol L. Bliss........... 35,026 -- -- 35,026
Leslie R. Surface........ 50,512 -- -- 50,512
Melvin R. and Marian R.
Martin.................. 93,902 -- -- 93,902
Stephen E. Rouse......... 21,312 14,644 (1) 35,956
Robert Cole.............. 22,023 -- -- 22,023
Garvin W. and Rita L.
Robertson............... 29,778 -- -- 29,778
Dale E. and Sandra K.
Schroeder............... 125,000 -- -- 125,000
Clifford W. Kennamer..... 144,785 -- -- 144,785
Janetta R. Bowman........ 19,805 4,952 July 2, 1999 24,757
Brian Healey............. 99,602 -- -- 99,602
Patrick K. Willis........ 113,208 -- -- 113,208
Wayne Brisco............. 73,191 17,925 (1) 91,116
Douglas F. Bettarel...... 29,148 -- -- 29,148
William B. McIntyre...... 2,917 1,945 July 30, 1999 4,862
James B. Kirkman......... 2,917 1,945 July 30, 1999 4,862
Victoria L. O'Connor..... 9,424 -- -- 9,424
Edward V. Corcoran....... 86,749 -- -- 86,749
Gerald J. Corcoran....... 86,749 -- -- 86,749
--------- ------ ---------
Total.................... 1,172,533 41,411 1,213,944
========= ====== =========
</TABLE>
- --------
(1) Release of shares pending final resolution of stockholder's
indemnification obligations.
Except for Mr. Martin, Ms. Martin and Mr. Kirkman, each of the selling
stockholders is currently, or has been during the past three years, an
employee or consultant of United Road Services.
If the selling stockholders sell all shares covered by this prospectus (and if
the stockholders do not purchase or sell any additional shares), none of the
stockholders would own any shares of Common Stock. We will not receive any
proceeds from any sales of shares by the selling stockholders.
40
<PAGE>
PLAN OF DISTRIBUTION
Selling stockholders may sell their shares either directly or through a
broker-dealer or other agent at prices related to prevailing market prices or
at negotiated prices, in one or more of the following kinds of transactions:
.transactions on the Nasdaq National Market or other stock exchange that
lists the shares;
.transactions on the over-the-counter market; or
.transactions negotiated between stockholders and purchasers, or otherwise.
Broker-dealers or agents may purchase shares directly from a selling
stockholder or sell shares to someone else on behalf of a selling stockholder.
Broker-dealers may charge commissions to both stockholders selling shares and
purchasers buying shares sold by a selling stockholder. If a broker buys
shares directly from a selling stockholder, the broker may resell the shares
through another broker, and the other broker may receive compensation from the
selling stockholder for the resale.
To the extent required by laws, regulations or agreements we have made, we
will use our best efforts to file a prospectus supplement during the time
stockholders are offering or selling shares covered by this prospectus in
order to add or correct important information about the plan of distribution
for the shares.
In addition to any other applicable laws or regulations, selling stockholders
must comply with certain regulations relating to distributions by selling
stockholders, including Regulation M under the Securities Exchange Act of
1934, as amended.
Certain states may require that registration, exemption from registration or
notification requirements be met before selling stockholders may sell their
shares. Certain states may also require selling stockholders to sell shares
only through broker-dealers.
We will pay all expenses to register the shares, but selling stockholders will
pay any underwriting commissions and expenses, brokerage fees, transfer taxes
and the fees and expenses of their attorneys and other experts.
41
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 40,000,000 shares. Of these shares,
35,000,000 shares are Common Stock, $0.001 par value, and 5,000,000 shares are
Preferred Stock, $0.001 par value. As of April 2, 1999, there were 17,662,225
shares of Common Stock and no shares of Preferred Stock outstanding. The
following discussion of the material features of our capital stock is intended
as a summary only. As a result, for complete information you should read our
Amended and Restated Certificate of Incorporation and Amended and Restated
Bylaws, which are included as exhibits to the registration statement of which
this prospectus is a part.
Common Stock
All holders of our Common Stock are entitled to one vote for each share they
own on all matters submitted to a vote of stockholders. Subject to the terms
of any Preferred Stock we may issue, holders of Common Stock are entitled to
receive ratably any dividends as may be declared from time to time by the
Board of Directors. In the event we liquidate, dissolve or wind up, holders of
our Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities and liquidation preferences of any outstanding shares
of Preferred Stock. Holders of our Common Stock have no preemptive rights or
rights to convert their Common Stock into any other securities. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and non-assessable.
Preferred Stock
Our Board of Directors has the authority, without action by the stockholders,
to designate and issue up to 5,000,000 shares of Preferred Stock in one or
more series and to designate the dividend rate, voting rights and other
rights, preferences and restrictions of each series, any or all of which may
be greater than the rights of the Common Stock. We have no present plans to
issue any shares of Preferred Stock.
One of the effects of undesignated Preferred Stock may be to enable our Board
to discourage an attempt to obtain control of the Company by means of a tender
offer, proxy contest, merger or otherwise and to protect the continuity of our
management. The issuance of shares of Preferred Stock may adversely affect the
rights of holders of our Common Stock. For example, any Preferred Stock we
issue may rank prior to the Common Stock as to dividend rights, liquidation
preference or both, may have full or limited voting rights and may be
convertible into shares of Common Stock. Accordingly, the issuance of shares
of Preferred Stock may discourage bids for the Common Stock or may otherwise
adversely affect the market price of the Common Stock.
Classified Board of Directors; Filling Vacancies
Our Amended and Restated Certificate of Incorporation provides that our Board
of Directors shall be divided into three classes and that the number of
directors in each class shall be as nearly equal as is possible based upon the
number of directors constituting the entire Board. The certificate of
incorporation effectively provides that the term of office of the first class
of directors will expire at our first annual meeting of stockholders following
the initial public offering, the term of office of the second class of
directors will expire at our second annual meeting of stockholders following
the initial public offering, and the term of office of the third class of
directors will expire at our third annual meeting of stockholders following
the initial public offering. At each annual meeting of stockholders,
successors to directors of the class whose term expires at such meeting will
be elected to serve for three-year terms and until their successors are
elected and qualified.
The classification of our Board of Directors has the effect of making it more
difficult for stockholders to change the composition of the Board. At least
two annual meetings of stockholders, instead of one, will generally be
required to change the majority of the Board. Such a delay may help to provide
the Board with sufficient time to analyze an unsolicited proxy contest, a
tender or exchange offer or any other extraordinary corporate transaction.
42
<PAGE>
However, such classification provisions could also have the effect of
discouraging a third party from initiating a proxy contest, making a tender
offer or otherwise attempting to obtain control of the Company, even though
such an attempt might be beneficial to our stockholders. The classification of
the Board could thus increase the likelihood that incumbent directors will
retain their positions.
Under Delaware law, unless otherwise provided in the certificate of
incorporation, directors serving on a classified board may only be removed by
the stockholders for cause. Our certificate of incorporation does not override
this provision. Our certificate of incorporation does provide that, subject to
the rights of any holders of Preferred Stock, newly created directorships
resulting from an increase in the authorized number of directors or vacancies
on the Board resulting from death, resignation, retirement, disqualification
or removal of directors or any other cause may be filled only by the Board
(and not by the stockholders unless there are no directors in office).
Accordingly, the Board could prevent any stockholder from enlarging the Board
and filling the new directorships with such stockholder's own nominees.
The provisions of the certificate of incorporation governing the removal of
directors and the filling of vacancies may have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or
otherwise attempting to gain control of United Road Services, or of attempting
to change the composition or policies of the Board, even though such attempts
might be beneficial to our stockholders. These provisions of the certificate
of incorporation could thus increase the likelihood that incumbent directors
will retain their positions.
Stockholder Meeting Provisions
Our certificate of incorporation and bylaws provide that (subject to the
rights of any holders of Preferred Stock) (i) only a majority of the Board of
Directors or the Chief Executive Officer is able to call a special meeting of
stockholders; and (ii) stockholder action may be taken only at a duly called
and convened annual or special meeting of stockholders and may not be taken by
written consent. These provisions, taken together, prevent stockholders from
forcing consideration of stockholder proposals over the opposition of the
Board, except at an annual meeting.
The Bylaws establish an advance notice procedure for stockholders to make
nominations of candidates for election as director, or to bring other business
before an annual meeting of our stockholders.
The notice procedure provides that, subject to the rights of any holders of
Preferred Stock, only persons who are nominated by or at the direction of the
Board, any committee appointed by the Board, or by a stockholder who has given
timely written notice to our Secretary prior to the meeting at which directors
are to be elected will be eligible for election as directors. At an annual
meeting, only such business may be conducted as has been brought before the
meeting by the Board, any committee appointed by the Board, or by a
stockholder who has given timely written notice to our Secretary of such
stockholder's intention to bring such business before such meeting. To be
timely, we must receive notice of stockholder nominations or proposals not
less than 60 days nor more than 90 days prior to the scheduled date of the
meeting (or, if less than 70 days' notice or prior public disclosure of the
date of the meeting is given, then not later than the 15th day following the
earlier of (i) the day such notice was mailed or (ii) the day such public
disclosure was made). These notices must contain certain prescribed
information.
This notice procedure affords our Board of Directors an opportunity to
consider the qualifications of proposed director nominees or the merit of
stockholder proposals, and, to the extent deemed appropriate by the Board, to
inform stockholders about such matters. The notice procedure also provides a
more orderly procedure for conducting annual meetings of stockholders.
Although our bylaws do not give our Board of Directors any power to approve or
disapprove stockholder nominations for the election of directors or proposals
for action, the provisions described above may have the effect of precluding a
contest for the election of directors or the consideration of stockholder
proposals. These
43
<PAGE>
provisions may also discourage or deter a third party from conducting a
solicitation of proxies to elect its own slate of directors or to approve its
own proposal.
Delaware Law
We are a Delaware corporation and are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, Section 203
prevents an "interested stockholder" (defined generally as a person owning 15%
or more of a corporation's outstanding voting stock) from engaging in a
"business combination" with a Delaware corporation for three years following
the date such person became an interested stockholder. This restriction is
subject to certain exceptions such as approval of the board of directors and
of the holders of at least two-thirds of the outstanding shares of voting
stock not owned by the interested stockholder. The existence of this provision
is expected to have an anti-takeover effect, possibly inhibiting attempts that
might result in a premium over the market price for the shares of Common
Stock.
Limitation of Liability and Indemnification Matters
Pursuant to the provisions of the Delaware General Corporation Law, we have
adopted provisions in our certificate of incorporation which provide that our
directors shall not be personally liable for monetary damages for a breach of
fiduciary duty as a director. However, the directors will be liable if the
damages result from (i) a breach of the director's duty of loyalty; (ii) acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) an act related to an unlawful stock repurchase
or payment of a dividend under Section 174 of Delaware General Corporation
Law; and (iv) transactions from which the director derived an improper
personal benefit. Also, the limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.
Our bylaws require us to indemnify our officers and directors, and permit us
to indemnify our other agents, to the fullest extent permitted under Delaware
law. We have entered into separate indemnification agreements with our
directors and officers which are, in some cases, broader than the specific
indemnification provisions contained in the Delaware General Corporation Law.
The indemnification agreements require us, among other things, to indemnify
our officers and directors against certain liabilities that may arise by
reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct), to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified, and to obtain directors' and officers' insurance if available on
reasonable terms.
Transfer Agent
The transfer agent and registrar for our Common Stock is American Stock
Transfer and Trust Company.
44
<PAGE>
LEGAL MATTERS
The legality of the Common Stock offered hereby has been passed on by the
international law firm of McDermott, Will & Emery.
EXPERTS
The consolidated financial statements of United Road Services, Inc. and
subsidiaries, the combined financial statements of Northland Auto
Transporters, Inc. and Northland Fleet Leasing, Inc., the combined financial
statements of Caron Auto Works, Inc. and Caron Auto Brokers, Inc., the
combined financial statements of 5-L Corporation and ADP Transport, Inc., the
consolidated financial statements of Smith-Christensen Enterprises, Inc. and
subsidiary, the consolidated financial statements of ASC Transportation
Services and subsidiary, the consolidated financial statements of E&R Towing &
Garage, Inc. and subsidiaries, and the financial statements of Falcon Towing
and Auto Delivery, Inc., Absolute Towing and Transporting, Inc., Keystone
Towing, Inc., Silver State Tow and Recovery, Inc., Neil's Used Truck & Car
Sales, Incorporated, Environmental Auto Removal, Inc., Alert Auto Transport,
Inc., Fast Towing, Inc., Car Transporters Corporation, Schroeder Auto
Carriers, Inc., MPG Transco, Ltd. and Pilot Transport, Inc. to the extent and
for the periods indicated in their reports, have been included herein and in
the registration statement in reliance upon the reports of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
45
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
UNITED ROAD SERVICES, INC.
Unaudited Pro Forma Combined Financial Statements--Basis of Presenta-
tion................................................................... F-4
Unaudited Pro Forma Combined Balance Sheet.............................. F-5
Unaudited Pro Forma Combined Statement of Operations.................... F-6
Notes to Unaudited Pro Forma Combined Financial Statements.............. F-7
UNITED ROAD SERVICES, INC.
Independent Auditors' Report............................................ F-10
Consolidated Balance Sheets............................................. F-11
Consolidated Statements of Operations................................... F-12
Consolidated Statements of Stockholders' Equity (Deficit)............... F-13
Consolidated Statements of Cash Flows................................... F-14
Notes to Consolidated Financial Statements.............................. F-15
FOUNDING COMPANIES
NORTHLAND AUTO TRANSPORTERS, INC. AND NORTHLAND FLEET LEASING, INC.
Independent Auditors' Report............................................ F-32
Combined Balance Sheets................................................. F-33
Combined Statements of Operations....................................... F-34
Combined Statements of Stockholder's Equity............................. F-35
Combined Statements of Cash Flows....................................... F-36
Notes to Combined Financial Statements.................................. F-37
FALCON TOWING AND AUTO DELIVERY, INC.
Independent Auditors' Report............................................ F-44
Balance Sheets.......................................................... F-45
Statements of Operations................................................ F-46
Statements of Stockholder's Equity...................................... F-47
Statements of Cash Flows................................................ F-48
Notes to Financial Statements........................................... F-49
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
Independent Auditors' Report............................................ F-53
Consolidated Balance Sheets............................................. F-54
Consolidated Statements of Operations................................... F-55
Consolidated Statements of Stockholders' Equity......................... F-56
Consolidated Statements of Cash Flows................................... F-57
Notes to Consolidated Financial Statements.............................. F-58
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
Independent Auditors' Report............................................ F-64
Combined Balance Sheets................................................. F-65
Combined Statements of Operations....................................... F-66
Combined Statements of Stockholders' Equity............................. F-67
Combined Statements of Cash Flows....................................... F-68
Notes to Combined Financial Statements.................................. F-69
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
ABSOLUTE TOWING AND TRANSPORTING, INC.
Independent Auditors' Report............................................ F-77
Balance Sheets.......................................................... F-78
Statements of Operations................................................ F-79
Statements of Stockholder's Equity...................................... F-80
Statements of Cash Flows................................................ F-81
Notes to Financial Statements........................................... F-82
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
Independent Auditors' Report............................................ F-86
Consolidated Balance Sheet.............................................. F-87
Consolidated Statement of Operations.................................... F-88
Consolidated Statement of Stockholder's Deficit......................... F-89
Consolidated Statement of Cash Flows.................................... F-90
Notes to Consolidated Financial Statements.............................. F-91
SILVER STATE TOW AND RECOVERY, INC.
Independent Auditors' Report............................................ F-96
Balance Sheet........................................................... F-97
Statement of Operations................................................. F-98
Statement of Stockholder's Equity (Deficit)............................. F-99
Statement of Cash Flows................................................. F-100
Notes to Financial Statements........................................... F-101
SELECTED ACQUIRED COMPANIES
MPG TRANSCO, LTD.
Independent Auditors' Report............................................ F-104
Balance Sheets.......................................................... F-105
Statements of Operations................................................ F-106
Statements of Stockholders' Equity...................................... F-107
Statements of Cash Flows................................................ F-108
Notes to Consolidated Financial Statements.............................. F-109
PILOT TRANSPORT, INC.
Independent Auditors' Report............................................ F-115
Balance Sheets.......................................................... F-116
Statements of Operations................................................ F-117
Statements of Stockholders' Equity...................................... F-118
Statements of Cash Flows................................................ F-119
Notes to Financial Statements........................................... F-120
E&R TOWING & GARAGE, INC. AND SUBSIDIARIES
Independent Auditors' Report............................................ F-123
Consolidated Balance Sheets............................................. F-124
Consolidated Statement of Operations and Retained Earnings ............. F-125
Consolidated Statements of Cash Flows................................... F-126
Notes to Consolidated Financial Statements.............................. F-127
</TABLE>
F-2
<PAGE>
<TABLE>
<S> <C>
ENVIRONMENTAL AUTO REMOVAL, INC.
Independent Auditors' Report............................................ F-132
Balance Sheets.......................................................... F-133
Statements of Operations and Retained Earnings (Deficit)................ F-134
Statements of Cash Flows................................................ F-135
Notes to Financial Statements........................................... F-136
NEIL'S USED TRUCK & CAR SALES, INCORPORATED
Independent Auditors' Report............................................ F-140
Balance Sheet........................................................... F-141
Statement of Operations................................................. F-142
Statement of Stockholders' Equity....................................... F-143
Statement of Cash Flows................................................. F-144
Notes to Financial Statements........................................... F-145
5-L CORPORATION AND ADP TRANSPORT, INC.
Independent Auditors' Report............................................ F-148
Combined Balance Sheet.................................................. F-149
Combined Statement of Operations........................................ F-150
Combined Statement of Stockholders' Equity.............................. F-151
Combined Statement of Cash Flows........................................ F-152
Notes to Combined Financial Statements.................................. F-153
CAR TRANSPORTERS CORPORATION
Independent Auditors' Report............................................ F-156
Balance Sheets.......................................................... F-157
Statements of Operations................................................ F-158
Statements of Stockholder's Deficit..................................... F-159
Statements of Cash Flows................................................ F-160
Notes to Financial Statements........................................... F-161
SCHROEDER AUTO CARRIERS, INC.
Independent Auditors' Report............................................ F-165
Balance Sheet........................................................... F-166
Statement of Operations................................................. F-167
Statement of Stockholders' Equity....................................... F-168
Statement of Cash Flows................................................. F-169
Notes to Financial Statements........................................... F-170
KEYSTONE TOWING, INC.
Independent Auditors' Report............................................ F-173
Balance Sheets.......................................................... F-174
Statements of Operations................................................ F-175
Statements of Stockholder's Equity...................................... F-176
Statements of Cash Flows................................................ F-177
Notes to Financial Statements........................................... F-178
FAST TOWING, INC.
Independent Auditors' Report............................................ F-183
Balance Sheet........................................................... F-184
Statement of Operations................................................. F-185
Statement of Stockholders' Equity....................................... F-186
Statement of Cash Flows................................................. F-187
Notes to Financial Statements........................................... F-188
ALERT AUTO TRANSPORT, INC.
Independent Auditors' Report............................................ F-192
Balance Sheet........................................................... F-193
Statement of Earnings and Retained Earnings............................. F-194
Statement of Cash Flows................................................. F-195
Notes to Financial Statements........................................... F-196
</TABLE>
F-3
<PAGE>
UNITED ROAD SERVICES, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect
to certain acquisitions completed by United Road Services, Inc. since its
inception in July 1997. All of these acquisitions were accounted for using the
purchase method of accounting.
The December 31, 1998 unaudited pro forma combined balance sheet gives
effect to the acquisition of MPG Transco, Ltd. ("MPG") and the sale of $31.5
million aggregate principal amount of Debentures to Charterhouse as if they
had occurred on December 31, 1998.
The unaudited pro forma combined statement of operations gives effect to the
acquisitions by United Road Services, Inc. of the Founding Companies and the
Selected Acquired Companies and the sale of $75.0 million aggregate principal
amount of Debentures to Charterhouse, which includes $43.5 million that
occurred on December 7, 1998 and $31.5 million that occurred on March 16,
1999, as if they had occurred on January 1, 1998.
To the extent the former owners of the Founding Companies and Selected
Acquired Companies have agreed to reductions in salary, bonuses and benefits,
these reductions have been reflected in the unaudited pro forma combined
statement of operations.
The pro forma adjustments are based on estimates, available information and
certain assumptions, and may be revised, as additional information becomes
available. The pro forma financial information does not purport to represent
what United Road Services, Inc.'s financial position or results of operations
would actually have been had such transactions occurred on these dates and are
not necessarily representative of United Road Services, Inc.'s financial
position or results of operations for any future period. Since United Road
Services, Inc., the Founding Companies and the Selected Acquired Companies
were not under common control or management during the periods presented,
historical combined results may not be comparable to, or indicative of, future
performance. See "Risk Factors" included elsewhere herein. The unaudited pro
forma combined financial statements should be read in conjunction with the
historical financial statements and notes thereto included elsewhere in this
prospectus.
F-4
<PAGE>
UNITED ROAD SERVICES, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
United
Road
Services, Pro Forma Pro Forma
Inc. MPG Adjustments Combined
--------- ------ ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...... $ 3,381 516 874 (a)(b) 4,771
Trade receivables.............. 17,572 1,936 -- 19,508
Less: allowance.............. 1,132 100 -- 1,232
--------- ------ ------ -------
Trade receivables, net......... 16,440 1,836 -- 18,276
Accounts receivable from
related parties and
employees..................... -- 47 -- 47
Other receivables.............. 1,495 28 -- 1,523
Prepaid income taxes........... 465 -- (465)(d) --
Prepaid expenses and other
current assets................ 1,752 600 -- 2,352
Current portion of rights to
equipment under finance
contracts..................... 547 -- -- 547
--------- ------ ------ -------
Total current assets......... 24,080 3,027 409 27,516
Vehicles and equipment, net..... 46,814 10,425 (205)(a) 57,034
Rights to equipment under
finance contracts, excluding
current portion................ 2,025 -- -- 2,025
Deferred financing costs, net... 3,552 -- 1,463 (b) 5,015
Goodwill, net................... 171,953 -- 19,680 (a) 191,633
Other non-current assets........ 308 -- -- 308
--------- ------ ------ -------
Total assets................. $ 248,732 13,452 21,347 283,531
========= ====== ====== =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current installments on notes
payable....................... $ 17 2,004 -- 2,021
Current installments of
obligations under capital
leases........................ 338 -- -- 338
Current installments of
obligations for equipment
under finance contracts....... 547 -- -- 547
Accounts payable............... 6,904 1,003 -- 7,907
Income taxes payable........... -- 762 (465)(d) 297
Accrued expenses............... 4,690 261 -- 4,951
Due to related parties......... 2,254 244 -- 2,498
--------- ------ ------ -------
Total current liabilities.... 14,750 4,274 (465) 18,559
Notes payable, excluding current
installments................... -- 2,164 -- 2,164
Capital lease obligations,
excluding current
installments................... 698 -- -- 698
Obligations for equipment under
finance contracts, excluding
current installments........... 2,025 -- -- 2,025
Long-term debt.................. 62,532 -- 12,700 (b)(c) 75,232
Deferred income taxes........... 4,961 1,462 (82)(a) 6,341
--------- ------ ------ -------
Total liabilities............ 84,966 7,900 12,153 105,019
--------- ------ ------ -------
Stockholders' equity:
Common stock................... 16 1 -- (a) 17
Additional paid-in capital..... 159,532 1,417 13,328 (a) 174,277
Retained earnings.............. 4,218 4,134 (4,134)(a) 4,218
--------- ------ ------ -------
Total stockholders' equity... 163,766 5,552 9,194 178,512
--------- ------ ------ -------
Total liabilities and
stockholders' equity........ $ 248,732 13,452 21,347 283,531
========= ====== ====== =======
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-5
<PAGE>
UNITED ROAD SERVICES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Year Ended December 31, 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
Total
United Founding
Road Companies Selected
Services, 1/1/98 - Acquired Pro Forma Pro Forma
Inc. 5/5/98 Companies(h) Adjustments Combined
--------- --------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Net revenue............. $87,919 19,035 73,646 (1,400)(f) 179,200
Cost of revenue......... 64,765 14,148 51,883 (2,936)(b)(f) 127,860
------- ------ ------ ------ -------
Gross profit........... 23,154 4,887 21,763 1,536 51,340
Selling, general and
administrative
expenses............... 12,428 3,338 14,031 (3,586)(a) 26,211
Goodwill amortization... 1,745 -- -- 2,207(c) 3,952
------- ------ ------ ------ -------
Income from operations.. 8,981 1,549 7,732 2,915 21,177
Other income (expense):
Interest expense....... (1,588) (451) (911) (6,432)(d) (9,382)
Interest income........ 658 19 117 -- 794
Gain (loss) on sale of
assets................ -- (24) (474) -- (498)
Other.................. (156) (232) 65 -- (323)
------- ------ ------ ------ -------
Income (loss) before
income taxes........... 7,895 861 6,529 (3,517) 11,768
Income tax expense
(benefit).............. 3,503 399 1,137 (139)(e) 5,178
------- ------ ------ ------ -------
Net income (loss)....... $ 4,392 462 5,392 (3,656) 6,590
======= ====== ====== ====== =======
Basic earnings per share
(g).................... -- -- -- -- $ 0.40
=======
Diluted earnings per
share (g).............. -- -- -- -- $ 0.39
=======
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements
F-6
<PAGE>
UNITED ROAD SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GENERAL:
United Road Services, Inc. was founded in July 1997 to become a leading
national provider of motor vehicle and equipment towing, recovery and
transport services. United Road Services, Inc. acquired the Founding Companies
simultaneously with its initial public offering and acquired the Selected
Acquired Companies subsequent to its initial public offering.
The historical financial data reflect the financial position and results of
operations of United Road Services, Inc., the Founding Companies and the
Selected Acquired Companies and were derived from the respective financial
statements included elsewhere herein. The information included in these
financial statements for the Founding Companies is for the period January 1,
1998 through May 5, 1998, with the exception of Caron Auto Works, Inc. and
Caron Auto Brokers, Inc. for which the information is for the period October
1, 1997 through May 5, 1998. The information included in these financial
statements for the Selected Acquired Companies, except MPG, Pilot and E&R, is
for the six months ended June 30, 1998; MPG is for the twelve-month period
ended December 31, 1998; Pilot is for the nine months ended September 30,
1998; and E&R is for the four month period ended June 30, 1998.
2. ACQUISITION OF THE SELECTED ACQUIRED COMPANIES:
United Road Services, Inc. acquired all of the Selected Acquired Companies
in transactions accounted for using the purchase method of accounting.
The following table sets forth the consideration paid in cash and in shares
of Common Stock for the Selected Acquired Companies (without giving effect to
any indebtedness of the Selected Acquired Companies that was assumed by the
Company).
<TABLE>
<CAPTION>
Shares of
Cash Common Stock
(Dollars in thousands)
<S> <C> <C>
MPG................................................ $ 10,363 996,772
Pilot.............................................. 10,589 1,000,000
E&R................................................ 13,250 --
EAR................................................ 9,563 173,498
Neil's............................................. 6,000 --
5-L/ADP............................................ 2,533 212,023
CTC................................................ 1,350 --
Schroeder.......................................... 969 125,000
Keystone........................................... 4,531 377,624
Fast............................................... 5,255 --
Alert.............................................. 1,146 144,785
---------- ------------
Total............................................ $65,549 3,029,702
========== ============
</TABLE>
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Reflects the acquisition of MPG by United Road Services, Inc. for a
purchase price (excluding assumed indebtedness) of $25.1 million, consisting
of $10.4 million in cash and 996,772 shares of Common Stock. The purchase
price less the net assets acquired, including an adjustment for property and
equipment to reflect fair market value, including the resulting tax effect,
results in goodwill of $19.7 million. Based upon management's preliminary
analysis, it is anticipated that the historical value of the assets and
liabilities of MPG, with the
F-7
<PAGE>
UNITED ROAD SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
exception of the adjustments made for property and equipment, will approximate
fair value. Management has not identified any other material tangible or
intangible assets to which a portion of the purchase price could be reasonably
allocated.
(b) Reflects the issuance of $31.5 million aggregate principal amount of
Debentures to Charterhouse.
(c) Reflects the repayment of $18.8 million of borrowings under the credit
facility as of December 31, 1998.
(d) Reflects the reclassification of prepaid income taxes.
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
Year ended December 31, 1998
(a) Reflects the reductions in salaries, bonuses and benefits to which the
former stockholders of the Founding Companies and the Selected Acquired
Companies have agreed in the amount of $3.6 million for the year ended
December 31, 1998.
(b) Adjusts the depreciation of vehicles based upon adjusted carrying values
utilizing lives of 10 to 15 years.
(c) Reflects the amortization, over a 40-year estimated life, of goodwill to
be recorded as a result of the acquisition of the Founding Companies and the
Selected Acquired Companies.
(d) Reflects the additional interest expense in the amount of $6.4 million
associated with the Debentures, the reduction of interest expense and related
amortization of deferred financing costs associated with the credit facility,
and the reduction in interest expense related to $1.5 million of debt at
December 31, 1998, which has been repaid.
(e) Reflects the incremental provision for federal and state income taxes
relating to all entities being combined and other statements of operations
adjustments at an effective tax rate of 44%.
(f) Reflects the elimination of $1.4 million of intercompany revenue and
related cost of revenue between E&R and EAR for the year ended December 31,
1998.
(g) The number of shares used in the calculations of basic and diluted
earnings per share have been derived as follows:
<TABLE>
<CAPTION>
Pro Forma
Combined
----------
<S> <C>
Shares outstanding at December 31, 1998.............................. 15,466,004
Shares issued in connection with the acquisition of MPG.............. 825,834
----------
Basic shares estimated to be outstanding............................. 16,291,838
Effect of dilutive securities:
Options and warrants............................................... 123,569
Earnout shares..................................................... 4,880
Shares withheld in acquisitions.................................... 412,019
----------
Diluted shares estimated to be outstanding........................... 16,832,306
==========
</TABLE>
Shares issuable upon conversion of the Charterhouse Debentures have been
excluded at December 31, 1998, as the effect would be antidilutive due to the
adjustment (increase in net income) for interest expense.
F-8
<PAGE>
UNITED ROAD SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
(h) The components of revenues, operating expenses and net income of each of
the Selected Acquired Companies reflected as historical results from January
1, 1998 through the respective dates of acquisition are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998
--------------------------------------------
Date Operating Net
acquired Revenue income (loss) income (loss)
-------- ------- ------------- -------------
<S> <C> <C> <C> <C>
MPG................................ 1/11/99 $23,823 $2,747 $1,175
Pilot.............................. 12/9/98 14,405 2,408 2,262
E&R................................ 8/21/98 2,929 622 420
EAR................................ 8/21/98 8,539 777 820
Neil's............................. 7/14/98 5,891 703 656
5-L/ADP............................ 6/12/98 5,069 445 468
CTC................................ 7/9/98 4,500 15 (338)
Schroeders......................... 7/2/98 3,169 236 219
Keystone........................... 8/7/98 1,998 17 85
Fast............................... 6/30/98 1,851 (187) (355)
Alert.............................. 7/2/98 1,472 (51) (20)
------- ------ ------
$73,646 $7,732 $5,392
======= ====== ======
</TABLE>
F-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
United Road Services, Inc.:
We have audited the accompanying consolidated balance sheets of United Road
Services, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the period from July 25, 1997 (inception) through December
31, 1997 and for the year ended December 31, 1998. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the Index at Item 14(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 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 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, 1997 and 1998, and the
results of their operations and their cash flows for the period from July 25,
1997 (inception) through December 31, 1997 and for the year ended December 31,
1998, in conformity with generally accepted accounting principles. 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.
/s/ KPMG LLP
Albany, New York
March 5, 1999, except as to
Note 16(b), which is as of
March 16, 1999
F-10
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1998
(In thousands, except share amounts)
<TABLE>
<CAPTION>
1997 1998
----- -------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................................... $ 50 3,381
Trade receivables, net of allowance for doubtful accounts of
$1,132....................................................... -- 16,440
Other receivables............................................. -- 1,495
Prepaid income taxes.......................................... -- 465
Prepaid expenses and other current assets..................... -- 1,752
Current portion of rights to equipment under finance
contracts.................................................... -- 547
----- -------
Total current assets........................................ 50 24,080
Vehicles and equipment, net..................................... -- 46,814
Rights to equipment under finance contracts, excluding current
portion........................................................ -- 2,025
Deferred financing costs, net................................... -- 3,552
Goodwill, net................................................... -- 171,953
Other non-current assets........................................ -- 308
----- -------
Total assets................................................ $ 50 248,732
===== =======
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of obligations under capital leases...... $ -- 338
Current installments of obligations for equipment under
finance contracts............................................ -- 547
Notes payable................................................. -- 17
Accounts payable.............................................. 62 6,904
Accrued expenses.............................................. -- 4,690
Due to related parties........................................ 92 2,254
----- -------
Total current liabilities................................... 154 14,750
Obligations under capital leases, excluding current portion..... -- 698
Obligations for equipment under finance contracts, excluding
current installments........................................... -- 2,025
Long-term debt.................................................. -- 62,532
Deferred income taxes........................................... -- 4,961
----- -------
Total liabilities........................................... 154 84,966
----- -------
Stockholders' equity (deficit):
Preferred stock; 5,000,000 shares authorized; no shares issued
or outstanding............................................... -- --
Common stock, $0.001 par value; 35,000,000 shares authorized;
15,707,085 shares issued and 15,466,004 shares outstanding at
December 31, 1998; 2,604,000 shares issued and outstanding at
December 31, 1997............................................ 3 16
Additional paid-in capital.................................... 67 159,532
Retained earnings (deficit)................................... (174) 4,218
----- -------
Total stockholders' equity (deficit)........................ (104) 163,766
----- -------
Total liabilities and stockholders' equity.................. $ 50 248,732
===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the
period from
July 25, 1997
(inception) through Year ended
December 31, 1997 December 31, 1998
------------------- -----------------
<S> <C> <C>
Net revenue.............................. $ -- 87,919
Cost of revenue.......................... -- 64,765
----- ------
Gross profit........................... -- 23,154
Selling, general and administrative
expenses................................ 174 12,428
Amortization of goodwill................. -- 1,745
----- ------
Income (loss) from operations.......... (174) 8,981
Other income (expense):
Interest income........................ -- 658
Interest expense....................... -- (1,588)
Other.................................. -- (156)
----- ------
Income (loss) before income taxes...... (174) 7,895
Income tax expense....................... -- 3,503
----- ------
Net income (loss)...................... $(174) 4,392
===== ======
Per share amounts:
Basic earnings (loss).................. $(.08) $ .43
===== ======
Diluted earnings (loss)................ $(.08) $ .42
===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the period from July 25, 1997 (inception) through December 31, 1997
and for the year ended December 31, 1998
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Additional Retained Total
Common paid-in earnings stockholders'
stock capital (deficit) equity (deficit)
------ ---------- --------- ----------------
<S> <C> <C> <C> <C>
Initial capitalization........... $ 3 67 -- 70
Net loss--1997................... -- -- (174) (174)
--- ------- ----- -------
Balance at December 31, 1997..... 3 67 (174) (104)
Issuance of common stock (218,736
shares)......................... -- 735 -- 735
Stock issued in connection with:
Initial public offering, net of
offering costs
(7,590,000 shares)............ 8 89,492 -- 89,500
Acquisitions, net of certain
registration costs
(5,053,268 shares)............ 5 68,769 -- 68,774
Issuance of warrant to acquire
117,789 shares
of common stock................. -- 469 -- 469
Net income--1998................. -- -- 4,392 4,392
--- ------- ----- -------
Balance at December 31, 1998..... $16 159,532 4,218 163,766
=== ======= ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the
period from
July 25, 1997
(inception) through Year ended
December 31, 1997 December 31, 1998
-------------------- -----------------
<S> <C> <C>
Net income (loss)...................... $(174) 4,392
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation.......................... -- 3,292
Amortization of goodwill.............. -- 1,745
Amortization of deferred financing
costs................................ -- 219
Provision for doubtful accounts....... -- 183
Deferred income taxes................. -- 1,659
Interest expense, paid-in-kind........ -- 232
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Increase in trade receivables......... -- (2,427)
Decrease in other receivables......... -- 171
Increase in prepaid income taxes...... -- (381)
Decrease in prepaid expenses and other
current assets....................... -- 724
Decrease in other non-current assets.. -- 105
Increase (decrease) in accounts
payable.............................. 62 (1,608)
Decrease in accrued expenses.......... -- (242)
----- --------
Net cash (used in) provided by
operating activities................ (112) 8,064
----- --------
Investing activities:
Acquisitions, net of cash acquired.... -- (118,161)
Purchases of vehicles and equipment... -- (11,297)
Proceeds from sale of vehicles and
equipment............................ -- 387
Amounts payable to related parties.... 92 2,162
----- --------
Net cash provided by (used in)
investing activities................ 92 (126,909)
----- --------
Financing activities:
Proceeds from issuance of common
stock, net........................... 70 90,235
Proceeds from issuance of convertible
subordinated debentures.............. -- 43,500
Borrowings on revolving credit
facility............................. -- 59,800
Repayments on revolving credit
facility............................. -- (41,000)
Payments of deferred financing costs.. -- (3,302)
Payments on long-term debt and capital
leases assumed in acquisitions....... -- (27,057)
----- --------
Net cash provided by financing
activities.......................... 70 122,176
----- --------
Increase in cash and cash equivalents.. 50 3,331
Cash and cash equivalents at beginning
of period............................. -- 50
----- --------
Cash and cash equivalents at end of
period................................ $ 50 3,381
===== ========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest.............................. $ -- 1,137
===== ========
Income taxes.......................... $ -- 2,309
===== ========
Supplemental disclosure of non-cash
investing and financing activity:
Issuance of common stock for
acquisitions......................... $ -- 69,355
===== ========
Warrant issued to lender as partial
loan fee............................. $ -- 469
===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
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. ("Company"), a Delaware corporation, was formed
in July 1997 to become a leading national provider of motor vehicle and
equipment towing, recovery and transport services. From inception through
December 31, 1998, the Company acquired 41 businesses, seven of which were
acquired simultaneously with the consummation of an initial public offering of
its 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 and Recovery. Both segments are operated under a common management
structure that evaluates each of the 50 service locations located in 17
states. Presently, the service locations are divided into two regions within
the United States; the Western and Eastern Regions.
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 negotiated flat
rates. Customers include automobile manufacturers, leasing and insurance
companies, automobile auction companies, automobile dealers, as well as
individual motorists. During 1998, the Company derived 53.4% of its revenue
from Transport services of which 64.5% was generated from the Western Region
and 35.5% from the Eastern Region operations.
The Towing and Recovery segment provides towing, impounding and storing,
lien sales and auto auctions of abandoned vehicles. In addition, the Towing
and Recovery segment provides recovery and relocation services for heavy-duty
commercial vehicles and construction equipment. Revenue from Towing and
Recovery services is principally derived from rates based on distance, time or
fixed charges, and any related impound and storage fees. Customers include
automobile dealers, repair and fleet operations, law enforcement agencies,
municipalities and individual motorists. During 1998, the Company derived
46.6% of its revenue from Towing and Recovery services, of which 62.4% was
generated from the Western Region and 37.6% from the Eastern Region
operations.
(b) Basis of Presentation
The financial statements for the period from July 25, 1997 (inception)
through December 31, 1997, present the activities of management in preparation
for the offering and the acquisition of the seven original founding companies,
and do not reflect the conduct of any operations.
The accompanying 1998 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 customers who require transport of
vehicles and equipment or towing and recovery service, and fees related to
vehicles, such as impound, storage, repair or auction. Transport revenue is
recognized upon the delivery of the vehicles and equipment to their final
destination, towing and recovery revenue is recognized at the completion of
each engagement, and fees 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-15
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(d) Cash Equivalents
Cash equivalents of $611 at December 31, 1998 consisted of money market
funds and interest-bearing certificates of deposit. 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 cost, or fair value as of date of
purchase under purchase accounting. Vehicles and equipment under capital
leases are stated at the present value of minimum lease payments. Replacement
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:
<TABLE>
<S> <C>
Transportation and towing equipment.............................. 10-15 years
Machinery and other equipment.................................... 5 years
Computer software and related equipment.......................... 3-7 years
Furniture and fixtures........................................... 5 years
Leasehold improvements........................................... 3-10 years
</TABLE>
(f) Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally 40 years. The Company considers 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, recent double digit growth rate and stable nature of
customer base. In addition, the Company has acquired well established
businesses that have generally been in existence for many years.
Accumulated amortization at December 31, 1998 was $1,745.
(g) 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 credit 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 or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.
(h) Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes standards for reporting and presentation of
F-16
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
comprehensive income and its components in a full set of financial statements.
The Company does not presently have any elements of comprehensive income as
outlined in SFAS No. 130, and consequently, there is no difference between net
income (loss) and comprehensive income (loss).
(i) Stock-Based Compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("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.
(j) Per Share Amounts
Basic earnings per share excludes dilution and is computed by dividing
income 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).
The following tables provide calculations of basic and diluted earnings per
share:
For the period July 25, 1997 (inception) through December 31, 1997
<TABLE>
<CAPTION>
Weighted Per
average share
Net loss shares amounts
-------- --------- -------
<S> <C> <C> <C>
Basic loss per share......................... $(174) 2,055,300 $(.08)
===== ========= =====
Diluted loss per share....................... $(174) 2,055,300 $(.08)
===== ========= =====
</TABLE>
Year ended December 31, 1998
<TABLE>
<CAPTION>
Weighted Per
Net average share
income shares amounts
------ ---------- -------
<S> <C> <C> <C>
Basic earnings per share........................ $4,392 10,221,810 $.43
====
Effect of dilutive securities:
Options and warrants.......................... -- 123,569
Earnout shares................................ -- 4,880
Shares held in escrow......................... -- 39,645
------ ----------
Diluted earnings per share...................... $4,392 10,389,904 $.42
====== ========== ====
</TABLE>
Shares issuable upon conversion of the convertible subordinated debentures
have been excluded at December 31, 1998, as the effect would be antidilutive
due to the adjustment (increase in net income) for interest expense.
F-17
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(k) Advertising Costs
Advertising costs are expensed as incurred and amounted to $0 and $490 in
1997 and 1998, 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 generally accepted accounting principles. 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 limits 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
conditions. No single customer accounted for greater than 10% of trade
receivables at December 31, 1998.
(n) Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Management is currently evaluating
the impact of SFAS No. 133 on the Company's consolidated financial
statements.
(2) Acquisitions
On May 6, 1998, the Company acquired the seven businesses, referred to as
the "Founding Companies", for aggregate consideration (excluding assumed
indebtedness) of $27,809 in cash and 2,375,741 shares of common stock valued
at $24,708. Between May 7, 1998 and December 31, 1998, the Company acquired 34
other businesses, referred to as the "Acquired Companies", for aggregate
consideration of $79,600 in cash and 2,918,608 shares of common stock valued
at $44,647. The Acquired Companies are located throughout the United States,
with the majority located in the Western Region of the country. The
acquisitions have been accounted for using the purchase method of accounting,
and accordingly, the assets and liabilities of the Acquired Companies have
been recorded at their estimated fair values at the dates of acquisition. The
excess of the purchase price over the fair value of the net assets acquired,
including certain direct costs associated with the acquisitions, of $173,698
has been recorded as goodwill and is being amortized on a straight-line basis
over 40 years. However, the Company has not completed its valuation of all of
its purchases and, accordingly, the purchase price allocations are subject to
change when additional information concerning asset and liability valuations
are completed. The results of operations of the Founding Companies and the
Acquired Companies have been included in the Company's results of operations
from their respective acquisition dates.
F-18
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
As discussed in note 13(a), contingent consideration is due on certain
companies acquired. In some cases, consideration is based on specific net
revenue goals over each of the next five years. In other cases, contingent
consideration is determined from the Company's evaluation of certain financial
ratios or other contingencies, for a specific period of time subsequent to the
dates of respective acquisitions. Contingent purchase price consideration is
capitalized when earned and amortized over the remaining life of the goodwill
associated with the respective acquisition.
The following unaudited pro forma financial information presents the
combined results of operations as if all the acquisitions that have been made
by the Company through December 31, 1998, had occurred as of January 1, 1997,
after giving effect to certain adjustments including amortization of goodwill,
additional depreciation expense, agreed-upon reductions in salaries and
bonuses to former owners/shareholders 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.
<TABLE>
<CAPTION>
Year ended December 31, 1997 Year ended December 31, 1998
----------------------------------- -----------------------------------
Proforma Proforma
Combined Combined
Founding Founding
United Companies United Companies
Road And Acquired Road And Acquired
Services, Inc. Companies Total Services, Inc. Companies Total
-------------- ------------ ------- -------------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Net revenue............. $ -- 163,024 163,024 87,919 108,590 196,509
===== ======= ======= ====== ======= =======
Net income (loss)....... $(174) 9,121 8,947 4,392 7,179 11,571
===== ======= ======= ====== ======= =======
Diluted income per
common share........... $ .58 $ .74
======= =======
</TABLE>
At December 31, 1998, the Company is committed to acquire one business with
a purchase price of $10,400 in cash, 996,351 shares of common stock and an
assumption of approximately $4,400 of debt.
(3) Stockholders' Equity
The Company effected a 100-for-one stock split on December 18, 1997 for each
share of common stock then outstanding. In addition, the Company increased
authorized shares of common stock to 1,000,000 shares with a $.001 par value.
Subsequently, and pursuant to an amended and restated certificate of
incorporation of United Road Services, Inc., filed on February 23, 1998, the
authorized number of shares was increased to 40,000,000 (35,000,000 common
shares and 5,000,000 preferred shares). Also on February 23, 1998, the Company
effected a 3.72 for 1 stock split for all outstanding common shares. Common
stock has been retroactively reflected in the accompanying consolidated
financial statements and related notes.
On December 18, 1997, the Company authorized the issuance of 188,976 shares
pursuant to the terms and conditions of a subscription agreement. These shares
were issued and fully paid on January 1, 1998 for $3.36 per share.
Additionally, during January 1998, the Company issued 29,760 shares of common
stock to a member of the board of directors for a purchase price of $3.36 per
share.
On May 1, 1998, the Company completed the initial public offering of its
common stock by issuing 7,590,000 shares, 990,000 of which were issued
pursuant to an underwriters' over-allotment provision, at a price of $13.00
per share. Prior to the offering, there was no public market for the Company's
common stock. The net proceeds of the offering, after deducting applicable
offering costs of $9,170, were $89,500. The net proceeds were used by the
Company to finance acquisitions and for general corporate purposes.
F-19
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
At various dates during 1998, as part of the financing of certain
acquisitions, discussed in note 2, the Company issued 5,053,268 shares of
common stock. The net consideration of these issuances, after deducting
applicable registration costs of $581, was $68,774 which has been recorded as
the purchase price for the applicable acquisitions.
On January 23, 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, 1,278,847 shares. Shares of common stock that are attributable to
grants that have expired or been terminated, canceled or forfeited are
available for issuance in connection with future grants. 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. 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 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, 500,000 shares. Shares of common stock that
are attributable to grants that have expired or been terminated, canceled or
forfeited are available for issuance in connection with future grants. 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.
Outstanding options may be canceled and reissued under terms specified in the
plan.
The following table summarizes activity under the Company's stock option
plans as of December 31, 1998:
<TABLE>
<CAPTION>
Weighted-
Number of average
shares exercise price
--------- --------------
<S> <C> <C>
Options outstanding at beginning of year....... -- $ --
Granted........................................ 1,080,850 12.22
Forfeited...................................... (2,950) 15.11
--------- ------
Options outstanding at end of year............. 1,077,900 $12.22
========= ======
Options exercisable at December 31, 1998....... --
=========
Weighted-average fair value of options granted
during the year............................... $ 5.95
======
</TABLE>
The per share weighted-average fair value of stock options granted during
1998 was determined using the Black-Scholes option-pricing model with the
following weighted average assumptions: (i) risk-free interest rate of
approximately 4.6%, (ii) expected life of 5 years, (iii) volatility of
approximately 50%, and (iv) expected dividend yield of 0%.
F-20
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
The following table summarizes information about stock options outstanding
as of December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding
----------------------------------------------------------------------------
Weighted-
Weighted- average
Range of Number average remaining
exercise prices outstanding exercise price contractual life
--------------- ----------- -------------- ----------------
<S> <C> <C> <C>
$7.00-10.50 537,800 $ 8.72 9.7 years
10.51-15.75 259,450 13.73 9.5 years
15.76-23.64 270,250 17.22 9.6 years
23.65-25.50 10,400 25.45 9.6 years
---------
1,077,900
=========
</TABLE>
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, 1998:
<TABLE>
<CAPTION>
Number of Exercise price
shares per share
--------- --------------
<S> <C> <C>
1998 Stock Option Plan.............................. 874,350 $9.00-25.50
1998 Non-Qualified Stock Option Plan................ 203,550 7.00-18.375
Convertible subordinated debentures................. 2,915,467
Warrants............................................ 117,789
---------
Shares reserved for issuance...................... 4,111,156
=========
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its stock option
plans and, since the exercise price of stock options granted under the
Company's stock option plans is not less than the market price of the
underlying stock on the date of grant, no compensation cost has been
recognized for such grants. 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. Had
compensation cost for these plans been determined consistent with SFAS No.
123, the Company's net income and earnings per share for the year ended
December 31, 1998 would have been reduced to the following pro forma amounts:
<TABLE>
<S> <C>
Net income:
As reported........................................................... $4,392
======
Pro forma............................................................. $3,321
======
Per share amounts:
Basic earnings per share:
As reported........................................................... $ .43
======
Pro forma............................................................. $ .32
======
Diluted earnings per share:
As reported........................................................... $ .42
======
Pro forma............................................................. $ .32
======
</TABLE>
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. The fair value of each option grant is estimated on the date
F-21
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
of grant using the Black-Scholes option-pricing model with the following
assumptions for 1998: (i) risk-free interest rates ranging from 4.5% to 4.6%,
(ii) expected life of 5 years, (iii) average volatility of 50%, and (iv)
expected dividend yield of 0%.
(4) Vehicles and Equipment
Vehicles and equipment at December 31, 1998 consists of the following:
<TABLE>
<S> <C>
Transportation and towing equipment................................. $42,806
Machinery and other equipment....................................... 1,399
Computer software and related equipment............................. 3,888
Furniture and fixtures.............................................. 587
Leasehold improvements.............................................. 1,426
-------
50,106
Less accumulated depreciation and amortization...................... (3,292)
-------
$46,814
=======
</TABLE>
Depreciation and amortization expense of vehicles and equipment was $0 and
$3,292 in 1997 and 1998, respectively.
Included in vehicles and equipment at December 31, 1998 are costs of $1,107
and accumulated amortization of $70, relating to certain transportation and
towing equipment recorded as capital leases. Amortization expense of $70
relating to transportation and towing equipment capital leases was included in
depreciation and amortization expense at December 31, 1998.
(5) Equipment Under Financing Contracts
The Company has guaranteed lease obligations for certain independent
carriers who lease equipment from financing companies. The guarantee includes
payment of the monthly installments should the primary lessee default, as well
as a specified minimum residual value at the end of the lease term. In return
for the lease guarantee, the independent carrier agrees to subcontract to the
Company for the duration of the lease term. For accounting purposes, the
Company has recorded the rights to the equipment and the corresponding
obligation under the equipment financing contracts. The recorded value of both
the asset and liability related to the financing contracts is determined based
on the present value of the future minimum installment payments and the
guaranteed residual value using the rate implicit in the lease agreements.
The following is a summary of obligations under equipment financing
contracts at December 31, 1998 :
<TABLE>
<S> <C>
Year ending December 31:
1999.............................................................. $ 783
2000.............................................................. 763
2001.............................................................. 667
2002.............................................................. 828
------
Total minimum obligations (includes residual guarantees of $730).. 3,041
Less: imputed interest (at rates from 7.25% to 10.50%)............ (469)
------
Present value of future minimum obligations, $547 of which is
included in current assets and liabilities at December 31, 1998.. $2,572
======
</TABLE>
F-22
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
During 1998, installment payments of $470 related to the obligations for
equipment under financing contracts are included in cost of revenue in the
accompanying consolidated statements of operations. Of this amount, $140
represents interest charges which were withheld from the amounts paid to the
respective independent contractors and remitted directly to the financing
companies. At December 31, 1998, the restricted amount of $140 was included in
cash and cash equivalents in the accompanying consolidated balance sheet.
(6) Deferred Financing Costs
Deferred financing costs at December 31, 1998 are associated with the
Company's revolving credit facility and the convertible subordinated
debentures, and consist of the following:
<TABLE>
<S> <C>
Revolving credit facility, net of accumulated amortization of $201... $1,358
Convertible subordinated debentures, net of accumulated amortization
of $18.............................................................. 2,194
------
$3,552
======
</TABLE>
Included within the deferred financing costs associated with the revolving
credit facility is a non-cash amount of $469 for the issuance of 117,789
warrants at an exercise price of $13.00 per share as consideration for
services rendered in establishing the revolving credit facility. The
compensatory amount was determined using the Black-Scholes option-pricing
model.
(7) Accrued Expenses
Accrued expenses at December 31, 1998 consist of:
<TABLE>
<S> <C>
Accrued payroll and related costs.................................... $2,412
Accrued insurance.................................................... 1,362
Other accrued liabilities............................................ 916
------
$4,690
======
</TABLE>
(8) Long-Term Debt
Long-term debt at December 31, 1998 consists of the following:
<TABLE>
<S> <C>
Revolving credit facility, interest at either the Base rate or
Eurodollar rate, as defined, plus 2.25% (7.75% at December 31,
1998), secured by substantially all of the net tangible assets of
the Company (a).................................................... $18,800
Convertible subordinated debentures bearing interest at 8% annually,
maturing in 2008 (b)............................................... 43,732
-------
Total long-term obligations....................................... $62,532
=======
</TABLE>
(a) Revolving Credit Facility
On May 8, 1998, the Company entered into a revolving credit agreement
("Credit Agreement") with a group of financial institutions enabling the
Company to borrow up to $50,000 on a revolving basis, based upon a defined
borrowing base comprised of specific assets of the Company.
On November 2, 1998 and December 3, 1998, the Credit Agreement was amended
and restated. As amended and restated, the Credit Agreement provides for a
revolving credit facility of $90,000. The Credit
F-23
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
Agreement allows for additional debt, as defined in the agreement, outside of
the credit facility and up to $75,000 in convertible subordinated debt. The
proceeds of the credit facility are to be used to finance working capital,
capital expenditures, permitted acquisitions as defined in the Credit
Agreement, and for other general corporate purposes. The Credit Agreement
matures on October 31, 2001, at which time all amounts then outstanding become
due. The interest rates on the outstanding borrowings are at the Base rate
(the higher of the Federal funds rate plus 0.5% or the reference rate, as
defined) plus the Base rate margin, or the bank's Eurodollar rate plus a
margin of 1.5% to 2.5%. The interest rate margins are dependent upon the
Company's funded debt to EBITDA ratio, as defined. A non-use fee is also
payable on the unused portion of the credit facility at the rate of 0.5% per
year, payable quarterly.
The Credit Agreement provides for various covenants, including requirements
for the Company to achieve certain consolidated net income levels, the
maintenance of defined financial ratios, and the prohibition of the
declaration or payment of any cash dividends or stock purchases or
redemptions. As anticipated by management and the financial institutions party
to the Credit Agreement, the Company was not in compliance with a covenant
limiting capital expenditures for the year ended December 31, 1998 and on
February 17, 1999, the Company received a waiver related specifically to this
event of default.
As of December 31, 1998, the Company had a total of $18,800 outstanding
under the revolving credit facility and had utilized approximately $1,850 of
the credit facility for letters of credit. The letters of credit were
established to secure certain insurance obligations and performance bonds and
expire at various dates during 1999. As of December 31, 1998, the borrowing
availability under the revolving credit facility was $69,350.
(b) Convertible Subordinated Debentures
On December 7, 1998, the Company completed the initial sale of 8%
convertible subordinated debentures ("Debentures") with a principal amount of
$43,500 and a maturity date of December 7, 2008, unless converted or redeemed
earlier. The sale was completed subject to a Purchase Agreement with Charter
URS LLC ("Charterhouse") dated November 19, 1998 which provides for the
issuance to Charterhouse of up to $75,000 of 8% convertible subordinated
debentures. The net proceeds from the sale were used to repay amounts owed
under the aforementioned revolving credit facility and to finance acquisitions
and working capital. The Debentures are subordinate to all existing and future
senior indebtedness including amounts outstanding under the revolving credit
facility. The Debentures are convertible into shares of the Company's common
stock at any time through the maturity date at a conversion price of $15.00
per share. The conversion price is adjustable for certain events as defined in
the Purchase Agreement. The conversion price exceeded the fair market value of
the Company's common stock on the date of execution of the Purchase Agreement.
As part of the Purchase Agreement, the Company is restricted from declaring or
paying a dividend.
At the option of the Company, the Debentures may be redeemed at any time on
or after December 7, 2003, if the average closing price of the Company's
common stock exceeds, for a period of 30 consecutive trading days, 150% of the
conversion price. The Debentures may be redeemed at a price equal to 100% of
the outstanding principal amount plus accrued interest as of the redemption
date. The Company's right of redemption is subject to the Debenture holder's
right to first convert the Debentures into shares of the Company's common
stock.
The Debentures bear interest at a rate of 8% per annum. Until December 7,
2003, such interest shall be paid by the issuance of additional debentures in
the principal amount of the interest payable. The Company has recorded
additional principal of $232, representing interest for the period December 8,
1998 through December 31, 1998. Subsequent to December 7, 2003, interest shall
be paid, at the Company's discretion, by the issuance of additional debentures
in the principal amount of the interest payable or in cash.
F-24
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
At December 31, 1998, long-term debt maturities are as follows:
<TABLE>
<S> <C>
1999................................................................. $ --
2000................................................................. --
2001................................................................. 18,800
2002................................................................. --
2003................................................................. --
Thereafter........................................................... 43,732
-------
$62,532
=======
</TABLE>
(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 has entered into various noncancelable agreements
with the former owners/shareholders of the companies acquired to lease
facilities used in the Company's 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 $0 and
$2,518 in 1997 and 1998, respectively. Included within rent expense was $0 and
$1,024 in 1997 and 1998, 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, 1998 are as follows:
<TABLE>
<CAPTION>
Operating leases
---------------------
Capital
Yar endinge lease Related
Dcember 31e obligations party Other Total
- ----------- ----------- ------- ------ ------
<S> <C> <C> <C> <C>
1999........................................ $ 338 $ 2,250 3,884 6,134
2000........................................ 339 2,239 3,610 5,849
2001........................................ 223 2,247 3,169 5,416
2002........................................ 177 2,214 1,371 3,585
2003........................................ 45 1,651 501 2,152
Thereafter.................................. -- 3,168 -- 3,168
------ ------- ------ ------
$13,769 12,535 26,304
======= ====== ======
Future minimum lease payments............... 1,122
Less: imputed interest...................... (86)
------
Present value of minimum lease payments..... $1,036
======
</TABLE>
F-25
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(10) Income Taxes
Income tax expense at December 31, 1998 consists of the following:
<TABLE>
<S> <C>
Current:
Federal............................................................. $1,555
State............................................................... 289
------
1,844
------
Deferred:
Federal............................................................. 1,408
State............................................................... 251
------
1,659
------
$3,503
======
</TABLE>
The following table reconciles the expected tax expense at the Federal
statutory rate to the effective tax rate for the year ended December 31, 1998:
<TABLE>
<CAPTION>
Amount %
------ ----
<S> <C> <C>
Pre-tax income at statutory rate................................ $2,684 34.0%
State taxes, net of federal benefit............................. 356 4.5
Non-deductible goodwill......................................... 431 5.5
Other........................................................... 32 0.4
------ ----
$3,503 44.4%
====== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1998 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Accounts payable and non-deductible accruals..................... $ 295
Intangible assets................................................ 305
Other, net....................................................... 188
-------
Total gross deferred tax assets................................ 788
Less valuation allowance....................................... --
-------
788
-------
Deferred tax liabilities:
Vehicles and equipment........................................... (4,764)
Amortization of goodwill......................................... (463)
Accounts receivable.............................................. (522)
-------
Net deferred tax liability..................................... $(4,961)
=======
</TABLE>
At December 31, 1997, there were no deferred tax assets or liabilities.
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
F-26
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
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. Based upon the level of
projected future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not that the
Company will realize the benefits of those deductible differences. The amount
of the deferred tax asset considered realizable could be reduced if estimates
of future taxable income during the carryforward period are reduced.
(11) Segment and Related Information
During 1998, the Company adopted SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. Prior to 1998, the Company had no
segment or related information to report.
The Company's divisions operate under a common management structure that
evaluates each divisions' performance. The Company's divisions have been
aggregated into two reportable segments: (1) Transport and (2) Towing and
Recovery. The reportable segments are considered by management to be strategic
business units that offer different services and each of whose respective
long-term financial performance is affected by similar economic conditions.
The Transport segment provides transport services to a broad range of
customers in the new and used vehicle markets. The Towing and Recovery segment
provides towing, impounding and storing, lien sales and auto auctions of
abandoned vehicles. In addition, the Towing and Recovery segment provides
recovery and relocation services for heavy-duty commercial vehicles and
construction equipment. Information regarding the Company's operating segments
is also described in note 1(a).
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. The Company evaluates the performance of its operating segments based
on income before income taxes. Intersegment revenues and transfers are not
significant.
Summarized financial information concerning the Company's reportable
segments is shown in the following table:
<TABLE>
<CAPTION>
Towing and
Transport Recovery Other Total
--------- ---------- ------ -------
<S> <C> <C> <C> <C>
Net revenues from external customers....... $46,908 41,011 -- 87,919
Cost of revenue............................ 34,955 29,810 -- 64,765
Interest income............................ 25 19 614 658
Interest expense........................... 160 69 1,359 1,588
Income before income taxes................. 7,796 4,674 (4,575) 7,895
Total assets............................... 115,324 126,479 6,929 248,732
Capital expenditures....................... 5,177 3,322 2,798 11,297
Depreciation and amortization.............. 1,948 2,895 413 5,256
</TABLE>
F-27
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
The following are reconciliations of the information used by the chief
operating decision maker to the Company's consolidated totals:
<TABLE>
<S> <C>
Reconciliation of income before income taxes:
Total profit from reportable segments............................... $ 12,470
Unallocated amounts:
Interest income................................................... 614
Interest expense.................................................. (1,359)
Depreciation and amortization..................................... (413)
Other selling, general and administrative costs................... (3,417)
--------
Income before income taxes....................................... $ 7,895
========
Reconciliation of total assets:
Total assets from reportable segments............................... $241,803
Unallocated amounts:
Prepaid income taxes.............................................. 465
Vehicles and equipment, net....................................... 2,604
Deferred financing costs, net..................................... 3,552
Other non-current assets.......................................... 308
--------
Total assets..................................................... $248,732
========
</TABLE>
(12) Commitments and Contingencies
(a) Purchase Commitments
As of December 31, 1998, the Company had entered into commitments to
purchase 30 Transport and Towing and Recovery vehicles for approximately
$4,100.
(b) Employment Contracts
During 1998, the Company entered into certain employment agreements with
members of senior management, as well as previous owners or key employees of
the companies acquired. Certain of these agreements represent noncancelable
contracts whereas if the individual is discharged, the remaining term of the
agreement is payable as severance. The terms of these noncancelable agreements
range through May 2003. At December 31, 1998, the Company had future
noncancelable employment commitments of $4,300.
(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
material effect on the Company's consolidated financial position or results of
operations.
(d) Employee Benefit Plans
The Company maintains certain 401(k) plans that enable eligible employees to
defer a portion of their income through contributions to the plans. The
Company contributed $35 to these plans during the year ended December 31,
1998.
F-28
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(13) Related Party Transactions
(a) Earn-out Payments
The Company is obligated to make certain earn-out payments to the former
owners of the Founding Companies and one other acquired company. For each of
the years 1998 through 2002, the Company will be required to make an earn-out
payment to the former owners of each of these companies that achieves certain
net revenue targets. The net revenue target for 1998 was generally 110% of
1997 net revenue of the particular company, and for the years 1999 through
2002 the net revenue target is 110% of the greater of the prior year's actual
net revenue or target net revenue. If the net revenue target is achieved for a
particular year, an initial payment in shares of common stock, generally equal
to 5% of the excess of actual net revenue over the net revenue target, is due.
In addition, upon achievement of the net revenue target for a particular year,
subsequent and equal payments will also be due for each year through 2002,
provided that the actual net revenue for the respective subsequent year
exceeds the actual net revenue for the year that the net revenue target was
first achieved. At December 31, 1998, the Company has recorded additional
goodwill and a liability within accrued expenses on the accompanying
consolidated balance sheet in the amount of $362, which represents the fair
value of 19,519 shares of common stock at December 31, 1998.
(b) Employment and Consultant Agreements with Directors
The Company entered into consultant agreements with two directors. Pursuant
to these agreements, each of the directors is entitled to receive from the
Company a consulting fee equal to two percent of the gross revenue of each
company that the respective director assists the Company in acquiring, with
the fee being based upon such acquired company's gross revenue for the twelve
months immediately preceding the acquisition. Each consultant agreement is for
a term of three years. In addition, the Company entered into an employment
agreement with a third director pursuant to which the director serves as a
Vice President of the Company for a term of three years, with an annual base
salary of $150,000. The employment and consultant agreements described above
also contain covenants not to compete with the Company for one year after the
termination of the agreement.
(c) Employment and Consultant Agreements With Former Owners
Upon consummation of certain acquisitions, the Company has entered
employment or consultant agreements with certain former owners of the
companies acquired. These agreements range from a term of one to five years,
and vary on a case-by-case basis, relative to compensation, duties and
compensation guarantees. Under certain negotiated agreements, the Company has
agreed on compensation amounts in excess of the current market value. For the
year ended December 31, 1998, the Company has recorded $404 of the excess
compensation as additional purchase price consideration and will amortize this
amount over the remaining life of the goodwill associated with the company
acquired.
(d) Holdback
During 1998, the Company has withheld purchase price consideration in the
form of cash and/or common stock that will be released based on the
achievement of certain financial ratios, or other contingencies, after a
contractually defined period of time. The Company does not record a liability
for the cash withheld or consider the shares of common stock issued, but held
in escrow, to be outstanding until the satisfaction of the defined
contingencies. At December 31, 1998, the Company had cash and shares of common
stock withheld in the amount of $1,461 and 241,081 shares, respectively.
F-29
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(e) Lease Agreements
As described in note 9, concurrent with the acquisition of certain
companies, the Company has entered various agreements with former owners to
lease land and buildings used in the Company's operations. In the opinion of
management, these agreements were entered into at a fair market value of the
property being leased.
(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, Notes Payable, and Accounts
Payable--The carrying amount approximates fair value because of the short
maturity of these instruments.
Long-term Debt--The carrying amount of the Company's bank borrowings
under the revolving credit facility approximate the fair value because the
interest rates are based on floating rates identified by reference to
market rates. At December 31, 1998, management estimates that the fair
value of the convertible subordinated debentures approximates the carrying
value of $43,732.
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 market place. The contract value and fair value of the
letters of credit at December 31, 1998 was $1,850.
(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, 1998, the Company has letters of
credit outstanding totaling $1,850.
F-30
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(15) Quarterly Consolidated Financial Data (Unaudited)
The table below sets forth the unaudited consolidated operating results by
quarter for the year ended December 31, 1998:
<TABLE>
<CAPTION>
Quarterly period ended
-----------------------------------------------------------------
March 31, 1998 June 30, 1998 September 30, 1998 December 31, 1998
-------------- ------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Net revenues............ $ -- 8,468 36,374 43,077
Income (loss) from
operations............. (390) 544 4,167 4,660
Net income (loss)....... (232) 457 1,970 2,197
Basic earnings (loss)
per common share (a)... $(.08) .05 .14 .15
===== ===== ====== ======
Diluted earnings (loss)
per common share (a)... $(.08) .05 .14 .15
===== ===== ====== ======
</TABLE>
- --------
(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 the initial public offering and shares
issued in conjunction with certain acquisitions.
(16) Subsequent Events
(a) Acquisitions
Since January 1, 1999, the Company has acquired 12 additional businesses for
aggregate consideration of approximately $23,500 in cash, 1,955,140 shares of
common stock and the assumption of approximately $14,300 of indebtedness.
(b) Convertible Subordinated Debentures
On February 23, 1999, the additional issuance of 8% convertible subordinated
debentures with a principal amount of $31,500, as described in note 8(b), to
Charterhouse was approved by the stockholders of the Company. At the second
closing on March 16, 1999, the Company issued the remaining Debentures to
Charterhouse.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholder and Board of Directors
Northland Auto Transporters, Inc. and
Northland Fleet Leasing, Inc.:
We have audited the accompanying combined balance sheets of Northland Auto
Transporters, Inc. and Northland Fleet Leasing, Inc. (collectively
"Northland") as of December 31, 1996 and 1997 and May 5, 1998, and the related
combined statements of operations, stockholder's equity, and cash flows for
each of the years in the three-year period ended December 31, 1997 and for the
period from January 1, 1998 through May 5, 1998. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Northland
Auto Transporters, Inc. and Northland Fleet Leasing, Inc. as of December 31,
1996 and 1997 and May 5, 1998, and the results of their combined operations
and their combined cash flows for each of the years in the three-year period
ended December 31, 1997 and for the period from January 1, 1998 through May 5,
1998, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Albany, New York
July 31, 1998
F-32
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC.
AND NORTHLAND FLEET LEASING, INC.
COMBINED BALANCE SHEETS
December 31, 1996 and 1997 and May 5, 1998
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ ---------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents................ $ 432,949 407,309 359,880
Trade accounts receivable, net of
allowance for doubtful accounts of
$40,000 in 1996, $75,000 in 1997
and $30,000 in 1998..................... 416,220 942,432 1,053,908
Accounts receivable from employees....... 4,955 3,445 19,907
Notes receivable......................... 35,068 17,453 66,115
Income tax receivable (note 7)........... 37,584 -- --
Prepaid and other current assets (note
2)...................................... 74,302 113,558 423,345
Deferred income taxes--current (note 7).. 9,000 17,000 11,000
---------- --------- ---------
Total current assets................... 1,010,078 1,501,197 1,934,155
Property and equipment, net (notes 3, 5,
and 6).................................... 2,204,802 3,924,055 3,768,576
Notes receivable--noncurrent............... 44,044 31,468 28,624
Other noncurrent assets, net (note 4)...... 8,862 8,426 8,426
---------- --------- ---------
Total assets........................... $3,267,786 5,465,146 5,739,781
========== ========= =========
Liabilities and Stockholder's Equity
Current liabilities:
Current installments of notes payable
(note 5)................................ 282,824 346,859 262,265
Current installments of capital lease
obligations (note 6).................... 4,408 147,538 160,846
Payable to related parties (note 8)...... 159,505 53,849 50,972
Accounts payable......................... 210,998 188,064 260,735
Income taxes payable (note 7)............ -- 261,933 201,000
Accrued payroll and related costs........ 18,062 52,676 216,385
Other accrued liabilities................ 98,914 51,300 67,165
---------- --------- ---------
Total current liabilities.............. 774,711 1,102,219 1,219,368
Long-term liabilities:
Notes payable, excluding current
installments (note 5)................... 318,382 279,963 219,019
Capital lease obligations, excluding
current installments
(note 6)................................ 12,833 793,774 694,309
Deferred income taxes--noncurrent (note
7)...................................... 171,000 244,000 272,000
---------- --------- ---------
Total liabilities...................... 1,276,926 2,419,956 2,404,696
Stockholder's equity:
Common stock, $1 par value, authorized,
issued and outstanding 2,000 shares in
1996, 1997 and 1998..................... 2,000 2,000 2,000
Retained earnings........................ 1,988,860 3,043,190 3,333,085
---------- --------- ---------
Total stockholder's equity............. 1,990,860 3,045,190 3,335,085
---------- --------- ---------
Total liabilities and stockholder's
equity................................ $3,267,786 5,465,146 5,739,781
========== ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-33
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC.
AND NORTHLAND FLEET LEASING, INC.
COMBINED STATEMENTS OF INCOME
Years ended December 31, 1995, 1996 and 1997 and
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
December 31, December 31, December 31, May 5,
1995 1996 1997 1998
------------ ------------ ------------ ---------
<S> <C> <C> <C> <C>
Revenue...................... $4,671,164 6,353,290 10,159,113 4,235,357
Cost of revenue.............. 3,683,119 5,132,828 7,341,748 2,946,829
---------- --------- ---------- ---------
Gross profit................. 988,045 1,220,462 2,817,365 1,288,528
Selling, general, and
administrative expenses..... 663,723 874,559 1,378,872 747,452
---------- --------- ---------- ---------
Income from operations....... 324,322 345,903 1,438,493 541,076
Other income (expense):
Interest expense........... (48,825) (79,384) (139,099) (49,863)
Interest income............ 16,624 37,701 35,723 15,172
Loss on sale of assets..... (14,540) -- (34,568) (20,304)
Other...................... 29,078 41,282 88,781 38,814
---------- --------- ---------- ---------
Income before income taxes... 306,659 345,502 1,389,330 524,895
Income tax expense (benefit)
(note 7).................... 31,400 (710) 335,000 235,000
---------- --------- ---------- ---------
Net income................... $ 275,259 346,212 1,054,330 289,895
========== ========= ========== =========
</TABLE>
See accompanying notes to combined financial statements.
F-34
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC.
AND NORTHLAND FLEET LEASING, INC.
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
Years ended December 31, 1995, 1996 and 1997
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
Total
Common Retained stockholder's
stock earnings equity
------ --------- -------------
<S> <C> <C> <C>
Balance at December 31, 1994.................... $2,000 1,367,389 1,369,389
Net income--1995................................ -- 275,259 275,259
------ --------- ---------
Balance at December 31, 1995.................... 2,000 1,642,648 1,644,648
Net income--1996................................ -- 346,212 346,212
------ --------- ---------
Balance at December 31, 1996.................... 2,000 1,988,860 1,990,860
Net income--1997................................ -- 1,054,330 1,054,330
------ --------- ---------
Balance at December 31, 1997.................... 2,000 3,043,190 3,045,190
Net income--period from January 1, 1998 through
May 5, 1998.................................... -- 289,895 289,895
------ --------- ---------
Balance at May 5, 1998.......................... $2,000 3,333,085 3,335,085
====== ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-35
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC.
AND NORTHLAND FLEET LEASING, INC.
COMBINED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1996 and 1997
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
December 31, December 31, December 31, May 5,
1995 1996 1997 1998
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income.................. $275,259 346,212 1,054,330 289,895
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization............. 181,634 224,637 289,479 129,692
(Decrease) increase in
deferred income taxes.... (11,000) (6,000) 65,000 34,000
Loss on retirement of
property and equipment... 14,540 -- 34,568 20,304
(Increase) decrease in
trade accounts
receivable............... (115,982) 138,452 (526,212) (111,476)
Decrease (increase) in
other accounts
receivable............... 1,185 (4,100) 1,510 --
Decrease in income tax
receivable............... -- -- 37,584 --
(Increase) decrease in
prepaid and other current
assets................... (17,892) 16,331 (39,256) (326,249)
Increase (decrease) in
accounts payable......... 716 23,236 (22,934) 72,671
Increase (decrease) in
income taxes payable..... -- 261,933 (60,933)
(Decrease) increase in
accrued payroll and
related costs............ (85,348) (14,137) 34,614 163,709
Increase (decrease) in
amounts payable to
related parties.......... 20,552 16,410 (105,656) (2,877)
Increase (decrease) in
other accrued
liabilities.............. 25,946 2,880 (47,614) 15,865
-------- -------- --------- --------
Net cash provided by operating
activities................... 289,610 743,921 1,037,346 224,601
-------- -------- --------- --------
Cash flows from investing
activities:
Purchase of plant and
equipment.................. (229,888) (395,881) (762,597) (169,467)
Proceeds from sale of
equipment.................. 53,044 -- 67,656 174,950
Decrease (increase) in notes
receivable................. 8,159 (30,984) 30,191 (45,818)
-------- -------- --------- --------
Net cash used in investing
activities................... (168,685) (426,865) (664,750) (40,335)
-------- -------- --------- --------
Cash flows from financing
activities:
Proceeds from long-term
debt....................... -- -- 24,629 --
Principal payments on long-
term debt and capital
leases..................... (139,745) (157,971) (422,865) (231,695)
-------- -------- --------- --------
Net cash used in financing
activities................... (139,745) (157,971) (398,236) (231,695)
-------- -------- --------- --------
Net increase (decrease) in
cash......................... (18,820) 159,085 (25,640) (47,429)
Cash at beginning of period... 292,684 273,864 432,949 407,309
-------- -------- --------- --------
Cash at end of period......... $273,864 432,949 407,309 359,880
======== ======== ========= ========
Supplemental disclosure of
cash flow information:
Cash paid during the period
for:
Interest.................. $ 48,825 79,384 139,099 49,863
======== ======== ========= ========
Income taxes.............. $ 7,024 79,835 6,480 275,064
======== ======== ========= ========
Supplemental disclosure of
noncash investing and
financing activities:
Issuance of notes for
financing of capital
leases................... $200,000 360,523 1,347,423 --
======== ======== ========= ========
</TABLE>
See accompanying notes to combined financial statements.
F-36
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997 and May 5, 1998
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Northland Auto Transporters, Inc. and Northland Fleet Leasing, Inc.
(referred to collectively as "Northland") were founded in 1977 and 1992,
respectively. Northland's primary business is transporting vehicles for auto
auctions, leasing companies, auto dealers, manufacturers and individuals,
primarily in the Midwestern United States. Northland has three facilities in
Detroit. It operates approximately 55 vehicles. Northland Fleet Leasing, Inc.
owns a fleet of trucks and trailers and contracts out work primarily with
Northland Auto Transporters, Inc., and to a limited extent, third party
contractors.
(b) Principles of Combination
The combined financial statements include the financial statements of
Northland Auto Transporters, Inc., the auto hauling company, and Northland
Fleet Leasing, Inc., a truck leasing company. Northland Auto Transporters,
Inc. is a C-Corporation while Northland Fleet Leasing, Inc. is an S-
Corporation. All sales relating to intercompany leasing arrangements have been
eliminated. Both entities have the same management and principal stockholder
ownership.
(c) Cash Equivalents
Cash equivalents of $432,949, $407,309, and $359,880 at December 31, 1996
and 1997 and at May 5, 1998, respectively, consist of bank accounts and
certificates of deposit with an initial term of less than three months. For
purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments with original maturities of three months or less to be
cash equivalents.
(d) Revenue Recognition
Northland operates as one segment related to the transportation of vehicles
and equipment for customers.
Northland's revenue is derived from customers who require transportation of
vehicles and equipment. Transport revenue is recognized upon the delivery of
the vehicles to their final destination. Expenses related to the generation of
revenue are recognized as incurred.
(e) Property and Equipment
Property and equipment are stated at cost. Plant and equipment under capital
leases are stated at the present value of minimum lease payments. Depreciation
is determined for financial statement purposes using the straight-line method
over the estimated useful lives of the individual assets. Accelerated methods
of depreciation have been used for income tax purposes. For financial
statement purposes, the Company provides for depreciation of property and
equipment over the following estimated useful lives:
<TABLE>
<S> <C>
Transportation equipment......................................... 10-20 years
Furniture and fixtures........................................... 7 years
Office equipment................................................. 5 years
Automobiles...................................................... 5 years
</TABLE>
F-37
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997 and May 5, 1998
(f) Fair Value of Financial Instruments
Due to the short-term nature of various financial instruments and the
current incremental borrowing rates available to the Company on bank loans
with similar terms and maturities, the fair value of the Company's financial
instruments approximates their carrying values.
(g) Other Assets
Other assets consist principally of prepaid insurance and short-term
deposits to purchase equipment.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method for
Northland Auto Transporters, Inc. 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 credit 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 or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Northland Fleet Leasing, Inc. is a Subchapter S corporation. As such, all
taxable events are recorded by the shareholders currently on their personal
tax returns and no deferrals are recorded.
(i) Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues, gains, and expenses during the reporting period. Actual results
could differ from those estimates.
(2) Prepaid and Other Current Assets
Prepaid and other current assets at December 31, 1996 and 1997 and May 5,
1998 consists of:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ -------
<S> <C> <C> <C>
Prepaid insurance.......................... $14,818 28,172 114,527
Prepaid vehicle registration............... 25,978 35,778 19,877
Deposits on trucks......................... 12,403 16,633 279,967
Miscellaneous advances..................... 12,716 9,320 5,501
Prepaid property and other taxes........... 8,387 23,655 3,473
------- ------- -------
$74,302 113,558 423,345
======= ======= =======
</TABLE>
F-38
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997 and May 5, 1998
(3) Property and Equipment
Property and equipment at December 31, 1996 and 1997 and May 5, 1998 consist
of the following:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ ---------
<S> <C> <C> <C>
Transportation equipment................ $2,745,094 4,457,178 4,344,681
Furniture and fixtures.................. 123,585 147,035 145,544
Office equipment........................ 34,449 34,244 34,244
Automobiles............................. 64,781 126,926 157,906
---------- --------- ---------
Total................................... 2,967,909 4,765,383 4,682,375
Less accumulated depreciation........... (763,107) (841,328) (913,800)
---------- --------- ---------
Property and equipment, net............. $2,204,802 3,924,055 3,768,575
========== ========= =========
</TABLE>
Depreciation of property and equipment in 1995, 1996, 1997 and 1998 totaled
$181,198, $224,201, $289,043 and $129,692, respectively.
(4) Other Noncurrent Assets
Other noncurrent assets at December 31, 1996 and 1997 and May 5, 1998 consist
of the following:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ ------
<S> <C> <C> <C>
Deposits.................................... $4,672 4,672 4,672
Goodwill.................................... 3,936 3,500 3,500
Mortgage commitment fee..................... 254 254 254
------ ----- -----
$8,862 8,426 8,426
====== ===== =====
</TABLE>
F-39
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997 and May 5, 1998
(5) Indebtedness
The Company's long-term debt consisted of the following at December 31, 1996
and 1997 and May 5, 1998:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ --------
<S> <C> <C> <C>
Note payable to Navistar Financial Corp.,
payable in monthly installments of $1,188,
including interest at 8.755%, maturing
June 2000. Secured by equipment........... $ 43,095 31,081 --
Note payable to First of America Bank,
payable in monthly installments of
$11,029, including interest at 8.25%,
maturing May 1999. Secured by equipment... 288,698 176,248 136,325
Note payable to First of America Bank,
payable in monthly principal installments
of $7,320, plus interest at 0.75% above
the prime lending rate (9.0%, 9.25% and
7.75% at December 31, 1996 and 1997 and
May 5, 1998), maturing July 1998. Secured
by equipment.............................. 141,143 49,628 17,376
Note payable to First of America Bank,
payable in monthly installments of $6,290,
including interest at 8.25%, maturing
October 1998. Secured by equipment........ 128,270 60,948 37,125
Various notes payable secured by
equipment................................. -- 20,261 18,743
-------- -------- --------
Total long-term debt....................... 601,206 626,822 481,284
-------- -------- --------
Less installments due within one year...... (282,824) (346,859) (262,265)
-------- -------- --------
Long-term debt, excluding current
installments.............................. $318,382 279,963 219,019
======== ======== ========
</TABLE>
Note payable to First of America Bank,
payable in monthly principal installments
of $6,771, including interest at the
Bank's base lending rate (8.50% at May 5,
1998 and December 31, 1997), maturing
April 10, 2001. Secured by equipment...... -- 288,656 271,715
Annual maturities of long-term debt for each of the four years subsequent to
May 5, 1998 are as follows:
<TABLE>
<S> <C>
1999................................................................ $262,265
2000................................................................ 74,779
2001................................................................ 108,308
2002................................................................ 35,932
--------
$481,284
========
</TABLE>
(6) Leases
The Company leases equipment under a capital leases expiring from 2000 to
2002. The asset and liability under the capital lease recorded at the present
value of the minimum lease payments. Amortization of equipment under the
capital lease is included in depreciation expense in the accompanying
statements of operations.
Northland leases its operating facility from a third-party under a
cancelable operating lease rent expense in 1995, 1996, 1997 and 1998 was
$40,054, $58,515, $41,700 and $14,782.
F-40
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997 and May 5, 1998
Following is a summary of property held under the capital leases at December
31, 1996 and 1997 and May 5, 1998:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ --------
<S> <C> <C> <C>
Equipment................................ $18,000 1,047,298 977,949
Less accumulated amortization.......... (3,600) (298,619) (385,141)
------- --------- --------
Net assets held under capital leases..... $14,400 748,679 592,808
======= ========= ========
</TABLE>
The present value of capital lease payments and minimum future rental
payments to be paid on all noncancelable operating leases for each of the next
five years are as follows:
<TABLE>
<CAPTION>
Years ending December 31, Capital leases
------------------------- --------------
<S> <C>
1998.......................................................... $ 136,268
1999.......................................................... 217,219
2000.......................................................... 208,195
2001.......................................................... 197,277
2002.......................................................... 271,073
---------
Total......................................................... 1,030,032
Less amount representing interest............................. (174,877)
---------
Present value of capital lease payments....................... $ 855,155
=========
</TABLE>
(7) Income Taxes
Income tax expense (benefit) for the year ended December 31, 1995, 1996 and
1997 and for the period from January 1 through May 5, 1998 consists of:
<TABLE>
<CAPTION>
December 31, December 31, December 31, May 5,
1995 1996 1997 1998
------------ ------------ ------------ -------
<S> <C> <C> <C> <C>
Current:
Federal..................... $42,400 5,290 270,000 201,000
Deferred.................... (11,000) (6,000) 65,000 34,000
------- ------ ------- -------
$31,400 (710) 335,000 235,000
======= ====== ======= =======
</TABLE>
The following table reconciles the expected federal statutory tax rate to
the effective tax rate:
<TABLE>
<CAPTION>
December 31, December 31, December 31, May 5,
1995 1996 1997 1998
------------ ------------ ------------ -------
<S> <C> <C> <C> <C>
Computed expected tax
expense..................... $104,264 117,471 472,372 178,464
Effect of earnings from S-
Corporation................. (77,750) (123,441) (141,644) 56,536
Non-deductible meals and
entertainment expense....... 4,886 5,260 4,272 --
-------- -------- -------- -------
$ 31,400 (710) 335,000 235,000
======== ======== ======== =======
</TABLE>
F-41
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997 and May 5, 1998
The tax effect of temporary differences that give rise to deferred tax
assets and deferred tax liabilities as of December 31, 1996 and 1997 and May
5, 1998 and are presented below:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ --------
<S> <C> <C> <C>
Deferred tax asset:
Allowance for doubtful accounts....... $ 9,000 17,000 11,000
Deferred tax liability:
Property and equipment, due to
differences in depreciation lives and
methods.............................. (171,000) (244,000) (272,000)
--------- -------- --------
Net deferred tax liability.............. $(162,000) (227,000) (261,000)
========= ======== ========
</TABLE>
At December 31, 1995, the net deferred tax liability was $168,000.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion of 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 during the
periods in which those temporary differences become deductible. Management
considers the projected future taxable income and tax planning strategies, as
well as carryback opportunities, in making this assessment. Based upon the
level of historical taxable income, projections for future taxable income, and
carryback opportunities over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences. The amount of the
deferred tax asset considered realizable, however, could be reduced in the
near term if estimates of future taxable income are reduced.
(8) Related Party
The Company has borrowed funds from its principal shareholder and has an
outstanding payable for December 31, 1996 and 1997 and for the period from
January 1, 1998 through May 5, 1998 of $159,505, $53,849, and $50,972,
respectively.
(9) Employee Benefits
The Company has a retirement savings plan, pursuant to section 401(k) of the
Internal Revenue Code, that is available to all employees with at least 1 year
of service to the Company and that are at least 21 years of age. Eligible
participants may contribute up to 15% of their compensation. The Company
provides discretionary matching contributions to the Plan, which amounted to
$12,985, $64,196, $0, and $88,329 in 1995, 1996, 1997, and the period from
January 1, 1998 through May 5, 1998, respectively.
(10) Business Risks
Two customers accounted for a combined 11% and 16% of the Company's sales in
1996 and 1997, respectively.
Four customers accounted for more than 44% of the Company's sales as of
period end May 5, 1998. At May 5, 1998, the Company had $418,924 of trade
accounts receivable due from these companies.
F-42
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997 and May 5, 1998
(11) Contingent Liabilities
Various legal claims arise against Northland 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) Subsequent Event
On May 5, 1998 the stockholder sold the companies to United Road Services,
Inc. as part of the initial public offering of the common stock of United Road
Services, Inc.
F-43
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholder
Falcon Towing and Auto Delivery, Inc.:
We have audited the accompanying balance sheets of Falcon Towing and Auto
Delivery, Inc. (Falcon) as of December 31, 1996 and 1997 and May 5, 1998 and
the related statement of operations, stockholder's equity, and cash flows for
each of the years in the three-year period ended December 31, 1997 and the
period from January 1, 1998 through May 5, 1998. These financial statements
are the responsibility of Falcon'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 Falcon Towing and Auto
Delivery, Inc. as of December 31, 1996 and 1997 and May 5, 1998 and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 1997 and the period from January 1, 1998
through May 5, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Albany, New York
July 27, 1998
F-44
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
BALANCE SHEETS
December 31, 1996 and 1997 and May 5, 1998
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ ---------
<S> <C> <C> <C>
Assets
Current assets:
Cash..................................... $ 23,505 3,527 8,090
Trade accounts receivable, net of
allowance for doubtful accounts of
$67,650 in 1996 and $188,500 in 1997 and
1998.................................... 476,896 717,560 499,074
Inventories.............................. 24,868 26,068 28,172
Prepaid and other current assets......... 46,537 131,328 131,331
---------- --------- ---------
Total current assets................... 571,806 878,483 666,667
Property and equipment, net (notes 2, 3 and
4)........................................ 1,656,635 2,423,368 2,440,528
---------- --------- ---------
Total assets........................... $2,228,441 3,301,851 3,107,195
========== ========= =========
Liabilities
Current liabilities:
Current installments of long-term debt
(note 3)................................ $ 123,722 264,081 407,992
Current installments of obligations under
capital leases (note 4)................. 252,527 368,590 414,628
Borrowings under lines of credit (note
3)...................................... 36,150 47,121 50,378
Accounts payable......................... 178,357 546,301 272,172
Accrued payroll and related costs........ 57,000 67,701 100,494
Income taxes payable (note 5)............ 98,698 207,399 250,723
Other accrued liabilities................ 137,600 214,979 163,443
---------- --------- ---------
Total current liabilities.............. 884,054 1,716,172 1,659,830
Long-term liabilities:
Long-term debt, excluding current
installments (note 3)................... 225,386 250,196 --
Obligations under capital leases,
excluding current installments (note
4)...................................... 630,677 716,288 685,204
Deferred income taxes (note 5)........... 11,733 10,555 42,253
---------- --------- ---------
Total liabilities...................... 1,751,850 2,693,211 2,387,287
Stockholder's equity:
Common stock, no par or stated value.
Authorized 1,000 shares; issued and
outstanding 750 shares.................. -- -- --
Retained earnings........................ 476,591 608,640 719,908
---------- --------- ---------
Total stockholder's equity............. 476,591 608,640 719,908
---------- --------- ---------
Total liabilities and stockholder's
equity................................ $2,228,441 3,301,851 3,107,195
========== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
STATEMENTS OF OPERATIONS
Years ended December 31, 1995, 1996 and 1997 and
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
December 31, December 31, December 31, May 5,
1995 1996 1997 1998
------------ ------------ ------------ ---------
<S> <C> <C> <C> <C>
Net revenue.................. $4,351,847 6,203,104 7,784,766 2,848,353
Cost of revenue.............. 3,492,248 4,638,239 5,955,423 2,134,217
---------- --------- --------- ---------
Gross profit............. 859,599 1,564,865 1,829,343 714,136
Selling, general and
administrative expenses..... 952,260 1,190,631 1,614,386 479,501
---------- --------- --------- ---------
Income (loss) from opera-
tions................... (92,661) 374,234 214,957 234,635
Other income (expense):
Interest expense........... (77,176) (129,150) (147,700) (48,345)
Gain (loss) on sale of
equipment................. (417) -- 98,735 --
Other...................... 38,508 12,167 73,580 --
---------- --------- --------- ---------
Income (loss) before in-
come taxes.............. (131,746) 257,251 239,572 186,290
Income tax expense (note 5).. 15,707 94,723 107,523 75,022
---------- --------- --------- ---------
Net income (loss)........ $ (147,453) 162,528 132,049 111,268
========== ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
Years ended December 31, 1995, 1996 and 1997 and
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
Total
Common Retained stockholder's
stock earnings equity
------ -------- -------------
<S> <C> <C> <C>
Balance at December 31, 1994.................... $-- 461,516 461,516
Net loss--1995.................................. -- (147,453) (147,453)
---- -------- --------
Balance at December 31, 1995.................... -- 314,063 314,063
Net income--1996................................ -- 162,528 162,528
---- -------- --------
Balance at December 31, 1996.................... -- 476,591 476,591
Net income--1997................................ -- 132,049 132,049
---- -------- --------
Balance at December 31, 1997.................... -- 608,640 608,640
Net income--period from January 1, 1998 through
May 5, 1998.................................... -- 111,268 111,268
---- -------- --------
Balance at May 5, 1998.......................... $-- 719,908 719,908
==== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1996 and 1997 and
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
December 31, December 31, December 31, May 5,
1995 1996 1997 1998
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss).......... $(147,453) 162,528 132,049 111,268
Adjustment to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and
amortization............ 343,595 431,828 621,673 257,178
Deferred income tax
(benefit) expense....... 15,707 (3,975) (1,178) 31,698
Gain on sale of
equipment............... 417 -- (98,735) --
(Increase) decrease in
trade accounts
receivable.............. (1,169) (236,557) (240,664) 218,486
Increase in inventories.. -- -- (1,200) (2,104)
Increase in prepaid and
other current assets.... (10,524) (9,236) (84,791) (3)
Increase (decrease) in
accounts payable........ 104,440 (8,097) 367,944 (274,129)
Increase in accrued
payroll and related
costs................... 71,443 53,937 10,701 32,793
(Decrease) increase in
income taxes payable.... (20,542) 98,698 108,701 43,324
Increase (decrease) in
other accrued
liabilities............. 7,434 (12,591) 77,379 (51,536)
--------- -------- -------- --------
Net cash provided by
operating activities.. 363,348 476,535 891,879 366,975
--------- -------- -------- --------
Cash flows used in investing
activities:
Purchases of property and
equipment................. (290,177) (169,861) (919,049) (274,338)
Proceeds from sale of
property and equipment.... -- -- 141,100 --
--------- -------- -------- --------
Net cash used in
investing activities.. (290,177) (169,861) (777,949) (274,338)
--------- -------- -------- --------
Cash flows from financing
activities:
Net proceeds from long-term
debt...................... 75,047 -- 384,609 --
Net repayments on long term
debt...................... (120,031) (282,833) (529,488) (91,331)
Net borrowing under lines
of credit................. (36,066) (2,784) 10,971 3,257
--------- -------- -------- --------
Net cash used in
financing activities.. (81,050) (285,617) (133,908) (88,074)
--------- -------- -------- --------
Net increase (decrease) in
cash........................ (7,879) 21,057 (19,978) 4,563
Cash at beginning of period.. 10,327 2,448 23,505 3,527
--------- -------- -------- --------
Cash at end of period........ $ 2,448 23,505 3,527 8,090
========= ======== ======== ========
Supplemental disclosure of
cash flow information:
Cash paid during the period
for:
Interest................. $ 74,280 125,435 144,806 48,345
========= ======== ======== ========
Income taxes............. $ -- 12,591 -- 31,698
========= ======== ======== ========
Supplemental disclosure of
noncash investing and
financing activities:
Issuance of notes for
financing of capital
leases.................... $ 571,137 671,086 511,722 156,990
========= ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997 and May 5, 1998
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Falcon Towing and Auto Delivery, Inc. (Falcon) was founded in 1985. Falcon's
primary business is transporting vehicles for dealers, leasing companies,
auction companies and long-haul transporters in the Western United States.
Falcon has facilities in Los Angeles, San Francisco and Phoenix. It operates
approximately 50 vehicles.
(b) Revenue Recognition
Falcon operates as one segment related to the transportation of vehicles and
equipment for customers.
Falcon's revenue is derived from customers who require transport of vehicles
and equipment. Transport revenue is recognized upon the delivery of the
vehicles and equipment to their final destination. Expenses related to the
generation of revenue are recognized as incurred.
(c) Inventories
Inventories, which consist principally of replacement tires and truck parts,
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 purposes using the straight-line method over the estimated
useful lives of the individual assets or, for leasehold improvements, over the
terms of the related leases if shorter. Accelerated methods of depreciation
have been used for income tax purposes. For financial statement purposes,
Falcon provides for depreciation of property and equipment over the following
estimated useful lives:
<TABLE>
<S> <C>
Transportation and towing equipment.................................. 5 years
Machinery and equipment.............................................. 5 years
Leasehold improvements............................................... 5 years
Furniture and fixtures............................................... 5 years
Office equipment..................................................... 5 years
</TABLE>
(e) Fair Value of Financial Instruments
Due to the short-term nature of various financial instruments and the
current incremental borrowing rates available to Falcon on bank loans with
similar terms and maturities, the fair value of Falcon's financial instruments
approximates their carrying values.
(f) 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 credit 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 or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
F-49
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997 and May 5, 1998
(g) Use of Estimates
Management of Falcon 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.
(2) Property and Equipment
Property and equipment at December 31, 1996 and 1997 and May 5, 1998 consist
of the following:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ ----------
<S> <C> <C> <C>
Transportation and towing equipment... $ 2,970,070 4,124,483 4,370,183
Machinery and equipment............... 70,296 104,411 108,388
Leasehold improvements................ 26,489 43,653 43,653
Furniture and fixtures................ 10,448 14,298 14,298
Office equipment...................... 19,225 19,225 43,886
Construction-in-progress.............. -- 33,000 33,000
----------- ---------- ----------
3,096,528 4,339,070 4,613,408
Less accumulated depreciation and
amortization......................... (1,439,893) (1,915,702) (2,172,880)
----------- ---------- ----------
$ 1,656,635 2,423,368 2,440,528
=========== ========== ==========
</TABLE>
Depreciation and amortization of property and equipment in 1995, 1996 and
1997 and for the period ended May 5, 1998 totaled $343,595, $431,828, $621,673
and $257,178, respectively.
(3) Indebtedness
Falcon has available a $50,000 line of credit with $50,378 outstanding at
May 5, 1998, secured by the assets of Falcon and a guarantee by Falcon's
stockholder. Outstanding borrowing bear interest at 11.5%. Subsequent to May
5, 1998, Falcon repaid the outstanding balance in full.
Falcon has various notes payable to banks aggregating $407,992 and payable
in monthly installments ranging from $1,024 to $2,909, including interest
ranging from 9.0% to 10.5%. The notes mature at dates ranging from April, 1998
to April, 2000 and are secured by vehicles and equipment. These notes have
been classified as current as subsequent to May 5, 1998, all outstanding notes
payable were paid in full.
(4) Leases
The Company is obligated under capital lease arrangements for certain
vehicles, which expire at various dates through November 2000.
Following is a summary of equipment held under capital leases at December
31, 1996, 1997 and May 5, 1998:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ ----------
<S> <C> <C> <C>
Transportation and towing
equipment................ $1,612,687 2,124,409 2,281,399
Less accumulated
amortization........... (703,928) (1,036,670) (1,281,130)
---------- ---------- ----------
$ 908,759 1,087,739 1,000,269
========== ========== ==========
</TABLE>
F-50
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997 and May 5, 1998
Falcon leases the land and buildings used for its operations at the El Monte
and Phoenix locations under lease agreements with its sole stockholder. Rent
paid to the stockholder in 1995, 1996, 1997 and for the period ended May 5,
1998 was $0, $24,000, $319,000 and $129,500, respectively. Additionally,
Falcon has a cancelable lease for the land and building used for its
operations at the Newark, CA location from an unrelated third party for annual
rental payments of approximately $48,000. Rent expense for the period ended
May 5, 1998 was $16,000. Falcon is responsible for all operating costs related
to the properties.
Subsequent to May 5, 1998, United Road Services, Inc. entered into
agreements with the stockholder to lease the land and buildings used in
Falcon's operations. Accordingly, the Company is not obligated with respect to
future operating lease commitments.
Future minimum capital lease payments as of May 5, 1998 are:
<TABLE>
<S> <C>
1998............................................................. $ 464,548
1999............................................................. 402,427
2000............................................................. 245,115
Thereafter....................................................... --
----------
Total future minimum lease payments............................ 1,112,090
Less amounts representing interest............................... (12,258)
----------
Present value of net minimum capital lease payments............ $1,099,832
==========
</TABLE>
(5) Income Taxes
Income tax expense for the years ended December 31, 1995, 1996 and 1997 and
the period from January 1, 1998 through May 5, 1998 consists of:
<TABLE>
<CAPTION>
December 31, December 31, December 31, December 31,
1995 1996 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Current:
Federal............... $ -- 77,500 86,271 34,384
State................. -- 21,198 22,430 8,940
------- ------ ------- ------
-- 98,698 108,701 43,324
Deferred................ 15,707 (3,975) (1,178) 31,698
------- ------ ------- ------
$15,707 94,723 107,523 75,022
======= ====== ======= ======
</TABLE>
F-51
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997 and May 5, 1998
The following table reconciles the expected tax expense at the Federal
statutory tax rate to the effective tax rate:
<TABLE>
<CAPTION>
December 31, December 31, December 31, May 5,
1995 1996 1997 1998
------------ ------------ ------------ ------
<S> <C> <C> <C> <C>
Computed expected tax
(benefit) expense........... $(44,794) 87,465 81,454 63,339
State income taxes (benefit),
net of Federal benefit...... (8,087) 13,991 14,803 10,869
Non-deductible meals and
entertainment expenses...... 1,428 354 2,116 814
Tax penalties and
disallowances............... -- 5,724 3,898 --
Net operating loss
carryforward for which no
benefit will be derived..... 73,039 -- -- --
Basis difference in fixed
assets which will not result
in a tax benefit or loss.... (5,879) (12,811) 5,252 --
-------- ------- ------- ------
$ 15,707 94,723 107,523 75,022
======== ======= ======= ======
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
liabilities at December 31, 1995, 1996 and 1997 and May 5, 1998 relate to
depreciation of property, plant and equipment. At December 31, 1995, 1996,
1997 and May 5, 1998, deferred tax liabilities amounted to $15,707, $11,733,
$10,555, and $42,253, respectively.
(6) Employee Benefits
Falcon has a retirement savings plan pursuant to section 401(k) of the
Internal Revenue Code that is available to all employees with at least one
year of service to Falcon and that are at least twenty-one years of age.
Falcon provides matching funds of 25% of eligible contributions to the Plan
which amounted to $0, $0, $18,000, and $12,000 in 1995, 1996 and 1997 and for
the period ended May 5, 1998, respectively.
(7) Subsequent Event
On May 5, 1998, the stockholder successfully completed the sale of Falcon to
United Road Services, Inc. The sales transaction is affected through a
combination of cash and common stock of United Road Services, Inc. The selling
price of Falcon exceeds its nets assets as of May 5, 1998. Certain of the
assets of Falcon, in the amount of $65,000, will be retained by the
stockholder.
F-52
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholder and Board of Directors
Smith-Christensen Enterprises, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of Smith-
Christensen Enterprises, Inc. and Subsidiary (City Towing, Inc. d/b/a Quality
Towing ("Quality")) as of January 31, 1997, December 31, 1997 and May 5, 1998
and the related consolidated statements of operations, stockholder's equity
and cash flows for the years ended January 31, 1996 and 1997, the twelve-month
period ended December 31, 1997, and the period from January 1, 1998 through
May 5, 1998. These consolidated financial statements are the responsibility of
Quality's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Smith-
Christensen Enterprises, Inc. and Subsidiary (City Towing, Inc. d/b/a Quality
Towing) as of January 31, 1997, December 31, 1997 and May 5, 1998, the results
of their operations and cash flows for the years ended January 31, 1996 and
1997, the twelve-month period ended December 31, 1997, and the period from
January 1, 1998 through May 5, 1998, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Albany, New York
August 14, 1998
F-53
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
January 31, 1997, December 31, 1997 and May 5, 1998
<TABLE>
<CAPTION>
January
31, December 31, May 5,
1997 1997 1998
---------- ------------ ---------
<S> <C> <C> <C>
Assets
Current assets:
Cash....................................... $ 180,269 266,687 691,294
Trade accounts receivable, net of allowance
for doubtful accounts of $26,850, $75,850
and $75,850, respectively................. 88,518 277,966 313,210
Accounts receivable from related parties... 10,665 50,151 116,582
Due from employees......................... 19,124 22,053 14,599
Inventories................................ 20,661 9,950 --
Prepaid expenses........................... 30,048 19,680 51,979
Other current assets....................... 900 900 --
---------- --------- ---------
Total current assets..................... 350,185 647,387 1,187,664
Property and equipment, net................ 2,653,243 2,877,229 1,952,495
Accounts receivable from related party..... 157,294 831,733 --
Other assets............................... 118,908 98,905 92,056
---------- --------- ---------
Total assets............................. $3,279,630 4,455,254 3,232,215
========== ========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt..... $ 447,875 541,836 2,330,070
Accounts payable........................... 38,278 68,203 149,034
Accrued payroll and related costs.......... 28,757 85,563 119,442
Income taxes payable....................... 60,863 345,339 77,710
Other accrued expenses..................... 5,305 3,110 6,416
---------- --------- ---------
Total current liabilities................ 581,078 1,044,051 2,682,672
Long-term liabilities:
Long-term debt, excluding current
installments.............................. 2,415,340 2,188,038 --
Deferred income taxes...................... 193,379 312,721 301,601
---------- --------- ---------
Total liabilities........................ 3,189,797 3,544,810 2,984,273
---------- --------- ---------
Stockholders' equity:
Common stock, no par value. Authorized
2,500 shares,
issued and outstanding 2,425 shares....... 20,000 20,000 20,000
Retained earnings.......................... 69,833 890,444 227,942
---------- --------- ---------
Total stockholders' equity............... 89,833 910,444 247,942
---------- --------- ---------
Total liabilities and stockholders'
equity.................................. $3,279,630 4,455,254 3,232,215
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-54
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended January 31, 1996 and 1997,
Twelve month period ended December 31, 1997, and
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
January January 31, December 31, May 5,
31, 1996 1997 1997 1998
---------- ----------- ------------ ---------
(Note 1)
<S> <C> <C> <C> <C>
Net revenue.................... $4,395,762 5,395,475 6,802,474 2,664,208
Cost of revenue 2,579,463 3,214,772 3,849,138 1,646,968
---------- --------- --------- ---------
Gross profit............... 1,816,299 2,180,703 2,953,336 1,017,240
Selling, general and
administrative expenses....... 1,436,488 1,194,716 1,389,707 336,447
---------- --------- --------- ---------
Income from operations..... 379,811 985,987 1,563,629 680,793
---------- --------- --------- ---------
Other income (expense):
Interest expense............. (258,554) (325,370) (277,436) (79,176)
Interest income.............. -- -- 4,524 --
Other........................ (25,005) 131,721 (27,375) (278,549)
---------- --------- --------- ---------
(283,559) (193,649) (300,287) (357,725)
---------- --------- --------- ---------
Income before income
taxes..................... 96,252 792,338 1,263,342 323,068
Income tax expense............. 103,752 277,623 440,978 111,590
---------- --------- --------- ---------
Net income (loss).......... $ (7,500) 514,715 822,364 211,478
========== ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-55
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended January 31, 1996,
Eleven months ended December 31, 1997 and
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
Total
Common Retained stockholders'
stock earnings equity
------- -------- -------------
<S> <C> <C> <C>
Balance at January 31, 1995.................... $20,000 (437,382) (417,382)
Net loss--year ended January 31, 1996.......... -- (7,500) (7,500)
------- -------- --------
Balance at January 31, 1996.................... 20,000 (444,882) (424,882)
Net income--year ended January 31, 1997........ -- 514,715 514,715
------- -------- --------
Balance at January 31, 1997.................... 20,000 69,833 89,833
Net income--twelve months ended December 31,
1997.......................................... -- 822,364 822,364
Net loss-month of January 1997................. -- (1,753) (1,753)
------- -------- --------
Balance at December 31, 1997................... 20,000 890,444 910,444
Net income--period from January 1, 1998 through
May 5, 1998................................... -- 211,478 211,478
Distributions to shareholders.................. -- (873,980) (873,980)
------- -------- --------
Balance at May 5, 1998......................... $20,000 227,942 247,942
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-56
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended January 31, 1996 and 1997,
Twelve month period ended December 31, 1997, and
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
January 31, January 31, December 31, May 5,
1996 1997 1997 1998
----------- ----------- ------------ --------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss).............. $ (7,500) 514,715 822,364 211,478
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Net loss for the month of
January 1997.................. -- -- (1,753) --
Depreciation and amortization.. 237,118 322,628 268,732 106,014
Loss on disposal of equipment.. -- -- -- 18,190
Deferred income tax expense
(benefit)..................... 151,090 106,198 119,342 (11,120)
Decrease (increase) in trade
accounts receivable........... (74,638) 63,597 (189,448) (35,244)
Increase in due from related
parties....................... (6,512) (10,285) (39,486) (66,431)
(Increase) decrease in due from
employees..................... -- -- (2,929) 7,454
(Increase) decrease in
inventories................... -- (20,661) 10,711 9,950
Decrease (increase) in prepaid
expenses...................... (29,858) 7,609 10,368 (32,299)
(Increase) decrease in
receivables from related
parties....................... (34,549) (297,009) (674,439) 831,733
(Decrease) increase in accounts
payable....................... 65,853 (49,744) 29,925 36,207
Decrease in other current
assets........................ -- -- -- 900
(Decrease) increase in accrued
payroll and related costs..... 62,316 (58,732) 56,806 33,879
Increase (decrease) in income
taxes payable................. (30,809) 75,650 284,476 (267,629)
(Decrease) increase in other
accrued expenses.............. 6,130 (1,785) (2,195) 3,306
--------- -------- -------- --------
Net cash provided by operating
activities................... 338,641 652,181 692,474 846,388
--------- -------- -------- --------
Cash flows from investing
activities:
Purchases of property, plant
and equipment................. (700,708) (493,663) (472,715) (108,053)
Purchase of Custom Towing...... (200,000) -- -- --
Proceeds from sale of
equipment..................... -- -- -- 8,000
--------- -------- -------- --------
Net cash used in investing
activities................... (900,708) (493,663) (472,715) (100,053)
--------- -------- -------- --------
Cash flows from financing
activities:
Proceeds from long-term debt... 424,979 -- -- --
Principal payments on long-term
debt.......................... -- (104,014) (133,341) (388,558)
Proceeds from borrowings under
lines-of credit............... -- -- -- 66,830
Distribution to shareholder.... 150,000 120,000 -- --
--------- -------- -------- --------
Net cash provided by (used in)
financing activities......... 574,979 15,986 (133,341) (321,728)
--------- -------- -------- --------
Net increase in cash............ 12,912 174,504 86,418 424,607
Cash at beginning of period..... (7,147) 5,765 180,269 266,687
--------- -------- -------- --------
Cash at end of period........... $ 5,765 180,269 266,687 691,294
========= ======== ======== ========
Supplemental disclosures of
financing activities and cash
flow information:
Noncash distribution to
shareholders:
Property and equipment......... $ -- -- -- 907,432
========= ======== ======== ========
Long-term debt................. $ -- -- -- 78,076
========= ======== ======== ========
Accounts payable............... $ -- -- -- 44,624
========= ======== ======== ========
Retained earnings.............. $ -- -- -- 873,980
========= ======== ======== ========
Cash paid during the period
for:
Interest....................... $ 258,554 325,370 253,242 79,033
========= ======== ======== ========
Income taxes................... $ 58,439 61,656 37,160 45,000
========= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-57
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 1996 and 1997, December 31, 1997 and May 5, 1998
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Smith-Christensen Enterprises, Inc. and Subsidiary and its wholly-owned
subsidiary City Towing, Inc. d/b/a Quality Towing, collectively referred to
herein as "Quality", were founded in 1988 and 1968 respectively. Quality's
primary business is towing, impounding and storing vehicles for municipal,
governmental and commercial customers in Southern Nevada. Quality has two
facilities in Las Vegas. It operates approximately 40 vehicles.
(b) Period Presented
Because Quality has a fiscal year end of January 31, the statements of
operations, stockholder's equity and cash flows for Quality's most recent
twelve-month period includes the results of operations for the month of
January 1997, which is also included in the prior fiscal year ended January
31, 1997. The following represents the condensed results of operations for the
month of January 1997 which is included in the twelve-month period ended
December 31, 1997 and in the fiscal year ended January 31, 1997:
<TABLE>
<S> <C>
Net income........................................................ $440,053
Cost of revenues.................................................. 242,564
--------
Gross profit.................................................. 197,489
Selling, general and administrative expenses...................... 174,187
--------
Income from operations........................................ 23,302
Other expenses:
Interest expense................................................ (24,193)
Other........................................................... (862)
--------
Loss before income taxes...................................... (1,753)
Income tax expense................................................ --
--------
Net loss...................................................... $ (1,753)
========
</TABLE>
(c) Principles of Consolidation
The consolidated financial statements include the financial statements of
Smith-Christensen Enterprises, Inc. and its wholly-owned subsidiary City
Towing, Inc. All significant intercompany balances and transactions have been
eliminated in consolidation.
(d) Revenue Recognition
Quality operates as one segment related to the transportation of vehicles
and equipment for customers.
Quality's revenue is derived from customers who require a towing service,
fees related to the storage of vehicles that have been towed, transport of
vehicles and equipment, 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, transport revenue is recognized upon the delivery of the
vehicles/equipment to their final destination, and revenue from auction sales
are recorded when title to the vehicle has been transferred. Expenses related
to the generation of revenue are recognized when incurred.
F-58
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
January 31, 1996 and 1997, December 31, 1997 and May 5, 1998
(e) Inventories
Inventories consist of vehicles that will be offered for auction.
Inventories are stated at the lower of cost or market.
(f) Property and Equipment
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the individual assets or for leasehold improvements over the
terms of the related leases if shorter using the straight-line method.
Estimated useful lives are as follows:
<TABLE>
<S> <C>
Buildings........................................................ 28-30 years
Leasehold improvements........................................... 15-30 years
Transportation and towing equipment.............................. 5-15 years
Office equipment................................................. 3-5 years
Machinery and equipment.......................................... 5 years
</TABLE>
(g) Fair Value of Certain Financial Instruments
The carrying amount of receivables and all current liabilities approximates
fair value due to the short-term nature of various financial instruments and
the current incremental borrowing rates available to Quality on bank loans
with similar terms and maturities.
(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 credit 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 or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(i) Long-Lived Assets
Management of Quality reviews all long-lived assets for impairment on an
annual basis. The carrying value is compared to future net undiscounted cash
flows expected to be generated by the assets to ascertain whether or not the
carrying value can be recovered during the expected life of the assets. If an
impairment exists, the write down will be recorded during the current period.
(j) Use of Estimates
Management of Quality has made a number of estimates and assumptions related
to the reporting of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods to
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
F-59
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
January 31, 1996 and 1997, December 31, 1997 and May 5, 1998
(2) Prepaid Expenses
Prepaid expenses consist of the following:
<TABLE>
<CAPTION>
January 31, December 31, May 5,
1997 1997 1998
----------- ------------ ---------
<S> <C> <C> <C>
Prepaid insurance....................... $ 28,010 19,680 44,479
Prepaid rent............................ 2,038 -- 7,500
---------- --------- ---------
Total................................. $ 30,048 19,680 51,979
========== ========= =========
(3) Property, Plant and Equipment
Property, plant and equipment consists of the following:
<CAPTION>
January 31, December 31, May 5,
1997 1997 1998
----------- ------------ ---------
<S> <C> <C> <C>
Land.................................... $ 600,000 600,000 --
Buildings............................... 156,225 156,225 --
Vehicles................................ 2,109,893 2,481,396 2,508,948
Office equipment........................ 123,691 212,066 222,089
Machinery and equipment................. 112,889 125,726 172,463
Leasehold improvements.................. 278,925 278,925 --
---------- --------- ---------
3,381,623 3,854,338 2,903,500
Less accumulated depreciation........... (728,380) (977,109) (951,005)
---------- --------- ---------
Property, plant and equipment........... $2,653,243 2,877,229 1,952,495
========== ========= =========
Depreciation of property, plant and equipment for the years ended January
31, 1996 and 1997, for the twelve-month period ended December 31, 1997 and for
the period from January 1, 1998 through May 5, 1998 totaled $140,910,
$224,196, $271,341 and $99,165, respectively.
(4) Other Assets
Other assets consist of the following:
<CAPTION>
January 31, December 31, May 5,
1997 1997 1998
----------- ------------ ---------
<S> <C> <C> <C>
Metro contract.......................... $ 705,850 705,850 705,850
Non-compete agreement................... 25,000 25,000 25,000
Goodwill................................ 225,048 225,048 225,048
---------- --------- ---------
955,898 955,898 955,898
Less accumulated amortization........... (836,990) (856,993) (863,842)
---------- --------- ---------
Other assets, net....................... $ 118,908 98,905 92,056
========== ========= =========
</TABLE>
Metro contract costs, non-compete agreement and goodwill are amortized over
nine, five and fifteen years, respectively. Amortization expense totaled
$96,208, $98,432, $20,003 and $6,849 for the years ended January 31, 1996 and
1997, for the twelve-month period ended December 31, 1997, and for the period
from January 1, 1998 through May 5, 1998, respectively.
F-60
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
January 31, 1996 and 1997, December 31, 1997 and May 5, 1998
(5) Indebtedness
The Company's long-term debt at January 31, 1997, December 31, 1997 and May
5, 1998 consisted of the following:
<TABLE>
<CAPTION>
January
31, December 31, May 5,
1997 1997 1998
---------- ------------ ----------
<S> <C> <C> <C>
Note payable to Navistar, payable in
monthly installments of $563, including
interest at 11.5% maturing August 28,
1997. Secured by equipment............... $ 3,796 -- --
Notes payable to bank, payable in
aggregate monthly installments of
$20,312, plus interest ranging from 9% to
9.25% over periods ranging from 36 to 48
months, maturing between September 5,
1998 and June 2001. Secured by vehicles
and equipment............................ 428,678 596,105 572,014
Note payable to former owner, payable in
varied monthly installments, including
interest at 10%, with a final lump sum
payment of $1,396,556, maturing March 1,
1999. Secured by stock City Towing,
Inc. .................................... 1,682,529 1,562,530 1,502,553
Note payable to former owner, payable in
monthly installments of $3,800, including
interest at 9%, maturing July 1, 2003.
Secured by land and building. Paid in
full May 1998............................ 226,489 202,485 --
Note payable to Navistar, payable in
monthly installments of $1,433, including
interest at 10.5%, maturing May 4, 1999.
Secured by equipment..................... 35,444 22,540 17,906
Notes payable to Navistar, payable in
monthly installments of $6,110 and
$2,900, respectively, including interest
at 9%, maturing May 12, 1999 and August
11, 1999, respectively. Secured by
equipment................................ 240,964 158,685 70,753
Note payable to bank, payable in monthly
installments of $6,716, including
interest at 8%, maturing July 1, 2000.
Secured by equipment..................... 245,316 187,529 166,844
---------- --------- ----------
2,863,216 2,729,874 2,330,070
Less installments due within one year..... (447,875) (541,836) (2,330,070)
---------- --------- ----------
Long-term debt, excluding current
installments............................. $2,415,341 2,188,038 --
========== ========= ==========
</TABLE>
(6) Leases
The Company leases land and building used as part of its operations under a
lease agreement with Nevada Recycling Corporation, an affiliated entity owned
by the owners of the Company. The lease is classified as an operating lease.
The agreement provides for monthly rental payment of $8,000 with an automatic
renewal for additional consecutive periods of one year beginning every
October, unless either party gives no less than 30 days written notice of the
intent to terminate. The Company is responsible for all operating costs
related to the property.
Rent expense was $96,000 and $32,000 for the twelve-month period ended
December 31, 1997 and for the period from January 1, 1998 through May 5, 1998,
respectively.
F-61
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
January 31, 1996 and 1997, December 31, 1997 and May 5, 1998
(7) Income Taxes
Income tax expense for the years ended January 31, 1996 and 1997, for the
twelve-month period ended December 31, 1997, and for the period from January 1,
1998 through May 5, 1998, consists of:
<TABLE>
<CAPTION>
January 31, January 31, December 31, May 5,
1996 1997 1997 1998
----------- ----------- ------------ -------
<S> <C> <C> <C> <C>
Current:
Federal........................ $(47,338) 171,425 321,636 122,710
Deferred....................... 151,090 106,198 119,342 (11,120)
-------- ------- ------- -------
$103,752 277,623 440,978 111,590
======== ======= ======= =======
The following table reconciles the expected tax expense at the Federal
statutory tax rate to the effective tax rate:
<CAPTION>
January 31, January 31, December 31, May 5,
1996 1997 1997 1998
----------- ----------- ------------ -------
<S> <C> <C> <C> <C>
Computed expected tax expense.... $ 32,726 269,395 429,536 109,843
Meals and entertainment.......... 1,114 6,345 6,341 --
Nondeductible goodwill........... 5,101 5,101 5,101 1,747
Adjustment to prior years' tax-
es.............................. 64,811 -- -- --
Other............................ -- (3,218) -- --
-------- ------- ------- -------
$103,752 277,623 440,978 111,590
======== ======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities for the year ended January 31, 1997, for
the twelve-month period ended December 31, 1997 and for the period from January
1, 1998 through May 5, 1998 are presented below:
<TABLE>
<CAPTION>
January 31, December 31, May 5,
1997 1997 1998
----------- ------------ -------
<S> <C> <C> <C>
Deferred tax assets:
Covenant-not-to-compete.................... $ 2,031 (3,164) (3,557)
Contract/intangible........................ 13,733 -- --
Allowance for doubtful accounts............ -- -- (25,789)
-------- ------- -------
Total gross deferred tax assets.......... 15,764 (3,164) (29,346)
Less valuation allowance................... -- -- --
-------- ------- -------
15,764 (3,164) (29,346)
Deferred tax liabilities:
Property and equipment, due to differences
in depreciation lives and methods......... 209,143 315,885 330,947
-------- ------- -------
Net deferred tax liability............... $193,379 312,721 301,601
======== ======= =======
</TABLE>
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 during the periods in
which those temporary differences become deductible. Management considers the
projected future taxable income and tax planning
F-62
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
January 31, 1996 and 1997, December 31, 1997 and May 5, 1998
strategies, as well as carryback opportunities, in making this assessment.
Based upon the level of historical taxable income, projections for future
taxable income and carryback opportunities over the periods in which the
deferred tax assets are deductible, management believes it is more likely than
not that Company will realize the benefits of these deductible differences.
The amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income are reduced.
(8) Related Party Transactions
Accounts receivable from related parties are amounts due from four companies
under the common control of Quality's stockholders. The amounts receivable
totaled $167,959, $881,884 and $116,582 as of January 31, 1997, December 31,
1997 and May 5, 1998, respectively.
Quality leases land and building from an affiliated entity owned by the
owners of the shareholder of Quality.
(9) Contingent Liabilities
Various legal claims arise against Quality 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.
(10) Subsequent Event
During February 1998, the stockholder entered into a definitive agreement to
sell Quality to United Road Services, Inc. The sales transaction, affected
through a combination of cash and common stock of United road Services, Inc.,
was effective May 6, 1998 upon the consummation of the initial public offering
of the common stock of United Road Services, Inc.
F-63
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders
Caron Auto Works, Inc. and
Caron Auto Brokers, Inc.:
We have audited the accompanying combined balance sheets of Caron Auto
Works, Inc. and Caron Auto Brokers, Inc. (collectively, "Caron") as of
September 30, 1996 and 1997 and May 5, 1998, and the related combined
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended September 30, 1997 and for the period
from October 1, 1997 through May 5, 1998. These combined financial statements
are the responsibility of Caron's management. Our responsibility is to express
an opinion on these combined 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 combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall combined financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Caron
Auto Works, Inc. and Caron Auto Brokers, Inc. as of September 30, 1996 and
1997 and May 5, 1998 and the results of their combined operations and their
combined cash flows for each of the years in the three-year period ended
September 30, 1997 and for the period from October 1, 1997 through May 5, 1998
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Albany, New York
August 21, 1998
F-64
<PAGE>
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
COMBINED BALANCE SHEETS
September 30, 1996, 1997 and May 5, 1998
<TABLE>
<CAPTION>
September 30, September 30, May 5,
1996 1997 1998
------------- ------------- ---------
<S> <C> <C> <C>
Assets
Current assets:
Cash.................................. $ 29,370 108,163 --
Trade accounts receivable, net of
allowance for doubtful accounts of
$26,793, $45,079 and $57,382,
respectively......................... 633,736 746,332 888,292
Accounts receivable from related
parties (note 7)..................... 98,056 49,754 12,113
Accounts receivable from employees.... -- 6,500 --
Notes receivable...................... -- 44,539 15,000
Inventories........................... 24,185 30,040 56,070
Prepaid and other current assets...... 38,685 5,142 80,528
---------- --------- ---------
Total current assets................ 824,032 990,470 1,052,003
---------- --------- ---------
Property and equipment, net (notes 2, 3
and 4)................................. 1,241,097 2,278,962 4,129,407
Stockholder loan receivable............. -- -- 258,521
Deferred income taxes (note 5).......... -- -- 35,541
Other assets............................ 2,500 22,736 62,156
---------- --------- ---------
Total assets........................ $2,067,629 3,292,168 5,537,628
========== ========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt
(note 3)............................. $ 83,297 263,093 708,103
Current installments under capital
lease obligations (note 4)........... 181,272 177,932 211,900
Borrowings under lines of credit (note
3)................................... 18,839 225,000 250,000
Payable to related parties (note 7)... 185,920 9,500 14,034
Accounts payable...................... 130,282 332,544 699,467
Accrued payroll and related costs..... 16,058 40,870 74,875
Income taxes payable (note 5)......... 101,128 92,447 214,041
Other accrued liabilities............. 24,021 48,277 112,857
---------- --------- ---------
Total current liabilities........... 740,817 1,189,663 2,285,277
Long-term liabilities:
Long-term debt, excluding current
installments (note 3)................ 56,982 1,010,856 2,183,809
Obligations under capital lease,
excluding current installments (note
4)................................... 428,862 437,789 458,603
Deferred income taxes (note 5)........ 160,342 54,019 --
---------- --------- ---------
Total liabilities................... 1,387,003 2,692,327 4,927,689
---------- --------- ---------
Stockholders' equity:
Common stock, $10 par value.
Authorized 10,000 shares; issued and
outstanding 200 shares............... 2,000 2,000 2,000
Additional paid-in capital............ 10,225 10,225 10,225
Retained earnings..................... 698,401 617,616 627,714
Less treasury stock, 3,000 common
shares at cost....................... (30,000) (30,000) (30,000)
---------- --------- ---------
Total stockholders' equity.......... 680,626 599,841 609,939
---------- --------- ---------
Total liabilities and stockholders'
equity............................. $2,067,629 3,292,168 5,537,628
========== ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-65
<PAGE>
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
COMBINED STATEMENTS OF OPERATIONS
Years ended September 30, 1995, 1996 and 1997 and
Period from October 1, 1997 through May 5, 1998
<TABLE>
<CAPTION>
September 30, September 30, September 30, May 5,
1995 1996 1997 1998
------------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
Net revenue............... $4,624,155 5,575,257 6,626,850 5,291,796
Cost of revenue........... 4,044,834 5,083,883 6,303,546 4,282,412
---------- --------- --------- ---------
Gross profit.......... 579,321 491,374 323,304 1,009,384
Selling, general and
administrative expenses.. 238,006 237,943 511,510 762,880
---------- --------- --------- ---------
Income (loss) from
operations........... 341,315 253,431 (188,206) 246,504
---------- --------- --------- ---------
Other income (expense):
Interest expense........ (77,693) (108,069) (141,000) (194,868)
Interest income......... 810 5,706 8,360 4,074
Gain (loss) on sale of
assets................. 7,457 16,985 114,966 (26)
Other................... 25,570 22,526 29,460 --
---------- --------- --------- ---------
Income (loss) before
income taxes......... 297,459 190,579 (176,420) 55,684
Income tax expense
(benefit) (note 5)....... 103,020 61,838 (95,635) 45,586
---------- --------- --------- ---------
Net income (loss)..... $ 194,439 128,741 (80,785) 10,098
========== ========= ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-66
<PAGE>
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 1995, 1996 and 1997 and
Period from October 1, 1997 through May 5, 1998
<TABLE>
<CAPTION>
Additional Total
Common paid-in Retained Treasury stockholders'
stock capital earnings stock equity
------ ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at September 30,
1994........................ $2,000 10,225 375,221 (30,000) 357,446
Net income-1995.............. -- -- 194,439 -- 194,439
------ ------ ------- ------- -------
Balance at September 30,
1995........................ 2,000 10,225 569,660 (30,000) 551,885
Net income-1996.............. -- -- 128,741 -- 128,741
------ ------ ------- ------- -------
Balance at September 30,
1996........................ 2,000 10,225 698,401 (30,000) 680,626
Net loss-1997................ -- -- (80,785) -- (80,785)
------ ------ ------- ------- -------
Balance at September 30,
1997........................ 2,000 10,225 617,616 (30,000) 599,841
Net income-period from
October 1, 1997 through May
5, 1998..................... -- -- 10,098 -- 10,098
------ ------ ------- ------- -------
Balance at May 5, 1998....... $2,000 10,225 627,714 (30,000) 609,939
====== ====== ======= ======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-67
<PAGE>
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
COMBINED STATEMENTS OF CASH FLOWS
Years ended September 30, 1995, 1996, and 1997 and Period from October 1, 1997
through May 5, 1998
<TABLE>
<CAPTION>
September 30, September 30, September 30, May 5,
1995 1996 1997 1998
------------- ------------- ------------- --------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)......... $194,437 128,741 (80,785) 10,098
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating activities:
Depreciation and
amortization........... 158,790 196,937 213,290 177,258
Deferred income tax
expense (benefit)...... 41,924 18,467 (106,323) (89,560)
(Gain) loss on sale of
assets................. (7,457) (16,985) (114,966) 26
Increase in trade
accounts receivable.... (63,618) (119,278) (112,596) (141,960)
(Increase) decrease in
receivables from
related parties........ (12,056) (66,885) 48,302 32,310
(Increase) decrease in
accounts receivable
from employees......... -- -- (6,500) 6,500
Increase in
inventories............ 4,705 (23,766) (5,855) (26,030)
(Increase) decrease in
prepaid expenses....... 4,758 (19,644) 33,543 (75,386)
Increase in other
assets................. 191 -- (20,236) (39,420)
(Decrease) increase in
amounts payable to
related parties........ (10,702) (22,889) (176,420) 4,534
Increase in accounts
payable................ (44,731) 16,036 202,262 366,923
(Decrease) increase in
accrued payroll and
related costs.......... (119,686) (1,670) 24,812 34,005
Increase in other
accrued liabilities.... 447 86,401 15,575 186,174
-------- -------- -------- --------
Net cash provided by
(used in) operating
activities........... 147,002 175,465 (85,897) 445,472
-------- -------- -------- --------
Cash flows from investing
activities:
Purchases of property and
equipment................ (142,383) (54,909) (333,277) (243,960)
Proceeds from sale of
assets................... 123,913 56,011 341,196 14,000
(Increase) decrease in
notes receivable......... -- -- (44,539) 29,539
-------- -------- -------- --------
Net cash provided by
(used in) investing
activities........... (18,470) 1,102 (36,620) (200,421)
-------- -------- -------- --------
Cash flows from financing
activities:
Proceeds from long-term
debt..................... 100,000 70,345 456,500 236,000
Principal payments on
long-term debt and
capital leases........... (174,880) (300,175) (461,351) (361,024)
Borrowings under line of
credit, net.............. (35,000) 18,839 206,161 25,000
Increase in shareholder
loan, net ............... -- -- -- (253,190)
-------- -------- -------- --------
Net cash (used in)
provided by financing
activities........... (109,880) (210,991) 201,310 (353,214)
-------- -------- -------- --------
Net increase (decrease) in
cash....................... 18,652 (34,424) 78,793 (108,163)
Cash at beginning of
period..................... 45,142 63,794 29,370 108,163
-------- -------- -------- --------
Cash at end of period....... $ 63,794 29,370 108,163 --
======== ======== ======== ========
Supplemental disclosure of
cash flow information:
Cash paid during the
period for:
Interest................ $124,505 110,038 143,639 194,868
======== ======== ======== ========
Income taxes............ $ -- 61,096 43,371 2,983
======== ======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-68
<PAGE>
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
September 30, 1995, 1996 and 1997
and May 5, 1998
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Caron Auto Works, Inc. and Caron Auto Brokers, Inc. (collectively, "Caron")
were founded in 1976 and 1993, respectively. Caron's primary business is
transporting vehicles for leasing companies, long-haul transporters and
individuals in the Northeastern United States. It also provides towing
services for commercial and private customers in the Hartford, Connecticut
region. Caron has two facilities in East Hartford and one facility in New
Jersey. It operates approximately 60 vehicles.
(b) Principles of Combination
The combined financial statements include the financial statements of Caron
Auto Works, Inc. and Caron Auto Brokers, Inc. All significant intercompany
balances and transactions have been eliminated in combination. Both entities
have the same management and principal stockholder ownership.
(c) Revenue Recognition
Caron operates as one segment related to the transportation of vehicles and
equipment for customers.
Caron's revenue is derived from customers who require a towing service,
transport of vehicles and equipment, fees related to repair of vehicles that
have been towed, and auction sales of unclaimed vehicles. Towing revenue is
recognized at the completion of each towing engagement, transport revenue is
recognized upon the delivery of the vehicles/equipment to their final
destination, repair fees are recorded when the service is performed, 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.
(d) Inventories
Inventories include spare parts used in the repair of vehicles, used
vehicles and fuel. Inventories are stated at the lower of cost or market.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation is determined for
financial statement purposes using the straight-line method over the estimated
useful lives of the individual assets or, for leasehold improvements, over the
terms of the related leases if shorter. Accelerated methods of depreciation
have been used for income tax purposes. For financial statement purposes,
Caron provides for depreciation of property and equipment over the following
estimated useful lives:
<TABLE>
<S> <C>
Automobiles and transportation
equipment............................. 5 years
Furniture and fixtures................. 5-7 years
Machinery and equipment................ 5-7 years
Leasehold improvements................. 7-39 years
</TABLE>
F-69
<PAGE>
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
September 30, 1995, 1996 and 1997
and May 5, 1998
(f) Fair Value of Financial Instruments
Due to the short-term nature of various financial instruments and the
current incremental borrowing rates available to Caron on bank loans with
similar terms and maturities, the fair value of Caron's financial instruments
approximates their carrying values.
(g) 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 credit 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 or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(h) Use of Estimates
Management of Caron 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.
(2) Property and Equipment
Property and equipment at September 30, 1996, 1997 and May 5, 1998 consists
of the following:
<TABLE>
<CAPTION>
September 30, September 30, May 5,
------------- ------------- ---------
1996 1997 1998
------------- ------------- ---------
<S> <C> <C> <C>
Vehicles............................. $ 16,608 42,258 25,650
Office equipment..................... 75,590 112,455 149,392
Transportation and towing equipment.. 1,663,407 2,604,541 4,508,408
Leasehold improvements............... 262,276 313,011 377,026
----------- --------- ---------
Total.............................. 2,017,881 3,072,265 5,060,476
Less accumulated depreciation and
amortization........................ (776,784) (793,303) (931,069)
----------- --------- ---------
$ 1,241,097 2,278,962 4,129,407
=========== ========= =========
</TABLE>
Depreciation and amortization of property and equipment in 1995, 1996 and
1997 and for the period from October 1, 1997 to May 5, 1998 totaled
$158,790, $196,937, $213,290 and $177,258, respectively.
(3) Indebtedness
Caron has available a $250,000 line of credit with Bank of South Windsor,
secured by all corporate assets and a personal guarantee by Caron's primary
stockholder. Interest is payable at the prime lending rate plus 1% (9.5% at
May 5, 1998). The outstanding balance of $250,000 at May 5, 1998 is due on
demand.
F-70
<PAGE>
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
September 30, 1995, 1996 and 1997
and May 5, 1998
Caron's long-term debt at September 30, 1996, 1997 and May 5, 1998 consists of
the following:
<TABLE>
<CAPTION>
September 30, September 30, May 5,
------------- ------------- -------
1996 1997 1998
------------- ------------- -------
<S> <C> <C> <C>
Note payable to Bank of South Windsor,
payable in monthly installments of
$3,203, including interest at 9.5%.
Secured by assets of Caron and the
personal guarantee by the primary
stockholders............................. $40,498 -- --
Note payable to Bank of South Windsor
payable in monthly installments of
$1,633, including interest at 9.5%.
Matured in October, 1996. Secured by one
tractor and three trailers. ............. 1,844 -- --
Note payable to Ford Motor Credit Company,
payable in monthly installments of $959,
including interest at 8.5%. Secured by
equipment. .............................. 16,150 -- --
Note payable to Savings Bank of
Manchester, payable in monthly principal
payments of $2,500, plus interest at
prime plus 1% (9.5% at May 5, 1998),
maturing August, 2002. Secured by a car
and the personal guarantee of the primary
stockholder. ............................ -- 147,500 130,000
Note payable to Savings Bank of
Manchester, payable in monthly
installments of $692, including interest
at 8.25%, maturing August, 2000. Secured
by a car. ............................... -- 21,459 17,585
Note payable to unrelated individual,
payable in monthly installments of $580,
including interest at 12.5%, maturing
October, 2000............................ 22,364 17,947 15,105
Note payable to Norwest Equipment Finance,
payable in monthly installments of
$3,398, including interest at 10.25%,
maturing April, 2002. Secured by tractor,
trailer and equipment. .................. -- -- 131,079
Note payable to Bank of South Windsor,
payable in monthly principal payments of
$1,111, plus interest at prime plus 1%
(9.5% at May 5, 1998), maturing April,
1999. Secured by assets of Caron and the
personal guarantee of the primary
stockholder. ............................ 34,444 21,111 13,333
Note payable to Bank of South Windsor,
payable in monthly installments of
$8,904, including interest at 9.25%,
maturing March, 2002. Secured by twelve
tractors, twelve trailers and the
personal guarantee of the primary
stockholder. ............................ -- 390,878 349,582
Note payable to Bank of South Windsor,
payable in monthly interest installments
only at prime plus 1% (9.5% at May 5,
1998), maturing June, 1998. Secured by
the assets of Caron and the personal
guarantee of the primary stockholder. ... -- -- 100,000
Note payable to Savings Bank of
Manchester, payable in monthly principal
payments of $1,085, plus interest at
8.25%, maturing September 29, 2000.
Secured by a car and the personal
guarantee of the primary stockholder. ... -- 34,500 --
Note payable to Chase Manhattan Bank,
payable in monthly installments of
$2,082, including interest at 9%,
maturing November, 2002. Unsecured. ..... -- -- 93,265
</TABLE>
F-71
<PAGE>
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
September 30, 1995, 1996 and 1997
and May 5, 1998
<TABLE>
<CAPTION>
September 30, September 30, May 5,
------------- ------------- ---------
<S> <C> <C> <C>
Note payable to Chase Manhattan Bank,
payable in monthly installments of
$741, including interest at 8.5%,
maturing December, 2002. Unsecured. ... -- -- 34,525
Note payable to Peoples Bank, payable in
monthly principal payments of $1,786,
plus interest at prime plus 1.5% (10%
at May 5, 1998), maturing August, 2004.
Secured by the assets of Caron and the
personal guarantee of the primary
stockholder and affiliated
companies. ............................ -- 148,214 135,712
Note payable to Orix Credit Alliance,
payable in monthly installments of
$3,719, including interest at 9.56%.
Secured by tractor, trailer and the
guarantee of affiliated companies. .... -- -- 142,759
Note payable to Ford Motor Credit
Company, payable in monthly
installments of $770, including
interest at 10%, maturing November,
2000. Secured by a truck. ............. 24,979 17,924 13,472
Note payable to Newcourt Financial,
payable in monthly installments of
$3,320, including interest at 10.75%.
Secured by tractor and trailer. ....... -- -- 135,452
Note payable to Navistar Financial
Corp., payable in monthly installments
ranging from $1,632 to $6,788,
including interest at rates of 9.9% and
10.3%, maturing between 2001 and 2002.
Secured by tractors and trailers. ..... -- 474,416 559,584
Note payable to Green Tree Financial
Servicing Corporation, payable in
monthly installments of $10,649,
including interest at 10.75%, maturing
July, 2002. Secured by tractors,
trailers and the personal guarantee of
the primary stockholder. .............. -- -- 434,410
Note payable to Paccar Financial,
payable in monthly installments of
$10,249, including interest at 10.71%,
maturing August, 2002. Secured by
tractors and trailers. ................ -- -- 423,798
Note payable to GE Capital in monthly
installments of $2,383, including
interest at 10.25%, maturing March,
2003. Secured by tractor. ............. -- -- 111,489
Note payable to GE Capital in monthly
installments of $1,091, including
interest at 10.5%, maturing March,
2003. Secured by trailer. ............. -- -- 50,762
-------- --------- ---------
Total long-term debt................ 140,279 1,273,949 2,891,912
Less installments due within one year... (83,297) 263,093 708,103
-------- --------- ---------
Long-term debt, excluding current
Installments....................... $ 56,982 1,010,856 2,183,809
======== ========= =========
</TABLE>
F-72
<PAGE>
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
September 30, 1995, 1996 and 1997
and May 5, 1998
The aggregate maturities of long-term debt for each of the five years
subsequent to May 5, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................... $ 708,103
2000........................................................... 635,805
2001........................................................... 683,274
2002........................................................... 650,463
2003........................................................... 185,715
Thereafter..................................................... 28,552
----------
$2,891,912
==========
</TABLE>
(4) Leases
Caron is obligated under various capital leases for transportation and
towing equipment that expire at various dates over the next six years.
Following is a summary of equipment held under the capital leases at
September 30, 1996, 1997 and May 5, 1998:
<TABLE>
<CAPTION>
September 30, September 30, May 5,
1996 1997 1998
------------- ------------- ---------
<S> <C> <C> <C>
Transportation and towing
equipment.......................... $ 885,356 741,628 1,199,927
Less accumulated amortization....... (186,143) (198,826) (326,092)
--------- -------- ---------
$ 699,213 542,802 873,835
========= ======== =========
</TABLE>
Amortization of assets held under capital leases is included with
depreciation expense.
Caron leases the facility used for its operations from its primary
shareholder. The lease is for a twenty-year term expiring in 2017 and has been
classified as an operating lease. Caron also leases additional office space
and storage lot on a month-to-month basis from its primary shareholder. The
lease is classified as an operating lease. Caron is responsible for all
operating costs related to the properties under both leases. Rent paid to the
shareholder in 1995, 1996, 1997 and for the period from October 1, 1997 to May
5, 1998 was $84,382, $86,181, $117,096, and $51,919, respectively.
Total rent expense for 1995, 1996 and 1997 and the period from October 1,
1997 to May 5, 1998 was $84,382, $86,181, $126,096, and $75,991, respectively.
F-73
<PAGE>
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
September 30, 1995, 1996 and 1997
and May 5, 1998
Future minimum lease payments under noncanceleable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of May 5, 1998 are:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- -----------
<S> <C> <C>
Period Ending May 5,
--------------------
1999.............................................. $ 280,713 $ 93,000
2000.............................................. 251,100 98,200
2001.............................................. 158,849 100,655
2002.............................................. 84,381 103,171
2003.............................................. 31,818 105,751
Thereafter........................................ -- 1,803,040
--------- -----------
Total minimum lease payments.................... 806,861 $ 2,303,817
===========
Less amount representing interest (at rates
ranging from 8.2% to 16.77%)..................... (136,358)
---------
Present value of net minimum capital lease
payments....................................... 670,503
Less current installments of obligations under
capital leases................................... (211,900)
---------
Obligations under capital leases, excluding
current installment............................ $ 458,603
=========
</TABLE>
(5) Income Taxes
Income tax expense (benefit) for the years ended September 30, 1995, 1996
and 1997 and the period from October 1, 1997 to May 5, 1998 consists of:
<TABLE>
<CAPTION>
September 30, September 30, September 30, May 5,
1995 1996 1997 1998
------------- ------------- ------------- -------
<S> <C> <C> <C> <C>
Current:
Federal.................... $ 38,174 26,900 5,789 90,087
State...................... 22,922 16,471 4,899 45,059
--------- ------ -------- -------
61,096 43,371 10,688 135,146
Deferred..................... 41,924 18,467 (106,323) (89,560)
--------- ------ -------- -------
$ 103,020 61,838 (95,635) 45,586
========= ====== ======== =======
</TABLE>
F-74
<PAGE>
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
September 30, 1995, 1996 and 1997
and May 5, 1998
The following table reconciles the expected tax expense at the Federal
statutory tax rate to the effective tax rate.
<TABLE>
<CAPTION>
September 30, September 30, September 30, May 5,
1995 1996 1997 1998
------------- ------------- ------------- -------
<S> <C> <C> <C> <C>
Computed expected tax
expense (benefit)....... $ 101,136 64,797 (59,983) 18,933
State income taxes, net
of Federal benefit...... 15,129 10,871 3,233 29,739
Officer's life
insurance............... 427 -- -- 694
Non-deductible meals and
entertainment expenses.. 512 998 1,647 3,373
Non-deductible fines and
penalties............... -- -- -- 9,813
Effect of graduated tax
rates................... (16,262) (14,980) (34,847) (18,021)
Other.................... 2,078 152 (5,685) 1,055
--------- ------- ------- -------
$ 103,020 61,838 (95,635) 45,586
========= ======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities as of September 30, 1996 and 1997 and May
5, 1998 are presented below:
<TABLE>
<CAPTION>
September 30, September 30, May 5,
1996 1997 1998
------------- ------------- --------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for bad debts............ $ 10,091 19,830 23,581
Net operating loss carryforwards... -- 186,261 338,983
---------- -------- --------
Total gross deferred tax asset... 10,091 206,091 362,564
Less valuation allowance -- -- --
---------- -------- --------
Net deferred tax asset........... 10,091 206,091 362,564
Deferred tax liabilities:
Property and equipment, due to
differences in depreciation lives
and methods....................... (170,133) (260,110) (327,023)
---------- -------- --------
Net deferred tax (liability)
asset........................... $ (160,042) (54,019) 35,541
========== ======== ========
</TABLE>
The net operating loss carryforward approximates $825,000, of which $453,000
expires in 2017 and $372,000 in 2018.
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 during the
periods in which those temporary differences become deductible. Management
considers the projected future taxable income and tax planning strategies, as
well as carryback opportunities, in making this assessment. Based upon the
level of historical taxable income, projections for future taxable income and
carryback opportunities over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not Caron will realize
the benefits of these deductible differences. The amount of the deferred tax
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income are reduced.
F-75
<PAGE>
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
September 30, 1995, 1996 and 1997
and May 5, 1998
(6) Non-Cash Transactions
During 1995, 1996, 1997 and for the period from October 1, 1997 to May 5,
1998, Caron financed $0, $0, $1,144,108 and $1,797,769, respectively, of
various transportation and towing equipment through several lending
institutions (see note 3).
(7) Related Party Transactions
As of May 5, 1998, the primary stockholder is indebted to Caron under an
unsecured note, bearing interest at 7%. The loan receivable consists of
personal expenses paid by Caron on the stockholder's behalf, net of advances
received and expenses incurred by Caron payable to the stockholder. The net
stockholder loan receivable totaled $258,521 as of May 5, 1998.
Included in accounts receivable and accounts payable from related parties
are amounts due to and from two companies under the common control of Caron's
primary stockholder. The amounts receivable and payable totaled $12,113 and
$14,034, respectively, as of May 5, 1998.
Caron leases two buildings located in East Hartford, Connecticut, from the
primary stockholder (see note 4).
(8) Subsequent Event
During February 1998, the stockholders entered into a definitive agreement
to sell Caron to United Road Services, Inc. The sales transaction, affected
through a combination of cash and common stock of United Road Services, Inc.,
was effective May 6, 1998 upon the consummation of the initial public offering
of the common stock of United Road Services, Inc. The selling price of Caron
exceeded its net assets as of May 5, 1998.
F-76
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholder
Absolute Towing and Transporting, Inc.:
We have audited the accompanying balance sheets of Absolute Towing and
Transporting, Inc. ("Absolute") as of December 31, 1996 and 1997 and May 5,
1998 and the related statements of operations, stockholder's equity and cash
flows for the years ended December 31, 1996 and 1997 and for the period from
January 1, 1998 through May 5, 1998. These financial statements are the
responsibility of the Company'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.
As described in note 6, 99%, 99% and 92% of Absolute's revenue is derived
from one customer, and all of Absolute's trade accounts receivable at December
31, 1996 and 1997 and May 5, 1998 is due from this single customer.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Absolute Towing and
Transporting, Inc. as of December 31, 1996 and 1997 and May 5, 1998 and the
results of its operations and its cash flows for the years ended December 31,
1996 and 1997 and the period from January 1, 1998 through May 5, 1998 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Albany, New York
July 24, 1998
F-77
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, INC.
BALANCE SHEETS
December 31, 1996 and 1997 and May 5, 1998
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ ---------
<S> <C> <C> <C>
Assets
Current assets:
Cash..................................... $ -- 10,935 416,506
Trade accounts receivable (note 3)....... 268,818 593,679 445,755
Income taxes receivable (note 5)......... 9,731 55,324 10,269
Prepaid expenses......................... 23,613 30,587 25,309
-------- --------- ---------
Total current assets................... 302,162 690,525 897,839
Property and equipment, net (notes 2 and
3)........................................ 265,934 306,153 414,882
Deferred income taxes (note 5)............. 6,436 31,331 16,260
-------- --------- ---------
$574,532 1,028,009 1,328,981
======== ========= =========
Liabilities and Stockholder's Equity
Current liabilities:
Current installments of long-term debt
(note 3)................................ 15,737 16,218 16,906
Borrowings under lines of credit (note
3)...................................... -- 212,403 760,317
Bank overdraft........................... 98,012 312,217 --
Accounts payable......................... 79,468 124,573 106,873
-------- --------- ---------
Total current liabilities.............. 193,217 665,411 884,096
-------- --------- ---------
Long-term liabilities:
Long-term debt, excluding current
installments (note 3) .................. -- 83,782 75,890
-------- --------- ---------
Total liabilities...................... 193,217 749,193 959,986
-------- --------- ---------
Stockholder's equity:
Common stock, $42.86 par value.
Authorized, issued and outstanding 1,000
shares.................................. 42,860 42,860 42,860
Retained earnings........................ 338,455 235,956 326,135
-------- --------- ---------
Total stockholder's equity............. 381,315 278,816 368,995
-------- --------- ---------
Total liabilities and stockholder's
equity................................ $574,532 1,028,009 1,328,981
======== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-78
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, INC.
STATEMENTS OF OPERATIONS
Years ended December 31, 1996 and 1997 and
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ ---------
<S> <C> <C> <C>
Net revenue............................... $3,464,623 4,779,901 2,006,600
Cost of revenue........................... 2,756,327 3,766,564 1,634,112
---------- --------- ---------
Gross profit.......................... 708,296 1,013,337 372,488
Selling, general and administrative
expenses................................. 635,595 1,095,416 201,295
---------- --------- ---------
Income (loss) from operations......... 72,701 (82,079) 171,193
---------- --------- ---------
Other income (expenses):
Interest expense........................ (1,440) (15,018) (20,888)
(Loss) gain on sale of assets........... (2,842) 9,254 --
---------- --------- ---------
Income (loss) before income taxes..... 68,419 (87,843) 150,305
---------- --------- ---------
Income tax (benefit) expense (note 5)..... (12,667) (24,095) 60,126
---------- --------- ---------
Net income (loss)..................... $ 81,086 (63,748) 90,179
========== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-79
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
Years ended December 31, 1996 and 1997 and
Period from January 1, 1998 to May 5, 1998
<TABLE>
<CAPTION>
Total
Common Retained stockholder's
stock earnings equity
------- -------- -------------
<S> <C> <C> <C>
Balance at December 31, 1995.................... $42,860 262,370 305,230
Distributions to stockholder.................... -- (5,001) (5,001)
Net income--1996................................ -- 81,086 81,086
------- ------- -------
Balance at December 31, 1996.................... 42,860 338,455 381,315
Distributions to stockholder.................... -- (38,751) (38,751)
Net loss--1997.................................. -- (63,748) (63,748)
------- ------- -------
Balance at December 31, 1997.................... 42,860 235,956 278,816
Net income--period from January 1, 1998 through
May 5, 1998.................................... -- 90,179 90,179
------- ------- -------
Balance at May 5, 1998.......................... $42,860 326,135 368,995
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-80
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1996 and 1997 and
Period from January 1, 1998 to May 5, 1998
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................ $ 81,086 (63,748) 90,179
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization.......... 110,327 127,960 69,933
Deferred income tax (benefit) expense.. (24,253) (24,895) 15,071
Loss (gain) from sale of property and
equipment............................. 2,842 (9,254) --
(Decrease) increase in trade accounts
receivable............................ (75,514) (324,861) 147,924
Decrease (increase) in income taxes
receivable............................ 8,086 (45,593) 45,055
Decrease (increase) in prepaid
expenses.............................. 2,718 (6,974) 5,278
Increase (decrease) in accounts
payable............................... 29,252 45,105 (17,700)
--------- -------- --------
Net cash provided by (used in)
operating activities................ 134,544 (302,260) 355,740
--------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment...... (143,215) (192,675) (178,662)
Proceeds from sale of property and
equipment............................... 11,749 33,750 --
--------- -------- --------
Net cash used in investing
activities.......................... (131,466) (158,925) (178,662)
--------- -------- --------
Cash flows from financing activities:
Net increase in borrowings under line of
credit.................................. -- 212,403 547,914
(Decrease) increase in bank overdraft.... (20,890) 214,205 (312,217)
Proceeds from long-term debt............. 15,737 100,000 --
Principal payments on long term debt..... -- (15,737) (7,204)
Stockholder distributions................ (5,001) (38,751) --
--------- -------- --------
Net cash (used in) provided by
financing activities................ (10,154) 472,120 228,493
Net (decrease) increase in cash...... (7,076) 10,935 405,571
Cash at beginning of period................ 7,076 -- 10,935
--------- -------- --------
Cash at end of period...................... $ -- 10,935 416,506
========= ======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest................................. $ 1,439 15,018 4,059
========= ======== ========
Income taxes............................. $ 3,500 46,393 25,340
========= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-81
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997 and May 5, 1998
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Absolute Towing and Transporting, Inc. ("Absolute") was founded in 1987.
Absolute's primary business is towing salvage vehicles for auction companies
in Southern California. Absolute has one facility in Los Angeles. It operates
approximately 25 vehicles.
(b) Revenue Recognition
Absolute operates as one segment related to the transportation of vehicles
and equipment for customers.
Absolute's revenue is derived from customers who require towing services.
Revenue is recognized at the completion of each towing engagement. Expenses
related to the generation of revenue are recognized as incurred.
(c) Property and Equipment
Property and equipment are stated at cost. Depreciation is determined for
financial statement purposes using the straight line method over the estimated
useful lives of the individual assets or, for leasehold improvements, over the
terms of the related leases, if shorter. Accelerated methods of depreciation
have been used for income tax purposes. For financial statement purposes,
Absolute provides for depreciation of property and equipment over the
following estimated useful lives:
<TABLE>
<S> <C>
Transportation and towing
equipment......................... 3-5 years
Leasehold improvements............. 5 years
Furniture and fixtures............. 5 years
</TABLE>
(d) Fair Value of Financial Instruments
Due to the short-term nature of various financial instruments and the
current incremental borrowing rates available to Absolute on bank loans with
similar terms and maturities, the fair value of Absolute's financial
instruments approximates their carrying values.
(e) 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 credit 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 or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(f) Use of Estimates
Management of Absolute 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.
F-82
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997 and May 5, 1998
(2) Property and Equipment
Property and equipment at December 31, 1996 and 1997 and May 5, 1998 consist
of the following:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ ---------
<S> <C> <C> <C>
Transportation and towing equipment.... $ 920,210 974,036 1,145,546
Leasehold improvements................. 3,740 27,110 27,110
Furniture and fixtures................. 1,060 1,060 1,060
--------- --------- ---------
Total................................ 925,010 1,002,206 1,173,716
Less accumulated depreciation and
amortization.......................... (659,076) (696,053) (758,834)
--------- --------- ---------
$ 265,934 306,153 414,882
========= ========= =========
</TABLE>
Depreciation and amortization of property and equipment in 1996, 1997 and
1998 totaled $110,327, $127,960 and $69,933, respectively.
(3) Indebtedness
Absolute has a line of credit with a bank permitting borrowings up to
$300,000 and is secured by accounts receivable, inventory, and equipment.
Outstanding borrowings bear interest at the bank's prime rate plus 1% (9.5% at
May 5, 1998). Borrowings under this non-revolving credit agreement aggregated
$212,403 at December 31, 1997 and $301,050 at May 5, 1998 and is secured by
accounts receivable, inventory, and equipment. The outstanding balance was
subsequently repaid during May 1998.
Absolute has a non-revolving credit agreement with a bank that provides for
maximum borrowings of $600,000. Outstanding borrowings bear interest at the
bank's prime rate plus 1% (9.5% at May 5, 1998). Borrowings under this non-
revolving credit agreement are $459,267 at May 5, 1998. The outstanding
balance was subsequently repaid during May 1998.
Absolute's long-term debt consists of the following at December 31, 1996 and
1997 and May 5, 1998:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ -------
<S> <C> <C> <C>
Note payable to bank, payable in monthly
installments of $2,125, including
interest at 10%, maturing December 1,
2002. Secured by personal property...... $ 15,737 100,000 92,796
Less installments due within one year.... (15,737) (16,218) (16,906)
-------- ------- -------
Long-term debt, excluding current
installments.......................... $ -- 83,782 75,890
======== ======= =======
</TABLE>
Aggregate maturities of long-term debt subsequent to May 5, 1998 are as
follows:
<TABLE>
<S> <C>
1999............................................................ $16,906
2000............................................................ 18,674
2001............................................................ 20,631
2002............................................................ 22,790
2003............................................................ 13,795
-------
$92,796
=======
</TABLE>
F-83
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997 and May 5, 1998
(4) Leases
Absolute leases the building used for its operations under a month-to-month
lease agreement. The lease is classified as an operating lease. The agreement
provides for monthly rental payments of $1,446. Absolute is responsible for
all operating costs related to the property.
Total rent expense for 1996, 1997 and 1998 was $24,442, $18,800 and $5,784,
respectively.
(5) Income Taxes
Income tax expense (benefit) for the years ended December 31, 1996 and 1997
and the period from January 1, 1998 through May 5, 1998 consists of:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ ------
<S> <C> <C> <C>
Current:
Federal................................... $ 10,786 -- 43,164
State..................................... 800 800 1,891
-------- ------- ------
11,586 800 45,055
Deferred.................................... (24,253) (24,895) 15,071
-------- ------- ------
$(12,667) (24,095) 60,126
======== ======= ======
</TABLE>
The following table reconciles the expected tax expense at Federal statutory
tax rate to the effective tax rate:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ ------
<S> <C> <C> <C>
Computed expected tax expense.............. $ 23,262 (29,867) 51,104
Effect of graduated tax rates.............. (10,018) 6,656 --
State income taxes, net of Federal
benefit................................... 3,695 (1,626) 8,769
Los Angeles Revitalization Zone (LARZ)
credit.................................... (33,371) -- --
Non-deductible meals and entertainment
expenses.................................. 3,765 742 253
-------- ------- ------
$(12,667) (24,095) 60,126
======== ======= ======
</TABLE>
F-84
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997 and May 5, 1998
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities as of December 31, 1996 and 1997 and May
5, 1998 are presented below:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ ------
<S> <C> <C> <C>
Deferred tax assets:
Accrued salaries......................... $ -- -- 8,015
Los Angeles Revitalization Zone credit... 12,927 12,927 --
Property and equipment due to differences
in depreciation lives and methods....... -- -- 8,245
Net operating loss carryforward.......... -- 20,524 --
------- ------ ------
Total gross deferred tax assets........ 12,927 33,451 16,260
Less valuation allowance................. -- -- --
------- ------ ------
12,927 33,451 16,260
Deferred tax liabilities:
Property and equipment due to differences
in depreciation lives and methods....... (6,491) (2,120) --
------- ------ ------
$ 6,436 31,331 16,260
======= ====== ======
</TABLE>
The net operating loss carryforward of approximately $60,000 expires in 2017
and LARZ credit of approximately $12,900 expires in 2011.
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 during the
periods in which those temporary differences become deductible. Management
considers the projected future taxable income and tax planning strategies, as
well as carryback opportunities, in making this assessment. Based upon the
level of historical taxable income, projections for future taxable income and
carryback opportunities over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not Absolute will
realize the benefits of these deductible differences. The amount of the
deferred tax asset considered realizable, however, could be reduced in the
near term if estimates of future income are reduced.
(6) Concentration of Business Risks
For the period ended May 5, 1998, 92% of Absolute's revenues were derived
from one customer, Insurance Auto Auctions (IAA). The loss of this customer
could significantly effect Absolute's performance.
(7) Subsequent Event
On May 5, 1998, the stockholder successfully completed the sale of Absolute
to United Road Services, Inc. The sales transaction is affected through a
combination of cash and common stock of United Road Services, Inc. The selling
price of Absolute exceeds its net assets as of May 5, 1998. Certain of the
assets of Absolute, in the amount of $65,000, will be retained by the
stockholder.
F-85
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholder
ASC Transportation Services:
We have audited the accompanying consolidated balance sheets of ASC
Transportation Services and subsidiary (Auto Service Center d/b/a ASC Truck
Service) as of December 31, 1997 and May 5, 1998, and the related consolidated
statements of operations, stockholder's deficit, and cash flows for the year
ended December 31, 1997 and for the period from January 1, 1998 through May 5,
1998. These consolidated financial statements are the responsibility of Auto
Service's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ASC
Transportation Services and subsidiary (Auto Service Center d/b/a ASC Truck
Service) as of December 31, 1997 and May 5, 1998, and the results of their
operations and their cash flows for the year ended December 31, 1997 and the
period from January 1, 1998 through May 5, 1998, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Albany, New York
July 31, 1998
F-86
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and May 5, 1998
<TABLE>
<CAPTION>
December 31, May 5,
1997 1998
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................. $ 138,213 51,983
Trade accounts receivable, (net of allowance for
doubtful accounts of $0 and $10,000, respectively).. 225,364 182,597
Income taxes receivable.............................. -- 9,642
Accounts receivable, other........................... 4,977 --
Due from employees................................... 715 --
Inventories.......................................... 18,167 12,508
Prepaid expenses..................................... 69,535 43,840
---------- ---------
Total current assets............................... 456,971 300,570
Property and equipment, net (notes 2 and 4)............ 806,503 726,430
Other assets........................................... 10,986 1,905
---------- ---------
Total assets....................................... $1,274,460 1,028,905
========== =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current installments of long-term debt (note 3)...... 20,275 16,512
Current installments of obligations under capital
leases (note 4)..................................... 247,845 234,874
Accounts payable..................................... 121,245 72,083
Accrued payroll related costs........................ 45,759 20,242
Income taxes payable (note 5)........................ 62,051 --
Other accrued liabilities............................ 16,961 33,732
---------- ---------
Total current liabilities.......................... 514,136 377,443
Long-term liabilities:
Long-term debt, excluding current installments (note
3).................................................. 209,326 205,073
Obligations under capital leases, excluding current
installments (note 4)............................... 491,680 417,675
Deferred income taxes (note 5)....................... 82,965 71,185
---------- ---------
Total liabilities.................................. 1,298,107 1,071,376
---------- ---------
Stockholder's deficit:
Common stock, no par value. Authorized 10,000 shares;
issued and outstanding 25 shares.................... 24,000 24,000
Additional paid-in capital........................... 33,325 33,325
Accumulated deficit.................................. (80,972) (99,796)
---------- ---------
Total stockholder's deficit........................ (23,647) (42,471)
---------- ---------
Total liabilities and stockholder's deficit........ $1,274,460 1,028,905
========== =========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-87
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, 1997 and
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
December 31, May 5,
1997 1998
------------ ---------
<S> <C> <C>
Net revenue............................................. $3,310,464 1,264,558
Cost of revenue......................................... 2,364,355 878,290
---------- ---------
Gross profit........................................ 946,109 386,268
Selling, general, and administrative expenses........... 764,778 384,096
---------- ---------
Income from operations.............................. 181,331 2,172
---------- ---------
Other income (expense):
Interest expense...................................... (71,947) (30,397)
Gain (loss) on sale of assets......................... 18,670 (9,652)
Other................................................. 34,834 8,121
---------- ---------
Income (loss) before income taxes................... 162,888 (29,756)
Income tax expense (benefit) (note 5)................... 49,096 (25,932)
---------- ---------
Net income (loss)................................... $ 113,792 (3,824)
========== =========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-88
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
Year ended December 31, 1997 and
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
Additional Total
Common paid-in Accumulated stockholder's
stock capital deficit deficit
------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997........ $24,000 33,325 (194,764) (137,439)
Net income--1997.................. -- -- 113,792 113,792
------- ------ -------- --------
Balance at December 31, 1997...... 24,000 33,325 (80,972) (23,647)
Distributions..................... -- -- (15,000) (15,000)
Net loss--period from January 1,
1998 through
May 5, 1998...................... -- -- (3,824) (3,824)
------- ------ -------- --------
Balance at May 5, 1998............ $24,000 33,325 (99,796) (42,471)
======= ====== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-89
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 1997 and
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
December 31, May 5,
1997 1998
------------ ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ 113,792 (3,824)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization...................... 177,150 80,079
Deferred income tax benefit........................ (6,786) (11,780)
(Gain) loss on sale of property and equipment...... (18,670) 9,652
(Increase) decrease in trade accounts receivable... (88,313) 42,767
(Increase) decrease in due from employees.......... (1,376) 715
(Increase) decrease in other accounts receivable... (1,366) 4,977
Increase in income taxes receivable................ -- (9,642)
(Increase) decrease in inventories................. (5,006) 5,659
Decrease in prepaid expenses....................... 28,383 25,695
Decrease in other assets........................... -- 9,081
Decrease in accounts payable....................... (11,932) (49,162)
Increase (decrease) in accrued payroll related
costs............................................. 17,020 (25,517)
Increase (decrease) in income taxes payable........ 38,517 (62,051)
Increase in other accrued liabilities.............. 7,191 16,771
--------- ---------
Net cash provided by operating activities........ 248,604 33,420
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment.................. (268,647) (22,731)
Proceeds from sale of property and equipment......... 52,938 13,073
--------- ---------
Net cash used in investing activities............ (215,709) (9,658)
--------- ---------
Cash flows from financing activities:
Proceeds net of principal payments on long-term debt
and capital leases................................... 240,673 (94,992)
Distribution to owner................................ (211,134) (15,000)
--------- ---------
Net cash provided by (used in) financing
activities...................................... 29,539 (109,992)
--------- ---------
Net increase (decrease) in cash........................ 62,434 (86,230)
Cash at beginning of period............................ 75,779 138,213
--------- ---------
Cash at end of period.................................. $ 138,213 51,983
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest........................................... $ 72,183 30,678
========= =========
Income taxes....................................... $ 57,541 14,260
========= =========
</TABLE>
See accompanying notes to financial statements.
F-90
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and May 5, 1998
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
ASC Transportation Services and its wholly-owned subsidiary, Auto Service
Center (d/b/a ASC Truck Service), collectively referred to herein as "Auto
Service", were founded in 1993 and 1965, respectively. Auto Service is a
commercial and police towing company with two facilities based in Sacramento,
California. One facility concentrates in the towing of commercial and personal
vehicles primarily contracting with law enforcement agencies and motor clubs.
The other location concentrates on the towing of larger commercial vehicles
and maintains a repair shop also for commercial vehicles. It operates
approximately 28 vehicles.
(b) Principles of Consolidation
The consolidated financial statements include the financial statements of
ASC Transportation Services and its wholly-owned subsidiary, Auto Service
Center. All significant intercompany balances and transactions have been
eliminated in consolidation.
(c) Revenue Recognition
Auto Service operates as one segment related to the transportation of
vehicles and equipment for customers.
Auto Service's revenue is derived from customers who require a towing
service, transport of vehicles and equipment, and fees related to the repair
of vehicles that have been towed. Towing revenue is recognized at the
completion of each towing engagement, transport revenue is recognized upon the
delivery of the vehicles and equipment to their final destination, and repair
fees are recorded when the service is performed. Expenses related to the
generation of revenue are recognized as incurred.
(d) Inventories
Inventories consist principally of spare parts used for repair and
maintenance. Inventories are stated at the lower of cost or market.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation is determined for
financial statement purposes using the straight-line method over the estimated
useful lives of the individual assets or, for leasehold improvements, over the
terms of the related leases if shorter. Accelerated methods of depreciation
have been used for income tax purposes. For financial statement purposes, Auto
Service provides for depreciation of property and equipment over the following
estimated useful lives:
<TABLE>
<S> <C>
Transportation and towing equipment............................ 5 years
Machinery and other equipment.................................. 7 years
Leasehold improvements......................................... 7-20 years
Furniture and fixtures......................................... 7 years
</TABLE>
(f) Fair Value of Financial Instruments
Due to the short-term nature of various financial instruments and the
current incremental borrowing rates available to Auto Service on bank loans
with similar terms and maturities, the fair value of Auto Service's financial
instruments approximates their carrying values.
F-91
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and May 5, 1998
(g) 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 credit 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 or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(h) Use of Estimates
Management of Auto Service 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.
(2) Property and Equipment
Property and equipment at December 31, 1997 and May 5, 1998 consists of the
following:
<TABLE>
<CAPTION>
December 31, May 5,
1997 1998
------------ ---------
<S> <C> <C>
Transportation and towing equipment.................. $1,425,655 1,415,326
Machinery and other equipment........................ 169,403 157,859
Leasehold improvements............................... 29,614 31,811
Furniture and fixtures............................... 39,175 40,442
---------- ---------
Total.............................................. 1,663,847 1,645,438
Less accumulated depreciation and amortization....... (857,344) (919,008)
---------- ---------
$ 806,503 726,430
========== =========
</TABLE>
Depreciation and amortization of property and equipment during the year
ended December 31, 1997 and the period from January 1, 1998 through May 5,
1998 totaled $177,150 and $80,079, respectively.
(3) Indebtedness
Auto Service's long-term debt consisted of the following at December 31,
1997 and May 5, 1998:
<TABLE>
<CAPTION>
December 31, May 5,
1997 1998
------------ -------
<S> <C> <C>
Note payable to bank, payable in monthly installments
of $1,042, including interest at 10.5%, maturing
August 1998.......................................... $ 8,333 4,167
Note payable to unrelated individuals payable in
monthly installments of $2,794, including interest at
10%, maturing November 2008. Guaranteed by the owners
of Auto Service and secured by a Pledge Agreement for
all authorized shares of stock of Auto Service....... 221,268 217,418
-------- -------
Total long-term debt................................ 229,601 221,585
Less installments due within one year................. (20,275) (16,512)
-------- -------
Long-term debt, excluding current installments...... $209,326 205,073
======== =======
</TABLE>
F-92
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and May 5, 1998
Annual maturities of long-term debt for the next five years subsequent to
May 5, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................... $ 16,512
2000........................................................... 13,638
2001........................................................... 15,066
2002........................................................... 16,644
2003........................................................... 18,386
Thereafter..................................................... 141,339
--------
$221,585
========
</TABLE>
(4)Leases
Auto Service is obligated under various capital leases for vehicles,
equipment and furniture and fixtures that expire at various dates ranging
between January 1998 to August 2003.
Auto Service is obligated to the stockholder under a capital lease for a
vehicle through December 1999.
Following is a summary of property and equipment held under the capital
leases at December 31, 1997 and May 5, 1998.
<TABLE>
<CAPTION>
December 31, May 5,
1997 1998
------------ ---------
<S> <C> <C>
Transportation and towing equipment.................. $1,136,544 1,127,808
Other equipment...................................... 55,350 53,248
Furniture and fixtures............................... 18,240 18,240
---------- ---------
1,210,134 1,199,296
Less accumulated amortization........................ (519,886) (601,176)
---------- ---------
$ 690,248 598,120
========== =========
</TABLE>
Auto Service leases the office building and a vehicle used for its
operations from the stockholder. These leases are classified as operating
leases and have been included in the data presented below. The building lease
expires April 2003 and the vehicle lease has indefinite terms with a 30 day
cancellation notice. Auto Service is responsible for all operating costs
related to these properties.
Auto Service also leases another building used for its operations from an
unrelated party. This lease is classified as an operating lease and is
included in the data presented below. The lease expires October 2002.
Total rent expense for the year ended December 31, 1997 was $151,393,
including $64,654 paid to stockholder, and was $52,091 for the period from
January 1, 1998 through May 5, 1998, including $21,708 paid to the
stockholder.
F-93
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and May 5, 1998
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 May 5, 1998 are:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- ---------
<S> <C> <C>
1999.................................................... $ 291,626 106,800
2000.................................................... 212,813 106,800
2001.................................................... 116,623 106,800
2002.................................................... 79,919 106,800
2003.................................................... 55,268 77,150
Thereafter.............................................. 19,197 --
--------- -------
Total................................................. 775,446 504,350
=======
Less amount representing interest....................... (122,897)
---------
Present value of net minimum capital lease payments..... $ 652,549
=========
</TABLE>
(5) Income Taxes
Income tax expense (benefit) for the year ended December 31, 1997 and the
period from January 1, 1998 through May 5, 1998 consists of:
<TABLE>
<CAPTION>
December 31, May 5,
1997 1998
------------ -------
<S> <C> <C>
Current:
Federal.............................................. $42,934 (9,672)
State................................................ 12,948 (4,480)
------- -------
55,882 (14,152)
Deferred............................................... (6,786) (11,780)
------- -------
$49,096 (25,932)
======= =======
</TABLE>
The following table reconciles the expected tax expense (benefit) at the
Federal statutory tax rate to the effective tax rate.
<TABLE>
<CAPTION>
December 31, May 5,
1997 1998
------------ -------
<S> <C> <C>
Computed expected tax expense.......................... $ 55,382 (13,074)
State income taxes, net of Federal benefit............. 8,546 1,056
Meals and entertainment................................ 1,372 --
Adjustment to prior years' taxes....................... (17,770) 2,350
Bad debts.............................................. -- (11,409)
Depreciation........................................... -- (4,945)
Other.................................................. 1,566 90
-------- -------
$ 49,096 (25,932)
======== =======
</TABLE>
F-94
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and May 5, 1998
The tax effects of temporary differences that give rise to deferred tax
liabilities as of December 31, 1997 and May 5, 1998 are presented below:
<TABLE>
<CAPTION>
December 31, May 5,
1997 1998
------------ ------
<S> <C> <C>
Deferred tax liability:
Property and equipment, due to differences in
depreciation lives and methods...................... $82,965 80,872
Bad debt allowance................................... -- (4,284)
State income taxes................................... -- (5,403)
------- ------
Net deferred tax liability......................... $82,965 71,185
======= ======
</TABLE>
At December 31, 1996, the net deferred tax liability was $89,751 and there
was no recorded valuation allowance.
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 during the
periods in which those temporary differences become deductible. Management
considers the projected future taxable income and tax planning strategies, as
well as carryback opportunities, in making this assessment. Based upon the
level of historical taxable income, projections for future taxable income and
carryback opportunities over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not Auto Service will
realize the benefits of these deductible differences. The amount of the
deferred tax asset considered realizable, however, could be reduced in the
near term if estimates of future taxable income are reduced.
(6) Subsequent Event
During February 1998, the stockholder entered into a definitive agreement to
sell Auto Service to United Road Services, Inc. The sales transaction,
affected through a combination of cash and common stock of United Road
Service, Inc., was effective May 6, 1998 upon the consummation of the initial
public offering of the common stock of United Road Service, Inc. The selling
price of Auto Service exceeded its net assets as of May 5, 1998.
Concurrently with the acquisition, United Road Service, Inc. entered into
agreements with the stockholder to lease land and buildings used in Auto
Service's operations for negotiated amounts and terms.
For the period from January 1, 1998 through May 5, 1998, 36% of Auto
Service's revenues were derived from one customer, Automobile Association of
America (AAA). Subsequent to May 5, 1998, the contract with this customer was
terminated.
F-95
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholder:
We have audited the accompanying balance sheet of Silver State Tow and
Recovery, Inc. (d/b/a Milne Tow and Transport Services) ("Milne") as of May 5,
1998, and the related statement of operations, stockholder's deficit, and cash
flows for the period from January 1, 1998 through May 5, 1998. These financial
statements are the responsibility of Milne's management. Our responsibility is
to express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides 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 Milne Tow and Transport
Services as of May 5, 1998, and the results of its operations and its cash
flows for the period from January 1, 1998 through May 5, 1998 in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Albany, New York
August 14, 1998
F-96
<PAGE>
MILNE TOW AND TRANSPORT SERVICES
BALANCE SHEET
May 5, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash.............................................................. $ 2,530
Trade accounts receivable (less allowance of $25,000)............. 142,259
Due from employees................................................ 451
Inventories....................................................... 9,500
Prepaid expenses.................................................. 22,269
----------
Total current assets............................................ 177,009
Property and equipment, net (note 2)................................ 749,705
Deferred taxes (note 4)............................................. 60,597
----------
Total assets.................................................... $ 987,311
==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Bank overdraft.................................................... $ 81,148
Current installments of notes payable (note 3).................... 27,182
Borrowings under line of credit (note 3).......................... 49,301
Accounts payable.................................................. 130,926
----------
Total current liabilities....................................... 288,557
Long-term liabilities:
Notes payable, excluding current installments (note 3)............ 746,409
----------
Total liabilities............................................... 1,034,966
----------
Stockholder's deficit:
Common stock, no par value. Authorized 2,500 shares; issued and
outstanding 2,500 shares......................................... 25,000
Additional paid-in capital........................................ 3,000
Accumulated deficit............................................... (75,655)
----------
Total stockholder's deficit..................................... (47,655)
----------
Total liabilities and stockholder's deficit..................... $ 987,311
==========
</TABLE>
See accompanying notes to the financial statements.
F-97
<PAGE>
MILNE TOW AND TRANSPORT SERVICES
STATEMENT OF OPERATIONS
Period from January 1, 1998 through May 5, 1998
<TABLE>
<S> <C>
Net revenue......................................................... $ 725,778
Cost of revenue..................................................... (624,662)
---------
Gross profit.................................................... 101,116
Selling, general, and administrative expenses....................... 426,911
---------
Loss from operations............................................ (325,795)
---------
Other income (expense):
Interest expense.................................................. (27,832)
Gain on sale of assets............................................ 6,099
---------
Loss before income taxes........................................ (347,528)
Income tax benefit (note 4)......................................... 101,745
---------
Net loss........................................................ $(245,783)
=========
</TABLE>
See accompanying notes to the financial statements.
F-98
<PAGE>
MILNE TOW AND TRANSPORT SERVICES
STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
Additional Total
Common paid-in Accumulated stockholder's
stock capital equity (deficit) equity (deficit)
------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C>
Balance at December 31,
1997................... $25,000 3,000 170,128 198,128
Net loss--period from
January 1, 1998 through
May 5, 1998............ -- -- (245,783) (245,783)
------- ----- -------- --------
Balance at May 5, 1998.. $25,000 3,000 (75,655) (47,655)
======= ===== ======== ========
</TABLE>
See accompanying notes to the financial statements.
F-99
<PAGE>
MILNE TOW AND TRANSPORT SERVICES
STATEMENT OF CASH FLOWS
Period from January 1, 1998 through May 5, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss for period from January 1, 1998 through May 5, 1998.. $(245,783)
Adjustments to reconcile net loss to net cash from operating
activities:
Depreciation and amortization............................... 94,200
Gain on sale of property and equipment...................... (6,099)
Deferred income taxes....................................... (101,745)
Decrease in trade accounts receivable....................... 195,599
Decrease in due from employees.............................. 5,355
Decrease in inventories..................................... 7,750
Increase in prepaid expenses................................ (22,269)
Increase in accounts payable................................ 25,695
Decrease in accrued payroll and related costs............... (36,171)
---------
Net cash used in operating activities..................... (83,468)
---------
Cash flows from investing activities:
Proceeds from sale of property and equipment.................. 44,170
---------
Net cash provided by investing activities................. 44,170
---------
Cash flows from financing activities:
Bank overdraft................................................ 66,228
Principal payments on notes payable........................... (34,492)
---------
Net cash provided by financing activities................. 31,736
---------
Net decrease in cash............................................ (7,562)
Cash, January 1, 1998........................................... 10,092
---------
Cash, May 5, 1998............................................... $ 2,530
=========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest.................................................... $ 27,832
=========
Income taxes................................................ $ --
=========
</TABLE>
See accompanying notes to the financial statements.
F-100
<PAGE>
MILNE TOW AND TRANSPORT SERVICES
NOTES TO FINANCIAL STATEMENTS
May 5, 1998
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Silver State Tow and Recovery, Inc. (d/b/a Milne Tow and Transport
Services), referred to herein as "Milne", were founded in 1984. Milne is a
towing and transport company which provides services to commercial
dealerships, rental car companies, municipalities and construction companies.
The Company's primary location is located in Sparks, Nevada. They operate a
satellite office in Lovelock, Nevada to service the northern Nevada area.
(b) Revenue Recognition
Milne's revenue is derived primarily from commercial customers who require a
towing service, transport of vehicles and equipment. Towing revenue is
recognized at the completion of each towing engagement and transport revenue
is recognized upon the delivery of the vehicles and equipment to their final
destination. Expenses related to the generation of revenue are recognized as
incurred.
(c) Inventories
Inventories consist principally of spare tires used for trucks. 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 purposes using the straight-line method over the estimated
useful lives of the individual assets. Accelerated methods of depreciation
have been used for income tax purposes. For financial statement purposes,
Milne provides for depreciation of property and equipment over the following
estimated useful lives:
<TABLE>
<S> <C>
Transportation and towing equipment............................. 5 years
Machinery and other equipment................................... 5 years
Leasehold improvements.......................................... 31 years
Office equipment................................................ 3-7 years
</TABLE>
(e) Fair Value of Financial Instruments
Due to the short-term nature of various financial instruments and the
current incremental borrowing rates available to Milne on bank loans with
similar terms and maturities, the fair value of Milne's financial instruments
approximates their carrying values.
(f) 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 credit 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 or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
F-101
<PAGE>
MILNE TOW AND TRANSPORT SERVICES
NOTES TO FINANCIAL STATEMENTS--(Continued)
May 5, 1998
(g) Use of Estimates
Management of Milne 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.
(2) Property and Equipment
Property and equipment at May 5, 1998 consists of the following:
<TABLE>
<S> <C>
Transportation and towing equipment.............................. $1,367,667
Machinery and other equipment.................................... 12,824
Leasehold improvements........................................... 19,823
Office equipment................................................. 34,819
----------
Total.......................................................... 1,435,133
Less accumulated depreciation and amortization................... (685,428)
----------
$ 749,705
==========
</TABLE>
Depreciation and amortization of property and equipment for the period from
January 1, 1998 through May 5, 1998, totaled $94,200.
(3) Notes Payable
Milne has available a $50,000 line of credit with a bank, expiring on June
6, 1998. Interest is payable at 11%. Total borrowings under this line of
credit at May 5, 1998 amounted to $49,301.
Milne's notes payable consisted of the following at May 5, 1998:
<TABLE>
<S> <C>
Notes payable to various third parties, payable in monthly
installments ranging from $462 to $2,774, including interest at
rates from 8.75% to 13.00%, maturing between 1999 and 2002.
Secured by property and equipment................................ $773,591
Less installments due within one year............................. (27,182)
--------
Notes payable, excluding current installments................... $746,409
========
</TABLE>
Aggregate maturities of notes payable subsequent to May 5, 1998, are as
follows:
<TABLE>
<S> <C>
1999................................................................ $ 27,182
2000................................................................ 244,981
2001................................................................ 244,833
2002................................................................ 256,595
--------
$773,591
========
</TABLE>
See footnote (6) regarding paydowns of certain notes payable subsequent to
May 5, 1998.
(4) Income Taxes
Income tax benefit for the period from January 1, 1998 through May 5, 1998
consists of:
<TABLE>
<S> <C>
Current:
Federal......................................................... $ --
---------
--
Deferred.......................................................... (101,745)
---------
$(101,745)
=========
</TABLE>
F-102
<PAGE>
MILNE TOW AND TRANSPORT SERVICES
NOTES TO FINANCIAL STATEMENTS--(Continued)
May 5, 1998
Milne is incorporated in the state of Nevada which imposes no corporate
income tax.
The following table reconciles the expected tax benefit at the Federal
statutory tax rate to the effective tax rate.
<TABLE>
<S> <C>
Computed expected tax benefit................................. $(118,160)
Other......................................................... 16,415
---------
$(101,745)
=========
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets as of May 5, 1998 are presented below:
<TABLE>
<S> <C>
Deferred tax asset:
Net operating loss........................................... $114,086
Property and equipment, due to differences in depreciation
lives and methods........................................... (67,017)
Other........................................................ 13,528
--------
Net deferred tax asset..................................... $ 60,597
========
</TABLE>
At December 31, 1997, the net deferred tax liability was $41,148 and there
was no recorded valuation allowance.
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 during the
periods in which those temporary differences become deductible. Management
considers the projected future taxable income and tax planning strategies, as
well as carryback opportunities, in making this assessment. Based upon the
level of historical taxable income, projections for future taxable income and
carryback opportunities over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not Milne will realize
the benefits of these deductible differences. The amount of the deferred tax
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income are reduced.
(5) Subsequent Event
During February 1997, the stockholder entered into a definitive agreement to
sell Milne to United Road Services, Inc. The sales transaction, affected
through a combination of cash and common stock of United Road Services, Inc.,
was effective May 6, 1998 upon the consummation of the initial public offering
of the common stock of United Road Services, Inc. The selling price of Milne
exceeded its net assets as of May 5, 1998.
Concurrently with the acquisition, United Road Services, Inc. entered into
agreements with the stockholder to lease land and buildings used in Milne's
operations for negotiated amounts and terms.
Subsequent to May 5, 1998, United Road Services, Inc. paid down
approximately $766,932 of Milne's outstanding borrowings on the line of credit
and notes payable as of May 5, 1998.
F-103
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MPG Transco, Ltd.:
We have audited the accompanying balance sheets of MPG Transco, Ltd. as of
July 31, 1997 and 1998, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company'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 MPG Transco, Ltd. as of
July 31, 1997 and 1998, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Detroit, Michigan
December 11, 1998
F-104
<PAGE>
MPG TRANSCO, LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
July 31,
---------------------- October 31,
1997 1998 1998
Assets ----------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................. $ 88,927 1,074,291 347,593
Trade accounts receivable, net of
allowance for doubtful accounts of
$100,000 in 1997 and 1998................ 1,368,797 1,986,064 1,957,619
Accounts receivable from employees........ 12,016 52,853 42,073
Income tax receivable (note 7)............ 152,991 -- --
Prepaid and other current assets (note 2). 344,503 158,569 111,853
Deferred income taxes (note 7)............ 101,824 208,225 171,418
----------- ---------- ----------
Total current assets.................... 2,069,058 3,480,002 2,630,556
Property and equipment, net (notes 3 and 5). 11,504,108 9,655,810 10,630,088
Cash surrender value of officer's life
insurance.................................. 246,065 302,734 320,045
Other assets................................ 28,200 27,700 27,700
----------- ---------- ----------
Total assets............................ $13,847,431 13,466,246 13,608,389
=========== ========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit (note 5)................... $ 1,125,000 999,580 986,224
Current installments of notes payable
(note 5)................................. 3,170,821 1,799,544 2,004,499
Accounts payable.......................... 759,029 879,062 818,074
Due to related party (note 9)............. 95,982 894,794 23,936
Income taxes payable (note 7)............. -- 625,665 739,706
Other accrued liabilities (note 4)........ 689,317 920,460 891,820
----------- ---------- ----------
Total current liabilities............... 5,840,149 6,119,105 5,464,259
Long-term liabilities:
Notes payable, excluding current
installments (note 5).................... 2,526,498 846,588 1,421,428
Deferred income taxes (note 7)............ 1,360,324 1,460,514 1,462,047
----------- ---------- ----------
Total liabilities....................... 9,726,971 8,426,207 8,347,734
----------- ---------- ----------
Stockholders' equity:
Common stock, no par value. 10,000 shares
authorized; 1,000 shares issued and
outstanding.............................. 1,000 1,000 1,000
Paid-in capital in excess of stated value. 1,417,234 1,417,234 1,417,234
Retained earnings......................... 2,702,226 3,621,805 3,842,421
----------- ---------- ----------
Total stockholders' equity.............. 4,120,460 5,040,039 5,260,655
----------- ---------- ----------
Total liabilities and stockholders'
equity................................. $13,847,431 13,466,246 13,608,389
=========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-105
<PAGE>
MPG TRANSCO, LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
Years Ended July 31, October 31,
----------------------- --------------------
1997 1998 1997 1998
----------- ---------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Net revenue..................... $20,469,778 23,471,030 5,813,482 5,816,476
Cost of revenue................. 14,503,066 16,093,952 3,991,915 4,136,818
----------- ---------- --------- ---------
Gross profit................ 5,966,712 7,377,078 1,821,567 1,679,658
Selling, general and
administrative expenses......... 5,224,312 5,225,129 1,245,141 1,222,955
----------- ---------- --------- ---------
Income from operations...... 742,400 2,151,949 576,426 456,703
Other income (expense):
Interest expense.............. (472,981) (487,295) (157,336) (76,608)
Interest income............... 19,736 17,453 69 2,457
Other......................... (13,257) (10,731) (1,867) 679
Loss on sale of assets........ (250,767) (132,343) (127,490) (10,234)
----------- ---------- --------- ---------
Income before income taxes.. 25,131 1,539,033 289,802 372,997
Income tax expense (note 7)..... 39,683 619,454 122,578 152,381
----------- ---------- --------- ---------
Net income (loss)........... $ (14,552) 919,579 167,224 220,616
=========== ========== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-106
<PAGE>
MPG TRANSCO, LTD.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Paid-in
Capital in Total
Common Excess of Retained Stockholders'
Stock Stated Value Earnings Equity
------ ------------ --------- -------------
<S> <C> <C> <C> <C>
Balance at July 31, 1996........... $1,000 1,417,234 2,716,778 4,135,012
Net loss--Year ended July 31, 1997. -- -- (14,552) (14,552)
------ --------- --------- ---------
Balance at July 31, 1997........... 1,000 1,417,234 2,702,226 4,120,460
Net income--Year ended July 31,
1998............................... -- -- 919,579 919,579
------ --------- --------- ---------
Balance at July 31, 1998........... 1,000 1,417,234 3,621,805 5,040,039
Net income--
Three months ended October 31,
1998 (unaudited)................ -- -- 220,616 220,616
------ --------- --------- ---------
Balance at October 31, 1998
(unaudited)........................ $1,000 1,417,234 3,842,421 5,260,655
====== ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-107
<PAGE>
MPG TRANSCO, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
Years Ended July 31, October 31,
----------------------- ----------------------
1997 1998 1997 1998
----------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)............. $ (14,552) 919,579 167,224 220,616
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization............... 1,392,177 1,526,643 405,590 404,264
Deferred income taxes....... 192,674 (6,211) -- 38,340
Loss on sale of property and
equipment.................. 250,767 132,343 127,490 10,234
(Increase) decrease in trade
accounts
receivable................. (111,392) (617,267) (461,594) 28,445
(Increase) decrease in
accounts receivable from
employees.................. (12,016) (40,837) (15,616) 10,780
(Increase) decrease in
income tax receivable...... (152,991) 152,991 152,991 --
(Increase) decrease in
prepaid and other
assets..................... (139,705) 129,765 (356,312) 29,405
Increase (decrease) in
accounts payable........... 178,135 120,033 719,500 (60,988)
Increase in income taxes
payable.................... -- 625,665 122,578 114,041
Increase (decrease) in other
accrued
liabilities................ 450,143 231,143 221,578 (28,640)
----------- ---------- ---------- ----------
Net cash provided by (used
in) operating activities. 2,033,240 3,173,847 1,083,429 766,497
----------- ---------- ---------- ----------
Cash flows from investing
activities:
Purchases of property and
equipment.................... (4,517,395) (227,568) (40,214) (1,450,467)
Proceeds from sale of
equipment.................... 400,144 416,880 322,193 61,691
----------- ---------- ---------- ----------
Net cash provided by (used
in) investing activities. (4,117,251) 189,312 281,979 (1,388,776)
----------- ---------- ---------- ----------
Cash flows from financing
activities:
Net borrowings (repayment) on
line of credit............... 1,125,000 (125,420) 277,835 (13,356)
Proceeds from long-term debt.. 1,051,227 -- -- 1,367,170
Principal payments on long-
term debt.................... (973,590) (3,051,187) (1,087,873) (587,375)
Increase (decrease) in due to
related party................ 719,699 798,812 319,095 (870,858)
----------- ---------- ---------- ----------
Net cash provided by (used
in) financing activities. 1,922,336 (2,377,795) (490,943) (104,419)
----------- ---------- ---------- ----------
Net change in cash and cash
equivalents................... (161,675) 985,364 874,465 (726,698)
Cash and cash equivalents at
beginning of period........... 250,602 88,927 88,927 1,074,291
----------- ---------- ---------- ----------
Cash and cash equivalents at
end of period................. $ 88,927 1,074,291 963,392 347,593
=========== ========== ========== ==========
Supplemental disclosure of cash
flow information:
Cash paid (received) during the
period for:
Interest.................... $ 472,981 487,296 157,336 76,608
=========== ========== ========== ==========
Income taxes................ $ -- (152,991) -- --
=========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-108
<PAGE>
MPG TRANSCO, LTD.
NOTES TO FINANCIAL STATEMENTS
July 31, 1997 and 1998
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
MPG Transco, Ltd.'s (MPG) primary business is transporting vehicles for
automotive manufacturers and transporting consumer merchandise for major
retail manufacturers. MPG's automotive operations utilize three terminals in
Toledo, Boston and Newark, while the consumer merchandise operation uses a
terminal in Allen Park, Michigan. MPG operates approximately 140 vehicles.
(b) Revenue Recognition
MPG operates as one segment related to the transportation of vehicles and
consumer merchandise for customers.
MPG's revenue is derived from customers who require transportation of
vehicles and consumer merchandise. Transport revenue is recognized upon the
delivery of the vehicles and consumer merchandise to their final destination.
Expenses related to the generation of revenue are recognized as incurred.
(c) Cash and Cash Equivalents
For purposes of the statement of cash flows, MPG considers all highly liquid
debt instruments with original maturities of three months or less to be cash
equivalents.
(d) Property and Equipment
Property and equipment are stated at cost. Depreciation is determined for
financial statement purposes using the straight-line method over the estimated
useful lives of the individual assets or, for leasehold improvements, over the
terms of the related leases if shorter. Accelerated methods of depreciation
have been used for income tax purposes. For financial statement purposes, MPG
provides for depreciation of property and equipment over the following
estimated useful lives.
<TABLE>
<S> <C>
Transportation equipment...................................... 10 years
Furniture and fixtures........................................ 5 years
Office equipment.............................................. 5 years
Automobiles................................................... 5 years
Leasehold improvements........................................ 3-5 years
</TABLE>
(e) Fair Value of Financial Instruments
Due to the short-term nature of various financial instruments and the
current incremental borrowing rates available to MPG on bank loans with
similar terms and maturities, the fair value of MPG's financial instruments
approximates their carrying values.
(f) 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 credit 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 or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
F-109
<PAGE>
MPG TRANSCO, LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(g) Use of Estimates
Management of MPG 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 recurring
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 consist of the following:
<TABLE>
<CAPTION>
July 31,
---------------- October 31,
1997 1998 1998
-------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Prepaid insurance.................................. $235,245 17,609 13,484
Prepaid vehicle registration....................... 77,552 82,185 47,442
Other.............................................. 31,706 58,775 50,927
-------- ------- -------
$344,503 158,569 111,853
======== ======= =======
</TABLE>
(3) Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
July 31,
---------------------- October 31,
1997 1998 1998
----------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Transportation equipment.................... $13,430,048 12,555,659 13,850,320
Office equipment and furniture.............. 186,782 186,782 190,578
Computer equipment.......................... 781,133 897,094 936,670
Automobiles................................. 320,454 235,317 214,543
Leasehold improvements...................... 82,005 104,805 104,805
----------- ---------- ----------
Total....................................... 14,800,422 13,979,657 15,296,916
Less accumulated depreciation and
amortization................................ 3,296,314 4,323,847 4,666,828
----------- ---------- ----------
$11,504,108 9,655,810 10,630,088
=========== ========== ==========
(4) Other Accrued Liabilities
Other accrued liabilities consist of the following:
<CAPTION>
July 31,
---------------------- October 31,
1997 1998 1998
----------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Accrued payroll............................. $ 554,247 237,000 386,000
Accrued bonus............................... -- 212,000 212,000
Accrued vacation............................ 50,000 55,000 55,000
Accrued lease termination................... -- 132,257 88,172
Accrued customer damage claims.............. -- 90,146 49,000
Other....................................... 85,070 194,057 101,648
----------- ---------- ----------
$ 689,317 920,460 891,820
=========== ========== ==========
</TABLE>
F-110
<PAGE>
MPG TRANSCO, LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(5) Indebtedness
Long-term debt consists of the following:
<TABLE>
<CAPTION>
July 31,
------------------ October 31,
1997 1998 1998
---------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Note payable to Associates Commercial
Corporation, payable in monthly installments
of $59,816, including interest at 7.75%,
maturing January 2000. Secured by
transportation equipment...................... $1,577,222 960,087 798,206
Note payable to Michigan National Bank, payable
in monthly installments of $28,023, including
interest at 7.65%, maturing January 2000.
Secured by transportation equipment........... 762,993 475,346 399,665
Note payable to Financial Federal Credit, Inc.,
payable in monthly installments of $18,546,
including interest at 9.25%, maturing July
2000. Secured by transportation equipment..... 565,945 404,325 357,885
Note payable to Concord Commercial Corporation,
payable in monthly installments of $21,016,
including interest at 8.20%, maturing October
1998. Secured by transportation equipment..... 298,649 62,196 --
Note payable to Associates Commercial
Corporation, payable in monthly installments
of $26,601, including interest at 8.00%,
maturing October 1998. Secured by
transportation equipment...................... 402,434 78,751 --
Note payable to Navistar Financial Corporation,
payable in monthly installments of $51,043,
including interest at 8.00%, scheduled to
mature August 1998. Secured by transportation
equipment..................................... 563,629 81,499 35,309
Note payable to Concord Commercial Corporation,
payable in monthly installments of $24,728,
including interest at 8.00%, maturing October
1997. Secured by transportation equipment..... 73,079 -- --
Note payable to NBD Equipment Finance, Inc.,
payable in monthly installments of $9,557,
including interest at 8.57%, scheduled to
mature April 1998. Secured by transportation
equipment..................................... 85,633 -- --
Note payable to Michigan National Bank, payable
in monthly installments of $14,945, including
interest at 8.85%, maturing March 1998.
Secured by transportation equipment........... 115,686 -- --
Note payable to Michigan National Bank, payable
in monthly installments of $11,614, including
interest at 8.85%, maturing August 1997.
Secured by transportation equipment........... 185,924 -- --
Note payable to General Electric Capital
Corporation, payable in monthly installments
of $30,471, including interest at 7.45%,
maturing January 2000. Secured by
transportation equipment...................... 849,010 535,070 453,140
</TABLE>
F-111
<PAGE>
MPG TRANSCO, LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
July 31,
-------------------- October 31,
1997 1998 1998
---------- --------- -----------
(unaudited)
<S> <C> <C> <C>
Note payable to General Electric Capital
Corporation, payable in monthly installments
of $20,082 until October 2001 and $1,521
thereafter, including interest at 6.6%,
maturing July 2003. Secured by
transportation equipment.................... $ -- -- 682,265
Note payable to General Electric Capital
Corporation, payable in monthly installments
of $20,454 until September 2001 and $1,541
thereafter, including interest at 7.5%,
maturing September 2003. Secured by
transportation equipment.................... -- -- 668,732
Various other notes payable secured by
transportation equipment.................... 104,686 --
Various other notes payable secured by
automobile equipment........................ 112,429 48,858 30,725
---------- --------- ---------
Total long-term debt.................... 5,697,319 2,646,132 3,425,927
Less current installments.................... 3,170,821 1,799,544 2,004,499
---------- --------- ---------
Long-term debt, excluding current
installments........................... $2,526,498 846,588 1,421,428
========== ========= =========
</TABLE>
Annual maturities of long-term as of July 31, 1998 are as follows:
<TABLE>
<S> <C>
1999......................................................... $1,799,544
2000......................................................... 846,588
----------
$2,646,132
==========
</TABLE>
(6) Leases
MPG leases its operating facility and other equipment from third parties
under noncancelable operating leases. Rent expense in 1997 and 1998 was
$789,315 and $719,851, respectively.
Future minimum operating lease payments as of July 31, 1998 are:
<TABLE>
<S> <C>
1999........................................................... $ 598,199
2000........................................................... 625,334
2001........................................................... 584,010
2002........................................................... 297,131
2003........................................................... 63,369
----------
Total...................................................... $2,168,043
==========
</TABLE>
F-112
<PAGE>
MPG TRANSCO, LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(7) Income Taxes
Income tax expense (benefit) for the years ended July 31, 1997 and 1998
consists of the following:
<TABLE>
<CAPTION>
1997 1998
--------- -------
<S> <C> <C>
Current:
Federal............................................. $(152,991) 511,665
State............................................... -- 114,000
--------- -------
(152,991) 625,665
Deferred--federal..................................... 192,674 (6,211)
--------- -------
$ 39,683 619,454
========= =======
</TABLE>
The following table reconciles the expected tax expense at the federal
statutory tax rate to the effective tax rate.
<TABLE>
<CAPTION>
Years Ended July
31,
----------------
1997 1998
-------- -------
<S> <C> <C>
Computed expected tax.................................... $ 8,545 523,271
Non-deductible expenses.................................. 31,138 20,943
State income taxes, net of federal tax benefit........... -- 75,240
-------- -------
$ 39,683 619,454
======== =======
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities as of July 31, 1997 and 1998 are presented
below:
<TABLE>
<CAPTION>
1997 1998
---------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts................... $ 34,000 34,000
Accrued expenses not currently deductible......... 67,824 174,225
---------- ---------
Gross deferred tax assets....................... 101,824 208,225
---------- ---------
Deferred tax liabilities--property and equipment,
due to differences in depreciation lives and
methods............................................ 1,360,324 1,460,514
---------- ---------
Net deferred tax liability...................... $1,258,500 1,252,289
========== =========
</TABLE>
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 during the
periods in which those temporary differences become deductible. Management
considers the projected future taxable income and tax planning strategies, as
well as carryback opportunities, in making this assessment. Based upon the
level of historical taxable income, projections for future taxable income and
carryback opportunities over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not that MPG will
realize the benefits of these deductible differences. The amount of the
deferred tax asset considered realizable, however, could be reduced in the
near term if estimates of future taxable income are reduced.
F-113
<PAGE>
MPG TRANSCO, LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(8) Employee Benefits
All employees of MPG are employed by Translesco, a related entity owned by
the same shareholders of MPG, and leased by MPG.
Translesco has a retirement savings plan pursuant to section 401(k) of the
Internal Revenue Code that is available to all employees with at least 90 days
of service to Translesco and who are at least 18 years of age. Eligible
participants may contribute up to 20% of their compensation. MPG does not make
contributions to the plan. The accompanying financial statements include all
payroll and related costs associated with the employees serving MPG.
(9) Related Party Transactions
MPG and Translesco maintain a combined cash management system. As a result
of this arrangement, approximately $96,000 and $895,000 were due to Translesco
at July 31, 1997 and 1998, respectively. For the years ended July 31, 1997 and
1998, average balances due Translesco were less than $100,000 except for a
borrowing in June, 1998, of $1,250,000 and repayments of approximately
$355,000 in July, 1998.
(10) Contingent Liabilities
Various legal claims arise against MPG 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.
(11) Subsequent Events
The stockholders of the Company entered into a definitive agreement on
November 13, 1998 to sell MPG Transco, Ltd. to United Road Services.
(12) Concentration of Business Risks
Sales to the Company's three largest customers, General Motors, Volkswagen
and Mercedes-Benz, amounted to 22%, 10% and 10%, respectively, of total
revenues for the year ended July 31, 1997 and 43%, 14% and 8%, respectively,
for the year ended July 31, 1998. The loss of one or all of these customers
could significantly affect MPG's performance.
F-114
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Pilot Transport, Inc.
We have audited the accompanying balance sheets of Pilot Transport, Inc. as
of December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company'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 Pilot Transport, 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 LLP
Detroit, Michigan
November 12, 1998
F-115
<PAGE>
PILOT TRANSPORT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------- September 30,
1996 1997 1998
---------- --------- -------------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash....................................... $ 13,853 12,413 181,442
Accounts receivable........................ 1,703,812 1,268,230 1,944,997
Prepaid expenses........................... 57,545 76,355 55,428
Contracts for trailer purchases (note 6)... 99,458 194,510 560,471
---------- --------- ---------
Total current assets.................... 1,874,668 1,551,508 2,742,338
Vehicles and equipment, net (note 2)........ 5,071,066 4,283,866 3,680,568
---------- --------- ---------
Total assets............................ $6,945,734 5,835,374 6,422,906
========== ========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Loan payable (note 3)...................... $2,200,000 1,050,000 2,005,000
Accounts payable........................... 164,100 73,276 240,236
Accrued bonus and profit sharing........... -- -- 792,326
Other accrued expenses..................... 160,000 236,852 272,528
---------- --------- ---------
Total current liabilities............... 2,524,100 1,360,128 3,310,090
---------- --------- ---------
Stockholders' equity:
Common stock, $1 par value; 1,000,000
shares authorized, 10,000 shares issued
and outstanding........................... 10,000 10,000 10,000
Retained earnings.......................... 4,411,634 4,465,246 3,102,816
---------- --------- ---------
Total stockholders' equity.............. 4,421,634 4,475,246 3,112,816
---------- --------- ---------
Total liabilities and stockholders'
equity................................. $6,945,734 5,835,374 6,422,906
========== ========= =========
</TABLE>
See accompanying notes to the financial statements.
F-116
<PAGE>
PILOT TRANSPORT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the nine months
For the years ended ended
December 31, September 30,
-------------------------- ------------------------
1996 1997 1997 1998
------------ ------------ ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Transportation revenue... $ 14,381,761 17,118,927 13,135,339 14,405,086
Cost of revenue.......... 9,386,529 10,066,642 7,463,219 8,906,264
------------ ------------ ----------- -----------
Gross profit......... 4,995,232 7,052,285 5,672,120 5,498,822
Selling, general and
administrative expense... 2,920,385 4,009,480 3,149,367 3,090,791
------------ ------------ ----------- -----------
Income from
operations.......... 2,074,847 3,042,805 2,522,753 2,408,031
Other income (expense):
Interest................ (249,378) (167,880) (144,432) (113,612)
Loss on sale of assets.. (48,926) (167,047) (151,709) (31,640)
------------ ------------ ----------- -----------
Income before income
tax................. 1,776,543 2,707,878 2,226,612 2,262,779
Income taxes (note 1).... -- -- -- --
------------ ------------ ----------- -----------
Net income........... $ 1,776,543 2,707,878 2,226,612 2,262,779
============ ============ =========== ===========
</TABLE>
See accompanying notes to the financial statements.
F-117
<PAGE>
PILOT TRANSPORT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Common Retained stockholders'
stock earnings equity
------- ---------- -------------
<S> <C> <C> <C>
Balance at December 31, 1995................. $10,000 3,903,266 3,913,266
Net income--1996............................. -- 1,776,543 1,776,543
Dividends.................................... -- (1,268,175) (1,268,175)
------- ---------- ----------
Balance at December 31, 1996................. 10,000 4,411,634 4,421,634
Net income--1997............................. -- 2,707,878 2,707,878
Dividends.................................... -- (2,654,266) (2,654,266)
------- ---------- ----------
Balance at December 31, 1997................. 10,000 4,465,246 4,475,246
Net income nine months ended September 30,
1998 (unaudited)............................ -- 2,262,779 2,262,779
Dividends (unaudited)........................ -- (3,625,209) (3,625,209)
------- ---------- ----------
Balance at September 30, 1998 (unaudited).... $10,000 3,102,816 3,112,816
======= ========== ==========
</TABLE>
See accompanying notes to the financial statements.
F-118
<PAGE>
PILOT TRANSPORT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December Nine months ended
31, September 30,
---------------------- ----------------------
1996 1997 1997 1998
---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income.................... $1,776,543 2,707,878 2,226,612 2,262,779
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization............... 797,272 815,703 606,964 599,660
Loss on sale of equipment... 48,926 167,047 151,709 31,640
Decrease (increase) in
accounts receivable........ 503,556 435,582 (367,252) (676,767)
Decrease (increase) in
prepaid expenses........... 85,253 (18,810) (26,135) 20,927
Decrease (increase) in
equipment deposits and
other...................... (94,458) (95,052) 12,848 (365,961)
Increase (decrease) in
accounts payable and
accrued expenses........... 96,244 (13,972) 948,292 994,962
---------- ---------- ---------- ----------
Net cash provided by
operations............... 3,213,336 3,998,376 3,553,038 2,867,240
---------- ---------- ---------- ----------
Cash flows from investing
activities:
Purchases of vehicles and
equipment.................... (1,625,686) (905,247) (799,532) (536,703)
Proceeds from sale of
equipment.................... 338,850 709,695 610,695 508,701
---------- ---------- ---------- ----------
Net cash used in investing
activities............... (1,286,836) (195,552) (188,837) (28,002)
---------- ---------- ---------- ----------
Cash flows from financing
activities:
Net borrowings (repayments)
from facility loan........... (675,000) (1,150,000) (700,000) 955,000
Dividends paid................ (1,268,175) (2,654,264) (2,654,264) (3,625,209)
---------- ---------- ---------- ----------
Net cash used in financing
activities............... (1,943,175) (3,804,264) (3,354,264) (2,670,209)
---------- ---------- ---------- ----------
Net increase (decrease) in
cash..................... (16,675) (1,440) 9,937 169,029
Cash at beginning of period.... 30,528 13,853 13,853 12,413
---------- ---------- ---------- ----------
Cash at end of period.......... $ 13,853 12,413 23,790 181,442
---------- ---------- ---------- ----------
Supplemental disclosures:
Interest paid................. $ 249,638 168,019 144,571 100,791
========== ========== ========== ==========
Income taxes paid............. $ -- -- -- --
========== ========== ========== ==========
</TABLE>
See accompanying notes to the financial statements.
F-119
<PAGE>
PILOT TRANSPORT, INC.
NOTES TO FINANCIAL STATEMENTS
Years ended December 31, 1996 and 1997 and the
nine months ended September 30, 1997 and 1998 (unaudited)
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Pilot Transport Inc. (the Company) operates a fleet of automobile carriers
and provides transportation of automobiles nationwide, primarily to the
automotive manufacturers. The Company's corporate headquarters are located in
Brighton, Michigan and it has an office in Tempe, Arizona.
(b) Revenue Recognition
The Company operates one segment related to the transportation of vehicles.
The Company's revenue is derived from customers who require transportation
of vehicles. Transport revenue is recognized upon the delivery of the vehicles
to their final destination. Expenses related to the generation of revenue are
recognized as incurred.
(c) Vehicles and Equipment
Vehicles and equipment are stated at cost. Depreciation is determined for
financial statement purposes using the straight-line method over the estimated
useful lives of the individual assets. Accelerated methods of depreciation
have been used for income tax purposes. For financial statement purposes, the
Company provides for depreciation of vehicles and equipment over the following
estimated useful lives.
<TABLE>
<S> <C>
Transportation equipment......................................... 10 years
Furniture and fixtures........................................... 5 years
Office and warehouse equipment................................... 5 years
Automobiles...................................................... 5 years
</TABLE>
(d) Income Taxes
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Under those provisions, the Company does not pay
Federal corporate income taxes on its taxable income. Instead, the
stockholders are liable for individual Federal and state income taxes on their
respective shares of the Company's taxable income. The State of Michigan has a
tax based primarily on gross sales and the corporation is subject to this tax.
Other states have various corporate taxes not based upon income and the
corporation is subject to these taxes. All state taxes are included in
selling, general and administrative expense.
The Company utilizes accelerated depreciation for transportation equipment
in reporting taxable income to its shareholders. This results in a lower tax
basis for assets than is reported in the accompanying financial statements of
$2,445,469, $2,027,962 and $1,729,441 at December 31, 1996 and 1997 and at
September 30, 1998, respectively.
(e) 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 financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
F-120
<PAGE>
PILOT TRANSPORT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(f) Fair Value of Financial Instruments
Due to the short-term nature of various financial instruments and the
current variable borrowing rates available to the Company on its bank
borrowings, the fair value of the Company's financial instruments approximates
their carrying values.
(g) Interim Financial Statements
The interim financial information included in these financial statements is
unaudited but reflects all adjustments (consisting of only normal recurring
accruals) which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented.
(2) Vehicles and Equipment
Vehicles and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------- September 30,
1996 1997 1998
----------- --------- -------------
<S> <C> <C> <C>
Transportation equipment.................... $ 7,306,993 6,316,499 5,600,964
Automobiles................................. 68,168 68,168 45,586
Office equipment............................ 223,509 270,801 323,033
Warehouse equipment and improvements........ 74,166 74,166 93,516
----------- --------- ---------
7,672,836 6,729,634 6,063,099
Accumulated depreciation.................... 2,601,770 2,445,768 2,382,531
----------- --------- ---------
Net vehicles and equipment................ $ 5,071,066 4,283,866 3,680,568
=========== ========= =========
</TABLE>
(3) Facility Loan Payable
A note payable to Comerica Bank is a Secured Accounts Financing Facility
("Facility") Master Revolving Note with a variable rate (at one-half a
percentage point less than prime rate) and is due on demand. The Facility is
renewed annually. The Company can borrow up to $5,000,000 for working capital
and the purchase of equipment. Advances and required repayments are determined
by a formula which is based upon a percentage of eligible accounts receivable,
the price of new equipment and a predetermined sliding scale of existing
equipment. Collateral for this note is a first lien on all accounts
receivable, vehicles and equipment. In addition, there is a third collateral
position on Michigan real estate owned by the Pilot Partners, LLC (see note
5).
(4) Pension Plan
The Company has a 401(k) profit-sharing plan for substantially all employees
who are over 21 years of age and have six months of service. Contributions are
not required by the Company; however, when made, they are determined as a
percentage of each eligible employee's salary. The Company contributions for
the years ended December 31, 1996 and 1997 and the nine months ended September
30, 1997 and 1998 (unaudited) were $223,106, $250,991, $158,396 and $286,485,
respectively.
(5) Related Party Transactions
The Company has entered into several agreements with various partnerships
owned by the shareholders of Pilot Transport, Inc. Following is a summary of
the significant activities between the Company and the partnerships:
(a) Equipment Leases
The Company leased trailers from three family partnerships. The leases
expired in March 1997 and were not renewed. The Company had the responsibility
to repair, maintain and insure the equipment during the lease
F-121
<PAGE>
PILOT TRANSPORT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
period. The Company paid these partnerships $96,000, $24,000, $24,000 and $0
in lease payments for the years ending December 31, 1996 and 1997 and the nine
months ended September 30, 1997 and 1998 (unaudited), respectively.
(b) Building and Land Lease
The Company leases an office building in Brighton, Michigan and land in
Tempe, Arizona from partnerships owned by the principal shareholders. All
leases require the Company to maintain the facility and insure its contents.
The lease of the land in Tempe, Arizona was terminated in March 1997. The
Brighton property lease expires in March 1999 and requires monthly payments of
$11,400. The Company paid the partnerships $180,000, $147,000, $135,000 and
$102,600 for the years ending December 31, 1996 and 1997 and the nine months
ended September 30, 1997 and 1998 (unaudited), respectively, for rental of
these facilities.
(6) Long-term Leases
The Company has entered into various operating leases for a building and
certain tractors and trailers used in providing transportation services to its
customers. The leases of tractors and trailers are generally over a 49-month
period. Following is a schedule of future minimum rental payments required as
of December 31, 1997 (including related party leases discussed in note 5(b)),
which includes new leases beginning at various dates in 1998 with monthly
payments of $50,650.
<TABLE>
<CAPTION>
Year ending
December 31, Amount
------------ -----------
<S> <C>
1998........................................................ $ 1,104,315
1999........................................................ 1,079,354
2000........................................................ 1,023,666
2001........................................................ 919,071
2002........................................................ 285,190
</TABLE>
Rental expense for the years ended December 31, 1996 and 1997 and the nine
months ended September 30, 1997 and 1998 (unaudited) was $350,281, $483,959,
$332,071 and $775,621, respectively.
The Company purchased six new "closed" trailers at September 30, 1998, for
which the purchase price has been deposited with the vendor as final
modifications are being made. It is anticipated these units will be delivered
and placed into service in the fourth quarter of 1998. Upon delivery of these
trailers, they will be subject to a sale lease-back under which the trailers
will be sold at cost and leased back.
(7) Significant Concentration of Credit Risk
Approximately 65% of the Company's revenues for each of the years ended
December 31, 1996 and 1997 and the nine months ended September 30, 1997 and
1998 were generated from General Motors and its subdivisions. The Company has
entered into a three-year contract with General Motors which expires
January 1, 2001 to transport vehicles at a predetermined fixed fee on select
routes throughout the United States. Additional business is done on other
routes at prevailing transportation rates. At September 30, 1998 and December
31, 1997 and 1996, the accounts receivable from General Motors and its
subdivisions represented approximately 60% of the total.
(8) Subsequent Event
The stockholders of the Company entered into a definitive agreement on
November 5, 1998 to sell Pilot Transport, Inc. to United Road Services.
F-122
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders
E&R Towing & Garage, Inc.
and Subsidiaries:
We have audited the accompanying consolidated balance sheet of E&R Towing &
Garage, Inc. and Subsidiaries (E&R) as of February 28, 1998, and the related
consolidated statements of operations and retained earnings, and cash flows
for the year then ended. These financial statements are the responsibility of
E&R management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides 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 E&R Towing
& Garage, Inc. and Subsidiaries as of February 28, 1998, and the results of
its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Chicago, Illinois
August 7, 1998
F-123
<PAGE>
E&R TOWING & GARAGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
February
28, June 30,
1998 1998
---------- -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................. $ 256,971 $1,083,564
Accounts receivable................................... 334,975 440,565
Due from E.A.R. (note 10)............................. 908,300 446,480
Notes receivable...................................... 57,653 46,402
Due from officers (note 10)........................... 112,450 --
Deferred tax (note 8)................................. 89,833 --
Prepaid expenses...................................... 82,422 64,434
Management fee receivable............................. -- 107,923
Other receivables..................................... 10,274 13,210
---------- ----------
Total current assets.................................... 1,852,878 2,202,578
Property and equipment, net (note 5).................... 2,008,337 1,795,334
Notes receivable........................................ 38,949 31,348
---------- ----------
Total assets............................................ $3,900,164 $4,029,260
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt (note 6)....... $ 468,467 $ 468,467
Accounts payable...................................... 52,914 110,886
Deferred gain on the sale of fixed assets............. 59,105 59,105
Accrued taxes......................................... 297,937 130,349
Accrued payroll....................................... 62,095 62,600
Other accrued expenses................................ 45,501 15,339
---------- ----------
Total current liabilities............................... 986,019 846,746
Long-term liabilities:
Long-term debt, excluding current installments (note
6)................................................... 481,179 322,590
Deferred gain on the sale of fixed assets............. 36,880 17,179
Deferred tax (note 8)................................. 205,303 231,541
---------- ----------
Total liabilities....................................... 1,709,381 1,418,056
---------- ----------
Stockholders' equity:
Common stock, no par value, stated value of $1,000.
Authorized, issued, and outstanding 1,000 shares in
1998................................................. 1,000 1,000
Additional paid-in capital............................ 159,273 159,273
Retained earnings..................................... 2,030,510 2,450,931
---------- ----------
Total stockholders' equity.............................. 2,190,783 2,611,204
---------- ----------
Total liabilities and stockholders' equity.............. $3,900,164 $4,029,260
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-124
<PAGE>
E&R TOWING & GARAGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Year Four-months Four-months
ended ended ended
February 28, June 30, June 30,
1998 1997 1998
------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Net revenue............................... $8,527,599 $2,766,519 $2,928,821
Cost of revenue........................... 5,193,019 1,465,810 1,645,115
---------- ---------- ----------
Gross profit.............................. 3,334,580 1,300,709 1,283,706
Selling, general, and administrative
expenses................................. 3,496,981 746,337 898,900
Management fee from affiliate (note 10)... (646,378) (215,460) (237,200)
---------- ---------- ----------
Income from operations.................... 483,977 769,832 622,006
---------- ---------- ----------
Other income (expense):
Other................................... 63 3,851 1,213
Interest income......................... 48,373 520 42,761
Interest expense........................ (113,944) (26,432) (25,260)
Gain on sale of assets.................. 62,405 1,500 19,701
---------- ---------- ----------
Income before income taxes................ 480,874 749,271 660,421
Income tax expense (note 8)............... (187,539) (275,000) (240,000)
---------- ---------- ----------
Net income................................ 293,335 474,271 420,421
Retained earnings at beginning of period.. 1,737,175 1,737,175 2,030,510
---------- ---------- ----------
Retained earnings at end of period........ $2,030,510 $2,211,446 $2,450,931
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-125
<PAGE>
E&R TOWING & GARAGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Four-months
Year ended ended June 30
February 28, -------------------
1998 1997 1998
------------ -------- ---------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $293,335 474,271 420,421
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................... 644,618 209,580 224,709
Gains from sale of property and equipment.. (62,405) (1,500) (19,701)
Deferred income taxes...................... 115,470 115,470 116,071
Changes in operating assets and
liabilities:
(Increase) decrease in accounts
receivable............................... (389,762) (310,786) 356,230
(Increase) decrease in notes receivable... (96,601) -- 18,852
Decrease in due from officers............. 4,000 20,000 112,450
(Increase) decrease in prepaid expenses... (14,022) 15,558 17,988
Increase in management fee receivable..... -- (108,675) (107,923)
Decrease (increase) in other receivables.. 10,644 (3,542) (2,936)
Increase in accounts payable.............. 20,703 56,510 57,972
Increase in accrued payroll............... 4,129 634 505
Increase (decrease) in other accrued
expenses................................. 7,833 27,152 (30,162)
Increase (decrease) in income taxes
payable.................................. 182,240 50,037 (167,588)
-------- -------- ---------
Net cash provided by operating activities.... 720,182 544,709 996,888
-------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment......... (661,312) (5,780) (11,706)
Proceeds from sale of property and
equipment.................................. 163,711 1,500 --
Proceeds from sale of subsidiary............ 293,006 -- --
-------- -------- ---------
Net cash used in investing activities........ (204,595) (4,280) (11,706)
-------- -------- ---------
Cash flows from financing activities:
Net decrease in borrowings under line of
credit..................................... (250,000) (250,000) --
Principal payments on long-term debt........ (622,713) (206,412) (158,589)
Additional borrowings on long-term debt..... 544,607 -- --
-------- -------- ---------
Net cash used in financing activities........ (328,106) (456,412) (158,589)
-------- -------- ---------
Net increase in cash and cash equivalents.... 187,481 84,017 826,593
Cash and cash equivalents at beginning of
period...................................... 69,490 69,490 256,971
-------- -------- ---------
Cash and cash equivalents at end of period... $256,971 153,507 1,083,564
======== ======== =========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest................................... $113,944 26,432 25,261
Income taxes............................... 41,650 14,920 62,165
</TABLE>
See accompanying notes to consolidated financial statements.
F-126
<PAGE>
E&R TOWING & GARAGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 1998
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
E&R Towing & Garage, Inc. and its two wholly owned subsidiaries, E&R Auto,
Inc. and E&R Transport, Inc., (collectively referred to herein as E&R or the
Company) were founded in 1978, 1988, and 1989, respectively. E&R also had a
55% owned subsidiary which was sold during February, 1998. E&R's primary
business is towing vehicles for commercial entities. E&R Towing & Garage, Inc.
(Towing) and E&R Auto, Inc. (Auto) operate primarily in Chicago and Chicago
suburbs. E&R Transport, Inc. (Transport) operates primarily in New Jersey. E&R
owns and operates approximately 70 vehicles.
(b) Principles of Consolidation
All intercompany transactions and balances have been eliminated in
consolidation. In the opinion of management, the financial statements include
all costs of doing business.
(c) Revenue Recognition
E&R's revenue is derived from customers who require a towing service.
Revenue is recognized at the completion of each towing engagement. Expenses
related to the generation of revenue are recognized as incurred.
(d) Property and Equipment
Property and equipment are stated at cost. Depreciation is determined for
financial statement purposes using the straight-line method over the estimated
useful lives of the individual assets or, for leasehold improvements, over the
terms of the related leases, if shorter. Accelerated methods of depreciation
have been used for income tax purposes. For financial statement purposes, E&R
provides for depreciation of property and equipment over the following
estimated useful lives:
<TABLE>
<S> <C>
Transportation and towing equipment............................ 5 years
Leasehold improvements......................................... 5 years
Furniture and fixtures......................................... 7 years
Computers and communications equipment......................... 5-7 years
</TABLE>
(e) Fair Value of Financial Instruments
Due to the short-term nature of various financial instruments and the
current incremental borrowing rates available to E&R on bank loans with
similar terms and maturities, the fair value of E&R's financial instruments
approximates their carrying values.
(f) 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 credit 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 or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
F-127
<PAGE>
E&R TOWING & GARAGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(g) Use of Estimates
Management of E&R 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) Unaudited Interim Financial Statements
In the opinion of the Company's management, the interim financial statements
as of June 30, 1998 and for the four month periods ended June 30, 1997 and
1998 include all adjustments, consisting of normal recurring accruals, that
are necessary for the fair presentation of the Company's financial position at
June 30, 1998 and its results of operations and cash flows for the interim
periods presented. The results for the four months ended June 30, 1998 are not
necessarily indicative of the results expected for the entire year.
(2) Cash and Cash Equivalents
Cash and cash equivalents of $256,971 at February 28, 1998 consist of bank
accounts and short-term investments with an initial term of less than three
months. For purposes of the statement of cash flows, E&R considers all highly
liquid debt instruments with original maturities of three months or less to be
cash equivalents.
(3) Investment in S.U.P.
The Company had a 55% owned subsidiary, Summit-U-Pick-A-Part (S.U.P.), a
junkyard. During the year ended February 28, 1998 the Company sold its
ownership in this subsidiary for the amount of its investment. No gain or loss
was incurred upon the sale. At February 28, 1998, the carrying value of this
investment was $-0-.
(4) Allowance for Doubtful Accounts
During the year ended February 28, 1998, E&R had no write-offs of
uncollectible accounts receivable. E&R has not recorded a provision for the
allowance of doubtful accounts during the year because management believes all
amounts are fully collectible.
(5) Property and Equipment
Property and equipment at February 28, 1998 consist of the following:
<TABLE>
<S> <C>
Transportation and towing equipment.............................. $3,955,717
Leasehold improvements........................................... 188,902
Furniture and fixtures........................................... 114,913
Computers and communications equipment........................... 225,830
----------
Total............................................................ 4,485,362
Less accumulated depreciation.................................... 2,477,025
----------
$2,008,337
==========
</TABLE>
Depreciation of property and equipment in the year ended February 28, 1998
totaled $644,618.
F-128
<PAGE>
E&R TOWING & GARAGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Indebtedness
E&R's long-term debt consists of the following at February 28, 1998:
<TABLE>
<S> <C>
Notes payable to Grand National Bank, payable in aggregate monthly
installments of $33,280, including interest ranging from 9.25% to
9.75%, maturing between December 5, 1998 and December 9, 2000.
Secured by the equipment of the Company.......................... $623,328
Notes payable to South Holland Bank, payable in aggregate monthly
installments of $7,617, including interest at 8.98%, maturing
between December 15, 2000 and December 20, 2001. Secured by the
equipment of the Company......................................... 231,936
Note payable to The Bank of New York, payable in monthly
installments of $4,947, including interest at 9.5%, maturing
December 10, 1999. Secured by equipment of the Company........... 94,382
--------
Total long-term debt.............................................. 949,646
Less installments due within one year............................ 468,467
--------
Long-term debt, excluding current installments.................... $481,179
========
</TABLE>
Annual maturities of long-term debt for the next three years are as follows:
<TABLE>
<S> <C>
February 28:
1999.............................................................. $468,467
2000.............................................................. 329,468
2001.............................................................. 151,711
--------
$949,646
========
</TABLE>
(7) Leases
E&R leases three buildings and one plot of land used for its separate
operations under annual lease agreements. These leases are classified as
operating leases. The agreements provide for monthly rental payments totaling
$13,673, of which $9,100 of these monthly rental payments are to related
parties. E&R is responsible for all operating costs related to the properties.
Total rent expense for the year ended February 28, 1998 was $164,072.
(8) Income Taxes
Income tax expense for the year ended February 28, 1998 consists of:
<TABLE>
<S> <C>
Current:
Federal........................................................... $ 55,569
State............................................................. 16,500
--------
72,069
Deferred............................................................ 115,470
--------
$187,539
========
</TABLE>
F-129
<PAGE>
E&R TOWING & GARAGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The differences between the U.S. Federal statutory income tax rate and the
Company's effective rate are:
<TABLE>
<S> <C>
U.S. Federal statutory income tax rate................................ 35.00%
State income taxes, net of Federal benefit............................ 4.50
Nondeductible expenses................................................ (0.50)
-----
39.00%
=====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Accrued liabilities not yet deductible for tax purposes........ $ 105,023
---------
Total deferred tax assets........................................ 105,023
Deferred tax liabilities:
Property, plant, and equipment, due primarily to accelerated
depreciation.................................................. (205,303)
Notes receivable............................................... (15,190)
---------
Total deferred tax liabilities................................... (220,493)
---------
Net deferred tax liability....................................... $(115,470)
=========
</TABLE>
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 during the
periods in which those temporary differences become deductible. Management
considers the projected future taxable income and tax planning strategies, as
well as carryback opportunities, in making this assessment. Based upon the
level of historical taxable income, projections for future taxable income and
carryback opportunities over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not E&R will realize
the benefits of these deductible differences. Therefore, no valuation
allowance has been recorded against the deferred tax assets at February 28,
1998. The amount of the deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future income are reduced.
(9) Concentration of Business Risks
Approximately $4.5 million or 53% of the Company's revenues were derived
from a customer in the auto pound management industry who is also an
affiliated company. Transactions with this company are discussed in note 10.
Approximately $1.6 million or 19% of the Company's revenues were derived from
a customer in the salvage industry.
(10) Related-party Transactions
The Company and Environmental Auto Removal, Inc. (EAR) are related parties
due to the majority shareholder of the Company holding an interest in EAR.
Both Auto and Towing provide towing services for EAR and all revenues for Auto
are derived from services provided to EAR. The cost of these services amounted
to $2,879,475 for the year ended February 28, 1998. Accounts receivable from
EAR totaled $908,300 at February 28, 1998.
The Company also receives management fees from EAR for the performance of
various administrative and managerial services. For the year ended February
28, 1998, the fees received by the Company for these services totaled $646,378
and are included in other income in the statement of operations and retained
earnings.
F-130
<PAGE>
E&R TOWING & GARAGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the year ended February 28, 1998, the Company paid approximately
$109,200 in rent expense under a lease agreement for buildings owned by the
majority shareholder of the Company. These agreements extend to October 1998
and are classified as operating leases.
At February 28, 1998, the Company had net accounts receivable from two of
the officers of the Company. These amounts are classified as current assets on
the balance sheet and totaled $112,450 at February 28, 1998. The accounts bear
interest at 10%. Due to the timing of activity in this account, only
immaterial amounts of interest income were generated throughout the year ended
February 28, 1998.
(11) Subsequent Event
During 1998, the stockholders entered into a definitive agreement to sell
E&R to United Road Services, Inc. The anticipated selling price of E&R exceeds
its net assets as of February 28, 1998.
(12) Contingent Liabilities
Various legal claims arise against the Company during the normal course of
business. In the opinion of management, liabilities, if any, arising from
legal proceedings would not have a material effect on the financial position
and results of operations of the Company.
F-131
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders
Environmental Auto Removal, Inc.:
We have audited the accompanying balance sheet of Environmental Auto
Removal, Inc. (EAR) as of December 31, 1997, and the related statements of
operations and retained earnings, and cash flows for the year then ended.
These financial statements are the responsibility of EAR's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
As discussed in note 7, the Company is party to an agreement with the City
of Chicago whereby the Company provides auto pound management and towing
services for the City of Chicago. In addition, the Company derives revenue
from the sale of vehicles purchased from the City of Chicago in accordance
with the same agreement. All of the Company's revenues are derived in
accordance with this agreement and 96% of EAR's trade receivable are due from
this one customer at December 31, 1997.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Environmental Auto
Removal, Inc. as of December 31, 1997, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Chicago, Illinois
August 7, 1998
F-132
<PAGE>
ENVIRONMENTAL AUTO REMOVAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................ $1,198,311 1,143,020
Accounts receivable.................................. 1,286,916 1,250,329
Inventory............................................ 54,560 78,573
Other receivables.................................... -- 2,253
---------- ---------
Total current assets.................................. 2,539,787 2,474,175
Property and equipment, net (note 3).................. 973,498 921,366
Investment in S.U.P................................... 28,174 --
Due from officers/shareholders (note 6)............... 80,000 805,235
---------- ---------
Total assets.......................................... $3,621,459 4,200,776
========== =========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt (note 4)...... $ 278,969 211,452
Accounts payable..................................... 1,711,036 1,765,094
Accounts payable to E&R (note 8)..................... 956,160 460,130
Accrued taxes and other accruals..................... 77,680 48,314
Accrued management fee to affiliate (note 8)......... -- 161,869
---------- ---------
Total current liabilities............................. 3,023,845 2,646,859
Long-term liabilities:
Due to officers/shareholders (note 6)................ -- 207,550
Long-term debt, excluding current installments (note
4).................................................. 110,129 39,328
---------- ---------
Total liabilities..................................... 3,133,974 2,893,737
---------- ---------
Stockholders' equity:
Common stock, no par value, stated value of $1,000.
Authorized, issued, and outstanding 1,000 shares in
1998 and 1997....................................... 1,000 1,000
Retained earnings.................................... 486,485 1,306,039
---------- ---------
Total stockholders' equity............................ 487,485 1,307,039
---------- ---------
Total liabilities and stockholders' equity............ $3,621,459 4,200,776
========== =========
</TABLE>
See accompanying notes to financial statements.
F-133
<PAGE>
ENVIRONMENTAL AUTO REMOVAL, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
Year
ended Six-months
December ended June 30,
31, --------------------
1997 1997 1998
----------- --------- ---------
(Unaudited)
<S> <C> <C> <C>
Net revenue................................. $14,104,317 6,147,351 8,539,488
Cost of revenue (note 8).................... 10,889,245 5,793,574 6,022,163
----------- --------- ---------
Gross profit................................ 3,215,072 353,777 2,517,325
Selling, general, and administrative
expenses................................... 1,924,209 704,806 1,382,085
Management fee to affiliate (note 8)........ 747,262 373,630 358,000
----------- --------- ---------
Income (loss) from operations............... 543,601 (724,659) 777,240
----------- --------- ---------
Other income (expense):
Other...................................... (6,231) 1,510 1,557
Interest income............................ 41,415 6,220 51,470
Interest expense........................... (27,344) (11,559) (7,013)
Gain on sale of assets..................... 12,287 -- 13,000
----------- --------- ---------
Income (loss) before income taxes........... 563,728 (728,488) 836,254
Income tax expense.......................... (9,597) -- (16,700)
----------- --------- ---------
Net income (loss)........................... 554,131 (728,488) 819,554
Retained earnings at beginning of period.... 114,944 114,944 486,485
Dividends paid.............................. (182,590) (182,590) --
----------- --------- ---------
Retained earnings (deficit) at end of
period..................................... $ 486,485 (796,134) 1,306,039
=========== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-134
<PAGE>
ENVIRONMENTAL AUTO REMOVAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Six-months
December ended June 30
31, -------------------
1997 1997 1998
----------- -------- ---------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... $ 554,131 (728,488) 819,554
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation............................... 129,210 58,847 91,082
Realized gains from sale of property and
equipment................................. (12,287) -- (13,000)
Changes in operating assets and
liabilities:
(Increase) decrease in accounts
receivable............................... (1,274,141) (45,000) 36,587
(Increase) decrease in inventory.......... (33,842) 7,490 (24,013)
Increase in other receivables............. -- -- (2,253)
Increase (decrease) in accounts payable... 1,237,214 307,871 (441,972)
Increase (decrease) in accrued expenses... 28,794 (16,046) (54,807)
Increase (decrease) in income taxes
payable.................................. 14,023 (2,490) 25,441
Increase in accrued management fee........ -- 227,632 161,869
----------- -------- ---------
Net cash provided by (used in) operating
activities.................................. 643,102 (190,184) 598,488
----------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment......... (449,284) (46,856) (38,950)
Proceeds from sale of property and
equipment.................................. 80,000 -- 13,000
Cash loaned to affiliate.................... 65,000 (65,000) --
Proceeds from sale of affiliate............. 47,654 -- 28,174
----------- -------- ---------
Net cash (used in) provided by investing
activities.................................. (256,630) (111,856) 2,224
----------- -------- ---------
Cash flows from financing activities:
Principal payments on long-term debt........ (189,319) (95,120) (138,318)
Additional borrowings on long-term debt..... 180,375 -- --
Decrease (increase) in due from
officers/shareholders...................... 120,000 -- (725,235)
Increase in due to officers/shareholders.... -- 450,000 207,550
----------- -------- ---------
Net cash provided by (used in) financing
activities.................................. 111,056 354,880 (656,003)
----------- -------- ---------
Net increase (decrease) in cash and cash
equivalents................................. 497,528 52,840 (55,291)
Cash and cash equivalents at beginning of
period...................................... 700,783 700,780 1,198,311
----------- -------- ---------
Cash and cash equivalents at end of period... $ 1,198,311 753,620 1,143,020
=========== ======== =========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest................................... $ 27,344 11,559 7,013
Income taxes............................... $ 9,597 -- --
</TABLE>
See accompanying notes to financial statements.
F-135
<PAGE>
ENVIRONMENTAL AUTO REMOVAL, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Environmental Auto Removal, Inc. (the Company or EAR) was founded in 1989.
EAR's primary business is the management of the towing services and auto
pounds for the city of Chicago (City) under a long term contract. In addition,
EAR purchases vehicles from the City for resale at auto auctions or for scrap
value. EAR operates primarily in Chicago.
(b) Revenue Recognition
EAR operates as one segment and revenue is derived from the collection of
towing revenues from the City and the sale of vehicles at auto auctions or for
scrap value. All revenue is recognized upon completion of the towing
engagement or sale of the vehicle at auction or for scrap. Expenses related to
the generation of revenue are recognized as incurred. In the opinion of
management, the financial statements include all costs of doing business.
(c) Property and Equipment
Property and equipment are stated at cost. Depreciation is determined for
financial statement purposes using the straight-line method over the estimated
useful lives of the individual assets or, for leasehold improvements, over the
terms of the related leases, if shorter. Accelerated methods of depreciation
have been used for income tax purposes. For financial statement purposes, EAR
provides for depreciation of property and equipment over the following
estimated useful lives:
<TABLE>
<S> <C>
Automobiles and equipment.......................................... 5-7 years
Furniture and fixtures............................................. 7 years
Computers and communications equipment............................. 5-7 years
</TABLE>
(d) Inventory
Inventory consists of vehicles purchased for resale at auto auctions or for
scrap value. Inventories are stated at the lower of cost or market.
(e) Fair Value of Financial Instruments
Due to the short-term nature of various financial instruments and the
current incremental borrowing rates available to EAR on bank loans with
similar terms and maturities, the fair value of EAR's financial instruments
approximates their carrying values.
(f) Income Taxes
The Company is an S Corporation under the provisions of the Internal Revenue
Code and, accordingly, the shareholders of the Company are responsible for
Federal tax liabilities. The Company remains liable for a portion of state
income taxes. Under the provisions of the Illinois replacement tax law, S
Corporations are assessed a 1.5% surtax at the corporate level and earnings or
losses flow through to the shareholder to be taxed at the individual level.
Accordingly, only this Illinois replacement tax liability has been recorded in
the financial statements.
Differences in the tax basis and financial statement carrying amounts result
primarily from accounts receivable; property, plant, and equipment; and
accrued liabilities not yet deductible for tax purposes.
F-136
<PAGE>
ENVIRONMENTAL AUTO REMOVAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(g) Use of Estimates
Management of EAR 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) Unaudited Interim Financial Statements
In the opinion of the Company's management the interim financial statements
as of June 30, 1998 and for the six month periods ended June 30, 1997 and 1998
include all adjustments, consisting of normal recurring accruals, that are
necessary for the fair presentation of the Company's financial position at
June 30, 1998 and its results of operations and cash flows for the interim
periods presented. The results for the six months ended June 30, 1998 are not
necessarily indicative of the results expected for the entire year.
(2) Cash and Cash Equivalents
Cash and cash equivalents of $1,198,311 at December 31, 1998 consist of bank
accounts and short-term investments with an initial term of less than three
months. For purposes of the statement of cash flows, EAR considers all highly
liquid debt instruments with original maturities of three months or less to be
cash equivalents.
(3) Allowance for Doubtful Accounts
During the year ended December 31, 1997, EAR had no write-offs of
uncollectible trade accounts receivable. EAR has not recorded a provision for
the allowance of doubtful accounts because management believes all amounts are
fully collectible.
(4) Property and Equipment
Property and equipment at December 31, 1997 consist of the following:
<TABLE>
<S> <C>
Automotive and equipment......................................... $1,093,579
Furniture and fixtures......................................... 43,080
Computer and communications equipment.......................... 238,450
----------
Total.......................................................... 1,375,109
Less accumulated depreciation.................................. 401,611
----------
$ 973,498
==========
</TABLE>
Depreciation of property and equipment in 1997 totaled $129,210.
(5) Investment in S.U.P.
The Company owns a 27% interest in Summit-U-Pick-A-Part (S.U.P.), a junk
yard. This investment was sold in part during December 1997 with the remainder
being sold in February 1998. The sale resulted in a loss of approximately
$8,800 which was recorded in other expense during the year ended December 31,
1997. At December 31, 1997, the carrying value of this investment was $28,174,
all of which was recovered by the Company through cash proceeds received
during February of 1998.
F-137
<PAGE>
ENVIRONMENTAL AUTO REMOVAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(6) Indebtedness
EAR's long-term debt consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Note payable to Associates Commercial Corporation, payable in monthly
installments of $7,874, including interest at 4.56%, maturing
December 31, 1999. Secured by the equipment of the Company........... $180,375
Note payable to Associates Commercial Corporation, payable in monthly
installments of $4,634, including interest at 4.79%, maturing
December 31, 1998. Secured by the equipment of the Company........... 54,223
Note payable to Associates Commercial Corporation, payable in monthly
installments of $4,530, including interest at 4.73%, maturing
December 31, 1998. Secured by the equipment of the Company........... 53,010
Note payable to Associates Commercial Corporation, payable in monthly
installments of $4,228, including interest at 4.68%, maturing
December 31, 1998. Secured by the equipment of the Company........... 49,470
Note payable to Associates Commercial Corporation, payable in monthly
installments of $2,172, including interest at 8.68%, maturing October
31, 1999. Secured by the equipment of the Company.................... 42,287
Note payable to South Holland Bank, payable in monthly installments of
$782, including interest at 7.9%, maturing January 11, 1999. Secured
by an automobile of the Company...................................... 9,733
--------
Total long-term debt.................................................. 389,098
Less installments due within one year................................. 278,969
--------
Long-term debt, excluding current installments........................ $110,129
========
</TABLE>
Notes payable to Associates Commercial Corporation were arranged with the
acquisition of equipment. The impact of adjusting the stated interest rate on
these notes to the Company's incremental borrowing rate is not material to the
results of operations or to the balance sheet.
Annual maturities of long-term debt for the next two years are as follows:
<TABLE>
<S> <C>
December 31:
1998................................................................. $278,969
1999................................................................. 110,129
--------
$389,098
========
</TABLE>
Line of Credit
The Company has available a secured, revolving line of credit totaling
$500,000. Advances are at the discretion of the bank and interest is charged
at the rate of Prime + 1%. The line of credit is secured by collateral which
includes all inventory, equipment, and fixtures of the Company. Any
outstanding principal plus all accrued, unpaid interest will be due on January
11, 1999. No amounts were outstanding at December 31, 1997.
(7) Concentration of Business Risks
Effective July 31, 1997, the Company entered into an agreement with the City
of Chicago for auto pound management and towing services. This agreement
extends for a period of 36 months. During this period, the agreement specifies
the amount of revenue to be collected by the Company for each vehicle towed as
well as the cost amount for each vehicle purchased by the Company from the
City.
F-138
<PAGE>
ENVIRONMENTAL AUTO REMOVAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company derived 76% of its revenue during 1997 from services performed
under this long-term contract. The remaining 24% of revenue was derived from
the sale of vehicles purchased from the City of Chicago in accordance with the
same agreement. Loss of this contract would have a material negative effect on
the Company.
At December 31, 1997, EAR had accounts receivable from and accounts payable
to the City in the amount of $1,233,996 and $1,340,710, respectively.
(8) Related-party Transactions
EAR and E&R Towing, Inc. (E&R) are related parties due to the majority
shareholder of E&R holding shares in EAR. E&R provides towing services for
EAR. The cost of these services amounted to $2,821,345 for the year ended
December 31, 1997. Accounts payable to E&R totaled $956,160 at December 31,
1997.
The Company also pays management fees for the performance of various
administrative and managerial services. For the year ended December 31, 1997,
the fees paid by the Company for these services totaled $747,262 and are
included in other income in the statement of operations and retained earnings.
At December 31, 1997, the Company had net accounts receivable from two of
the officers of the Company. These amounts are classified as current assets on
the balance sheet and totaled $80,000 at December 31, 1997. These accounts
bear interest at 12%. Due to the timing of activity in this account, only
immaterial amounts of interest income were generated throughout 1997.
In the opinion of management, the financial statements at December 31, 1997
include all costs of doing business.
(9) Subsequent Event
During August 1998, the stockholders entered into a definitive agreement to
sell EAR to United Road Services, Inc. Consideration for the sale was paid
through a combination of cash and common stock of United Road Services, Inc.
The anticipated selling price of EAR exceeds its net assets as of December 31,
1997.
(10) Contingent Liabilities
Various legal claims arise against the Company during the normal course of
business. In the opinion of management, liabilities, if any, arising from
legal proceedings would not have a material effect on the financial position
and results of operations of the Company.
F-139
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors:
We have audited the accompanying balance sheet of Neil's Used Truck & Car
Sales, Incorporated, as of December 31, 1997, and the related statements of
operations, stockholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit 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 audit provides 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 Neil's Used Truck & Car
Sales, Incorporated as of December 31, 1997, and the results of its operations
and its cash flows for the year then ended in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
July 2, 1998, except for note 8,
which is as of July 14, 1998
F-140
<PAGE>
NEIL'S USED TRUCK & CAR SALES, INCORPORATED
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................ $ 32,236 $ 356,404
Trade accounts receivable, net of allowance for
doubtful accounts of $13,000........................ 774,618 933,281
Accounts receivable from employees and related party. 13,140 14,899
Drivers advances..................................... 21,420 29,417
Inventory............................................ 175,661 190,954
---------- ----------
Total current assets.............................. 1,017,075 1,524,955
---------- ----------
Property and equipment, net (note 2).................. 1,521,305 1,654,310
---------- ----------
$2,538,380 $3,179,265
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Note payable to stockholder.......................... $ 20,417 $ --
Current installments of long-term debt (note 4)...... 152,826 133,482
Current installments of obligations under capital
leases (note 5)..................................... 163,684 163,684
Accounts payable..................................... 126,753 85,381
Accrued payroll and related costs.................... 293,386 419,456
Other current liabilities (note 3)................... 62,665 60,394
---------- ----------
Total current liabilities......................... 819,731 862,397
Long-term debt, excluding current installments (note
4)................................................... 578,461 660,824
Obligations under capital leases, excluding current
installments (note 5)................................ 256,482 176,341
---------- ----------
Total liabilities................................. 1,654,674 1,699,562
---------- ----------
Stockholders' equity:
Common stock, no par value. Authorized 50,000 shares;
issued and outstanding 10,000 shares in 1997........ 1,000 1,000
Retained earnings.................................... 882,706 1,478,703
---------- ----------
Total stockholders' equity........................ 883,706 1,479,703
---------- ----------
Commitments and contingencies (notes 5, 7 and 8)
$2,538,380 $3,179,265
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-141
<PAGE>
NEIL'S USED TRUCK & CAR SALES, INCORPORATED
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six-months
Year ended ended June 30 ,
December 31, ---------------------
1997 1997 1998
------------ ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Net revenue................................. $9,552,971 $4,631,559 $5,891,071
Cost of revenue............................. 8,246,207 3,931,638 4,813,249
---------- ---------- ----------
Gross profit.............................. 1,306,764 699,921 1,077,822
Selling, general, and administrative
expenses................................... 789,663 387,372 375,249
---------- ---------- ----------
Income from operations...................... 517,101 312,549 702,573
Interest expense............................ 70,590 41,449 46,576
---------- ---------- ----------
Net income................................ $ 446,511 $ 271,100 $ 655,997
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-142
<PAGE>
NEIL'S USED TRUCK & CAR SALES, INCORPORATED
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
stock-
Common Retained holder's
stock earnings equity
------ ---------- ----------
<S> <C> <C> <C>
Balances at December 31, 1996................... $1,000 $ 531,475 $ 532,475
Net income...................................... -- 446,511 446,511
Owners' distributions........................... -- (95,280) (95,280)
------ ---------- ----------
Balances at December 31, 1997................... 1,000 882,706 883,706
Net income--six-months ended June 30, 1998
(unaudited).................................... -- 655,997 655,997
Distribution to stockholders--six-months ended
June 30, 1998 (unaudited)...................... -- (60,000) (60,000)
------ ---------- ----------
Balance at June 30, 1998 (unaudited)............ $1,000 $1,478,703 $1,479,703
====== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-143
<PAGE>
NEIL'S USED TRUCK & CAR SALES, INCORPORATED
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Six-months ended
December 31, June 30,
------------ --------------------
1997 1997 1998
------------ --------- ---------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................. $ 446,511 $ 271,100 $ 655,997
Adjustments to reconcile net income to net
cash provided by
operating activities:
Depreciation.............................. 126,639 59,024 99,470
Change in operating assets and
liabilities:
Trade accounts receivable................ (197,304) (100,904) (158,663)
Accounts receivable from employees....... (150) (200) 1,287
Accounts receivable from related parties. 9,155 19,078 (3,046)
Drivers advances......................... 3,304 (5,150) (7,997)
Inventory................................ (7,320) (19,286) (15,292)
Accounts payable......................... 55,237 24,483 (41,372)
Accrued payroll and related costs........ 94,938 31,387 126,070
Other current liabilities................ (6,488) (11,999) (2,272)
--------- --------- ---------
Net cash provided by operating
activities............................. 524,522 267,533 654,182
--------- --------- ---------
Cash flows used in investing activity--
purchases of property and equipment........ (761,445) (157,794) (232,475)
Cash flows from financing activities:
Proceeds from issuance of long-term debt... 702,999 150,000 135,552
Owners' distributions...................... (95,280) (43,280) (60,000)
Principal payments on long-term debt....... (188,443) (152,381) (92,950)
Principal payments on obligations under
capital leases............................ (150,618) (64,079) (80,141)
--------- --------- ---------
Net cash provided by (used in) financing
activities............................. 268,658 (109,740) (97,539)
--------- --------- ---------
Net increase (decrease) in cash......... 31,735 (1) 324,168
Cash and cash equivalents at beginning of
period..................................... 501 $ 501 32,236
--------- --------- ---------
Cash and cash equivalents at end of period.. $ 32,236 $ 500 $ 356,404
========= ========= =========
Supplemental Disclosure of Cash Flow
Information
Cash paid during the period for interest.... $ 75,051 $ 38,424 $48,621
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-144
<PAGE>
NEIL'S USED TRUCK & CAR SALES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Neil's Used Truck & Car Sales, Incorporated, dba Neil's Auto Transport, (the
Company) was founded in 1993. The Company's primary business is transporting
vehicles for auto auctions and auto dealers, throughout the continental United
States. The Company has one facility located in Utah. It owns a fleet of
approximately 24 trucks and trailers, and contracts with various third party
owner/operators.
(b) Income Taxes
Income taxes are not reflected in the financial statements since the Company
has elected to be treated as a small business corporation under Subchapter S
of the Internal Revenue Code. Accordingly, the tax effects of the Company's
operations accrue directly to the shareholders.
(c) Cash and Cash Equivalents
Cash and cash equivalents of $32,236 at December 31, 1997, consist of cash
on deposit in bank accounts. For purposes of the statement of cash flows, the
Company considers all highly liquid investment instruments with original
maturities of three months or less to be cash equivalents.
(d) Property and Equipment
Property and equipment are stated at cost. Plant and equipment under capital
leases are stated at the present value of minimum lease payments. Depreciation
is determined for financial statement purposes using the straight-line method
over the estimated useful lives of the individual assets. For financial
statement purposes, the Company provides for depreciation of property and
equipment over the following estimated useful lives.
<TABLE>
<S> <C>
Transportation equipment......................................... 5--10 years
Furniture and fixtures........................................... 5--7 years
Equipment........................................................ 7 years
</TABLE>
(e) Inventories
Inventories are stated at lower of cost or market. Cost is determined using
the first-in, first-out method for all inventories.
(f) Income Taxes
The Company has elected to be taxed under the Subchapter S provisions of the
Internal Revenue Code. Accordingly, tax liabilities of the Company are the
direct responsibility of the stockholders, and no provision for income taxes
is reflected in the accompanying statement of operations. Due to differences,
primarily in the timing of the recognition of depreciation expense for book
purposes versus tax purposes, the book bases in the reported net assets in the
accompanying balance sheet exceeds the tax bases by approximately $538,000.
(g) 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 financial statements in
conformity with generally a ccepted 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 recurring
accruals) which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented.
F-145
<PAGE>
NEIL'S USED TRUCK & CAR SALES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(2) Property and Equipment
Property and equipment at December 31, 1997 consists of the following:
<TABLE>
<S> <C>
Transportation equipment......................................... $1,520,955
Furniture and fixtures........................................... 47,847
Equipment........................................................ 86,609
Land............................................................. 140,000
----------
Total........................................................ 1,795,411
Less accumulated depreciation and amortization................... 274,106
----------
$1,521,305
==========
(3) Other Current Liabilities
Other current liabilities at December 31, 1997 consist of:
Deposit liability................................................ $ 35,440
Accrued sales tax................................................ 12,725
Other............................................................ 14,500
----------
$ 62,665
==========
</TABLE>
(4) Long-term debt
Long-term debt consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Note payable to a bank, payable in monthly installments of $3,758,
including interest at 8.27%; maturing June 2001; secured by
transport equipment.............................................. $ 137,221
Note payable to a bank, payable in monthly installments of $7,420,
including interest at 8.60%; maturing March 2002; secured by
transport equipment.............................................. 292,000
Note payable to a bank, payable in monthly principal installments
of $6,630, plus interest at 8.58%; maturing March 2002; secured
by transport equipment........................................... 260,999
Note payable to a bank, payable in monthly installments of $4,292,
including interest at 8.75%; maturing October 1998; secured by
transport equipment.............................................. 41,067
---------
Total long-term debt.......................................... 731,287
Less installments due within one year............................. 152,826
---------
Long-term debt, excluding current installments................ $ 578,461
=========
</TABLE>
Aggregate maturities of long-term debt for the next five years are as
follows:
<TABLE>
<S> <C>
1998............................................................... $ 173,243
1999............................................................... 171,111
2000............................................................... 186,169
2001............................................................... 179,627
2002............................................................... 41,554
---------
$ 751,704
=========
</TABLE>
F-146
<PAGE>
NEIL'S USED TRUCK & CAR SALES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
As of December 31, 1997, the Company had a line-of-credit with a bank
totaling $100,000. There were no borrowings outstanding at December 31, 1997,
and the agreement expired April 30, 1998.
(5) Leases
The Company leases equipment under a capital lease which expires in May
2000. The following is a summary of transportation equipment held under
capital leases at December 31, 1997:
<S> <C>
Transportation equipment........................................... $639,587
Less accumulated amortization...................................... 67,981
--------
$571,606
========
</TABLE>
The Company leases its operating facility from a related stockholder under a
month to month lease. Rent expense was $207,158 in 1997.
Future minimum lease payment under noncancelable operating leases and future
minimum capital lease payments as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
-------- ---------
<S> <C> <C>
Year ending December 31:
1998....................................................... $192,591 28,234
1999....................................................... 192,591 5,160
2000....................................................... 80,246 5,160
2001....................................................... -- 5,160
2002....................................................... -- 1,290
-------- ------
Total.................................................... 465,428 45,004
======
Less amount representing interest............................ 45,262
--------
Present value of net minimum capital lease payments...... 420,166
Less current installments.................................... 163,684
--------
$256,482
========
</TABLE>
(6) Employee Benefits
The Company has a retirement savings plan pursuant to section 401(k) of the
Internal Revenue Code that is available to all employees with at least one
year of service to the Company. Eligible participants may contribute up to
four percent of their compensation. The Company provides non-discretionary
matching contributions to the Plan which amounted to $7,800 in 1997.
(7) Contingencies
Various legal claims arise against the Company 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 Company's financial
position, results of operations, or cash flows.
(8) Subsequent Event
On July 14, 1998, the stockholders consummated a transaction whereby all of
the net assets of the Company were sold to United Road Services, Inc.
F-147
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders
5-L Corporation and ADP Transport, Inc.:
We have audited the accompanying combined balance sheet of 5-L Corporation
and ADP Transport, Inc. as of December 31, 1997, and the related combined
statements of operations, stockholders' equity and cash flows for the year
then ended. These combined financial statements are the responsibility of the
management of 5-L Corporation and ADP Transport, Inc. Our responsibility is to
express an opinion on these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall combined financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of 5-L
Corporation and ADP Transport, Inc. as of December 31, 1997, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Denver, Colorado
June 12, 1998
F-148
<PAGE>
5-L CORPORATION AND ADP TRANSPORT, INC.
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................ $ 47,083 $ 31,614
Trade accounts receivable............................ 806,009 982,508
Accounts receivable from employees................... 5,000 --
Prepaid expenses..................................... 23,040 53,940
Other current assets................................. 4,074 1,350
Current portion of rights to equipment under
financing contracts................................. 382,246 290,638
---------- ----------
Total current assets.............................. 1,267,452 1,360,050
Rights to equipment under financing contracts,
excluding current portion............................ 1,780,129 2,714,344
Goodwill, net of accumulated amortization of $7,224
and $7,974, respectively............................. 17,776 17,026
Other assets.......................................... 7,700 7,700
---------- ----------
Total assets...................................... $3,073,057 $4,099,120
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of obligations for equipment un-
der financing contracts............................. $ 382,246 $ 290,638
Contractor payments payable.......................... 198,182 289,441
Accounts payable..................................... 89,849 140,474
Accrued payroll and related costs.................... 99,721 20,662
Notes payable to stockholders........................ -- 257,140
---------- ----------
Total current liabilities......................... 769,998 998,355
Obligations for equipment under financing contracts,
excluding current
installments......................................... 1,780,129 2,714,344
---------- ----------
Total liabilities................................. 2,550,127 3,712,699
---------- ----------
Stockholders' equity:
Common stock, $1 par value. Authorized, issued and
outstanding
2,000 shares........................................ 2,000 2,000
Retained earnings.................................... 520,930 384,421
---------- ----------
Total stockholders' equity........................ 522,930 386,421
---------- ----------
Total liabilities and stockholders' equity........ $3,073,057 $4,099,120
========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-149
<PAGE>
5-L CORPORATION AND ADP TRANSPORT, INC.
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six-months
Year ended ended June 30,
December 31, ----------------------
1997 1997 1998
------------ ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Net revenue............................... $9,852,142 $4,918,861 $5,069,454
Cost of revenue........................... 8,389,700 4,180,156 4,288,975
---------- ---------- ----------
Gross profit.......................... 1,462,442 738,705 780,479
Selling, general and administrative
expenses................................. 927,560 377,110 335,113
---------- ---------- ----------
Income from operations................ 534,882 361,595 445,366
Other income (expense):
Interest expense......................... (10,057) (1,374) (189)
Other.................................... 11,105 5,497 22,594
---------- ---------- ----------
Net income............................ $ 535,930 $ 365,718 $ 467,771
========== ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-150
<PAGE>
5-L CORPORATION AND ADP TRANSPORT, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Common Retained stockholders'
stock earnings equity
------- --------- --------------
<S> <C> <C> <C>
Balances at January 1, 1997.................. $1,000 $ 555,585 $ 556,585
Net income -- 1997........................... -- 535,930 535,930
Distribution to stockholders................. -- (570,585) (570,585)
Stock issued ADP............................. 1,000 -- 1,000
------ --------- ---------
Balances at December 31, 1997................ 2,000 520,930 522,930
Net income--six-months ended June 30, 1998
(unaudited)................................. -- 467,771 467,771
Distribution to stockholders--cash paid--six-
months ended June 30, 1998 (unaudited)...... -- (347,140) (347,140)
Distribution to stockholders--notes payable--
six-months ended June 30, 1998 (unaudited).. -- (257,140) (257,140)
------ --------- ---------
Balance at June 30, 1998 (unaudited)......... $2,000 $ 384,421 $ 386,421
====== ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-151
<PAGE>
5-L CORPORATION AND ADP TRANSPORT, INC.
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six-months
Year ended ended June 30,
December 31, --------------------
1997 1997 1998
------------ --------- ---------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................. $ 535,930 $ 365,718 $ 467,771
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization............................. 1,667 765 750
Decrease (increase) in trade accounts
receivable.............................. (36,133) 114,873 (176,499)
Decrease in accounts receivable from
employees............................... 22,500 27,500 5,000
Decrease (increase) in prepaid expenses
and other current assets................ 32,516 (12,307) (28,175)
(Decrease) increase in accounts payable.. (2,372) (11,669) 50,625
Decrease in accrued payroll and related
costs................................... (169) (89,947) (78,059)
Increase in contractor payments payable.. 39,419 51,678 91,258
--------- --------- ---------
Net cash provided by operating
activities............................. 593,358 446,611 331,671
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock..... 1,000 -- --
Distributions to stockholders.............. (570,585) (281,398) (347,140)
--------- --------- ---------
Net cash used in financing activities... (569,585) (281,398) (347,140)
--------- --------- ---------
Net increase (decrease) in cash......... 23,773 165,213 (15,469)
Cash and cash equivalents at beginning of
period..................................... 23,310 23,310 47,083
--------- --------- ---------
Cash and cash equivalents at end of period.. $ 47,083 $ 188,523 $ 31,614
========= ========= =========
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest.... $ 10,057 $ 1,374 $ 198
========= ========= =========
Reduction for the period in rights to and
obligations for equipment under financing
contracts, net............................ $ 59,892 $ -- $ 842,607
========= ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-152
<PAGE>
5-L CORPORATION AND ADP TRANSPORT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
5-L Corporation (5-L) was founded in 1993 and its primary business is
coordinating the transport of vehicles for auto auctions, leasing companies,
auto dealers, manufacturers and individuals. It operates throughout the
continental United States via a network of independently contracted carriers.
ADP Transport, Inc. (ADP) was founded in 1997 and acts as an agent for
independent carriers by securing and servicing transport equipment lease
agreements. Both companies" operations are headquartered in Westminster,
Colorado.
(b) Principles of Combination
The combined financial statements include the financial statements of 5-L
and ADP, the "Company" when referred to collectively. The accompanying
financial statements are presented on a combined basis because 5-L and ADP are
under common management. All significant intercompany balances and
transactions have been eliminated.
(c) Revenue Recognition
5-L operates as one segment related to the transportation of vehicles for
customers such as auto auctions, leasing companies, auto dealers,
manufacturers and individuals. Transport revenue and related direct expenses
are recognized when the service originates, which does not differ
significantly from the amounts that would be recognized as the service is
performed.
ADP's revenue is derived from service fees associated with the
administration of equipment lease agreements for certain independent carriers
of 5-L. For a monthly fee, ADP performs administrative functions relating to
the leased equipment, such as monthly payment processing and procurement of
insurance coverage on behalf of the carrier/lessee. Service revenues are
recognized when services are performed. Cost of sales and operating expenses
associated with the service revenues are nominal.
(d) Cash and Cash Equivalents
Cash and cash equivalents consist of bank accounts and certificates of
deposit with an initial term of less than three months. For purposes of the
statement of cash flows, the Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
(e) Goodwill
Goodwill represents the excess of purchase price over fair value of net
assets acquired and is amortized on a straight-line basis over 15 years, which
is the Company"s estimate of the expected periods to be benefited.
(f) Accounting for Long-Lived Assets
The Company reviews long-lived tangible and intangible assets including
rights to equipment under financing contracts for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets is measured by a comparison of
the carrying amount of an asset to the future net cash flows expected to be
generated by the asset. The impairment, if any, is measured by the amount by
which the carrying amount of the assets exceed the fair value of the assets.
F-153
<PAGE>
5-L CORPORATION AND ADP TRANSPORT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(g) Other Assets
Other assets consist principally of deposits made by the Company to secure
office facilities and surety bonding.
(h) Income Taxes
Both 5-L and ADP are operated as S-corporations for federal and state income
tax purposes and all corporate earnings flow through and are taxed solely at
the stockholder level. Accordingly, no income tax expense has been recorded
for the year ended December 31, 1997. The tax basis of the Company's assets
and liabilities does not differ materially from their recorded values at
December 31, 1997.
(i) Fair Value of Financial Instruments
The carrying values of the Company's financial instruments, which are
comprised mainly of receivables and payables, approximate their fair values.
(j) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of sales and expenses during the reporting
period. Actual results could differ significantly from those estimates.
(k) Interim Combined Financial Statements
The interim financial information included in these combined financial
statements is unaudited but reflects all adjustments (consisting of only
normal recurring accruals) which are, in the opinion of management, necessary
for a fair presentation of the results for the interim periods presented.
(2) Equipment Under Financing Contracts
ADP has guaranteed lease obligations for certain independent carriers who
lease the equipment from financing companies. The guarantee includes payment
of the monthly installments should the primary lessee default, as well as a
specified minimum residual value at the end of the lease term. In return for
the lease guarantee, the independent carrier agrees to subcontract the
equipment to 5-L for the duration of the lease term. For accounting purposes,
the Company has recorded the rights to the equipment and the corresponding
obligation under the equipment financing contracts. The recorded value of both
the asset and liability related to the financing contracts is determined based
on the present value of the future minimum installment payments and the
guaranteed residual value using the rate implicit in the lease agreements.
The following is a summary of obligations under equipment financing
contracts at December 31, 1997:
<TABLE>
<S> <C>
Year ending December 31:
1998.......................................................... $ 539,602
1999.......................................................... 539,602
2000.......................................................... 539,602
2001.......................................................... 965,760
2002.......................................................... --
----------
Total minimum obligations (includes residual guarantees of
$519,989)...................................................... 2,584,566
Less: imputed interest (at rates from 7.25% to 10.50%).......... (422,191)
----------
Present value of future minimum obligations, $382,246 of which
is included in current assets and liabilities at December 31,
1997........................................................... $2,162,375
==========
</TABLE>
During 1997, installment payments of $93,626 related to the obligations for
equipment under financing contracts are included in cost of revenue. Of this
amount, $33,734 represents interest charges. These amounts
F-154
<PAGE>
5-L CORPORATION AND ADP TRANSPORT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
were withheld from the amounts paid to the respective independent contractors
and remitted directly to the financing companies.
Subsequent to December 31, 1997, the Company entered into agreements whereby
they guaranteed monthly payments and minimum residual values on seven
additional leases, the terms of which are consistent with those described
above. The value of the assets and corresponding liabilities recorded in
connection with these additional agreements is approximately $1,094,000.
(3) Leases
5-L is committed under a non-cancellable operating lease for office space.
The future minimum lease payments at December 31, 1997 are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1998................................................................. $31,808
1999................................................................. 21,623
2000................................................................. --
2001................................................................. --
2002................................................................. --
-------
Total minimum lease payments........................................... $53,431
=======
</TABLE>
(4) Employee Benefits
5-L has a simplified employee pension plan (Plan) pursuant to Section 408(k)
of the Internal Revenue Code. The Plan provides for discretionary employer
contributions for employees who have completed two years of service with 5-L.
Employees are immediately vested in all balances. For 1997, 5-L made
contributions of $52,695 to the Plan.
(5) Related Party Transactions
During 1997, 5-L paid $9,995 in interest related to notes payable to
stockholders. The notes were repaid in 1997.
(6) Contingent Liabilities
Various claims arise against the Company 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.
(7) Subsequent Event
On June 12, 1998 all of the outstanding stock of 5-L and ADP was sold to
United Road Services, Inc. The sales transaction, affected through a
combination of cash and common stock of United Road Services, Inc., will be
accounted for as a purchase. The selling price of 5-L and ADP exceeds their
combined net assets as of December 31, 1997.
F-155
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Car Transporters Corporation:
We have audited the accompanying balance sheet of Car Transporters
Corporation (a wholly-owned subsidiary of Automotive Services, Inc.) as of
December 31, 1997, and the related statements of operations, stockholder's
deficit, and cash flows for the year then ended. These financial statements
are the responsibility of Car Transporters Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides 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 Car Transporters
Corporation (a wholly-owned subsidiary of Automotive Services, Inc.) as of
December 31, 1997, and the results of its operations, and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Portland, Oregon
August 19, 1998
F-156
<PAGE>
CAR TRANSPORTERS CORPORATION
(A Wholly-owned Subsidiary of Automotive Services, Inc.)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash................................................. $ 73,964 $ --
Trade accounts receivable, net of allowance for
doubtful accounts of $5,893 for December 31, 1997
and June 30, 1998................................... 683,474 892,437
Prepaid insuance...................................... 44,189 --
Other prepaid expenses................................ 82,169 66,224
---------- ----------
Total current assets.............................. 883,796 958,661
Property and equipment, net........................... 1,805,508 2,492,549
Other assets, net..................................... 10,707 525,207
---------- ----------
Total assets...................................... $2,700,011 $3,976,417
========== ==========
Liabilities and Stockholder's Deficit
Current liabilities:
Bank overdraft....................................... $ -- $ 195,992
Current installments of long-term debt............... 411,300 4,917,491
Current installments of obligations under capital
leases.............................................. 152,136 321,991
Borrowings under lines of credit..................... 753,743 594,286
Accounts payable..................................... 1,416,318 1,776,398
Accrued liabilities.................................. 316,567 370,278
Accrued claims....................................... 169,301 107,890
---------- ----------
Total current liabilities......................... 3,219,365 8,284,326
Long-term liabilities:
Long-term debt, excluding current installments....... 3,275,118 --
Obligations under capital leases, excluding current
installments........................................ 175,267 --
---------- ----------
Total liabilities................................. 6,669,750 8,284,326
---------- ----------
Stockholder's deficit:
Common stock, $10 par value. Authorized 1,000 shares;
issued and outstanding 1,000 shares................. 10,000 10,000
Retained deficit..................................... (3,979,739) (4,317,909)
---------- ----------
Total stockholder's deficit....................... (3,969,739) (4,307,909)
---------- ----------
Total liabilities and stockholder's deficit....... $2,700,011 $3,976,417
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-157
<PAGE>
CAR TRANSPORTERS CORPORATION
(A Wholly-owned Subsidiary of Automotive Services, Inc.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six-months
Year ended ended June 30
December 31, ----------------------
1997 1997 1998
------------ ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Net revenue............................... $6,676,340 $3,436,357 $4,499,480
Cost of revenue........................... 5,708,638 3,018,772 3,861,840
---------- ---------- ----------
Gross profit.......................... 967,702 417,585 637,640
Selling, general and administrative
expenses................................. 829,859 272,833 623,053
---------- ---------- ----------
Income from operations................ 137,843 144,752 14,587
Other income (expense):
Interest expense, net.................... (737,894) (425,884) (299,331)
Gain on sale of equipment................ 21,571 -- --
Penalty and late charges on debt, net.... (199,510) -- (53,426)
---------- ---------- ----------
Loss before provision for income
taxes................................ (777,990) (281,132) (338,170)
Provision for income taxes................ -- -- --
---------- ---------- ----------
Net loss.............................. $ (777,990) $ (281,132) $ (338,170)
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-158
<PAGE>
CAR TRANSPORTERS CORPORATION
(A Wholly-owned Subsidiary of Automotive Services, Inc.)
STATEMENTS OF STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
Total
Common Retained stockholder's
stock deifict deficit
------- ----------- -------------
<S> <C> <C> <C>
Balance at December 31, 1996................ $10,000 $(3,201,749) $(3,191,749)
Net loss.................................... -- (777,990) (777,990)
------- ----------- -----------
Balance at December 31, 1997................ 10,000 (3,979,739) (3,969,739)
Net loss--six-months ended June 30, 1998
(unaudited)................................ -- (338,170) (338,170)
------- ----------- -----------
Balance at June 30, 1998 (unaudited)........ $10,000 $(4,317,909) $(4,307,909)
======= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-159
<PAGE>
CAR TRANSPORTERS CORPORATION
(A Wholly-owned Subsidiary of Automotive Services, Inc.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six-months
Year ended ended June 30
December 31, ----------------------
1997 1997 1998
------------ --------- -----------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................. $ (777,990) $(281,132) $ (338,170)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization........... 355,246 160,579 215,273
Amortization of non-compete............. 13,200 1,320 --
Gain on sale of equipment............... (21,571) -- --
Changes in current assets and
liabilities:
Increase in accounts receivable, net... (649,969) (695,354) (208,963)
Decrease (increase) in prepaid
insurance and other prepaid expenses.. (12,631) (150,484) 60,134
Increase (decrease) in accounts
payable............................... (150,946) 247,789 360,080
Increase (decrease) in accrued
liabilities........................... (75,100) (270,260) 53,711
Decrease in accrued claims............. (27,951) (8,146) (61,411)
----------- --------- -----------
Net cash (used in) provided by
operating activities................. (1,347,712) (995,688) 80,654
----------- --------- -----------
Cash flows from investing activities:
Purchase of property and equipment....... (7,733) -- --
Proceeds from sale of equipment.......... 39,634 -- --
Decrease in other assets................. (1,107) -- (3,500)
Cash paid for acquisitions............... -- -- (1,413,314)
----------- --------- -----------
Net cash provided by (used in)
investing activities................. 30,794 -- (1,416,814)
----------- --------- -----------
Cash flows from financing activities:
Proceeds from long-term debt............. 1,460,293 742,105 1,650,000
Payments on long-term debt, notes payable
and capital lease obligations........... (662,462) (276,026) (424,339)
Net borrowings under lines of credit..... 753,743 644,662 (159,457)
Decrease in bank overdrafts.............. (199,521) (153,882) 195,992
Decrease in notes receivable............. 37,836 37,836 --
----------- --------- -----------
Net cash provided by financing
activities........................... 1,389,889 994,695 1,262,196
----------- --------- -----------
Net increase (decrease) in cash....... 72,971 (993) (73,964)
Cash at beginning of period............... 993 993 73,964
----------- --------- -----------
Cash at end of period..................... $ 73,964 $ -- $ --
=========== ========= ===========
Supplemental disclosure of cash flow
information:
Cash paid for interest................... $ 741,058 $ 431,402 $ 299,331
=========== ========= ===========
</TABLE>
See accompanying notes to financial statements.
F-160
<PAGE>
CAR TRANSPORTERS CORPORATION
(A Wholly-owned Subsidiary of Automotive Services, Inc.)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(1) Description of Business and Summary of Significant Accounting Policies
Description of Business
Car Transporters Corporation (CTC) is a Washington Corporation founded in
1980 and is a wholly-owned subsidiary of Automotive Services, Inc. a
Washington Corporation. CTC's primary business is transporting vehicles for
dealers, leasing companies, auction companies and long-haul transporters in
the Western United States. CTC operates approximately 60 vehicles. These
financial statements include all costs of doing business of CTC.
Unaudited Information
The financial information included herein for the six-month periods ended
June 30, 1997 and 1998 is unaudited; however, such information reflects all
adjustments consisting only of normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods. The
results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full year.
Revenue Recognition
CTC operates as one segment related to the transportation of vehicles and
equipment for customers.
CTC's revenue is derived from customers who require transport of vehicles
and equipment. Transport revenue is recognized upon the delivery of the
vehicles and equipment to their final destination. Expenses related to the
generation of revenue are recognized as incurred.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization is
determined for financial statement purposes using the straight-line 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, CTC provides for depreciation of property and equipment
over the following estimated useful lives:
<TABLE>
<S> <C>
Machinery and equipment....................................... 10-20 years
Leasehold improvements........................................ 10 years
Furniture and fixtures........................................ 10-20 years
</TABLE>
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable and debt instruments. At December 31, 1997, the fair value of
the Company's receivables approximated carrying value. At December 31, 1997,
the fair value of the Company's debt instruments was approximately $3,000,000.
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 credit 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 or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
F-161
<PAGE>
CAR TRANSPORTERS CORPORATION
(A Wholly-owned Subsidiary of Automotive Services, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Accrued Claims
CTC is responsible for damage incurred while transporting vehicles to their
final destination. Damage incurred is identified upon delivery at final
destination and CTC reimburses for the cost of repairs.
Use of Estimates
Management of CTC 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.
(2) Property and Equipment
Property and equipment at December 31, 1997 consist of the following:
<TABLE>
<S> <C>
Machinery and equipment......................................... $ 3,251,888
Leasehold improvements.......................................... 12,568
Furniture and fixtures.......................................... 26,498
-----------
3,290,954
Less accumulated depreciation and amortization.................. (1,485,446)
-----------
$ 1,805,508
===========
</TABLE>
Depreciation and amortization of property and equipment in 1997 totaled
$355,246. CTC held equipment under capital leases of $728,571 at December 31,
1997.
(3) Line of Credit
CTC has a line of credit to borrow up to $1,000,000 which is secured by
eligible accounts receivable. Interest is charged at prime plus 6% (14.5% at
December 31, 1997).
(4) Debt
<TABLE>
<S> <C>
Long-term debt consists of the following at December 31, 1997:
Note payable to lending institution, payable in monthly
installments plus interest of 16% through 2001. This note is
secured by various equipment.................................. $ 330,000
Various notes payable due in varying amounts with maturities
ranging from December of 2000 to December of 2005 with
interest ranging from 8% to 16%. These notes are secured by
various equipment............................................. 1,171,146
Note payable to lending institution, payable in monthly
installments plus interest of 18% through 2002................ 600,000
Various unsecured notes payable, due in varying amounts with
maturities ranging from December of 1998 to December of 2002
with interest ranging from 9.25% to 36%....................... 1,585,272
----------
Total long-term debt........................................ 3,686,418
Less current portion............................................ (411,300)
----------
$3,275,118
==========
</TABLE>
(See Footnote 9 for subsequent event)
F-162
<PAGE>
CAR TRANSPORTERS CORPORATION
(A Wholly-owned Subsidiary of Automotive Services, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(5) Capital Lease Obligations
CTC leases certain vehicles under capital leases.
At December 31, 1997 obligations under capital leases consist of the
following:
<TABLE>
<S> <C>
Three capital leases net of interest, payable in monthly
installments bearing interest at 11.5% through 2001. These leases
are secured by the respective trucks and trailers acquired under
the capital lease. ............................................... $ 353,544
Capital lease net of interest, payable in monthly installments
bearing interest at 18% through 2001. This lease is secured by the
truck and trailer acquired under the capital lease. .............. 82,070
---------
435,614
Less amount that represents imputed interest....................... (108,211)
---------
327,403
---------
Less current portion............................................... (152,136)
---------
$ 175,267
=========
</TABLE>
(See Footnote 9 for subsequent event)
(6) Operating Leases
CTC leases certain land and buildings used for its operations under
operating lease agreements expiring in 2006. Total rent expense for 1997 was
$60,989.
Future annual minimum operating lease payments at December 31, 1997 are:
<TABLE>
<S> <C>
1998................................................................ $ 61,506
1999................................................................ 63,350
2000................................................................ 65,244
2001................................................................ 67,198
2002................................................................ 69,212
Thereafter.......................................................... 281,931
--------
$608,441
========
</TABLE>
(7) Income Taxes
The Company incurred a loss for both financial reporting and tax return
purposes and as such, there was no current or deferred tax provision for the
year ended December 31, 1997.
At December 31, 1997, CTC's long-term deferred tax asset/liability consists
of:
<TABLE>
<S> <C>
Deferred tax asset:
Net operating loss carryforward................................ $1,614,089
Deferred tax liability:
Fixed assets, due to depreciation.............................. 259,360
----------
Net.......................................................... 1,354,729
Valuation allowance.............................................. (1,354,729)
----------
Total........................................................ $ --
==========
</TABLE>
F-163
<PAGE>
CAR TRANSPORTERS CORPORATION
(A Wholly-owned Subsidiary of Automotive Services, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
CTC's net operating loss carryforwards (NOL's) of approximately $4,747,000
expire at various times in the future. At December 31, 1997, a valuation
allowance has been provided against the deferred tax assets, as it is
uncertain that the deferred tax assets will be realized since the Company has
incurred substantial operating losses.
The following table reconciles the expected tax benefit (expense) at the
Federal statutory tax rate to the actual tax provision:
<TABLE>
<S> <C>
Federal statutory rate............................................ $ 264,517
NOL's for which no benefit is recognized.......................... (264,517)
---------
Provision for income taxes...................................... $ --
=========
</TABLE>
(8) Significant Customer
CTC has one significant customer that accounts for approximately 30% of
total sales. As of December 31, 1997 this customer had an outstanding accounts
receivable balance of $302,004.
(9) Subsequent Events
During February of 1998, the Company acquired equipment from Spokane Auto
Transport for approximately $865,000 of cash. The aggregate purchase price,
over the fair value of equipment acquired of approximately $361,000, was
recognized as goodwill and is being amortized over 15 years on a straight-line
basis. In March of 1998, the Company acquired equipment from All West Auto
Transport for $550,000 of cash. The aggregate purchase price, over the fair
value of equipment acquired of approximately $150,000, was recognized as
goodwill and is being amortized over 15 years on a straight-line basis. These
assets were included in the sale to United Road Services, Inc.
During July 1998, CTC completed an asset purchase transaction with United
Road Services, Inc. (URS) whereby CTC sold all of its assets, properties and
business to URS. URS also assumed all current liabilities and indebtedness of
CTC. The assets sold to URS included receivables, fixed assets and tangible
personal property, customer accounts, cash and cash equivalents, prepaids,
leasehold interests, proprietary rights, licenses and permits and other
assets.
Subsequent to the closing of the asset purchase transaction, URS has paid
off all outstanding indebtedness.
F-164
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders
Schroeder Auto Carriers, Inc.:
We have audited the accompanying balance sheet of Schroeder Auto Carriers,
Inc. as of December 31, 1997 and the related statements of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of Schroeder Auto Carriers, Inc.'s
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides 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 Schroeder Auto Carriers, Inc.
as of December 31, 1997, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Denver, Colorado
August 13, 1998
F-165
<PAGE>
SCHROEDER AUTO CARRIERS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
Assets
December 31, June 30,
1997 1998
------------ -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash................................................. $ 54,216 $ 107,504
Trade accounts receivable, net of allowance for
doubtful accounts of $78,215 and $62,871,
respectively........................................ 736,954 744,798
Accounts receivable from employees................... 4,207 8,381
Prepaid expenses..................................... 3,300 39,309
---------- ----------
Total current assets.............................. 798,677 899,992
Property and equipment, net.......................... 738,109 1,166,502
---------- ----------
Total assets...................................... $1,536,786 $2,066,494
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt............... $ 25,087 $ 93,852
Accounts payable..................................... 116,068 158,287
Accrued payroll and related costs.................... 26,852 56,201
Current portion of notes payable to related parties.. 180,000 180,000
---------- ----------
Total current liabilities......................... 348,007 488,340
Long-term debt, excluding current installments........ 101,895 340,882
Notes payable to related parties...................... 25,000 --
---------- ----------
Total liabilities................................. 474,902 829,222
---------- ----------
Stockholders' equity:
Common stock, $1 par value. 700,000 shares
authorized; 35,000 shares issued and outstanding.... 35,000 35,000
Retained earnings.................................... 1,026,884 1,202,272
---------- ----------
Total stockholders' equity........................ 1,061,884 1,237,272
---------- ----------
Total liabilities and stockholders' equity........ $1,536,786 $2,066,494
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-166
<PAGE>
SCHROEDER AUTO CARRIERS, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six-months
Year ended ended June 30
December 31, ----------------------
1997 1997 1998
------------ ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Net revenue............................... $5,799,071 $2,727,236 $3,168,786
Cost of revenue........................... 4,567,940 2,086,816 2,536,525
---------- ---------- ----------
Gross profit.......................... 1,231,131 640,420 632,261
Selling, general and administrative
expenses................................. 888,887 395,454 395,870
---------- ---------- ----------
Income from operations................ 342,244 244,966 236,391
---------- ---------- ----------
Other income (expense):
Interest expense......................... (31,235) (14,921) (17,979)
Gain on sale of assets................... 9,431 -- --
Other.................................... 3,507 2,602 1,021
---------- ---------- ----------
Net income............................ $ 323,947 $ 232,647 $ 219,433
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-167
<PAGE>
SCHROEDER AUTO CARRIERS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Common Retained stockholders'
stock earnings equity
------- ---------- --------------
<S> <C> <C> <C>
Balances at January 1, 1997................. $35,000 $ 767,293 $ 802,293
Net income--1997............................ -- 323,947 323,947
Distribution to stockholders................ -- (64,356) (64,356)
------- ---------- ----------
Balances at December 31, 1997............... 35,000 1,026,884 1,061,884
Net income--six-months ended June 30, 1998
(unaudited)................................ -- 219,433 219,433
Distribution to stockholders--six-months
ended June 30, 1998 (unaudited)............ -- (44,045) (44,045)
------- ---------- ----------
Balance at June 30, 1998 (unaudited)........ $35,000 $1,202,272 $1,237,272
======= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-168
<PAGE>
SCHROEDER AUTO CARRIERS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six-months
Year ended ended June 30
December 31 --------------------
1997 1997 1998
----------- --------- ---------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................. $ 323,947 $ 232,647 $ 219,433
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.............................. 69,682 33,393 43,104
Gain on sale of assets.................... (9,431) -- --
Increase in trade accounts receivable..... (178,667) (99,663) (12,018)
Decrease in accounts receivable from
employees................................ 5,954 -- --
Decrease (increase) in prepaid expenses... 6,899 (21,186) (36,009)
(Decrease) increase in accounts payable... (54,881) (60,531) 42,219
Increase in accrued payroll and related
costs.................................... 9,507 492 29,349
--------- --------- ---------
Net cash provided by operating
activities............................. 173,010 85,152 286,078
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of assets............... 15,000 -- --
Purchases of property and equipment........ (221,829) (168,500) (471,497)
--------- --------- ---------
Net cash used in investing activities... (206,829) (168,500) (471,497)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt............... 142,000 142,000 450,512
Principal payments on long-term debt....... (139,646) (41,077) (142,760)
Distributions to stockholders.............. (64,356) (50,000) (44,045)
Proceeds from notes payable to related
parties................................... 205,000 170,000 --
Principal payments on notes payable to
related parties........................... (160,000) (160,000) (25,000)
--------- --------- ---------
Net cash (used in) provided by financing
activities............................. (17,002) 60,923 238,707
--------- --------- ---------
Net (decrease) increase in cash......... (50,821) (22,425) 53,288
Cash at beginning of period................. 105,037 105,037 54,216
--------- --------- ---------
Cash at end of period....................... $ 54,216 $ 82,612 $ 107,504
========= ========= =========
Supplemental disclosure of cash flow
information--cash paid during the period
for interest............................... $ 31,235 $ 14,921 $ 17,979
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-169
<PAGE>
SCHROEDER AUTO CARRIERS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Schroeder Auto Carriers, Inc. (the Company) was founded in 1990 and provides
vehicle transport services for auto auctions, leasing companies, auto dealers
and individuals. The Company owns and operates approximately 35 vehicles
throughout 27 states in the western region of the United States. The Company
also uses, on a limited basis, independent contractors who have their own
equipment. The independent contractors operate under a carrier agreement when
performing transport services for the Company. The Company is headquartered in
Henderson, Colorado and also maintains a satellite facility in Salt Lake City,
Utah.
(b) Revenue Recognition
Revenue is recognized upon the delivery of the vehicles to their final
destination. Expenses related to the generation of revenue are recognized as
incurred.
(c) Property and Equipment
Property and equipment are stated at cost. Depreciation is determined for
financial statement purposes using the straight-line method over the following
estimated useful lives of the individual assets.
<TABLE>
<S> <C>
Transportation equipment......................................... 15 years
Vehicles......................................................... 5 years
Office equipment................................................. 7 years
</TABLE>
(d) Income Taxes
The Company operates as an S-corporation for federal and state income tax
purposes and all corporate earnings flow through and are taxed solely at the
stockholder level. Accordingly, no income tax expense has been recorded for
the year ended December 31, 1997.
(e) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of sales and expenses during the reporting
period. Actual results could differ significantly from those estimates.
(f) Fair Value of Financial Instruments
The carrying values of the Company's financial instruments, which are
comprised mainly of receivables and payables, approximate their fair values.
(g) Interim Financial Statements
The interim financial information included in these financial statements is
unaudited but reflects all adjustments (consisting of only normal recurring
accruals) which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented.
F-170
<PAGE>
SCHROEDER AUTO CARRIERS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(2) Property and Equipment
Property and equipment at December 31, 1997 consists of the following:
<TABLE>
<S> <C>
Transportation equipment.......................................... $ 845,138
Vehicles.......................................................... 62,144
Office equipment.................................................. 54,297
---------
Total......................................................... 961,579
Less: accumulated depreciation.................................... (223,470)
---------
$ 738,109
=========
</TABLE>
Depreciation of property and equipment in 1997 totaled $69,682.
(3) Indebtedness
The Company has a note payable to First Security Bank payable in monthly
installments of $2,958, including interest at 9%, maturing April 2002. The
remaining balance on the note at December 31, 1997 is $126,982; $25,087 of
which is classified in current liabilities.
The Company has a note payable to stockholders of $180,000, payable in a
lump sum on August 15, 1998. The note bears interest at 8.75% per annum which
is paid monthly. In addition, the Company has a note payable to other related
parties of $25,000, payable in a lump sum on June 1, 1999. The note bears
interest at 10% per annum, paid monthly. For 1997, interest expense on the
above notes was $18,250.
Debt maturities at December 31 are as follows:
<TABLE>
<S> <C>
1998................................................................ $205,087
1999................................................................ 52,441
2000................................................................ 30,017
2001................................................................ 32,830
2002................................................................ 11,607
--------
Total............................................................. $331,982
========
</TABLE>
(4) Leases
The Company leases their main facility from a related party. The lease is a
non-cancelable operating lease with future minimum lease payments at December
31, 1997 as follows:
<TABLE>
<S> <C>
Year ending December 31:
1998............................................................. $ 96,000
1999............................................................. 96,000
2000............................................................. 96,000
2001............................................................. 96,000
2002............................................................. 96,000
Thereafter....................................................... 1,264,000
----------
Total minimum lease payments................................... $1,744,000
==========
</TABLE>
Total rent expense for 1997, all of which was paid to a related party, was
$96,900.
F-171
<PAGE>
SCHROEDER AUTO CARRIERS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(5) Income Taxes
As the Company uses accelerated methods of depreciation for income tax
purposes, the recorded values of property and equipment are approximately
$423,000 higher than those used for tax purposes at December 31, 1997.
Depreciation expense reported for tax purposes for 1997 was approximately
$152,000 higher than the amount recorded for book purposes. The tax basis of
all other assets and liabilities does not differ materially from their
recorded values at December 31, 1997.
(6) Contingent Liabilities
Various claims arise against the Company 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.
(7) Subsequent Event
On July 1, 1998 all of the outstanding stock of the Company was sold to
United Road Service, Inc. The sales transaction will be accounted for as a
purchase.
F-172
<PAGE>
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 LLP
Albany, New York
January 16, 1998,
except as to note 13(b),
which is as of May 6, 1998
F-173
<PAGE>
KEYSTONE TOWING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
------------------- June 30,
1996 1997 1998
-------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
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
======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-174
<PAGE>
KEYSTONE TOWING, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six-months
Year ended December 31 ended June 30
------------------------ ----------------------
1996 1997 1997 1998
----------- ----------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
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
=========== =========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-175
<PAGE>
KEYSTONE TOWING, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Total
Common Retained stockholder's
stock earnings equity
------- --------- -------------
<S> <C> <C> <C>
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
======= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-176
<PAGE>
KEYSTONE TOWING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Six-months
December 31 ended June 30
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
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
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-177
<PAGE>
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:
<TABLE>
<S> <C>
Automobiles and transportation equipment.......................... 5 years
Furniture and fixtures............................................ 5-7 years
Machinery and equipment........................................... 5-7 years
Leasehold improvements............................................ 7-39 years
</TABLE>
(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.
F-178
<PAGE>
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:
<TABLE>
<CAPTION>
December 31
---------------
1996 1997
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
(3) Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31
----------------------
1996 1997
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
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):
<TABLE>
<CAPTION>
December 31,
1997
------------
<S> <C>
Goodwill........................................................ $85,572
Covenant-not-to-compete......................................... 2,500
-------
Total......................................................... 88,072
Less accumulated amortization................................... (5,816)
-------
$82,256
=======
</TABLE>
F-179
<PAGE>
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:
<TABLE>
<CAPTION>
December 31
-----------------
1996 1997
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
- --------
(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:
<TABLE>
<CAPTION>
December 31
--------------------
1996 1997
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
F-180
<PAGE>
KEYSTONE TOWING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Annual maturities for the next five years are as follows:
<TABLE>
<S> <C>
1998................................................................ $313,811
1999................................................................ 176,125
2000................................................................ 109,042
2001................................................................ 72,782
2002................................................................ 7,301
--------
$679,061
========
</TABLE>
(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:
<TABLE>
<S> <C>
1998.............................................................. $ 475,560
1999.............................................................. 475,560
2000.............................................................. 475,560
2001.............................................................. 475,560
2002.............................................................. 39,630
----------
$1,941,870
==========
</TABLE>
(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).
F-181
<PAGE>
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.
F-182
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Fast Towing, Inc.:
We have audited the accompanying balance sheet of Fast Towing, Inc. as of
December 31, 1997, and the related statements of operations, stockholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides 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 Fast Towing, Inc. as of
December 31, 1997, and the results of its operations and its cash flows for
the year ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Phoenix, Arizona
July 31, 1998
F-183
<PAGE>
FAST TOWING, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................... $ 92,186 $ 22,200
Trade accounts receivable........................... 214,958 100,449
Prepaid expenses and other current assets........... 7,214 37,514
-------- --------
Total current assets.............................. 314,358 160,163
Property and equipment, net (note 2).................. 469,825 515,119
Other assets.......................................... 18,531 1,600
Intangibles, net (note 3)............................. 17,014 16,431
-------- --------
Total assets...................................... $819,728 $693,313
======== ========
<CAPTION>
Liabilities and Stockholders' Equity
<S> <C> <C>
Current liabilities:
Line of credit (note 4)............................. $ 49,113 $238,763
Accounts payable.................................... 5,803 37,594
Income taxes payable (note 6)....................... 1,220 --
Deferred income taxes (note 6)...................... 5,889 5,889
Accrued expenses.................................... 8,460 14,054
Other accrued liabilities........................... 3,000 6,267
-------- --------
Total current liabilities......................... 73,485 302,567
-------- --------
Stockholders' equity:
Common stock, no par value, 100,000 shares
authorized and 550 shares issued and outstanding... 550 550
Retained earnings................................... 745,693 390,196
-------- --------
Total stockholders' equity........................ 746,243 390,746
Commitments and contingencies (notes 4, 5 and 8)
-------- --------
Total liabilities and stockholders' equity........ $819,728 $693,313
======== ========
</TABLE>
See accompanying notes to financial statements.
F-184
<PAGE>
FAST TOWING, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six-months
Year ended ended June 30
December 31, ---------------------
1997 1997 1998
------------ ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Net revenue................................ $3,354,597 $1,438,065 $1,850,910
Cost of revenue............................ 1,775,911 796,991 914,517
---------- ---------- ----------
Gross profit........................... 1,578,686 641,074 936,393
Selling, general and administrative
expenses.................................. 1,431,882 446,067 1,123,447
---------- ---------- ----------
Income (loss) from operations.......... 146,804 195,007 (187,054)
---------- ---------- ----------
Other (expense):
Interest (expense) income................ (6,703) 373 408
Gain (loss) on sale of assets............ (9,545) 7,708 (140,213)
---------- ---------- ----------
Income (loss) before income taxes...... 130,556 203,088 (326,859)
Income tax expense (note 6).............. 47,009 40,710 28,638
---------- ---------- ----------
Net income (loss)...................... $ 83,547 $ 162,378 $ (355,497)
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-185
<PAGE>
FAST TOWING, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Common Retained stockholders'
stock earnings equity
------ --------- -------------
<S> <C> <C> <C>
Balance at December 31, 1996................... $550 $ 662,146 $ 662,696
Net income..................................... -- 83,547 83,547
---- --------- ---------
Balance at December 31, 1997................... 550 745,693 746,243
Net loss--six-months ended June 30, 1998
(unaudited)................................... -- (355,497) (355,497)
---- --------- ---------
Balance at June 30, 1998 (unaudited)........... $550 $ 390,196 $ 390,746
==== ========= =========
</TABLE>
F-186
<PAGE>
FAST TOWING, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six-months
Year ended ended June 30
December 31, -------------------
1997 1997 1998
------------ -------- ---------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................... $ 83,547 $162,378 $(355,497)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............ 212,144 93,703 90,196
Deferred income taxes.................... 5,889 -- --
Loss (gain) on sale of property and
equipment............................... 9,545 (7,708) 140,213
(Increase) decrease in trade accounts
receivable.............................. (20,750) (73,061) 114,509
Decrease (increase) in prepaid expenses
and other current assets................ 1,363 (18,023) (30,300)
Decrease in other assets................. 1,307 16,163 16,931
Increase in accounts payable............. 5,803 -- 31,791
(Decrease) increase in income taxes
payable................................. (30,031) 9,459 (30,760)
(Decrease) increase in accrued expenses.. (4,468) (4,047) 38,401
-------- -------- ---------
Net cash provided by operating
activities............................ 264,349 178,864 15,484
-------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment........ (158,455) (50,615) (321,066)
Proceeds from sale of equipment............ 119,600 21,195 45,946
Issuance of note receivable................ -- (15,000) --
-------- -------- ---------
Net cash used in investing activities.. (38,855) (44,420) (275,120)
-------- -------- ---------
Cash flows from financing activities:
Net increase in line of credit............. 49,113 -- 189,650
Principal payments on long-term debt....... (241,606) (48,066) --
-------- -------- ---------
Net cash (used in) provided by
financing activities.................. (192,493) (48,066) 189,650
-------- -------- ---------
Net increase (decrease) in cash and
cash equivalents...................... 33,001 86,378 (69,986)
Cash and cash equivalents at beginning of
period...................................... 59,185 59,185 92,186
-------- -------- ---------
Cash and cash equivalents at end of period... $ 92,186 $145,563 $ 22,200
======== ======== =========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest................................. $ 7,471
========
Income taxes............................. $ 70,660
========
</TABLE>
See accompanying notes to financial statements.
F-187
<PAGE>
FAST TOWING, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(1) Description of Business and Summary of Significant Accounting Policies
Description of Business
Fast Towing, Inc. was founded in 1991 and operates as an Arizona
corporation. Fast Towing's primary business is towing, impounding and storing
vehicles. Fast Towing has two facilities in the Phoenix metropolitan area. It
operates approximately 34 vehicles.
On June 14, 1997, Fast Towing purchased substantially all of the assets and
assumed certain liabilities of Pars Towing, Inc. The purchase price of
$162,000 was conveyed in the form of a note payable to the seller. The
transaction was accounted for under the purchase method of accounting.
Revenue Recognition
Fast Towing operates as one segment related to the transportation of
vehicles for customers.
Fast Towing's revenue is derived from customers who require transportation
of vehicles. Transport revenue is recognized upon the delivery of the vehicles
to their final destination. Expenses related to the generation of revenue are
recognized as incurred.
Cash and Cash Equivalents
Cash and cash equivalents of $92,186 at December 31, 1997 consist of bank
accounts and certificates of deposit with an initial term of less than three
months. For purposes of the statements of cash flows, Fast Towing considers
all highly liquid debt instruments with original maturities of three months or
less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation is determined for
financial statement purposes using the straight-line method for leasehold
improvements and the double-declining method for all other assets over the
estimated useful lives of the individual assets. For financial statement
purposes, Fast Towing provides for depreciation of property and equipment over
the following estimated useful lives.
<TABLE>
<S> <C>
Transportation equipment....................................... 5 years
Furniture and fixtures......................................... 7 years
Office equipment............................................... 5 years
Leasehold improvements......................................... 10-39 years
</TABLE>
Fair Value of Financial Instruments
Due to the short-term nature of various financial instruments and the
current incremental borrowing rates available to Fast Towing on bank loans
with similar terms and maturities, the fair value of Fast Towing's financial
instruments approximates their carrying values.
Income Taxes
Income taxes are accounted for under the asset and liability method for Fast
Towing, Inc. 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. Deferred tax assets
F-188
<PAGE>
FAST TOWING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived assets and certain identifiable intangibles are 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 undiscounted net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
assets exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
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 financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Interim Financial Statements
The interim financial information included in these financial statements is
unaudited but reflects all adjustments (consisting of only normal recurring
accruals) which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented.
(2) Property and Equipment
Property and equipment at December 31, 1997 consists of the following:
<TABLE>
<S> <C>
Transportation equipment....................................... $ 842,948
Machinery and equipment........................................ 50,877
Office equipment............................................... 46,628
Leasehold improvements......................................... 98,393
----------
1,038,846
Less accumulated depreciation and amortization................. (569,021)
----------
$ 469,825
==========
</TABLE>
Depreciation of property and equipment in 1997 totaled $211,658.
(3) Intangibles
Intangibles consist primarily of goodwill and a trade name. Intangibles are
being amortized on a straight-line basis over the expected period to be
benefited, generally 15 years.
(4) Indebtedness
Fast Towing maintains a $300,000 line of credit with Valley First Community
Bank. The line of credit bears interest at 9.5%. The line is collateralized by
substantially all the assets of Fast Towing. There were $49,113 in borrowings
against this line of credit at December 31, 1997.
F-189
<PAGE>
FAST TOWING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(5) Leases
Fast Towing has several noncancelable operating leases, primarily for
transportation equipment and its operating facilities, that expire over the
next five years. Rental payments for the transportation equipment include
minimum rentals plus contingent rentals based on mileage. Rent expense in 1997
was $161,797.
Future minimum operating lease payments as of December 31, 1997 are:
<TABLE>
<S> <C>
Year ending December 31,
1998............................................................ $262,503
1999............................................................ 263,103
2000............................................................ 228,547
2001............................................................ 188,858
2002............................................................ 33,147
--------
$976,158
========
</TABLE>
(6) Income Taxes
Income tax expense for the years ended December 31, 1997 consists of:
<TABLE>
<S> <C>
Current:
Federal.......................................................... $31,575
State............................................................ 9,545
-------
41,120
-------
Deferred:
Federal.......................................................... 4,522
State............................................................ 1,367
-------
5,889
-------
$47,009
=======
</TABLE>
The provision for income taxes differs from the amount computed by applying
the statutory Federal income tax rate to income before taxes. The sources and
tax effects of the differences are as follows:
<TABLE>
<S> <C>
Computed "expected" federal income tax expense.................... $38,832
Expected state income taxes, net of federal benefit............... 7,667
Non deductible item............................................... 31
Other............................................................. 479
-------
$47,009
=======
</TABLE>
The tax effects of temporary differences that give rise to a deferred tax
liability as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
Deferred tax assets (liabilities):
Trade accounts receivable...................................... $(8,175)
Accounts payable............................................... 2,286
-------
Net deferred tax liability................................... $(5,889)
=======
</TABLE>
F-190
<PAGE>
FAST TOWING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(7) Related Party Transactions
During 1997, Fast Towing made payments of $39,606 to a stockholder in
payment of a note.
(8) Contingent Liabilities
Various legal claims arise against Fast Towing 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.
(9) Subsequent Event
During June 1998, the stockholders entered into an agreement to sell Fast
Towing to United Road Services, Inc. The transaction, completed June 29, 1998,
was a cash transaction. The selling price of Fast Towing exceeds its net
assets as of December 31, 1997.
F-191
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Alert Auto Transport, Inc.:
We have audited the accompanying balance sheet of Alert Auto Transport,
Inc., as of May 31, 1998, and the related statements of earnings and retained
earnings, and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audit 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 audit provides 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 Alert Auto Transport,
Inc., as of May 31, 1998 and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
July 31, 1998
Birmingham, Alabama
F-192
<PAGE>
ALERT AUTO TRANSPORT, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
May 31, June 30,
1998 1998
-------- --------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash....................................................... $ 33,852 $184,657
Accounts receivable, net of allowance for doubtful accounts
of $7,000 and $7,000, respectively........................ 158,244 216,234
Inventory.................................................. 1,230 1,230
Income tax refund receivable (note 5)...................... 1,212 1,212
Deferred income taxes (note 5)............................. 1,479 1,547
-------- --------
Total current assets..................................... 196,017 404,880
Property and equipment, net (notes 2 and 3).................. 519,536 513,645
Notes receivable from stockholder (note 6)................... 17,500 17,500
-------- --------
Total assets............................................. $733,053 $936,025
======== ========
Liabilities and Stockholder's Equity
Current liabilities:
Current installments of notes payable (note 3)............. $ 17,798 $139,295
Accounts payable........................................... 74,801 99,355
Income taxes payable....................................... -- 22,499
Accrued payroll and related costs.......................... 20,576 474
-------- --------
Total current liabilities................................ 113,175 261,623
Long-term liabilities:
Deferred income taxes (note 5)............................. 78,854 83,037
-------- --------
Total liabilities........................................ 192,029 344,660
-------- --------
Stockholder's equity:
Common stock, $10 par value. Authorized, issued and
outstanding 100 shares.................................... 1,000 1,000
Retained earnings.......................................... 540,024 590,365
-------- --------
Total stockholder's equity............................... 541,024 591,365
-------- --------
Total liabilities and stockholder's equity............... $733,053 $936,025
======== ========
</TABLE>
See accompanying notes to financial statements.
F-193
<PAGE>
ALERT AUTO TRANSPORT, INC.
STATEMENT OF EARNINGS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
One-month
Year ended ended June 30
May 31, ------------------
1998 1997 1998
---------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Net revenue................................... $3,045,085 $298,818 $339,416
Cost of revenue (includes related party lease
expense of $488,421, $21,792, and $27,915,
respectively)................................ 2,657,228 183,162 240,063
---------- -------- --------
Gross profit.............................. 387,857 115,656 99,353
Selling, general, and administrative expenses
(includes related party lease expense of
$65,100, $4,800, and $5,150, respectively)... 267,851 20,692 22,279
---------- -------- --------
Income from operations.................... 120,006 94,964 77,074
Other income (expense):
Interest expense............................ (3,262) (365) (116)
Gain (loss) on sale of assets............... 21,690 (519) --
---------- -------- --------
Income before income taxes................ 138,434 94,080 76,958
Income tax expense (note 5)................... 23,660 16,078 26,617
---------- -------- --------
Net income................................ 114,774 78,002 50,341
Retained earnings, beginning of period........ 425,250 425,250 540,024
---------- -------- --------
Retained earnings, end of period.............. $ 540,024 $503,252 $590,365
========== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-194
<PAGE>
ALERT AUTO TRANSPORT, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
One-month
Year ended ended June 30
May 31, --------------------
1998 1997 1998
---------- --------- ---------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 114,774 $ 78,002 $ 50,341
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation................................ 70,499 5,875 5,891
(Gain) loss on sale of property and
equipment.................................. (21,690) 519 --
Deferred income taxes....................... 12,072 12,073 4,115
Increase in trade accounts receivable....... (41,855) (41,791) (57,990)
Increase in income tax refund receivable.... (1,212) -- --
(Decrease) increase in accounts payable..... (37,836) 24,689 24,554
(Decrease) increase in income taxes payable. (11,686) 4,005 22,499
Increase (decrease) in accrued payroll and
related costs.............................. 4,139 (5,795) (20,102)
--------- --------- ---------
Net cash provided by operating activities. 87,205 77,577 29,308
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment.......... (187,233) -- --
Proceeds from sale of equipment.............. 72,500 -- --
Loans to stockholder......................... (15,500) -- --
--------- --------- ---------
Net cash used in investing activities..... (130,233) -- --
--------- --------- ---------
Cash flows from financing activities:
Proceeds from short-term borrowings.......... -- -- 125,000
Principal payments on long-term debt......... (40,195) (3,254) (3,503)
--------- --------- ---------
Net cash (used in) provided by financing
activities............................... (40,195) (3,254) 121,497
--------- --------- ---------
Net (decrease) increase in cash........... (83,223) 74,323 150,805
Cash at beginning of period................... 117,075 117,075 33,852
--------- --------- ---------
Cash at end of period......................... $ 33,852 $ 191,398 $ 184,657
========= ========= =========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest.................................... $ 3,262 $ 399 $ 116
========= ========= =========
Income taxes................................ $ 24,486 $ -- $ --
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-195
<PAGE>
ALERT AUTO TRANSPORT, INC.
NOTES TO FINANCIAL STATEMENTS
May 31, 1998
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Alert Auto Transportation, Inc. (the "Company") was founded on May 20, 1988.
The Company's primary business is transporting vehicles for auto auctions,
transportation brokers, auto dealers, and individuals, primarily in the
Southeast. The Company has facilities in Guntersville, Alabama.
(b) Revenue Recognition
Revenue is derived from customers who require transportation of vehicles.
Transport revenue is recognized upon the delivery of the vehicles to their
final destination. Expenses related to the generation of revenue are
recognized as incurred.
(c) Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated on the
straight-line method over the estimated useful lives of the assets. The
Company provides for depreciation of property and equipment using estimated
useful lives as follows:
<TABLE>
<S> <C>
Transportation equipment........................................... 10 years
Machinery and equipment............................................ 5-7 years
Office equipment................................................... 5-7 years
</TABLE>
(d) 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 operating loss and tax credit 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 or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(e) 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 financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(f) Interim Financial Statements
The interim financial information included in these financial statements is
unaudited but reflects all adjustments (consisting of only normal recurring
accruals) which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented.
(2) Property and Equipment
Property and equipment at May 31, 1998 consists of the following:
<TABLE>
<S> <C>
Transportation equipment........................................... $801,299
Machinery and equipment............................................ 16,587
Office equipment................................................... 17,741
--------
Total.......................................................... 835,627
Less accumulated depreciation...................................... 316,091
--------
Property and equipment, net........................................ $519,536
========
</TABLE>
F-196
<PAGE>
ALERT AUTO TRANSPORT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(3) Indebtedness
Long-term debt at May 31, 1998 and 1997 consists of the following:
<TABLE>
<S> <C>
Note payable to AmSouth Bank, payable in monthly installments of
$3,618, including interest at 8.0 percent, maturing October 1998,
secured by equipment............................................. $ 17,798
Less installments due within one year............................. (17,798)
--------
Long-term debt, excluding current installments.................... $ --
========
</TABLE>
(4) Leases and Related Party Transactions
The Company leases trucks from its sole stockholder which are utilized in
operations of the business. Lease payments are 25 percent of the revenue
generated by the leased trucks. The total payments made to the stockholder in
1998 related to the lease agreements was $488,421.
The Company leases the building used for its operations from its
stockholder. The lease is classified as an operating lease and the Company is
responsible for all operating costs related to the property. Rent paid to the
stockholder in 1998 was $65,100.
(5) Income Taxes
Income tax expense for the year ended May 31, 1998, consists of:
<TABLE>
<S> <C>
Current:
Federal........................................................... $ 9,099
State............................................................. 2,489
-------
11,588
-------
Deferred:
Federal........................................................... 7,978
State............................................................. 4,094
-------
12,072
-------
Total income tax expense........................................ $23,660
=======
</TABLE>
The following table reconciles the expected tax expense at the Federal
statutory tax rate to the effective tax rate for the year ended May 31, 1998:
<TABLE>
<S> <C>
Computed expected tax expense...................................... $ 47,068
State income tax, net of Federal tax benefit....................... 3,928
Effect of graduated tax rates...................................... (28,135)
Other.............................................................. 799
--------
Total income tax expense....................................... $ 23,660
========
</TABLE>
The tax effect of temporary differences that give rise to deferred tax
assets and deferred tax liabilities as of May 31, 1998 are presented below:
<TABLE>
<S> <C>
Deferred tax asset:
Accounts receivable, principally due to allowance for doubtful
accounts....................................................... $ 1,479
Deferred tax liability:
Property and equipment, principally due to differences in
depreciation................................................... (78,854)
--------
Net deferred tax liability.................................... $(77,375)
========
</TABLE>
F-197
<PAGE>
ALERT AUTO TRANSPORT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 during the
periods in which those temporary differences become deductible. Management
considers the projected future taxable income and tax planning strategies, as
well as carryback opportunities, in making this assessment. Based upon the
level of historical taxable income, projections for future taxable income and
carryback opportunities over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences. The amount of the
deferred tax asset considered realizable, however, could be reduced in the
near term if estimates of future taxable income are reduced.
(6) Concentration of Business Risks
One customer, TNT Incorporated, accounted for approximately 22 percent of
Alert's sales in 1998. The loss of this customer could significantly affect
Alert's performance.
(7) Subsequent Events
The Company's sole stockholder entered into a definitive agreement to sell
the Company to United Road Services, Inc. as of July 1, 1998.
F-198
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
You should rely only on the information contained in this document or that we
have referred you to. We have not authorized anyone to provide you with
information that is different. This prospectus is not an offer to sell Common
Stock and it is not soliciting an offer to buy Common Stock in any state where
the offer or sale is not permitted.
1,213,944 Shares
[LOGO]
UNITED ROAD
SERVICES, INC.
Common Stock
April 21, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses payable by the
Registrant in connection with the sale of the Common Stock being registered
hereby.
<TABLE>
<CAPTION>
Item Amount
---- --------
<S> <C>
SEC registration fee............................................ $ 2,643
Legal fees and expenses......................................... 100,000*
Accounting fees and expenses.................................... 200,000*
Miscellaneous expenses.......................................... 2,357
--------
Total......................................................... $305,000
========
</TABLE>
--------
* Estimated
Item 14. Indemnification of Directors and Officers.
The Registrant has included in its Certificate of Incorporation and Bylaws
provisions to (i) eliminate the personal liability of its directors for
monetary damages resulting from breaches of their fiduciary duty to the extent
permitted by the General Corporation Law of the State of Delaware (the "DGCL")
and (ii) indemnify its directors and officers to the fullest extent permitted
by the DGCL, including circumstances in which indemnification is otherwise
discretionary.
Section 145 of the DGCL permits a corporation, under specified
circumstances, to indemnify its directors, officers, employees or agents
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlements actually and reasonably incurred by each in connection
with any action, suit or proceeding brought by third parties by reason of the
fact that they were or are directors, officers, employees or agents of the
corporation, if such directors, officers, employees or agents acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any criminal action or
proceeding, had no reason to believe their conduct was unlawful. In a
derivative action, i.e., one by or in the right of the corporation,
indemnification may be made only for expenses (including attorneys' fees)
actually and reasonably incurred by directors, officers, employees or agents
in connection with the defense or settlement of an action or suit, and only
with respect to a matter as to which they shall have acted in good faith and
in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged liable to the corporation, unless and
only to the extent that the court in which the action or suit was brought
shall determine upon application that the defendant directors, officers,
employees or agents are fairly and reasonably entitled to indemnity for such
expenses despite such adjudication of liability.
The Registrant has entered into indemnification agreements with its
directors and certain key officers pursuant to which the Registrant is
generally obligated to indemnify its directors and such officers to the full
extent permitted by the DGCL as described above.
The Registrant has purchased insurance for its directors and officers
indemnifying them against certain civil liabilities, including liabilities
under the federal securities laws, which might be incurred by them in such
capacity.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities.
The information in this Item 15 gives effect to a 100-for-1 split of the
Common Stock effected on December 29, 1997 and a 3.72-for-1 split of the
Common Stock effected on February 23, 1998.
Since its incorporation in July 1997, the Registrant has issued and sold the
following unregistered securities, the purchasers of which were all accredited
investors:
(1) In August 1997, in connection with its formation, the Company issued
930,000 shares of Common Stock to each of Mark McKinney and Ross Berner for
aggregate cash consideration of $50,000.
(2) In November 1997, pursuant to a Stock Purchase and Restriction
Agreement between the Company and Edward T. Sheehan, the Company issued
744,000 shares of Common Stock to Mr. Sheehan for cash consideration of
$20,000.
(3) In January 1998, the Company issued an aggregate of 218,736 shares of
Common Stock to private investors for cash consideration of $735,000. Such
shares were issued pursuant to Subscription Agreements between the Company
and each of the investors.
(4) On May 6, 1998, the Company issued an aggregate of 2,375,741 shares
of Common Stock in connection with its acquisitions of Northland Auto
Transporters, Inc., Northland Fleet Leasing, Inc., Falcon Towing and Auto
Delivery, Inc., Smith Christensen Enterprises, Inc., Caron Auto Works,
Inc., Caron Auto Brokers, Inc., Absolute Towing and Transporting, Inc., ASC
Transportation Services, and Silver State Tow & Recovery, Inc.
(5) On June 12, 1998, the Company issued an aggregate of 212,023 shares
of Common Stock in connection with its acquisition of 5L Corporation and
ADP Transport, Inc.
(6) On June 16, 1998, the Company issued a warrant to purchase 117,789
shares of Common Stock at $13.00 per share to Bank of America National
Trust and Savings Association, in connection with the credit facility. The
warrant expires on June 16, 2003.
(7) On June 22, 1998, the Company issued an aggregate of 93,902 shares of
Common Stock in connection with its acquisition of D&M Auto Towing, Inc.
(8) On June 29, 1998, the Company issued an aggregate of 35,956 shares of
Common Stock in connection with its acquisition of Rouse's Body Shop, Inc.
(9) On June 30, 1998, the Company issued an aggregate of 22,023 shares of
Common Stock in connection with its acquisition of Northshore Towing, Inc.,
Northshore Recycling Inc. and Evanston Reliable Maintenance, Inc.
(10) On July 1, 1998, the Company issued an aggregate of 29,778 shares of
Common Stock in connection with its acquisition of Bill and Wags, Inc.
(11) On July 1, 1998, the Company issued an aggregate of 125,000 shares
of Common Stock in connection with its acquisition of Schroeder Auto
Carriers, Inc.
(12) On July 2, 1998, the Company issued an aggregate of 144,785 shares
of Common Stock in connection with its acquisitions of PBM, Inc. and Alert
Auto Transport.
(13) On July 2, 1998, the Company issued an aggregate of 24,757 shares of
Common Stock in connection with its acquisition of West Nashville Wrecker
Service, Inc.
(14) On July 14, 1998, the Company issued an aggregate of 36,657 shares
of Common Stock in connection with its acquisition of AAAmazing, Inc.
(15) On July 20, 1998, the Company issued an aggregate of 99,602 shares
of Common Stock in connection with its acquisition of Healey Automotive,
Inc.
II-2
<PAGE>
(16) On July 21, 1998, the Company issued an aggregate of 17,735 shares
of Common Stock in connection with its acquisition of Sid's Wrecker
Service, Inc.
(17) On July 22, 1998, the Company issued an aggregate of 113,208 shares
of Common Stock in connection with its acquisition of Patrick K. Willis and
Company, Inc.
(18) On July 31, 1998, the Company issued an aggregate of 9,724 shares of
Common Stock in connection with its acquisition of Kirk's Sineath Motor
Company, Inc.
(19) On August 3, 1998, the Company issued an aggregate of 29,148 shares
of Common Stock in connection with its acquisition of Better All Auto
Transport, Inc.
(20) On August 6, 1998, the Company issued an aggregate of 91,116 shares
of Common Stock in connection with its acquisition of El Paso Towing, Inc.
(21) On August 7, 1998, the Company issued an aggregate of 377,624 shares
of Common Stock in connection with its acquisition of Keystone Towing, Inc.
(22) On August 14, 1998, the Company issued an aggregate of 23,480 shares
of Common Stock in connection with its acquisition of A&B Towing, Inc.
(23) On August 21, 1998, the Company issued an aggregate of 173,498
shares of Common Stock in connection with its acquisition of Environmental
Auto Removal, Inc.
(24) On August 26, 1998, the Company issued an aggregate of 9,424 shares
of Common Stock in connection with its acquisition of Arri Brothers, Inc.
(25) On September 8, 1998, the Company issued an aggregate of 39,467
shares of Common Stock in connection with its acquisition of 1113
Enterprises, Inc. d/b/a Central Service Center and T.J. West, Inc.
(26) On October 14, 1998, the Company issued an aggregate of 41,346
shares of Common Stock in connection with its acquisition of Freeman's
Transporting, Inc.
(27) On December 7, 1998, the Company issued $43,500,000 aggregate
principal amount of its 8% Convertible Subordinated Notes due 2008 to
Charter URS LLC, pursuant to the Purchase Agreement, dated as of November
19, 1998, between the Company and Charter URS LLC.
(28) On February 1, 1999, the Company issued an aggregate of 70,594
shares of Common Stock in connection with its acquisition of Yellowstone
Transport, Inc.
(29) On February 22, 1999, the Company issued an aggregate of 64,678
shares of Common Stock in connection with its acquisition of Kern Radiator
& Towing, Inc. d/b/a B&J Towing.
(30) On February 26, 1999, the Company issued an aggregate of 116,391
shares of Common Stock in connection with its acquisition of Louisville
Auto Transport, Inc. and Louisville-Orlando Auto Delivery, Inc.
(31) On March 1, 1999, the Company issued an aggregate of 71,431 shares
of Common Stock in connection with its acquisition of Flynn Motor
Transport, Inc.
(32) On March 2, 1999, the Company issued an aggregate of 25,899 shares
of Common Stock in connection with its acquisition of Let's Move It, Inc.
d/b/a Auto Movers of Ohio.
(33) On March 3, 1999, the Company issued an aggregate of 217,880 shares
of Common Stock in connection with its acquisition of Beartooth Auto
Delivery, Inc. and J&C Incorporated.
(34) On March 5, 1999, the Company issued an aggregate of 81,943 shares
of Common Stock in connection with its acquisition of Arizona's Towing
Professionals, Inc. d/b/a Shamrock Towing.
(35) On March 16, 1999, the Company issued $31,500,000 aggregate
principal amount of its 8% Convertible Subordinated Notes due 2008 to
Charter URS LLC, pursuant to the Purchase Agreement, dated as of November
19, 1998, between the Company and Charter URS LLC.
(36) On March 22, 1999, the Company issued an aggregate of 83,916 shares
of Common Stock in connection with its acquisition of River City Auto
Recovery, Inc., Skipbusters, Inc., ARS Recovery, Inc., and Ability Employee
Leasing, Inc.
II-3
<PAGE>
The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act or
Regulation D promulgated thereunder as transactions by an issuer not involving
a public offering. The recipients of securities in each such transaction
represented their 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 share certificates issued in such
transactions.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Number Description of Document
------ -----------------------
<C> <S>
2.1 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Northland Auto Transporters, Inc. and the
Stockholder named therein (incorporated by reference to the same-
numbered Exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-46925)).
2.2 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Northland Fleet Leasing, Inc. and the
Stockholder named therein (incorporated by reference to the same-
numbered Exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-46925)).
2.3 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Falcon Towing and Auto Delivery, Inc. and the
Stockholder named therein (incorporated by reference to the same-
numbered Exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-46925)).
2.4 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Smith-Christensen Enterprises, Inc. and City
Towing, Inc. and the Stockholders named therein (incorporated by
reference to the same-numbered Exhibit to the Company's Registration
Statement on Form S-1 (Registration No. 333-46925)).
2.5 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Caron Auto Works, Inc. and the Stockholders
named therein (incorporated by reference to the same-numbered Exhibit
to the Company's Registration Statement on Form S-1 (Registration No.
333-46925)).
2.6 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Caron Auto Brokers, Inc. and the Stockholder
named therein (incorporated by reference to the same-numbered Exhibit
to the Company's Registration Statement on Form S-1 (Registration No.
333-46925)).
2.7 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Absolute Towing and Transporting, Inc. and the
Stockholder named therein (incorporated by reference to the same-
numbered Exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-46925)).
2.8 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Keystone Towing, Inc. and the Stockholder named
therein (incorporated by reference to the same-numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 333-
46925)).
2.9 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, ASC Transportation Services, Auto Service Center
and the Stockholders named therein (incorporated by reference to the
same-numbered Exhibit to the Company's Registration Statement on Form
S-1 (Registration No. 333-46925)).
2.10 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Silver State Tow & Recovery, Inc. and the
Stockholders named therein (incorporated by reference to the same-
numbered Exhibit to the Company's Registration Statement on Form S-1
(Registration
No. 333-46925)).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Number Description of Document
------ -----------------------
<C> <S>
2.11 Form of Amendment Number One to Agreement and Plan of Reorganization
dated as of February 23, 1998, by and among the Company, Keystone
Towing, Inc. and the Stockholder named therein (incorporated by
reference to the same-numbered Exhibit to Amendment No. 3 to the
Company's Form S-1 Registration Statement (Registration No. 333-
46925)).
2.12 Stock Purchase Agreement, dated as of August 21, 1998, by and among the
Company, E & R Towing and Garage, Inc., Gerald J. Corcoran, Edward V.
Corcoran, Edward V. Corcoran, Jr. and David Corcoran (incorporated by
reference to Exhibit 2.1 to the Company's Current Report on Form 8-K
filed September 1, 1998).
2.13 Stock Purchase Agreement, dated as of August 21, 1998, by and among the
Company, Environmental Auto Removal, Inc., Gerald J. Corcoran and
Edward V. Corcoran (incorporated by reference to Exhibit 2.2 to the
Company's Current Report on Form 8-K filed September 1, 1998).
2.14 Merger Agreement, dated November 5, 1998, by and among the Company, URS
Transport, Inc., Pilot Transport, Inc. and the Shareholders named
therein (incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K, dated December 9, 1998).
2.15 First Amendment to Merger Agreement, dated December 2, 1998, by and
among the Company, URS Transport, Inc., Pilot Transport, Inc. and the
Shareholders named therein (incorporated by reference to Exhibit 2.2 to
the Company's Current Report on Form 8-K, dated December 9, 1998).
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 Amended and Restated Bylaws 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)).
4.1 Specimen Common Stock Certificate (incorporated by reference to the
same-numbered Exhibit to Amendment No. 3 to the Company's Form S-1
Registration Statement (Registration No. 333-46925)).
4.2 Form of 8% Convertible Subordinated Debenture due 2008 (incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-K,
dated November 19, 1998).
5.1 Opinion of McDermott, Will & Emery, as to the validity of the issuance
of the securities registered hereby (previously filed).
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 Stock Purchase and Restriction Agreement between the Company and Edward
Sheehan (incorporated by reference to the same-numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 333-
46925)).
10.3 Amended and Restated Executive Employment Agreement dated as of January
1, 1999 between the Company and Edward T. Sheehan (filed herewith).
10.4 Resignation letter from Mark McKinney in favor of the Company
(incorporated by reference to the same-numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 333-
56603)).
10.5 Resignation letter from Ross Berner in favor of the Company
(incorporated by reference to the same-numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 333-
56603)).
10.6 Amended and Restated Executive Employment Agreement dated as of January
1, 1999 between the Company and Allan D. Pass (filed herewith).
10.7 Executive Employment Agreement between the Company and Donald J. Marr
(incorporated by reference to the same-numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 333-
46925)).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Number Description of Document
------ -----------------------
<C> <S>
10.8 Employment Agreement between the Company and Edward Morawski
(incorporated by reference to the same-numbered Exhibit to Amendment
No. 1 to the Company's Form S-1 Registration Statement (Registration
No. 333-46925)).
10.9 Consulting Agreement between the Company and Todd Q. Smart
(incorporated by reference to the same-numbered Exhibit to Amendment
No. 1 to the Company's Form S-1 Registration Statement (Registration
No. 333-46925)).
10.10 Credit Agreement dated as of May 8, 1998 among United Road Services,
Inc., various financial institutions and Bank of America National Trust
and Savings Association, as Agent (incorporated by reference to the
same-numbered Exhibit to the Company's Registration Statement on Form
S-1 (Registration No. 333-56603)).
10.11 Amended and Restated Executive Employment Agreement, dated as of May 1,
1998, between the Company and Donald J. Marr (incorporated by reference
to the same-numbered Exhibit to the Company's Registration Statement on
Form S-1 (Registration No. 333-56603)).
10.12 [Reserved]
10.13 Form of Registration Rights Agreement between the Company and
Stockholders named therein (incorporated by reference to the same-
number Exhibit to Amendment No. 1 to the Company's Form S-1
Registration Statement (Registration No. 333-46925)).
10.14 Form of Indemnification Agreement between the Company and each of the
Company's executive officers and directors (incorporated by reference
to the same-numbered Exhibit to Amendment No. 2 to the Company's Form
S-1 Registration Statement Registration No. 333-46925)).
10.15 Lease between the Company and Edward Morawski (incorporated by
reference to the same-numbered Exhibit to Amendment No. 1 to the
Company's Form S-1 Registration Statement (Registration
No. 333-46925)).
10.16 Consulting Agreement, dated as of May 7, 1998, by and between the
Company and Mark J. Henninger (previously filed).
10.17 Amended and Restated Executive Employment Agreement, dated as of
January 1, 1999, between the Company and Robert Joseph Adams, Jr.
(filed herewith).
10.18 First Amendment to Credit Agreement, dated as of June 26, 1998, by and
among the Company, various financial institutions and Bank of America
National Trust and Savings Association, as Agent (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-
Q for the period ended June 30, 1998).
10.19 Second Amendment to Credit Agreement, dated as of July 15, 1998, by and
among the Company, various financial institutions and Bank of America
National Trust and Savings Association, as Agent (incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-
Q for the period ended June 30, 1998).
10.20 Third Amendment to Credit Agreement, dated as of September 30, 1998, by
and among the Company, various financial institutions and Bank of
America National Trust and Savings Association, as Agent (previously
filed).
10.21 Stock Purchase Warrant, dated as of June 16, 1998, issued by the
Company to Bank of America National Trust and Savings Association
(previously filed).
10.22 Amended and Restated Credit Agreement, dated as of November 2, 1998, by
and among the Company, various financial institutions, BankBoston,
N.A., as Documentation Agent and Bank of America National Trust and
Savings Association, as Agent (previously filed).
10.23 First Amendment to Amended and Restated Credit Agreement, dated as of
December 4, 1998, by and among the Company, various financial
institutions, BankBoston, N.A., as Documentation Agent and Bank of
America National Trust and Savings Association, as Agent (previously
filed).
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Number Description of Document
------ -----------------------
<C> <S>
10.24 Purchase Agreement, dated as of November 19, 1998, by and between
Charter URS LLC and the Company (incorporated by reference to Exhibit
99.1 to the Company's Current Report on Form 8-K, dated November 19,
1998).
10.25 Registration Rights Agreement, dated as of November 19, 1998, by and
between Charter URS LLC and the Company (incorporated by reference to
Exhibit 99.2 to the Company's Current Report on Form 8-K, dated
November 19, 1998).
10.26 Investors Agreement, dated as of November 19, 1998, by and between
Charter URS LLC and the Company (incorporated by reference to Exhibit
99.3 to the Company's Current Report on Form 8-K, dated November 19,
1998).
10.27 Merger Agreement dated as of November 12, 1998, by and among the
Company, URS Transport, Inc., MPG Transco, Ltd., Michael A. Wysocki,
Patrick M. Riley and Gary R. Sienkiewicz (previously filed).
10.28 Amendment Number One to Amended and Restated Executive Employment
Agreement, dated as of March 30, 1999, between the Company and Edward
T. Sheehan (filed herewith).
10.29 Amendment Number One to Amended and Restated Executive Employment
Agreement, dated as of March 30, 1999, between the Company and Allan D.
Pass, (filed herewith).
10.30 Amendment Number One to Amended and Restated Executive Employment
Agreement, dated as of March 30, 1999, between the Company and Robert
Joseph Adams, Jr. (filed herewith).
21.1 Subsidiaries of the Registrant (previously filed).
24.1 Consent of McDermott, Will & Emery (included in Exhibit 5.1).
24.2 Consent of KPMG LLP (filed herewith).
</TABLE>
- --------
(b) Financial Statement Schedules
All schedules are omitted because they are inapplicable or the requested
information is shown in the financial statements of the registrant or related
notes thereto.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Post-Effective Amendment No. 2 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Albany, State of
New York, on the 19th day of April, 1999.
United Road Services, Inc.
By: /s/ Edward T. Sheehan
----------------------------------
Edward T. Sheehan
Chairman of the Board,
Chief Executive Officer
and Secretary
KNOW ALL PERSONS BY THESE PRESENTS, that Mr. Pfeffer, whose signature appears
below, constitutes and appoints Edward T. Sheehan and Allan D. Pass and each of
them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution for him in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact
and agents, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 2 has been signed on April 19, 1999 by the following
persons in the capacities indicated.
Signature Title
/s/ Edward T. Sheehan Chairman of the Board
- ------------------------ Chief Executive Officer,
Edward T. Sheehan and Secretary (Principal Executive Officer)
and Director
/s/ Donald J. Marr Senior Vice President and Chief Financial
- ------------------------ Officer (Principal Financial and Accounting
Donald J. Marr Officer)
/s/ Grace M. Hawkins* Director
- ------------------------
Grace M. Hawkins
/s/ Donald F. Director
Moorehead, Jr.*
- ------------------------
Donald F. Moorehead,
Jr.
/s/ Edward W. Morawski* Director
- ------------------------
Edward W. Morawski
/s/ Todd Q. Smart* Director
- ------------------------
Todd Q. Smart
/s/ Richard A. Director
Molyneux*
- ------------------------
Richard A. Molyneux
/s/ Mark J. Henninger* Director
- ------------------------
Mark J. Henninger
/s/ Merril M. Halpern* Director
- ------------------------
Merril M. Halpern
/s/ Robert L. Berner, Director
III*
- ------------------------
Robert L. Berner, III
/s/ Michael S. Pfeffer Director
- ------------------------
Michael S. Pfeffer
/s/ Edward T. Sheenan
*By:____________________
Edward T. Sheenan
Attorney-in-fact
II-8
<PAGE>
Exhibit 10.3
AMENDED AND RESTATED Executive Employment Agreement
This Amended and Restated Executive Employment Agreement ("Agreement") is
made and entered into as of January 1, 1999 (the "Effective Date") by and
between United Road Services, Inc., a Delaware corporation (the "Company") and
Edward T. Sheehan, an individual resident of the State of New York
("Executive").
RECITALS
WHEREAS, the Company is engaged in the business of motor vehicle and
equipment towing, recovery and transport services (the "Business");
WHEREAS, the Company desires to employ Executive on a full-time basis as
Chief Executive Officer of the Company, and Executive is willing to be employed
by the Company in that capacity on the terms and conditions set forth in this
Agreement; and
WHEREAS, Executive is employed hereunder by the Company in a confidential
relationship wherein Executive, in the course of his employment with the
Company, has and will continue to become familiar with and aware of information
as to the Company's customers, specific manner of doing business, including the
processes, techniques and trade secrets utilized by the Company, and future
plans with respect thereto, all of which have been and will be established and
maintained at great expense to the Company; this information is a trade secret
and constitutes the valuable goodwill of the Company.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Company and Executive hereby
agree as follows:
1. Employment. The Company hereby employs Executive on the terms set
forth herein and Executive hereby accepts such employment.
2. Duties. During the period of his employment with the Company
hereunder, Executive will be employed as Chief Executive Officer of the Company.
Executive will:
(a) Devote his full business time, ability, knowledge and attention, and
give his best effort and skill solely to the Company's business
affairs and interests;
(b) Perform such services and assume such duties and responsibilities
appropriate to the positions identified above as well as those which
may from time to time be reasonably assigned to him by the Board of
Directors of the Company, to whom Executive will directly report; and
(c) In all respects use his best efforts to further, enhance and develop
the Company's business affairs, interests and welfare.
3. Compensation. In consideration of Executive's services to the Company
during the Employment Term, the Company will pay Executive a gross base salary
of $200,000 per annum during the Employment term. Executive's base salary will
be paid in equal installments (pro rated for portions of a pay period) on the
Company's regular pay days and the Company will withhold from such compensation
all applicable federal and state income, social security,
<PAGE>
disability and other taxes as required by applicable laws. On at least an annual
basis, the Compensation Committee of the Board of Directors (the "Compensation
Committee") will review Executive's performance and may increase such base
salary if, in its discretion, any such increase is warranted. The Company may
also pay Executive such bonuses and other incentive compensation, including
without limitation, stock options, as are determined from time to time to be
appropriate by the Compensation Committee or another duly authorized committee
of the Board of Directors.
4. Change of Control.
(a) Operation of Section 4. This Section 4 shall be effective, but not
operative, immediately upon execution of this Agreement by the parties
hereto and shall remain in effect so long as Executive remains
employed by the Company, but shall not be operative unless and until
there has been a Change of Control, as defined in subsection 4(b)
hereof. Upon such Change of Control, this Section 4 shall become
operative immediately.
(b) Definition. For purposes of this Agreement, a "Change of Control"
means (i) the sale of all or substantially all of the assets of the
Company to any person or entity that, prior to such sale, did not
control, was not under common control with, or was not controlled by,
the Company, (ii) a merger or consolidation or other reorganization in
which the Company is not the surviving entity or becomes owned
entirely by another entity, unless the outstanding voting securities
of the surviving or parent corporation, as the case may be,
immediately following such transaction are beneficially held by the
same persons and entities that beneficially held the outstanding
voting securities of the Company immediately prior to such transaction
in the same proportion as such persons or entities held such voting
securities immediately prior to the transaction, (iii) any transaction
or series of transactions which results in any person or "group"
becoming the beneficial owner, directly or indirectly, of securities
representing more than fifty percent (50%) of the outstanding voting
securities of the Company, or (iv) during any period of twelve
consecutive months after the Effective Date the persons who were
directors of the Company at the beginning of such twelve month period
cease to constitute a majority of the Board of Directors of the
Company or of any successor to the Company.
(c) Executive's Election Upon Change of Control. If, while Executive is
employed by the Company, a Change of Control (as defined in subsection
(b) of Section 4) occurs and one or more of the following events
occurs:
(i) The assignment to Executive of duties, responsibilities, or
status inconsistent with his duties, responsibilities, and status
prior to the Change of Control;
(ii) A reduction by the Company in Executive's base salary or bonus
eligibility (as in effect prior to the Change of Control);
2
<PAGE>
(iii)The failure to continue in effect the Company's insurance,
disability, stock option plans, or any other Executive benefit
plans, policies, practices or arrangements in which Executive
participates, or the failure to continue Executive's
participation therein on substantially the same basis, both in
terms of the amount of benefits provided and the level of
Executive's participation relative to other participants, as
existed prior to the Change of Control;
(iv) The failure of the Company to obtain a satisfactory agreement
from the successor to the Company to assume and agree to perform
this Agreement;
(v) Any termination by the Company of Executive's employment other
than pursuant to Section 7.2(b) hereof; or
(vi) The persons who were directors immediately before the transaction
that constitutes the Change of Control cease to constitute a
majority of the Board of Directors of the Company after the
transaction;
Executive may, in his sole discretion, within one (1) year after the effective
date of the Change of Control, give notice to the Company that he intends to
elect to exercise his rights to receive the payments provided for in Section
4(d) hereof (the "Notice of Intention"). The right to give such Notice of
Intention shall continue for one (1) year from the date of the Change of
Control. In the event that Executive elects not to exercise such rights,
Executive's employment with the Company shall continue on the terms and
conditions provided in this Agreement. In the event that Executive does elect
to exercise such rights, Executive's employment with the Company shall terminate
effective as of the date upon which the Notice of Intention is received by the
Company. Within ten (10) business days after the Company's receipt of the
Notice of Intention, payment by the Company to Executive of the amounts set
forth in Section 4(d)(i) below shall be made by cashier's check, accompanied by
a written notice to Executive setting forth the Company's computation of the
amount payable pursuant to Section 4(d). If Executive takes exception to the
Company's computation of such amount, Executive may (but shall not be prejudiced
in his right to later contest the amount actually paid by failure to do so) give
a further written notice to the Company setting forth in reasonable detail
Executive's exceptions to the Company's computation. If the Company and
Executive are unable to resolve any dispute over the total amount to be paid to
Executive pursuant to Section 4(d)(i) hereof in accordance with Section 13
hereof within thirty (30) days after the date of the Notice of Intention, such
dispute shall be submitted for resolution to an independent third party agreed
upon between the Company and Executive and any additional amount that is
determined to be owed by the Company to Executive pursuant to Section 4(d)(i)
hereof shall be paid to Executive by cashier's check within ten (10) business
days after such dispute has been finally resolved.
(d) Compensation Upon Change of Control.
(i) If Executive gives the Notice of Intention described in Section
4(c), or if the Company terminates Executive's employment within
one (1) year after a Change of Control other than pursuant to
Section 7.2(b) hereof, the Company shall pay Executive a lump sum
amount equal to three times Executive's base amount (as defined
by Section 280(G) of the Internal
3
<PAGE>
Revenue Code of 1986, as amended (the "Code")) less one dollar
($1.00). In addition to the foregoing, the Company will continue
to provide, for a period of three years from the effective date
of Executive's termination, medical, life, dental and disability
insurance coverage to Executive of the type and amount provided
to Executive under the Company's insurance policies as in effect
at the time of termination; provided, however, that if such
coverage does not continue to be maintained by the Company or is
otherwise not available to Executive, the Company shall provide
for or make available to Executive substantially similar economic
benefits; provided, however, that nothing in this subsection (i)
shall obligate the Company to provide for or make any such
similar economic benefits available to Executive if the Company
does not have such benefits available to its other executive
officers.
(ii) Payment of the amount set forth in Section 4(d)(i) shall
terminate Executive's rights to receive any and all other
payments, rights or benefits pursuant to Sections 3, 6 and 7 of
this Agreement from the date of termination, other than any
payments, rights or benefits arising (x) pursuant to Section 15.6
of this Agreement, or (y) from any other agreement, plan or
policy which by its terms or by operation of law provides for the
continuation of such payments, rights or benefits after the
termination of Executive's relationship with the Company.
(iii)The lump sum payment referred to in subsection (i) above shall
be in addition to and shall not be offset or reduced by (x) any
other amounts that have accrued or have otherwise become payable
to Executive or his beneficiaries, but have not been paid by the
Company as of the effective date of termination of Executive's
employment with the Company, including, but not limited to,
salary, consulting fees, disability benefits, termination
benefits, retirement benefits, life and health insurance
benefits, or any other compensation or benefit payment that is
part of any valid previous, current, or future contract, plan or
agreement, written or oral, or (y) any indemnification payments
that may be or become payable to Executive pursuant to the
provisions of the Company's Certificate of Incorporation, By-
laws, or similar policy, plan, or agreement relating to the
indemnification of directors or officers of the Company under
certain circumstances.
(iv) Notwithstanding anything in this Agreement to the contrary, in
the event that the Company determines in good faith that any
portion of the compensation described in this Section 4(d)
constitutes an excess parachute payment under Section 280(G) of
the Code, then the Company shall have no obligation to provide
such portion to Executive.
5. Vesting of Stock Options Upon Change of Control. In the event of a
Change of Control, in addition to any benefits provided to Executive upon a
Change of Control pursuant to the relevant stock option plan or stock option
agreement governing any grant of stock options to Executive, (and regardless of
whether Executive intends to give a Notice of Intention pursuant to
4
<PAGE>
Section 4(c) hereof or Executive's employment with the Company terminates after
a Change of Control), any and all stock options granted to Executive pursuant to
any of the Company's stock option plans prior to the effective date of such
Change of Control that are unvested as of the effective date of such Change of
Control will become fully vested and exercisable beginning two business days
prior to the effective date of such Change of Control without regard to any
vesting schedules established in the relevant option plan or option agreement.
6. Benefits and Reimbursements.
6.1 Executive will, during the Employment Term, have the right to receive
such benefits as are generally made available to full-time executive officers of
the Company, including the right to participate in any retirement plan or
executive bonus plan that the Company may create. In addition, or inclusive of
such benefits, the Company will provide Executive with the following:
(a) The opportunity to apply for coverage under the Company's
medical, life, dental and disability plans, if any. If Executive
is accepted for coverage under such plans, the Company will
provide to Executive and his immediate family such coverage on
the same terms as is customarily provided by the Company to the
plan participants as modified from time to time.
(b) In addition to normal holidays recognized by the Company,
Executive will be entitled to the greater of (i) three (3) weeks
paid vacation annually, or (ii) such other amount of paid
vacation as may be afforded executive officers of similar
position and seniority to Executive under the Company's policies
in effect from time to time (prorated for any year in which
Executive is employed for less than the full year).
6.2 The Company will reimburse Executive for travel and other out-of-
pocket expenses reasonably incurred by Executive in the performance of his
duties hereunder, provided that all such expenses will be reimbursed only (i)
upon the presentation by Executive to the Company of such documentation as may
be reasonably necessary to substantiate that all such expenses were incurred in
the performance of his duties, and (ii) if such expenses are consistent with all
policies of the Company in effect from time to time as to the kind and amount of
such expenses.
7. Term; Termination; Rights Upon Termination.
7.1 Term. The Company hereby employs Executive and Executive hereby
accepts employment with the Company for a period beginning on the Effective Date
and ending on the third anniversary of the Effective Date (as extended pursuant
to the following provisions, the "Term"). As of the first day of any month
following the Effective Date, the Term shall be extended for an additional one
(1) month period unless either Executive or the Company gives the other party
written notice at least ten (10) days prior to the first day of such month that
this Agreement shall terminate on the then scheduled expiration date of the
Term. If such notice is given, this Agreement shall automatically terminate on
such expiration date. If this Agreement is extended, the terms in effect under
this Agreement immediately preceding such extension shall
5
<PAGE>
apply during the extension period. If Executive's employment hereunder is
terminated by either the Company or Executive at any time for any reason, the
expiration date shall thereupon no longer be automatically extended.
7.2 Termination. This Agreement and Executive's employment may be
terminated in any one of the following ways:
(a) Death or Permanent Disability of Executive. Subject to the payment to
Executive of the amounts required by Section 7.3 below, this Agreement
will terminate immediately upon the death or permanent disability of
Executive, whereupon Executive shall have no further rights or be
entitled to any other benefits of this Agreement, other than the
payments and benefits referred to in Section 7.3 below. Executive will
be deemed permanently disabled for the purpose of this Agreement if,
in the good faith determination of the Board of Directors, based on
sound medical advice, Executive has become physically or mentally
incapable of performing his duties hereunder for a continuous period
of one hundred eighty (180) days, in which event Executive will be
deemed permanently disabled upon the expiration of such one hundred
eighty (180) day period.
(b) Executive's Discharge for Cause. At any time during the term of this
Agreement, subject to the payment to Executive of the amounts required
by Section 7.3(a) below, the Company may terminate Executive's
employment for "Cause" effective immediately upon its giving of
written notice setting forth with particularity the facts and
circumstances constituting such Cause, whereupon this Agreement will
terminate and Executive shall have no further rights or be entitled to
any other benefits of this Agreement, other than the payments and
benefits referred to in Section 7.3(a) below. For purposes of this
Agreement, "Cause" means the occurrence of one or more of the
following: (i) the commission by Executive of any act materially
detrimental to the Company, including but not limited to fraud,
embezzlement, theft, bad faith, gross negligence, recklessness,
dishonesty, insubordination or willful misconduct; (ii) gross
incompetence or repeated failure or refusal to perform the duties
required by this Agreement and as may be assigned to Executive by the
Company's Board of Directors from time to time; (iii) conviction of a
felony or of any crime of moral turpitude; (iv) any material
misrepresentation by Executive to the Company regarding the operation
of the business; or (v) material breach of any covenant of this
Agreement, provided, however, that the action or conduct described in
clause (ii) or clause (v) above will constitute "Cause" only if
Executive shall have either failed to remedy such alleged breach
within thirty (30) days from his receipt of written notice from the
Company demanding that he remedy such alleged breach, or shall have
failed to take reasonable steps in good faith to that end during such
thirty (30) day period and thereafter; and provided further that there
shall have been delivered to Executive a further notice after the end
of such thirty (30) day period asserting that the Board of Directors
has determined that Executive was guilty of conduct set forth in
clause (ii) or clause (v), as the case may be, that Executive has
failed to take reasonable steps in good faith to remedy such alleged
breach, and specifying the particulars thereof in detail; and provided
further that Executive thereafter shall have received a certified copy
of a resolution of the Board of
6
<PAGE>
Directors of the Company adopted by the affirmative vote of not less
than three-fourths of the entire membership of the Board of Directors
at a meeting called and held for that purpose and at which Executive
was given an opportunity to be heard, finding that Executive was
guilty of conduct set forth in clause (ii) or clause (v), as the case
may be, that Executive has failed to take reasonable steps in good
faith to remedy such alleged breach, and specifying the particulars
thereof in detail.
(c) The Company's Right to Terminate Without Cause. Subject to the
payment to Executive of the amounts required by Section 7.3 below, at
any time during the term of this Agreement, the Company may terminate
Executive's employment with the Company without "Cause" (as defined in
subsection (b) above), effective immediately upon written notice to
Executive, whereupon this Agreement will terminate and Executive shall
have no further rights or be entitled to any other benefits of this
Agreement, other than the payments and benefits referred to in Section
7.3 below. Notwithstanding the foregoing, if the Company terminates
Executive without "Cause" within one (1) year after a Change of
Control, the Company shall pay Executive the compensation described in
Section 4(d) hereof as though Executive had given the Notice of
Intention described in Section 4(c) (whether or not Executive actually
gave such Notice of Intention).
(d) Executive's Right to Terminate At Will. Executive shall have the
right at any time during the term of this Agreement, by giving written
notice to the Company, to terminate this Agreement and Executive's
employment with the Company effective as of the date on which such
notice is given by Executive, unless the Company advises Executive
that it requires the services of Executive for an additional period of
time, not to exceed 30 days, in which case Executive's employment
shall cease as of the end of such period (such effective date being
hereinafter referred to as the "Executive Termination Date"). On the
Executive Termination Date, this Agreement shall terminate and
Executive shall have no further rights under or be entitled to any
other benefits of this Agreement, other than the payments and benefits
referred to in Section 7.3(a) below.
7.3 Compensation and Benefits Upon Termination.
(a) Upon any termination of Executive's employment pursuant to this
Section 7, Executive will be entitled to: (i) the compensation
provided for in Section 3 hereof for the period of time ending with
the effective date of termination; (ii) compensation for any unused
vacation that Executive may have accrued, as well as all earned
benefits, up to and including the effective date of termination; (iii)
"COBRA" benefits to the extent required by applicable law; and (iv)
reimbursement for such expenses as Executive may have properly
incurred on behalf of the Company as provided in Section 6.2 above
prior to the effective date of termination.
(b) If (i) the Company terminates Executive's employment pursuant to
Section 7.2(c) above, or (ii) Executive terminates his employment
following the Company's assignment to Executive of regular duties,
responsibilities, or status which the
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Board of Directors determines, in good faith, to be materially
inconsistent with Executive's duties, responsibilities, and status
under this Agreement, then, in addition to the amounts payable in
Section 7.3(a) above:
(i) Executive will be entitled to receive a severance payment in an
amount equal to (i) two times the amount of Executive's base
salary in effect at the time of termination, plus (ii) the
aggregate amount of Executive's annual cash bonuses for the two
years immediately preceding such termination, which amount shall
be paid to Executive over a two-year period in equal installments
(pro rated for portions of a pay period) on the Company's regular
pay days, and the Company will withhold all applicable federal
and state income, social security, disability and other taxes as
required by applicable law; provided, however, that Executive's
right to receive payments pursuant to this Section 7.3(b)(i)
shall cease immediately upon a knowing violation by Executive of
any of the provisions of Sections 8, 9 or 10 hereof.
(ii) any and all stock options granted to Executive pursuant to any of
the Company's stock option plans prior to the effective date of
such termination that are unvested as of the effective date of
such termination will continue to vest, and Executive shall be
permitted to exercise such options on the terms set forth in the
relevant option plan and option agreement, in the same amounts
and at the same times as such options would have vested had
Executive remained employed by the Company until all such options
become fully vested (the period between the effective date of
termination and the date that all such options become fully
vested being hereafter referred to as the "Option Vesting
Period"); provided, that such continued vesting of options shall
immediately cease upon a knowing violation by Executive during
the Option Vesting Period of any of the provisions of Sections 8,
9 or 10 hereof.
(iii)the Company will continue to provide, for a period of two years
from the effective date of Executive's termination, medical,
life, dental and disability insurance coverage to Executive of
the type and amount provided to Executive under the Company's
insurance policies as in effect at the time of termination;
provided, however, that if such coverage does not continue to be
maintained by the Company or is otherwise not available to
Executive, the Company shall provide for or make available to
Executive substantially similar economic benefits; provided, that
nothing in this subsection (iii) shall obligate the Company to
provide for or make any such similar economic benefits available
to Executive if the Company does not have such benefits available
to its other Executive officers.
(c) In the event of a termination upon the death or permanent disability
of Executive as provided in Section 7.2(a) above, Executive or his
estate shall be entitled to receive from the Company, for a period of
twelve months following the effective date of termination, 100% of
Executive's base salary at the rate then in effect, payable in equal
installments (pro rated for portions of a pay period) on the
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Company's regular pay days, and the Company will withhold all
applicable federal and state income, social security, disability and
other taxes as required by applicable law; provided, however, that in
the case of a termination upon the permanent disability of Executive,
such payments shall be reduced by all payments in respect of
Executive's salary payable to Executive under the Company's disability
insurance, if any, for the same period.
7.4 Effect of Termination. Subject to Section 4 hereof, the payments set
forth in Section 7.3 will fully discharge all responsibilities of the Company to
Executive under this Agreement or relating to or arising out of the termination
of Executive's employment, and all other rights and obligations of the Company
and Executive under this Agreement shall cease as of the effective date of
termination, except that Executive's obligations under Sections 8, 9, and 10 and
each party's obligations under Section 14 hereof shall survive such termination.
8. Unfair Competition by Executive.
8.1 Executive agrees that all trade secrets, or confidential or
proprietary information with respect to the activities and businesses of the
Company, including, without limitation, personnel information, secret processes,
know-how, customer lists, databases, ideas, techniques, processes, inventions
(whether patentable or not), and other technical plans, business plans,
marketing plans, product plans, forecasts, contacts, strategies and information
(collectively "Proprietary Information") which were learned by Executive in the
course of his employment by the Company, and any other Proprietary Information
received, developed or learned by Executive hereafter in the course of his
future employment by or in association with the Company, are confidential and
will be kept and held in confidence and trust as a fiduciary by Executive.
Executive will not use or disclose Proprietary Information of the Company except
as necessary in the normal course of the business of the Company for its sole
and exclusive benefit, unless Executive is compelled so to disclose under
process of law, in which case Executive will first notify the Company promptly
after receipt of a demand to so disclose.
8.2 During the term of this Agreement and for the greater of (i) the
period during which Executive is receiving compensation or benefits pursuant to
Section 7.3 hereof and (ii) a period of one year following the expiration or
termination of this Agreement for any reason, directly or on behalf of or in
conjunction with any other person, persons, company, partnership, corporation or
business whatever nature, Executive will not:
(a) engage, as an officer, director, shareholder, owner, partner, joint
venturer, financier, manager, executive, independent contractor,
consultant, advisor, or sales representative, in any business selling
any products or services in direct competition with the Company or any
of its subsidiaries within 100 miles of any geographic location in
which the Company or any of its subsidiaries conducts business at such
time (or in the case of a termination or expiration of this Agreement,
within 100 miles of any geographic location in which the Company or
any of its subsidiaries conducted business at the time of such
expiration or termination) (the "Territory");
(b) call upon any prospective acquisition candidate on Executive's own
behalf or on behalf of any competitor of the Company or any of its
subsidiaries, which
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candidate was either called upon by the Company (including its
subsidiaries) or for which the Company made an acquisition analysis,
for the purpose of acquiring such entity; provided, however, that
Executive shall not be charged with a violation of this Section 8.2(b)
unless and until Executive shall have knowledge or notice that such
prospective acquisition candidate was called upon, or that an
acquisition analysis was made, for the purpose of acquiring such
entity;
(c) call upon, contact or solicit any person who is, at that time, an
employee of the Company (including the subsidiaries thereof) for the
purpose or with the intent of enticing such employee away from or out
of the employ of the Company (including the subsidiaries thereof);
provided that Executive shall be permitted to call upon and hire any
member of his or her immediate family;
(d) call upon any person or entity which is, at that time, or which has
been, within one (1) year prior to that time, a customer of the
Company (including the subsidiaries thereof) within the Territory for
the purpose of soliciting or selling products or services in direct
competition with the Company within the Territory;
(e) disclose customers, whether in existence or proposed, of the Company
(or the Company's subsidiaries) to any person, firm, partnership,
corporation or business for any reason or purpose.
(f) engage in any pattern of conduct that involves the making or
publishing of written or oral statements or remarks (including,
without limitation, the repetition or distribution of derogatory
rumors, allegations, negative reports or comments) which are
disparaging, deleterious or damaging to the integrity, reputation or
good will of the Company, its management, or of management of
corporations affiliated with the Company.
8.3 Except for activities expressly permitted by the prior written
approval of the Board of Directors of the Company, during the term of this
Agreement, the Executive will not: (a) engage in business independent of
Executive's employment by the Company that requires any substantial portion of
Executive's time; (b) serve as an officer, general partner or member in any for-
profit corporation, partnership or firm; (c) serve as a director of any
corporation, partnership of firm having the Business as its principal
enterprise; or (d) directly, indirectly or through any Affiliate, invest in,
participate in or acquire an interest in any entity engaged in the Business. For
purposes of this Agreement, the terms: (i) "Affiliate" means as to any Person,
each other Person that directly or indirectly (through one (1) or more
intermediaries) controls, is controlled by or is under common control with such
person; and (ii) "Person" means an individual, corporation, partnership, limited
liability company, association, joint stock company, trust, associate (as
defined in regulations promulgated by the Securities and Exchange Commission) or
other legally recognizable entity. Notwithstanding anything herein to the
contrary, the limitations in Sections 8.2 and 8.3 hereof will not prohibit any
investment by the Executive of not more than 3% of the outstanding capital stock
of a company whose securities are listed on a public exchange or the National
Association of Securities Dealers Automated Quotation National Market System.
8.4 Executive and the Company acknowledge that: (i) each covenant and
restriction contained in Sections 8.1, 8.2, 8.3, 9 and 10 of this Agreement is
necessary, fundamental, and
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required for the protection of the Company's business and goodwill; (ii) such
covenants and restrictions relate to matters which are of a special, unique, and
extraordinary character that gives each of them a special, unique, and
extraordinary value which is difficult to measure in economic terms; and (iii) a
breach of any such covenant or restriction will result in immediately and
irreparable harm and damage to the Company which cannot be compensated
adequately by a monetary award or other remedy at law. Accordingly, it is
expressly agreed that, in addition to all other remedies available at law or in
equity, and notwithstanding anything to the contrary in Section 13 below, the
Company will be entitled to the immediate remedy of a temporary restraining
order, preliminary injunction, or such other form of injunctive or equitable
relief as may be used by any court of competent jurisdiction to restrain or
enjoin any of the parties hereto from breaching any such covenant or
restriction, or otherwise specifically to enforce the provisions contained in
Sections 8.1, 8.2, 8.3, 9, and 10 of this Agreement.
8.5 Reasonable Restraint. It is agreed by the parties hereto that the
foregoing covenants in Sections 8.1, 8.2 and 8.3 impose a reasonable restraint
on Executive in light of the activities and business of the Company (including
the subsidiaries thereof) on the date of the execution of this Agreement and the
current plans of the Company; but it is also the intent of the Company and
Executive that such covenants be construed and enforced in accordance with the
changing activities and business of the Company (including the subsidiaries
thereof) throughout the term of this Agreement. It is further agreed by the
parties that a portion of the compensation paid to Executive under this
Agreement is paid in consideration of the covenants herein contained, the
sufficiency of which consideration is hereby acknowledged. If the scope of any
restriction contained in Sections 8.1, 8.2 or 8.3 is too broad to permit
enforcement of such restriction to its full extent, then such restriction shall
be enforced to the maximum extent permitted by law, and the parties consent that
such scope may be judicially modified accordingly in any proceeding brought to
enforce such restriction.
8.6 Independent Covenant. Each of the covenants in Sections 8, 9 and 10
shall be construed as an agreement independent of any other provisions in this
Agreement, and the existence of any claim or cause of action of Executive
against the Company (including the subsidiaries thereof), whether predicated on
this Agreement or otherwise, shall not constitute a defense to the enforcement
by the Company of such covenants. It is specifically agreed that the time
periods stated at the beginning of Sections 8.2 and 9, during which the
agreements and covenants of Executive made in Sections 8.2 and 9 shall be
effective, shall be computed by excluding from such computation any time during
which Executive is in violation of any provision of Section 8 or 9. The
covenants contained in Sections 8, 9 and 10 shall not be affected by any breach
of any other provision of this Agreement by any party hereto.
9. Proprietary Matters. Executive expressly understands and agrees that
any and all improvements, inventions, discoveries, processes, or know-how that
are generated, conceived or made by Executive, solely or jointly with another,
during the term of this Agreement or within the greater of (i) the period during
which Executive is receiving compensation or benefits pursuant to Section 7.3
hereof, and (ii) one (1) year following termination or expiration of this
Agreement, and which are directly related to the business or activities of the
Company and which Executive conceives as a result of his employment by the
Company, whether so generated or conceived during Executive's regular working
hours or otherwise, and whether patentable or not, are the sole and exclusive
property of the Company, and Executive shall promptly disclose any such
improvements, inventions, discoveries, processes or know-how to the Company.
Executive
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hereby assigns and agrees to assign all his interests in such improvements,
inventions, discoveries, processes, and know-how to the Company or its nominees
and agrees, whenever requested to do so by the Company (either during the term
of this Agreement or thereafter), to execute and assign any and all
applications, assignments and/or other instruments and do all things which the
Company may deem necessary or appropriate in order to apply for, obtain,
maintain, enforce and defend Letters of Patent, copyrights, trade names or
trademarks of the United States or of foreign countries for said improvements,
inventions, discoveries, processes, or know-how, or in order to assign and
convey or otherwise make available to the Company the sole and exclusive right,
title, and interest in and to said improvements, inventions, discoveries,
processes, know-how, or otherwise to protect the Company's interest therein.
10. Return of Company Property. All records, designs, patents, business
plans, financial statements, manuals, memoranda, lists and other property
delivered to or compiled by Executive by or on behalf of the Company or its
representatives, vendors or customers which pertain to the business of the
Company shall be and remain the property of the Company, and be subject at all
times to its discretion and control. Likewise, all correspondence, reports,
records, charts, advertising materials and other similar data pertaining to the
business, activities or future plans of the Company which is collected by
Executive shall be delivered promptly to the Company without request by it upon
termination of Executive's employment.
11. No Prior Agreements. Executive hereby represents and warrants to the
Company that the execution of this Agreement by Executive and his employment by
the Company and the performance of his duties hereunder will not violate or be a
breach of any agreement with a former employer, client or any other person or
entity. Further, Executive agrees to indemnify the Company for any claim,
including, but not limited to, attorneys' fees, costs and expenses and expenses
of investigation, by any such third party that such third party may now have or
may hereafter come to have against the Company based upon or arising out of any
non-competition agreement, invention or secrecy agreement between Executive and
such third party which was in existence as of the date of this Agreement.
12. Key-Person Insurance. Executive agrees to make himself available and
to undergo, at the Company's request and expense, any physical examination or
other procedure necessary to allow the Company to obtain a key-person insurance
policy on Executive. If the Company obtains such policy, it will maintain the
policy at its expense and all proceeds will be the sole property of the Company.
13. Resolution of Disputes. The parties will attempt in good faith
promptly by negotiations to resolve any dispute or controversy arising out of or
relating to this Agreement or to the employment or termination of Executive by
the Company. All negotiations pursuant to this clause are confidential and will
be treated as compromise and settlement negotiations for purposes of the Federal
Rules of Evidence and state rules of evidence.
14. Indemnification. In the event Executive is made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by the Company
against Executive), by reason of the fact that he is or was performing services
within the course and scope of his employment with the Company under this
Agreement, then the Company shall protect, defend, indemnify and hold harmless
Executive against all expenses (including attorneys' fees, costs and expenses),
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judgments, fines, costs, liabilities, damages, and amounts paid in settlement,
actually and reasonably incurred by Executive in connection therewith. Without
limiting the requirement above that Executive be performing services within the
course and scope of his employment, activities constituting violations of law or
Company policy shall not constitute services within the course and scope of
Executive's employment, and the Company shall not indemnify Executive for any
such activities. Executive agrees to immediately notify the Company of any
threatened, pending or completed matter; provided, however, that Executive's
failure to immediately notify the Company of such matter shall not relieve the
Company of any obligation hereunder, unless, and only to the extent that, the
Company is materially prejudiced by such delay or failure to give notice.
Executive agrees to accept any attorney reasonably assigned by the Company;
provided that if counsel selected by the Company shall have a conflict of
interest that prevents such counsel from representing Executive, Executive may
engage separate counsel and the Company shall pay all reasonable attorneys fees
of such counsel.
15. Miscellaneous.
15.1 Governing Law; Interpretation. This Agreement will be governed by
the substantive laws of the State of New York applicable to contracts entered
into and fully performed in such jurisdiction. The headings and captions of the
Sections of this Agreement are for convenience only and in no way define, limit
or extend the scope or intent of this Agreement or any provision hereof. This
Agreement will be construed as a whole, according to its fair meaning, and not
in favor of or against any party, regardless of which party may have initially
drafted certain provisions set forth herein.
15.2 Assignment. This Agreement is personal to Executive and he may not
assign any of his rights or delegate any of his obligations hereunder without
first obtaining the prior written consent of the Board of Directors of the
Company.
15.3 Notices. Any notice, request, claim or other communication required
or permitted hereunder will be in writing and will be deemed to have been duly
given if delivered by hand or if sent by certified mail, postage and
certification prepaid, to Company at its current address or to Executive at his
residence (as noted in the Company's records) or to such other address or
addresses as either party may have furnished to the other in writing in
accordance herewith.
15.4 Severability. If any provision of this Agreement or the application
of any such provision to either of the parties is held by a court of competent
jurisdiction to be contrary to law, such provision will be deemed amended to the
extent necessary to comply with such law, and the remaining provisions of this
Agreement will remain in full force and effect unless the result would be
manifestly unjust or would deprive either party of the benefit of its bargain.
15.5 Entire Agreement; Amendments. This Agreement and any other exhibits
and attachments hereto constitutes the final and complete expression of all of
the terms of the understanding and agreement between the parties hereto with
respect to the subject matter hereof, and this Agreement replaces and supersedes
any and all prior or contemporaneous negotiations, communications,
understandings, obligations, commitments, agreements or contracts, whether
written or oral, between the parties respecting the subject matter hereof.
Except as provided in Section 15.4 above, this Agreement may not be modified,
amended,
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altered or supplemented except by means of the execution and delivery of a
written instrument mutually executed by both parties.
15.6 Attorneys' Fees. If it becomes necessary for any party to initiate
legal action or any other proceeding to enforce, defend or construe such party's
rights or obligations under this Agreement, the prevailing party will be
entitled to its reasonable costs and expenses, including attorneys' fees,
incurred in connection with such action or proceeding.
15.7 Counterparts. This Agreement may be executed simultaneously in two
(2) or more counterparts, each of which shall be deemed an original and all of
which together shall constitute but one and the same instrument.
16. EXECUTIVE ACKNOWLEDGMENT. EXECUTIVE ACKNOWLEDGES THAT HE HAS BEEN
GIVEN THE OPPORTUNITY TO CONSULT WITH LEGAL COUNSEL CONCERNING THE RIGHTS AND
OBLIGATIONS ARISING UNDER THIS AGREEMENT, THAT HE HAS READ AND UNDERSTANDS EACH
AND EVERY PROVISION OF THIS AGREEMENT, AND THAT HE IS FULLY AWARE OF THE LEGAL
EFFECT AND IMPLICATIONS OF THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
Company: Executive:
United Road Services, Inc. Edward T. Sheehan
By:/s/ Allan D. Pass /s/ Edward T. Sheehan
----------------------------- ---------------------------------
Allan D. Pass
President and Chief Operating Officer
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EXHIBIT 10.6
AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT
This Amended and Restated Executive Employment Agreement ("Agreement") is
made and entered into as of January 1, 1999 (the "Effective Date") by and
between United Road Services, Inc., a Delaware corporation (the "Company") and
Allan D. Pass, Ph.D, an individual resident of the State of New York
("Executive").
RECITALS
WHEREAS, the Company is engaged in the business of motor vehicle and
equipment towing, recovery and transport services (the "Business");
WHEREAS, the Company desires to employ Executive on a full-time basis as
President and Chief Operating Officer of the Company, and Executive is willing
to be employed by the Company in that capacity on the terms and conditions set
forth in this Agreement; and
WHEREAS, Executive is employed hereunder by the Company in a confidential
relationship wherein Executive, in the course of his employment with the
Company, has and will continue to become familiar with and aware of information
as to the Company's customers, specific manner of doing business, including the
processes, techniques and trade secrets utilized by the Company, and future
plans with respect thereto, all of which have been and will be established and
maintained at great expense to the Company; this information is a trade secret
and constitutes the valuable goodwill of the Company.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Company and Executive hereby
agree as follows:
1. Employment. The Company hereby employs Executive on the terms set
forth herein and Executive hereby accepts such employment.
2. Duties. During the period of his employment with the Company
hereunder, Executive will be employed as President and Chief Operating Officer
of the Company. Executive will:
(a) Devote his full business time, ability, knowledge and attention, and
give his best effort and skill solely to the Company's business
affairs and interests;
(b) Perform such services and assume such duties and responsibilities
appropriate to the positions identified above as well as those which
may from time to time be reasonably assigned to him by the Chief
Executive Officer of the Company, to whom Executive will directly
report, or the Board of Directors of the Company; and
(c) In all respects use his best efforts to further, enhance and develop
the Company's business affairs, interests and welfare.
3. Compensation. In consideration of Executive's services to the Company
during the Employment Term, the Company will pay Executive a gross base salary
of $150,000 per annum during the Employment term. Executive's base salary will
be paid in equal installments
<PAGE>
(pro rated for portions of a pay period) on the Company's regular pay days and
the Company will withhold from such compensation all applicable federal and
state income, social security, disability and other taxes as required by
applicable laws. On at least an annual basis, the Compensation Committee of the
Board of Directors (the "Compensation Committee") will review Executive's
performance and may increase such base salary if, in its discretion, any such
increase is warranted. The Company may also pay Executive such bonuses and other
incentive compensation, including without limitation, stock options, as are
determined from time to time to be appropriate by the Compensation Committee or
another duly authorized committee of the Board of Directors.
4. Change of Control.
(a) Operation of Section 4. This Section 4 shall be effective, but not
operative, immediately upon execution of this Agreement by the parties
hereto and shall remain in effect so long as Executive remains
employed by the Company, but shall not be operative unless and until
there has been a Change of Control, as defined in subsection 4(b)
hereof. Upon such Change of Control, this Section 4 shall become
operative immediately.
(b) Definition. For purposes of this Agreement, a "Change of Control"
means (i) the sale of all or substantially all of the assets of the
Company to any person or entity that, prior to such sale, did not
control, was not under common control with, or was not controlled by,
the Company, (ii) a merger or consolidation or other reorganization in
which the Company is not the surviving entity or becomes owned
entirely by another entity, unless the outstanding voting securities
of the surviving or parent corporation, as the case may be,
immediately following such transaction are beneficially held by the
same persons and entities that beneficially held the outstanding
voting securities of the Company immediately prior to such transaction
in the same proportion as such persons or entities held such voting
securities immediately prior to the transaction, (iii) any transaction
or series of transactions which results in any person or "group"
becoming the beneficial owner, directly or indirectly, of securities
representing more than fifty percent (50%) of the outstanding voting
securities of the Company, or (iv) during any period of twelve
consecutive months after the Effective Date the persons who were
directors of the Company at the beginning of such twelve month period
cease to constitute a majority of the Board of Directors of the
Company or of any successor to the Company.
(c) Executive's Election Upon Change of Control. If, while Executive is
employed by the Company, a Change of Control (as defined in subsection
(b) of Section 4) occurs and one or more of the following events
occurs:
(i) The assignment to Executive of duties, responsibilities, or
status inconsistent with his duties, responsibilities, and
status prior to the Change of Control;
(ii) A reduction by the Company in Executive's base salary or bonus
eligibility (as in effect prior to the Change of Control);
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(iii) The failure to continue in effect the Company's insurance,
disability, stock option plans, or any other Executive benefit
plans, policies, practices or arrangements in which Executive
participates, or the failure to continue Executive's
participation therein on substantially the same basis, both in
terms of the amount of benefits provided and the level of
Executive's participation relative to other participants, as
existed prior to the Change of Control;
(iv) The failure of the Company to obtain a satisfactory agreement
from the successor to the Company to assume and agree to
perform this Agreement;
(v) Any termination by the Company of Executive's employment other
than pursuant to Section 7.2(b) hereof; or
(vi) The persons who were directors immediately before the
transaction that constitutes the Change of Control cease to
constitute a majority of the Board of Directors of the Company
after that transaction;
Executive may, in his sole discretion, within one (1) year after the effective
date of the Change of Control, give notice to the Company that he intends to
elect to exercise his rights to receive the payments provided for in Section
4(d) hereof (the "Notice of Intention"). The right to give such Notice of
Intention shall continue for one (1) year from the date of the Change of
Control. In the event that Executive elects not to exercise such rights,
Executive's employment with the Company shall continue on the terms and
conditions provided in this Agreement. In the event that Executive does elect
to exercise such rights, Executive's employment with the Company shall terminate
effective as of the date upon which the Notice of Intention is received by the
Company. Within ten (10) business days after the Company's receipt of the
Notice of Intention, payment by the Company to Executive of the amounts set
forth in Section 4(d)(i) below shall be made by cashier's check, accompanied by
a written notice to Executive setting forth the Company's computation of the
amount payable pursuant to Section 4(d). If Executive takes exception to the
Company's computation of such amount, Executive may (but shall not be prejudiced
in his right to later contest the amount actually paid by failure to do so) give
a further written notice to the Company setting forth in reasonable detail
Executive's exceptions to the Company's computation. If the Company and
Executive are unable to resolve any dispute over the total amount to be paid to
Executive pursuant to Section 4(d)(i) hereof in accordance with Section 13
hereof within thirty (30) days after the date of the Notice of Intention, such
dispute shall be submitted for resolution to an independent third party agreed
upon between the Company and Executive and any additional amount that is
determined to be owed by the Company to Executive pursuant to Section 4(d)(i)
hereof shall be paid to Executive by cashier's check within ten (10) business
days after such dispute has been finally resolved.
(d) Compensation Upon Change of Control.
(i) If Executive gives the Notice of Intention described in Section
4(c), or if the Company terminates Executive's employment
within one (1) year after a Change of Control other than
pursuant to Section 7.2(b) hereof, the Company shall pay
Executive a lump sum amount equal to three times
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Executive's base amount (as defined by Section 280(G) of the
Internal Revenue Code of 1986, as amended (the "Code")) less
one dollar ($1.00). In addition to the foregoing, the Company
will continue to provide, for a period of three years from the
effective date of Executive's termination, medical, life,
dental and disability insurance coverage to Executive of the
type and amount provided to Executive under the Company's
insurance policies as in effect at the time of termination;
provided, however, that if such coverage does not continue to
be maintained by the Company or is otherwise not available to
Executive, the Company shall provide for or make available to
Executive substantially similar economic benefits; provided,
however, that nothing in this subsection (i) shall obligate the
Company to provide for or make any such similar economic
benefits available to Executive if the Company does not have
such benefits available to its other executive officers.
(ii) Payment of the amount set forth in Section 4(d)(i) shall
terminate Executive's rights to receive any and all other
payments, rights or benefits pursuant to Sections 3, 6 and 7 of
this Agreement from the date of termination, other than any
payments, rights or benefits arising (x) pursuant to Section
15.6 of this Agreement, or (y) from any other agreement, plan
or policy which by its terms or by operation of law provides
for the continuation of such payments, rights or benefits after
the termination of Executive's relationship with the Company.
(iii) The lump sum payment referred to in subsection (i) above shall
be in addition to and shall not be offset or reduced by (x) any
other amounts that have accrued or have otherwise become
payable to Executive or his beneficiaries, but have not been
paid by the Company as of the effective date of termination of
Executive's employment with the Company, including, but not
limited to, salary, consulting fees, disability benefits,
termination benefits, retirement benefits, life and health
insurance benefits, or any other compensation or benefit
payment that is part of any valid previous, current, or future
contract, plan or agreement, written or oral, or (y) any
indemnification payments that may be or become payable to
Executive pursuant to the provisions of the Company's
Certificate of Incorporation, By-laws, or similar policy, plan,
or agreement relating to the indemnification of directors or
officers of the Company under certain circumstances.
(iv) Notwithstanding anything in this Agreement to the contrary, in
the event that the Company determines in good faith that any
portion of the compensation described in this Section 4(d)
constitutes an excess parachute payment under Section 280(G) of
the Code, then the Company shall have no obligation to provide
such portion to Executive.
5. Vesting of Stock Options Upon Change of Control. In the event of a
Change of Control, in addition to any benefits provided to Executive upon a
Change of Control pursuant to the relevant stock option plan or stock option
agreement governing any grant of stock options to
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Executive, and regardless of whether Executive intends to give a Notice of
Intention pursuant to Section 4(c) hereof or Executive's employment with the
Company terminates after a Change of Control), any and all stock options granted
to Executive pursuant to any of the Company's stock option plans prior to the
effective date of such Change of Control that are unvested as of the effective
date of such Change of Control will become fully vested and exercisable
beginning two business days prior to the effective date of such Change of
Control without regard to any vesting schedules established in the relevant
option plan or option agreement.
6. Benefits and Reimbursements.
6.1 Executive will, during the Employment Term, have the right to receive
such benefits as are generally made available to full-time executive officers of
the Company, including the right to participate in any retirement plan or
executive bonus plan that the Company may create. In addition, or inclusive of
such benefits, the Company will provide Executive with the following:
(a) The opportunity to apply for coverage under the Company's
medical, life, dental and disability plans, if any. If Executive
is accepted for coverage under such plans, the Company will
provide to Executive and his immediate family such coverage on
the same terms as is customarily provided by the Company to the
plan participants as modified from time to time.
(b) In addition to normal holidays recognized by the Company,
Executive will be entitled to the greater of (i) three (3) weeks
paid vacation annually, or (ii) such other amount of paid
vacation as may be afforded executive officers of similar
position and seniority to Executive under the Company's policies
in effect from time to time (prorated for any year in which
Executive is employed for less than the full year).
6.2 The Company will reimburse Executive for travel and other out-of-
pocket expenses reasonably incurred by Executive in the performance of his
duties hereunder, provided that all such expenses will be reimbursed only (i)
upon the presentation by Executive to the Company of such documentation as may
be reasonably necessary to substantiate that all such expenses were incurred in
the performance of his duties, and (ii) if such expenses are consistent with all
policies of the Company in effect from time to time as to the kind and amount of
such expenses.
7. Term; Termination; Rights Upon Termination.
7.1 Term. The Company hereby employs Executive and Executive hereby
accepts employment with the Company for a period beginning on the Effective Date
and ending on the third anniversary of the Effective Date (as extended pursuant
to the following provisions, the "Term"). As of the first day of any month
following the Effective Date, the Term shall be extended for an additional one
(1) month period unless either Executive or the Company gives the other party
written notice at least ten (10) days prior to the first day of such month that
this Agreement shall terminate on the then scheduled expiration date of the
Term. If such notice is given, this Agreement shall automatically terminate on
such expiration date. If this Agreement is
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extended, the terms in effect under this Agreement immediately preceding such
extension shall apply during the extension period. If Executive's employment
hereunder is terminated by either the Company or Executive at any time for any
reason, the expiration date shall thereupon no longer be automatically extended.
7.2 Termination. This Agreement and Executive's employment may be
terminated in any one of the following ways:
(a) Death or Permanent Disability of Executive. Subject to the payment to
Executive of the amounts required by Section 7.3 below, this Agreement
will terminate immediately upon the death or permanent disability of
Executive, whereupon Executive shall have no further rights or be
entitled to any other benefits of this Agreement, other than the
payments and benefits referred to in Section 7.3 below. Executive will
be deemed permanently disabled for the purpose of this Agreement if,
in the good faith determination of the Board of Directors, based on
sound medical advice, Executive has become physically or mentally
incapable of performing his duties hereunder for a continuous period
of one hundred eighty (180) days, in which event Executive will be
deemed permanently disabled upon the expiration of such one hundred
eighty (180) day period.
(b) Executive's Discharge for Cause. At any time during the term of this
Agreement, subject to the payment to Executive of the amounts required
by Section 7.3(a) below, the Company may terminate Executive's
employment for "Cause" effective immediately upon its giving of
written notice setting forth with particularity the facts and
circumstances constituting such Cause, whereupon this Agreement will
terminate and Executive shall have no further rights or be entitled to
any other benefits of this Agreement, other than the payments and
benefits referred to in Section 7.3(a) below. For purposes of this
Agreement, "Cause" means the occurrence of one or more of the
following: (i) the commission by Executive of any act materially
detrimental to the Company, including but not limited to fraud,
embezzlement, theft, bad faith, gross negligence, recklessness,
dishonesty, insubordination or willful misconduct; (ii) gross
incompetence or repeated failure or refusal to perform the duties
required by this Agreement and as may be assigned to Executive by the
Company's Chief Executive Officer or Board of Directors from time to
time; (iii) conviction of a felony or of any crime of moral turpitude;
(iv) any material misrepresentation by Executive to the Company
regarding the operation of the business; or (v) material breach of any
covenant of this Agreement, provided, however, that the action or
conduct described in clause (ii) or clause (v) above will constitute
"Cause" only if Executive shall have either failed to remedy such
alleged breach within thirty (30) days from his receipt of written
notice from the Company demanding that he remedy such alleged breach,
or shall have failed to take reasonable steps in good faith to that
end during such thirty (30) day period and thereafter; and provided
further that there shall have been delivered to Executive a further
notice after the end of such thirty (30) day period asserting that the
Board of Directors has determined that Executive was guilty of conduct
set forth in clause (ii) or clause (v), as the case may be, that
Executive has failed to take reasonable steps in good faith to remedy
such alleged breach, and specifying the particulars thereof in detail;
and provided further that
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Executive thereafter shall have received a certified copy of a
resolution of the Board of Directors of the Company adopted by the
affirmative vote of not less than three-fourths of the entire
membership of the Board of Directors at a meeting called and held for
that purpose and at which Executive was given an opportunity to be
heard, finding that Executive was guilty of conduct set forth in
clause (ii) or clause (v), as the case may be, that Executive has
failed to take reasonable steps in good faith to remedy such alleged
breach, and specifying the particulars thereof in detail.
(c) The Company's Right to Terminate Without Cause. Subject to the
payment to Executive of the amounts required by Section 7.3 below, at
any time during the term of this Agreement, the Company may terminate
Executive's employment with the Company without "Cause" (as defined in
subsection (b) above), effective immediately upon written notice to
Executive, whereupon this Agreement will terminate and Executive shall
have no further rights or be entitled to any other benefits of this
Agreement, other than the payments and benefits referred to in Section
7.3 below. Notwithstanding the foregoing, if the Company terminates
Executive without "Cause" within one (1) year after a Change of
Control, the Company shall pay Executive the compensation described in
Section 4(d) hereof as though Executive had given the Notice of
Intention described in Section 4(c) (whether or not Executive actually
gave such Notice of Intention).
(d) Executive's Right to Terminate At Will. Executive shall have the
right at any time during the term of this Agreement, by giving written
notice to the Company, to terminate this Agreement and Executive's
employment with the Company effective as of the date on which such
notice is given by Executive, unless the Company advises Executive
that it requires the services of Executive for an additional period of
time, not to exceed 30 days, in which case Executive's employment
shall cease as of the end of such period (such effective date being
hereinafter referred to as the "Executive Termination Date"). On the
Executive Termination Date, this Agreement shall terminate and
Executive shall have no further rights under or be entitled to any
other benefits of this Agreement, other than the payments and benefits
referred to in Section 7.3(a) below.
7.3 Compensation and Benefits Upon Termination.
(a) Upon any termination of Executive's employment pursuant to this
Section 7, Executive will be entitled to: (i) the compensation
provided for in Section 3 hereof for the period of time ending with
the effective date of termination; (ii) compensation for any unused
vacation that Executive may have accrued, as well as all earned
benefits, up to and including the effective date of termination; (iii)
"COBRA" benefits to the extent required by applicable law; and (iv)
reimbursement for such expenses as Executive may have properly
incurred on behalf of the Company as provided in Section 6.2 above
prior to the effective date of termination.
(b) If (i) the Company terminates Executive's employment pursuant to
Section 7.2(c) above, or (ii) Executive terminates his employment
following the Company's
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assignment to Executive of regular duties, responsibilities, or status
which the Board of Directors determines, in good faith, to be
materially inconsistent with Executive's duties, responsibilities, and
status under this Agreement, then, in addition to the amounts payable
in Section 7.3(a) above:
(i) Executive will be entitled to receive a severance payment in an
amount equal to (i) two times the amount of Executive's base
salary in effect at the time of termination, plus (ii) the
aggregate amount of Executive's annual cash bonuses for the two
years immediately preceding such termination, which amount
shall be paid to Executive over a two-year period in equal
installments (pro rated for portions of a pay period) on the
Company's regular pay days, and the Company will withhold all
applicable federal and state income, social security,
disability and other taxes as required by applicable law;
provided, however, that Executive's right to receive payments
pursuant to this Section 7.3(b)(i) shall cease immediately upon
a knowing violation by Executive of any of the provisions of
Sections 8, 9 or 10 hereof.
(ii) any and all stock options granted to Executive pursuant to any
of the Company's stock option plans prior to the effective date
of such termination that are unvested as of the effective date
of such termination will continue to vest, and Executive shall
be permitted to exercise such options on the terms set forth in
the relevant option plan and option agreement, in the same
amounts and at the same times as such options would have vested
had Executive remained employed by the Company until all such
options become fully vested (the period between the effective
date of termination and the date that all such options become
fully vested being hereafter referred to as the "Option Vesting
Period"); provided, however, that such continued vesting of
options shall immediately cease upon a knowing violation by
Executive during the Option Vesting Period of any of the
provisions of Sections 8, 9 or 10 hereof.
(iii) the Company will continue to provide, for a period of two years
from the effective date of Executive's termination, medical,
life, dental and disability insurance coverage to Executive of
the type and amount provided to Executive under the Company's
insurance policies as in effect at the time of termination;
provided, however, that if such coverage does not continue to
be maintained by the Company or is otherwise not available to
Executive, the Company shall provide for or make available to
Executive substantially similar economic benefits; provided,
however, that nothing in this subsection (iii) shall obligate
the Company to provide for or make any such similar economic
benefits available to Executive if the Company does not have
such benefits available to its other Executive officers.
(c) In the event of a termination upon the death or permanent disability
of Executive as provided in Section 7.2(a) above, Executive or his
estate shall be entitled to
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receive from the Company, for a period of twelve months following the
effective date of termination, 100% of Executive's base salary at the
rate then in effect, payable in equal installments (pro rated for
portions of a pay period) on the Company's regular pay days, and the
Company will withhold all applicable federal and state income, social
security, disability and other taxes as required by applicable law;
provided, however, that in the case of a termination upon the
permanent disability of Executive, such payments shall be reduced by
all payments in respect of Executive's salary payable to Executive
under the Company's disability insurance, if any, for the same period.
(d) In the event that Executive terminates his employment with the Company
pursuant to Section 7.2(d) hereof within six months after Edward T.
Sheehan ceases to be employed by the Company for any reason, Executive
shall be entitled to receive the compensation and benefits set forth
in Sections 7.3(b)(i), 7.3(b)(ii) and 7.3(b)(iii) above in the amounts
and at the times set forth therein.
7.4 Effect of Termination. Subject to Section 4 hereof, the payments set
forth in Section 7.3 will fully discharge all responsibilities of the Company to
Executive under this Agreement or relating to or arising out of the termination
of Executive's employment, and all other rights and obligations of the Company
and Executive under this Agreement shall cease as of the effective date of
termination, except that Executive's obligations under Sections 8, 9, and 10 and
the Company's and Executive's obligations under Section 14 hereof shall survive
such termination.
8. Unfair Competition by Executive.
8.1 Executive agrees that all trade secrets, or confidential or
proprietary information with respect to the activities and businesses of the
Company, including, without limitation, personnel information, secret processes,
know-how, customer lists, databases, ideas, techniques, processes, inventions
(whether patentable or not), and other technical plans, business plans,
marketing plans, product plans, forecasts, contacts, strategies and information
(collectively "Proprietary Information") which were learned by Executive in the
course of his employment by the Company, and any other Proprietary Information
received, developed or learned by Executive hereafter in the course of his
future employment by or in association with the Company, are confidential and
will be kept and held in confidence and trust as a fiduciary by Executive.
Executive will not use or disclose Proprietary Information of the Company except
as necessary in the normal course of the business of the Company for its sole
and exclusive benefit, unless Executive is compelled so to disclose under
process of law, in which case Executive will first notify the Company promptly
after receipt of a demand to so disclose.
8.2 During the term of this Agreement and for the greater of (i) the
period during which Executive is receiving compensation or benefits pursuant to
Section 7.3 hereof and (ii) a period of one year following the expiration or
termination of this Agreement for any reason, directly or on behalf of or in
conjunction with any other person, persons, company, partnership, corporation or
business whatever nature, Executive will not:
(a) engage, as an officer, director, shareholder, owner, partner, joint
venturer, financier, manager, executive, independent contractor,
consultant, advisor, or
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sales representative, in any business selling any products or services
in direct competition with the Company or any of its subsidiaries
within 100 miles of any geographic location in which the Company or
any of its subsidiaries conducts business at such time (or in the case
of a termination or expiration of this Agreement, within 100 miles of
any geographic location in which the Company or any of its
subsidiaries conducted business at the time of such expiration or
termination) (the "Territory");
(b) call upon any prospective acquisition candidate on Executive's own
behalf or on behalf of any competitor of the Company or any of its
subsidiaries, which candidate was either called upon by the Company
(including its subsidiaries) or for which the Company made an
acquisition analysis, for the purpose of acquiring such entity;
provided, however, that Executive shall not be charged with a
violation of this Section 8.2(b) unless and until Executive shall have
knowledge or notice that such prospective acquisition candidate was
called upon, or that an acquisition analysis was made, for the purpose
of acquiring such entity;
(c) call upon, contact or solicit any person who is, at that time, an
employee of the Company (including the subsidiaries thereof) for the
purpose or with the intent of enticing such employee away from or out
of the employ of the Company (including the subsidiaries thereof);
provided that Executive shall be permitted to call upon and hire any
member of his or her immediate family;
(d) call upon any person or entity which is, at that time, or which has
been, within one (1) year prior to that time, a customer of the
Company (including the subsidiaries thereof) within the Territory for
the purpose of soliciting or selling products or services in direct
competition with the Company within the Territory;
(e) disclose customers, whether in existence or proposed, of the Company
(or the Company's subsidiaries) to any person, firm, partnership,
corporation or business for any reason or purpose.
(f) engage in any pattern of conduct that involves the making or
publishing of written or oral statements or remarks (including,
without limitation, the repetition or distribution of derogatory
rumors, allegations, negative reports or comments) which are
disparaging, deleterious or damaging to the integrity, reputation or
good will of the Company, its management, or of management of
corporations affiliated with the Company.
8.3 Except for activities expressly permitted by the prior written
approval of the Board of Directors of the Company, during the term of this
Agreement, the Executive will not: (a) engage in business independent of
Executive's employment by the Company that requires any substantial portion of
Executive's time; (b) serve as an officer, general partner or member in any for-
profit corporation, partnership or firm; (c) serve as a director of any
corporation, partnership of firm having the Business as its principal
enterprise; or (d) directly, indirectly or through any Affiliate, invest in,
participate in or acquire an interest in any entity engaged in the Business. For
purposes of this Agreement, the terms: (i) "Affiliate" means as to any Person,
each other Person that directly or indirectly (through one (1) or more
intermediaries) controls, is controlled by or is
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under common control with such person; and (ii) "Person" means an individual,
corporation, partnership, limited liability company, association, joint stock
company, trust, associate (as defined in regulations promulgated by the
Securities and Exchange Commission) or other legally recognizable entity.
Notwithstanding anything herein to the contrary, the limitations in Sections 8.2
and 8.3 hereof will not prohibit any investment by the Executive of not more
than 3% of the outstanding capital stock of a company whose securities are
listed on a public exchange or the National Association of Securities Dealers
Automated Quotation National Market System.
8.4 Executive and the Company acknowledge that: (i) each covenant and
restriction contained in Sections 8.1, 8.2, 8.3, 9 and 10 of this Agreement is
necessary, fundamental, and required for the protection of the Company's
business and goodwill; (ii) such covenants and restrictions relate to matters
which are of a special, unique, and extraordinary character that gives each of
them a special, unique, and extraordinary value which is difficult to measure in
economic terms; and (iii) a breach of any such covenant or restriction will
result in immediately and irreparable harm and damage to the Company which
cannot be compensated adequately by a monetary award or other remedy at law.
Accordingly, it is expressly agreed that, in addition to all other remedies
available at law or in equity, and notwithstanding anything to the contrary in
Section 13 below, the Company will be entitled to the immediate remedy of a
temporary restraining order, preliminary injunction, or such other form of
injunctive or equitable relief as may be used by any court of competent
jurisdiction to restrain or enjoin any of the parties hereto from breaching any
such covenant or restriction, or otherwise specifically to enforce the
provisions contained in Sections 8.1, 8.2, 8.3, 9, and 10 of this Agreement.
8.5 Reasonable Restraint. It is agreed by the parties hereto that the
foregoing covenants in Sections 8.1, 8.2 and 8.3 impose a reasonable restraint
on Executive in light of the activities and business of the Company (including
the subsidiaries thereof) on the date of the execution of this Agreement and the
current plans of the Company; but it is also the intent of the Company and
Executive that such covenants be construed and enforced in accordance with the
changing activities and business of the Company (including the subsidiaries
thereof) throughout the term of this Agreement. It is further agreed by the
parties that a portion of the compensation paid to Executive under this
Agreement is paid in consideration of the covenants herein contained, the
sufficiency of which consideration is hereby acknowledged. If the scope of any
restriction contained in Sections 8.1, 8.2 or 8.3 is too broad to permit
enforcement of such restriction to its full extent, then such restriction shall
be enforced to the maximum extent permitted by law, and the parties consent that
such scope may be judicially modified accordingly in any proceeding brought to
enforce such restriction.
8.6 Independent Covenant. Each of the covenants in Sections 8, 9 and 10
shall be construed as an agreement independent of any other provisions in this
Agreement, and the existence of any claim or cause of action of Executive
against the Company (including the subsidiaries thereof), whether predicated on
this Agreement or otherwise, shall not constitute a defense to the enforcement
by the Company of such covenants. It is specifically agreed that the time
periods stated at the beginning of Sections 8.2 and 9, during which the
agreements and covenants of Executive made in Sections 8.2 and 9 shall be
effective, shall be computed by excluding from such computation any time during
which Executive is in violation of any provision of Section 8 or 9. The
covenants contained in Sections 8, 9 and 10 shall not be affected by any breach
of any other provision of this Agreement by any party hereto.
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9. Proprietary Matters. Executive expressly understands and agrees that
any and all improvements, inventions, discoveries, processes, or know-how that
are generated, conceived or made by Executive, solely or jointly with another,
during the term of this Agreement or within the greater of (i) the period during
which Executive is receiving compensation or benefits pursuant to Section 7.3
hereof, and (ii) one (1) year following termination or expiration of this
Agreement, and which are directly related to the business or activities of the
Company and which Executive conceives as a result of his employment by the
Company, whether so generated or conceived during Executive's regular working
hours or otherwise, and whether patentable or not, are the sole and exclusive
property of the Company, and Executive shall promptly disclose any such
improvements, inventions, discoveries, processes or know-how to the Company.
Executive hereby assigns and agrees to assign all his interests in such
improvements, inventions, discoveries, processes, and know-how to the Company or
its nominees and agrees, whenever requested to do so by the Company (either
during the term of this Agreement or thereafter), to execute and assign any and
all applications, assignments and/or other instruments and do all things which
the Company may deem necessary or appropriate in order to apply for, obtain,
maintain, enforce and defend Letters of Patent, copyrights, trade names or
trademarks of the United States or of foreign countries for said improvements,
inventions, discoveries, processes, or know-how, or in order to assign and
convey or otherwise make available to the Company the sole and exclusive right,
title, and interest in and to said improvements, inventions, discoveries,
processes, know-how, or otherwise to protect the Company's interest therein.
10. Return of Company Property. All records, designs, patents, business
plans, financial statements, manuals, memoranda, lists and other property
delivered to or compiled by Executive by or on behalf of the Company or its
representatives, vendors or customers which pertain to the business of the
Company shall be and remain the property of the Company, and be subject at all
times to its discretion and control. Likewise, all correspondence, reports,
records, charts, advertising materials and other similar data pertaining to the
business, activities or future plans of the Company which is collected by
Executive shall be delivered promptly to the Company without request by it upon
termination of Executive's employment.
11. No Prior Agreements. Executive hereby represents and warrants to the
Company that the execution of this Agreement by Executive and his employment by
the Company and the performance of his duties hereunder will not violate or be a
breach of any agreement with a former employer, client or any other person or
entity. Further, Executive agrees to indemnify the Company for any claim,
including, but not limited to, attorneys' fees, costs and expenses and expenses
of investigation, by any such third party that such third party may now have or
may hereafter come to have against the Company based upon or arising out of any
non-competition agreement, invention or secrecy agreement between Executive and
such third party which was in existence as of the date of this Agreement.
12. Key-Person Insurance. Executive agrees to make himself available and
to undergo, at the Company's request and expense, any physical examination or
other procedure necessary to allow the Company to obtain a key-person insurance
policy on Executive. If the Company obtains such policy, it will maintain the
policy at its expense and all proceeds will be the sole property of the Company.
13. Resolution of Disputes. The parties will attempt in good faith
promptly by negotiations to resolve any dispute or controversy arising out of or
relating to this Agreement or
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to the employment or termination of Executive by the Company. All negotiations
pursuant to this clause are confidential and will be treated as compromise and
settlement negotiations for purposes of the Federal Rules of Evidence and state
rules of evidence.
14. Indemnification. In the event Executive is made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by the Company
against Executive), by reason of the fact that he is or was performing services
within the course and scope of his employment with the Company under this
Agreement, then the Company shall protect, defend, indemnify and hold harmless
Executive against all expenses (including attorneys' fees, costs and expenses),
judgments, fines, costs, liabilities, damages, and amounts paid in settlement,
actually and reasonably incurred by Executive in connection therewith. Without
limiting the requirement above that Executive be performing services within the
course and scope of his employment, activities constituting violations of law or
Company policy shall not constitute services within the course and scope of
Executive's employment, and the Company shall not indemnify Executive for any
such activities. Executive agrees to immediately notify the Company of any
threatened, pending or completed matter; provided, however, that Executive's
failure to immediately notify the Company of such matter shall not relieve the
Company of any obligation hereunder, unless, and only to the extent that, the
Company is materially prejudiced by such delay or failure to give notice.
Executive agrees to accept any attorney reasonably assigned by the Company to
defend the Executive; provided that if counsel selected by the Company shall
have a conflict of interest that prevents such counsel from representing
Executive, Executive may engage separate counsel and the Company shall pay all
reasonable attorneys fees of such counsel.
15. Miscellaneous.
15.1 Governing Law; Interpretation. This Agreement will be governed by
the substantive laws of the State of New York applicable to contracts entered
into and fully performed in such jurisdiction. The headings and captions of the
Sections of this Agreement are for convenience only and in no way define, limit
or extend the scope or intent of this Agreement or any provision hereof. This
Agreement will be construed as a whole, according to its fair meaning, and not
in favor of or against any party, regardless of which party may have initially
drafted certain provisions set forth herein.
15.2 Assignment. This Agreement is personal to Executive and he may not
assign any of his rights or delegate any of his obligations hereunder without
first obtaining the prior written consent of the Board of Directors of the
Company.
15.3 Notices. Any notice, request, claim or other communication required
or permitted hereunder will be in writing and will be deemed to have been duly
given if delivered by hand or if sent by certified mail, postage and
certification prepaid, to Executive at his residence (as noted in the Company's
records), or to the Company at its address as set forth below its signature on
the signature page of this Agreement, or to such other address or addresses as
either party may have furnished to the other in writing in accordance herewith.
15.4 Severability. If any provision of this Agreement or the application
of any such provision to either of the parties is held by a court of competent
jurisdiction to be contrary to
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law, such provision will be deemed amended to the extent necessary to comply
with such law, and the remaining provisions of this Agreement will remain in
full force and effect unless the result would be manifestly unjust or would
deprive either party of the benefit of its bargain.
15.5 Entire Agreement; Amendments. This Agreement and any other exhibits
and attachments hereto constitutes the final and complete expression of all of
the terms of the understanding and agreement between the parties hereto with
respect to the subject matter hereof, and this Agreement replaces and supersedes
any and all prior or contemporaneous negotiations, communications,
understandings, obligations, commitments, agreements or contracts, whether
written or oral, between the parties respecting the subject matter hereof.
Except as provided in Section 15.4 above, this Agreement may not be modified,
amended, altered or supplemented except by means of the execution and delivery
of a written instrument mutually executed by both parties.
15.6 Attorneys' Fees. If it becomes necessary for any party to initiate
legal action or any other proceeding to enforce, defend or construe such party's
rights or obligations under this Agreement, the prevailing party will be
entitled to its reasonable costs and expenses, including attorneys' fees,
incurred in connection with such action or proceeding.
15.7 Counterparts. This Agreement may be executed simultaneously in two
(2) or more counterparts, each of which shall be deemed an original and all of
which together shall constitute but one and the same instrument.
16. EXECUTIVE ACKNOWLEDGMENT. EXECUTIVE ACKNOWLEDGES THAT HE HAS BEEN
GIVEN THE OPPORTUNITY TO CONSULT WITH LEGAL COUNSEL CONCERNING THE RIGHTS AND
OBLIGATIONS ARISING UNDER THIS AGREEMENT, THAT HE HAS READ AND UNDERSTANDS EACH
AND EVERY PROVISION OF THIS AGREEMENT, AND THAT HE IS FULLY AWARE OF THE LEGAL
EFFECT AND IMPLICATIONS OF THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
Company: Executive:
United Road Services, Inc. Allan D. Pass, Ph.D
By: /s/ Edward T. Sheehan /s/ Allan D. Pass
------------------------------------- -------------------------------
Edward T. Sheehan
Chairman and Chief Executive Officer
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Exhibit 10.17
AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT
This Amended and Restated Executive Employment Agreement ("Agreement") is
made and entered into as of January 1, 1999 (the "Effective Date") by and
between United Road Services, Inc., a Delaware corporation (the "Company") and
Robert Joseph Adams, Jr., an individual resident of the State of Georgia
("Executive").
RECITALS
WHEREAS, the Company is engaged in the business of motor vehicle and
equipment towing, recovery and transport services (the "Business");
WHEREAS, the Company desires to employ Executive on a full-time basis as
Senior Vice President and Chief Acquisition Officer of the Company, and
Executive is willing to be employed by the Company in that capacity on the terms
and conditions set forth in this Agreement; and
WHEREAS, Executive is employed hereunder by the Company in a confidential
relationship wherein Executive, in the course of his employment with the
Company, has and will continue to become familiar with and aware of information
as to the Company's customers, specific manner of doing business, including the
processes, techniques and trade secrets utilized by the Company, and future
plans with respect thereto, all of which have been and will be established and
maintained at great expense to the Company; this information is a trade secret
and constitutes the valuable goodwill of the Company.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Company and Executive hereby
agree as follows:
1. Employment. The Company hereby employs Executive on the terms set
forth herein and Executive hereby accepts such employment.
2. Duties. During the period of his employment with the Company
hereunder, Executive will be employed as Senior Vice President and Chief
Acquisition Officer of the Company. Executive will:
(a) Devote his full business time, ability, knowledge and attention, and
give his best effort and skill solely to the Company's business
affairs and interests;
(b) Perform such services and assume such duties and responsibilities
appropriate to the positions identified above as well as those which
may from time to time be reasonably assigned to him by the Chief
Executive Officer of the Company, to whom Executive will directly
report, or the Board of Directors of the Company; and
(c) In all respects use his best efforts to further, enhance and develop
the Company's business affairs, interests and welfare.
3. Compensation. In consideration of Executive's services to the Company
during the Employment Term, the Company will pay Executive a gross base salary
of $140,000 per
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annum during the Employment term. Executive's base salary will be paid in equal
installments (pro rated for portions of a pay period) on the Company's regular
pay days and the Company will withhold from such compensation all applicable
federal and state income, social security, disability and other taxes as
required by applicable laws. On at least an annual basis, the Compensation
Committee of the Board of Directors (the "Compensation Committee") will review
Executive's performance and may increase such base salary if, in its discretion,
any such increase is warranted. The Company may also pay Executive such bonuses
and other incentive compensation, including without limitation, stock options,
as are determined from time to time to be appropriate by the Compensation
Committee or another duly authorized committee of the Board of Directors.
4. Change of Control.
(a) Operation of Section 4. This Section 4 shall be effective, but not
operative, immediately upon execution of this Agreement by the parties
hereto and shall remain in effect so long as Executive remains
employed by the Company, but shall not be operative unless and until
there has been a Change of Control, as defined in subsection 4(b)
hereof. Upon such Change of Control, this Section 4 shall become
operative immediately.
(b) Definition. For purposes of this Agreement, a "Change of Control"
means (i) the sale of all or substantially all of the assets of the
Company to any person or entity that, prior to such sale, did not
control, was not under common control with, or was not controlled by,
the Company, (ii) a merger or consolidation or other reorganization in
which the Company is not the surviving entity or becomes owned
entirely by another entity, unless the outstanding voting securities
of the surviving or parent corporation, as the case may be,
immediately following such transaction are beneficially held by the
same persons and entities that beneficially held the outstanding
voting securities of the Company immediately prior to such transaction
in the same proportion as such persons or entities held such voting
securities immediately prior to the transaction, (iii) any transaction
or series of transactions which results in any person or "group"
becoming the beneficial owner, directly or indirectly, of securities
representing more than fifty percent (50%) of the outstanding voting
securities of the Company, or (iv) during any period of twelve
consecutive months after the Effective Date the persons who were
directors of the Company at the beginning of such twelve month period
cease to constitute a majority of the Board of Directors of the
Company or of any successor to the Company.
(c) Executive's Election Upon Change of Control. If, while Executive is
employed by the Company, a Change of Control (as defined in subsection
(b) of Section 4) occurs and one or more of the following events
occurs:
(i) The assignment to Executive of duties, responsibilities, or
status inconsistent with his duties, responsibilities, and status
prior to the Change of Control;
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(ii) A reduction by the Company in Executive's base salary or bonus
eligibility (as in effect prior to the Change of Control);
(iii) The failure to continue in effect the Company's insurance,
disability, stock option plans, or any other Executive benefit
plans, policies, practices or arrangements in which Executive
participates, or the failure to continue Executive's
participation therein on substantially the same basis, both in
terms of the amount of benefits provided and the level of
Executive's participation relative to other participants, as
existed prior to the Change of Control;
(iv) The failure of the Company to obtain a satisfactory agreement
from the successor to the Company to assume and agree to perform
this Agreement;
(v) Any termination by the Company of Executive's employment other
than pursuant to Section 7.2(b) hereof; or
(vi) The persons who were directors immediately before the transaction
that constitutes the Change of Control cease to constitute a
majority of the Board of Directors of the Company after the
transaction;
Executive may, in his sole discretion, within one (1) year after the effective
date of the Change of Control, give notice to the Company that he intends to
elect to exercise his rights to receive the payments provided for in Section
4(d) hereof (the "Notice of Intention"). The right to give such Notice of
Intention shall continue for one (1) year from the date of the Change of
Control. In the event that Executive elects not to exercise such rights,
Executive's employment with the Company shall continue on the terms and
conditions provided in this Agreement. In the event that Executive does elect
to exercise such rights, Executive's employment with the Company shall terminate
effective as of the date upon which the Notice of Intention is received by the
Company. Within ten (10) business days after the Company's receipt of the
Notice of Intention, payment by the Company to Executive of the amounts set
forth in Section 4(d)(i) below shall be made by cashier's check, accompanied by
a written notice to Executive setting forth the Company's computation of the
amount payable pursuant to Section 4(d). If Executive takes exception to the
Company's computation of such amount, Executive may (but shall not be prejudiced
in his right to later contest the amount actually paid by failure to do so) give
a further written notice to the Company setting forth in reasonable detail
Executive's exceptions to the Company's computation. If the Company and
Executive are unable to resolve any dispute over the total amount to be paid to
Executive pursuant to Section 4(d)(i) hereof in accordance with Section 13
hereof within thirty (30) days after the date of the Notice of Intention, such
dispute shall be submitted for resolution to an independent third party agreed
upon between the Company and Executive and any additional amount that is
determined to be owed by the Company to Executive pursuant to Section 4(d)(i)
hereof shall be paid to Executive by cashier's check within ten (10) business
days after such dispute has been finally resolved.
(d) Compensation Upon Change of Control.
(i) If Executive gives the Notice of Intention described in Section
4(c), or if the Company terminates Executive's employment within
one (1) year after
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a Change of Control other than pursuant to Section 7.2(b) hereof,
the Company shall pay Executive a lump sum amount equal to three
times Executive's base amount (as defined by Section 280(G) of
the Internal Revenue Code of 1986, as amended (the "Code")) less
one dollar ($1.00). In addition to the foregoing, the Company
will continue to provide, for a period of three years from the
effective date of Executive's termination, medical, life, dental
and disability insurance coverage to Executive of the type and
amount provided to Executive under the Company's insurance
policies as in effect at the time of termination; provided,
however, that if such coverage does not continue to be maintained
by the Company or is otherwise not available to Executive, the
Company shall provide for or make available to Executive
substantially similar economic benefits; provided, however, that
nothing in this subsection (i) shall obligate the Company to
provide for or make any such similar economic benefits available
to Executive if the Company does not have such benefits available
to its other executive officers.
(ii) Payment of the amount set forth in Section 4(d)(i) shall
terminate Executive's rights to receive any and all other
payments, rights or benefits pursuant to Sections 3, 6 and 7 of
this Agreement from the date of termination, other than any
payments, rights or benefits arising (x) pursuant to Section 15.6
of this Agreement, or (y) from any other agreement, plan or
policy which by its terms or by operation of law provides for the
continuation of such payments, rights or benefits after the
termination of Executive's relationship with the Company.
(iii) The lump sum payment referred to in subsection (i) above shall
be in addition to and shall not be offset or reduced by (x) any
other amounts that have accrued or have otherwise become payable
to Executive or his beneficiaries, but have not been paid by the
Company as of the effective date of termination of Executive's
employment with the Company, including, but not limited to,
salary, consulting fees, disability benefits, termination
benefits, retirement benefits, life and health insurance
benefits, or any other compensation or benefit payment that is
part of any valid previous, current, or future contract, plan or
agreement, written or oral, or (y) any indemnification payments
that may be or become payable to Executive pursuant to the
provisions of the Company's Certificate of Incorporation, By-
laws, or similar policy, plan, or agreement relating to the
indemnification of directors or officers of the Company under
certain circumstances.
(iv) Notwithstanding anything in this Agreement to the contrary, in
the event that the Company determines in good faith that any
portion of the compensation described in this Section 4(d)
constitutes an excess parachute payment under Section 280(G) of
the Code, then the Company shall have no obligation to provide
such portion to Executive.
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5. Vesting of Stock Options Upon Change of Control. In the event of a
Change of Control, in addition to any benefits provided to Executive upon a
Change of Control pursuant to the relevant stock option plan or stock option
agreement governing any grant of stock options to Executive, and regardless of
whether Executive intends to give a Notice of Intention pursuant to Section 4(c)
hereof or Executive's employment with the Company terminates after a Change of
Control), any and all stock options granted to Executive pursuant to any of the
Company's stock option plans prior to the effective date of such Change of
Control that are unvested as of the effective date of such Change of Control
will become fully vested and exercisable beginning two business days prior to
the effective date of such Change of Control without regard to any vesting
schedules established in the relevant option plan or option agreement.
6. Benefits and Reimbursements.
6.1 Executive will, during the Employment Term, have the right to receive
such benefits as are generally made available to full-time executive officers of
the Company, including the right to participate in any retirement plan or
executive bonus plan that the Company may create. In addition, or inclusive of
such benefits, the Company will provide Executive with the following:
(a) The opportunity to apply for coverage under the Company's
medical, life, dental and disability plans, if any. If Executive
is accepted for coverage under such plans, the Company will
provide to Executive and his immediate family such coverage on
the same terms as is customarily provided by the Company to the
plan participants as modified from time to time.
(b) In addition to normal holidays recognized by the Company,
Executive will be entitled to the greater of (i) three (3) weeks
paid vacation annually, or (ii) such other amount of paid
vacation as may be afforded executive officers of similar
position and seniority to Executive under the Company's policies
in effect from time to time (prorated for any year in which
Executive is employed for less than the full year).
6.2 The Company will reimburse Executive for travel and other out-of-
pocket expenses reasonably incurred by Executive in the performance of his
duties hereunder, provided that all such expenses will be reimbursed only (i)
upon the presentation by Executive to the Company of such documentation as may
be reasonably necessary to substantiate that all such expenses were incurred in
the performance of his duties, and (ii) if such expenses are consistent with all
policies of the Company in effect from time to time as to the kind and amount of
such expenses.
7. Term; Termination; Rights Upon Termination.
7.1 Term. The Company hereby employs Executive and Executive hereby
accepts employment with the Company for a period beginning on the Effective Date
and ending on the third anniversary of the Effective Date (as extended pursuant
to the following provisions, the "Term"). As of the first day of any month
following the Effective Date, the Term shall be extended for an additional one
(1) month period unless either Executive or the Company gives
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the other party written notice at least ten (10) days prior to the first day of
such month that this Agreement shall terminate on the then scheduled expiration
date of the Term. If such notice is given, this Agreement shall automatically
terminate on such expiration date. If this Agreement is extended, the terms in
effect under this Agreement immediately preceding such extension shall apply
during the extension period. If Executive's employment hereunder is terminated
by either the Company or Executive at any time for any reason, the expiration
date shall thereupon no longer be automatically extended.
7.2 Termination. This Agreement and Executive's employment may be
terminated in any one of the following ways:
(a) Death or Permanent Disability of Executive. Subject to the payment to
Executive of the amounts required by Section 7.3 below, this Agreement
will terminate immediately upon the death or permanent disability of
Executive, whereupon Executive shall have no further rights or be
entitled to any other benefits of this Agreement, other than the
payments and benefits referred to in Section 7.3 below. Executive will
be deemed permanently disabled for the purpose of this Agreement if,
in the good faith determination of the Board of Directors, based on
sound medical advice, Executive has become physically or mentally
incapable of performing his duties hereunder for a continuous period
of one hundred eighty (180) days, in which event Executive will be
deemed permanently disabled upon the expiration of such one hundred
eighty (180) day period.
(b) Executive's Discharge for Cause. At any time during the term of this
Agreement, subject to the payment to Executive of the amounts required
by Section 7.3(a) below, the Company may terminate Executive's
employment for "Cause" effective immediately upon its giving of
written notice setting forth with particularity the facts and
circumstances constituting such Cause, whereupon this Agreement will
terminate and Executive shall have no further rights or be entitled to
any other benefits of this Agreement, other than the payments and
benefits referred to in Section 7.3(a) below. For purposes of this
Agreement, "Cause" means the occurrence of one or more of the
following: (i) the commission by Executive of any act materially
detrimental to the Company, including but not limited to fraud,
embezzlement, theft, bad faith, gross negligence, recklessness,
dishonesty, insubordination or willful misconduct; (ii) gross
incompetence or repeated failure or refusal to perform the duties
required by this Agreement and as may be assigned to Executive by the
Company's Chief Executive Officer or Board of Directors from time to
time; (iii) conviction of a felony or of any crime of moral turpitude;
(iv) any material misrepresentation by Executive to the Company
regarding the operation of the business; or (v) material breach of any
covenant of this Agreement, provided, however, that the action or
conduct described in clause (ii) or clause (v) above will constitute
"Cause" only if Executive shall have either failed to remedy such
alleged breach within thirty (30) days from his receipt of written
notice from the Company demanding that he remedy such alleged breach,
or shall have failed to take reasonable steps in good faith to that
end during such thirty (30) day period and thereafter; and provided
further that there shall have been delivered to Executive a further
notice after the end of such thirty (30) day period asserting that the
Board of Directors has determined that Executive was
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guilty of conduct set forth in clause (ii) or clause (v), as the case
may be, that Executive has failed to take reasonable steps in good
faith to remedy such alleged breach, and specifying the particulars
thereof in detail; and provided further that Executive thereafter
shall have received a certified copy of a resolution of the Board of
Directors of the Company adopted by the affirmative vote of not less
than three-fourths of the entire membership of the Board of Directors
at a meeting called and held for that purpose and at which Executive
was given an opportunity to be heard, finding that Executive was
guilty of conduct set forth in clause (ii) or clause (v), as the case
may be, that Executive has failed to take reasonable steps in good
faith to remedy such alleged breach, and specifying the particulars
thereof in detail.
(c) The Company's Right to Terminate Without Cause. Subject to the
payment to Executive of the amounts required by Section 7.3 below, at
any time during the term of this Agreement, the Company may terminate
Executive's employment with the Company without "Cause" (as defined in
subsection (b) above), effective immediately upon written notice to
Executive, whereupon this Agreement will terminate and Executive shall
have no further rights or be entitled to any other benefits of this
Agreement, other than the payments and benefits referred to in Section
7.3 below. Notwithstanding the foregoing, if the Company terminates
Executive without "Cause" within one (1) year after a Change of
Control, the Company shall pay Executive the compensation described in
Section 4(d) hereof as though Executive had given the Notice of
Intention described in Section 4(c) (whether or not Executive actually
gave such Notice of Intention).
(d) Executive's Right to Terminate At Will. Executive shall have the
right at any time during the term of this Agreement, by giving written
notice to the Company, to terminate this Agreement and Executive's
employment with the Company effective as of the date on which such
notice is given by Executive, unless the Company advises Executive
that it requires the services of Executive for an additional period of
time, not to exceed 30 days, in which case Executive's employment
shall cease as of the end of such period (such effective date being
hereinafter referred to as the "Executive Termination Date"). On the
Executive Termination Date, this Agreement shall terminate and
Executive shall have no further rights under or be entitled to any
other benefits of this Agreement, other than the payments and benefits
referred to in Section 7.3(a) below.
7.3 Compensation and Benefits Upon Termination.
(a) Upon any termination of Executive's employment pursuant to this
Section 7, Executive will be entitled to: (i) the compensation
provided for in Section 3 hereof for the period of time ending with
the effective date of termination; (ii) compensation for any unused
vacation that Executive may have accrued, as well as all earned
benefits, up to and including the effective date of termination; (iii)
"COBRA" benefits to the extent required by applicable law; and (iv)
reimbursement for such expenses as Executive may have properly
incurred on behalf of the Company as provided in Section 6.2 above
prior to the effective date of termination.
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(b) If (i) the Company terminates Executive's employment pursuant to
Section 7.2(c) above, or (ii) Executive terminates his employment
following the Company's assignment to Executive of regular duties,
responsibilities, or status which the Board of Directors determines,
in good faith, to be materially inconsistent with Executive's duties,
responsibilities, and status under this Agreement, then, in addition
to the amounts payable in Section 7.3(a) above:
(i) Executive will be entitled to receive a severance payment in an
amount equal to (i) two times the amount of Executive's base
salary in effect at the time of termination, plus (ii) the
aggregate amount of Executive's annual cash bonuses for the two
years immediately preceding such termination, which amount shall
be paid to Executive over a two-year period in equal installments
(pro rated for portions of a pay period) on the Company's regular
pay days, and the Company will withhold all applicable federal
and state income, social security, disability and other taxes as
required by applicable law; provided, however, that Executive's
right to receive payments pursuant to this Section 7.3(b)(i)
shall cease immediately upon a knowing violation by Executive of
any of the provisions of Sections 8, 9 or 10 hereof.
(ii) any and all stock options granted to Executive pursuant to any of
the Company's stock option plans prior to the effective date of
such termination that are unvested as of the effective date of
such termination will continue to vest, and Executive shall be
permitted to exercise such options on the terms set forth in the
relevant option plan and option agreement, in the same amounts
and at the same times as such options would have vested had
Executive remained employed by the Company until all such options
become fully vested (the period between the effective date of
termination and the date that all such options become fully
vested being hereafter referred to as the "Option Vesting
Period"); provided, however, that such continued vesting of
options shall immediately cease upon a knowing violation by
Executive during the Option Vesting Period of any of the
provisions of Sections 8, 9 or 10 hereof.
(iii) the Company will continue to provide, for a period of two years
from the effective date of Executive's termination, medical,
life, dental and disability insurance coverage to Executive of
the type and amount provided to Executive under the Company's
insurance policies as in effect at the time of termination;
provided, however, that if such coverage does not continue to be
maintained by the Company or is otherwise not available to
Executive, the Company shall provide for or make available to
Executive substantially similar economic benefits; provided,
however, that nothing in this subsection (iii) shall obligate the
Company to provide for or make any such similar economic benefits
available to Executive if the Company does not have such benefits
available to its other Executive officers.
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(c) In the event of a termination upon the death or permanent disability
of Executive as provided in Section 7.2(a) above, Executive or his
estate shall be entitled to receive from the Company, for a period of
twelve months following the effective date of termination, 100% of
Executive's base salary at the rate then in effect, payable in equal
installments (pro rated for portions of a pay period) on the Company's
regular pay days, and the Company will withhold all applicable federal
and state income, social security, disability and other taxes as
required by applicable law; provided, however, that in the case of a
termination upon the permanent disability of Executive, such payments
shall be reduced by all payments in respect of Executive's salary
payable to Executive under the Company's disability insurance, if any,
for the same period.
(d) In the event that Executive terminates his employment with the Company
pursuant to Section 7.2(d) hereof within six months after Edward T.
Sheehan ceases to be employed by the Company for any reason, Executive
shall be entitled to receive the compensation and benefits set forth
in Section 7.3(b)(i), 7.3(b)(ii) and 7.3(b)(iii) above in the amounts
and at the times set forth therein.
7.4 Effect of Termination. Subject to Section 4 hereof, the payments set
forth in Section 7.3 will fully discharge all responsibilities of the Company to
Executive under this Agreement or relating to or arising out of the termination
of Executive's employment, and all other rights and obligations of the Company
and Executive under this Agreement shall cease as of the effective date of
termination, except that Executive's obligations under Sections 8, 9, and 10 and
the Company's and Executive's obligations under Section 14 hereof shall survive
such termination.
8. Unfair Competition by Executive.
8.1 Executive agrees that all trade secrets, or confidential or
proprietary information with respect to the activities and businesses of the
Company, including, without limitation, personnel information, secret processes,
know-how, customer lists, databases, ideas, techniques, processes, inventions
(whether patentable or not), and other technical plans, business plans,
marketing plans, product plans, forecasts, contacts, strategies and information
(collectively "Proprietary Information") which were learned by Executive in the
course of his employment by the Company, and any other Proprietary Information
received, developed or learned by Executive hereafter in the course of his
future employment by or in association with the Company, are confidential and
will be kept and held in confidence and trust as a fiduciary by Executive.
Executive will not use or disclose Proprietary Information of the Company except
as necessary in the normal course of the business of the Company for its sole
and exclusive benefit, unless Executive is compelled so to disclose under
process of law, in which case Executive will first notify the Company promptly
after receipt of a demand to so disclose.
8.2 During the term of this Agreement and for the greater of (i) the
period during which Executive is receiving compensation or benefits pursuant to
Section 7.3 hereof and (ii) a period of one year following the expiration or
termination of this Agreement for any reason, directly or on behalf of or in
conjunction with any other person, persons, company, partnership, corporation or
business whatever nature, Executive will not:
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(a) engage, as an officer, director, shareholder, owner, partner, joint
venturer, financier, manager, executive, independent contractor,
consultant, advisor, or sales representative, in any business selling
any products or services in direct competition with the Company or any
of its subsidiaries within 100 miles of any geographic location in
which the Company or any of its subsidiaries conducts business at such
time (or in the case of a termination or expiration of this Agreement,
within 100 miles of any geographic location in which the Company or
any of its subsidiaries conducted business at the time of such
expiration or termination) (the "Territory");
(b) call upon any prospective acquisition candidate on Executive's own
behalf or on behalf of any competitor of the Company or any of its
subsidiaries, which candidate was either called upon by the Company
(including its subsidiaries) or for which the Company made an
acquisition analysis, for the purpose of acquiring such entity;
provided, however, that Executive shall not be charged with a
violation of this Section 8.2(b) unless and until Executive shall have
knowledge or notice that such prospective acquisition candidate was
called upon, or that an acquisition analysis was made, for the purpose
of acquiring such entity;
(c) call upon, contact or solicit any person who is, at that time, an
employee of the Company (including the subsidiaries thereof) for the
purpose or with the intent of enticing such employee away from or out
of the employ of the Company (including the subsidiaries thereof);
provided that Executive shall be permitted to call upon and hire any
member of his or her immediate family;
(d) call upon any person or entity which is, at that time, or which has
been, within one (1) year prior to that time, a customer of the
Company (including the subsidiaries thereof) within the Territory for
the purpose of soliciting or selling products or services in direct
competition with the Company within the Territory;
(e) disclose customers, whether in existence or proposed, of the Company
(or the Company's subsidiaries) to any person, firm, partnership,
corporation or business for any reason or purpose.
(f) engage in any pattern of conduct that involves the making or
publishing of written or oral statements or remarks (including,
without limitation, the repetition or distribution of derogatory
rumors, allegations, negative reports or comments) which are
disparaging, deleterious or damaging to the integrity, reputation or
good will of the Company, its management, or of management of
corporations affiliated with the Company.
8.3 Except for activities expressly permitted by the prior written
approval of the Board of Directors of the Company, during the term of this
Agreement, the Executive will not: (a) engage in business independent of
Executive's employment by the Company that requires any substantial portion of
Executive's time; (b) serve as an officer, general partner or member in any for-
profit corporation, partnership or firm; (c) serve as a director of any
corporation, partnership of firm having the Business as its principal
enterprise; or (d) directly, indirectly or through any
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Affiliate, invest in, participate in or acquire an interest in any entity
engaged in the Business. For purposes of this Agreement, the terms: (i)
"Affiliate" means as to any Person, each other Person that directly or
indirectly (through one (1) or more intermediaries) controls, is controlled by
or is under common control with such person; and (ii) "Person" means an
individual, corporation, partnership, limited liability company, association,
joint stock company, trust, associate (as defined in regulations promulgated by
the Securities and Exchange Commission) or other legally recognizable entity.
Notwithstanding anything herein to the contrary, the limitations in Sections 8.2
and 8.3 hereof will not prohibit any investment by the Executive of not more
than 3% of the outstanding capital stock of a company whose securities are
listed on a public exchange or the National Association of Securities Dealers
Automated Quotation National Market System.
8.4 Executive and the Company acknowledge that: (i) each covenant and
restriction contained in Sections 8.1, 8.2, 8.3, 9 and 10 of this Agreement is
necessary, fundamental, and required for the protection of the Company's
business and goodwill; (ii) such covenants and restrictions relate to matters
which are of a special, unique, and extraordinary character that gives each of
them a special, unique, and extraordinary value which is difficult to measure in
economic terms; and (iii) a breach of any such covenant or restriction will
result in immediately and irreparable harm and damage to the Company which
cannot be compensated adequately by a monetary award or other remedy at law.
Accordingly, it is expressly agreed that, in addition to all other remedies
available at law or in equity, and notwithstanding anything to the contrary in
Section 13 below, the Company will be entitled to the immediate remedy of a
temporary restraining order, preliminary injunction, or such other form of
injunctive or equitable relief as may be used by any court of competent
jurisdiction to restrain or enjoin any of the parties hereto from breaching any
such covenant or restriction, or otherwise specifically to enforce the
provisions contained in Sections 8.1, 8.2, 8.3, 9, and 10 of this Agreement.
8.5 Reasonable Restraint. It is agreed by the parties hereto that the
foregoing covenants in Sections 8.1, 8.2 and 8.3 impose a reasonable restraint
on Executive in light of the activities and business of the Company (including
the subsidiaries thereof) on the date of the execution of this Agreement and the
current plans of the Company; but it is also the intent of the Company and
Executive that such covenants be construed and enforced in accordance with the
changing activities and business of the Company (including the subsidiaries
thereof) throughout the term of this Agreement. It is further agreed by the
parties that a portion of the compensation paid to Executive under this
Agreement is paid in consideration of the covenants herein contained, the
sufficiency of which consideration is hereby acknowledged. If the scope of any
restriction contained in Sections 8.1, 8.2 or 8.3 is too broad to permit
enforcement of such restriction to its full extent, then such restriction shall
be enforced to the maximum extent permitted by law, and the parties consent that
such scope may be judicially modified accordingly in any proceeding brought to
enforce such restriction.
8.6 Independent Covenant. Each of the covenants in Sections 8, 9 and 10
shall be construed as an agreement independent of any other provisions in this
Agreement, and the existence of any claim or cause of action of Executive
against the Company (including the subsidiaries thereof), whether predicated on
this Agreement or otherwise, shall not constitute a defense to the enforcement
by the Company of such covenants. It is specifically agreed that the time
periods stated at the beginning of Sections 8.2 and 9, during which the
agreements and covenants of Executive made in Sections 8.2 and 9 shall be
effective, shall be computed by excluding from such computation any time during
which Executive is in violation of any
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provision of Section 8 or 9. The covenants contained in Sections 8, 9 and 10
shall not be affected by any breach of any other provision of this Agreement by
any party hereto.
9. Proprietary Matters. Executive expressly understands and agrees that
any and all improvements, inventions, discoveries, processes, or know-how that
are generated, conceived or made by Executive, solely or jointly with another,
during the term of this Agreement or within the greater of (i) the period during
which Executive is receiving compensation or benefits pursuant to Section 7.3
hereof, and (ii) one (1) year following termination or expiration of this
Agreement, and which are directly related to the business or activities of the
Company and which Executive conceives as a result of his employment by the
Company, whether so generated or conceived during Executive's regular working
hours or otherwise, and whether patentable or not, are the sole and exclusive
property of the Company, and Executive shall promptly disclose any such
improvements, inventions, discoveries, processes or know-how to the Company.
Executive hereby assigns and agrees to assign all his interests in such
improvements, inventions, discoveries, processes, and know-how to the Company or
its nominees and agrees, whenever requested to do so by the Company (either
during the term of this Agreement or thereafter), to execute and assign any and
all applications, assignments and/or other instruments and do all things which
the Company may deem necessary or appropriate in order to apply for, obtain,
maintain, enforce and defend Letters of Patent, copyrights, trade names or
trademarks of the United States or of foreign countries for said improvements,
inventions, discoveries, processes, or know-how, or in order to assign and
convey or otherwise make available to the Company the sole and exclusive right,
title, and interest in and to said improvements, inventions, discoveries,
processes, know-how, or otherwise to protect the Company's interest therein.
10. Return of Company Property. All records, designs, patents, business
plans, financial statements, manuals, memoranda, lists and other property
delivered to or compiled by Executive by or on behalf of the Company or its
representatives, vendors or customers which pertain to the business of the
Company shall be and remain the property of the Company, and be subject at all
times to its discretion and control. Likewise, all correspondence, reports,
records, charts, advertising materials and other similar data pertaining to the
business, activities or future plans of the Company which is collected by
Executive shall be delivered promptly to the Company without request by it upon
termination of Executive's employment.
11. No Prior Agreements. Executive hereby represents and warrants to the
Company that the execution of this Agreement by Executive and his employment by
the Company and the performance of his duties hereunder will not violate or be a
breach of any agreement with a former employer, client or any other person or
entity. Further, Executive agrees to indemnify the Company for any claim,
including, but not limited to, attorneys' fees, costs and expenses and expenses
of investigation, by any such third party that such third party may now have or
may hereafter come to have against the Company based upon or arising out of any
non-competition agreement, invention or secrecy agreement between Executive and
such third party which was in existence as of the date of this Agreement.
12. Key-Person Insurance. Executive agrees to make himself available and
to undergo, at the Company's request and expense, any physical examination or
other procedure necessary to allow the Company to obtain a key-person insurance
policy on Executive. If the Company obtains such policy, it will maintain the
policy at its expense and all proceeds will be the sole property of the Company.
12
<PAGE>
13. Resolution of Disputes. The parties will attempt in good faith
promptly by negotiations to resolve any dispute or controversy arising out of or
relating to this Agreement or to the employment or termination of Executive by
the Company. All negotiations pursuant to this clause are confidential and will
be treated as compromise and settlement negotiations for purposes of the Federal
Rules of Evidence and state rules of evidence.
14. Indemnification. In the event Executive is made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by the Company
against Executive), by reason of the fact that he is or was performing services
within the course and scope of his employment with the Company under this
Agreement, then the Company shall protect, defend, indemnify and hold harmless
Executive against all expenses (including attorneys' fees, costs and expenses),
judgments, fines, costs, liabilities, damages, and amounts paid in settlement,
actually and reasonably incurred by Executive in connection therewith. Without
limiting the requirement above that Executive be performing services within the
course and scope of his employment, activities constituting violations of law or
Company policy shall not constitute services within the course and scope of
Executive's employment, and the Company shall not indemnify Executive for any
such activities. Executive agrees to immediately notify the Company of any
threatened, pending or completed matter; provided, however, that Executive's
failure to immediately notify the Company of such matter shall not relieve the
Company of any obligation hereunder, unless, and only to the extent that, the
Company is materially prejudiced by such delay or failure to give notice.
Executive agrees to accept any attorney reasonably assigned by the Company to
defend the Executive; provided that if counsel selected by the Company shall
have a conflict of interest that prevents such counsel from representing
Executive, Executive may engage separate counsel and the Company shall pay all
reasonable attorneys fees of such counsel.
15. Miscellaneous.
15.1 Governing Law; Interpretation. This Agreement will be governed by
the substantive laws of the State of New York applicable to contracts entered
into and fully performed in such jurisdiction. The headings and captions of the
Sections of this Agreement are for convenience only and in no way define, limit
or extend the scope or intent of this Agreement or any provision hereof. This
Agreement will be construed as a whole, according to its fair meaning, and not
in favor of or against any party, regardless of which party may have initially
drafted certain provisions set forth herein.
15.2 Assignment. This Agreement is personal to Executive and he may not
assign any of his rights or delegate any of his obligations hereunder without
first obtaining the prior written consent of the Board of Directors of the
Company.
15.3 Notices. Any notice, request, claim or other communication required
or permitted hereunder will be in writing and will be deemed to have been duly
given if delivered by hand or if sent by certified mail, postage and
certification prepaid, to Executive at his residence (as noted in the Company's
records), or to the Company at its address as set forth below its signature on
the signature page of this Agreement, or to such other address or addresses as
either party may have furnished to the other in writing in accordance herewith.
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<PAGE>
15.4 Severability. If any provision of this Agreement or the application
of any such provision to either of the parties is held by a court of competent
jurisdiction to be contrary to law, such provision will be deemed amended to the
extent necessary to comply with such law, and the remaining provisions of this
Agreement will remain in full force and effect unless the result would be
manifestly unjust or would deprive either party of the benefit of its bargain.
15.5 Entire Agreement; Amendments. This Agreement and any other exhibits
and attachments hereto constitutes the final and complete expression of all of
the terms of the understanding and agreement between the parties hereto with
respect to the subject matter hereof, and this Agreement replaces and supersedes
any and all prior or contemporaneous negotiations, communications,
understandings, obligations, commitments, agreements or contracts, whether
written or oral, between the parties respecting the subject matter hereof.
Except as provided in Section 15.4 above, this Agreement may not be modified,
amended, altered or supplemented except by means of the execution and delivery
of a written instrument mutually executed by both parties. The Consulting
Agreement between Executive and the Company (the "Consulting Agreement") is
hereby terminated effective as of June 1, 1998, and such Consulting Agreement
shall be of no further force and effect except that Executive shall be entitled
to be paid commissions pursuant to Section 3(d) of the Consulting Agreement with
respect to the Company's acquisitions of Alert Auto Transport, Inc., West
Nashville Wrecker Services, Inc. and Kirk's Sineath, Inc.
15.6 Attorneys' Fees. If it becomes necessary for any party to initiate
legal action or any other proceeding to enforce, defend or construe such party's
rights or obligations under this Agreement, the prevailing party will be
entitled to its reasonable costs and expenses, including attorneys' fees,
incurred in connection with such action or proceeding.
15.7 Counterparts. This Agreement may be executed simultaneously in two
(2) or more counterparts, each of which shall be deemed an original and all of
which together shall constitute but one and the same instrument.
16. EXECUTIVE ACKNOWLEDGMENT. EXECUTIVE ACKNOWLEDGES THAT HE HAS BEEN
GIVEN THE OPPORTUNITY TO CONSULT WITH LEGAL COUNSEL CONCERNING THE RIGHTS AND
OBLIGATIONS ARISING UNDER THIS AGREEMENT, THAT HE HAS READ AND UNDERSTANDS EACH
AND EVERY PROVISION OF THIS AGREEMENT, AND THAT HE IS FULLY AWARE OF THE LEGAL
EFFECT AND IMPLICATIONS OF THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
Company: Executive:
United Road Services, Inc. Robert Joseph Adams, Jr.
By: /s/ Edward T. Sheehan /s/ Robert Joseph Adams, Jr.
------------------------------ ---------------------------------
Edward T. Sheehan
Chairman and Chief Executive Officer
14
<PAGE>
Exhibiit 10.28
Amendment Number One
to Amended and Restated Executive Employment Agreement
This Amendment Number One to Amended and Restated Executive Employment
Agreement is entered into effective as of March 30, 1999 by and between Edward
T. Sheehan (the "Executive") and United Road Services, Inc., a Delaware
corporation (the "Company").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company and the Executive have entered into that certain
Amended and Restated Executive Employment Agreement, dated as of January 1, 1999
(the "Original Agreement"), providing for the Executive's continued employment
with the Company; and
WHEREAS, the Company and the Executive desire to amend the Original
Agreement to increase the Executive's annual base salary to $300,000.
NOW THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto hereby agree as follows:
The first sentence of Section 3 of the Original Agreement is hereby amended
in its entirety to read as follows:
The Company will pay Executive a gross base salary of $300,000 per annum
during the Employment Term.
All remaining provisions of the Original Agreement shall remain unchanged
and in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment Number
One to be executed as of the date first above written.
EXECUTIVE UNITED ROAD SERVICES, INC.
By:/s/ Edward T. Sheehan By:/s/ Allan D. Pass
------------------------- --------------------------
Edward T. Sheehan Allan D. Pass, Ph.D.
President and Chief Operating Officer
<PAGE>
Exhibit 10.29
Amendment Number One
to Amended and Restated Executive Employment Agreement
This Amendment Number One to Amended and Restated Executive Employment
Agreement is entered into effective as of March 30, 1999 by and between Allan D.
Pass, Ph.D. (the "Executive") and United Road Services, Inc., a Delaware
corporation (the "Company").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company and the Executive have entered into that certain
Amended and Restated Executive Employment Agreement, dated as of January 1, 1999
(the "Original Agreement"), providing for the Executive's continued employment
with the Company; and
WHEREAS, the Company and the Executive desire to amend the Original
Agreement to increase the Executive's annual base salary to $250,000.
NOW THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto hereby agree as follows:
The first sentence of Section 3 of the Original Agreement is hereby amended
in its entirety to read as follows:
The Company will pay Executive a gross base salary of $250,000 per annum
during the Employment Term.
All remaining provisions of the Original Agreement shall remain unchanged
and in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment Number
One to be executed as of the date first above written.
EXECUTIVE UNITED ROAD SERVICES, INC.
By:/s/ Allan D. Pass By:/s/ Edward T. Sheehan
-------------------------- ----------------------------
Allan D. Pass, Ph.D. Edward T. Sheehan
Chairman, Chief Executive Officer
and Secretary
<PAGE>
Exhibit 10.30
Amendment Number One
to Amended and Restated Executive Employment Agreement
This Amendment Number One to Amended and Restated Executive Employment
Agreement is entered into effective as of March 30, 1999 by and between Robert
J. Adams, Jr. (the "Executive") and United Road Services, Inc., a Delaware
corporation (the "Company").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company and the Executive have entered into that certain
Amended and Restated Executive Employment Agreement, dated as of January 1, 1999
(the "Original Agreement"), providing for the Executive's continued employment
with the Company; and
WHEREAS, the Company and the Executive desire to amend the Original
Agreement to increase the Executive's annual base salary to $200,000.
NOW THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto hereby agree as follows:
The first sentence of Section 3 of the Original Agreement is hereby amended
in its entirety to read as follows:
The Company will pay Executive a gross base salary of $200,000 per annum
during the Employment Term.
All remaining provisions of the Original Agreement shall remain unchanged
and in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment Number
One to be executed as of the date first above written.
EXECUTIVE UNITED ROAD SERVICES, INC.
By:/s/ Robert J. Adams, Jr. By:/s/ Edward T. Sheehan
---------------------------- ---------------------------
Robert J. Adams, Jr. Edward T. Sheehan
Chairman, Chief Executive Officer
and Secretary
<PAGE>
EXHIBIT 24.2
The Stockholders and Board of Directors
United Road Services, Inc.:
We consent to the use of our reports on United Road Services, Inc. and
subsidiaries, Northland Auto Transporters, Inc. and Northland Fleet Leasing,
Inc., Falcon Towing and Auto Delivery, Inc., Smith-Christensen Enterprises,
Inc. and subsidiary, Caron Auto Works, Inc. and Caron Auto Brokers, Inc.,
Absolute Towing and Transporting, Inc., ASC Transportation Services and
subsidiary, Silver State Tow and Recovery, Inc., MPG Transco, Ltd., Pilot
Transport, Inc., E&R Towing & Garage, Inc. and subsidiaries, Environmental
Auto Removal, Inc., Neil's Used Truck & Car Sales, Incorporated, 5-L
Corporation and ADP Transport, Inc., Car Transporters Corporation, Schroeder
Auto Carriers, Inc., Keystone Towing, Inc., Fast Towing, Inc., and Alert Auto
Transport, Inc., included herein and to the reference to our firm under the
heading "Experts" in the prospectus.
/s/ KPMG LLP
Albany, New York
April 21, 1999
