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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Sections 240.14a-11(c) or Section 240.14a-
12
United Road Services, Inc.
(Name of Registrant as Specified in its Charter)
Payment of Filing Fee (Check the appropriate box):
[X]No fee required
[_]Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11:
(1) Title of each class of securities to which transaction applies: United
Road Services, Inc. Common Stock, $0.001 par value.
(2) Aggregate number of securities to which transaction applies: [ ]
shares
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined): $[ ]
(4) Proposed maximum aggregate value of transaction: $[ ]
(5) Total fee paid: $[ ]
[_]Fee paid previously with preliminary materials
[_]Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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UNITED ROAD SERVICES, INC.
8 Automation Lane
Albany, New York 12205
[DATE]
Dear Stockholder of United Road Services, Inc.:
You are invited to attend a special meeting of the stockholders (the
"Meeting") of United Road Services, Inc. ("United Road") to be held on [DATE]
at [TIME], Eastern Standard Time at [LOCATION], at which you will be asked to
ratify and approve the sale and issuance of $31,500,000 aggregate principal
amount of United Road's 8% Convertible Subordinated Debentures due 2008 (the
"Debentures") to Charter URS LLC, a Delaware limited liability company
("Charterhouse").
On December 7, 1998, United Road issued and sold $43,500,000 aggregate
principal amount of Debentures to Charterhouse pursuant to a Purchase
Agreement, dated November 19, 1998, between United Road and Charterhouse (the
"Purchase Agreement"). At the Meeting, you will be asked to vote upon a
proposal (the "Debentures Proposal") to issue and sell an additional
$31,500,000 of Debentures to Charterhouse pursuant to the Purchase Agreement.
The Debentures are convertible into shares of United Road's Common Stock,
$0.001 par value, at a price of $15.00 per share, subject to adjustment as
provided in the Purchase Agreement. The proceeds from the sale of the
Debentures to Charterhouse will be used to repay certain outstanding
indebtedness of United Road under its revolving credit facility (the "Credit
Facility") and for general corporate purposes, including working capital and
future acquisitions.
The United Road Board of Directors believes that the sale of the Debentures
is in the best interests of United Road's stockholders and recommends that the
stockholders vote FOR the Debentures Proposal at the Meeting.
The enclosed Notice and Proxy Statement contain details concerning the
Debentures Proposal. We urge you to read and consider these documents
carefully. Whether or not you plan to be at the Meeting, please be sure to
sign, date and return the enclosed proxy card in the enclosed envelope as
promptly as possible so that your shares may be represented at the Meeting and
voted in accordance with your wishes. Your vote is important regardless of the
number of shares you own.
Sincerely,
/s/ Edward T. Sheehan
_____________________________________
Edward T. Sheehan
Chairman of the Board and Chief
Executive Officer
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UNITED ROAD SERVICES, INC.
8 Automation Lane
Albany, New York 12205
[DATE]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [DATE]
To the Stockholders of United Road Services, Inc.:
Notice is hereby given that a Special Meeting of Stockholders (the "Meeting")
of United Road Services, Inc. ("United Road") will be held at [LOCATION] on
[DATE] at [TIME], Eastern Standard Time, to consider and act upon the following
proposal (the "Debentures Proposal"):
To ratify and approve the issuance of $31,500,000 aggregate
principal amount of United Road's 8% Convertible Subordinated
Debentures due 2008 (the "Debentures") to Charter URS LLC, a
Delaware limited liability company ("Charterhouse") pursuant to a
Purchase Agreement dated November 19, 1998, between United Road and
Charterhouse (the "Purchase Agreement"). The Debentures are
convertible into shares of United Road's Common Stock, $0.001 par
value (the "Common Stock"), at a price of $15.00 per share, subject
to adjustment as provided in the Purchase Agreement.
The Meeting may be postponed or adjourned from time to time, and at any
reconvened meeting actions with respect to the matters specified in this notice
may be taken without further notice to stockholders unless required by the
Bylaws of United Road.
Only stockholders of record at the close of business on [DATE], are entitled
to notice of and to vote on the Debentures Proposal at the Meeting and any
postponements or adjournments thereof. Approval of the Debentures Proposal
requires the affirmative vote of a majority of the shares of Common Stock
present or represented by proxy at the Meeting. The Debentures Proposal is more
fully described in the accompanying Proxy Statement and the Appendices thereto,
which form a part of this notice and should be read carefully by all
stockholders.
By Order of the Board of Directors,
/s/ Edward T. Sheehan
-------------------------------------
Edward T. Sheehan
Corporate Secretary
WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE MEETING, PLEASE SIGN AND DATE
THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED PREPAID ENVELOPE. IF YOU
ATTEND THE SPECIAL MEETING, YOU MAY VOTE EITHER IN PERSON OR BY YOUR PROXY.
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UNITED ROAD SERVICES, INC.
PROXY STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS
[DATE]
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of United Road Services, Inc. (the "Company"
or "United Road") for use at the Special Meeting of Stockholders (the
"Meeting") scheduled for [DATE] at [TIME] Eastern Standard Time at [LOCATION]
and at any adjournments thereof.
On December 7, 1998 United Road issued and sold $43,500,000 aggregate
principal amount of its 8% Convertible Subordinated Debentures (the
"Debentures") to Charter URS LLC, a Delaware limited liability company
("Charterhouse") pursuant to a Purchase Agreement, dated November 19, 1998,
between United Road and Charterhouse (the "Purchase Agreement"), a copy of
which is attached hereto as Appendix A. At the Meeting, the holders of the
common stock, $0.001 par value, of United Road (the "Common Stock") will be
asked to vote upon a proposal (the "Debentures Proposal") to issue and sell an
additional $31,500,000 aggregate principal amount of Debentures to Charterhouse
pursuant to the Purchase Agreement.
The Debentures are convertible into shares of Common Stock at a price of
$15.00 per share, subject to adjustment as provided in the Purchase Agreement.
The proceeds from the sale of the Debentures to Charterhouse will be used to
repay certain outstanding indebtedness of United Road under its revolving
credit facility (the "Credit Facility") and for general corporate purposes,
including working capital and future acquisitions. Stockholder approval of the
Debentures Proposal is required in accordance with the rules of The Nasdaq
Stock Market, Inc. ("Nasdaq") because the aggregate amount of Common Stock
issuable to Charterhouse upon conversion of the Debentures issued to
Charterhouse in December 1998 (the "First Tranche Debentures") and the
Debentures to be issued to Charterhouse if the Debentures Proposal is approved
by the stockholders (the "Second Tranche Debentures") will be in excess of 20%
of the number of shares of Common Stock outstanding as of the date of the
Purchase Agreement.
The Board of Directors (hereinafter sometimes referred to as the "Board") has
fixed [DATE] as the record date (the "Record Date") for determining the
stockholders entitled to vote at the Meeting. Only holders of record of Common
Stock at the close of business on the Record Date are entitled to notice of,
and to vote at, the Meeting. On the Record Date there were [NUMBER] holders of
record of Common Stock and [NUMBER] shares of Common Stock issued and
outstanding. Each share of Common Stock entitles the holder thereof to one vote
on each matter submitted for stockholder approval. See "Principal Stockholders"
for information regarding persons known to management of United Road to be the
beneficial owners of more than 5% of the outstanding Common Stock.
This Proxy Statement and the accompanying proxy card are first being mailed
to the stockholders of United Road on or about , 1999.
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THE DEBENTURES PROPOSAL
General
On November 19, 1998, the Company entered into the Purchase Agreement with
Charterhouse, providing for the issuance by the Company to Charterhouse of up
to $75,000,000 aggregate principal amount of Debentures. Under the Purchase
Agreement, the Debentures are issuable in two tranches. The first tranche of
$43,500,000 aggregate principal amount of Debentures (the "First Tranche") was
issued on December 7, 1998 (the "First Closing"). The issuance of the second
tranche of $31,500,000 aggregate principal amount of Debentures (the "Second
Tranche") is subject to approval by the stockholders at the Meeting and
satisfaction of certain other conditions precedent as described below. If the
stockholders approve the issuance of the Second Tranche, a closing of the
Second Tranche (the "Second Closing") will be held on or about the twelfth
business day following the Meeting.
The Company believes that during the next several months a number of
opportunities will arise to acquire additional motor vehicle and equipment
towing, recovery and transport businesses in markets in which the Company has
established a presence, as well as in new markets. In addition, the Company
believes that additional working capital can be used effectively to expand the
Company's business and operations through select investments in equipment and
information systems. The capital requirements posed by these acquisition
opportunities and working capital outlays exceed the Company's cash on hand,
cash flow from operations and available credit under the Credit Facility. The
Company initially considered offering and selling additional shares of Common
Stock in a registered public offering to meet its anticipated capital needs.
However, under market conditions that existed at the time of negotiation and
execution of the Purchase Agreement, the Company believed that the price at
which it could have reasonably expected to offer and sell such Common Stock
would have been excessively dilutive to current stockholders. As a result, the
Company elected to offer and sell the Debentures in a private offering to
Charterhouse. The Company believes that the issuance of the Second Tranche
Debentures on the terms set forth in the Purchase Agreement, which are
described more fully below, is in the best interest of the Company and its
stockholders because it will provide the Company additional capital to pursue
the acquisition and operational strategies described above.
The Company's Board of Directors unanimously approved the Debentures
Proposal and the other transactions contemplated by the Purchase Agreement at
the November 19, 1998 Board meeting, and recommended that the Company's
stockholders be asked to approve the Debentures Proposal. Stockholders should
consider the following summary of the Debentures Proposal before voting on
such proposal. The following summary is qualified in its entirety by reference
to the Purchase Agreement, the Investors Agreement (as defined below) and the
Registration Rights Agreement (as defined below), copies of which are attached
hereto as Appendices A, B and C, respectively.
Conditions to the Second Tranche
The obligation of Charterhouse to close on the Second Tranche is subject to
the satisfaction or waiver of the following conditions prior to or at the date
of the Second Closing (the "Second Closing Date"): (i) the stockholders of the
Company shall have approved the issuance of the Second
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Tranche Debentures at the Meeting; (ii) the minimum average daily closing price
of the Common Stock for the 30 consecutive trading days ending before the
Meeting shall be at least $10.00 per share; (iii) the Company shall have
performed and complied with all covenants and conditions contained in the
Purchase Agreement and required to be performed or complied with prior to or at
the Second Closing and no Default or Event of Default (defined below) shall
occur or be continuing after giving effect to the issue and sale of the
Debentures; (iv) the representations and warranties of the Company contained in
the Purchase Agreement, and in the Investors Agreement and the Registration
Rights Agreement (the "Other Agreements"), shall be true and correct when made
and on the Second Closing Date; (v) the Company shall have delivered to
Charterhouse certain certificates and an opinion of counsel specified in the
Purchase Agreement; (vi) Charterhouse's purchase of the Debentures shall not
violate any applicable law or regulation or subject Charterhouse to any tax,
penalty or liability under any applicable law or regulation; and (vii) the
Other Agreements shall be in full force and effect, and all documents and
instruments incident to the transactions contemplated by the Purchase Agreement
and the Other Agreements shall be satisfactory to Charterhouse and its counsel.
The obligation of the Company to close on the Second Tranche is subject to
the satisfaction or waiver of the following conditions prior to or at the
Second Closing Date: (i) the stockholders of the Company shall have approved
the issuance of the Second Tranche Debentures at the Meeting; (ii) the
representations and warranties of Charterhouse contained in the Purchase
Agreement shall be true and correct when made and on the Second Closing Date;
(iii) Charterhouse shall have performed and complied with all covenants and
conditions contained in the Purchase Agreement and required to be performed or
complied with prior to or at the Second Closing; (iv) Charterhouse shall have
delivered to the Company an Officer's Certificate as specified in the Purchase
Agreement; and (v) all documents and instruments incident to the transactions
contemplated by the Purchase Agreement shall be satisfactory to the Company and
its counsel.
If either party fails to perform its respective obligations at the Second
Closing, or if any of the conditions required from either party in connection
with the Second Closing are not fulfilled by March 31, 1999, then the party not
in default shall have the option to be relieved of all further obligations with
respect to the issuance of the Second Tranche Debentures.
If Charterhouse, as the holder of all of the First Tranche Debentures, were
to convert all outstanding Debentures at a conversion price of $15.00 per
share, Charterhouse would own approximately 19.9% of the Common Stock of the
Company outstanding prior to the issuance of the First Tranche Debentures and
the conversion thereof. Assuming that the Debentures Proposal is approved by
the stockholders and the Second Tranche Debentures are issued, if Charterhouse,
as the holder of all of First Tranche Debentures and the Second Tranche
Debentures, were to convert all outstanding Debentures at a conversion price of
$15.00 per share, Charterhouse would own approximately 34% of the Common Stock
of the Company outstanding prior to the issuance of the Debentures and the
conversion thereof.
The Debentures
Maturity
The Debentures will mature on December 7, 2008.
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Interest
Interest is payable on the Debentures at a rate of 8% per annum, payable in
equal quarterly installments, and at a rate of 10% per annum on any overdue
payment of principal or interest. For the period beginning on December 7, 1998
through and including January 1, 2004, interest shall be payable in additional
Debentures. From January 2, 2004, interest shall be payable in additional
Debentures or in cash, at the Company's option.
Subordination
The Debentures are subordinate in right of payment to the Company's Senior
Obligations (defined below) in the manner set forth in the Purchase Agreement.
Generally, the Company may make scheduled payments on account of outstanding
Debentures (including payments of principal, premium, if any, and interest),
unless (i) the Company is in default on any payments of principal, premium, if
any, or interest on any Senior Obligation, or (ii) the Company is in default of
a term or condition of any Senior Obligation, other than a payment default,
that gives rise to a payment blockage as described below. During the
continuance of any payment default or Payment Blockage Period (as defined
below), the Company may not make any scheduled payment on the Debentures (other
than in the form of additional Debentures) until and unless the Senior
Obligations have been paid in full, unless all holders of Senior Obligations
agree otherwise in writing.
Bank of America National Trust and Savings Association, as agent under the
Credit Facility, or a holder of $20,000,000 or more in aggregate principal
amount of Senior Obligations may block scheduled payments under the Debentures
(other than in the form of additional Debentures) for a specified period (the
"Payment Blockage Period") if the Company is in default in the performance or
observance of a term or condition of any Senior Obligation that gives the
holders of such Senior Obligations the right to declare such Senior Obligations
to be due and payable. The Payment Blockage Period begins when the Company
receives notice of the payment blockage and ends when: (i) the default is cured
or waived; (ii) the holders of Senior Obligations terminate the blockage; or
(iii) 180 days have elapsed since the date of the payment blockage notice,
whichever occurs first, except when a default in any payment on the Senior
Obligations has occurred or would otherwise result.
The term "Senior Obligation" includes: (i) all obligations of the Company
under the Credit Facility; (ii) all obligations of the Company under any
secured debt instrument with an initial principal amount in excess of
$5,000,000 that specifies that it is a "Senior Obligation"; (iii) any
obligations to a financial institution which is from time to time party to the
Credit Facility ("Bank") or its affiliate in connection with (A) any interest
rate, currency or commodity swap agreement, cap agreement or collar agreement,
or any other arrangement designed to protect the Company against fluctuations
in interest rates, currency exchange rates, or commodity prices, or (B) any
credit or purchase card issued by such Bank or its affiliate; or (iv) all
obligations of the Company to any Bank or affiliate of any Bank in connection
with any other credit arrangement that is secured by the Company's assets. The
Debentures do not impose a limit on the amount of Senior Obligations the
Company may incur. As of December 31, 1998, $18.8 million of obligations of
United Road that constituted Senior Obligations were outstanding.
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Upon the acceleration of the maturity of any Senior Obligations, holders of
the Debentures may accelerate the scheduled maturity of the Debentures to the
extent permitted by the Purchase Agreement, but in no event shall the holders
of Debentures be entitled to any cash payment or security on account of the
Debentures unless and until the Senior Obligations have been paid in full.
If any event of default under the Purchase Agreement ("Event of Default")
shall occur and be continuing, holders of the Debentures may not accelerate the
maturity, institute any proceeding to enforce or collect any obligation in
respect of the Debentures, commence or join with any other creditor in
commencing bankruptcy or other similar proceedings against the Company, or
otherwise exercise any right or remedy in respect of the Debentures, without
the prior written consent of the agent under the Credit Facility, until the
first to occur of: (i) thirty (30) days after the Debenture holder(s) notify
the agent of the Event of Default; (ii) bankruptcy, insolvency or
reorganization proceedings against the Company have been ongoing for sixty (60)
days, or the Company has itself filed for or acquiesced to such proceedings; or
(iii) the maturity of the Senior Obligations have been accelerated.
The subordination provisions do not limit the right of the holders of the
Debentures to convert the Debentures into Common Stock in accordance with the
terms of the Purchase Agreement.
Affirmative Covenants
Reporting Requirements. Under the Purchase Agreement, the Company is required
to deliver to each holder of at least $5,000,000 aggregate principal amount of
the Debentures monthly flash financial reports and operational summaries
prepared in the normal course of business. The Company is also required to
provide such holders unaudited quarterly reports and audited annual reports
consisting of a consolidated balance sheet of the Company and its subsidiaries
as at the end of such period, and consolidated statements of income, changes in
stockholders' equity and cash flows of the Company and its subsidiaries for
such period and, in the case of quarterly reports, for the portion of the
fiscal year ending with such quarter.
The Company will also furnish to each holder of at least $5,000,000 aggregate
principal amount of the Debentures copies of financial statements, reports,
notices or proxy statements sent to holders of its publicly traded securities
generally, and reports, final prospectuses and effective registration
statements filed with the SEC.
Inspection, Notice. Under the Purchase Agreement, holder(s) of at least
$5,000,000 aggregate principal amount of the Debentures have the right, at the
Company's expense, to visit and inspect the offices and properties of the
Company and its subsidiaries, and to examine the Company's books of account and
other records as reasonably necessary to keep such holder(s) informed of the
Company's affairs, finances and accounts.
The Company will provide the holder(s) of the Debentures at least twenty (20)
days' advance notice of (i) the grant to the Company's stockholders of any
rights or warrants to subscribe for or to purchase any shares of capital stock,
(ii) any reclassification of the Company's Common Stock, (iii) any
consolidation or merger to which the Company is a party and for which
stockholder approval is required or the sale or transfer of all or
substantially all of the Company's assets, or (iv) any voluntary or involuntary
dissolution, liquidation or winding up of the Company.
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Under the Purchase Agreement, the Company has agreed to deliver to each
holder of at least $5,000,000 aggregate principal amount of the Debentures
prompt written notice of: (i) an Event of Default or an event which, with the
lapse of time or giving of notice would be an Event of Default (a "Default");
(ii) any "reportable event" (as defined in Section 4043(c) of the Employment
Retirement Income Security Act of 1974 ("ERISA")) under any employment benefit
plan governed by ERISA and administered by or on behalf of the Company or any
subsidiary (a "Plan"), (iii) the occurrence or receipt of notice of a
proceeding for the termination of, or the appointment of a trustee to
administer, any Plan, (iv) the incurrence of any material liability on, or the
imposition of any material lien on the assets of, the Company or any subsidiary
or ERISA Affiliate (as defined in the Purchase Agreement), under ERISA or the
penalty or excise tax provisions of the Internal Revenue Code of 1986, as
amended (the "Code") relating to employee benefit plans, and (v) such other
data and information relating to the business of the Company or any of its
subsidiaries, or relating to the ability of the Company to perform its
obligations under the Purchase Agreement, the Other Agreements or the
Debentures, as is reasonably requested by any holder of Debentures.
Compliance with Law. Under the Purchase Agreement, the Company is obligated
to comply with all laws, ordinances or governmental regulations, to maintain
all certificates, permits, franchises and other governmental authorizations
necessary to its business, to maintain insurance for its properties and
businesses customary within its industry, and to maintain its properties and
assets in good working order. Any failure to do so would constitute an Event of
Default under the Purchase Agreement.
Under the Purchase Agreement, the Company and its subsidiaries are obligated
to file all income tax and other tax returns and to pay and discharge all taxes
due and payable and all other taxes and similar assessments before they become
delinquent, unless the amount, applicability or validity thereof is contested
by the Company or the nonpayment of all such taxes and assessments in the
aggregate would not reasonably be expected to have a material adverse effect on
the Company. Except as provided in the Purchase Agreement, the Company has
agreed to keep in full force and effect its corporate existence and that of its
subsidiaries and all rights and franchises of the Company and its subsidiaries
unless, in the good faith judgment of the Company, the failure to do so would
not have a material adverse effect on the Company.
Negative Covenants
Dividends. The Company and its subsidiaries have agreed not to declare or pay
any dividend or make any distribution on account of its capital stock, other
than dividends payable to the Company or any of its subsidiaries or payable in
connection with a shareholder rights plan.
Merger or Consolidation. Under the Purchase Agreement, the Company has agreed
not to consolidate or merge with any other corporation, or convey, transfer or
lease substantially all of its assets in a single transaction or series of
transactions unless: (i) the transaction does not give rise to a Default or
Event of Default under the Purchase Agreement; and (ii) either (A) the
successor or resulting entity is solvent and duly organized and existing under
the laws of the United States or any state thereof, or (B) the successor or
resulting entity assures the holder(s) of the Debentures of its assumption of
the obligations of the Company under the Debentures, the Purchase Agreement and
the Other Agreements, and of its punctual performance and observance of such
obligations.
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Forbearance. The Company has also agreed not to enter into any agreement or
instrument or otherwise agree to any covenant that would in any way limit the
right of the holder(s) of the Debentures to convert the Debentures into Common
Stock.
Conversion
Each Debenture holder may, at any time prior to the earlier to occur of
December 7, 2008 or the close of business on the business day immediately
preceding any scheduled redemption of the Debentures by the Company (described
below), upon five business days' prior written notice, convert all or part of
its Debentures into fully paid and nonassessable shares of Common Stock. The
price at which the Debenture holder(s) may convert the Debentures into Common
Stock is $15.00 per share, subject to adjustment as described below (as
adjusted from time to time, the "Conversion Price"). Interest that is payable
on a Debenture tendered for conversion will be prorated to and payable on the
date the Debenture is converted to Common Stock ("Conversion Date").
Pursuant to the Purchase Agreement, the Conversion Price will be adjusted if:
(i) the Company issues additional shares of Common Stock for a price per share
less than 90% of the Current Market Price (as defined below); or (ii) the
Company (A) issues options or convertible securities with an exercise price or
conversion price that is less than the lower of (1) the Conversion Price then
in effect, and (2) 90% of the then Current Market Price, or (B) fixes a record
date for the determination of holders of any class of securities then entitled
to receive any such options or convertible securities; provided, that the
Company will not be required to make any further adjustment in the Conversion
Price upon the subsequent exercise of such options or exchange of such
convertible securities. In any such event, the Conversion Price will be reduced
to reflect the proportionate difference between the amount that the Company
would have received had it sold such Common Stock at the Current Market Price
(or in the case of options and convertible securities, received an amount equal
to the Current Market Price upon the exercise or conversion thereof), and the
amount actually obtained by the Company for such issuance.
The "Current Market Price" per share is the average for the ten consecutive
business days before the Conversion Date of the daily closing prices of the
Common Stock as reported in the Wall Street Journal, or if not so reported, of
the last reported sales price regular way, or if no such sale took place, the
average of the reported closing bid and asked prices regular way, in any such
case on the Nasdaq National Market or the principal national securities
exchange on which the Common Stock is at the time listed, or, if not so listed,
the average of the closing bid and asked prices in the over-the-counter market
as furnished by any National Association of Securities Dealers member firm
selected by the Company.
If the Company pays or makes an extraordinary dividend or other distribution
of Common Stock, the Conversion Price will be proportionately reduced to
reflect the increase in outstanding shares of Common Stock. In the event of a
stock split or combination of the outstanding shares of Common Stock, the
Conversion Price will be adjusted proportionately to reflect the change in
number of shares outstanding.
If the Company issues rights or warrants entitling stockholders to purchase
shares of Common Stock at less than the Current Market Price, the Conversion
Price will be reduced to reflect the
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proportionate difference between the amount that the Company would have
received had the aggregate of such warrants or rights been exercised at the
Current Market Price, and the aggregate exercise price for such warrants or
rights. If the rights or warrants can only be exercised upon the occurrence of
one or more triggering events, the Conversion Price will only be adjusted when
such event or events occur. If the rights or warrants expire before being
exercised, the Conversion Price will be re-adjusted as though such unexercised
rights or warrants had never been issued.
If the Company distributes to holders of its Common Stock any of the
Company's assets, shares of its capital stock other than Common Stock, or debt
securities of the Company (other than a dividend or distribution paid in cash
out of the Company's retained earnings or a dividend or distribution referred
to above), the Conversion Price will be adjusted by multiplying the Conversion
Price in effect on the date fixed for determining stockholders of record
entitled to receive such distribution by a fraction, the numerator of which is
the Current Market Price on such date less the per-share fair market value of
the assets or securities so distributed, and the denominator of which is the
Current Market Price.
If the Company consolidates or merges with another entity (other than a
merger that does not result in any reclassification, conversion, exchange or
cancellation of the Common Stock), or transfers all or substantially all of its
assets while the Debentures remain outstanding, each Debenture holder will be
entitled, during the period that such Debenture is otherwise convertible, to
convert such Debenture into the kind and amount of cash, securities and other
property receivable upon such consolidation, merger, sale or transfer by a
holder of the number of shares of Common Stock into which such Debenture might
have been converted immediately prior to such merger, consolidation, sale or
transfer.
The reclassification of Common Stock into securities other than Common Stock
(other than a reclassification upon a consolidation or merger to which the
preceding paragraph applies) will be deemed to involve (i) a distribution of
such securities to all holders of Common Stock, and (ii) a subdivision or
combination, as the case may be, of the number of shares of Common Stock
outstanding immediately prior to such reclassification into the number of
shares of Common Stock outstanding immediately thereafter.
Optional Redemption
If the average closing price of the Common Stock for any thirty (30)
consecutive trading days following December 7, 2003 exceeds 150% of the
Conversion Price, the Company may elect, upon at least thirty (30) days' prior
written notice, to redeem all (but not part) of the outstanding Debentures,
subject to any holder's right to first convert its Debentures into Common Stock
prior to the close of business on the business day immediately preceding the
scheduled redemption date, in the manner described above. If the Company makes
such an election, the redemption price will equal 100% of the principal amount
of such Debentures, together with accrued interest to the date of redemption.
Repurchase of Debentures Upon A Change of Control
For purposes of the Purchase Agreement, a "Change of Control" with respect to
the Company is defined as a circumstance in which: (i) any person or group (as
such terms are used for purposes of Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amend (the "Exchange Act"))
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becomes the beneficial owner of more than 50% of the total voting power of the
Company, or a successor to the Company by merger, consolidation, transfer of
all or substantially all of the Company's assets or otherwise; or (ii) during
any consecutive twelve-month period following December 7, 1998, the Directors
at the beginning of such period and their successors cease to comprise a
majority of the Board.
Pursuant to the Purchase Agreement, in the event of a Change of Control, the
Company must make an offer to each holder of Debentures to purchase for cash
all or any part of such holder's Debentures on a date that is no later than
sixty (60) business days after the Change of Control at (i) 106.5% of the
principal amount of the Debentures if the Change of Control occurs on or prior
to December 7, 2003, or (ii) 103% of the principal amount of the Debentures if
the Change of Control occurs after December 7, 2003, in each case together with
accrued and unpaid interest to the date of purchase. In such event, each holder
of Debentures will have the option to tender such holder's Debentures for
redemption. The Company's offer must be made within ten (10) business days
following the event giving rise to the Change of Control, and the offer must
remain open for twenty (20) business days from the date of such offer.
Registration
The Debentures have not been registered under the Securities Act of 1933, as
amended (the "Securities Act"), and are not required to be registered. The
Debentures may not be resold unless they are registered, they fall within an
exemption from registration under the Securities Act, or neither such
registration nor such an exemption is required by law.
Survival of Representations
All representations and warranties contained in the Purchase Agreement will
survive and may be relied upon by any permitted transferee of a Debenture until
thirty (30) days after Charterhouse receives the audited financial statements
of the Company for the year ended December 31, 1999.
Events of Default
An Event of Default will exist under the Purchase Agreement if any of the
following conditions or events occur and are continuing:
(a) the Company defaults in payment of principal or premium on any
Debenture when such payment becomes due and payable;
(b) the Company defaults in the payment of any interest on any Debenture
for more than ten (10) business days after such payment becomes due and
payable;
(c) the Company defaults in the performance of or compliance with its
negative covenants in the Purchase Agreement relating to mergers or
consolidations (described above);
(d) the Company fails to perform or comply with any other term of the
Purchase Agreement and such default is not remedied within thirty (30) days
after a responsible officer of the Company obtains actual knowledge of such
default or the Company receives written notice of such default from any
holder of a Debenture, whichever occurs first;
(e) any written representation or warranty made in connection with the
Purchase Agreement or the Other Agreements proves to be materially false or
incorrect;
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(f) the Company or a significant subsidiary is in default (beyond any
grace period) in the payment of any principal, premium or interest on
indebtedness that is outstanding in an aggregate principal amount of at
least $1,000,000, or is in default in the performance or compliance with
any term of any indebtedness in an aggregate outstanding principal amount
of at least $1,000,000 or any other agreement relating thereto, and as a
result of such default, such indebtedness has become or been declared due
and payable before its stated maturity or regularly scheduled payment
dates;
(g) the Company or any significant subsidiary (i) is generally not paying
or admits in writing that it is unable to pay its debts as they become due,
(ii) files a petition for relief or reorganization under any bankruptcy or
similar law, or consents to such a filing, (iii) makes an assignment for
the benefit of its creditors, (iv) consents to the appointment of a
custodian, receiver, trustee or other similar officer, (v) is adjudicated
as insolvent or to be liquidated, or (vi) takes corporate action for the
purpose of any of the foregoing;
(h) a court or governmental authority enters an order appointing a
custodian or other similar officer with respect to the Company or any
significant subsidiary or any substantial part of its property, or
constituting an order for relief or approving a petition for relief or
reorganization or any other petition in bankruptcy or liquidation or taking
advantage of any bankruptcy or insolvency law of any jurisdiction, or
ordering its dissolution, winding-up or liquidation, or any such petition
is filed and not dismissed within sixty (60) days;
(i) a final judgment or judgments for the payment of money in excess of
$2,000,000 is rendered against the Company or a significant subsidiary and
remains outstanding after sixty (60) days; or
(j) a violation of Section 4975 of the Code or of Section 406 of ERISA
occurs which has a reasonable likelihood of resulting in liability to the
Company, or the Company or an affiliate files a notice to voluntarily
terminate any Plan in a distress termination, or the Company or any
affiliate incurs withdrawal liability in excess of $50,000 with respect to
any Multiemployer Plan (as such term is defined under ERISA), or incurs an
accumulated funding deficiency or requests a funding waiver from the
Internal Revenue Service with respect to any Plan subject to Title IV of
ERISA, provided that any such event described in this subsection (j) must
have a material adverse effect on the Company in order to constitute an
Event of Default.
If an Event of Default with respect to the Company occurs pursuant to (g) or
(h) above, the Debentures will automatically become immediately due and
payable.
If an Event of Default occurs pursuant to (a) or (b) above, any holder(s) of
Debentures affected by such Event of Default may at any time declare all of the
Debentures held by it or them to be immediately due and payable.
If any other Event of Default occurs, the holder(s) of at least 50% in
principal amount of the Debentures may at any time at their option, by notice
to the Company declare, all then outstanding Debentures, together with all
accrued and unpaid interest thereon, to be immediately due and payable.
However, if the holder(s) of at least 50% in principal amount of the Debentures
elect to accelerate the maturity of the Debentures as described above, the
resulting acceleration and its consequences may be rescinded and annulled if
holder(s) of at least 25% in principal amount of the
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Debentures provide written notice thereof to the Company, and (i) the Company
has paid all overdue interest on outstanding Debentures, all principal of and
premium, if any, on any Debentures that are due and payable other than by
reason of such declaration and are unpaid, and all interest on such overdue
principal, and any overdue interest in respect of the Debentures, at the
default interest rate of 10%, (ii) all defaults have been cured or waived,
other than non-payment of amounts that are due solely because of the
acceleration, and (iii) no judgment or decree has been entered for the payment
of any monies due.
Irrespective of any acceleration of the maturity of the Debentures, if a
Default or Event of Default has occurred and is continuing, the holder(s) of at
least 50% in principal amount of the Debentures may protect and enforce their
rights by taking legal action or other appropriate proceeding. Notwithstanding
any of the foregoing, any holder of Debentures has the absolute and
unconditional right to receive payment of the principal, premium if any, and
interest on its Debentures and to institute suit for the enforcement of any
such payment. Should Debenture holder(s) pursue enforcement or collection
proceedings in connection with an Event of Default, the Company will reimburse
the holder(s) for all costs and expenses incurred in connection with such
proceedings.
Indemnification
Under the Purchase Agreement, the Company has agreed to indemnify
Charterhouse and its affiliates for all claims asserted against any such party
that arise out of any inaccuracy or breach of any representation or warranty of
the Company or any breach of a covenant or obligation of the Company contained
in the Purchase Agreement. The Company's indemnification obligation is not
limited by any investigation of the Company performed by Charterhouse prior to
Closing. Charterhouse has agreed to indemnify the Company and its affiliates
for all claims against such party that arise out of any inaccuracy or breach of
any representation or warranty of Charterhouse contained in the Purchase
Agreement.
If a claim arises as a result of which one party becomes obligated to
indemnify the other party, the party seeking indemnification must provide the
indemnifying party with prompt written notice of any claim. Failure to provide
such notice will not limit the indemnification obligation except to the extent
that such failure materially prejudices the rights of the indemnifying party.
Generally, the indemnifying party has the right to undertake the defense of
the claim. If the indemnifying party fails to defend such claim, the
indemnified party may defend the claim on behalf of and for the account and
risk of the indemnifying party. Notwithstanding the foregoing, if there is a
reasonable probability that a claim for which indemnification is available
would materially and adversely affect the indemnified party, other than as a
result of money damages, the indemnified party will have the right to
participate in the defense, compromise or settlement of such claim at the
expense of the indemnifying party. In no event may the indemnifying party
consent, without the approval of the indemnified party, to any settlement or
compromise which does not include an unconditional release of the indemnified
party from all liability for such claim.
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Modifications
The Debentures, the Purchase Agreement, the Investors Agreement and the
Registration Rights Agreement may be amended, and the observance of any term
thereof may be waived, with the written consent of the Company and holders of
at least 50% in aggregate principal amount of the Debentures at the time
outstanding (exclusive of Debentures held by the Company or any affiliate).
However, no amendment or waiver of the provisions of certain specified sections
of the Purchase Agreement will be effective as to Charterhouse unless consented
to by Charterhouse in writing. In addition, no amendment or waiver may (i)
change the amount or time of payment or method of computation of interest
(except the provisions regarding acceleration or rescission in the case of an
Event of Default), (ii) change the percentage of the principal amount of
Debentures which are required to consent to an amendment or waiver, or (iii)
amend certain specified sections of the Purchase Agreement without the written
consent of the holder of each Debenture at the time outstanding affected by
such amendment or waiver.
Transaction Fees and Expenses
At each Closing, the Company has agreed to pay a fee equal to one percent
(1%) of the principal amount of the Debentures issued at such Closing to
Charterhouse Group International, Inc. ("Charterhouse International"), an
affiliate of Charterhouse. The Company has also agreed to pay all reasonable
out-of-pocket fees and expenses incurred by Charterhouse in connection with the
issuance of the Debentures up to a maximum of $500,000, whether or not the
Second Closing occurs. This includes the reasonable fees and expenses of a
special counsel, accountants and other representatives engaged by Charterhouse
in connection with the transaction. The Company has also agreed to pay all fees
and expenses in connection with any amendments, waivers or consents under the
Purchase Agreement or the Other Agreements or in connection with any future
required filings by Charterhouse under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 related to the issuance of the Debentures.
Other Agreements
Investors Agreement
Composition of Board
Pursuant to the Investors Agreement dated as of November 19, 1998 between the
Company and Charterhouse (the "Investors Agreement"), concurrently with the
First Closing, the Company's Board of Directors was increased from eight to ten
members, and the two vacancies created thereby were filled by Merril H. Halpern
and Robert L. Berner, III, both nominees designated by Charterhouse. Mr.
Halpern is Chairman of the Board and Chief Executive Officer of Charterhouse
International. Mr. Berner is a Managing Director of Charterhouse International.
Charterhouse International is an affiliate of Charterhouse. See "Principal
Stockholders." Mr. Berner's term on the United Road Board of Directors will
expire at the Company's annual meeting of stockholders in 2000, and Mr.
Halpern's term on the United Road Board of Directors will expire at the
Company's annual meeting of stockholders in 2001. The Investors Agreement
further provides that, effective upon the Second Closing, the Company's Board
of Directors shall be increased from ten to eleven members and Charterhouse
will have the right to designate an additional nominee to fill the vacancy
created thereby.
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If the Second Closing does not occur, for so long as Charterhouse and its
"Permitted Transferees" (defined below) are the beneficial owners of at least
50% of the aggregate number of shares of Common Stock into which the Debentures
held by Charterhouse and its Permitted Transferees were convertible as of the
First Closing, Charterhouse will have the right to nominate two persons for
election to the Company's Board of Directors. For so long as Charterhouse and
its Permitted Transferees are the beneficial owners of at least 17% but less
than 50% of such shares, Charterhouse will have the right to nominate one
person for election to the Company's Board.
If the Second Closing does occur, for so long as Charterhouse and its
Permitted Transferees are the beneficial owners of at least 50% of the
aggregate number of shares of Common Stock into which the Debentures held by
Charterhouse and its Permitted Transferees were convertible as of the Second
Closing, Charterhouse will have the right to nominate three persons for
election to the Company's Board of Directors. For so long as Charterhouse and
its Permitted Transferees are the beneficial owners of at least 25% but less
than 50% of such shares, Charterhouse will have the right to nominate two
persons for election to the Company's Board. For so long as Charterhouse and
its Permitted Transferees are the beneficial owners of at least 10% but less
than 25% of such shares, Charterhouse will have the right to nominate one
person for election to the Company's Board.
Approval Rights
Under the Investors Agreement, the Company may not take any of the following
actions without the approval of a majority of Charterhouse's designees to the
Board who are present at the relevant Board meeting: (i) any declaration or
payment of any dividend or other payment to holders of any securities that are
junior to the Debentures other than scheduled interest and principal payments;
(ii) any increase in the size of the Board of Directors other than the
increases provided for in the preceding paragraph; (iii) any action (other than
the election of directors) requiring stockholder approval under the Delaware
General Corporation Law or under the rules of the Nasdaq (or any other exchange
on which the Common Stock may from time to time trade); (iv) any adoption of a
shareholders rights plan; provided, that the Charterhouse designees shall not
unreasonably withhold approval of a proposed shareholders rights plan, and that
the triggering event under any such shareholders rights plan with respect to
Charterhouse and its Permitted Transferees shall be the beneficial ownership of
more than 35% of the outstanding Common Stock of the Company by any such
entity, or if Charterhouse and its Permitted Transferees are acting in concert,
the beneficial ownership of more than an aggregate of 35% of the outstanding
Common Stock of the Company by Charterhouse and its Permitted Transferees.
The Company has further agreed not to take or approve any transaction between
the Company and any entity that directly or indirectly controls, is controlled
by, or is under common control with, the Company (other than a subsidiary of
the Company) without the approval of the Board of Directors, acting by a
majority of the disinterested directors.
The foregoing approval rights terminate on the earlier to occur of: (i) the
date on which Charterhouse and its Permitted Transferees beneficially own
Shares (as defined below) representing
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less than 10% of the aggregate number of Shares into which the outstanding
Debentures were convertible as of the Second Closing if the Second Closing
occurs, or less than 10% of the aggregate number of shares into which the
outstanding Debentures were convertible as of the First Closing, if the Second
Closing does not occur; and (ii) the date on which all of the Debentures have
been converted into Common Stock.
For purposes hereof, "Shares" means, at any time, the aggregate amount of (i)
the shares of Common Stock at the time held by Charterhouse or its Permitted
Transferees, and (ii) any shares of Common Stock Charterhouse or its Permitted
Transferees have the right to receive upon the exercise of options or warrants
or upon the conversion of all Debentures or other convertible securities of the
Company (other than the Debentures) at the time held by them.
Standstill Obligation
Under the Investors Agreement, Charterhouse has agreed not to: (i) acquire
any securities of the Company if, after such acquisition, Charterhouse would
beneficially own more than 35% of the voting power of the Company's outstanding
securities; or (ii) acquire or attempt to acquire, directly or indirectly,
control of the Company or of any of the Company's businesses or assets, unless
previously agreed to by the Company in writing (the "Standstill Obligation").
This Standstill Obligation terminates on the earlier to occur of: (i) the date
on which Charterhouse and its Permitted Transferees no longer beneficially own
any Shares; or (ii) the maturity date of the Debentures.
Restriction on Transfer
Pursuant to the Investors Agreement, Charterhouse may transfer the Debentures
or any Shares received upon conversion of the Debentures only to: (i) an
affiliate of Charterhouse, or (ii) upon the prior written consent of the
Company, which consent may not be unreasonably withheld, to a party which
agrees to be bound by the provisions of the Investors Agreement (other than the
Standstill Obligation) in a transaction exempt from registration under the
Securities Act (a "Permitted Transferee").
Registration Rights
In conjunction with the Purchase Agreement, the Company entered into a
Registration Rights Agreement dated as of November 19, 1998 with Charterhouse
(the "Registration Rights Agreement") under which, at any time after December
7, 1999, holders of at least 50% in the aggregate of outstanding Registrable
Securities (defined below) have the right to require (each, a "Demand
Registration Right") the Company to file a registration statement under the
Securities Act to register the Registrable Securities that such holders request
to be registered and to use its best efforts to have such registration
statement declared effective. "Registrable Securities" means any shares of
Common Stock into which the Debentures have been converted or are convertible
and any other shares of Common Stock acquired by Charterhouse after November
19, 1998.
If a Demand Registration Right is exercised for purposes of an underwritten
offering of Registrable Securities, a holder of Registrable Securities may have
its shares included in the registration statement only if it participates in
the underwritten offering. If the underwriter concludes
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that marketing factors require limiting the number of shares to be included in
an offering, the number of shares to be included in such offering will be
allocated (i) first, proportionately among the holder(s) initiating the
registration request, (ii) second, proportionately among all other holder(s) of
Registrable Securities that have elected to participate in the offering, and
(iii) thereafter, among any other holders of Common Stock who have exercised
piggyback registration rights to participate in the offering.
The Company is obligated to effect only two (2) registrations pursuant to
Charterhouse's Demand Registration Rights; provided that, if registration
pursuant to Form S-3 or any similar "short-form" registration statement is
available, the Company will be required to effect as many registrations as may
be requested by holder(s) of Registrable Securities (but not more than one (1)
per calendar quarter). In any event, the Company will not be required to effect
more than one (1) registration pursuant to Charterhouse's Demand Registration
Rights (other than a "short-form" registration on Form S-3) in any six (6)
month period, and no more than two (2) underwritten offerings in any twelve-
month period.
The Company may defer filing a registration statement under a Demand
Registration Right for up to one hundred twenty (120) days after receipt of the
request therefor, if in the good faith judgment of the Board of Directors, such
filing would be detrimental to the Company and its stockholders, and the
Company furnishes the holder(s) initiating the registration request with a
letter signed by the Company's President to such effect. The Company may not
utilize this right for more than an aggregate of one hundred twenty (120) days
in any twelve-month period. In addition, if the holders(s) of Registrable
Securities exercise a Demand Registration Right during a time at which the
Company has fixed plans to file within sixty (60) days of such request a
registration statement under the Securities Act covering the sale of any of its
securities in a public offering (a "Company Registration"), the Company will
not be required to honor the Demand Registration Right until ninety (90) days
after the effective date of such Company Registration, so long as the Company
(i) proceeds diligently with the Company Registration, and (ii) provides the
holder(s) of Registrable Securities with the right to participate in such
offering. In the event the Company proposes to register any of its Common Stock
under the Securities Act in connection with a public offering of such stock
solely for cash (other than a registration on Form S-8 or Form S-4), the
Company will use its best efforts to permit the holder(s) of Registrable
Securities to include their shares in such registration.
The Company has agreed to bear all expenses, other than underwriting
discounts and commissions, in connection with the exercise of a Demand
Registration Right or a Company Registration.
Pursuant to the Registration Rights Agreement, the Company has agreed to
indemnify each holder of Registrable Securities and such holder's successors,
affiliates and controlling persons, against any losses, claims, damages or
liabilities ("Claims") to which they may become subject under the Securities
Act, the Exchange Act or other federal or state securities law ("Securities
Laws") insofar as such Claims arise out of a violation of any Securities Law or
any rule or regulation thereunder ("Violation"), except to the extent that the
Claim arises out of or is based upon a Violation which occurs in reliance upon
written information furnished expressly for use in connection with such
registration by such holder. In addition, each selling holder has agreed to
indemnify the Company and its successors, affiliates and controlling persons,
against any Claims to
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which such person becomes subject under any Securities Law to the extent such
Claims arise out of any Violation and to the extent that such Violation occurs
in reliance upon written information furnished by such holder expressly for use
in connection with such registration; provided, that, in no event shall the
liability of any holder exceed the net proceeds from the offering received by
such holder. To the extent that any such indemnification is unavailable, the
Registration Rights Agreement provides for certain rights of contribution
accruing to the party otherwise entitled to indemnification. Certain procedures
relating to indemnification and the defense of claims are set forth in the
Registration Rights Agreement.
In order to permit a holder to sell Registrable Securities to the public
without registration or pursuant to a "short form" registration statement, the
Company has agreed to: (i) make and keep public information available, as those
terms are understood and defined in Rule 144 under the Securities Act; (ii)
take such action as is necessary to enable the holders to utilize a "short
form" registration statement for the sale of Registrable Securities; (iii) file
with the SEC in a timely manner all reports and other documents required of the
Company under the Securities Act and the Exchange Act; and (iv) furnish to any
holder, so long as the holder owns any Registrable Securities, upon request,
(A) a written statement by the Company that it has complied with the reporting
requirements of Rule 144 or that it qualifies as a registrant whose securities
may be resold pursuant to a "short form" registration statement, (B) a copy of
reports and documents filed by the Company with the SEC, and (C) such other
information as may be reasonably requested by a holder to permit such a sale of
Registrable Securities.
The registration rights may be assigned in whole or in part by a holder to
one or more Permitted Transferees of not less than ten percent (10%) of the
Registrable Securities owned by such holder, on the condition that such
transferee delivers to the Company a written instrument agreeing to be bound by
the obligations imposed on holders under the Registration Rights Agreement.
From and after November 19, 1998, the Company has agreed not to enter into
any agreement with any holder or prospective holder of any securities of the
Company which would allow such holder or prospective holder to include such
securities in any registration filed under the Registration Rights Agreement,
without the prior written consent of holders of a majority of the Registrable
Securities then outstanding, unless under the terms of such agreement, such
holder or prospective holder may include securities in any such registration
only to the extent that the inclusion of such holder's securities will not
reduce the amount of Registrable Securities a holder of Registrable Securities
may include therein.
Recommendation: The Board of Directors of United Road Services, Inc.
recommends that the stockholders vote "FOR" the Debentures Proposal.
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FINANCIAL AND OTHER INFORMATION
United Road was formed in July 1997 to become a leading national provider of
motor vehicle and equipment towing, recovery and transport services. On May 6,
1998, the Company simultaneously completed the acquisition of seven motor
vehicle and equipment towing, recovery and transport service businesses (the
"Founding Companies") and an initial public offering of its Common Stock.
Between May 6, 1998 and December 31, 1998 , the Company acquired a total of 34
additional motor vehicle and equipment towing, recovery and transport service
businesses.
Financial Information
Financial statements for United Road Services, Inc., the Founding Companies,
and the eleven companies that the Company has acquired since May 6, 1998 whose
separate financial statements are required to be included in this Proxy
Statement (the "Selected Acquired Companies") are included herein at pages F-
through F- and incorporated herein by reference. Unaudited pro forma combined
financial statements for United Road Services, Inc., the Founding Companies and
the Selected Acquired Companies are included herein at pages F- through F-
and incorporated herein by reference.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis should be read in conjunction with the
unaudited pro forma combined financial statements included elsewhere herein. In
addition to the historical information contained herein, the discussion in this
Proxy Statement contains forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Proxy
Statement should be read as being applicable to all related forward-looking
statements wherever they appear. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include those discussed below, as well as those discussed
elsewhere in this document.
Introduction
The Company provides a broad range of towing, recovery, transport and related
services. These services include:
. towing, impounding and storing motor vehicles;
. conducting lien sales and auctions of abandoned vehicles;
. recovering heavy-duty commercial vehicles; and
. transporting new and used vehicles and heavy construction equipment.
The Company derives revenue from towing, recovery and transport services
based on distance, time or fixed charges and from related impounding and
storage fees. If an impounded vehicle is not collected within a period
prescribed by law (typically between 30 and 90 days), the Company completes
lien proceedings and sells the vehicle at auction or to a scrap metal facility,
depending on the value of the vehicle. Depending on the jurisdiction, the
Company either may keep all the proceeds from the vehicle sales, or keep the
proceeds up to the amount of the towing and storage
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fees and pay the remainder to the municipality or law enforcement agency. The
Company provides these services in some cases under contracts with
municipalities or police, sheriff and highway patrol departments. In other
cases, these services are provided to municipalities or law enforcement
agencies without a long-term contract. The prices charged by the Company for
towing and storage of impounded vehicles for municipalities or law enforcement
agencies are limited by contractual provisions or local regulation.
The Company's 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.
The Company's selling, general and administrative expenses consist primarily
of the following:
. compensation and benefits to sales and administrative employees;
. fees for professional services;
. advertising; and
. other general office expenses.
In the case of law enforcement and private impound towing, the Company is
paid either by the owner of the impounded vehicle when the owner claims the
vehicle or from the proceeds of lien sales or auctions. With respect to the
Company's other operations, customers are billed upon completion of the
Company's services, with payment due within 30 days. The Company recognizes
revenue as follows:
. towing revenue is recognized at the completion of each towing engagement;
. transport and recovery revenue is recognized upon the delivery of the
vehicle or equipment to its final destination; and
. revenue from auction sales is recorded when title to the vehicles has
been transferred.
The Company recognizes expenses related to the generation of revenue as they
are incurred.
At the time of its initial public offering in May 1998, the Company acquired
the seven Founding Companies. Between May 6, 1998 and December 31, 1998, the
Company 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.
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Due to the number of acquisitions completed to date, this management's
discussion and analysis addresses both the Company's historical and pro forma
results of operations and financial condition. The historical discussion
addresses the Company's actual results of operations as shown in its financial
statements for the nine months ended September 30, 1998 and the year ended
December 31, 1997 (its first year of operations). The historical results for
the nine months ended September 30, 1998 include the results of all businesses
acquired prior to September 30, 1998 from their respective dates of
acquisition.
The pro forma discussion addresses the Company's results of operations for
the nine months ended September 30, 1998 and the year ended December 31, 1997,
assuming that the Founding Companies and the Selected Acquired Companies were
acquired on January 1, 1997, with certain pro forma adjustments as described in
the notes to the Unaudited Pro Forma Combined Financial Statements contained
elsewhere in this Proxy Statement. The pro forma results of operations are not
necessarily indicative of the results that would have been obtained had these
businesses actually been acquired on January 1, 1997 or of the Company's future
results.
The results of operations of the Founding Companies and the Selected Acquired
Companies reflect different tax structures (S corporations or C corporations)
which have influenced the historical level of owner compensation. Gross profit
margins and selling, general and administrative expenses as a percentage of net
revenue may not be comparable among the various acquired companies. Owners of
such companies have agreed to certain reductions in their compensation and
benefits in connection with the Company's acquisition of their businesses. The
aggregate amount of such reductions, had they been in effect in 1997, would
have been $6.7 million and the aggregate amount of such reductions, had they
been in effect during the nine months ended September 30, 1998, would have been
$3.5 million. These reductions have been reflected as adjustments in the
Unaudited Pro Forma Combined Statement of Operations.
Results of Operations
Pro Forma Results for the Nine Months Ended September 30, 1998
Net Revenue. Pro forma net revenue was $129.4 million for the nine months
ended September 30, 1998. Pro forma cost of revenue was $90.3 million for the
nine months ended September 30, 1998, or 69.8% of pro forma net revenue. The
pro forma net revenue reflects the results of all businesses acquired since
their respective date of acquisition. The most significant component of pro
forma cost of revenue was labor and subcontractor costs. Pro forma gross profit
was $39.1 million for the nine months ended September 30, 1998, or 30.2% of pro
forma net revenue.
Expenses and Income From Operations. Pro forma selling, general and
administrative expenses were $20.2 million for the nine months ended September
30, 1998, or 15.6% 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 $3.0 million, or
2.3% of pro forma net revenue. Pro forma income from operations was $15.9
million, or 12.3% of pro forma net revenue, for the nine months ended September
30, 1998. Pro forma other expenses, net were $2.9 million, or 2.2% of pro forma
net revenue, for the nine months ended September 30, 1998.
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<PAGE>
Income Tax Expense. Pro forma income tax expense was $6.1 million, or 4.7% of
pro forma net revenue, for the nine months ended September 30, 1998.
Net Income. Pro forma net income was $7.0 million, or 5.4% of pro forma net
revenue, for the nine months ended September 30, 1998.
Pro Forma Results for the Year Ended December 31, 1997
Net Revenue. Pro forma net revenue was $143.3 million for the year ended
December 31, 1997. Pro forma cost of revenue was $101.1 million for the year
ended December 31, 1997, or 70.5% of pro forma net revenue. The most
significant component of pro forma cost of revenue was labor and subcontractor
expenses. Pro forma gross profit was $42.3 million for the year ended December
31, 1997, or 29.5% of pro forma net revenue.
Expenses and Income From Operations. Pro forma selling, general and
administrative expenses were $22.9 million for the year ended December 31,
1997, or 16.0% 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 $3.8 million, or 2.6% of
pro forma net revenue. Pro forma income from operations was $15.6 million, or
10.9% of pro forma net revenue, for the year ended December 31, 1997. Pro forma
other expenses, net were $3.8 million, or 2.7% of pro forma net revenue, for
the year ended December 31, 1997.
Income Tax Expense. Pro forma income tax expense was $5.9 million, or 4.1% of
pro forma net revenue, for the year ended December 31, 1997.
Net Income. Pro forma net income was $5.8 million, or 4.1% of pro forma net
revenue, for the year ended December 31, 1997.
Historical Results for the Nine Months Ended September 30, 1998
Net Revenue. Net revenue was $44.8 million for the nine months ended
September 30, 1998. Cost of revenue was $32.1 million, or 71.5% of net revenue,
for the nine months ended September 30, 1998, consisting primarily of $17.0
million in labor and subcontractor costs. This resulted in a gross profit of
$12.8 million, or 28.5% of net revenue.
Expenses and Income From Operations. Selling, general and administrative
expenses were $7.6 million, or 16.9% of net revenue, for the nine months ended
September 30, 1998. These expenses consisted primarily of $3.9 million in
salary and wages and resulted in income from operations of $4.3 million, or
9.6% of net revenue. Other income (expense) was $89,000, or 0.2% of net
revenue, for the nine months ended September 30, 1998.
Historical Results for the Year Ended December 31, 1997
No net revenue or cost of revenue was generated for the period July 25, 1997
(inception) through December 31, 1997. Selling, general and administrative
expenses were $174,000 for this period. No other income (expense) or tax
benefit were generated, resulting in a net loss of $174,000 for the period.
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Liquidity and Capital Resources
As of September 30, 1998, the Company had approximately:
. $2.3 million of cash and cash equivalents,
. $1.2 million of working capital, and
. $29.9 million of outstanding indebtedness.
In the nine months ended September 30, 1998, the Company (i) generated $4.8
million of cash from operations, primarily due to increases in accounts payable
and accrued expenses, (ii) used $98.4 million of cash in investing activities
(primarily relating to acquisitions of businesses) and (iii) used $95.8 million
of cash in financing activities. The Company's financing activities consisted
of reductions in long-term debt and capital lease obligations of $20.6 million.
These amounts were offset by cash proceeds from issuance of stock and debt of
$117.0 million.
The Company has a Credit Facility with a group of banks that enables it 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 the Company's 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).
The Company's obligations under the Credit Facility are guaranteed by each of
its subsidiaries. The Company's obligations and the obligations of its
subsidiaries under the Credit Facility and related guarantees are secured by
substantially all of the Company's assets, the assets of its subsidiaries and
the stock of its subsidiaries. Under the Credit Facility, the Company 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, the Company's 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 the Company borrows amounts under the Credit Facility to
finance capital expenditures, its interest expense will increase. In connection
with the Credit Facility, the Company 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. The warrant expires on
June 16, 2003.
On November 19, 1998, the Company 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
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 the
Company's option at 100% of their principal amount if the average closing price
of the Common Stock exceeds 150% of the conversion price over a thirty day
period. The Company issued $43.5 million aggregate principal amount of
Debentures to Charterhouse at a first closing on December 7, 1998. Issuance of
the remaining $31.5 million aggregate principal
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<PAGE>
amount of Debentures to Charterhouse is subject to approval of the Company's
stockholders. The Debentures bear interest at a rate of 8% annually, payable in
kind for the first five years following issuance, and thereafter either in kind
or in cash, at the Company's discretion. Pursuant to the Purchase Agreement,
the Company has agreed to pay Charterhouse a fee of 1% of the principal amount
of the Debentures issued at each closing. The Company has also agreed to pay
certain fees and expenses incurred by Charterhouse in connection with the
transaction.
The Company's accounting and financial reporting activities are centralized
at its headquarters in Albany, New York. In addition, the Company is in the
process of developing a national dispatch system for its transport operations.
As of September 30, 1998, the Company had spent approximately $3.2 million to
install its integrated information system. Although management expects that the
Company will need to upgrade and expand this system in the future, it cannot
currently quantify the amount that the Company will need to spend to do so.
The Founding Companies spent an aggregate of $2.4 million on purchases of
property and equipment, including towing, recovery and transport vehicles,
during the three months ended March 31, 1998. United Road spent $5.1 million
on purchases of property and equipment (including amounts spent in connection
with installation of the integrated information system) during the nine months
ended September 30, 1998. The Company expects to make capital expenditures of
an additional $3.9 million during the remainder of 1998. The Company expects to
fund these expenditures from earnings and related cash flow.
Between May 6, 1998, when the Company completed its initial public offering
and acquired the Founding Companies, and December 31, 1998, the Company
acquired 34 other motor vehicle and equipment towing, recovery and transport
businesses for aggregate consideration of $79.6 million in cash, 2,918,608
shares of Common Stock and the assumption of approximately $23.2 million of
indebtedness. The cash portion of these acquisitions was funded through
proceeds from the initial public offering and long term borrowings under the
Credit Facility. In addition, the Company has entered into a definitive
agreement to acquire MPG Transco, Ltd., for aggregate consideration of
approximately $29.5 million, consisting of approximately $10.4 million in cash,
996,351 shares of Common Stock and the assumption of approximately $4.4 million
of indebtedness.
The Company intends to continue to pursue acquisition opportunities and to
expand through internal growth. The Company expects to fund future acquisitions
and its ongoing liquidity needs through the issuance of additional Common
Stock, borrowings, including use of amounts available under the Credit
Facility, and cash flow from operations.
Year 2000 Compliance
There has been a great deal of public discussion regarding the possibilities
of a "year 2000 problem." The issue arises because many existing computer
programs only use the last two digits to refer to a year and therefore do not
properly recognize that a year that ends with "00" (i.e. "2000") should follow
the year that ends with "99" (i.e. "1999"). If not corrected, it is possible
that many computer applications will fail or create errors. No one knows the
extent of the potential impact of the year 2000 problem generally.
22
<PAGE>
The Company has taken a variety of steps in an effort to assess its readiness
for this year 2000 situation. The Company has considered whether it will have a
year 2000 problem with regard to:
National Operations. The Company has recently centralized its accounting and
financial reporting activities at its headquarters in Albany, New York. The
software that the Company has implemented in this regard is year 2000
compliant. In addition, in order to make its transport operations more
efficient, the Company is in the process of developing a national dispatch
system to replace the local systems that are currently in use. The proposed
national transport system is year 2000 compliant and the Company expects that
it will be installed prior to January 1, 2000. If an unforseeable event were to
make the Company unable to install the national transport system by January 1,
2000, the Company would need to rely on its local transport dispatch systems,
which may not be year 2000 compliant. If the local transport dispatch systems
become inoperable, the Company expects that it will be able to perform such
functions manually, although not as efficiently. The Company cannot now predict
the likelihood, extent or impact of such effects on its results of operations
or financial condition. The Company's payroll operations are managed by a
national payroll processor which has informed the Company that it is year 2000
compliant.
Local Operations. Certain of the operating functions of some of the companies
the Company has acquired are computerized. The Company has reviewed these
systems and determined that some are not year 2000 compliant. In order to make
its operations more efficient (and to address year 2000 issues), the Company
intends to replace all of the local operating systems with standardized
operational software which has been certified as year 2000 compliant. The
Company expects this replacement to be completed by January 1, 2000. In the
event that the Company is not able to install new software, it would need to
rely on its existing systems. While the computerized systems make the Company
more efficient, if they were to become inoperable, the Company believes it can
perform all necessary functions manually, although not as efficiently. The
Company cannot now predict the likelihood, extent or impact of such effects on
its results of operations or financial condition.
Vendors and Customers. The Company is currently developing a plan to review
with its significant vendors, customers and financial institutions their
individual year 2000 compliance. Such a review has not yet been formally
commenced. As a result, it is difficult to predict the impact that year 2000
problems at the Company's vendors, customers or financial institutions will
have on the Company.
As of September 30, 1998, the Company had spent approximately $3.2 million to
install its integrated information system. The Company is not now able to
estimate the costs it will incur to fully install its national transport system
or to replace its local operating systems. Other than ensuring that its
centralized systems are year 2000 compliant, given that its operations and its
interactions with its vendors and customers have historically been conducted in
a substantially manual mode, the Company has not developed a contingency plan
to guide its responses to year 2000 problems if and when they may arise.
Management intends to continue to examine the year 2000 issue as it potentially
impacts the Company and will develop a contingency plan if it believes one is
necessary. The Company cannot predict the likelihood that year 2000 problems
will cause a significant disruption in the economy as a whole.
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PRINCIPAL STOCKHOLDERS
The following table sets forth as of December 31, 1998 the beneficial
ownership of the Common Stock by: (i) each person who is known by the Company
to own beneficially 5% or more of the Company's Common Stock, (ii) each of the
Company's Directors, (iii) each of the Company's executive officers, and (iv)
all directors and current executive officers of the Company as a group. Except
as otherwise indicated below, each of the entities and persons named in the
tables has sole voting and investment power with respect to all shares of
Common Stock beneficially owned. For purposes of these tables, a person or
group of persons is deemed to have "beneficial ownership" as of a given date of
any shares which such person has the right to acquire within 60 days after such
date. For purposes of computing the percentage of outstanding shares held by
each person or group of persons named below on a given date, any security which
such person or persons has the right to acquire within 60 days after such date
is deemed to be outstanding for the purpose of computing the percentage
ownership of such person or persons, but is not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person. Unless
otherwise indicated, the address for each of the individuals or entities named
in the tables below is the principal executive offices of United Road.
<TABLE>
<CAPTION>
Number of Shares Percentage
Name Beneficially Owned of Shares
- ---- ------------------ ----------
<S> <C> <C>
Edward T. Sheehan /1/............................ 714,235 4.5%
Edward W. Morawski............................... 692,277 4.4%
Todd Q. Smart.................................... 297,267 1.9%
Donald F. Moorehead, Jr.......................... 86,760 *
Richard A. Molyneux.............................. -- --
Robert J. Adams, Jr. /2/......................... 8,333 *
Allan D. Pass /3/................................ 30,000 *
Donald J. Marr /4/............................... 16,667 *
Grace M. Hawkins................................. -- --
Mark J. Henninger ............................... 377,624 2.4%
Robert L. Berner III /5/......................... -- --
Merrill M. Halpern /5/........................... -- --
Charter URS LLC /6/.............................. 2,900,000 15.6%
Mark McKinney /7/................................ 930,000 5.9%
Ross Berner /8/.................................. 930,000 5.9%
All directors and executive officers as group (12
persons)........................................ 2,228,403 14.1%
</TABLE>
- -------
*Less than one percent
/1/Includes 10,235 shares held by children of Mr. Sheehan. Mr. Sheehan
disclaims beneficial ownership of such shares.
/2/Includes 8,333 shares issuable pursuant to options exercisable within 60
days.
/3/Includes 30,000 shares issuable pursuant to options exercisable within 60
days.
/4/Includes 16,667 shares issuable pursuant to options exercisable within 60
days.
/5/The address of this director is c/o Charterhouse Group International, Inc.,
535 Madison Avenue, New York, New York, 10022.
/6/Consists entirely of shares issuable upon conversion of Debentures held by
Charterhouse at a conversion price of $15.00 per share. According to a
Schedule 13D dated 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. ("Charterhouse
International"). Charterhouse International may be deemed to beneficially own
the common stock owned beneficially by Charterhouse. Mr. Halpern serves as
the Chairman of the Board and Chief Executive Officer of Charterhouse
International. Mr. Berner serves as Managing Director of Charterhouse
International. Messrs. Berner and Halpern disclaim beneficial ownership with
respect to the shares beneficially held 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 1298 Green Oaks Dr., Littleton, CO 80121.
/8/The address of this stockholder is 1360 Lombard #302, San Francisco, CA
94109.
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<PAGE>
DESCRIPTION OF UNITED ROAD CAPITAL STOCK
General
The Company is authorized to issue 40,000,000 shares of capital stock,
consisting of 35,000,000 shares of Common Stock, $0.001 par value, and
5,000,000 shares of Preferred Stock, $0.001 par value. As of December 31, 1998,
there were 15,707,085 shares of Common Stock and no shares of Preferred Stock
outstanding. The following discussion of the material features of the capital
stock of the Company is intended as a summary only and is qualified in its
entirety by reference to the Company's Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws.
Common Stock
The holders of Common Stock are entitled to one vote for each share held of
record by them on all matters submitted to a vote of stockholders. Subject to
preferences that may be applicable to any outstanding shares of Preferred Stock
that may be issued, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available for the payment of dividends. In the
event of a liquidation, dissolution or winding up of the Company, the holders
of 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 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
The Company's Board of Directors (the "Board") 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. The Company
has no present plans to issue any shares of Preferred Stock. One of the effects
of undesignated Preferred Stock may be to enable the 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 the Company's
management. The issuance of shares of Preferred Stock may adversely affect the
rights of holders of Common Stock. For example, Preferred Stock issued by the
Company 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
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate") provides that the Board 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 provides that the term of office of the first class will expire at
the annual meeting of
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<PAGE>
stockholders of the Company for 1999, the term of office of the second class
will expire at the annual meeting of stockholders of the Company for 2000, and
the term of office of the third class will expire at the annual meeting of
stockholders of the Company for 2001. 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 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 effect
a change in a 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. 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 the Company and its 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. The Certificate does not override this provision.
The Certificate 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), provided that a quorum is then in office and
present, or by a majority of the directors then in office, if less than a
quorum is then in office, or by the sole remaining director. 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 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 the Company, or of attempting to change the composition or
policies of the Board, even though such attempts might be beneficial to the
Company or its stockholders. These provisions of the Certificate could thus
increase the likelihood that incumbent directors will retain their positions.
Stockholder Meeting Provisions
The Certificate and the Company's Amended and Restated Bylaws (the "Bylaws")
provide that (subject to the rights of any holders of Preferred Stock): (i)
only a majority of the Board 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 by the stockholders 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 stockholders of the Company (the "Notice
Procedure").
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<PAGE>
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 the Secretary of the Company prior to the meeting at
which directors are to be elected will be eligible for election as directors of
the Company. The Notice Procedure provides that at an annual meeting only such
business may be conducted as has been brought before the meeting 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 the Secretary of the Company
of such stockholders' intention to bring such business before such meeting.
Under the Notice Procedure, to be timely, notice of stockholder nominations or
proposals to be made at an annual or special meeting must be received by the
Company no 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.
The Notice Procedure affords the Board 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, and also provides a more orderly procedure for
conducting annual meetings of stockholders.
Although the Bylaws do not give the Board any power to approve or disapprove
stockholder nominations for the election of directors or proposals for action,
the foregoing provisions may have the effect of precluding a contest for the
election of directors or the consideration of stockholder proposals and of
discouraging or deterring a third party from conducting a solicitation of
proxies to elect its own slate of directors or to approve its own proposal, if
the proper advance notice procedures are not followed, without regard to
whether consideration of such nominees or proposals might be harmful or
beneficial to the Company and its stockholders.
Delaware Law
The Company is a Delaware corporation and 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" (as defined) with a Delaware corporation for three years
following the date such person became an interested stockholder, 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
held by stockholders.
Limitation of Liability and Indemnification Matters
Pursuant to the provisions of the Delaware General Corporation Law, the
Company has adopted provisions in the Certificate which provide that directors
of the Company shall not be personally liable for monetary damages to the
Company or its stockholders for a breach of fiduciary duty as a director,
except for liability as a result of (i) a breach of the director's duty of
loyalty to the Company or its stockholders; (ii) acts or omissions not in good
faith or which involve intentional
27
<PAGE>
misconduct or a knowing violation of law; (iii) an act related to the 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. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.
The Bylaws require the Company to indemnify its officers and directors and
permit the Company to indemnify its other agents, by bylaws, agreements or
otherwise, to the fullest extent permitted under Delaware law. The Company has
entered into separate indemnification agreements with its directors and
officers which may, in some cases, be broader than the specific indemnification
provisions contained in the Delaware General Corporation Law. The
indemnification agreements may require the Company, among other things, to
indemnify such 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 of a culpable nature), 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 Company's transfer agent and registrar for its Common Stock is American
Stock Transfer and Trust Company.
VOTING PROCEDURES
The affirmative vote of a majority of the shares of the outstanding Common
Stock present in person or represented by proxy at the Meeting, provided a
quorum is present, is necessary for approval of the Debentures Proposal. A
quorum shall consist of a majority of the shares of Common Stock issued,
outstanding and entitled to vote. On the Record Date, the directors and
executive officers of United Road and their affiliates held approximately
[2,173,403] shares of Common Stock, representing approximately % of the
shares outstanding on such date. Messrs. Sheehan, Morawski, Smart and
Henninger, each of whom is a member of the Board of Directors and a stockholder
of the Company, have signed agreements requiring that they vote the shares of
Common Stock beneficially owned by them in favor of the Debentures Proposal. As
of the Record Date, these individuals beneficially owned an aggregate of
2,081,403 shares of Common Stock, or approximately % of the shares of Common
Stock outstanding on such date. Other directors and officers of United Road who
own Common Stock have indicated to United Road that they intend to vote their
shares in favor of the Debentures Proposal.
An automated system administered by the transfer agent of United Road will be
used to tabulate the votes at the Meeting. Abstentions, directions to withhold
authority, and broker non-votes are counted as shares present in the
determination of whether the number of shares of Common Stock represented at
the Meeting constitutes a quorum. Abstentions will be counted as part of the
total number of votes cast in determining whether the Debentures Proposal has
received the requisite number of favorable votes, whereas broker non-votes will
not be counted as part of the total number of votes cast on such proposal.
Thus, abstentions will have the same effect as votes against the Debentures
Proposal, whereas broker non-votes will have no effect in determining whether
such proposal has been approved by the stockholders.
28
<PAGE>
It is expected that the solicitation of proxies will be primarily by mail.
The Company's directors, officers and employees may also solicit proxies by
telephone, telegraph, facsimile or personal interview. United Road has engaged
[Corporate Investor Communications, Inc.], a proxy solicitation firm, to assist
in the solicitation of proxies from United Road stockholders. The Company will
bear all proxy solicitation costs, including the fees charged by the proxy
solicitation firm, which are anticipated to be approximately $6,000, plus such
firm's out-of-pocket expenses. It is anticipated that banks, brokerage houses,
and other custodians, nominees, and fiduciaries will be requested on behalf of
the Company to forward solicitation materials to their principals to obtain
authorizations for the execution of proxies. United Road will reimburse
brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket
expenses incurred by them in connection therewith.
Each signed and returned proxy will be voted in accordance with the
instructions, if any, of the stockholder(s) executing such proxy. If a
stockholder executes and returns a proxy and does not specify otherwise, the
shares represented by such proxy will be voted FOR approval of the Debentures
Proposal. A stockholder who has executed and returned a proxy may revoke it at
any time before it is voted at the Meeting by (a) executing and returning a
proxy bearing a later date, (b) filing a written notice of such revocation with
the Secretary of United Road at the above address stating that the proxy is
revoked, or (c) attending the meeting and voting in person.
In the event that a quorum of the outstanding shares is not represented at
the Meeting or at any adjournment thereof, or, even though a quorum is so
represented, in the event that sufficient votes to approve the Debentures
Proposal are not received, the persons named as proxies may propose and vote
for one or more adjournments of the Meeting to be held within a reasonable time
after the date originally set for the Meeting, and further solicitation of
proxies may be made without the necessity of further notice. The persons name
as proxies will vote in favor of any such adjournment those proxies which
instruct them to vote in favor of the Debentures Proposal, and will vote
against any such adjournment those proxies which instruct them to vote against
or to abstain from voting on such proposal. Any such adjournment must be
approved by a majority of the shares voting on the matter.
Delaware law does not require that stockholders who object to the Debentures
Proposal and who vote against or abstain from voting in favor of the Debentures
Proposal be afforded any appraisal rights or the right to receive cash for
their shares. United Road does not intend to make any such rights available to
stockholders.
29
<PAGE>
PROPOSALS OF STOCKHOLDERS FOR ANNUAL MEETING
The Board of Directors of United Road will consider proposals of stockholders
intended to be presented for action at United Road's 1999 annual meeting of
stockholders. A stockholder proposal must be submitted in writing and be
received at United Road's principal executive offices, 8 Automation Lane,
Albany, New York 12205, no later than [ ], to be considered for inclusion
in United Road's proxy statement and form of proxy relating to the 1999 annual
meeting of stockholders. Submission of a stockholder proposal does not assure
inclusion in the proxy statement or form of proxy because proposals must meet
certain rules of the Securities and Exchange Commission and United Road Bylaw
requirements.
INDEPENDENT ACCOUNTANTS
KPMG LLP serves as independent certified public accountants for the Company.
Representatives of KPMG LLP are expected to be present at the Meeting to
respond to appropriate questions.
OTHER MATTERS
No business other than the Debentures Proposal is expected to come before the
Meeting, but should any other matter requiring a vote of shareholders arise,
including questions as to an adjournment of the Meeting, the persons named in
the enclosed proxy will vote thereon according to their best judgment in the
interest of the Company.
Stockholders who wish to have their shares voted are requested to sign and
date the enclosed proxy and return it in the enclosed envelope. No postage is
required if mailed in the United States.
30
<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-8
UNITED ROAD SERVICES, INC.
Independent Auditors' Report............................................ F-11
Balance Sheet........................................................... F-12
Statement of Operations................................................. F-13
Statement of Stockholders' Equity (Deficit)............................. F-14
Statement of Cash Flows................................................. F-15
Notes to Financial Statements........................................... F-16
FOUNDING COMPANIES
NORTHLAND AUTO TRANSPORTERS, INC. AND NORTHLAND FLEET LEASING, INC.
Independent Auditors' Report............................................ F-20
Combined Balance Sheets................................................. F-21
Combined Statements of Operations....................................... F-22
Combined Statements of Stockholder's Equity............................. F-23
Combined Statements of Cash Flows....................................... F-24
Notes to Combined Financial Statements.................................. F-25
FALCON TOWING AND AUTO DELIVERY, INC.
Independent Auditors' Report............................................ F-31
Balance Sheets.......................................................... F-32
Statements of Operations................................................ F-33
Statements of Stockholder's Equity...................................... F-34
Statements of Cash Flows................................................ F-35
Notes to Financial Statements........................................... F-36
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
Independent Auditors' Report............................................ F-41
Consolidated Balance Sheets............................................. F-42
Consolidated Statements of Operations................................... F-43
Consolidated Statements of Stockholders' Equity......................... F-44
Consolidated Statements of Cash Flows................................... F-45
Notes to Consolidated Financial Statements.............................. F-46
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
Independent Auditors' Report............................................ F-53
Combined Balance Sheets................................................. F-54
Combined Statements of Operations....................................... F-55
Combined Statements of Stockholders' Equity............................. F-56
Combined Statements of Cash Flows....................................... F-57
Notes to Combined Financial Statements.................................. F-58
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
ABSOLUTE TOWING AND TRANSPORTING, INC.
Independent Auditors' Report............................................ F-64
Balance Sheets.......................................................... F-65
Statements of Operations................................................ F-66
Statements of Stockholder's Equity...................................... F-67
Statements of Cash Flows................................................ F-68
Notes to Financial Statements........................................... F-69
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
Independent Auditors' Report............................................ F-73
Consolidated Balance Sheet.............................................. F-74
Consolidated Statement of Operations.................................... F-75
Consolidated Statement of Stockholder's Deficit......................... F-76
Consolidated Statement of Cash Flows.................................... F-77
Notes to Consolidated Financial Statements.............................. F-78
SELECTED ACQUIRED COMPANIES
MPG TRANSCO, LTD.
Independent Auditors' Report............................................ F-83
Balance Sheets.......................................................... F-84
Statements of Operations................................................ F-85
Statements of Stockholders' Equity...................................... F-86
Statements of Cash Flows................................................ F-87
Notes to Consolidated Financial Statements.............................. F-88
PILOT TRANSPORT, INC.
Independent Auditors' Report............................................ F-94
Balance Sheets.......................................................... F-95
Statements of Operations................................................ F-96
Statements of Stockholders' Equity...................................... F-97
Statements of Cash Flows................................................ F-98
Notes to Financial Statements........................................... F-99
E&R TOWING & GARAGE, INC. AND SUBSIDIARIES
Independent Auditors' Report............................................ F-102
Consolidated Balance Sheets............................................. F-103
Consolidated Statement of Operations and Retained Earnings ............. F-104
Consolidated Statements of Cash Flows................................... F-105
Notes to Consolidated Financial Statements.............................. F-107
ENVIRONMENTAL AUTO REMOVAL, INC.
Independent Auditors' Report............................................ F-111
Balance Sheets.......................................................... F-112
Statements of Operations and Retained Earnings (Deficit)................ F-113
Statements of Cash Flows................................................ F-114
Notes to Financial Statements........................................... F-115
NEIL'S USED TRUCK & CAR SALES, INCORPORATED
Independent Auditors' Report............................................ F-119
Balance Sheet........................................................... F-120
Statement of Operations................................................. F-121
Statement of Stockholders' Equity....................................... F-122
Statement of Cash Flows................................................. F-123
Notes to Financial Statements........................................... F-124
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
5-L CORPORATION AND ADP TRANSPORT, INC.
Independent Auditors' Report............................................ F-127
Combined Balance Sheet.................................................. F-128
Combined Statement of Operations........................................ F-129
Combined Statement of Stockholders' Equity.............................. F-130
Combined Statement of Cash Flows........................................ F-131
Notes to Combined Financial Statements.................................. F-132
CAR TRANSPORTERS CORPORATION
Independent Auditors' Report............................................ F-135
Balance Sheets.......................................................... F-136
Statements of Operations................................................ F-137
Statements of Stockholder's Deficit..................................... F-138
Statements of Cash Flows................................................ F-139
Notes to Financial Statements........................................... F-140
SCHROEDER AUTO CARRIERS, INC.
Independent Auditors' Report............................................ F-144
Balance Sheet........................................................... F-145
Statement of Operations................................................. F-146
Statement of Stockholders' Equity....................................... F-147
Statement of Cash Flows................................................. F-148
Notes to Financial Statements........................................... F-149
KEYSTONE TOWING, INC.
Independent Auditors' Report............................................ F-152
Balance Sheets.......................................................... F-153
Statements of Operations................................................ F-154
Statements of Stockholder's Equity...................................... F-155
Statements of Cash Flows................................................ F-156
Notes to Financial Statements........................................... F-157
FAST TOWING, INC.
Independent Auditors' Report............................................ F-162
Balance Sheet........................................................... F-163
Statement of Operations................................................. F-164
Statement of Stockholders' Equity....................................... F-165
Statement of Cash Flows................................................. F-166
Notes to Financial Statements........................................... F-167
ALERT AUTO TRANSPORT, INC.
Independent Auditors' Report............................................ F-171
Balance Sheet........................................................... F-172
Statement of Earnings and Retained Earnings............................. F-173
Statement of Cash Flows................................................. F-174
Notes to Financial Statements........................................... F-175
</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 September 30, 1998 unaudited pro forma combined balance sheet gives
effect to the acquisitions of MPG Transco, Ltd. ("MPG") and Pilot Transport,
Inc. ("Pilot") as if they had occurred on September 30, 1998.
The unaudited pro forma combined statements of operations give effect to the
acquisitions by United Road Services, Inc. of the Founding Companies and the
Selected Acquired Companies, as if they had occurred on January 1, 1997.
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
statements 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
other financial statements and notes thereto included elsewhere in this
prospectus.
F-4
<PAGE>
UNITED ROAD SERVICES, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNITED
ROAD PRO FORMA PRO
SERVICES, ACQUISITION FORMA
INC. MPG PILOT ADJUSTMENTS COMBINED
--------- ------ ----- ----------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.... $ 2,290 348 181 (1,952)(a)(b) 867
Accounts receivable.......... 16,096 2,058 1,945 -- 20,099
Less: allowance............. 1,317 100 -- -- 1,417
--------- ------ ----- ------ -------
Accounts receivable, net..... 14,779 1,958 1,945 -- 18,682
Accounts receivable from
related parties and
employees................... 285 42 -- -- 327
Inventory.................... 564 -- -- -- 564
Notes receivables............ 430 -- -- -- 430
Prepaid and other current
assets...................... 2,078 283 616 -- 2,977
--------- ------ ----- ------ -------
Total Current Assets........ 20,426 2,631 2,742 (1,952) 23,847
Property and equipment, net.. 37,094 10,630 3,681 (341)(a) 51,064
Other non-current assets,
net......................... 1,592 347 -- -- 1,939
Goodwill..................... 137,516 -- -- 41,930 (a) 179,446
--------- ------ ----- ------ -------
Total Assets................ $ 196,628 13,608 6,423 39,637 256,296
========= ====== ===== ====== =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current installment of notes
payable..................... $ 170 2,005 -- -- 2,175
Current installment of lease
obligations................. 1,435 -- -- -- 1,435
Borrowings under lines of
credit...................... -- 986 2,005 -- 2,991
Payable to related parties... 1,134 -- -- -- 1,134
Accounts payable............. 10,011 818 240 -- 11,069
Income taxes payable......... 616 740 -- -- 1,356
Payable to stockholders...... 1,064 24 -- -- 1,088
Other accrued liabilities.... 4,761 891 1,065 -- 6,717
--------- ------ ----- ------ -------
Total Current Liabilities... 19,191 5,464 3,310 -- 27,965
Credit facility borrowings... 26,000 -- -- 19,000 (b) 45,000
Notes payable, excluding
current installments........ -- 1,422 -- -- 1,422
Capital lease obligations,
excluding current
installments................ 2,253 -- -- -- 2,253
Deferred income taxes........ 2,736 1,462 -- (136)(a) 4,062
--------- ------ ----- ------ -------
Total Liabilities........... 50,180 8,348 3,310 18,864 80,702
Stockholders' Equity:
Common stock................. 14 1 10 (9)(a) 16
Additional paid-in capital... 144,413 1,417 -- 27,727 (a) 173,557
Retained earnings............ 2,021 3,842 3,103 (6,945)(a) 2,021
--------- ------ ----- ------ -------
Total Stockholders' Equity.. 146,448 5,260 3,113 20,773 175,594
--------- ------ ----- ------ -------
Total Liabilities and
Stockholders' Equity....... $ 196,628 13,608 6,423 39,637 256,296
========= ====== ===== ====== =======
</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
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
UNITED FOUNDING
ROAD COMPANIES
SERVICES, 1/1/98 -
INC. 5/5/98 MPG PILOT E&R EAR NEIL'S 5-L/ADP CTC SCHROEDER KEYSTONE FAST TOW ALERT
--------- --------- ------ ------ ----- ----- ------ ------- ----- --------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue...... $44,842 19,035 17,082 14,405 2,929 8,539 5,891 5,069 4,500 3,169 1,998 1,851 1,472
Cost of revenue.. 32,073 13,851 11,639 8,906 1,645 6,022 4,813 4,289 3,862 2,537 1,329 915 1,375
------- ------ ------ ------ ----- ----- ----- ----- ----- ----- ----- ------ -----
Gross profit.... 12,769 5,184 5,443 5,499 1,284 2,517 1,078 780 638 632 669 936 97
Selling general
and
administrative
expenses......... 7,565 3,525 3,420 3,091 662 1,740 375 335 623 396 652 1,123 148
Goodwill
amortization..... 883 -- -- -- -- -- -- -- -- -- -- -- --
------- ------ ------ ------ ----- ----- ----- ----- ----- ----- ----- ------ -----
Income (loss)
from operations.. 4,321 1,659 2,023 2,408 622 777 703 445 15 236 17 (187) (51)
Other income
(expense):
Interest
expense......... (526) (451) (292) (114) (25) (7) (47) -- (299) (18) (26) -- (1)
Interest income. 615 19 19 -- 43 52 -- -- -- -- -- 1 --
Gain (loss) on
sale of assets.. -- (24) (325) (32) 19 13 -- -- -- -- -- (140) 21
Other........... -- (232) (2) -- 1 1 -- 23 (54) 1 94 -- --
------- ------ ------ ------ ----- ----- ----- ----- ----- ----- ----- ------ -----
Income (loss)
before income
taxes............ 4,410 971 1,423 2,262 660 836 656 468 (338) 219 85 (326) (31)
Income tax
expense
(benefit)........ 2,215 437 591 -- 240 16 -- -- -- -- -- 29 (11)
------- ------ ------ ------ ----- ----- ----- ----- ----- ----- ----- ------ -----
Net income
(loss)........... $ 2,195 534 832 2,262 420 820 656 468 (338) 219 85 (355) (20)
======= ====== ====== ====== ===== ===== ===== ===== ===== ===== ===== ====== =====
Basic earnings
per share (g).... -- -- -- -- -- -- -- -- -- -- -- -- --
Diluted earnings
per share (g).... -- -- -- -- -- -- -- -- -- -- -- -- --
<CAPTION>
PRO FORMA
ACQUISITION PRO FORMA
ADJUSTMENTS COMBINED
---------------- ---------
<S> <C> <C>
Net revenue...... (1,400)(f) 129,382
Cost of revenue.. (2,936)(b)(f) 90,320
---------------- ---------
Gross profit.... 1,536 39,062
Selling general
and
administrative
expenses......... (3,504)(a) 20,151
Goodwill
amortization..... 2,082(c) 2,965
---------------- ---------
Income (loss)
from operations.. 2,958 15,946
Other income
(expense):
Interest
expense......... (1,205)(d) (3,011)
Interest income. -- 749
Gain (loss) on
sale of assets.. -- (468)
Other........... -- (168)
---------------- ---------
Income (loss)
before income
taxes............ 1,753 13,048
Income tax
expense
(benefit)........ 2,568 6,085
---------------- ---------
Net income
(loss)........... (815) 6,963
================ =========
Basic earnings
per share (g).... -- $ 0.64
=========
Diluted earnings
per share (g).... -- $ 0.63
=========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements
F-6
<PAGE>
UNITED ROAD SERVICES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
UNITED
ROAD TOTAL
SERVICES, FOUNDING 5-L/
INC. COMPANIES MPG PILOT E&R EAR NEIL'S ADP CTC SCHROEDERS KEYSTONE FAST ALERT
--------- --------- ------ ------ ----- ------ ------ ----- ----- ---------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue...... $ -- 42,599 21,745 17,119 8,528 14,104 9,553 9,852 6,676 5,799 3,943 3,355 2,958
Cost of revenue.. -- 31,258 15,416 10,067 5,193 10,889 8,246 8,390 5,708 4,568 2,607 1,776 2,418
----- ------ ------ ------ ----- ------ ----- ----- ----- ----- ----- ----- -----
Gross profit.... -- 11,341 6,329 7,052 3,335 3,215 1,307 1,462 968 1,231 1,336 1,579 540
Selling general
and
administrative
expenses......... 174 8,070 5,536 4,009 2,851 2,671 790 927 830 889 1,140 1,432 301
Goodwill
amortization..... -- -- -- -- -- -- -- -- -- -- -- -- --
----- ------ ------ ------ ----- ------ ----- ----- ----- ----- ----- ----- -----
Income (loss)
from operations.. (174) 3,271 793 3,043 484 544 517 535 138 342 196 147 239
Other income
(expense):
Interest
expense......... -- (835) (569) (168) (114) (27) (71) (10) (738) (31) (71) (7) (9)
Interest income. -- 48 8 -- 48 41 -- -- -- -- 2 -- --
Gain (loss) on
sale of assets.. -- 207 (92) (167) 63 12 -- -- 22 9 36 (9) 24
Other........... -- 201 (13) -- -- (6) -- 11 (200) 4 76 -- --
----- ------ ------ ------ ----- ------ ----- ----- ----- ----- ----- ----- -----
Income (loss)
before income
taxes............ (174) 2,892 127 2,708 481 564 446 536 (778) 324 239 131 254
Income tax
expense
(benefit)........ -- 826 68 -- 188 10 -- -- -- -- -- 47 89
----- ------ ------ ------ ----- ------ ----- ----- ----- ----- ----- ----- -----
Net income
(loss)........... $(174) 2,066 59 2,708 293 554 446 536 (778) 324 239 84 165
===== ====== ====== ====== ===== ====== ===== ===== ===== ===== ===== ===== =====
Basic earnings
per share(g)..... -- -- -- -- -- -- -- -- -- -- -- -- --
Diluted earnings
per share(g)..... -- -- -- -- -- -- -- -- -- -- -- -- --
<CAPTION>
PRO FORMA
ACQUISITION PRO FORMA
ADJUSTMENTS COMBINED
---------------- ---------
<S> <C> <C>
Net revenue...... (2,800)(f) 143,431
Cost of revenue.. (5,397)(b)(f) 101,139
---------------- ---------
Gross profit.... 2,597 42,292
Selling general
and
administrative
expenses......... (6,671)(a) 22,949
Goodwill
amortization..... 3,769 (c) 3,769
---------------- ---------
Income (loss)
from operations.. 5,499 15,574
Other income
(expense):
Interest
expense......... (1,524)(d) (4,174)
Interest income. -- 147
Gain (loss) on
sale of assets.. -- 105
Other........... -- 73
---------------- ---------
Income (loss)
before income
taxes............ 3,975 11,725
Income tax
expense
(benefit)........ 4,659 5,887
---------------- ---------
Net income
(loss)........... (684) 5,838
================ =========
Basic earnings
per share(g)..... -- $0.54
=========
Diluted earnings
per share(g)..... -- $0.53
=========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements
F-7
<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 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 and for the year ended December 31, 1997, with the
exception of Caron Auto Works, Inc. and Caron Auto Brokers, Inc. for which the
information is as of and for the six months ended June 30, 1998 and for the
fiscal year ended September 30, 1997. The information included in these
financial statements for the Selected Acquired Companies is as of and for the
nine-months ended September 30, 1998 and for the year ended December 31, 1997,
with the exception of E&R, EAR, Neil's, 5-L/ADP, CTC, Schroeder, Keystone and
Fast Tow which are for the six-month period ended June 30, 1998 and for the
year ended December 31, 1997, and Alert for which the information is as of and
for the six-month period ended May 31, 1998 and for the twelve-month period
ended February 28, 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................................................ $ 10,363 996,351
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 3,029,281
========== ============
</TABLE>
F-8
<PAGE>
UNITED ROAD SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Reflects the acquisitions of MPG and Pilot by United Road Services, Inc.
for a purchase price of $50.0 million consisting of $21.0 million in cash and
1,996,351 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 $41.9
million. Based upon management's preliminary analysis, it is anticipated that
the historical value of the assets and liabilities of the acquired companies,
with the 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 $19.0 million of credit facility borrowings utilized to fund
acquisitions.
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
Nine-months ended September 30, 1998 and year ended December 31, 1997
(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 amounts of $3.5 million and $6.7 million for the
nine-months ended September 30, 1998 and for the year ended December 31, 1997,
respectively.
(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 interest expense relating to the credit facility borrowings
utilized to fund acquisitions and the reduction in interest expense related to
$1.6 million and $1.5 million of debt at December 31, 1997 and September 30,
1998 respectively 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 including the non-deductibility of goodwill at an estimated rate
of 38%.
(f) Reflects the elimination of $1.4 million and $2.8 million of
intercompany revenue and related cost of revenue between E&R and EAR for the
nine-months ended September 30, 1998 and the year ended December 31, 1997,
respectively.
F-9
<PAGE>
UNITED ROAD SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(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 issued in connection with the formation of United Road
Services, Inc. ................................................ 2,604,000
Shares issued in the initial public offering.................... 2,594,863
Shares issued in January 1998................................... 218,736
Shares issued in connection with the acquisitions of the
Founding Companies and the Selected Acquired Companies......... 5,405,022
----------
Basic shares estimated to be outstanding........................ 10,822,621
Incremental effect of options on shares outstanding............. 159,117
----------
Diluted shares estimated to be outstanding...................... 10,981,731
==========
</TABLE>
F-10
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
United Road Services, Inc.:
We have audited the accompanying balance sheet of United Road Services, Inc.
as of December 31, 1997, and the related statement of operations,
stockholders' equity (deficit), and cash flows for the period from July 25,
1997 (inception) through December 31, 1997. These financial statements are the
responsibility of United Road Services, 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 United Road Services, Inc.
as of December 31, 1997, and the results of its operations and its cash flows
for the period from July 25, 1997 (inception) through December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Albany, New York
February 24, 1998, except as
to Notes (4), 4(g) and 4(h),
which are as of May 8, 1998,
May 6, 1998 and December 7,
1998, respectively
F-11
<PAGE>
UNITED ROAD SERVICES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 49,987 $ 2,290,000
Trade receivables, net............................ -- 14,779,000
Other receivables................................. -- 1,040,000
Prepaid expenses and deposits..................... -- 2,317,000
--------- ------------
Total current assets............................ 49,987 20,426,000
Property and equipment, net......................... -- 37,092,000
Goodwill, net....................................... -- 137,516,000
Deferred financing costs, net....................... -- 997,000
Other non-current assets............................ -- 597,000
--------- ------------
Total assets.................................... $ 49,987 $196,628,000
========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt and capitalized
leases.......................................... $ -- $ 1,435,000
Notes payable.................................... -- 170,000
Accounts payable................................. 62,077 10,011,000
Accrued income taxes............................. -- 616,000
Other accrued liabilities........................ -- 4,761,000
Due to related parties........................... 91,874 2,198,000
--------- ------------
Total current liabilities....................... 153,951 19,191,000
--------- ------------
Credit facility borrowings.......................... -- 26,000,000
Long-term debt and capitalized lease obligations
less current portion............................... -- 2,253,000
Deferred income taxes............................... -- 2,736,000
--------- ------------
Total liabilities............................... 153,951 50,180,000
--------- ------------
Stockholders' equity (deficit):
Preferred stock; 5,000,000 shares authorized; no
shares issued or outstanding..................... -- --
Common stock, $.001 par value; 35,000,000 shares
authorized; Issued and outstanding 2,604,000 and
14,497,384 shares, respectively.................. 2,604 14,000
Additional paid-in capital........................ 67,396 144,413,000
Retained earnings (accumulated deficit)........... (173,964) 2,021,000
--------- ------------
Total stockholders' equity (deficit)............ (103,964) 146,448,000
--------- ------------
Total liabilities and stockholders' equity
(deficit)...................................... $ 49,987 $196,628,000
========= ============
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE>
UNITED ROAD SERVICES, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
JULY 25, 1997
(INCEPTION) NINE-MONTHS
THROUGH ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
Revenue................................... $ -- $44,842,000
Cost of revenue........................... -- 30,765,000
Amortization of goodwill.................. -- 883,000
Depreciation.............................. -- 1,308,000
Selling, general and administrative ex-
penses................................... 173,964 7,565,000
--------- -----------
(Loss) income from operations......... (173,964) 4,321,000
Other income (expense):
Interest income....................... -- 615,000
Interest expense...................... -- (526,000)
--------- -----------
Income (loss) before income taxes..... (173,964) 4,410,000
Income tax expense........................ -- 2,215,000
--------- -----------
Net (loss) income..................... $(173,964) $ 2,195,000
========= ===========
Per share amounts:
Basic earnings........................ $ (.08) $ .25
========= ===========
Diluted earnings...................... $ (.08) $ .25
========= ===========
</TABLE>
See accompanying notes to financial statements.
F-13
<PAGE>
UNITED ROAD SERVICES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
COMMON PAID-IN EARNINGS STOCKHOLDERS'
STOCK CAPITAL (DEFICIT) EQUITY (DEFICIT)
------- ------------ ---------- ----------------
<S> <C> <C> <C> <C>
Initial capitalization....... $ 2,604 $ 67,396 $ -- $ 70,000
Net loss--1997............... -- -- (173,964) (173,964)
------- ------------ ---------- ------------
Balance at December 31, 1997. 2,604 67,396 (173,964) (103,964)
Issuance of common stock--
nine-months ended September
30, 1998 (unaudited)........ 11,396 144,345,604 -- 144,357,000
Net income--nine-months ended
September 30, 1998
(unaudited)................. -- -- 2,194,964 2,194,964
------- ------------ ---------- ------------
Balance at September 30, 1998
(unaudited)................. $14,000 $144,413,000 $2,021,000 $146,448,000
======= ============ ========== ============
</TABLE>
See accompanying notes to financial statements.
F-14
<PAGE>
UNITED ROAD SERVICES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM NINE-MONTHS
JULY 25, 1997 ENDED
(INCEPTION) THROUGH SEPTEMBER 30,
DECEMBER 31, 1997 1998
------------------- -------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss................................... $(173,964) $ 2,194,964
Adjustments to reconcile net income (loss)
to net cash (used in) provided by
operating activities:
Depreciation............................. -- 1,308,000
Amortization of goodwill................. -- 883,000
Amortization of deferred loan costs...... -- 96,000
Deferred income taxes.................... -- 516,000
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Increase in trade receivables............ -- (3,994,000)
Decrease in other receivables............ -- 1,081,000
Decrease in prepaid expenses and
deposits................................ -- 79,000
Increase in other non-current assets..... -- (186,000)
Increase in accounts and notes payable... 62,077 2,367,049
Increase in accrued income taxes......... -- 616,000
Decrease in other accrued liabilities.... -- (127,000)
--------- ------------
Net cash (used in) provided by
operating activities.................. (111,887) 4,834,013
--------- ------------
Cash flows from investing activities:
Acquisition of companies, net of cash
acquired.................................. -- (95,336,000)
Purchase of property and equipment......... -- (5,127,000)
Amounts payable to related parties......... 91,874 2,106,000
--------- ------------
Net cash provided by (used in)
investing activities.................. 91,874 (98,357,000)
--------- ------------
Cash flows from financing activities:
Proceeds from issuance of stock, net....... 70,000 90,982,000
Borrowings on credit facility.............. -- 26,000,000
Payment of deferred financing costs........ -- (622,000)
Payments on long-term debt and capital
leases.................................... -- (20,597,000)
--------- ------------
Net cash provided by financing
activities............................ 70,000 95,763,000
--------- ------------
Net increase in cash and cash equivalents.... 49,987 2,240,013
Cash and cash equivalents at beginning of pe-
riod........................................ -- 49,987
--------- ------------
Cash and cash equivalents at end of period... $ 49,987 $ 2,290,000
========= ============
</TABLE>
See accompanying notes to financial statements.
F-15
<PAGE>
UNITED ROAD SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
United Road Services, Inc. (formerly Towing America, Inc.), a Delaware
corporation was formed in July 1997 to become a leading national provider of
motor vehicle and equipment towing and transport services. United Road
Services, Inc. elected to incorporate under the S-corporation provisions of
the Internal Revenue Code. United Road Services, Inc. changed its status to a
C-corporation effective January 1, 1998. From inception through September 30,
1998, United Road Services, Inc. has acquired thirty-three businesses (the
"Acquisitions"), seven of which closed simultaneously with the consummation of
an initial public offering ("Offering") of its common stock on May 6, 1998.
United Road Services, Inc. commenced operations when it acquired the
Founding Companies on May 6, 1998. As such, it has a limited combined
operating history and future success is dependent upon a number of factors
which include, among others, the ability to integrate operations, reliance on
the identification and integration of satisfactory acquisition candidates, the
availability of acquisition financing, and the ability to manage growth and
attract and retain quality management.
(b) Fair Value of Financial Instruments
Due to the short-term nature of various financial instruments the fair value
of United Road Services, Inc.'s financial instruments approximates their
carrying values.
(c) Use of Estimates
Management of United Road Services, Inc. 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.
(d) Income Taxes
From July 25, 1997 (inception) to December 31, 1997, United Road Services,
Inc. elected to file federal and State income tax returns under S-corporation
provisions. As such, earnings or losses flow through to the stockholder level.
Accordingly, no income tax expense or benefit has been recorded by United Road
Services, Inc. as of December 31, 1997.
Effective January 1, 1998, United Road Services, Inc. elected to file
federal and State income tax returns under C-corporation provisions. As a
result of United Road Services, Inc. profit for the nine-months ended
September 30, 1998, a tax expense has been recorded at September 30, 1998 at
the effective tax rate expected by United Road Services, Inc. for the year
ending December 31, 1998.
(e) 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
F-16
<PAGE>
UNITED ROAD SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
for a fair presentation of the results for the interim periods presented.
Results of operations for the nine-months ended September 30, 1998 is not
necessarily indicative of results to be expected for the full year ended
December 31, 1998.
Subsequent to the Offering, regional subsidiaries were formed in order to
facilitate the management of businesses acquired throughout the United States.
In addition to these regional subsidiaries, thirteen of the businesses
acquired are subsidiaries of United Road Services, Inc. Consequently, the
interim financial information consists of consolidated amounts.
(f) Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. SFAS No. 130 requires all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed in
equal prominence with the other financial statements. United Road Services,
Inc. adopted SFAS No. 130 during the period ended March 31, 1998, however the
adoption of SFAS No. 130 did not have any effect on the reporting and display
of the financial position, results of operations or cash flows of United Road
Services, Inc. There is no difference in the nine months ended September 30,
1998 between net income and comprehensive income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 131 established standards for
the way public companies are to report information about operating segments in
annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 focuses on a "management approach" concept as the
basis for identifying reportable segments. The management approach is based on
the way that management organizes the segments within the enterprise for
making operating decisions and assessing performance. United Road Services,
Inc. continues to evaluate the provisions of SFAS No. 131 and will adopt SFAS
No. 131 as of and for the period ending December 31, 1998.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires
that certain costs related to the development or purchase of internal-use
software be capitalized and amortized over the estimated useful life of the
software. SOP 98-1 also requires the costs related to the preliminary project
stage and post-implementation/operations state of an internal-use computer
software development project be expensed as incurred. United Road Services,
Inc. adopted SOP 98-1 as of January 1, 1998.
In March 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-
up Activities." SOP 98-5 requires the expensing of certain costs such as pre-
operating expenses and organizational costs associated with the company's
start-up activities. The effect of adoption is required to be accounted for as
a cumulative change in accounting principle. United Road Services, Inc.
adopted SOP 98-5 as of January 1, 1998. Since January 1, 1998, all start-up
costs as defined under SOP 98-5 have been expensed.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is 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
United Road Services, Inc. consolidated financial statements.
F-17
<PAGE>
UNITED ROAD SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) STOCKHOLDER'S EQUITY AND PER SHARE AMOUNTS
United Road Services, Inc. effected a 100-for-one stock split on December
18, 1997 for each share of common stock of United Road Services, Inc. ("Common
Stock") then outstanding. In addition United Road Services, Inc. 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 have been increased to 40,000,000 (35,000,000
common shares and 5,000,000 preferred shares). Also on February 23, 1998,
United Road Services, Inc. effected a 3.72 for 1 stock split for all
outstanding common shares. Common stock has been retroactively reflected in
the accompanying financial statements and related notes.
On December 18, 1997, United Road Services, Inc. authorized the issuance of
188,976 shares pursuant to the terms and conditions of a subscription
agreement. At December 31, 1997 United Road Services, Inc. had obtained
subscription agreements to purchase all authorized shares. These shares were
issued and fully paid on January 1, 1998 for $3.36 per share.
Loss per share was computed by dividing the net loss by the weighted average
number of shares outstanding after giving effect to the stock-splits referred
to above. The weighted average number of shares used in the computation was
2,055,300 for period ended December 31, 1997.
Basic and diluted earnings per share for the nine months ended September 30,
1998 was calculated using weighted average shares of 8,799,686 and 8,937,442,
respectively.
(3) RELATED PARTY TRANSACTIONS
United Road Services, Inc. is indebted to two of the primary stockholders
under unsecured notes, bearing interest at 8.5% per annum. The notes and
unpaid interest were repaid subsequent to the offering.
(4) SUBSEQUENT EVENTS
(a) United Road Services, Inc. has signed definitive agreements to acquire
seven companies (Founding Companies) to be effective simultaneously with the
Offering and one company, Keystone Towing, Inc., to be acquired after the
Offering. The companies to be acquired are:
Northland Auto Transporters, Inc. and Northland Fleet Leasing, Inc.
Falcon Towing and Auto Delivery, Inc.,
Smith-Christensen Enterprises, Inc. and subsidiary ("City Towing, Inc."
d/b/a Quality Towing)
Caron Auto Works, Inc. and Caron Auto Brokers, Inc.
Absolute Towing and Transporting, Inc.
Keystone Towing, Inc.
ASC Transportation Services and subsidiary ("Auto Service Center" d/b/a ASC
Truck Service)
Milne Tow Service
(b) The aggregate consideration to acquire the Founding Companies is
approximately $27.8 million in cash and 2,375,741 in shares of Common Stock.
Additionally, upon consummation of the Keystone Towing, Inc. acquisition, the
stockholder will receive cash consideration of $4.5 million and 377,624 shares
of Common Stock.
(c) United Road Services, Inc. has received a commitment for a revolving
line of credit of $50 million. The funding is intended to be used for
acquisitions, capital expenditures, refinancing of debt not paid out of the
proceeds of the Offering and for general corporate purposes.
(d) Concurrently with the Acquisitions, United Road Services, Inc. may enter
into an agreement with the stockholders to lease the building used in United
Road Services, Inc.'s operation for negotiated amounts and terms.
F-18
<PAGE>
UNITED ROAD SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(e) Prior to the Acquisitions, several Founding Companies and Keystone
Towing, Inc. intend to make distributions of certain net assets not to exceed
approximately $930,000.
(f) In January 1998, United Road Services, Inc. issued 29,760 shares to a
member of the board of directors for a purchase price of $3.36 per share. In
addition, options to purchase 215,000 shares were issued during January and
February 1998 to several employees of United Road Services, Inc. and outside
consultants. Stock options were issued at a price of $9.00 per share and vest
over a three-year period. Additional options to purchase 40,000 shares are
expected to be issued after the consummation of the Offering at the Offering
price per share.
(g) On May 6, 1998, United Road Services, Inc. effectively acquired the
Founding Companies as a result of the successful completion of the Offering,
as described in note 1(a).
(h) On November 19, 1998, United Road Services, Inc. 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 8% Convertible
Subordinated Debentures ("Debentures") due 2008. The Debentures are
convertible into United Road Services, Inc. Common Stock 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. United Road
Services, Inc. issued $43.5 million aggregate principal amount of Debentures
to Charterhouse at a first closing on December 7, 1998. Issuance of the
remaining $31.5 million aggregate principal amount of Debentures to
Charterhouse is subject to approval of the stockholders of United Road
Services, Inc.
(5) ACQUISITIONS (UNAUDITED)
On May 6, 1998, United Road Services, Inc. acquired the seven businesses
referred to as the Founding Companies. Between May 7, 1998 and September 30,
1998, United Road Services, Inc. acquired 25 other businesses for aggregate
consideration (excluding assumed indebtedness) of approximately $63.7 million
in cash and 1,708,907 shares of Common Stock with a recorded value of $28.8
million. The acquired companies are located throughout the United States, with
the majority located in the Western Region of the country. These companies are
engaged in the motor vehicle and equipment towing, recovery and transport
services. The acquisitions have been accounted for using the purchase method
of accounting. The excess of the purchase price over the fair value of the
assets acquired of $83.7 million has been recorded as goodwill and is being
amortized on a straight-line basis over 40 years.
The following unaudited pro forma financial information presents the
combined results of operations as if all the acquisitions that have been made
by United Road Services, Inc. through December 31, 1998, had occurred as of
the beginning of the period presented, after giving effect to certain
adjustments, including amortization of goodwill, additional depreciation
expense, reduction in salaries and bonuses to former 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 NINE MONTHS ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
---------------------------------------- ----------------------------------------
PROFORMA COMBINED PROFORMA COMBINED
FOUNDING COMPANIES FOUNDING COMPANIES
AND SELECTED ALL OTHER AND SELECTED ALL OTHER
ACQUIRED COMPANIES ACQUISITIONS TOTAL ACQUIRED COMPANIES ACQUISITIONS TOTAL
------------------ ------------ -------- ------------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Net revenue............. $143,431 $12,376 $155,807 $129,382 $11,344 $140,726
======== ======= ======== ======== ======= ========
Net income.............. $ 5,838 $ 506 $ 6,344 $ 6,963 $ 552 $ 7,515
======== ======= ======== ======== ======= ========
Diluted net income per
share.................. $ 0.53 $ 0.63
======== ========
</TABLE>
United Road Services Inc. is committed to acquire one business with a
purchase price of $10.4 million in cash, 996,351 shares of common stock and an
assumption of $4.4 million of debt.
F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholder
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 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. These combined
financial statements are the responsibility of Northland'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 Northland
Auto Transporters, Inc. and Northland Fleet Leasing, Inc. as of December 31,
1996 and 1997, 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 in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Albany, New York
January 28, 1998,
except as to note 14(b),
which is as of May 6, 1998
F-20
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------- MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 432,949 $ 407,309 $ 806,933
Trade accounts receivable, net of allowance
for doubtful accounts of $40,000 in 1996
and $75,000 in 1997....................... 416,220 942,432 814,778
Accounts receivable from employees......... 4,955 3,445 40,822
Notes receivable........................... 35,068 17,453 20,933
Income tax receivable (note 7)............. 37,584 -- --
Prepaid and other current assets (note 2).. 74,302 113,558 76,555
Deferred income taxes (note 7)............. 9,000 17,000 17,000
---------- ---------- ----------
Total current assets..................... 1,010,078 1,501,197 1,777,021
Property and equipment, net (notes 3, 5 and
6).......................................... 2,204,802 3,924,055 3,886,336
Notes receivable............................. 44,044 31,468 14,347
Other assets................................. 8,862 8,426 8,426
---------- ---------- ----------
Total assets............................. $3,267,786 $5,465,146 $5,686,130
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current installments of notes payable (note
5)........................................ $ 282,824 $ 346,859 $ 324,347
Current installments of obligations under
capital leases (note 6)................... 4,408 147,538 131,883
Payable to related parties (note 10)....... 159,505 53,849 47,756
Accounts payable........................... 210,998 188,064 204,058
Income taxes payable (note 7).............. -- 261,933 317,465
Accrued payroll and related costs.......... 18,062 52,676 105,949
Other accrued liabilities (note 4)......... 98,914 51,300 28,705
---------- ---------- ----------
Total current liabilities................ 774,711 1,102,219 1,160,163
Long-term liabilities:
Notes payable, excluding current
installments (note 5)..................... 318,382 279,963 219,074
Obligations under capital leases, excluding
current installments (note 6)............. 12,833 793,774 710,171
Deferred income taxes (note 7)............. 171,000 244,000 244,000
---------- ---------- ----------
Total liabilities........................ 1,276,926 2,419,956 2,333,408
---------- ---------- ----------
Stockholder's equity:
Common stock, $1 par value. Authorized,
issued and outstanding 2,000 shares in
1996 and 1997............................. 2,000 2,000 2,000
Retained earnings.......................... 1,988,860 3,043,190 3,350,722
---------- ---------- ----------
Total stockholder's equity............... 1,990,860 3,045,190 3,352,722
---------- ---------- ----------
Total liabilities and stockholder's
equity.................................. $3,267,786 $5,465,146 $5,686,130
========== ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-21
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE-MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31
----------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue............. $4,671,164 $6,353,290 $10,159,113 $2,081,610 $3,057,307
Cost of revenue......... 3,683,119 5,132,828 7,341,748 1,237,243 2,451,066
---------- ---------- ----------- ---------- ----------
Gross profit........ 988,045 1,220,462 2,817,365 844,367 606,241
Selling, general and
administrative
expenses............... 663,723 874,559 1,378,872 201,071 281,946
---------- ---------- ----------- ---------- ----------
Income from
operations......... 324,322 345,903 1,438,493 643,296 324,295
---------- ---------- ----------- ---------- ----------
Other income (expense):
Interest expense...... (48,825) (79,384) (139,099) (18,122) (10,674)
Interest income....... 16,624 37,701 35,723 19,904 31,498
Gain (loss) on sale of
assets............... (14,540) -- (34,568) 23,000 60,127
Other................. 29,078 41,282 88,781 (24,183) --
---------- ---------- ----------- ---------- ----------
Income before income
taxes.............. 306,659 345,502 1,389,330 643,895 405,246
Income tax expense
(benefit)
(note 7)............... 31,400 (710) 335,000 155,258 97,714
---------- ---------- ----------- ---------- ----------
Net income.......... $ 275,259 $ 346,212 $ 1,054,330 $ 488,637 $ 307,532
========== ========== =========== ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-22
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
<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--three-months ended March 31, 1998
(unaudited)................................... -- 307,532 307,532
------ ---------- ----------
Balance at March 31, 1998 (unaudited).......... $2,000 $3,350,722 $3,352,722
====== ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-23
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE-MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
-------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............. $ 275,259 $ 346,212 $1,054,330 $ 488,637 $ 307,532
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization........ 181,634 224,637 289,479 66,815 73,596
Deferred income
taxes............... (11,000) (6,000) 65,000 -- --
Loss (gain) on sale
of property and
equipment........... 14,540 -- 34,568 (23,000) (60,127)
Decrease (increase)
in trade accounts
receivable.......... (115,982) 138,452 (526,212) (275,875) 127,654
Decrease (increase)
in accounts
receivable from
employees........... 1,185 (4,100) 1,510 (24,420) (37,377)
Decrease (increase)
in income tax
receivable.......... -- -- 37,584 (5,791) --
Decrease (increase)
in prepaid and other
current assets...... (17,892) 16,331 (39,256) (23,374) 37,003
Increase (decrease)
in accounts payable. 716 23,236 (22,934) (28,080) 15,994
Increase in income
taxes payable....... -- -- 261,933 -- 55,532
Increase (decrease)
in accrued payroll
and related costs... (85,348) (14,137) 34,614 1,313 53,273
Increase (decrease)
in amounts payable
to related parties.. 20,552 16,410 (105,656) 16,303 (6,093)
Increase (decrease)
in other accrued
liabilities......... 25,946 2,880 (47,614) (12,816) (22,595)
--------- --------- ---------- --------- ---------
Net cash provided
by operating
activities........ 289,610 743,921 1,037,346 179,712 544,392
--------- --------- ---------- --------- ---------
Cash flows from
investing activities:
Purchases of property
and equipment......... (229,888) (395,881) (762,597) (271,868) (54,450)
Proceeds from sale of
equipment............. 53,044 -- 67,656 23,000 78,700
Decrease in notes
receivable............ 8,159 (30,984) 30,191 38,697 13,641
--------- --------- ---------- --------- ---------
Net cash (used in)
provided by
investing
activities........ (168,685) (426,865) (664,750) (210,171) 37,891
--------- --------- ---------- --------- ---------
Cash flows from
financing activities:
Proceeds from long-
term debt............. -- -- 24,629 -- 15,434
Principal payments on
long-term debt........ (139,745) (156,620) (317,543) (76,931) (98,835)
Principal payments on
obligations under
capital leases........ -- (1,351) (105,322) (603) (99,258)
--------- --------- ---------- --------- ---------
Net cash used in
financing
activities........ (139,745) (157,971) (398,236) (77,534) (182,659)
--------- --------- ---------- --------- ---------
Net (decrease)
increase in cash.. (18,820) 159,085 (25,640) (107,993) 399,624
Cash and cash
equivalents at
beginning of period.... 292,684 273,864 432,949 432,949 407,309
--------- --------- ---------- --------- ---------
Cash and cash
equivalents at end of
period................. $ 273,864 $ 432,949 $ 407,309 $ 324,956 $ 806,933
========= ========= ========== ========= =========
Supplemental disclosure
of cash flow
information:
Cash paid during the
year for:
Interest............. $ 48,825 $ 79,384 $ 139,099 $ 18,122 $ 10,674
========= ========= ========== ========= =========
Income taxes......... $ 7,024 $ 79,835 $ 6,480 $ 161,049 $ 42,182
========= ========= ========== ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-24
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(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) 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.
(d) Cash and Cash Equivalents
Cash and cash equivalents of $432,949 and $407,309 at December 31, 1996 and
1997, respectively, 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, Northland considers all highly liquid debt instruments with
original maturities of three months or less to be cash equivalents.
(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, Northland 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) Fair Value of Financial Instruments
Due to the short-term nature of various financial instruments and the
current incremental borrowing rates available to Northland on bank loans with
similar terms and maturities, the fair value of Northland's financial
instruments approximates their carrying values.
F-25
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(g) 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 stockholder currently on his personal tax
returns.
(h) Use of Estimates
Management of Northland 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.
(i) 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 consists of:
<TABLE>
<CAPTION>
DECEMBER 31
---------------- MARCH 31,
1996 1997 1998
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Prepaid insurance............................. $14,818 $ 28,172 $17,638
Prepaid vehicle registration.................. 25,978 35,778 23,852
Deposits on trucks............................ 12,403 16,633 29,843
Miscellaneous advances........................ 12,716 9,320 205
Prepaid property and other taxes.............. 8,387 23,655 5,017
------- -------- -------
$74,302 $113,558 $76,555
======= ======== =======
</TABLE>
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------- MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Transportation equipment.............. $2,745,094 $4,457,178 $4,336,121
Furniture and fixtures................ 123,585 147,035 141,338
Office equipment...................... 34,449 34,244 34,244
Automobiles........................... 64,781 126,926 124,009
---------- ---------- ----------
Total............................... 2,967,909 4,765,383 4,635,712
Less accumulated depreciation and
amortization......................... (763,107) (841,328) (749,376)
---------- ---------- ----------
$2,204,802 $3,924,055 $3,886,336
========== ========== ==========
</TABLE>
Depreciation of property and equipment in 1995, 1996 and 1997 totaled
$181,198, $224,201 and $289,043, respectively.
F-26
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(4) OTHER ACCRUED LIABILITIES
Other accrued liabilities consists of:
<TABLE>
<CAPTION>
DECEMBER 31
--------------- MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued highway use tax............................. $ 9,487 $14,300 $ 4,247
Accrued insurance................................... 12,324 6,880 5,397
Accrued profit sharing.............................. 64,196 -- --
Other............................................... 12,907 30,120 19,061
------- ------- -------
$98,914 $51,300 $28,705
======= ======= =======
</TABLE>
(5) INDEBTEDNESS
Northland's long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------- MARCH 31,
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
<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 $ 43,113
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. ................ 288,698 176,248 146,308
Note payable to First of America Bank,
payable in monthly principal installments of
$7,320, plus interest at .75% above the
prime lending rate (9.0% and 9.25% at
December 31, 1996 and 1997, respectively),
maturing July 1998. Secured by equipment. .. 141,143 49,628 25,492
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 28,150
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 December 31,
1997), maturing April 10, 2001. secured by
equipment. ................................. -- 288,656 281,234
Various notes payable secured by equipment... -- 20,261 19,124
--------- --------- ---------
Total long-term debt....................... 601,206 626,822 543,421
Less installments due within one year........ (282,824) (346,859) (324,347)
--------- --------- ---------
Long-term debt, excluding current
installments.............................. $ 318,382 $ 279,963 $ 219,074
========= ========= =========
</TABLE>
Annual maturities of long-term debt for the next four years are as follows:
<TABLE>
<S> <C>
1998.............................................................. $346,859
1999.............................................................. 147,902
2000.............................................................. 87,161
2001.............................................................. 44,900
--------
$626,822
========
</TABLE>
F-27
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(6) LEASES
Northland leases equipment under capital leases which expire in stages from
August 2000 to July 2002.
Northland leases its operating facility from a third party under a
cancelable operating lease. Rent expense in 1995, 1996 and 1997 was $40,054,
$58,515 and $41,700, respectively.
Following is a summary of transportation equipment held under capital
leases:
<TABLE>
<CAPTION>
DECEMBER 31
------------------- MARCH 31,
1996 1997 1998
------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Transportation equipment................. $18,000 $1,047,298 $1,047,298
Less accumulated amortization............ (3,600) (298,619) (372,374)
------- ---------- ----------
$14,400 $ 748,679 $ 674,924
======= ========== ==========
</TABLE>
Future minimum capital lease payments as of December 31, 1997 are:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, CAPITAL
------------------------ LEASES
<S> <C>
1998........................................................... $ 213,228
1999........................................................... 216,655
2000........................................................... 214,758
2001........................................................... 210,973
2002........................................................... 298,065
----------
Total........................................................ 1,153,679
Less amount representing interest.............................. (212,367)
----------
Present value of net minimum capital lease payments............ $ 941,312
==========
</TABLE>
(7) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1995, 1996 and
1997 consists of:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Current:
Federal...................................... $ 42,400 $ 5,290 $270,000
Deferred....................................... (11,000) (6,000) 65,000
-------- ------- --------
$ 31,400 $ (710) $335,000
======== ======= ========
</TABLE>
The following table reconciles the expected tax expense at the Federal
statutory tax rate to the effective tax rate.
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Computed expected tax expense............. $104,264 $ 117,471 $ 472,372
Effect of earnings from S-corporation..... (77,750) (123,441) (141,644)
Non-deductible meals and entertainment
expenses................................. 4,886 5,260 4,272
-------- --------- ---------
$ 31,400 $ (710) $ 335,000
======== ========= =========
</TABLE>
F-28
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities as of December 31, 1996 and 1997 are
presented below:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts................... $ 9,000 $ 17,000
Deferred tax liabilities:
Property and equipment, due to differences in
depreciation lives and methods................... (171,000) (244,000)
--------- ---------
Net deferred tax liability...................... $(162,000) $(227,000)
========= =========
</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 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 Northland 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) NON-CASH TRANSACTIONS
During 1995, 1996 and 1997, Northland leased transportation equipment
totaling $200,000, $360,523 and, $1,347,923 respectively, through capital
leases with several lending institutions.
(9) EMPLOYEE BENEFITS
Northland 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 Northland and that are at least 21 years of age. Eligible
participants may contribute up to 15% of their compensation. Northland
provides discretionary matching contributions to the Plan which amounted to,
$12,985, $64,196 and $0 in 1995, 1996 and 1997, respectively.
(10) RELATED PARTY TRANSACTIONS
Northland has borrowed funds from its principal stockholder and has
outstanding notes payable as of December 31, 1996 and 1997 of $159,505 and
$53,849. Such amounts are included in notes payable on the combined balance
sheets. The notes accrue interest at 8%, compounded monthly.
(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) CONCENTRATION OF BUSINESS RISKS
Two customers, GE Capital and C.T. Services, accounted for a combined 10.7%
and 16.4% of Northland's sales in 1996 and 1997, respectively. The loss of one
or both of these customers could significantly effect Northland's performance.
F-29
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(13) ALLOWANCE FOR DOUBTFUL ACCOUNTS
During 1995, 1996 and 1997, Northland recorded provisions for the allowance
for doubtful accounts in the amounts of $32,000, $30,000 and $52,000,
respectively. During 1995, 1996 and 1997, Northland wrote-off an average of
$17,000 in each year.
(14) SUBSEQUENT EVENT
(a) During February 1998, the stockholder entered into a definitive
agreement to sell Northland to United Road Services, Inc. The transaction,
effected through a combination of cash and common stock of United Road
Services, Inc., is contingent and effective upon the initial public offering
of the common stock of United Road Services, Inc. The anticipated selling
price of Northland exceeds its net assets as of December 31, 1997.
(b) On May 6, 1998, United Road Services, Inc. effectively acquired
Northland as a result of the successful completion of the initial public
offering of the common stock of United Road Services, Inc.
F-30
<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 the related
statements of operations, stockholder's equity, and cash flows for each of the
years in the three-year period ended December 31, 1997. 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 the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Albany, New York
January 17, 1998,
except as to note 11(c),
which is as of May 6, 1998
F-31
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash....................................... $ 23,505 $ 3,527 $ 3,024
Trade accounts receivable, net of allowance
for doubtful accounts of $67,650 in 1996
and $188,500 in 1997...................... 476,896 717,560 563,353
Inventories................................ 24,868 26,068 26,068
Prepaid and other current assets (note 2).. 46,537 131,328 149,729
---------- ---------- ----------
Total current assets..................... 571,806 878,483 742,174
Property and equipment, net (notes 3, 5 and
6).......................................... 1,656,635 2,423,368 2,453,169
---------- ---------- ----------
Total assets............................. $2,228,441 $3,301,851 $3,195,343
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current installments of long-term debt
(note 5).................................. $ 123,722 $ 264,081 $ 355,393
Current installments of obligations under
capital leases
(note 6).................................. 252,527 368,590 368,590
Borrowings under lines of credit (note 5).. 36,150 47,121 45,316
Accounts payable........................... 178,357 546,301 595,073
Accrued payroll and related costs.......... 57,000 67,701 67,701
Income taxes payable (note 8).............. 98,698 207,399 216,261
Other accrued liabilities (note 4)......... 137,600 214,979 219,959
---------- ---------- ----------
Total current liabilities................ 884,054 1,716,172 1,868,293
Long-term liabilities:
Long-term debt, excluding current
installments (note 5)..................... 225,386 250,196 72,831
Obligations under capital leases, excluding
current installments (note 6)............. 630,677 716,288 624,140
Deferred income taxes (note 8)............. 11,733 10,555 10,555
---------- ---------- ----------
Total liabilities........................ 1,751,850 2,693,211 2,575,819
---------- ---------- ----------
Stockholder's equity:
Common stock, no par or stated value.
Authorized 1,000 shares; issued and
outstanding 750 shares in 1996 and 1997... -- -- --
Retained earnings.......................... 476,591 608,640 619,524
---------- ---------- ----------
Total stockholder's equity............... 476,591 608,640 619,524
---------- ---------- ----------
Total liabilities and stockholder's
equity.................................. $2,228,441 $3,301,851 $3,195,343
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE-MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue............. $4,351,847 $6,203,104 $7,784,766 $1,697,166 $1,965,856
Cost of revenue......... 3,492,248 4,638,239 5,955,423 1,265,627 1,430,094
---------- ---------- ---------- ---------- ----------
Gross profit........ 859,599 1,564,865 1,829,343 431,539 535,762
Selling, general and
administrative
expenses............... 952,260 1,190,631 1,614,386 420,944 505,544
---------- ---------- ---------- ---------- ----------
Income (loss) from
operations......... (92,661) 374,234 214,957 10,595 30,218
---------- ---------- ---------- ---------- ----------
Other income (expense):
Interest expense...... (77,176) (129,150) (147,700) (35,021) (10,472)
Gain (loss) on sale of
equipment............ (417) -- 98,735 (9,323) --
Other................. 38,508 12,167 73,580 16,041 --
---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes....... (131,746) 257,251 239,572 (17,708) 19,746
Income tax expense
(benefit) (note 8)..... 15,707 94,723 107,523 (7,947) 8,862
---------- ---------- ---------- ---------- ----------
Net income (loss)... $ (147,453) $ 162,528 $ 132,049 $ (9,761) $ 10,884
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<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 loss--three-months ended March 31, 1998
(unaudited)................................... -- 10,884 10,884
---- --------- ---------
Balance at March 31, 1998 (unaudited).......... $-- $ 619,524 $ 619,524
==== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE-MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
------------------------------- ------------------
1995 1996 1997 1997 1998
--------- --------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)....... $(147,453) $ 162,528 $ 132,049 $ (9,761) $ 10,884
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation and
amortization......... 343,595 431,828 621,673 139,697 121,399
Deferred income taxes. 15,707 (3,975) (1,178) -- --
(Gain) loss on sale of
equipment............ 417 -- (98,735) 9,323 --
Decrease (increase) in
trade accounts
receivable........... (1,169) (236,557) (240,664) (2,334) 154,207
Increase in
inventories.......... -- -- (1,200) (1,200) --
Decrease (increase) in
prepaid and other
current assets....... (10,524) (9,236) (84,791) 1,817 (18,401)
Increase (decrease) in
accounts payable..... 104,440 (8,097) 367,944 58,796 48,772
Increase in accrued
payroll and related
costs................ 71,443 53,937 10,701 -- --
Increase (decrease) in
income taxes payable. (20,542) 98,698 108,701 (7,947) 8,862
Increase (decrease) in
other accrued
liabilities.......... 7,434 (12,591) 77,379 434 4,980
--------- --------- --------- -------- --------
Net cash provided by
operating
activities......... 363,348 476,535 891,879 188,825 330,703
--------- --------- --------- -------- --------
Cash flows used in
investing activities:
Purchases of property
and equipment.......... (290,177) (169,861) (919,049) (93,685) (151,200)
Proceeds from sale of
property and
equipment.............. -- -- 141,100 -- --
--------- --------- --------- -------- --------
Net cash used in
investing
activities......... (290,177) (169,861) (777,949) (93,685) (151,200)
--------- --------- --------- -------- --------
Cash flows from financing
activities:
Proceeds from long-term
debt................... 75,047 -- 384,609 -- --
Payments on notes
payable and capital
leases................. (120,031) (282,833) (529,488) (122,471) (178,201)
Net borrowings under
lines of credit........ (36,066) (2,784) 10,971 8,259 (1,805)
--------- --------- --------- -------- --------
Net cash used in
financing
activities......... (81,050) (285,617) (133,908) (114,212) (180,006)
--------- --------- --------- -------- --------
Net (decrease) increase
in cash................. (7,879) 21,057 (19,978) (19,072) (503)
Cash at beginning of
period.................. 10,327 2,448 23,505 23,505 3,527
--------- --------- --------- -------- --------
Cash at end of period.... $ 2,448 $ 23,505 $ 3,527 $ 4,433 $ 3,024
========= ========= ========= ======== ========
Supplemental disclosure
of cash flow
information:
Cash paid during the year
for:
Interest................ $ 74,280 $ 125,435 $ 144,806 $ 35,021 $ 10,472
========= ========= ========= ======== ========
Income taxes............ $ -- $ 12,591 $ -- $ -- $ --
========= ========= ========= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(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.
(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.
F-36
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(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 EXPENSES
Prepaid and other current assets consists of:
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1996 1997
------- --------
<S> <C> <C>
Prepaid vehicle registration............................. $ -- $ 64,790
Prepaid insurance........................................ 19,414 27,340
Other.................................................... 27,123 39,198
------- --------
$46,537 $131,328
======= ========
</TABLE>
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------ MARCH 31,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Transportation and towing
equipment......................... $ 2,970,070 $ 4,124,483 $ 4,275,683
Machinery and equipment............ 70,296 104,411 104,411
Leasehold improvements............. 26,489 43,653 43,653
Furniture and fixtures............. 10,448 14,298 14,298
Office equipment................... 19,225 19,225 19,225
Construction-in-progress........... -- 33,000 33,000
----------- ----------- -----------
Total............................ 3,096,528 4,339,070 4,490,270
Less accumulated depreciation and
amortization...................... (1,439,893) (1,915,702) (2,037,101)
----------- ----------- -----------
$ 1,656,635 $ 2,423,368 $ 2,453,169
=========== =========== ===========
</TABLE>
Depreciation and amortization of property and equipment in 1995, 1996 and
1997 totaled $343,595, $431,828 and $621,673, respectively.
(4) OTHER ACCRUED LIABILITIES
Other accrued liabilities consists of:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1996 1997
-------- --------
<S> <C> <C>
Accrued insurance premiums.............................. $ 20,248 $ 17,712
Accrued fuel expenses................................... 31,827 80,055
Accrued commissions..................................... 43,000 51,000
Accrued vacation........................................ 18,000 21,000
Accrued 401(k) contributions............................ -- 17,983
Other................................................... 24,525 27,229
-------- --------
$137,600 $214,979
======== ========
</TABLE>
F-37
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) INDEBTEDNESS
Falcon has available a $50,000 line of credit with $36,150 and $47,121
outstanding at December 31, 1996 and 1997, respectively, secured by the assets
of Falcon and a guarantee by Falcon's stockholder. Interest is payable at
11.5%.
Falcon's long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------- MARCH 31,
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to banks payable in
monthly installments ranging from
$1,024 to $2,909, including interest
ranging from 9.0% to 10.5%, and
maturing at dates ranging from April,
1998 to April, 2000. Secured by
vehicles and equipment. ............... $ 349,108 $ 514,277 $428,224
Less installments due within one year... (123,722) (264,081) (355,393)
--------- --------- --------
Long-term debt, excluding current
installments........................... $ 225,386 $ 250,196 $ 72,831
========= ========= ========
</TABLE>
The aggregate maturities of long-term debt subsequent to December 31, 1997
are as follows:
<TABLE>
<S> <C>
1998.............................................................. $264,081
1999.............................................................. 166,798
2000.............................................................. 83,398
--------
$514,277
========
</TABLE>
(6) LEASES
Falcon is the lessee of vehicles under a number of capital leases which
expire in stages from April 1999 to November 2000.
Following is a summary of equipment held under capital leases:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------- MARCH 31,
1996 1997 1998
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Transportation and towing
equipment......................... $1,612,687 $ 2,124,409 $ 2,124,409
Less accumulated amortization...... (703,928) (1,036,670) (1,127,996)
---------- ----------- -----------
$ 908,759 $ 1,087,739 $ 996,413
========== =========== ===========
</TABLE>
Falcon leases the land and buildings used for its operations at the El Monte
and Phoenix locations under lease agreements with its sole stockholder. These
agreements provide for annual rental payments of $288,000 beginning December
1996 and $37,000 beginning March 1997 at the El Monte and Phoenix locations,
respectively. Rent paid to the stockholder in 1995, 1996 and 1997 was $0,
$24,000 and $319,000, 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. The leases are classified as operating leases. Falcon
is responsible for all operating costs related to the properties.
Total rent expense for 1995, 1996 and 1997 was $240,003, $265,103 and
$438,003, respectively.
F-38
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments under noncancellable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of December 31, 1997 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
<S> <C> <C>
1998............................................... $ 473,698 $ 325,000
1999............................................... 400,408 325,000
2000............................................... 254,520 325,000
2001............................................... 14,112 277,000
2002............................................... -- 3,100
---------- ----------
Total............................................ 1,142,738 $1,255,100
==========
Less amount representing interest.................. (57,860)
----------
Present value of net minimum capital lease
payments........................................ $1,084,878
==========
</TABLE>
(7) NON-CASH TRANSACTIONS
During 1995, 1996 and 1997, Falcon financed certain purchases of vehicles
and equipment totaling $571,137, $671,086 and $511,722, respectively.
(8) INCOME TAXES
Income tax expense for the years ended December 31, 1995, 1996 and 1997
consists of:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Current:
Federal....................................... $ -- $77,500 $ 86,271
State......................................... -- 21,198 22,430
------- ------- --------
-- 98,698 108,701
Deferred........................................ 15,707 (3,975) (1,178)
------- ------- --------
$15,707 $94,723 $107,523
======= ======= ========
</TABLE>
The following table reconciles the expected tax expense at the Federal
statutory tax rate to the effective tax rate.
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Computed expected tax (benefit) expense...... $(44,794) $ 87,465 $ 81,454
State income taxes (benefit), net of Federal
benefit..................................... (8,087) 13,991 14,803
Non-deductible meals and entertainment
expenses.................................... 1,428 354 2,116
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
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
liabilities as of December 31, 1995, 1996 and 1997 relate to fixed assets
caused by differences in depreciation lives and methods and total $15,707,
$11,733 and $10,555, respectively.
F-39
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(9) 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 and $18,000 in 1995, 1996 and 1997, respectively.
(10) RELATED PARTY TRANSACTIONS
Falcon leases land and buildings, located at the El Monte and Phoenix
locations, from the sole stockholder (see note 6).
(11) SUBSEQUENT EVENT
(a) During February 1998, the stockholder entered into a definitive
agreement to sell Falcon to United Road Services, Inc. The transaction,
effected through a combination of cash and common stock of United Road
Services, Inc., is contingent and effective upon the initial public offering
of the common stock of United Road Services, Inc. The anticipated selling
price of Falcon exceeds its net assets as of December 31, 1997.
(b) Concurrently with the acquisition, United Road Services, Inc. will enter
into agreements with the stockholder to lease land and buildings used in
Falcon's operations for negotiated amounts and terms.
(c) On May 6, 1998, United Road Services, Inc. effectively acquired Falcon
as a result of the successful completion of the initial public offering of the
common stock of United Road Services, Inc.
F-40
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders
Smith-Christensen Enterprises, Inc.:
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 and December 31, 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years ended January 31, 1996 and 1997 and for the
twelve-month period ended December 31, 1997. 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 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 and December 31, 1997, and the results of their operations
and their cash flows for each of the years ended January 31, 1996 and 1997 and
for the twelve-month period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Albany, New York
January 16, 1998,
except as to note 11(c),
which is as of May 6, 1998
F-41
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 31, MARCH 31,
1997 1997 1998
----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................... $ 180,269 $ 266,687 $ 308,414
Trade accounts receivable, net of
allowance for doubtful accounts of
$26,850 and $75,850 at January 31, 1997
and December 31, 1997, respectively.... 88,518 277,966 283,677
Accounts receivable from related parties
(note 9)............................... 10,665 50,151 50,151
Due from employees...................... 19,124 22,053 15,955
Inventories............................. 20,661 9,950 29,372
Prepaid expenses (note 2)............... 30,048 19,680 46,988
Other current assets.................... 900 900 900
---------- ---------- ----------
Total current assets.................. 350,185 647,387 735,457
Property, plant and equipment, net (notes
3 and 5)................................. 2,653,243 2,877,229 3,165,423
Accounts receivable from related parties
(note 9)................................. 157,294 831,733 454,441
Other assets, net (note 4)................ 118,908 98,905 98,905
---------- ---------- ----------
Total assets.......................... $3,279,630 $4,455,254 $4,454,226
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt
(note 5)............................... $ 447,875 $ 541,836 $ 522,470
Accounts payable........................ 38,278 68,203 163,506
Accrued payroll and related costs....... 28,757 85,563 21,832
Income taxes payable (note 7)........... 60,863 345,339 336,039
Other accrued expenses.................. 5,305 3,110 25,418
---------- ---------- ----------
Total current liabilities............. 581,078 1,044,051 1,069,265
---------- ---------- ----------
Long-term liabilities:
Long-term debt, excluding current
installments (note 5).................. 2,415,340 2,188,038 2,188,038
Deferred income taxes (note 7).......... 193,379 312,721 312,721
---------- ---------- ----------
Total liabilities..................... 3,189,797 3,544,810 3,570,024
---------- ---------- ----------
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....................... 69,833 890,444 864,202
---------- ---------- ----------
Total stockholders' equity............ 89,833 910,444 884,202
---------- ---------- ----------
Total liabilities and stockholders'
equity............................... $3,279,630 $4,455,254 $4,454,226
========== ========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-42
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
TWELVE-MONTH THREE-MONTH PERIODS
PERIOD ENDED ENDED MARCH 31
YEAR ENDED YEAR ENDED DECEMBER 31, 1997 ----------------------
JANUARY 31, 1996 JANUARY 31, 1997 (NOTE 1(B)) 1997 1998
---------------- ---------------- ----------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue............. $4,395,762 $5,395,475 $6,802,474 $1,533,327 $1,954,670
Cost of revenue......... 2,579,463 3,214,772 3,849,138 1,014,657 1,223,785
---------- ---------- ---------- ---------- ----------
Gross profit........ 1,816,299 2,180,703 2,953,336 518,670 730,885
Selling, general and
administrative
expenses............... 1,436,488 1,194,716 1,389,707 234,887 520,620
---------- ---------- ---------- ---------- ----------
Income from
operations......... 379,811 985,987 1,563,629 283,783 210,265
---------- ---------- ---------- ---------- ----------
Other income (expense):
Interest expense...... (258,554) (325,370) (277,436) (70,352) (64,460)
Interest income....... -- -- 4,524 -- --
Other................. (25,005) 131,721 (27,375) (127,032) (181,347)
---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes....... 96,252 792,338 1,263,342 86,399 (35,542)
Income tax expense
(benefit) (note 7)..... 103,752 277,623 440,978 30,240 (9,300)
---------- ---------- ---------- ---------- ----------
Net income (loss)... $ (7,500) $ 514,715 $ 822,364 $ 56,159 $ (26,242)
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-43
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
RETAINED STOCKHOLDERS'
COMMON EARNINGS EQUITY
STOCK (DEFICIT) (DEFICIT)
------- --------- -------------
<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 (note 1(b))... -- (1,753) (1,753)
------- --------- ---------
Balance at December 31, 1997.................. 20,000 890,444 910,444
Net loss--three-month periods ended March 31,
1998 (unaudited)............................. -- (26,242) (26,242)
------- --------- ---------
Balance at March 31, 1998 (unaudited)......... $20,000 $ 864,202 $ 884,202
======= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-44
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE-MONTH
PERIODS ENDED
TWELVE-MONTH MARCH 31
YEAR ENDED YEAR ENDED PERIOD ENDED ------------------
JANUARY 31, 1996 JANUARY 31, 1997 DECEMBER 31, 1997 1997 1998
---------------- ---------------- ----------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)..... $ (7,500) $ 514,715 $ 822,364 $ 56,159 $(26,242)
Adjustments to
reconcile net income
(loss) to net cash
provided by
operating
activities:
Net loss for the
month of January
1997 (note 1(b))... -- -- (1,753) -- --
Depreciation and
amortization....... 237,118 322,628 268,732 67,183 23,638
Deferred income
taxes.............. 151,090 106,198 119,342 -- --
Decrease (increase)
in trade accounts
receivable......... (74,638) 63,597 (189,448) 141,456 (5,711)
Increase in due from
related parties.... (6,512) (10,285) (39,486) -- --
Decrease (increase)
in due from
employees.......... -- -- (2,929) -- 6,098
Decrease (increase)
in inventories..... -- (20,661) 10,711 5,175 (19,422)
Decrease (increase)
in prepaid
expenses........... (29,858) 7,609 10,368 (262,315) (27,308)
Decrease (increase)
in receivables from
related parties.... (34,549) (297,009) (674,439) -- 377,292
Increase (decrease)
in accounts
payable............ 65,853 (49,744) 29,925 (15,789) 95,303
Increase (decrease)
in accrued payroll
and related costs.. 62,316 (58,732) 56,806 52,697 (63,731)
Increase (decrease)
in income taxes
payable............ (30,809) 75,650 284,476 (2,214) (9,300)
(Decrease) increase
in other accrued
expenses........... 6,130 (1,785) (2,195) -- 22,308
--------- --------- --------- -------- --------
Net cash provided
by operating
activities....... 338,641 652,181 692,474 42,352 372,925
--------- --------- --------- -------- --------
Cash flows from
investing activities:
Purchases of
property, plant and
equipment............ (700,708) (493,663) (472,715) (175,175) (311,832)
Purchase of Custom
Towing............... (200,000) -- -- -- --
--------- --------- --------- -------- --------
Net cash used in
investing
activities....... (900,708) (493,663) (472,715) (175,175) (311,832)
--------- --------- --------- -------- --------
Cash flows from
financing activities:
Proceeds from long-
term debt............ 424,979 -- -- 76,624 --
Principal payments on
long-term debt....... -- (104,014) (133,341) -- (19,366)
Proceeds from
borrowings under
lines of credit...... 150,000 120,000 -- -- --
--------- --------- --------- -------- --------
Net cash (used in)
provided by
financing
activities....... 574,979 15,986 (133,341) 76,624 (19,366)
--------- --------- --------- -------- --------
Net increase in cash... 12,912 174,504 86,418 (56,199) 41,727
Cash at beginning of
period................ (7,147) 5,765 180,269 258,181 266,687
--------- --------- --------- -------- --------
Cash at end of period.. $ 5,765 $ 180,269 $ 266,687 $201,982 $308,414
========= ========= ========= ======== ========
Supplemental disclosure
of cash flow
information:
Cash paid during the
year for:
Interest............ $ 258,554 $ 325,370 $ 253,242 $ 63,310 $ 62,063
========= ========= ========= ======== ========
Income taxes........ $ 58,439 $ 61,656 $ 37,160 $ 9,290 $ 11,889
========= ========= ========= ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-45
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1996, JANUARY 31, 1997 AND DECEMBER 31, 1997
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Smith-Christensen Enterprises, Inc. 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) Periods 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 revenue..................................................... $440,053
Cost of revenue................................................. 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 vehicles has been transferred. Expenses related
to the generation of revenue are recognized as incurred.
F-46
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(e) Inventories
Inventories consist of vehicles that will be offered for auction.
Inventories are stated at the lower of cost or market.
(f) Property, Plant and Equipment
Property, plant 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, Quality provides for depreciation of property and
equipment over the following estimated useful lives:
<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 other equipment.................................. 5 years
</TABLE>
(g) Fair Value of Financial Instruments
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, the fair value of Quality's financial
instruments approximates their carrying values.
(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) Use of Estimates
Management of Quality 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.
(j) 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 EXPENSES
Prepaid expenses consist of the following:
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 31, MARCH 31,
1997 1997 1998
----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Prepaid insurance..................... $28,010 $19,680 $45,988
Prepaid interest...................... 2,038 -- --
------- ------- -------
$30,048 $19,680 $45,988
======= ======= =======
</TABLE>
F-47
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 31, MARCH 31,
1997 1997 1998
----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Land................................. $ 600,000 $ 600,000 $ 600,000
Buildings............................ 156,225 156,225 156,225
Leasehold improvements............... 278,925 278,925 278,925
Transportation and towing equipment.. 2,109,893 2,481,396 2,736,468
Office equipment..................... 123,691 212,066 222,089
Machinery and other equipment........ 112,889 125,726 172,463
---------- ---------- ----------
Total.............................. 3,381,623 3,854,338 4,166,170
Less accumulated depreciation and
amortization........................ (728,380) (977,109) (1,000,747)
---------- ---------- ----------
$2,653,243 $2,877,229 $3,165,423
========== ========== ==========
</TABLE>
Depreciation and amortization of property, plant and equipment for the years
ended January 31, 1996 and 1997 and the twelve-month period ended December 31,
1997, totaled $140,910, $224,196, and $271,341, respectively.
(4) OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 31, MARCH 31,
1997 1997 1998
----------- ------------ -----------
(UNAUDITED)
<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
--------- --------- ---------
Total............................... 955,898 955,898 955,898
Less accumulated amortization......... (836,990) (856,993) (861,993)
--------- --------- ---------
$ 118,908 $ 98,905 $ 93,905
========= ========= =========
</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 and $20,003 for the years ended January 31, 1996 and 1997 and
the twelve-month period ended December 31, 1997.
F-48
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) INDEBTEDNESS
Quality's long-term debt consisted of the following:
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 31, MARCH 31,
1997 1997 1998
----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
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, ma-
turing between September 5, 1998
and June, 2001. Secured by vehi-
cles and equipment. .............. $ 428,678 $ 596,105 $ 667,913
Note payable to former owner, pay-
able in varied monthly install-
ments, including interest at 10%,
with a final lump sum payment of
$1,396,556, maturing March 1,
1999. Secured by land, building
and the stock of City Towing,
Inc. ............................. 1,682,529 1,562,530 1,522,484
Note payable to former owner, pay-
able in monthly installments of
$3,800, including interest at 9%,
maturing July 1, 2003. Secured by
land and building. ............... 226,489 202,485 195,357
Note payable to Navistar, payable
in monthly installments of $1,433,
including interest at 10.5%, ma-
turing May 4, 1999. Secured by
equipment. ....................... 35,444 22,540 18,666
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, respec-
tively. Secured by equipment. .... 240,964 158,685 135,102
Note payable to Navistar, payable
in monthly installments of $563,
including interest at 11.5%, ma-
turing August 28, 1997. Secured by
equipment. ....................... 3,796 -- --
Note payable to bank, payable in
monthly installments of $6,716,
including interest at 8%, maturing
July 1, 2000. Secured by equip-
ment. ............................ 245,316 187,529 170,986
---------- ---------- ----------
Total long-term debt............. 2,863,216 2,729,874 2,710,508
Less installments due within one
year.............................. (447,875) (541,836) (522.470)
---------- ---------- ----------
Long-term debt, excluding current
installments.................... $2,415,341 $2,188,038 $2,188,038
========== ========== ==========
</TABLE>
Annual maturities of long-term debt for the next five years and thereafter
are as follows:
<TABLE>
<S> <C>
1998............................................................ $ 541,836
1999............................................................ 1,771,119
2000............................................................ 264,155
2001............................................................ 81,521
2002............................................................ 40,849
Thereafter...................................................... 30,394
----------
$2,729,874
==========
</TABLE>
F-49
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) LEASES
Quality 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 stockholder of Quality. The lease is classified as an
operating lease. The agreement provides for monthly rental payments 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. Quality is responsible for all
operating costs related to the property.
Rent expense was $96,000 for the years ended January 31, 1996 and 1997 and
the twelve-month period ended December 31, 1997, respectively.
(7) INCOME TAXES
Income tax expense for the years ended January 31, 1997 and 1996 and the
twelve-month period ended December 31, 1997 consists of:
<TABLE>
<CAPTION>
TWELVE-MONTH
YEAR ENDED YEAR ENDED PERIOD ENDED
JANUARY 31, JANUARY 31, DECEMBER 31,
1996 1997 1997
----------- ----------- ------------
<S> <C> <C> <C>
Current:
Federal............................... $(47,338) $171,425 $321,636
Deferred.............................. 151,090 106,198 119,342
-------- -------- --------
$103,752 $277,623 $440,978
======== ======== ========
</TABLE>
The following table reconciles the expected tax expense at the Federal
statutory tax rate to the effective tax rate:
<TABLE>
<CAPTION>
TWELVE-MONTH
YEAR ENDED YEAR ENDED PERIOD ENDED
JANUARY 31, JANUARY 31, DECEMBER 31,
1996 1997 1997
----------- ----------- ------------
<S> <C> <C> <C>
Computed expected tax expense......... $ 32,726 $269,395 $429,536
Meals and entertainment............... 1,114 6,345 6,341
Non-deductible goodwill............... 5,101 5,101 5,101
Adjustment to prior years' taxes...... 64,811 -- --
Other................................. -- (3,218) --
-------- -------- --------
$103,752 $277,623 $440,978
======== ======== ========
</TABLE>
F-50
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities as of January 31, 1997 and the twelve-
month period ended December 31, 1997 are presented below:
<TABLE>
<CAPTION>
TWELVE-MONTH
PERIOD ENDED
JANUARY 31, DECEMBER 31,
1997 1997
----------- ------------
<S> <C> <C>
Deferred tax assets:
Covenant-not-to-compete........................ $ 2,031 $ 3,164
Contract/intangible............................ 13,733 --
-------- --------
Total gross deferred tax assets.............. 15,764 3,164
Less valuation allowance..................... -- --
-------- --------
15,764 3,164
Deferred tax liabilities:
Property and equipment, due to differences in
depreciation lives and methods................ 209,143 315,885
-------- --------
Net deferred tax liability..................... $193,379 $312,721
======== ========
</TABLE>
At January 31, 1996, the net deferred tax liability was $299,577 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 Quality 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) NON-CASH TRANSACTIONS
During 1995, Quality financed $331,223 of certain transportation and towing
equipment in connection with the purchase of Custom Towing through a lending
institution.
(9) 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 and $881,884 as of January 31, 1997 and December 31, 1997,
respectively.
Quality leases land and building from an affiliated entity owned by the
owners of the stockholder of Quality (see note 6).
(10) 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.
F-51
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) SUBSEQUENT EVENT
(a) During February 1998, the stockholder entered into a definitive
agreement to sell Quality net of land, buildings and leasehold improvements
and the note payable to the former owner of City Towing, in the amount of
$202,485 at December 31, 1997, to United Road Services, Inc. The transaction,
effected through a combination of cash and common stock of United Road
Services, Inc., is contingent and effective upon the initial public offering
of the common stock of United Road Services, Inc. Additionally, proceeds of
the initial public offering will be used to pay the note payable to former
owner of $1,562,530 at December 31, 1997. The anticipated selling price of
Quality exceeds its net assets as of December 31, 1997.
(b) Concurrently with the acquisition, United Road Services, Inc. will enter
into agreements with the stockholder to lease land and buildings used in
Quality's operations for negotiated amounts and terms.
(c) On May 6, 1998, United Road Services, Inc. effectively acquired Quality
as a result of the successful completion of the initial public offering of the
common stock of United Road Services, Inc.
F-52
<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 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. 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 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
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Albany, New York
January 16, 1998,
except as to note 8(c),
which is as of May 6, 1998
F-53
<PAGE>
CARON AUTO WORKS, INC. AND
CARON AUTO BROKERS, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------- MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash..................................... $ 29,370 $ 108,163 $ 29,676
Trade accounts receivable, net of
allowance for doubtful accounts of
$26,793 in 1996 and $45,079 in 1997..... 633,736 746,332 1,044,089
Accounts receivable from related parties
(note 7)................................ 98,056 49,754 496,589
Accounts receivable from employees....... -- 6,500 13,000
Notes receivable......................... -- 44,539 153,561
Inventories.............................. 24,185 30,040 91,520
Prepaid and other current assets......... 38,685 5,142 175,429
---------- ---------- ----------
Total current assets................... 824,032 990,470 2,003,864
Property and equipment, net (notes 2, 3 and
4)........................................ 1,241,097 2,278,962 3,309,753
Other assets............................... 2,500 22,736 66,780
---------- ---------- ----------
Total assets........................... $2,067,629 $3,292,168 5,380,397
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt
(note 3)................................ $ 83,297 $ 263,093 $ 549,176
Current installments of obligations under
capital lease (note 4).................. 181,272 177,932 233,205
Borrowings under lines of credit (note
3)...................................... 18,839 225,000 250,000
Payable to related parties (note 7)...... 185,920 9,500 --
Accounts payable......................... 130,282 332,544 815,157
Accrued payroll and related costs........ 16,058 40,870 199,961
Income taxes payable (note 5)............ 101,128 92,447 7,950
Other accrued liabilities................ 24,021 48,277 17,458
---------- ---------- ----------
Total current liabilities.............. 740,817 1,189,663 2,072,907
Long-term liabilities:
Long-term debt, excluding current
installments (note 3)................... 56,982 1,010,856 2,003,282
Obligations under capital lease,
excluding current installments (note 4). 428,862 437,789 662,669
Deferred income taxes (note 5)........... 160,342 54,019 54,019
---------- ---------- ----------
Total liabilities...................... 1,387,003 2,692,327 4,792,877
---------- ---------- ----------
Stockholders' equity:
Common stock, $10 par value.
Authorized 10,000 shares; issued and
outstanding 200 shares in 1996 and 1997. 2,000 2,000 2,000
Additional paid-in capital............... 10,225 10,225 10,225
Retained earnings........................ 698,401 617,616 605,295
Less treasury stock, 3,000 common shares
in 1996 and 1997, at cost............... (30,000) (30,000) (30,000)
---------- ---------- ----------
Total stockholders' equity............. 680,626 599,841 587,520
---------- ---------- ----------
Total liabilities and stockholders'
equity................................ $2,067,629 $3,292,168 $5,380,397
========== ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-54
<PAGE>
CARON AUTO WORKS, INC. AND
CARON AUTO BROKERS, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX-MONTHS
YEARS ENDED SEPTEMBER 30 ENDED MARCH 31
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue............. $4,624,155 $5,575,257 $6,626,850 $3,565,268 $4,016,293
Cost of revenue......... 4,044,834 5,083,883 6,303,546 3,278,560 3,354,742
---------- ---------- ---------- ---------- ----------
Gross profit......... 579,321 491,374 323,304 286,708 661,551
Selling, general and
administrative
expenses............... 238,006 237,943 511,510 380,692 611,988
---------- ---------- ---------- ---------- ----------
Income (loss) from
operations.......... 341,315 253,431 (188,206) (93,984) 49,563
---------- ---------- ---------- ---------- ----------
Other income (expense):
Interest expense....... (77,693) (108,069) (141,000) (52,060) (131,207)
Interest income........ 810 5,706 8,360 -- --
Gain on sale of
assets................ 7,457 16,985 114,966 3,263 54,534
Other.................. 25,570 22,526 29,460 10,693 8,442
---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes........ 297,459 190,579 (176,420) (132,088) (18,668)
Income tax expense
(benefit) (note 5)..... 103,020 61,838 (95,635) (44,910) (6,347)
---------- ---------- ---------- ---------- ----------
Net income (loss).... $ 194,439 $ 128,741 $ (80,785) $ (87,178) $ (12,321)
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-55
<PAGE>
CARON AUTO WORKS, INC. AND
CARON AUTO BROKERS, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<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--Six-months
ended March 31, 1998
(unaudited)............... -- -- (12,321) -- (12,321)
------ ------- -------- -------- --------
Balance of March 31, 1998
(unaudited)............... $2,000 $10,225 $605,295 $(30,000) $587,520
====== ======= ======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-56
<PAGE>
CARON AUTO WORKS, INC. AND
CARON AUTO BROKERS, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX-MONTHS
YEARS ENDED SEPTEMBER 30 ENDED MARCH 31
------------------------------- ---------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)....... $ 194,437 $ 128,741 $ (80,785) $ (87,178) $ (12,321)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization......... 158,790 196,937 213,290 84,186 98,113
Deferred income taxes. 41,924 18,467 (106,323) -- --
Gain on sale of
assets............... (7,457) (16,985) (114,966) (3,263) 54,534
Increase in trade
accounts receivable.. (63,618) (119,278) (112,596) (135,102) (297,757)
Decrease (increase) in
receivables from
related parties...... (12,056) (66,885) 48,302 4,967 (446,835)
Increase in accounts
receivable from
employees............ -- -- (6,500) -- (6,500)
(Increase) decrease in
inventories.......... 4,705 (23,766) (5,855) (9,235) (61,480)
Decrease (increase) in
prepaid expenses..... 4,758 (19,644) 33,543 (104,759) (172,187)
(Increase) decrease in
other assets......... 191 -- (20,236) -- (44,044)
Decrease in amounts
payable to related
parties.............. (10,702) (22,889) (176,420) 14,947 (9,500)
Increase (decrease) in
accounts payable..... (44,731) 16,036 202,262 161,676 482,613
Increase (decrease) in
accrued payroll and
related costs........ (119,686) (1,670) 24,812 24,859 159,091
Increase in other
accrued liabilities.. 447 86,401 15,575 (72,439) (115,316)
--------- --------- --------- --------- ----------
Net cash provided by
(used in) operating
activities......... 147,002 175,465 (85,897) (121,341) (371,589)
--------- --------- --------- --------- ----------
Cash flows from investing
activities:
Purchases of property
and equipment.......... (142,383) (54,909) (333,277) (137,328) (1,261,847)
Proceeds from sale of
assets................. 123,913 56,011 341,196 156,636 80,309
Increase in notes
receivable............. -- -- (44,539) (189,157) (109,022)
--------- --------- --------- --------- ----------
Net cash provided by
(used in) investing
activities......... (18,470) 1,102 (36,620) (169,849) (1,290,560)
--------- --------- --------- --------- ----------
Cash flows from financing
activities:
Proceeds from long-term
debt................... 100,000 70,345 456,500 456,500 1,835,267
Principal payments on
long-term debt and
capital leases......... (174,880) (300,175) (461,351) (174,890) (276,605)
Borrowings under line
of credit, net......... (35,000) 18,839 206,161 51,161 25,000
--------- --------- --------- --------- ----------
Net cash provided by
(used in) financing
activities......... (109,880) (210,991) 201,310 332,771 1,583,662
--------- --------- --------- --------- ----------
Net increase (decrease)
in cash................. 18,652 (34,424) 78,793 41,581 (78,487)
Cash at beginning of
year.................... 45,142 63,794 29,370 29,370 108,163
--------- --------- --------- --------- ----------
Cash at end of year...... $ 63,794 $ 29,370 $ 108,163 $ 70,951 $ 29,676
========= ========= ========= ========= ==========
Supplemental disclosure
of cash flow
information:
Cash paid during the
year for:
Interest.............. $ 124,505 $ 110,038 $ 143,639 $ 52,060 $ 131,207
========= ========= ========= ========= ==========
Income taxes.......... $ -- $ 61,096 $ 43,371 $ 44,910 $ 78,150
========= ========= ========= ========= ==========
</TABLE>
See accompanying notes to combined financial statements.
F-57
<PAGE>
CARON AUTO WORKS, INC. AND
CARON AUTO BROKERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1996 AND 1997
(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 55 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 and 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) 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.
F-58
<PAGE>
CARON AUTO WORKS, INC.
AND CARON AUTO BROKERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(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.
(i) 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 of the interim periods presented.
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------- MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Vehicles................................... $ 16,608 $ 42,258 $ 25,650
Office equipment........................... 75,590 112,455 149,391
Transportation and towing equipment........ 1,663,407 2,604,541 3,600,952
Leasehold improvements..................... 262,276 313,011 366,898
---------- ---------- ----------
Total.................................... 2,017,881 3,072,265 4,142,891
Less accumulated depreciation and
amortization.............................. (776,784) (793,303) (833,138)
---------- ---------- ----------
$1,241,097 $2,278,962 $3,309,753
========== ========== ==========
</TABLE>
Depreciation and amortization of property and equipment in 1995, 1996 and
1997 totaled $158,790, $196,937 and $213,290, 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
September 30, 1997). Total borrowings under this unsecured line of credit as
of September 30, 1996 and 1997 amounted to $18,839 and $225,000, respectively.
F-59
<PAGE>
CARON AUTO WORKS, INC.
AND CARON AUTO BROKERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Caron's long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------- MARCH 31,
1996 1997 1998
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
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 $ 29,333
Note payable to Savings Bank of Manchester,
payable in monthly principal payments of $2,500,
plus interest at prime plus 1% (9.5% at
September 30, 1997), maturing on August 26,
2002. Secured by a car and the personal
guarantee of the primary stockholder............ -- 147,500 132,500
Note payable to Savings Bank of Manchester,
payable in monthly installments of $692,
including interest at 8.25%, maturing on August
29, 2000. Secured by a car...................... -- 21,459 18,714
Note payable to unrelated individual, payable in
monthly installments of $580, including interest
at 12.5%, maturing on October 31, 2000.......... 22,364 17,947 14,124
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 Bank of South Windsor, payable in
monthly principal payments of $1,111, plus
interest at prime plus 1% (9.5% at September 30,
1997), maturing on April 18, 1999. Secured by
assets of Caron and the personal guarantee of
the primary stockholder......................... 34,444 21,111 14,444
Note payable to Bank of South Windsor, payable in
monthly installments of $8,904, including
interest at 9.25%, maturing on March 27, 2002.
Secured by twelve tractors and twelve trailers
and the personal guarantee of the primary
stockholder..................................... -- 390,878 355,615
Note payable to Peoples Bank, payable in monthly
principal payments of $1,786, plus interest at
prime plus 1.5% (10% at September 30, 1997),
maturing August 15, 2004. Secured by the assets
of Caron and the personal guarantee of the
primary stockholder and affiliated companies.... -- 148,214 137,498
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
stockholder..................................... 40,498 -- --
Note payable to Ford Motor Credit Company,
payable in monthly installments of $770,
including interest at 10%, maturing November 27,
1998. Secured by a truck........................ 24,979 17,924 15,524
Note payable to Ford Motor Credit Company,
payable in monthly installments of $959,
including interest at 8.5%. Secured by
equipment....................................... 16,150 -- --
Notes 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................ -- 474,416 426,239
Notes payable to Chase Manhattan Bank, payable in
monthly installments of $2,082 and $741
including interest at 9.0% and 8.5%, maturing in
2002. Secured by a tractor trailer and real
property........................................ -- -- 129,138
Notes payable to Green Tree Financial Servicing
Corporation, payable in monthly installments of
$10,649 including interest at 10.9% maturing
July 20, 2002. Secured by three trucks.......... -- -- 432,970
</TABLE>
F-60
<PAGE>
CARON AUTO WORKS, INC.
AND CARON AUTO BROKERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30
-------------------- MARCH 31,
1996 1997 1998
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to PACCAR Financial Corp,
payable in monthly installments of $7,199
and $3,049 including interest at 10.8%
maturing August 1, 2002. Secured by two
trucks..................................... $ -- $ -- $ 430,161
Note payable to Orix Credit Alliance, Inc.,
payable in monthly installments of $3,719,
including interest at 9.6% maturing
February 3, 2002. Secured by one trailer
and one tractor truck...................... -- -- 145,321
Note payable to Norwest Equipment Finance,
Inc., payable in monthly installments of
$3,398, including interest at 10.3%
maturing April 2, 2002. Secured by one
tractor, one trailer, and a car carrier.... -- -- 133,337
Note payable to Newcourt Financial Corp.,
payable in monthly installments of $3,320
including interest at 10.8% maturing July
23, 2002. Secured by one tractor and one
car hauler................................. -- -- 137,540
-------- ---------- ----------
Total long-term debt...................... 140,279 1,273,949 2,552,458
Less installments due within one year....... (83,297) (263,093) (549,176)
-------- ---------- ----------
Long-term debt, excluding current
installments............................. $ 56,982 $1,010,856 $2,003,282
======== ========== ==========
</TABLE>
The aggregate maturities of long-term debt for each of the five years
subsequent to September 30, 1997 are as follows:
<TABLE>
<S> <C>
1998.............................................................. $ 263,093
1999.............................................................. 279,925
2000.............................................................. 285,877
2001.............................................................. 259,616
2002.............................................................. 144,384
Thereafter........................................................ 41,054
----------
$1,273,949
==========
</TABLE>
(4) LEASES
Caron is the lessee for various transportation and towing equipment under
capital leases expiring in 2002.
Following is a summary of equipment held under the capital leases:
<TABLE>
<CAPTION>
SEPTEMBER 30
-------------------- MARCH 31,
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Transportation and towing equipment........... $ 885,356 $ 741,628 $856,719
Less accumulated amortization................. (186,143) (198,826) (218,000)
--------- --------- --------
$ 699,213 $ 542,802 $638,719
========= ========= ========
</TABLE>
Caron leases the building used for its operations on a month-to-month basis
from its primary stockholder. The lease is classified as an operating lease.
Caron is responsible for all operating costs related to the property. Rent
paid to the stockholder in 1995, 1996 and 1997 was $75,382, $77,181 and
$117,096, respectively.
Total rent expense for 1995, 1996 and 1997 was $84,382, $86,181 and
$126,096, respectively.
F-61
<PAGE>
CARON AUTO WORKS, INC.
AND CARON AUTO BROKERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum capital lease payments as of September 30, 1997 are:
<TABLE>
<S> <C>
Year Ending September 30,
1998............................................................ $ 236,171
1999............................................................ 208,828
2000............................................................ 178,665
2001............................................................ 93,094
2002............................................................ 5,644
---------
Total......................................................... 722,402
Less amount representing interest............................... (106,681)
---------
Present value of net minimum capital lease payments........... $ 615,721
=========
</TABLE>
(5) INCOME TAXES
Income tax expense (benefit) for the years ended September 30, 1995, 1996 and
1997 consists of:
<TABLE>
<CAPTION>
1995 1996 1997
-------- ------- ---------
<S> <C> <C> <C>
Current:
Federal........................................ $ 38,174 $26,900 $ 5,789
State.......................................... 22,922 16,471 4,899
-------- ------- ---------
61,096 43,371 10,688
Deferred......................................... 41,924 18,467 (106,323)
-------- ------- ---------
$103,020 $61,838 $ (95,635)
======== ======= =========
</TABLE>
The following table reconciles the expected tax expense at the Federal
statutory tax rate to the effective tax rate.
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Computed expected tax expense (benefit)....... $101,136 $ 64,797 $(59,983)
State income taxes, net of Federal benefit.... 15,129 10,871 3,233
Officer's life insurance...................... 427 -- --
Non-deductible meals and entertainment
expenses..................................... 512 998 1,647
Effect of graduated tax rates................. (16,262) (14,980) (34,847)
Other......................................... 2,078 152 (5,685)
-------- -------- --------
$103,020 $ 61,838 $(95,635)
======== ======== ========
</TABLE>
F-62
<PAGE>
CARON AUTO WORKS, INC.
AND CARON AUTO BROKERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities as of September 30, 1996 and 1997 are
presented below:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts............................. $ 10,091 $ 19,830
Net operating loss carryforwards.................... -- 186,261
--------- ---------
Total gross deferred tax asset.................... 10,091 206,091
Less valuation allowance.......................... -- --
--------- ---------
Net deferred tax asset............................ 10,091 206,091
Deferred tax liabilities:
Property and equipment, due to differences in
depreciation lives and methods..................... (170,133) (260,110)
--------- ---------
Net deferred tax liability........................ $(160,342) $ (54,019)
========= =========
</TABLE>
Caron had a net deferred tax liability of $141,875 at September 30, 1995.
The net operating loss carryforward of approximately $465,000 expires in 2017.
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.
(6) NON-CASH TRANSACTIONS
During 1997, Caron leased $1,144,108 of various transportation and towing
equipment through several lending institutions (see note 3).
(7) RELATED PARTY TRANSACTIONS
Caron is indebted to the primary stockholder under an unsecured note,
bearing interest at 7% per annum. The note, unpaid interest on the note, and
accrued bonus to the sole stockholder are included in payable to related
parties in the accompanying combined balance sheets.
Included in accounts receivable from related parties are amounts due from
two companies under the common control of Caron's primary stockholder. The
amounts receivable totaled $98,056, $49,757 and $496,589 as of September 30,
1996 and 1997 and March 31, 1998, respectively.
Caron leases two buildings located in East Hartford, Connecticut, from the
primary stockholder (see note 4).
(8) SUBSEQUENT EVENT
(a) During February 1998, the stockholders entered into a definitive
agreement to sell Caron to United Road Services, Inc. The transaction,
effected through a combination of cash and common stock of United Road
Services, Inc., is contingent and effective upon the initial public offering
of the common stock of United Road Services, Inc. The anticipated selling
price of Caron exceeds its net assets as of September 30 1997.
(b) Concurrently with the acquisition, United Road Services, Inc. will enter
into agreements with the stockholders to lease land and buildings used in
Caron's operations for negotiated amounts and terms.
(c) On May 6, 1998, United Road Services, Inc. effectively acquired Caron as
a result of the successful completion of the initial public offering of the
common stock of United Road Services, Inc.
F-63
<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 the
related statements of operations, stockholder's equity, and cash flows for the
years then ended. These financial statements are the responsibility of
Absolute'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% of Absolute's revenue is derived from one
customer, and all of Absolute's trade accounts receivable at December 31, 1997
are 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 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 28, 1998,
except as to note 7(b),
which is as of May 6, 1998
F-64
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------- MARCH 31,
1996 1997 1998
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash......................................... $ -- $ 10,935 $ 744,792
Trade accounts receivable (note 3)........... 268,818 593,679 107,156
Income taxes receivable (note 5)............. 9,731 55,324 --
Prepaid expenses............................. 23,613 30,587 27,156
-------- ---------- ----------
Total current assets....................... 302,162 690,525 879,104
Property and equipment, net (notes 2 and 3).... 265,934 306,153 423,604
Deferred income taxes (note 5)................. 6,436 31,331 31,331
-------- ---------- ----------
Total assets............................... $574,532 $1,028,009 $1,334,039
======== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current installments of long-term debt (note
3).......................................... $ 15,737 $ 16,218 $ 16,915
Borrowings under lines of credit (note 3).... -- 212,403 556,034
Book overdraft............................... 98,012 312,217 --
Accounts payable............................. 79,468 124,573 233,190
-------- ---------- ----------
Total current liabilities.................. 193,217 665,411 806,139
Long-term liabilities:
Long-term debt, excluding current
installments (note 3)....................... -- 83,782 78,006
-------- ---------- ----------
Total liabilities.......................... 193,217 749,193 884,145
-------- ---------- ----------
Stockholder's equity:
Common stock, $42.86 par value. Authorized,
issued and outstanding 1,000 shares in 1996
and 1997.................................... 42,860 42,860 42,860
Retained earnings............................ 338,455 235,956 407,034
-------- ---------- ----------
Total stockholder's equity................. 381,315 278,816 449,894
-------- ---------- ----------
Total liabilities and stockholder's equity. $574,532 $1,028,009 $1,334,039
======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-65
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED THREE-MONTHS
DECEMBER 31 ENDED MARCH 31
---------------------- ----------------------
1996 1997 1997 1998
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenue.................... $3,464,623 $4,779,901 $1,079,300 $1,409,417
Cost of revenue................ 2,756,327 3,766,564 734,684 1,054,974
---------- ---------- ---------- ----------
Gross profit............... 708,296 1,013,337 344,616 354,443
Selling, general and
administrative expenses....... 635,595 1,095,416 98,728 104,035
---------- ---------- ---------- ----------
Income (loss) from
operations................ 72,701 (82,079) 245,888 250,408
---------- ---------- ---------- ----------
Other income (expense):
Interest expense............. (1,440) (15,018) (1,763) (14,667)
Gain (loss) on sale of
assets...................... (2,842) 9,254 -- --
---------- ---------- ---------- ----------
Income (loss) before income
taxes..................... 68,419 (87,843) 244,125 235,741
Income tax expense (benefit)
(note 5)...................... (12,667) (24,095) 66,963 64,663
---------- ---------- ---------- ----------
Net income (loss).......... $ 81,086 $ (63,748) $ 177,162 $ 171,078
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-66
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, 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................... $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--three-months ended March 31, 1998
(unaudited)................................... -- 171,078 171,078
------- -------- --------
Balance at March 31, 1998 (unaudited).......... $42,860 $407,034 $449,894
======= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-67
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE-MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
------------------------ --------------------
1996 1997 1997 1998
----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)............. $ 81,086 $ (63,748) $ 177,162 $ 171,078
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization............... 110,327 127,960 30,728 51,812
Deferred income taxes....... (24,253) (24,895) -- --
Loss (gain) from sale of
property and equipment..... 2,842 (9,254) -- --
Decrease (increase) in trade
accounts receivable........ (75,514) (324,861) (112,420) 486,523
Decrease (increase) in
income taxes receivable.... 8,086 (45,593) 9,731 55,324
Decrease (increase) in
prepaid expenses........... 2,718 (6,974) 4,069 3,431
Increase (decrease) in
accounts payable........... 29,252 45,105 (1,230) 108,617
----------- ----------- --------- ---------
Net cash provided by (used
in) operating activities. 134,544 (302,260) 108,040 876,785
----------- ----------- --------- ---------
Cash flows from investing
activities:
Purchases of property and
equipment.................... (143,215) (192,675) (57,606) (169,263)
Proceeds from sale of
property and equipment....... 11,749 33,750 -- --
----------- ----------- --------- ---------
Net cash used in investing
activities............... (131,466) (158,925) (57,606) (169,263)
----------- ----------- --------- ---------
Cash flows from financing
activities:
Net increase in borrowings
under line of credit......... -- 212,403 -- 343,631
Increase (decrease) in book
overdraft.................... (20,890) 214,205 41,412 (312,217)
Proceeds from long-term debt.. 15,737 100,000 -- --
Principal payments on long
term debt.................... -- (15,737) (15,737) (5,079)
Stockholder distributions..... (5,001) (38,751) -- --
----------- ----------- --------- ---------
Net cash provided by (used
in) financing activities. (10,154) 472,120 25,675 26,335
----------- ----------- --------- ---------
Net (decrease) increase in
cash.......................... (7,076) 10,935 76,109 733,857
Cash at beginning of period.... 7,076 -- -- 10,935
----------- ----------- --------- ---------
Cash at end of period.......... $ -- $ 10,935 $ 76,109 $ 744,792
=========== =========== ========= =========
Supplemental disclosure of cash
flow information:
Cash paid during the year
for:
Interest.................... $ 1,439 $ 15,018 $ 1,763 $ 14,667
=========== =========== ========= =========
Income taxes................ $ 3,500 $ 46,393 $ 57,232 $ 9,339
=========== =========== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-68
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(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 a towing service.
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.
(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-69
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------- MARCH 31,
1996 1997 1998
--------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Transportation and towing equipment...... $ 920,210 $ 974,036 $1,143,299
Leasehold improvements................... 3,740 27,110 27,110
Furniture and fixtures................... 1,060 1,060 1,060
--------- ---------- ----------
Total.................................. 925,010 1,002,206 1,171,469
Less accumulated depreciation and
amortization............................ (659,076) (696,053) (747,865)
--------- ---------- ----------
$ 265,934 $ 306,153 $ 423,604
========= ========== ==========
</TABLE>
Depreciation and amortization of property and equipment in 1996 and 1997
totaled $110,327 and $127,960, respectively.
(3) INDEBTEDNESS
Absolute has a line of credit with a bank in the amount of $300,000, which
bears interest at the bank's prime rate plus 1% (9.5% at December 31, 1997).
This line of credit expires on May 1, 1998. Borrowings under this line of
credit are $212,403 at December 31, 1997 and are secured by accounts
receivable, inventory, and equipment. Additionally, in 1997, Absolute entered
into a 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% and are payable in 60 monthly installments beginning
December 10, 1998. The credit facility matures November, 1998. There were no
borrowings outstanding at December 31, 1997.
Absolute's long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------ MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<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 $ 94,921
Less installments due within one year...... (15,737) (16,218) (16,915)
-------- -------- --------
Long-term debt, excluding current
installments............................ $ -- $ 83,782 $ 78,006
======== ======== ========
</TABLE>
Annual maturities of long-term debt for the next five years are as follows:
<TABLE>
<S> <C>
1998................................................................ $ 16,218
1999................................................................ 17,917
2000................................................................ 19,791
2001................................................................ 21,865
2002................................................................ 24,209
--------
$100,000
========
</TABLE>
(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 and 1997 was $24,442 and $18,800, respectively.
F-70
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1996 and 1997
consists of:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Current:
Federal................................................ $ 10,786 $ --
State.................................................. 800 800
-------- --------
11,586 800
Deferred................................................. (24,253) (24,895)
-------- --------
$(12,667) $(24,095)
======== ========
</TABLE>
The following table reconciles the expected tax expense at the Federal
statutory tax rate to the effective tax rate:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Computed expected tax expense........................... $ 23,262 $(29,867)
Effect of graduated tax rates........................... (10,018) 6,656
State income taxes, net of Federal benefit.............. 3,695 (1,626)
Los Angeles Revitalization Zone ("LARZ") credit......... (33,371) --
Non-deductible meals and entertainment expenses......... 3,765 742
-------- --------
$(12,667) $(24,095)
======== ========
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities as of December 31, 1996 and 1997 are
presented below:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Los Angeles Revitalization Zone credit.................. $12,927 $12,927
Net operating loss carryforward......................... -- 20,524
------- -------
Total gross deferred tax assets....................... 12,927 33,451
Less valuation allowance.............................. -- --
------- -------
12,927 33,451
Deferred tax liabilities:
Property and equipment, due to differences in
depreciation lives and methods......................... (6,491) (2,120)
------- -------
Net deferred tax asset................................ $ 6,436 $31,331
======= =======
</TABLE>
At December 31, 1995, the net deferred tax liability was $17,817. The net
operating loss carryforward of approximately $60,400 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
F-71
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 both 1996 and 1997, 99% 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
(a) During February 1998, the stockholder entered into a definitive
agreement to sell Absolute to United Road Services, Inc. The transaction,
effected through a combination of cash and common stock of United Road
Service, Inc., is contingent and effective upon the initial public offering of
the common stock of United Road Service, Inc. The anticipated selling price of
Absolute exceeds its net assets as of December 31, 1997. Certain of the assets
of Absolute, in the amount of $65,000, will be retained by the stockholder.
(b) On May 6, 1998, United Road Services, Inc. effectively acquired Absolute
as a result of the successful completion of the initial public offering of the
common stock of United Road Services, Inc.
F-72
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholder
ASC Transportation Services:
We have audited the accompanying consolidated balance sheet of ASC
Transportation Services and subsidiary (Auto Service Center d/b/a ASC Truck
Service) ("Auto Service") as of December 31, 1997, and the related
consolidated statements of operations, stockholder's deficit, and cash flows
for the year then ended. 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 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 ASC
Transportation Services and subsidiary (Auto Service Center d/b/a ASC Truck
Service) 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
Albany, New York
February 10, 1998,
except as to notes 7 and 8(c)
which are as of May 8, 1998 and
May 6, 1998, respectively
F-73
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................ $ 138,213 $ 132,644
Trade accounts receivable........................... 225,364 249,103
Due from employees.................................. 715 1,884
Accounts receivable--other.......................... 4,977 9,089
Inventories......................................... 18,167 9,213
Prepaid expenses.................................... 69,535 66,753
---------- ----------
Total current assets.............................. 456,971 468,686
Property and equipment, net (notes 2 and 4)........... 806,503 764,338
Other assets.......................................... 10,986 25,577
---------- ----------
Total assets...................................... $1,274,460 $1,258,601
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current installments of long-term debt (note 3)..... $ 20,275 $ 17,450
Current installments of obligations under capital
leases (note 4).................................... 247,845 249,390
Accounts payable.................................... 121,245 80,736
Accrued payroll and related costs................... 45,759 77,339
Income taxes payable (note 5)....................... 62,051 46,565
Other accrued liabilities........................... 16,961 31,152
---------- ----------
Total current liabilities......................... 514,136 502,632
Long-term liabilities:
Long-term debt, excluding current installments (note
3)................................................. 209,326 206,149
Obligations under capital leases, excluding current
installments (note 4).............................. 491,680 438,445
Deferred income taxes (note 5)...................... 82,965 82,965
---------- ----------
Total liabilities................................. 1,298,107 1,230,191
---------- ----------
Stockholders' 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) (28,915)
---------- ----------
Total stockholders' deficit....................... (23,647) 28,410
---------- ----------
Total liabilities and stockholders' deficit....... $1,274,460 $1,258,601
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-74
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE-MONTHS
ENDED MARCH 31
------------------
YEAR ENDED
DECEMBER 31, 1997 1997 1998
----------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net revenue.............................. $3,310,464 $743,768 $919,626
Cost of revenue.......................... 2,364,355 459,654 555,251
---------- -------- --------
Gross profit......................... 946,109 284,114 364,375
Selling, general, and administrative
expenses................................ 764,778 239,078 258,285
---------- -------- --------
Income from operations............... 181,331 45,036 106,090
---------- -------- --------
Other income (expense):
Interest expense....................... (71,947) (17,553) (17,936)
Gain (loss) on sale of assets.......... 18,670 10,500 (9,652)
Other.................................. 34,834 7,826 --
---------- -------- --------
Income before income taxes........... 162,888 45,809 78,502
Income tax expense (note 5).............. 49,096 13,808 26,445
---------- -------- --------
Net income........................... $ 113,792 $ 32,001 $ 52,057
========== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-75
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDER'S
STOCK CAPITAL DEFICIT EQUITY (DEFICIT)
------- ---------- ----------- ----------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996... $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)
Net income--three-months ended
March 31, 1998
(unaudited)................... -- -- 52,057 52,057
------- ------- --------- ---------
Balance at March 31, 1998 (un-
audited)...................... $24,000 $33,325 $ (28,915) $ 28,410
======= ======= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-76
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE-MONTHS
ENDED MARCH 31
YEAR ENDED ------------------
DECEMBER 31, 1997 1997 1998
----------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................. $ 113,792 $ 32,001 $ 52,057
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization........ 177,150 41,790 41,219
Deferred income taxes................ (6,786) -- --
Loss (gain) on sale of property and
equipment........................... (18,670) (10,500) 9,652
Decrease (increase) in trade accounts
receivable.......................... (88,313) 2,757 (23,739)
Increase in due from employees....... (1,376) (661) (1,169)
Increase in accounts receivable--
other............................... (1,366) (2,182) (4,112)
Decrease (increase) in inventories... (5,006) (1,987) 8,954
Decrease (increase) in prepaid
expenses and other assets........... 28,383 26,044 (11,809)
Decrease in accounts payable......... (11,932) (35,648) (40,509)
Increase in accrued payroll and
related costs....................... 17,020 27,495 31,580
Increase (decrease) in income taxes
payable............................. 38,517 8,479 (15,486)
Increase in other accrued
liabilities......................... 7,191 298 14,191
--------- -------- --------
Net cash provided by operating
activities........................ 248,604 87,886 60,829
--------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment.... (268,647) (11,561) (8,706)
Proceeds from sale of property and
equipment............................. 52,938 18,537 --
--------- -------- --------
Net cash used in investing activi-
ties.............................. (215,709) 6,976 (8,706)
--------- -------- --------
Cash flows from financing activities:
Proceeds from long-term debt........... 240,673 -- --
Principal payments on long-term debt
and capital leases.................... (211,134) (41,206) (57,692)
--------- -------- --------
Net cash provided by financing ac-
tivities.......................... 29,539 (41,206) (57,692)
--------- -------- --------
Net increase (decrease) in cash.......... 62,434 53,656 (5,569)
Cash at beginning of period.............. 75,779 75,779 138,213
--------- -------- --------
Cash at end of period.................... $ 138,213 $129,435 $132,644
========= ======== ========
Supplemental disclosure of cash flow in-
formation:
Cash paid during the year for:
Interest............................. $ 72,183 $ 17,553 $ 17,936
========= ======== ========
Income taxes......................... $ 17,660 $ 5,624 $ 41,931
========= ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-77
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(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-78
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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.
(i) 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 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Transportation and towing equipment................ $1,425,655 $1,414,374
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 1,644,486
Less accumulated depreciation and amortization..... (857,344) (880,148)
---------- ----------
$ 806,503 $ 764,338
========== ==========
</TABLE>
Depreciation and amortization of property and equipment in 1997 totaled
$177,150.
(3) INDEBTEDNESS
Auto Service's long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Note payable to bank, payable in monthly
installments of $1,042, including interest at
10.5%, maturing August 1998....................... $ 8,333 $ 5,207
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...................................... 221,268 218,392
-------- --------
Total long-term debt............................. 229,601 223,599
Less installments due within one year.............. (20,275) (17,450)
-------- --------
Long-term debt, excluding current installments... $209,326 $206,149
======== ========
</TABLE>
F-79
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Annual maturities of long-term debt for the next five years and thereafter
are as follows:
<TABLE>
<S> <C>
1998................................................................ $ 20,275
1999................................................................ 13,193
2000................................................................ 14,574
2001................................................................ 16,100
2002................................................................ 17,786
Thereafter.......................................................... 147,673
--------
$229,601
========
</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:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Transportation and towing equipment................... $1,136,544 $1,136,544
Other equipment....................................... 55,350 55,350
Furniture and fixtures................................ 18,240 18,240
---------- ----------
1,210,134 1,210,134
Less accumulated amortization......................... (519,886) (553,639)
---------- ----------
$ 690,248 $ 656,495
========== ==========
</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
is for an initial three-year term expiring in May 1998 with an option to renew
for five years. The lease was renewed on January 1997 and expires April 2003.
The vehicle lease has indefinite terms with a 30 day 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 1997 was $151,393, including $64,654 paid to the
stockholder.
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, 1997 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
<S> <C> <C>
1998..................................................... $310,859 106,800
1999..................................................... 253,159 106,800
2000..................................................... 132,122 106,800
2001..................................................... 85,626 106,800
2002..................................................... 68,505 98,500
Thereafter............................................... 28,795 19,000
-------- -------
Total.................................................. 879,066 544,700
=======
Less amount representing interest........................ (139,541)
--------
Present value of net minimum capital lease payments...... $739,525
========
</TABLE>
F-80
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) INCOME TAXES
Income tax expense for the year ended December 31, 1997 consists of:
<TABLE>
<S> <C>
Current:
Federal......................................................... $42,934
State........................................................... 12,948
-------
55,882
Deferred.......................................................... (6,786)
-------
$49,096
=======
</TABLE>
The following table reconciles the expected tax expense at the Federal
statutory tax rate to the effective tax rate.
<TABLE>
<S> <C>
Computed expected tax expense.................................... $ 55,382
State income taxes, net of Federal benefit....................... 8,546
Meals and entertainment.......................................... 1,372
Adjustment to prior years' taxes................................. (17,770)
Other............................................................ 1,566
--------
$ 49,096
========
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
liabilities as of December 31, 1997 are presented below:
<TABLE>
<S> <C>
Deferred tax liability:
Property and equipment, due to differences in depreciation lives
and methods.................................................... $82,965
-------
Net deferred tax liability.................................... $82,965
=======
</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) NON-CASH TRANSACTIONS
During 1997, Auto Service leased $66,561 of certain vehicles through lending
institutions.
F-81
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) CONCENTRATION OF BUSINESS RISKS
For 1997, 33% of Auto Service's revenues were derived from one customer,
Automobile Association of America (AAA). On May 8, 1998, the Automobile
Association of America (AAA) terminated its relationship with Auto Service.
The loss of this customer could significantly effect Auto Service's
performance.
(8) SUBSEQUENT EVENT
(a) During February 1998, the stockholder entered into a definitive
agreement to sell Auto Service to United Road Services, Inc. The transaction,
effected through a combination of cash and common stock of United Road
Service, Inc., is contingent and effective upon the initial public offering of
the common stock of United Road Service, Inc. The anticipated selling price of
Auto Service exceeds its net assets as of December 31, 1997.
(b) Concurrently with the acquisition, United Road Service, Inc. will enter
into agreements with the stockholder to lease land and buildings used in Auto
Service's operations for negotiated amounts and terms.
(c) On May 6, 1998, United Road Services, Inc. effectively acquired Auto
Service as a result of the successful completion of the initial public
offering of the common stock of United Road Services, Inc.
F-82
<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-83
<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-84
<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-85
<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-86
<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-87
<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-88
<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-89
<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-90
<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-91
<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-92
<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-93
<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-94
<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-95
<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-96
<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-97
<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-98
<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-99
<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-100
<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-101
<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-102
<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-103
<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-104
<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-105
<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-106
<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-107
<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-108
<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-109
<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-110
<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-111
<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-112
<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-113
<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-114
<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-115
<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-116
<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-117
<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-118
<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-119
<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-120
<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-121
<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-122
<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-123
<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-124
<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-125
<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-126
<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-127
<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-128
<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-129
<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-130
<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-131
<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-132
<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-133
<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-134
<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-135
<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-136
<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-137
<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-138
<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-139
<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-140
<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-141
<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-142
<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-143
<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-144
<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-145
<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-146
<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-147
<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-148
<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-149
<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-150
<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-151
<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-152
<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-153
<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-154
<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-155
<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-156
<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-157
<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-158
<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-159
<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-160
<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-161
<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-162
<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-163
<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-164
<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-165
<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-166
<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-167
<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-168
<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-169
<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-170
<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-171
<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-172
<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-173
<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-174
<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-175
<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-176
<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-177
<PAGE>
APPENDIX A
United Road Services, Inc.
$75,000,000
8% Convertible Subordinated
Debentures due 2008
-------------------------
Purchase Agreement
-------------------------
Dated as of November 19, 1998
<PAGE>
United Road Services, Inc.
8 Automation Lane
Albany, New York 12205
$75,000,000
8% Convertible Subordinated
Debentures due 2008
As of November 19, 1998
Charter URS LLC
575 Madison Avenue
New York, New York
Ladies and Gentlemen:
United Road Services, Inc., a Delaware corporation (the "Company"),
agrees with Charter URS LLC ("Charterhouse") as follows:
1. AUTHORIZATION OF DEBENTURES
The Company has authorized the issue and sale of up to $75,000,000
aggregate principal amount of its 8% Convertible Subordinated Debentures due
2008 (the "Debentures"). The Debentures shall be substantially in the form set
out in Exhibit 1 attached hereto, with such changes therefrom, if any, as may be
approved by Charterhouse and the Company. Certain capitalized terms used in this
Agreement are defined in Schedule A; references to a "Schedule" or an "Exhibit"
are, unless otherwise specified, to a Schedule or an Exhibit attached to this
Agreement.
2. SALE AND PURCHASE OF DEBENTURES
2.1. Subject to the terms and conditions of this Agreement, the Company
will issue and sell to Charterhouse, and Charterhouse will purchase from the
Company, at the First Closing (as defined in Section 4.1), an aggregate of
$43,500,000 in principal amount of the Debentures at 100% of the principal
amount thereof.
2.2. Subject to the terms and conditions of this Agreement, the Company
will issue and sell to Charterhouse, and Charterhouse will purchase from the
Company, at the Second Closing (as defined in Section 4.2), an aggregate of
$31,500,000 in principal amount of the Debentures at 100% of the principal
amount thereof.
<PAGE>
3. INTENTIONALLY OMITTED
4. CLOSINGS
4.1. FIRST CLOSING
4.1.1 The sale and purchase of an aggregate of $43,500,000 in principal
amount of the Debentures to be purchased by Charterhouse shall occur at the
offices of Proskauer Rose LLP ("Proskauer"), 1585 Broadway, New York, New York,
10036, at 9:00 a.m., Eastern Standard Time, at a closing (the "First Closing")
on the twelfth Business Day following the execution of this Agreement, subject
to the satisfaction or waiver of the conditions set forth in Section 5.1 (the
"First Issue Date") or such other Business Day thereafter as may be agreed upon
by Charterhouse and the Company. At the First Closing, the Company will deliver
to Charterhouse the Debentures to be purchased by Charterhouse in the form of a
single Debenture (or such greater number of Debentures as Charterhouse may
request) dated the First Issue Date and registered in Charterhouse's name (or in
the name of Charterhouse's nominee), against delivery by Charterhouse to the
Company or its order of immediately available funds in the amount of the
purchase price therefor by wire transfer for the account of the Company to such
bank account as the Company shall have notified Charterhouse in writing.
(a) If at the First Closing the Company shall fail to tender such
Debentures to Charterhouse as provided above in this Section 4.1, or any of the
conditions specified in Section 5.1.1 shall not have been fulfilled to
Charterhouse's satisfaction, Charterhouse shall, at Charterhouse's election, be
relieved of all further obligations under this Agreement, without thereby
waiving any rights Charterhouse may have by reason of such failure or such
nonfulfillment.
(b) If at the First Closing Charterhouse shall fail to pay the purchase
price for the Debentures to the Company as provided above in this Section 4.1,
or any of the conditions specified in Section 5.1.2 shall not have been
fulfilled to the Company's satisfaction, the Company shall, at the Company's
election, be relieved of all further obligations under this Agreement (other
than as provided in Section 17.1), without thereby waiving any rights the
Company may have by reason of such failure or such nonfulfillment.
4.2. THE SECOND CLOSING
4.2.1 The sale and purchase of an aggregate of $31,500,000 in principal
amount of the Debentures to be purchased by Charterhouse shall occur at the
offices of Proskauer at 9:00 a.m., Eastern Standard Time, at a closing (the
"Second Closing") on the twelfth Business Day following the date of the Special
Meeting (as defined in Section 5.2.1) subject to the satisfaction or waiver of
the conditions set forth in Section 5.2 (the "Second Issue Date") or such other
Business Day thereafter as may be agreed upon by Charterhouse and the Company.
At the Second Closing, the Company will deliver to Charterhouse the Debentures
to be purchased by Charterhouse in the form of a single Debenture (or such
greater number of Debentures as Charterhouse may request) dated the Second Issue
Date and registered in Charterhouse's name
<PAGE>
(or in the name of Charterhouse's nominee), against delivery by Charterhouse to
the Company or its order of immediately available funds in the amount of the
purchase price therefor by wire transfer for the account of the Company to such
bank account as the Company shall have notified Charterhouse in writing.
(a) If at the Second Closing the Company shall fail to tender such
Debentures to Charterhouse as provided above in this Section 4.2, or any of the
conditions specified in Section 5.2.1 shall not have been fulfilled to
Charterhouse's satisfaction by March 31, 1999, Charterhouse shall, at
Charterhouse's election, be relieved of all further obligations with respect to
the purchase of the Debentures to be issued and sold at the Second Closing,
without thereby waiving any rights Charterhouse may have by reason of such
failure or such nonfulfillment.
(b) If at the Second Closing Charterhouse shall fail to pay such
purchase price for the Debentures to the Company as provided above in this
Section 4.2, or any of the conditions specified in Section 5.2.2 shall not have
been fulfilled to the Company's satisfaction by March 31, 1999, the Company
shall, at the Company's election, be relieved of all further obligations with
respect to the issuance of the Debentures to be issued at the Second Closing
without thereby waiving any rights the Company may have by reason of such
failure or such nonfulfillment.
5. CONDITIONS TO THE CLOSINGS
5.1. CONDITIONS TO FIRST CLOSING
5.1.1 Charterhouse's obligation to purchase and pay for the Debentures
to be sold to Charterhouse at the First Closing is subject to the fulfillment or
waiver, prior to or at the First Closing, of the following conditions:
(a) Representations and Warranties. The representations and
warranties of the Company in this Agreement and the Other Agreements which are
qualified as to materiality shall be true and correct, and all other
representations and warranties of the Company in this Agreement and the Other
Agreements shall be true and correct, in all material respects, in each case (i)
when made and (ii) at the time of the First Closing (except where such
representations and warranties expressly relate to a specific date or time
(other than the date hereof) which need only be true and correct as of such date
or time).
(b) Performance; No Default. The Company shall have performed
and complied with all agreements and conditions contained in this Agreement
required to be performed or complied with by it prior to or at the First Closing
and after giving effect to the issue and sale of the Debentures no Default or
Event of Default shall have occurred and be continuing.
(c) Compliance Certificates.
(i) Officer's Certificate. The Company shall have
delivered to Charterhouse an Officer's Certificate, dated the date of the First
Closing, certifying that the conditions specified in Sections 5.1.1(a) and
5.1.1(b) have been fulfilled.
<PAGE>
(ii) Secretary's Certificate. The Company shall have
delivered to Charterhouse a certificate of the secretary of the Company
certifying as to the resolutions attached thereto and other corporate
proceedings relating to the authorization, execution and delivery of the
Debentures, this Agreement and the Other Agreements and the approval of the
issuance of the Debentures pursuant to this Agreement.
(d) Opinion of Counsel. Charterhouse shall have received an
opinion, dated the date of the First Closing, from McDermott, Will & Emery
("McDermott Will"), counsel to the Company, reasonably acceptable to Proskauer.
(e) Purchase Permitted by Applicable Law, etc. On the date of
the First Closing, Charterhouse's purchase of the Debentures shall not (i)
violate any applicable law or regulation (including, without limitation,
Regulation U, T, or X of the Board of Governors of the Federal Reserve System)
and (ii) subject Charterhouse to any tax, penalty or liability under or pursuant
to any applicable law or regulation.
(f) Bank Consent. The consent described in Section 5.1.2(e)
shall have been received by the Company.
(g) Other Agreements and Documents. All Other Agreements
(other than the Voting Agreements) shall be in full force and effect and the
Company and the other parties thereto shall have delivered to Charterhouse a
true, complete and executed copy of each Other Agreement (other than the Voting
Agreements). All documents and instruments incident to the transactions
contemplated by this Agreement and the Other Agreements shall be satisfactory to
Charterhouse and Proskauer, its counsel, and Charterhouse and Proskauer shall
have received all such counterpart originals or certified or other copies of
such documents (other than the Voting Agreements) as they may reasonably
request.
5.1.2 The Company's obligation to issue and sell the Debentures to be
sold to Charterhouse at the First Closing is subject to the fulfillment or
waiver, prior to or at the First Closing, of the following conditions:
(a) Representations and Warranties. The representations and
warranties of Charterhouse in this Agreement which are qualified as to
materiality shall be true and correct, and all other representations and
warranties of Charterhouse in this Agreement shall be true and correct, in all
material respects, in each case (i) when made and (ii) at the time of the First
Closing (except where such representations and warranties expressly relate to a
specific date or time (other than the date hereof) which need only be true and
correct as of such date or time).
(b) Performance. Charterhouse shall have performed and
complied with all agreements and conditions contained in this Agreement required
to be performed or complied with by it prior to or at the First Closing.
<PAGE>
(c) Officer's Certificate. Charterhouse shall have delivered
to the Company an Officer's Certificate, dated the date of the First Closing,
certifying that the conditions specified in Sections 5.1.2(a) and 5.1.2(b) have
been fulfilled.
(d) Other Documents. All documents and instruments incident to
the transactions contemplated by this Agreement shall be satisfactory to the
Company and McDermott Will, its counsel, and McDermott Will shall have received
all such counterpart originals or certified or other copies as they may
reasonably request.
(e) Bank Consent. The Company shall have received the consent
of its lenders under the Senior Credit Agreement (as defined in Section 11.7) to
the issuance and sale of $75,000,000 in aggregate principal amount of the
Debentures, and the execution and performance of this Agreement and the
transactions contemplated hereby.
(f) Opinion of Counsel. The Company shall have received an
opinion of its tax counsel, McDermott, Will, or if it is unable to obtain such
opinion on or prior to the First Closing, an opinion of tax counsel to
Charterhouse, to the effect that the interest on the Debentures should be
deductible.
5.2. CONDITIONS TO SECOND CLOSING
5.2.1 Charterhouse's obligation to purchase and pay for the Debentures
to be sold to Charterhouse at the Second Closing is subject to the fulfillment
or waiver, prior to or at the Second Closing, of the following conditions:
(a) Stockholder Approval. At a special meeting of the
stockholders of the Company entitled to vote (the "Special Meeting") the
stockholders shall have approved the issuance to Charterhouse pursuant to this
Agreement of securities convertible into 20% or more of the Common Stock of the
Company outstanding prior to such issuance (the "20% Issuance").
(b) Representations and Warranties. The representations and
warranties of the Company in this Agreement and the Other Agreements which are
qualified as to materiality shall be true and correct, and all other
representations and warranties of the Company in this Agreement and the Other
Agreements shall be true and correct, in all material respects, in each case (i)
when made and (ii) at the time of the Second Closing (except where such
representations and warranties expressly relate to a specific date or time
(other than the date hereof) which need only be true and correct as of such date
or time).
(c) Performance; No Default. The Company shall have performed
and complied with all agreements and conditions contained in this Agreement
required to be performed or complied with by it prior to or at the Second
Closing and after giving effect to the issue and sale of the Debentures no
Default or Event of Default shall have occurred and be continuing.
(d) Compliance Certificates.
<PAGE>
(i) Officer's Certificate. The Company shall have
delivered to Charterhouse an Officer's Certificate, dated the date of the Second
Closing, certifying that the conditions specified in Sections 5.2.1(b) and
5.2.1(c) have been fulfilled.
(ii) Secretary's Certificate. The Company shall have
delivered to Charterhouse a certificate of the secretary of the Company
certifying as to the resolutions attached thereto and other corporate
proceedings (including the approval of the 20% Issuance by the stockholders)
relating to the authorization, execution and delivery of the Debentures to be
purchased at the Second Closing and the approval of the issuance of such
Debentures pursuant to this Agreement.
(e) Opinion of Counsel. Charterhouse shall have received an
opinion, dated the date of the Second Closing, from McDermott Will, counsel to
the Company in the form of the opinion described in Section 5.1.1(d).
(f) The average of the daily closing prices of the Common
Stock for the 30 consecutive trading days ending the day before the Special
Meeting shall be not less than $10.00 per share. (See Section 10.5.1 to
determine the "closing price").
(g) Purchase Permitted by Applicable Law, etc. On the date of
the Second Closing, Charterhouse's purchase of the Debentures shall not (i)
violate any applicable law or regulation (including, without limitation,
Regulation U, T, or X of the Board of Governors of the Federal Reserve System)
and (ii) subject Charterhouse to any tax, penalty or liability under or pursuant
to any applicable law or regulation.
(h) Other Agreements and Documents. The Other Agreements shall
be in full force and effect. All documents and instruments incident to the
transactions contemplated by this Agreement and the Other Agreements shall be
satisfactory to Charterhouse and Proskauer, its counsel, and Charterhouse and
Proskauer shall have received all such counterpart originals or certified or
other copies as they may reasonably request.
5.2.2 The Company's obligation to issue and sell the Debentures to be
sold to Charterhouse at the Second Closing is subject to the fulfillment or
waiver, prior to or at the Second Closing, of the following conditions:
(a) Stockholder Approval. At the Special Meeting the
stockholders shall have approved the 20% Issuance.
(b) Representations and Warranties. The representations and
warranties of Charterhouse in this Agreement which are qualified as to
materiality shall be true and correct, and all other representations and
warranties of Charterhouse in this Agreement shall be true and correct, in all
material respects, in each case (i) when made and (ii) at the time of the Second
Closing (except where such representations and warranties expressly relate to a
specific date or time (other than the date hereof) which need only be true and
correct as of such date or time).
<PAGE>
(c) Performance; No Default. Charterhouse shall have performed
and complied with all agreements and conditions contained in this Agreement
required to be performed or complied with by it prior to or at the Second
Closing.
(d) Officer's Certificate. Charterhouse shall have delivered
to the Company an Officer's Certificate, dated the date of the Second Closing,
certifying that the conditions specified in Sections 5.2.2 (b) and 5.2.2(c) have
been fulfilled.
(e) Other Documents. All documents and instruments incident to
the transactions contemplated by this Agreement shall be satisfactory to the
Company and McDermott Will, its counsel, and the Company and McDermott Will
shall have received all such counterpart originals or certified or other copies
as they may reasonably request.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants as follows:
6.1. ORGANIZATION; POWER AND AUTHORITY
The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, and is duly qualified as
a foreign corporation and is in good standing in each jurisdiction in which such
qualification is required by law, other than those jurisdictions as to which the
failure to be so qualified or in good standing would not, individually or in the
aggregate, be expected to have a Material Adverse Effect. The Company has the
corporate power and authority (i) to own or hold under lease the properties it
purports to own or hold under lease and to transact the business it transacts
and proposes to transact except where the failure to have such corporate power
or authority would not, individually or in the aggregate, be expected to have a
Material Adverse Effect, (ii) to execute and deliver this Agreement, the Other
Agreements to which it is a party, and the Debentures and (iii) to perform the
provisions hereof and thereof.
6.2. AUTHORIZATION, ETC.
This Agreement, the Other Agreements to which the Company is a party
and the Debentures have been duly authorized by all necessary corporate action
on the part of the Company, and this Agreement constitutes, and upon execution
and delivery thereof, each Other Agreement to which the Company is a party and
the Debentures will constitute, a legal, valid and binding obligation of the
Company enforceable against the Company in accordance with its terms, except as
such enforceability may be limited by (i) applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights generally and (ii) general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
The Common Stock issuable upon conversion of the Debentures has been duly
authorized and reserved for issuance and upon issuance of the Common Stock upon
conversion of the Debentures pursuant to Section 10 hereof such Common Stock
will be validly issued, fully paid and nonassessable.
<PAGE>
6.3. CAPITALIZATION
6.3.1 As of the date hereof, the authorized capital stock of the
Company consists of (i) 35,000,000 shares of common stock, par value $.001 per
share (the "Common Stock"), of which 14,538,730 shares are issued and
outstanding and (ii) 5,000,000 shares of preferred stock, par value $.001 per
share (the "Company Preferred Stock"), of which no shares are issued and
outstanding.
6.3.2 The outstanding shares of Common Stock of the Company have been
duly authorized and are validly issued and outstanding, fully paid and
nonassessable, and subject to no preemptive rights (and were not issued in
violation of preemptive rights). As of the date hereof, except as disclosed in
the previous paragraph or as set forth in Schedule 6.3.2 (a) or Schedule 6.3.2
(b), there are no other shares of capital stock of the Company authorized and
reserved for issuance and the Company does not have any commitment to authorize,
issue or sell any of its capital stock or securities convertible into or
exchangeable for its capital stock. The number of shares of Common Stock which
are issuable and reserved for issuance upon exercise of stock options or
warrants of the Company as of the date hereof (and the exercise price thereof)
are disclosed on Schedule 6.3.2 (b). The Company has no outstanding securities
convertible into capital stock of the Company. Schedule 6.3.2 (c) lists all
stock option plans of the Company.
6.4. ORGANIZATION AND OWNERSHIP OF SHARES OF SUBSIDIARIES
6.4.1 The Company has disclosed in Schedule 6.4.1 (a) a list of all of
its Subsidiaries together with the jurisdiction of organization of each such
Subsidiary. All of the outstanding shares of capital stock or similar equity
interests of each Subsidiary of the Company have been validly issued, are fully
paid and nonassessable and are owned by the Company or another Subsidiary free
and clear of any Lien, except for Liens on certain Subsidiaries' shares as set
forth on Schedule 6.4.1 (b). The Company owns no equity interests in any other
Person other than the Subsidiaries listed on Schedule 6.4.1(a).
6.4.2 Each Subsidiary of the Company is a corporation or other legal
entity duly organized, validly existing and in good standing under the laws of
its jurisdiction of organization, and is duly qualified as a foreign corporation
or other legal entity and is in good standing in each jurisdiction in which such
qualification is required by law, other than those jurisdictions as to which the
failure to be so qualified or in good standing would not, individually or in the
aggregate, be expected to have a Material Adverse Effect. Each such Subsidiary
has the corporate or other power and authority to own or hold under lease the
properties it purports to own or hold under lease and to transact the business
it transacts and proposes to transact except where the failure to have such
power or authority would not, individually or in the aggregate, be expected to
have a Material Adverse Effect.
<PAGE>
6.5. FILED DOCUMENTS AND FINANCIAL STATEMENTS
6.5.1 Each of the documents filed by the Company with the SEC complied
when filed in all material respects with all of the requirements of the
Securities Act and the Exchange Act, as applicable, and did not contain any
untrue statement of a material fact or omit to state any material fact required
to be contained therein or necessary in order to make the statements contained
therein, in light of the circumstances under which they were made, not
misleading. Any financial statements (excluding proforma financial statements)
contained in such filings (including in each case the related schedules and
notes) fairly present in all material respects the combined financial position
of the Company and its Subsidiaries as of the respective dates and the combined
results of their operations and cash flows for the respective periods and have
been prepared in accordance with GAAP consistently applied throughout the
periods involved (subject, in the case of any interim financial statements, to
normal year-end adjustments).
6.5.2 The Company's unaudited interim financial statements, included in
the information listed in Schedule 6.5.2 and delivered to Charterhouse, were
prepared in all material respects on the same basis as the financial statements
contained in the documents filed with the SEC and fairly present the financial
position of the Company as of the dates referenced therein subject to normal
year-end adjustments.
6.5.3 The Company's financial projections included in the information
listed in Schedule 6.5.3 and delivered to Charterhouse were prepared in good
faith based on assumptions believed to have been reasonable at the time made and
were prepared in all material respects consistent with past accounting
practices; provided, however, that no representation or warranty is made with
respect to actual financial results which may vary from such projections.
6.6. COMPLIANCE WITH LAW, ETC.
The execution, delivery and performance by the Company of this
Agreement, the Other Agreements to which it is a party and the Debentures will
not (i) contravene, result in any breach of, or constitute a default under, or
result in the creation of any Lien in respect of any Property of the Company or
any Subsidiary under, any indenture, mortgage, deed of trust, loan, credit
agreement, corporate charter or bylaws, or any other agreement, lease or
instrument to which the Company or any Subsidiary is bound or by which the
Company or any Subsidiary or any of their respective properties may be bound or
affected, (ii) conflict with, or result in a breach of any of the terms,
conditions or provisions of any order, judgment, decree, or ruling of any court,
arbitrator or Governmental Authority applicable to the Company or any Subsidiary
or (iii) violate any provision of any statute or other rule or regulation of any
Governmental Authority applicable to the Company or any Subsidiary, which
violation would reasonably be expected to have a Material Adverse Effect.
<PAGE>
6.7. GOVERNMENTAL AUTHORIZATIONS, ETC.
No consent, approval or authorization of, or registration, filing or
declaration with, any Governmental Authority is required in connection with the
execution, delivery or performance by the Company of this Agreement, the Other
Agreements to which the Company is a party and the Debentures, except (i) the
filing of a proxy statement and related documents with the SEC in connection
with the Special Meeting and (ii) a filing pursuant to the HSR Act as may be
required in connection with the issuance or conversion of the Debentures.
6.8. LITIGATION; OBSERVANCE OF STATUTES AND ORDERS
6.8.1 Except as set forth in Schedule 6.8.1, there are no actions,
suits or proceeding pending or, to the knowledge of the Company, threatened
against or affecting the Company or any Subsidiary or any Property of the
Company or any Subsidiary in any court or before any arbitrator of any kind or
before or by any Governmental Authority which actions, suits or proceedings
would reasonably be expected to have a Material Adverse Effect.
6.8.2 Except as set forth in Schedule 6.8.2, neither the Company nor
any Subsidiary is in default under any order, judgment, decree or ruling of any
court, arbitrator or Governmental Authority or is in violation of any applicable
law, ordinance, rule or regulation (including without limitation Environmental
Laws) of any Governmental Authority which default or violation would reasonably
be expected to have a Material Adverse Effect.
6.9. TAXES
6.9.1 The Company has duly, timely and properly filed when due, all
national, local and other Tax Returns required to be filed by it with respect to
its sales, income, business or operations, except for such failures which would
not reasonably be expected to have a Material Adverse Effect, and such Tax
Returns are true, complete and accurate in all material respects. The Company
has duly paid all Taxes due from it as shown on such Tax Returns except where
the failure to pay such taxes would not reasonably be expected to have a
Material Adverse Effect.
6.9.2 All amounts required to be withheld by the Company from customers
or from or on behalf of employees for income, value added, "social security" and
unemployment insurance taxes have been collected or withheld and either paid to
the appropriate governmental agency or set aside and, to the extent required by
law, held in accounts for such purpose, except for such amounts, the failure of
which to withhold, collect, pay, set aside or hold in accounts for such purpose
would not reasonably be expected to have a Material Adverse Effect.
6.9.3 Except as set forth in Schedule 6.9, there are no pending or, to
the knowledge of the Company, threatened actions or proceedings by any
applicable taxing authority for the assess ment, collection, adjustment or
deficiency of Taxes against the Company which actions or proceedings would
reasonably be expected to have a Material Adverse Effect.
<PAGE>
6.10. CONTRACTS AND COMMITMENTS
6.10.1 Except as set forth in Schedule 6.10:
(a) The Company has no agreements, contracts, or commitments,
written or oral, which either individually or in conjunction with other
agreements, contracts or commitments with the same party and in connection with
the same matter, are Material;
(b) No Material contract or bid is anticipated to result in
any loss (other than losses covered by insurance) to the Company upon completion
or performance thereof, and no Material contract or bid is at prices Materially
above or below the usual prices of the Company for the same or similar products
or services;
(c) The Company has no outstanding Material contracts,
agreements or arrangements with any Affiliate or 5% or greater stockholder of
the Company;
(d) The Company has no collective bargaining or union
contracts or agreements;
(e) The Company is not in breach or default, and there is no
basis for any valid claim of breach or default by the Company, under any
Material contract, license agreement, commitment or restriction (whether written
or oral) to which the Company is a party or by which the Company or any of its
assets are bound and, to the knowledge of the Company, there exists no event or
condition which (whether with or without notice, lapse of time, or both) would
constitute a default by the Company thereunder, give rise to a right to
accelerate or terminate any provision thereof or give rise to any Lien on the
Property or assets of the Company, except for such breaches, defaults, rights to
acceleration or termination or Liens that would not reasonably be expected to
have a Material Adverse Effect; and to the knowledge of the Company, no other
party to any such contract, agreement or commitment is in breach or default
thereof which breach or default would not reasonably be expected to have a
Material Adverse Effect;
(f) The Company is not restricted by any agreement or other
commitment from carrying on its business as currently conducted anywhere in the
world;
(g) Each contract and agreement referred to in Schedule 6.10
is valid and in full force and effect, and accurate and complete copies thereof,
together with all amendments thereto, have been heretofore delivered to
Charterhouse.
6.11. ENVIRONMENTAL MATTERS
6.11.1 All of the operations of the Company comply, and have at all
times complied, in all material respects with all applicable Environmental Laws
and the Company is not subject to any Material Environmental Liabilities. The
Company has not engaged in, authorized, allowed or suffered any operations or
activities upon any of the Real Property for the purpose of or in any way
involving the handling, manufacture, treatment, processing, storage, use,
generation, release,
<PAGE>
discharge, emission, dumping or disposal of any Hazardous Substances at, on or
under the Real Property, except in material compliance with all applicable
Environmental Laws.
6.11.2 To the knowledge of the Company, none of the Real Property or
any assets of the Company contain any Hazardous Substances in, on, over, under
or at in concentrations or amounts which would Materially violate Environmental
Laws or impose material liability or obligations on the Company under the
Environmental Laws for any assessment, investigation, corrective action,
remediation or monitoring of Hazardous Substances.
6.11.3 To the knowledge of the Company, there are no conditions
existing at any Real Property or with respect to any other assets of the
Company, that require, or which with the giving of notice or the passage of time
or both may require monitoring, assessment, investigation, remedial or
corrective action, or removal or closure pursuant to the Environmental Laws
except for such monitoring, assessments, investigations, remedial or corrective
actions, removals or closures which would not reasonably be expected to have a
Material Adverse Effect.
6.12. ABSENCE OF CERTAIN CHANGES OR EVENTS
6.12.1 Except as set forth in Schedule 6.12, since September 30, 1998,
the Company has conducted its business in the usual, regular and ordinary
course. Without limiting the generality of the foregoing, except as set forth in
Schedule 6.12, since September 30, 1998 the Company has not:
(a) suffered any change that would have a Material Adverse
Effect on the Company;
(b) suffered any Material damage, destruction or casualty loss
(whether or not covered by insurance);
(c) entered into any Material agreement except agreements in
the ordinary course of business;
(d) made any Material change in its accounting methods,
principles or practices;
(e) authorized, declared, set aside or paid any dividend or
other distribution;
(f) redeemed, purchased or otherwise acquired any of its
shares of capital stock or authorized any stock split or recapitalization;
(g) borrowed or agreed to borrow any funds or incurred,
assumed or become subject to, whether directly or by way of guarantee or
otherwise, any liabilities or obligations which individually or in the aggregate
are Material;
<PAGE>
(h) paid, discharged or satisfied any Material claim,
liability or obligation other than the payment, discharge or satisfaction of
liabilities and obligations incurred in the ordinary course of business and
consistent with past practice;
(i) sold, transferred, or otherwise disposed of any of its
Material Properties or assets, except in the ordinary course of business and
consistent with past practice;
(j) disposed of, abandoned or permitted to lapse any rights to
the use of any Material intellectual property used in the conduct of its
business, or disposed of or disclosed, or permitted to be disclosed (except as
necessary in the conduct of its business) such Material intellectual property,
to any Person;
(k) made any individual capital expenditures or commitments in
excess of $150,000 for repairs or additions to property, plant, equipment or
tangible capital assets; or
(l) agreed, whether in writing or otherwise, to take any
action described in this Section 6.12.
6.13. ABSENCE OF UNDISCLOSED LIABILITIES
Except as set forth in Schedule 6.13, the Company has no Material
liabilities, losses or obligations of any nature, whether absolute, accrued,
contingent or otherwise, except for (i) liabilities included or reflected in the
financial statements of the Company for the nine months ended September 30, 1998
and adequately reserved against therein in accordance with GAAP, (ii)
liabilities disclosed in the Schedules hereto, (iii) liabilities incurred in the
ordinary course of business subsequent to September 30, 1998, (iv) liabilities
or performance obligations arising in the ordinary course of business (and not
as a result of a breach or default by the Company) out of or under agreements,
contracts, leases, arrangements or commitments to which the Company is a party
or (v) liabilities under this Agreement.
6.14. TITLE TO PROPERTY; LEASES
The Company and its Subsidiaries have good title to their respective
Material Properties, including all such Properties reflected in the Company's
unaudited balance sheet as of September 30, 1998 or purported to have been
acquired by the Company or any Subsidiary after said date (except as sold or
otherwise disposed of), in each case free and clear of Liens, except for those
defects in title and Liens that, individually or in the aggregate, would not
have a Material Adverse Effect or as otherwise set forth on Schedule 6.14.
6.15. LICENSES, PERMITS, ETC.
The Company and its Subsidiaries own or possess all licenses, permits,
franchises, authorizations, patents, copyrights, service marks, trademarks and
trade names, or rights thereto, that are necessary for the conduct of their
respective businesses, except where the failure to have
<PAGE>
such licenses, permits, franchises, authorizations, patents, copyrights, service
marks, trademarks and trade names, or rights thereto would not have a Material
Adverse Effect.
6.16. COMPLIANCE WITH ERISA
6.16.1 The Company, each Subsidiary and each ERISA Affiliate has
operated and administered each Plan in substantial compliance with all
applicable laws and in substantial compliance with its terms. None of the
Company, any Subsidiary or any ERISA Affiliate has incurred any Material
liability pursuant to ERISA (including, without limitation Title I or IV of
ERISA or the penalty or excise tax provisions of the Code), and, to the
knowledge of the Company, no event, transaction or condition has occurred or
exists (or is reasonably expected to occur or exist) that would reasonably be
expected to result in the incurrence of any such Material liability by the
Company, any Subsidiary or any ERISA Affiliate, or in the imposition of any Lien
on any of the rights, properties or assets of the Company or any ERISA
Affiliate, in either case pursuant to ERISA or the Code or to such penalty or
excise tax provisions or to section 401(a)(29) or 412 of the Code, other than
such liens or liabilities as would not be expected individually or in the
aggregate to have a Material Adverse Effect.
6.16.2 The present value of the benefit liabilities under each of the
Plans subject to Title IV of ERISA determined as of the end of each such Plan's
most recently ended plan year on the basis of the actuarial assumptions
specified for funding purposes in such Plan's most recent actuarial valuation
report, did not exceed the current value of the assets of such Plan allocable to
such benefit liabilities. The term "benefit liabilities" has the meaning
specified in section 4001 of ERISA and the terms "current value" and "present
value" have the meaning specified in section 3 of ERISA.
6.16.3 Each Plan intended to qualify under section 401(a) of the Code
is qualified and any trust maintained pursuant thereto is exempt from federal
income taxation under section 501 of the Code and, to the knowledge of the
Company, nothing has occurred or is expected to occur that has caused or could
cause the loss of such qualification or exemption except for such losses that
would not have a Material Adverse Effect. No claim, lawsuit, arbitration or
other action has been asserted, instituted, or, to the knowledge of the Company,
is threatened against any Plan (other than non-material routine claims for
benefits, and appeals of such claims), any trustee or fiduciaries thereof, the
Company, any Subsidiary, any ERISA Affiliate, any director, officer, or employee
thereof, or any of the assets of any trust of the Plans, except for those
claims, lawsuits, arbitrations or other actions that, individually or in the
aggregate, would not reasonably be expected to have a Material Adverse Effect.
No "prohibited transaction," within the meaning of section 4975 of the Code and
section 406 of ERISA, has occurred or is expected to occur with respect to the
Plan except for such transactions that would not have a Material Adverse Effect.
No Plan is under audit or investigation by the Internal Revenue Service, U.S.
Department of Labor, or any other governmental authority and no such completed
audit, if any, has resulted in the imposition of any Material tax or penalty.
No amounts payable under any Plan will fail to be deductible for
federal income tax purposes by virtue of section 280G or 162(m) of the Code,
except where any such failure,
<PAGE>
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect. None of the Company, any Subsidiary or any ERISA
Affiliate maintains, contributes to, or in any way provides for any benefits of
any kind whatsoever (other than under section 4980B of the Code, the Federal
Social Security Act, or a plan qualified under section 401(a) of the Code) to
any current or future retiree or terminee, except where the obligations with
respect to such benefits would not reasonably be expected, individually or in
the aggregate, to have a Material Adverse Effect. None of the Company, any
Subsidiary or any ERISA Affiliate has any Material unfunded liabilities pursuant
to any Plan that is not intended to be qualified under section 401(a) of the
Code.
6.17. MARGIN REGULATIONS
No part of the proceeds from the sale of the Debentures hereunder will
be used, directly or indirectly, for the purpose of buying or carrying any
margin stock within the meaning of Regulation U of the Board of Governors of the
Federal Reserve System (12 CFR 207), or for the purpose of buying or carrying or
trading in any securities under such circumstances as to involve the Company in
a violation of Regulation X of said Board (12 CFR 224) or to involve any broker
or dealer in a violation of Regulation Y of said Board (12 CFR 220).
6.18. EXISTING INDEBTEDNESS
Neither the Company nor any Subsidiary is in default and no waiver of
default is currently in effect, in the payment of any principal of or interest
on any Indebtedness of the Company or such Subsidiary in an aggregate principal
amount in excess of $1,000,000 and to the knowledge of the Company no event or
condition exists with respect to any such Indebtedness of the Company or any
Subsidiary that would permit (or that with notice or the lapse of time, or both,
would permit) one or more Persons to cause such Indebtedness to become due and
payable before its stated maturity or before its regularly scheduled dates of
payment.
6.19. STATUS UNDER CERTAIN STATUTES
Neither the Company nor any Subsidiary is subject to regulation under
the Investment Company Act of 1940, as amended, the Public Utility Holding
Company Act of 1935, as amended, the Interstate Commerce Act, as amended, or the
Federal Power Act, as amended.
6.20. FOREIGN CORRUPT PRACTICES ACT; NO UNLAWFUL PAYMENTS
The Company is not in violation of section 30A of the Exchange Act. No
director, officer, agent, employee, or any other Person acting on behalf the
Company has, directly or indirectly, used any corporate funds for unlawful
contributions, gifts, entertainment, or other unlawful expenses; made any
unlawful payment to government officials or employees or to political parties or
campaigns; established or maintained any unlawful fund of corporate monies or
other assets; made or received any bribe, or any unlawful rebate, payoff,
influence payment, kickback or other payment, to any governmental or
non-governmental Person, regardless of form,
<PAGE>
whether in money, property, or services, to obtain favorable treatment in
securing business or to obtain special concessions, or to pay for favorable
treatment for business or for special concessions secured, the result of which
would have a Material Adverse Effect.
6.21. PROXY STATEMENT AND REQUIRED VOTE
The Company Proxy Statement relating to the Special Meeting will not,
at the dates mailed to the holders of Common Stock of the Company and at the
time of the Special Meeting, contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The Company Proxy Statement will comply in all
material respects with the provisions of the Exchange Act and the rules and
regulations thereunder.
6.22. YEAR 2000 COMPLIANCE
The computer systems of the Company (including without limitation all
software, hardware, workstations and related components, automated devices,
embedded chips and other date sensitive equipment) are Year 2000 Compliant or
will be Year 2000 Compliant by August 31, 1999 except where the failure to be
Year 2000 Compliant would not have a Material Adverse Effect.
6.23. NO BROKERS OR FINDERS
Except as set forth on Schedule 6.23, no agent, broker, finder, or
investment or commercial banker or other Person or firm engaged by or acting on
behalf of the Company or any Subsidiary in connection with the negotiation,
execution or performance of this Agreement or the transactions contemplated by
this Agreement, is or will be entitled to any brokerage or finder's or similar
fee or other commission as a result of this Agreement or such transactions.
7. REPRESENTATIONS OF THE PURCHASER
7.1. AUTHORIZATION, ETC.
Charterhouse is a limited liability company duly organized, validly
existing and in good standing under the laws of the State of Delaware.
Charterhouse represents that this Agreement and the Other Agreements to which it
is or becomes a party, has been duly authorized by all necessary organizational
action on the part of it, and this Agreement and the Other Agreements to which
it is or becomes a party, constitutes, and upon execution and delivery by the
Company of this Agreement and the Other Agreements, will constitute, legal,
valid and binding obligations of it enforceable against it in accordance with
their terms, except as such enforceability may be limited by (i) applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and (ii) general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
<PAGE>
7.2. PURCHASE FOR INVESTMENT
Charterhouse represents that it is purchasing the Debentures for
investment purposes, for its own account or for one or more separate accounts
maintained by it and not with a view to the distribution thereof, provided that
the disposition of its property shall at all times be within its control.
Charterhouse acknowledges that the Debentures have not been registered under the
Securities Act and may be resold only if registered pursuant to the provisions
of the Securities Act or if an exemption from registration is available, except
under circumstances where neither such registration nor such an exemption is
required by law, and that the Company is not required to register the
Debentures. Charterhouse is an "Accredited Investor" as defined under Rule 501
of Regulation D promulgated under the Securities Act.
8. INFORMATION AS TO THE COMPANY
8.1. FINANCIAL AND BUSINESS INFORMATION
The Company shall deliver to each holder of a minimum of $5,000,000 in
principal amount of the Debentures:
(a) Monthly Statements -- promptly after delivery of such reports to
management:
(i) duplicate copies of preliminary flash financial reports
prepared monthly in the normal course of business for Company
management and/or board of directors with respect to the Company's
operations by region and business segment; and
(ii) duplicate copies of operational summaries prepared
monthly in the normal course of business for Company management and/or
board of directors with respect to the Company's regional and
geographical results of operations;
(b) Quarterly Statements -- within 45 days after the end of each
quarterly fiscal period in each fiscal year of the Company (other than the last
quarterly fiscal period of each such fiscal year), duplicate copies of:
(i) a consolidated balance sheet of the Company and its
Subsidiaries as at the end of such quarter; and
(ii) consolidated statements of income, changes in
stockholders' equity and cash flows of the Company and its
Subsidiaries, for such quarter and (in the case of the second and third
quarters) for the portion of the fiscal year ending with such quarter,
setting forth in each case in comparative form the figures for the
corresponding periods in the previous fiscal year (if applicable) all in
reasonable detail, prepared in accordance with GAAP applicable to quarterly
financial statements generally, and certified by a Senior Financial Officer as
fairly presenting, in all material respects, the financial position of the
companies being reported on and their results of operations and cash flows,
subject to changes resulting from year-end adjustments, provided that delivery
within the time period specified above of copies of the Company's Quarterly
Report on Form 10-Q prepared in compliance with the requirements therefor and
filed with the SEC shall be deemed to satisfy the requirements of this Section
8.1(b);
(c) Annual Statements -- within 90 days after the end of each fiscal
year of the Company, duplicate copies of:
(i) a consolidated balance sheet of the Company and its
Subsidiaries, as at the
end of such year, and
(ii) consolidated statements of income, changes in
stockholders' equity and cash flows of the Company and its
Subsidiaries, for such year,
setting forth in each case in comparative form the figures for the
previous fiscal year (if applicable) all in reasonable detail, prepared in
accordance with GAAP, and accompanied by an opinion thereon of independent
certified public accountants of recognized national standing, which opinion
shall state that such financial statements present fairly, in all material
respects, the financial position of the companies being reported upon and their
results of operations and cash flows in conformity with GAAP, and that the
examination of such accountants in connection with such financial statements has
been made in accordance with generally accepted auditing standards, and that
such audit provides a reasonable basis for such opinion, provided that the
Company's Annual Report on Form 10-K for such fiscal year (together with the
Company's Annual Report to stockholders, if any, prepared pursuant to Rule 14a-3
under the Exchange Act) prepared in accordance with the requirements therefor
and filed with the SEC shall be deemed to satisfy the requirements of this
Section 8.1(c);
(d) SEC and Other Reports -- promptly upon their becoming available,
one copy of (i) each financial statement, report, notice or proxy statement sent
by the Company or any Subsidiary to public securities holders generally, and
(ii) each regular or periodic report, each registration statement that shall
have become effective (without exhibits except as expressly requested by such
Holder), and each final prospectus and all amendments thereto filed by the
Company or any Subsidiary with the SEC;
(e) Notice of Default or Event of Default -- promptly, and in any event
within five days after a Responsible Officer becoming aware of the existence of
any Default or Event of Default, a written notice specifying the nature and
period of existence thereof and what action the Company is taking or proposes to
take with respect thereto;
(f) ERISA Matters -- promptly, and in any event within ten days after a
Responsible Officer knows of the occurrence of any of the following, a written
notice setting forth the nature thereof and the action, if any, that the
Company, any Subsidiary or an ERISA Affiliate proposes to take with respect
thereto:
<PAGE>
(i) with respect to any Plan, where any reportable event, as
defined in section 4043(c) of ERISA and the regulation thereunder, has
occurred for which notice thereof has not been waived pursuant to such
regulations as in effect on the date thereof; or
(ii) where any proceeding under section 4042 of ERISA has
occurred for the termination of, or the appointment of a trustee to
administer, any Plan, or the receipt by the Company, any Subsidiary or
any ERISA Affiliate of a notice from a Multiemployer Plan that such
action has been taken by the PBGC with respect to such Multiemployer
Plan; or
(iii) the incurrence of any Material liability by the Company,
any Subsidiary or any ERISA Affiliate pursuant to ERISA, including
Title I or IV of ERISA, or the penalty or excise tax provisions of the
Code relating to employee benefit plans, or the imposition of any
Material Lien on any of the rights, properties or assets of the Company
or any ERISA Affiliate pursuant to ERISA or the Code or such penalty or
excise tax provisions;
(g) Requested Information -- with reasonable promptness, such other
data and information relating to the business, operations, affairs, financial
condition, assets or properties of the Company or any of its Subsidiaries or
relating to the ability of the Company to perform its obligations under this
Agreement, the Other Agreements to which it is a party and the Debentures as
from time to time may be reasonably requested by any such Holder of Debentures.
8.2. INSPECTION
The Company shall permit the representatives of each Holder of a
minimum of $5,000,000 in principal amount of Debentures at the expense of the
Company to visit and inspect any of the offices or properties of the Company or
any Significant Subsidiary, to examine all their respective books of account,
records, reports and other papers, to make copies and extracts therefrom, and to
discuss their respective affairs, finances and accounts with their respective
officers and independent public accountants, during normal business hours and
with prior notice; provided, however, that each Holder agrees to conduct, and
the Company shall be required to pay the Holder's expenses, only for such
visits, inspections, examinations, copies and discussions as are reasonably
necessary to keep the Holder informed of the Company's affairs, finances and
accounts.
<PAGE>
9. OPTIONAL REDEMPTION OF THE DEBENTURES
9.1. OPTIONAL REDEMPTION
If at any time following the fifth anniversary of the First Issue Date,
the average of the closing prices of the Common Stock on the NASDAQ/NMS (or such
other national market system or exchange on which such shares are then listed,
traded or quoted) exceeds, for a period of 30 consecutive trading days, 150.0%
of the Conversion Price, the Company may, at any time, after such 30th
consecutive trading day give notice (in accordance with Section 9.2 below) to
the Holders that it wishes to redeem the outstanding Debentures in whole but not
in part at a redemption price equal to 100% of the principal amount of such
Debentures, together with accrued interest to the Redemption Date (as defined in
Section 9.2), subject to any Holder's right to first convert the Debentures into
Common Stock pursuant to Section 10.2 hereof.
9.2. ELECTION TO REDEEM; NOTICE TO HOLDERS
The Company shall give each Holder of Debentures written notice of an
optional redemption pursuant to Section 9.1 hereof not less than 30 days prior
to the date fixed for such redemption (the "Redemption Date"), specifying the
Redemption Date and the redemption price. During such 30-day period and on or
prior to the Business Day preceding the Redemption Date, a Holder of Debentures
may inform the Company of its intent to exercise the Holder's right to convert
the Debentures into Common Stock. If such notice is given, the conversion of the
Debentures will be carried out in accordance with the provisions of Section 10
of this Agreement.
9.3. DEBENTURES PAYABLE ON REDEMPTION DATE
Notice of redemption having been given, the Debentures shall, on the
Redemption Date, become due and payable at 100% of the principal amount of such
Debentures plus accrued interest to the Redemption Date, and from and after such
date (unless the Company shall default in the payment of such principal and
accrued interest) such Debentures shall cease to bear interest. The Company will
promptly cancel all Debentures redeemed by it and no Debentures may be issued in
substitution or exchange for any such Debenture.
10. OPTIONAL CONVERSION
10.1. INTENTIONALLY OMITTED
10.2. CONVERSION BY THE HOLDER
10.2.1 Subject to and upon compliance with the provisions of this
Section, at the option of the Holder thereof, any Debenture or any portion of
the principal amount thereof may be converted into fully paid and nonassessable
shares (calculated as to each conversion to the nearest 1/100th of a share) of
Common Stock, at the Conversion Price, determined as hereinafter provided, in
effect at the time of conversion. Such conversion right shall expire at the
close of
<PAGE>
business on the tenth anniversary of the First Issue Date. In case the
Debentures are called for redemption by the Company pursuant to Section 9, such
conversion right in respect of the Debentures shall expire at the close of
business on the Business Day immediately preceding the Redemption Date, unless
(i) notice of conversion under Section 10.2.2 has been given by the Holder prior
to such time, or (ii) the Company defaults in making the payment due upon
redemption.
10.2.2 The Holder of any Debenture wishing to exercise the conversion
privilege shall give the Company irrevocable written notice of such election at
least 5 Business Days prior to the Business Day designated in such notice as the
date of conversion (the "Conversion Date"). Such notice shall also specify the
principal amount of Debentures to be converted. The Holder of any Debenture to
be converted shall, on or before the Conversion Date, surrender such Debenture,
duly endorsed or assigned to the Company or in blank, at the principal executive
office of the Company. Except as provided in Section 10.3.2, no payment or
adjustment shall be made upon any conversion on account of any interest accrued
on the Debentures surrendered for conversion or on account of any dividends on
the Common Stock issued upon conversion.
10.2.3 In the case of any Debenture which is converted in part only,
upon such conversion the Company shall execute and deliver to the holder
thereof, at the expense of the Company, a new Debenture(s) of authorized
denominations in aggregate principal amount equal to the unconverted portion of
the principal amount of such Debenture.
10.3. CONVERSION PRICE
10.3.1 The price at which shares of Common Stock shall be delivered
upon conversion shall be initially $15.00 per share of Common Stock (the
"Conversion Price"). The Conversion Price shall be adjusted in certain instances
as provided in paragraphs 10.5.1 through 10.5.6 of Section 10.5.
10.3.2 In the case of any Debenture which is converted after any
Regular Record Date and on or prior to the next succeeding Interest Payment Date
(other than any Debenture whose maturity is prior to such Interest Payment
Date), interest that is due shall be prorated to the Conversion Date and payable
on such Conversion Date in the manner provided in the second paragraph of
Section 16.3 of this Agreement to the Person in whose name that Debenture is
registered at the close of business on such Regular Record Date.
10.3.3 Debentures shall be deemed to have been converted immediately
prior to the close of business on the Conversion Date, and at such time the
rights of the holders of such Debentures as holders shall cease, and the Person
or Persons entitled to receive the Common Stock issuable upon conversion shall
be treated for all purposes as the record holder or holders of such Common Stock
at such time. As promptly as practicable on or after the Conversion Date, the
Company shall issue and shall deliver at such office or agency a certificate or
certificates for the number of full shares of Common Stock issuable upon
conversion, together with payment in lieu of any fraction of a share, as
provided in Section 10.4.
<PAGE>
10.4. FRACTIONS OF SHARES
No fractional shares of Common Stock shall be issued upon conversion of
Debentures. If more than one Debenture shall be surrendered for conversion at
one time by the same holder, the number of full shares which shall be issuable
upon conversion thereof shall be computed on the basis of the aggregate
principal amount of the Debentures (or specified portions thereof) so converted.
Instead of any fractional share of Common Stock which would otherwise be
issuable upon conversion of any Debenture(s) (or specified portions thereof),
the Company shall pay a cash adjustment in respect of such fraction in an amount
equal to the same fraction of the market price per share of Common Stock at the
close of business on the Conversion Date.
10.5. ADJUSTMENT OF CONVERSION PRICE
10.5.1 SPECIAL DEFINITIONS. For purposes of this Section 10.5, the
following definitions shall apply:
(a) "Options" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire either Common Stock or Convertible
Securities (as defined below).
(b) "Convertible Securities" shall mean any evidence of
Indebtedness, shares (other than Common Stock) or other securities convertible
into or exchangeable for Common Stock.
(c) "Additional Common Stock" shall mean all Common Stock
issued (or, pursuant to Section 10.5.2, deemed to be issued) by the Company
after the First Issue Date, other than Common Stock issued or issuable:
(i) upon conversion of the Debentures;
(ii) to officers, directors or employees of, or
consultants to, the Company pursuant to the stock option plans listed
on Schedule 6.3.2 (c);
(iii) for which adjustment of the Conversion Price is
made pursuant to Section 10.5.7;
(iv) in an underwritten public offering registered
under the Securities Act; and
(v) as part of the consideration to be paid by the
Company for the acquisition of stock or assets of another entity.
10.5.2 In the event the Company at any time or from time to time after
the First Issue Date shall issue any Options or Convertible Securities with an
exercise price or conversion price that is less than both (i) the Conversion
Price then in effect and (ii) 90% of the current market price (as determined as
provided in Section 10.5.10) or shall fix a record date for the
<PAGE>
determination of holders of any class of securities then entitled to receive any
such Options or Convertible Securities, then the maximum number of shares of
Common Stock (as set forth in the instrument relating thereto without regard to
any provisions contained therein designed to protect against dilution) issuable
upon the exercise of such Options or, in the case of Convertible Securities and
Options therefor, the conversion or exchange of such Convertible Securities,
shall be deemed to be Additional Common Stock (subject to the limitations of
Section 10.5.1(c) hereof), issued as of the time of such issue or, in case such
a record date shall have been fixed, as of the close of business on such record
date, provided that in any such case in which shares of Additional Common Stock
are deemed to be issued, no further adjustments in the Conversion Price shall be
made upon the subsequent issue of Convertible Securities or Common Stock upon
the exercise of such Options or conversion or exchange of such Convertible
Securities.
10.5.3 In case the Company shall, at any time after the First Issue
Date, issue Additional Common Stock without consideration or for a consideration
per share less than 90% of the current market price (determined as provided in
Section 10.5.10) per share of the Common Stock on the date of such issue or be
deemed to have issued Additional Common Stock pursuant to Section 10.5.2, then
and in such event the then current Conversion Price shall be reduced,
concurrently with such issue, to a new Conversion Price (calculated to the
nearest cent) determined by multiplying the then current Conversion Price by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issue plus the number of shares of Common
Stock which the aggregate consideration received by the Company for the total
number of shares of Additional Common Stock so issued would purchase at the
current market price; and the denominator of which shall be the number of shares
of Common Stock outstanding immediately prior to such issue plus the number of
shares of such Additional Common Stock so issued (or deemed to have been
issued); and provided further that, for the purposes of this Section 10.5.3, all
shares of Common Stock issuable upon conversion of all outstanding Debentures
immediately prior to such issue of Additional Common Stock shall be deemed to be
outstanding.
10.5.4 For purposes of this Section 10.5, the consideration received by
the Company for the issue of any shares of Additional Common Stock shall be
computed as follows:
(a) Cash and Property. Such consideration shall:
(i) insofar as it consists of cash, be computed at
the aggregate amount of cash received by the Company, excluding amounts
paid or payable for accrued interest or accrued dividends;
(ii) insofar as it consists of property other than
cash, be computed at the fair market value thereof at the time of such
issue, as determined in good faith by the Company Board; and
(iii) in the event Additional Common Stock is issued
together with other shares or securities or other assets of the Company
for consideration which covers both, be the
<PAGE>
proportion of such consideration so received,
computed as provided in clauses (i) and (ii) above, as determined in
good faith by the Company Board.
(b) Options and Convertible Securities. The consideration per
share received by the Company for shares of Additional Common Stock deemed to
have been issued pursuant to Section 10.5.2, relating to Options and Convertible
Securities shall be determined by dividing:
(i) the total amount, if any, received or receivable
by the Company as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto,
without regard to any provision contained therein designed to protect
against dilution) payable to the Company upon the exercise of such
Options or the conversion or exchange of such Convertible Securities,
or in the case of Options for Convertible Securities, the exercise of
such Options for Convertible Securities and the conversion or exchange
of such Convertible Securities; by
(ii) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard to any
provision contained therein designed to protect against dilution)
issuable upon the exercise of such Options or conversion or exchange of
such Convertible Securities.
10.5.5 In case the Company shall, at any time after the First Issue
Date, pay or make an extraordinary dividend or other distribution payable in
shares of Common Stock on any class of capital stock of the Company, the
Conversion Price in effect at the opening of business on the day following the
date fixed for the determination of stockholders entitled to receive such
dividend or other distribution shall be reduced (calculated to the nearest cent)
by multiplying such Conversion Price by a fraction of which the numerator shall
be the number of shares of Common Stock outstanding at the close of business on
the date fixed for such determination and the denominator shall be the sum of
such number of shares and the total number of shares constituting such dividend
or other distribution, such reduction to become effective immediately after the
opening of business on the day following the date fixed for such determination.
For the purposes of this paragraph, the number of shares of Common Stock at any
time outstanding shall not include shares held in the treasury of the Company.
The Company will not pay any dividend or make any distribution on shares of
Common Stock held in the treasury of the Company.
10.5.6 In case the Company shall, at any time after the First Issue
Date, issue rights or warrants to all holders of its Common Stock entitling them
to subscribe for or purchase shares of Common Stock at a price per share less
than the current market price per share (determined as provided in Section
10.5.10) of the Common Stock on the date fixed for the determination of
stockholders entitled to receive such rights or warrants, the Conversion Price
in effect at the opening of business on the day following the date fixed for
such determination shall be reduced (calculated to the nearest cent) by
multiplying such Conversion Price by a fraction of which the numerator shall be
the number of shares of Common Stock outstanding at the close of business on the
date fixed for such determination plus the number of shares of Common Stock
which the aggregate of the offering price of the total number of shares of
Common Stock so offered for
<PAGE>
subscription or purchase would purchase at such current market price and the
denominator shall be the number of shares of Common Stock outstanding at the
close of business on the date fixed for such determination plus the number of
shares of Common Stock so offered for subscription or purchase, such reduction
to become effective immediately after the opening of business on the day
following the date fixed for such determination; provided, however, that if such
rights or warrants are only exercisable upon the occurrence of certain
triggering events, then the Conversion Price will not be adjusted until such
triggering events occur. For the purposes of this Section 10.5.6, the number of
shares of Common Stock at any time outstanding shall not include shares held in
the treasury of the Company. The Company will not issue any rights or warrants
in respect of shares of Common Stock held in the treasury of the Company. If any
such rights or warrants shall expire without having been exercised, the
Conversion Price shall thereupon be readjusted to eliminate the amount of its
adjustment due to their issuance.
10.5.7 In case outstanding shares of Common Stock shall, at any time
after the First Issue Date, be subdivided into a greater number of shares of
Common Stock, the Conversion Price in effect at the opening of business on the
day following the day upon which such subdivision becomes effective shall be
proportionately reduced (calculated to the nearest cent), and, conversely, in
case outstanding shares of Common Stock shall each be combined (calculated to
the nearest cent) into a smaller number of shares of Common Stock, the
Conversion Price in effect at the opening of business on the day following the
day upon which such combination becomes effective shall be proportionately
increased, such reduction or increase, as the case may be, to become effective
immediately after the opening of business on the day following the day upon
which such subdivision or combination becomes effective.
10.5.8 In case the Company shall, at any time after the First Issue
Date, by dividend or otherwise, distribute to all holders of its Common Stock
evidences of its indebtedness or assets or shares of capital stock other than
Common Stock (excluding any dividend or distribution paid in cash out of the
retained earnings of the Company or any dividend or distribution referred
above), the Conversion Price shall be adjusted (calculated to the nearest cent)
so that the same shall equal the price determined by multiplying the Conversion
Price in effect immediately prior to the close of business on the date fixed for
the determination of stockholders entitled to receive such distribution by a
fraction of which the numerator shall be the current market price per share
(determined as provided in Section 10.5.10) of the Common Stock on the date
fixed for such determination less the then fair market value of the portion of
the assets or evidences of indebtedness so distributed applicable to one share
of Common Stock and the denominator shall be such current market price per share
of the Common Stock, such adjustment to become effective immediately prior to
the opening of business on the day following the date fixed for the
determination of stockholders entitled to receive such distribution.
10.5.9 The reclassification of Common Stock into securities other than
Common Stock (other than any reclassification upon a consolidation or merger to
which Section 10.12 applies) shall be deemed to involve (i) a distribution of
such securities other than Common Stock to all holders of Common Stock (and the
effective date of such reclassification shall be deemed to be "the date fixed
for the determination of stockholders entitled to receive such distribution" and
"the date fixed for such determination" within the meaning of Section 10.5.8),
and (ii) a
<PAGE>
subdivision or combination, as the case may be, of the number of shares of
Common Stock outstanding immediately prior to such reclassification into the
number of shares of Common Stock outstanding immediately thereafter (and the
effective date of such reclassification shall be deemed to be "the day upon
which such subdivision becomes effective" or "the day upon which such
combination becomes effective", as the case may be, and "the day upon which such
subdivision or combination becomes effective" within the meaning of Section
10.5.7).
10.5.10 For the purpose of any computation under paragraphs 10.5.3,
10.5.6 and 10.5.8 of this Section, the current market price per share of Common
Stock on any date shall be deemed to be the average of the daily closing prices
for the 10 consecutive Business Days before the day in question. The closing
price for each day shall be the closing price for such day reported in The Wall
Street Journal or, if not so reported, the last reported sales price regular way
or, in case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices regular way, in either case on the
NASDAQ/NMS or, if the Common Stock is not listed or admitted to trading or
quoted on such National Market System, on the principal national securities
exchange on which the Common Stock is listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, the average
of the closing bid and asked prices in the over-the-counter market as furnished
by any NASD member firm selected from time to time by the Company for that
purpose.
10.6. NOTICE OF ADJUSTMENTS OF CONVERSION PRICE
Whenever the Conversion Price is adjusted as herein provided:
10.6.1 the Company shall compute the adjusted Conversion Price in
accordance with Section 10.5 and shall prepare a certificate signed by a Senior
Financial Officer of the Company setting forth the adjusted Conversion Price and
showing in reasonable detail the facts upon which such adjustment is based, and
such certificate shall forthwith be filed at each office or agency maintained
for the purpose of conversion of the Debentures pursuant to Section 15; and
10.6.2 a notice stating that the Conversion Price has been adjusted and
setting forth the adjusted Conversion Price shall forthwith be required, and as
soon as practicable after it is required, such notice shall be mailed by the
Company together with a copy of the certificate prepared in accordance with
Section 10.6.1 to all holders at their last addresses as they shall appear in
the Debenture Register.
10.7. NOTICE OF CERTAIN CORPORATE ACTION
In case:
10.7.1 the Company shall authorize the granting to the holders of its
Common Stock of rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any other rights (other than in connection with
the adoption of a shareholder rights plan); or
<PAGE>
10.7.2 of any reclassification of the Common Stock of the Company, or
of any consolidation or merger to which the Company is a party and for which
approval of any stockholders of the Company is required (other than issuances of
Common Stock which require stockholder approval pursuant to the rules of the
NASDAQ/NMS), or of the sale or transfer of all or substantially all of the
assets of the Company; or
10.7.3 of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; then the Company shall cause to be filed at each
office or agency maintained for the purpose of conversion of the Debentures
pursuant to Section 15, and shall cause to be mailed to all holders at their
last addresses as they shall appear in the Debenture Register, at least 20 days
(or 10 days in any case specified in clause 10.7.1 above) prior to the
applicable record or effective date hereinafter specified, a notice describing
such event in reasonable detail and stating (x) the date on which a record is to
be taken for the purpose of such dividend, distribution, rights or warrants, or,
if a record is not to be taken, the date as of which the holders of Common Stock
of record to be entitled to such dividend, distribution, rights or warrants are
to be determined, or (y) the date on which such reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation or winding up is expected to
become effective, and the date as of which it is expected that holders of Common
Stock of record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or winding up.
10.8. COMPANY TO RESERVE COMMON STOCK
The Company shall at all times reserve and keep available, free from
preemptive rights, out of its authorized but unissued Common Stock, for the
purpose of effecting the conversion of Debentures, the full number of shares of
Common Stock then issuable upon the conversion of all outstanding Debentures.
10.9. INTENTIONALLY OMITTED
10.10. COVENANT AS TO COMMON STOCK
The Company covenants that all shares of Common Stock which may be
issued upon conversion of Debentures will, upon issuance, be fully paid and
nonassessable and the Company will pay all taxes (including transfer and stamp),
liens and charges with respect to the issue thereof.
10.11. CANCELLATION OF CONVERTED DEBENTURES
All Debentures delivered for conversion shall be delivered to and
canceled by the Company.
<PAGE>
10.12. PROVISIONS IN CASE OF CONSOLIDATION, MERGER OR SALE OF ASSETS
In case of any consolidation of the Company with, or merger of the
Company into, any other Person, any merger of another Person into the Company
(other than a merger which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock of the Company)
or any sale or transfer of all or substantially all of the assets of the
Company, the Person formed by such consolidation or resulting from such merger
or which acquires such assets, as the case may be, shall execute and deliver a
supplement to this Agreement providing that the holder of each Debenture then
outstanding shall have the right thereafter, during the period that such
Debenture shall be convertible as specified in Section 10.2, to convert such
Debenture into the kind and amount of securities, cash and other property
receivable upon such consolidation, merger, sale or transfer by a holder of the
number of shares (including fractional shares) of Common Stock of the Company
into which such Debenture might have been converted immediately prior to such
consolidation, merger, sale or transfer. Such supplement to this Agreement shall
provide for adjustments which, for events subsequent to the effective date of
the event which triggers the requirement of such supplement to this Agreement,
shall be as nearly equivalent as may be practicable to the adjustments provided
for in this Section 10. The above provisions of this Section 10.12 shall
similarly apply to successive consolidations, mergers, sales or transfers.
11. AFFIRMATIVE COVENANTS
The Company covenants that so long as any of the Debentures are
outstanding:
11.1. COMPLIANCE WITH LAW
The Company will and will cause each of its Subsidiaries to comply with
all laws, ordinances or governmental rules or regulations to which each of them
is subject, including, without limitation, Environmental Laws, and will obtain
and maintain in effect all licenses, certificates, permits, franchises and other
governmental authorizations necessary to the ownership of their respective
properties or to the conduct of their respective businesses, in each case to the
extent necessary to ensure that non-compliance with such laws, ordinances or
governmental rules or regulations or failures to obtain or maintain in effect
such licenses, certificates, permits, franchises and other governmental
authorizations would not reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect.
11.2. INSURANCE
The Company will maintain, with reputable insurers, insurance with
respect to the properties and businesses of the Company and its subsidiaries
against such casualties and contingencies, of such types, on such terms and in
such amounts (including deductibles, co-insurance and self-insurance, if
adequate reserves are maintained with respect thereto) as is customary in the
industry.
<PAGE>
11.3. MAINTENANCE OF PROPERTIES
The Company will and will cause each of its Subsidiaries to maintain
and keep, or cause to be maintained and kept, their respective Material
Properties in good repair, working order and condition (other than ordinary wear
and tear), so that the business carried on in connection therewith may be
properly conducted at all times, provided that this Section shall not prevent
the Company or any Subsidiary from discontinuing the operation and the
maintenance of any of its Properties if such discontinuance is desirable in the
conduct of its business and the Company has concluded that such discontinuance
would not, individually or in the aggregate, have a Material Adverse Effect.
11.4. PAYMENT OF TAXES
The Company will and will cause each of its Subsidiaries to file all
income tax or similar tax returns required to be filed in any jurisdiction and
to pay and discharge all taxes shown to be due and payable on such returns and
all other taxes, assessments, governmental charges, or levies payable by any of
them, to the extent such taxes and assessments have become due and payable and
before they have become delinquent, provided that neither the Company nor any
Subsidiary need pay any such tax or assessment if (i) the amount, applicability
or validity thereof is contested by the Company or such Subsidiary on a timely
basis in good faith and in appropriate proceedings, and the Company or a
Subsidiary has established adequate reserves therefor in accordance with GAAP on
the books of the Company or such Subsidiary or (ii) the nonpayment of all such
taxes and assessments in the aggregate would not reasonably be expected to have
a Material Adverse Effect.
11.5. CORPORATE EXISTENCE, ETC.
Except as provided in Section 12.1, the Company will at all times
preserve and keep in full force and effect its corporate existence. Subject to
Section 12.1, the Company will at all times preserve and keep in full force and
effect the corporate existence of each of its Subsidiaries (unless merged or
consolidated into the Company or a Subsidiary) and all rights and franchises of
the Company and its Subsidiaries unless, in the good faith judgment of the
Company, the termination of or failure to preserve and keep in full force and
effect such corporate existence, right or franchise would not, individually or
in the aggregate, have a Material Adverse Effect.
11.6. REPURCHASE OF THE DEBENTURES AT THE OPTION OF THE HOLDER UPON
A CHANGE OF CONTROL
11.6.1 Upon the occurrence of a Change of Control, the Company shall
make an offer (subject only to conditions required by applicable law, if any) to
each Holder (the "Change of Control Offer"), to repurchase for cash all or any
part of such holder's Debentures on a date (the "Change of Control Purchase
Date") that is no later than 60 Business Days after the occurrence of such
Change of Control, at the Change of Control Purchase Price specified below, plus
accrued and unpaid interest to the Change of Control Purchase Date, and each
Holder shall have the right, at such Holder's option, to tender such Holder's
Debentures to the Company on the terms set
<PAGE>
forth in the Change of Control Offer. The Change of Control Offer shall be made
within 10 Business Days following a Change of Control, and shall remain open for
20 Business Days following its commencement (the "Change of Control Offer
Period"). Upon expiration of the Change of Control Offer Period, the Company
promptly, but, in any event, no later than 60 Business Days from the Change of
Control, shall purchase all Debentures properly tendered in response to the
Change of Control Offer and each Holder who has given a notice pursuant to this
Section 11.6.1 that such Holder desires to accept the Change of Control Offer
for all or part of such Holder's Debentures shall be obligated to tender and
sell such Debentures to the Company pursuant to such Offer.
11.6.2 As used herein, a "Change of Control" means:
(i) any merger or consolidation of the Company with or into
any Person or any sale, transfer or other conveyance, whether direct or
indirect, of all or substantially all of the assets of the Company on a
consolidated basis, in one transaction or a series of related
transactions, if, immediately after giving effect to such
transaction(s), any "person" or "group" (as such terms are used for
purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or
not applicable), is or becomes the beneficial owner (as such term is
used in Rule 13d-3 of the Exchange Act or any successor provision
thereto), directly or indirectly, of more than 50% of the total voting
power in the aggregate normally entitled to vote in the election of
directors, managers or trustees, as applicable, of the transferee(s) or
surviving entity or entities,
(ii) any "person" or "group," becomes the beneficial owner,
directly or indirectly, of more than 50% of the total voting power in
the aggregate of all classes of capital stock of the Company then
outstanding normally entitled to vote in elections of directors, or
(iii) during any period of 12 consecutive months after the
First Issue Date, individuals, together with successors selected by
such individuals, who at the beginning of any such 12-month period
constituted the Board of Directors of the Company cease for any reason
(other than a planned retirement) to constitute a majority of the Board
of Directors of the Company then in office, as applicable.
The "Change of Control Purchase Price" means
(i) 106.5% of the principal amount of the Debentures, if a
Change of Control occurs on or prior to the fifth anniversary of the
First Issue Date.
(ii) 103% of the principal amount of the Debentures, if a
Change of Control occurs after the fifth anniversary of the First Issue
Date.
11.6.3 On or before the Change of Control Purchase Date, the Company
will (i) accept for payment the Debentures or portions thereof properly tendered
pursuant to the Change of Control Offer, (ii) promptly pay the holders of
Debentures so accepted an amount equal to the
<PAGE>
Change of Control Purchase Price (together with accrued and unpaid interest, if
any), and (iii) authenticate and deliver to such holders a new Debenture equal
in principal amount to any unpurchased portion of the Debenture surrendered.
11.7. DEBENTURES SUBORDINATE TO SENIOR OBLIGATIONS
The Company covenants and agrees, and each holder of a Debenture, by
acceptance thereof, likewise covenants and agrees (i) that, to the extent and in
the manner set forth in this Section 11.7, the Company's Senior Obligations (as
defined in Section 11.7.4), if any, will be senior in right of payment to the
Debentures, and (ii) that the subordination provisions set forth in this Section
11.7 are, and are intended to be, an inducement and a consideration to each
holder of any Senior Obligation, whether such Senior Obligation was created or
acquired before or after the date of this Agreement, to acquire and continue to
hold, or to continue to hold, such Senior Obligation, and each holder of Senior
Obligations shall be deemed conclusively to have relied on such subordination
provisions in acquiring and continuing to hold, or continuing to hold, such
Senior Obligations.
11.7.1 As used herein, "senior in right of payment to the Debentures"
means that:
(i) no part of the Debt shall have any claim to the assets of
the Company on a parity with or prior to the claim of the Senior
Obligations; and
(ii) unless and until the Senior Obligations have been paid in
full, without the express prior written consent of all holders of such
Senior Obligations, no Holder will take, demand (including by means of
any legal action) or receive from the Company, and the Company will not
make, give or permit, directly or indirectly, by set-off, redemption,
purchase or in any other manner, any cash payment of or security for
the whole or any part of the Debt; provided, however, that (x) so long
as no default exists in the payment of any principal of or premium, if
any, or interest on any Senior Obligations, the Company may make, and
the Holders may receive, scheduled payments on account of the Debt in
accordance with the terms hereof, except if a default in the
performance or observance of any term or condition relating to any
Senior Obligations (other than a default in the payment of any
principal of or premium, if any, or interest on the Senior Obligations)
has occurred and is continuing that permits the holders of the Senior
Obligations to declare such Senior Obligations to be due and payable,
any Designated Holder of Senior Obligations (as defined in Section
11.7.6) may give notice (a "Senior Blockage Notice") to the Company
(provided, however, no more than one Senior Blockage Notice may be
given during any 360 consecutive day period) that until all Senior
Obligations are paid in full, no scheduled payments (whether in cash or
securities, but excluding additional Debentures) may be made by the
Company on account of the Debt during the period ("Senior Blockage
Period") commencing on the date of such Senior Blockage Notice and
ending on the earliest of: (A) 180 days after the date of such Senior
Blockage Notice; (B) the date such default is cured or waived; and (C)
the date that the holders of the Senior Obligations shall have given
notice to the Company of termination of the Senior Blockage Period, and
except when a default in the payment of
<PAGE>
any principal of, premium if any, or interest on the Senior Obligations
has occurred and is continuing or would result therefrom, (y) at any
time Debentures may be converted in accordance with the terms hereof,
and (z) upon the acceleration of the maturity of any Senior
Obligations, the Holders may accelerate the scheduled maturities of the
Debentures if and to the extent permitted hereby at such time but such
acceleration shall not give (i) any Holder any right to take, demand
(including by means of any legal action) or receive from the Company,
or (ii) the Company the right to make, give or permit, directly or
indirectly, by set-off, redemption, purchase or in any other manner,
any cash payment of or security for the whole or any part of the
Debentures unless and until the Senior Obligations have been paid in
full.
11.7.2 Any payment or distribution by the Company to which any Holder
would be entitled except for the provisions hereof (whether in cash or
securities, but excluding additional Debentures) shall be paid or delivered by
the Holder, or any receiver, trustee in bankruptcy, liquidating trustee,
disbursing agent or other Person making such payment or distribution, to the
holders of the Senior Obligations or their representative, ratably in accordance
with the amounts thereof, to the extent necessary to pay in full all Senior
Obligations, before any payment or distribution shall be made to any Holder.
11.7.3 The expressions "prior payment in full," "payment in full,"
"paid in full" and any other similar terms or phrases when used herein with
respect to the Senior Obligations shall mean the payment in full in cash of all
of the Senior Obligations; and the expression "any cash payment of or security
for the whole or any part of the Debt" and any other similar terms or phrases
when used herein shall not be deemed to include a payment or distribution of
stock or securities of the Company provided for by a plan of reorganization or
readjustment authorized by an order or decree of a court of competent
jurisdiction in a reorganization proceeding under any applicable bankruptcy law,
or of any other corporation provided for by such plan of reorganization or
readjustment, which stock or securities are subordinated in right of payment to
all then outstanding Senior Obligations to substantially the same extent as the
Debentures are so subordinated as provided in this Section 11.7. The
consolidation of the Company with, or the merger of the Company into, another
Person or the liquidation or dissolution of the Company following the conveyance
or transfer of all or substantially all of its properties and assets as an
entirety to another Person upon the terms and conditions set forth in Section
12.1 shall not be deemed a "proceeding" for the purposes of this Section 11.7 if
the Person formed by such consolidation or into which the Company is merged or
the Person which acquires by conveyance or transfer such properties and assets
as an entirety, as the case may be, shall, as a part of such consolidation,
merger, conveyance or transfer, comply with the conditions set forth in Section
12.1.
11.7.4 As used herein, "Senior Obligations" shall mean collectively all
obligations of the Company (i) under or in connection with the Senior Credit
Agreement (as defined below) and the other "Loan Documents" referred to in the
Senior Credit Agreement; (ii) to any Bank (as defined below) or any affiliate of
a Bank under or in connection with (x) any interest rate, currency or commodity
swap agreement, cap agreement or collar agreement or any other agreement or
arrangement designed to protect the Company against fluctuations in interest
rates, currency
<PAGE>
exchange rates or commodity prices, or (y) any purchase card or credit card
issued by such Bank or such affiliate, (iii) to any Bank or any affiliate of any
Bank under or in connection with any other credit arrangement (including without
limitation any lease by such Bank or such affiliate, any guaranty issued by the
Company in favor of such Bank or such affiliate and any deposit account services
(including in respect of any overdraft) if such obligation is secured by the
assets of the Company; and (iv) under or in connection with any other secured
Indebtedness of the Company having an initial principal amount in excess of
$5,000,000 which by its express terms states that it is a "Senior Obligation";
in each case (a) whether direct or indirect, absolute or contingent, due or to
become due, now existing or hereafter incurred, and (b) whether on account of
principal, premium, interest (including, without limitation, interest accruing
after the maturity date of any Senior Obligation and interest accruing after the
commencement of any bankruptcy, insolvency, reorganization or similar proceeding
relating to the Company, whether or not a claim for post-filing or post-petition
interest is allowed in such proceeding), reimbursement obligations, fees,
indemnities, costs, expenses or otherwise. For purposes of the foregoing,
"Senior Credit Agreement" means the Amended and Restated Credit Agreement dated
as of October 30, 1998 among the Company, various financial institutions and
Bank of America National Trust and Savings Association, as Agent, as amended,
restated or otherwise modified from time to time, together with any replacement
or refinancing thereof; and "Bank" means any bank, insurance company, mutual
fund or other financial institution which from time to time is a party to the
Senior Credit Agreement.
11.7.5 As used herein, "Debt" shall mean collectively the unpaid
principal of, premium, if any, and interest on (including, without limitation,
interest accruing after the maturity date of any Debenture and interest accruing
after the filing of any petition in bankruptcy, or the commencement of any
insolvency, reorganization or like proceeding, relating to the Company, whether
or not a claim for post-filing or post-petition interest is allowed in such
proceeding) and all other obligations in respect of the Debentures, whether
direct or indirect, absolute or contingent, due or to become due, now existing
or hereafter incurred, in each case whether on account of principal, premium,
interest, reimbursement obligations, rights to rescission, fees, indemnities,
costs, expenses or otherwise.
11.7.6 As used herein, "Designated Holder of Senior Obligations" means
(i) the Agent under the Senior Credit Agreement or (ii) any holder of Senior
Obligations (or representative of holders of Senior Obligations) in an initial
aggregate principal amount of $20,000,000 or more (excluding Senior Obligations
under the Senior Credit Agreement).
11.7.7 Any Designated Holder of Senior Obligations is hereby authorized
to (i) file an appropriate claim for and on behalf of any Holder if such Holder
does not file, and there is not otherwise filed on behalf of such Holder, a
proper claim or proof of claim in the form required in any bankruptcy,
insolvency, reorganization or similar proceeding with respect to the Company at
least 30 days before the expiration of the time to file such claim or proof of
claim and (ii) file an appropriate ballot for and on behalf of any Holder if
such Holder does not file, and there is not otherwise filed on behalf of such
Holder, a proper ballot in any such proceeding in the form required at least 10
days before the expiration of the time to file such ballot.
<PAGE>
11.7.8 If any Event of Default shall occur and be continuing, the
Holders shall not, without the prior written consent of the agent under the
Senior Credit Agreement (the "Agent"), accelerate the maturity of any Debt, or
institute proceedings to enforce or collect any Debt, or commence or join with
any other creditor of the Company in commencing any bankruptcy, insolvency,
reorganization or similar proceeding against the Company, or otherwise exercise
any right or remedy in respect of the Debt, except after the first to occur of a
Standstill Termination Event or the 30th day following the giving of notice of
such Event of Default to the Agent by a Holder. For purposes of the foregoing, a
"Standstill Termination Event" will be deemed to occur upon (1) commencement of
a bankruptcy, insolvency, reorganization or similar proceeding by or against the
Company (provided that if such proceeding is instituted against the Company, a
Standstill Termination Event shall only be deemed to occur in respect thereof if
such proceeding has not been dismissed within 60 days of commencement thereof or
if the Company acquiesces thereto) or (2) the acceleration of the maturity of
any Senior Obligations.
11.7.9 The Holders agree with and for the benefit of each holder of
Senior Obligations that no provision of this Section 11.7 may be amended or
otherwise modified, and no other provision of this Agreement may be amended or
otherwise modified in any manner which is adverse to the holders of the Senior
Obligations, without (in each case) the prior written consent of all Designated
Holders of Senior Obligations.
12. NEGATIVE COVENANTS
The Company covenants that so long as any of the Debentures are
outstanding:
12.1. MERGER, CONSOLIDATION, ETC.
The Company shall not consolidate with or merge with any other
corporation or convey, transfer or lease substantially all of its assets in a
single transaction or series of transactions to any Person unless:
12.1.1 the successor formed by such consolidation or the survivor of
such merger or the Person that acquires by conveyance, transfer or lease
substantially all of the assets of the Company as an entirety, as the case may
be, shall be a solvent corporation organized and existing under the laws of the
United States or any State thereof (including the District of Columbia), and, if
the Company is not such corporation, such corporation shall have executed and
delivered to each holder of any Debentures its assumption of the due and
punctual performance and observance of each covenant and condition of this
Agreement, the Other Agreements and the Debentures; and
12.1.2 immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing.
No such conveyance, transfer or lease of substantially all of the
assets of the Company shall have the effect of releasing the Company or any
successor corporation that shall theretofore
<PAGE>
have become such in the manner prescribed in this Section 12.1 from its
liability under this Agreement, the Other Agreements to which the Company is a
party or the Debentures.
12.2. NO DIVIDENDS
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly declare or pay any dividend or make any distribution on
account of the capital stock (including all shares, interests, participations,
rights or other equivalents of corporate stock) of the Company or any of its
Subsidiaries (other than dividends or distributions payable to the Company or
any of its Subsidiaries and other than dividends or distributions in connection
with a shareholder rights plan).
12.3. FORBEARANCE FROM RESTRICTIONS ON RIGHTS OF HOLDERS OF
DEBENTURES
The Company will not enter into any agreement or instrument or
otherwise agree to any covenant that would in any way limit the right of the
holders of the Debentures to convert the Debentures into Common Stock.
13. EVENTS OF DEFAULT
An "Event of Default" shall exist if any of the following conditions or
events shall occur and be continuing:
(a) the Company defaults in the payment of any principal or
premium on any Debenture when the same becomes due and payable; or
(b) the Company defaults in the payment of any interest on any
Debenture for more than ten Business Days after the same becomes due
and payable; or
(c) the Company defaults in the performance of or compliance
with any term contained in Section 12.1; or
(d) the Company defaults in the performance of or compliance
with any term contained herein (other than those referred to in
paragraphs (a), (b) and (c) of this Section 13 and such default is not
remedied within 30 days after the earlier of (i) a Responsible Officer
obtaining actual knowledge of such default and (ii) the Company
receiving written notice of such default from any holder of a Debenture
(any such written notice to be identified as a "notice of default" and
to refer specifically to this paragraph (d) of Section 13); or
(e) any representation or warranty made in writing by or on
behalf of the Company or by any officer of the Company in this
Agreement or the Other Agreements to which the Company is a party
proves to have been false or incorrect in any material
<PAGE>
respect on the date as of which made if a date is specified, or
as of the respective Closings; or
(f) (i) the Company or any Significant Subsidiary is in
default (as principal or as guarantor or other surety) in the payment
of any principal of or premium or make-whole amount or interest on any
Indebtedness that is outstanding in an aggregate principal amount of at
least $1,000,000 beyond any period of grace provided with respect
thereto, or (ii) the Company or any Significant Subsidiary is in
default in the performance of or compliance with any term of any
evidence of any Indebtedness in an aggregate outstanding principal
amount of at least $1,000,000 or of any mortgage, indenture or other
agreement relating thereto or any other condition exists, and as a
consequence of such default or condition such Indebtedness has become,
or has been declared due and payable before its stated maturity or
before its regularly scheduled dates of payment; or
(g) the Company or any Significant Subsidiary (i) is generally
not paying, or admits in writing its inability to pay, its debts as
they become due, (ii) files, or consents by answer or otherwise to the
filing against it of, a petition for relief or reorganization or
arrangement or any other petition in bankruptcy, for liquidation or to
take advantage of any bankruptcy, insolvency, reorganization,
moratorium or other similar law of any jurisdiction, (iii) makes an
assignment for the benefit of its creditors, (iv) consents to the
appointment of a custodian, receiver, trustee or other officer with
similar powers with respect to it or with respect to any substantial
part of its property, (v) is adjudicated as insolvent or to be
liquidated, or (vi) takes corporate action for the purpose of any of
the foregoing; or
(h) a court or governmental authority of competent
jurisdiction enters an order appointing, without consent by the Company
or any of its Significant Subsidiaries, a custodian, receiver, trustee
or other officer with similar powers with respect to it or with respect
to any substantial part of its property, or constituting an order for
relief or approving a petition for relief or reorganization or any
other petition in bankruptcy or for liquidation or to take advantage of
any bankruptcy or insolvency law of any jurisdiction, or ordering the
dissolution, winding-up or liquidation of the Company or any of its
Significant Subsidiaries, or any such petition shall be filed against
the Company or any of its Significant Subsidiaries and such petition
shall not be dismissed within 60 days; or
(i) a final judgment or judgments for the payment of money
aggregating in excess of $2,000,000 are rendered against one or more of
the Company and its Significant Subsidiaries and which judgments are
not, within 60 days after entry thereof, bonded, discharged or stayed
pending appeal, or are not discharged within 60 days after the
expiration of such stay; or
(j) (i) with respect to any Plan, a prohibited transaction
within the meaning of section 4975 of the Code or section 406 of ERISA
shall occur which has a reasonable likelihood of resulting in direct or
indirect liability to the Company, (ii) with respect to any Plan
subject to Title IV of ERISA, the filing of a notice by the Company or
<PAGE>
an ERISA Affiliate to voluntarily terminate any such Plan in a distress
termination, (iii) with respect to any Multiemployer Plan, the Company
or any ERISA Affiliate shall incur any withdrawal liability in excess
of $50,000 or (iv) with respect to any Plan subject to Title IV of
ERISA, the Company or any ERISA Affiliate shall incur an accumulated
funding deficiency or request a funding waiver from the Internal
Revenue Service, provided that an event listed in clauses (i) through
(iv) hereof shall constitute an Event of Default only if it has a
Material Adverse Effect.
14. REMEDIES ON DEFAULT, ETC.
14.1. ACCELERATION. Subject to Section 11.7.
(a) If an Event of Default with respect to the Company described in
paragraph (g) or (h) of Section 13 has occurred, all the Debentures then
outstanding shall automatically become immediately due and payable.
(b) If any other Event of Default has occurred and is continuing, the
Required Holder(s) may at any time at its or their option, by notice or notices
to the Company, declare all the Debentures then outstanding to be immediately
due and payable.
(c) If any Event of Default described in paragraph (a) or (b) of
Section 13 has occurred and is continuing, any holder or holders of Debentures
at the time outstanding affected by such Event of Default may at any time, at
its or their option, by notice or notices to the Company, declare all the
Debentures held by it or them to be immediately due and payable.
Upon any Debentures becoming due and payable under this Section 14.1,
whether automatically or by declaration, such Debentures will forthwith mature
and the entire unpaid principal amount of such Debentures, plus all accrued and
unpaid interest thereon to the date of payment of the principal thereof shall
all be immediately due and payable, in each and every case without presentment,
demand, protest or further notice, all of which are hereby waived.
14.2. OTHER REMEDIES
If any Default or Event of Default has occurred and is continuing, and
irrespective of whether any Debentures have become or have been declared
immediately due and payable under Section 14.1, the Required Holder(s) may
proceed to protect and enforce the rights of such holder by an action at law,
suit in equity or other appropriate proceeding, whether for the specific
performance of any agreement contained herein or in any Debenture, or for an
injunction against a violation of any of the terms hereof or thereof, or in aid
of the exercise of any power granted hereby or thereby or by law or otherwise.
Notwithstanding the foregoing, the holder of any Debenture shall have
the right, which is absolute and unconditional, to receive payment of the
principal of, premium, if any, and interest
<PAGE>
on such Debenture and to institute suit for the enforcement of any such payment,
and such rights shall not be impaired without the consent of such holder.
14.3. RESCISSION
At any time after any Debentures have been declared due and payable
pursuant to clause (b) of Section 14.1, the holders of not less than 25% in
principal amount of the Debentures then outstanding, by written notice to the
Company, may rescind and annul any such declaration and its consequences if (a)
the Company has paid all overdue interest on the Debentures, all principal of
and premium, if any, on any Debentures that are due and payable other than by
reason of such declaration and are unpaid, and all interest on such overdue
principal and (to the extent permitted by applicable law) any overdue interest
in respect of the Debentures, at the Default Rate, (b) all Events of Default and
Defaults, other than non-payment of amounts that have become due solely by
reason of such declaration, have been cured or have been waived pursuant to
Section 20, and (c) no judgment or decree has been entered for the payment of
any monies due pursuant hereto or to the Debentures. No rescission and annulment
under this Section 14.3 will extend to or affect any subsequent Event of Default
or Default or impair any right consequent thereon.
14.4. NO WAIVERS OR ELECTION OF REMEDIES, EXPENSES, ETC.
No course of dealing and no delay on the part of any holder of any
Debenture in exercising any right, power or remedy shall operate as a waiver
thereof or otherwise prejudice such holder's rights, powers or remedies. No
right, power or remedy conferred by this Agreement or by any Debenture upon any
holder thereof shall be exclusive of any other right, power or remedy referred
to herein or therein or now or hereafter available at law, in equity, by statute
or otherwise. Without limiting the obligations of the Company under Section 17,
the Company will pay to the holder of each Debenture on demand such further
amount as shall be sufficient to cover all costs and expenses of such holder
incurred in any enforcement or collection proceeding under this Section 14,
including, without limitation, reasonable attorneys' fees, expenses and
disbursements.
15. REGISTRATION; EXCHANGE; SUBSTITUTION OF DEBENTURES
15.1. REGISTRATION OF DEBENTURES
The Company shall keep at its principal executive office a register for
the registration and registration of transfers of Debentures (the "Debenture
Register"). The name and address of each holder of one or more Debentures, each
transfer thereof and the name and address of each transferee of one or more
Debentures shall be registered in such register. Prior to due presentment for
registration of transfer, the Person in whose name any Debenture shall be
registered shall be deemed and treated as the owner and holder thereof for all
purposes hereof, and the Company shall not be affected by any notice or
knowledge to the contrary. The Company shall give to any holder of at least 5%
of the original aggregate principal amount of
<PAGE>
Debentures promptly upon request therefor, a complete and correct copy of the
names and addresses of all registered holders of Debentures.
15.2. TRANSFER AND EXCHANGE OF DEBENTURES
The Debentures are subject to restrictions upon transfer. As long as
such restrictions on transfer are complied with, upon surrender of any Debenture
at the principal executive office of the Company for registration of transfer or
exchange (and in the case of a surrender for registration of transfer, duly
endorsed or accompanied by a written instrument of transfer duly executed by the
registered holder of such Debenture or his attorney duly authorized in writing
and accompanied by the address for notices of each transferee of such Debenture
or part thereof), the Company shall execute and deliver, at the Company's
expense (except as provided below), one or more new Debentures (as requested by
the holder thereof) in exchange therefor, in an aggregate principal amount equal
to the unpaid principal amount of the surrendered Debenture. Each such new
Debenture shall be payable to such Person as such holder may request and shall
be substantially in the form of Exhibit 1. Each such new Debenture shall be
dated and bear interest from the date to which interest shall have been paid on
the surrendered Debenture or dated the date of the surrendered Debenture if no
interest shall have been paid thereon; provided, however, that the aggregate
amount of interest payable during any quarter with respect to any transferred
Debenture shall in no event exceed the amount of interest that would have been
payable during such quarter with respect to such Debenture absent such transfer.
Debentures shall not be transferred in denominations of less than $100,000,
provided that if necessary to enable the registration of transfer by a holder of
its entire holding of Debentures, one Debenture may be in a denomination of less
than $100,000. Any transferee, by its acceptance of a Debenture registered in
its name (or the name of its nominee), shall be deemed to have made the
representation set forth in Section 7.2.
15.3. REPLACEMENT OF DEBENTURES
Upon receipt by the Company of evidence reasonably satisfactory to it
of the ownership of and the loss, theft, destruction or mutilation of any
Debenture, and:
(a) in the case of loss, theft or destruction, of indemnity reasonably
satisfactory to it, or
(b) in the case of mutilation, upon surrender and cancellation thereof,
the Company at its own expense shall execute and deliver, in lieu thereof, a new
Debenture, dated and bearing interest from the date to which interest shall have
been paid on such lost, stolen, destroyed or mutilated Debenture or dated the
date of such lost, stolen, destroyed or mutilated Debenture if no interest shall
have been paid thereon.
<PAGE>
16. PAYMENTS ON DEBENTURES
16.1. PLACE OF PAYMENT
Subject to Section 16.2, payments of principal and interest becoming
due and payable on the Debentures shall be made in Albany, New York, at the
principal office of the Company. The Company may at any time, by notice to each
holder of a Debenture, change the place of payment of the Debentures so long as
such place of payment shall be either the principal office of the Company in
such jurisdiction or the principal office of a bank or trust company in such
jurisdiction.
16.2. HOME OFFICE PAYMENT
So long as Charterhouse or Charterhouse's nominee shall be the
registered holder of any Debenture, and notwithstanding anything contained in
Section 16.1 or in such Debenture to the contrary, the Company will pay all sums
becoming due on such Debenture for principal, premium, if any, and interest by
the method and at the address as Charterhouse shall have from time to time
specified to the Company in writing for such purpose, without the presentation
or surrender of such Debenture or the making of any notation thereon, except
that, in order to receive payment or prepayment in full of any Debenture,
Charterhouse shall surrender such Debenture for cancellation to the Company at
its principal executive office or at the place of payment most recently
designated by the Company pursuant to Section 16.1. Prior to any sale or other
disposition of any Debenture held by Charterhouse or Charterhouse's nominee
Charterhouse will surrender such Debenture to the Company in exchange for a new
Debenture(s) pursuant to Section 15.2.
16.3. INTEREST
Interest on the Debentures shall be computed on the basis of a 360-day
year of twelve 30- day months at a rate of 8% per annum from the Issue Date,
payable in equal quarterly installments on each Interest Payment Date of each
year (or such prorated amount as may be applicable with respect to the first
payment) until the principal on the Debentures becomes due and payable. To the
extent permitted by law, interest on any overdue payment of principal or
interest shall be payable quarterly at a rate equal to 10% per annum (the
"Default Rate").
From the Issue Date through and including the day after the first
Interest Payment Date following the fifth anniversary of the Issue Date, such
interest shall be paid on each Interest Payment Date by the issuance to the
Holder of additional Convertible Debentures in the principal amount of the
interest payable on such Interest Payment Date. After the first Interest Payment
Date following the fifth anniversary of the Issue Date, such interest shall be
paid in either (I) additional Convertible Debentures in the principal amount of
the interest payable on such Interest Payment Date or (ii) cash; the method of
payment to be determined by the Company in its discretion.
<PAGE>
17. EXPENSES, ETC.
17.1. TRANSACTION EXPENSES
Notwithstanding the provisions of Sections 4.1.1(a) or 4.1.1(b) (unless
Charterhouse's failure to pay the purchase price as provided therein is due to a
failure by Charterhouse to satisfy its conditions) the Company will promptly pay
all reasonable out-of-pocket fees and expenses incurred by Charterhouse in
connection with the transactions contemplated hereby (including the reasonable
fees and expenses of a special counsel, accountants and other representatives
engaged by Charterhouse in connection with such transactions)("Transaction
Fees") up to a maximum of $500,000, whether or not this Agreement is terminated
prior to the First Closing or the Second Closing. The Transaction Fees in
connection with any amendments, waivers or consents under or in respect of this
Agreement, the Other Agreements or the Debentures (whether or not such
amendment, waiver or consent becomes effective) or in connection with any
required any HSR Act filing by Charterhouse, including, without limitation: (a)
the costs and expenses incurred in enforcing or defending (or determining
whether or how to enforce or defend) any rights under this Agreement or the
Debentures or in responding to any subpoena or other legal process or informal
investigative demand issued in connection with this Agreement or the Debentures,
or by reason of being a holder of any Debenture, (b) the costs and expenses,
including financial advisors' fees, incurred in connection with the insolvency
or bankruptcy of the Company or any Subsidiary or in connection with any
work-out or restructuring of the transactions contemplated hereby and by the
Debentures shall not be subject to the $500,000 cap. The Company will pay, and
will save Charterhouse and each other holder of a Debenture harmless from, all
claims in respect of any fees, costs or expenses if any, of brokers and finders
(other than those retained by Charterhouse), its investment advisors and its
counsel, and any filing fees payable by the Company in connection with any
filings or submissions required under the HSR Act. At each Closing under this
Agreement, the Company will pay to Charterhouse Group International, Inc. a fee
in the amount of 1% of the principal amount of the Debentures issued at such
Closing.
17.2. SURVIVAL
The obligations of the Company under this Section 17 will survive the
payment or transfer of any Debenture, the enforcement, amendment or waiver of
any provision of this Agreement or the Debentures, and the termination of this
Agreement.
18. INDEMNIFICATION
18.1. INDEMNIFICATION BY THE COMPANY
18.1.1 From and after the Closing, the Company shall indemnify and hold
each Charterhouse entity, its Affiliates, and their respective directors,
officers, employees, share holders, partners, agents, successors and assigns
(collectively, "Charterhouse Claimants" and individually, a "Charterhouse
Claimant") harmless from and defend each of them from and against any and all
demands, claims, actions, liabilities, losses, costs, damages or expenses
whatsoever (including without limitation reasonable attorneys' fees and
expenses) (collectively,
<PAGE>
"Claims") asserted against, imposed upon or incurred by the Charterhouse
Claimants resulting from or arising out of (i) any inaccuracy or breach of any
representation or warranty of the Company contained herein; and/or (ii) any
breach of any covenant or obligation of the Company contained herein. The
Charterhouse Claimant's right to indemnification shall not be limited or
affected in any way by any pre-Closing investigation by Charterhouse.
INDEMNIFICATION BY CHARTERHOUSE
18.1.2 From and after the Closing, Charterhouse shall indemnify and
hold the Company, its Affiliates and their respective directors, officers,
employees, shareholders, partners, agents, successors and assigns (collectively,
the "Company Claimants" and individually, a "Company Claimant") harmless from
and defend each of them from and against any and all Claims asserted against,
imposed upon or incurred by the Company Claimants resulting from or arising out
of any inaccuracy or breach of any representation or warranty of Charterhouse in
Section 7 hereof.
18.2. TERMS AND CONDITIONS OF INDEMNIFICATION
18.2.1 The respective obligations and liabilities of the Company and
Charterhouse (each, an "indemnifying party") to indemnify pursuant to this
Section 18 shall be subject to the following terms and conditions:
(a) The party seeking to be indemnified (the "Indemnified Party") shall
give the indemnifying party prompt written notice of any such claim. The
Indemnified Party's failure to give prompt notice, however, shall not serve to
eliminate or limit the Indemnified Party's right to indemnification hereunder
except to the extent such failure materially prejudices the rights of the
indemnifying party.
(b) The obligations and liabilities of the indemnifying party to
indemnify pursuant to this Section 18 in respect of any Claim by a third party
shall be subject to the following additional terms and conditions:
(i) The indemnifying party shall have the right to undertake,
by counsel or other representatives of its own choosing reasonably
satisfactory to the Indemnified Party, the defense, compromise, and
settlement of such Claim.
(ii) In the event that the indemnifying party shall elect not
to undertake such defense, or within a reasonable time after notice of
any such claim from the Indemnified Party shall fail to defend, the
Indemnified Party (upon further written notice to the indemnifying
party) shall have the right to undertake the defense, compromise or
settlement of such claim, by counsel or other representatives of its
own choosing, on behalf of and for the account and risk of the
indemnifying party.
18.2.2 Notwithstanding anything in this Section 18 to the contrary, (A)
if there is a reasonable probability that a Claim may materially and adversely
affect the Indemnified Party other than as a result of money damages or other
money payments, the Indemnified Party shall
<PAGE>
have the right, at the cost and expense of the indemnifying party, to
participate in the defense, compromise or settlement of the Claim, (B) the
indemnifying party shall not, without the Indemnified Party's written consent,
settle or compromise any Claim or consent to entry of any judgment which does
not include as an unconditional term thereof the giving by the claiming party or
the plaintiff to the Indemnified Party of a release from all liability in
respect of such claim, and (C) in the event that the indemnifying party
undertakes defense of any Claim, the Indemnified Party by counsel or other
representative of its own choosing and at its sole cost and expense, shall have
the right to consult with the indemnifying party and its counsel or other
representatives concerning such claim (other than any claim for money damages
with respect to which the indemnifying party has agreed to indemnify the
Indemnified Party) and the indemnifying party and the Indemnified Party and
their respective counsel or other representatives shall cooperate with respect
to such claim, subject to the execution and delivery of a mutually satisfactory
joint defense agreement.
19. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT
All representations and warranties contained herein shall survive the
execution and delivery of this Agreement and the Debentures, the purchase or
transfer by Charterhouse of any Debenture or portion thereof or interest therein
and the payment of any Debenture, and may be relied upon by any Permitted
Transferee of a Debenture, regardless of any investigation made at any time by
or on behalf of Charterhouse or any Permitted Transferee of a Debenture until 30
days after Charterhouse receives the audited financial statements of the Company
for the year ended December 31, 1999. All statements contained in any
certificate delivered by or on behalf of the Company pursuant to this Agreement
shall be deemed representations and warranties of the Company under this
Agreement. Subject to the preceding sentence, this Agreement, the Other
Agreements and the Debentures embody the entire agreement and understanding
between Charterhouse and the Company and supersede all prior agreements and
understandings relating to the subject matter hereof.
20. AMENDMENT AND WAIVER
20.1. REQUIREMENTS
This Agreement, the Other Agreements and the Debentures may be amended,
and the observance of any term hereof, of the Other Agreements or of the
Debentures may be waived (either retroactively or prospectively), with (and only
with) the written consent of the Company and the Required Holders, except that
(a) no amendment or waiver of any of the provisions of Section 1, 2, 4, 5, 6.18,
9, 11.6, 11.7, 16.3, 18 or 24 or any defined term (as it is used therein), will
be effective as to Charterhouse unless consented to by Charterhouse in writing,
and (b) no such amendment or waiver may, without the written consent of the
holder of each Debenture at the time outstanding affected thereby: (I) subject
to the provisions of Section 14 relating to acceleration or rescission, change
the amount or time of any prepayment or payment of principal of, or reduce the
rate or change the time of payment or method of computation of interest on the
Debentures, (ii) change the percentage of the principal amount of the Debentures
the holders of
<PAGE>
which are required to consent to any such amendment or waiver, or (iii) amend
any of Sections 10, 13, 14, 20 or 23 hereof.
20.2. SOLICITATION OF HOLDERS OF DEBENTURES
20.2.1 Solicitation. The Company will provide each holder of Debentures
(irrespective of the amount of Debentures then owned by it) with sufficient
information, sufficiently far in advance of the date a decision is required, to
enable such holder to make an informed and considered decision with respect to
any proposed amendment, waiver or consent in respect of any of the provisions
hereof or of the Debentures. The Company will deliver executed or true and
correct copies of each amendment, waiver or consent effected pursuant to the
provisions of this Section 19 to each holder of outstanding Debentures promptly
following the date on which it is executed and delivered by, or receives the
consent or approval of, the requisite holders of Debentures.
20.2.2 Payment. The Company will not directly or indirectly pay or
cause to be paid any remuneration, whether by way of supplemental or additional
interest, fee or otherwise, or grant any security, to any holder of Debentures
as consideration for or as an inducement to the entering into by any holder of
Debentures of any waiver or amendment of any of the terms and provisions hereof
unless such remuneration is concurrently paid, or security is concurrently
granted, on the same terms, ratably to each holder of Debentures then
outstanding that consent thereto.
20.3. BINDING EFFECT, ETC.
Any amendment or waiver consented to as provided in this Section 20
applies equally to all holders of Debentures and is binding upon them and upon
each future holder of any Debenture and upon the Company without regard to
whether such Debenture has been marked to indicate such amendment or waiver. No
such amendment or waiver will extend to or affect any obligation, covenant,
agreement, Default or Event of Default not expressly amended or waived or impair
any right consequent thereon. No course of dealing between the Company and the
holder of any Debenture nor any delay in exercising any rights hereunder or
under any Debenture shall operate as a waiver of any rights of any holder of
such Debenture. As used herein, the term "this Agreement" and references thereto
shall mean this Agreement as it may from time to time be amended or
supplemented.
20.4. DEBENTURES HELD BY COMPANY, ETC.
Solely for the purpose of determining whether the holders of the
requisite percentage of the aggregate principal amount of Debentures then
outstanding approved or consented to any amendment, waiver or consent to be
given under this Agreement or the Debentures, or have directed the taking of any
action provided herein or in the Debentures to be taken upon the direction of
the holders of a specified percentage of the aggregate principal amount of
Debentures then outstanding, Debentures directly or indirectly owned by the
Company or any of its Affiliates shall be deemed not to be outstanding.
<PAGE>
21. NOTICES
All notices and communications provided for hereunder shall be in
writing and sent (a) by telecopy if the sender on the same day sends a
confirming copy of such notice by a recognized overnight delivery service
(charges prepaid), or (b) by registered or certified mail with return receipt
requested (postage prepaid), or (c) by a recognized overnight delivery service
(with charges prepaid). Any such notice must be sent:
(i) if to Charterhouse or Charterhouse's nominee, c/o
Charterhouse Group International, Inc. 535 Madison Avenue, New York, NY
10022 Attention: President, with a copy to:
Stephen W. Rubin, Esq.
Proskauer Rose LLP
1585 Broadway
New York, NY 10036
(ii) if to any other holder of any Debenture, to such holder
at such address as such other holder shall have specified to the
Company in writing, or
(iii) if to the Company, to the Company at its address set
forth at the beginning hereof to the attention of President, or at such
other address as the Company shall have specified to the holder of each
Debenture in writing, with a copy to:
Karen A. Dewis, Esq.
McDermott Will & Emery
600 13th Street, N.W.
Washington, DC 20005
Notices under this Section 21 will be deemed given only when actually received.
22. REPRODUCTION OF DOCUMENTS
This Agreement and all documents relating thereto, including, without
limitation, (a) consents, waivers and modifications that may hereafter be
executed, (b) documents received by Charterhouse at the Closings (except the
Debentures themselves), and (c) financial statements, certificates and other
information previously or hereafter furnished to Charterhouse, may be reproduced
by Charterhouse by any photographic, photostatic, microfilm, microcard,
miniature photographic or other similar process and Charterhouse may destroy any
original document so reproduced.
<PAGE>
23. STOCKHOLDER APPROVALS, ETC.
23.1. The Company shall take all action necessary, in accordance with
applicable law, the Company Charter and its By-laws, to duly call, give notice
of, convene and hold the Special Meeting as promptly as reasonably practicable
after the date on which the definitive Company Proxy Statement has been mailed
to the Company's stockholders for the purpose of considering and approving the
20% Issuance. The Company Board will recommend that holders of Common Stock vote
in favor of the 20% Issuance at the Special Meeting.
23.2. In connection with the Special Meeting, the Company (i) will as
promptly as practicable prepare and file with the SEC, will use its best efforts
to have cleared by the SEC and will thereafter mail to its stockholders as
promptly as practicable the Company Proxy Statement and all other proxy
materials for such meeting, (ii) will use its best efforts to obtain the
necessary approvals by its stockholders of the 20% Issuance (including, without
limitation, securing the services of a firm of proxy solicitors reasonably
acceptable to Charterhouse), and (iii) will otherwise comply with all legal
requirements applicable to such meeting. The Company will provide Charterhouse
with a copy of the preliminary proxy statement and all modifications thereto
prior to filing or delivery to the SEC and will consult with Charterhouse in
connection therewith. The Company will notify Charterhouse promptly of the
receipt of any comments from the SEC or its staff and of any request by the SEC
or its staff for amendments or supplements to the Company Proxy Statement or for
additional information and will supply Charterhouse with copies of all written
correspondence between the Company or any of its representatives, on the one
hand, and the SEC or its staff, on the other hand, with respect to the Company
Proxy Statement or this Agreement. If at any time prior to the Special Meeting
there shall occur any event that should be set forth in an amendment or
supplement to the Company Proxy Statement, the Company will promptly prepare and
mail to its stockholders such an amendment or supplement.
24. SUBSTITUTION OF PURCHASER
Charterhouse shall have the right to substitute any one of
Charterhouse's Affiliates as the purchaser of the Debentures that Charterhouse
has agreed to purchase hereunder, by written notice to the Company, which notice
shall be signed by both Charterhouse and such Affiliate, shall contain such
Affiliate's agreement to be bound by this Agreement and the Other Agreements to
which Charterhouse is a party and shall contain a confirmation by such Affiliate
of the accuracy with respect to it of the representations set forth in Section
7. Upon receipt of such notice, wherever the word "Charterhouse" is used in this
Agreement (other than in this Section 24), such word shall be deemed to refer to
such Affiliate in lieu of Charterhouse, provided, however, that substitution of
Charterhouse's Affiliate shall not release Charterhouse from any liability under
this Agreement. In the event that such Affiliate is so substituted as a
purchaser hereunder and such Affiliate thereafter transfers to Charterhouse all
of the Debentures then held by such Affiliate, upon receipt by the Company of
notice of such transfer, wherever the word "Charterhouse" is used in this
Agreement (other than in this Section 24), such word shall no longer be deemed
to refer to such Affiliate, but shall refer to Charterhouse, and Charterhouse
shall have all the rights of an original holder of the Debentures under this
Agreement.
<PAGE>
25. MISCELLANEOUS
25.1. SUCCESSORS AND ASSIGNS
All covenants and other agreements contained in this Agreement by or on
behalf of any of the parties hereto bind and inure to the benefit of their
respective permitted successors and assigns (including, without limitation, any
Permitted Transferee of a Debenture) whether so expressed or not.
25.2. PAYMENTS DUE ON NON-BUSINESS DAYS
Anything in this Agreement or the Debentures to the contrary
notwithstanding, any payment of principal of or premium or interest on any
Debenture that is due on a date other than a Business Day shall be made on the
next succeeding Business Day without including the additional days elapsed in
the computation of the interest payable on such next succeeding Business Day.
25.3. SEVERABILITY
Any provision of this Agreement that is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall (to the full extent permitted by law) not invalidate or
render unenforceable such provision in any other jurisdiction.
25.4. CONSTRUCTION
Each covenant contained herein shall be construed (absent express
provision to the contrary) as being independent of each other covenant contained
herein, so that compliance with any one covenant shall not (absent such an
express contrary provision) be deemed to excuse compliance with any other
covenant. Where any provision herein refers to action to be taken by any Person,
or which such Person is prohibited from taking, such provision shall be
applicable whether such action is taken directly or indirectly by such Person.
25.5. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be an original but all of which together shall constitute one
instrument. Each counterpart may consist of a number of copies hereof, each
signed by less than all, but together signed by all, of the parties hereto.
<PAGE>
25.6. GOVERNING LAW
THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. All
actions and proceedings arising out of or relating to this Agreement shall be
brought by the parties and heard and determined only in a Federal or State court
located in the Borough of Manhattan in the City and State of New York and the
parties hereto consent to jurisdiction before and waive any objections to the
venue of such New York and Federal courts. The parties hereto agree to accept
service of process in connection with any such action or proceeding in any
manner permitted for a notice hereunder.
25.7. FURTHER ASSURANCES
Each party shall cooperate and take such action as may be reasonably
requested by the other party in order to carry out the provisions and purposes
of this Agreement. In that regard, the Company agrees to cooperate with
Charterhouse with respect to any filing required pursuant to the HSR Act.
<PAGE>
If Charterhouse is in agreement with the foregoing, please sign the
form of agreement on the accompanying counterpart of this Agreement and return
it to the Company, whereupon the foregoing shall become a binding agreement
between Charterhouse and the Company.
Very truly yours,
UNITED ROAD SERVICES, INC.
By: ______________________________
Name: ________________
Title: ________________
The foregoing is hereby
agreed to as of the
date thereof.
CHARTER URS LLC
By: ______________________________
Name:
Title:
<PAGE>
SCHEDULE A
DEFINED TERMS
As used herein, the following terms have the respective meanings set
forth below or set forth in the Section hereof following such term:
"20% ISSUANCE" is defined in Section 5.2.
"AFFILIATE" means, at any time, and with respect to any Person, any
other Person that at such time directly or indirectly through one or more
intermediaries Controls, or is Controlled by, or is under common Control with,
such first Person. As used in this definition, "CONTROL" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise. Unless the context otherwise clearly
requires, any reference to an "Affiliate" is a reference to an Affiliate of the
Company.
"BUSINESS DAY" means for the purposes of any provision of this
Agreement, any day other than a Saturday, a Sunday or a day on which commercial
banks in New York are required or authorized to be closed.
"CAPITAL LEASE" means, at any time, a lease with respect to which the
lessee is required concurrently to recognize the acquisition of an asset and the
incurrence of a liability in accordance with GAAP.
"CHANGE OF CONTROL" is defined in Section 11.6.
"CHANGE OF CONTROL OFFER" is defined in Section 11.6.
"CHANGE OF CONTROL OFFER PERIOD" is defined in Section 11.6.
"CHANGE OF CONTROL PURCHASE DATE" is defined in Section 11.6.
"CHANGE OF CONTROL PURCHASE PRICE" is defined in Section 11.6.
"CHARTERHOUSE" is defined in the preamble.
"CLOSINGS" means the First Closing and the Second Closing.
"CODE" means the Internal Revenue Code of 1986, as amended from time to
time, and the rules and regulations promulgated thereunder from time to time.
<PAGE>
"COMMON STOCK" is defined in Section 6.3.
"COMPANY" means United Road Services, Inc., a Delaware corporation.
"COMPANY BOARD" means the Board of Directors of the Company.
"COMPANY PREFERRED STOCK" is defined in Section 6.3.
"CONVERSION DATE" is defined in Section 10.2.
"CONVERSION PRICE" is defined in Section 10.3.
"DEBENTURES" is defined in Section 1.
"DEBENTURE REGISTER" is defined in Section 15.1.
"DEFAULT" means an event or condition the occurrence or existence of
which would, with the lapse of time or the giving of notice or both, become an
Event of Default.
"DEFAULT RATE" is defined in Section 16.3.
"ENVIRONMENTAL LAWS" means any and all Federal, state, local, and
foreign statutes, laws, regulations, ordinances, rules, judgments, orders,
decrees, permits, concessions, grants, franchises, licenses, agreements or
governmental restrictions relating to pollution and the protection of the
environment or the release of any materials into the environment, including but
not limited to those related to hazardous substances or wastes, air emissions
and discharges to waste or public systems.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the rules and regulations promulgated thereunder
from time to time in effect.
"ERISA AFFILIATE" means any entity (whether or not incorporated) that
is or was, within the preceding six years treated as a single employer together
with the Company (or any of its predecessors) under section 414(b), (c), (m) or
(o) of the Code or Section 4001(b) of ERISA.
"EVENT OF DEFAULT" is defined in Section 13.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FIRST CLOSING" is defined in Section 4.1.
"FIRST ISSUE DATE" is defined in Section 4.1.
<PAGE>
"GAAP" means generally accepted accounting principles as in effect from
time to time in the United States of America.
"GOVERNMENTAL AUTHORITY" means
(a) the government of
(i) the United States of America or any State or other
political subdivision thereof, or
(ii) any jurisdiction in which the Company or any Significant
Subsidiary conducts all or any part of its business, or which has
jurisdiction over any properties of the Company or any Significant
Subsidiary, or
(b) any entity exercising executive, legislative, judicial, regulatory
or administrative functions of, or pertaining to, any such government.
"GUARANTY" means, with respect to any Person, any obligation (except
the endorsement in the ordinary course of business of negotiable instruments for
deposit or collection) of such Person guaranteeing or in effect guaranteeing any
indebtedness, dividend or other obligation of any other Person in any manner,
whether directly or indirectly, including (without limitation) obligations
incurred through an agreement, contingent or otherwise, by such Person:
(a) to purchase such indebtedness or obligation or any
property constituting security therefor;
(b) to advance or supply funds (I) for the purchase or payment
of such indebtedness or obligation, or (ii) to maintain any working
capital or other balance sheet condition or any income statement
condition of any other Person or otherwise to advance or make available
funds for the purchase or payment of such indebtedness or obligation;
(c) to lease properties or to purchase properties or services
primarily for the purpose of assuring the owner of such indebtedness or
obligation of the ability of any other Person to make payment of the
indebtedness or obligation; or
(d) otherwise to assure the owner of such indebtedness or
obligation against loss in respect thereof.
In any computation of the indebtedness or other liabilities of the obligor under
any Guaranty, the indebtedness or other obligations that are the subject of such
Guaranty shall be assumed to be direct obligations of such obligor.
<PAGE>
"HOLDER" or "HOLDERS" means, with respect to any Debenture, the Person
in whose name such Debenture is registered in the register maintained by the
Company pursuant to Section 15.1.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended from time to time.
"INDEBTEDNESS" with respect to any Person means, at any time, without
duplication,
(a) its liabilities for borrowed money and its redemption
obligations in respect of mandatorily redeemable Preferred Stock;
(b) its liabilities for the deferred purchase price of
property acquired by such Person (excluding accounts payable arising in
the ordinary course of business but including all liabilities created
or arising under any conditional sale or other title retention
agreement with respect to any such property);
(c) all liabilities appearing on its balance sheet in
accordance with GAAP in respect of Capital Leases;
(d) all liabilities for borrowed money secured by any Lien
with respect to any property owned by such Person (whether or not it
has assumed or otherwise become liable for such liabilities);
(e) all its liabilities in respect of letters of credit or
instruments serving a similar function issued or accepted for its
account by banks and other financial institutions (whether or not
representing obligations for borrowed money); and
(f) any Guaranty of such Person with respect to liabilities of
a type described in any of clauses (a) through (e) hereof.
"INTEREST PAYMENT DATE" means each March 31, June 30, September 30 and
December 31.
"INVESTORS AGREEMENT" means the Investors Agreement, to be entered into
and dated as of the date hereof, between the Company and Charterhouse, as
amended, supplemented, changed or modified from time to time.
"ISSUE DATE" means the First Issue Date or the Second Issue Date, as
the case may be.
"LIEN" means, with respect to any Person, any mortgage, lien, pledge,
charge, security interest or other encumbrance, or any interest or title of any
vendor, lessor, lender or other secured party to or of such Person under any
conditional sale or other title retention agreement or Capital Lease, upon or
with respect to any property or asset of such Person (including in the case of
stock, stockholder agreements, voting trust agreements and all similar
arrangements).
<PAGE>
"LOCKUP AGREEMENT" means the Lockup Agreement dated as of the date
hereof between Charterhouse and Edward T. Sheehan.
"MATERIAL" means material in relation to the business, operations,
financial condition, assets, or properties of the Company and its Subsidiaries
taken as a whole.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the
business, operations, financial condition, assets or properties of the Company
and its Subsidiaries taken as a whole, or (b) the ability of the Company to
perform its obligations under this Agreement, the Other Agreements to which it
is a party and the Debentures, or (c) the validity or enforceability of this
Agreement, the Other Agreements to which it is a party or the Debentures.
"MCDERMOTT WILL" is defined in Section 5.1.
"MULTIEMPLOYER PLAN" means any Plan that is a "multiemployer plan" (as
such term is defined in section 4001(a)(3) of ERISA).
"NASDAQ/NMS" means the National Association of Securities Dealers
Automated Quotations National Market System.
"OFFICER'S CERTIFICATE" means a certificate of a Senior Financial
Officer or of any other officer of the Company whose responsibilities extend to
the subject matter of such certificate.
"OTHER AGREEMENTS" means the Investors Agreement, the Registration
Rights Agreement, the Lockup Agreement, the Voting Agreements and the Side
Letter from
Charterhouse to the Company dated of even date herewith.
"PBGC" means the Pension Benefit Guaranty Corporation referred to and
defined in ERISA or any successor thereto.
"PERMITTED TRANSFEREE" is defined in the Investors Agreement.
"PERSON" means an individual, partnership, corporation, limited
liability company, association, trust, unincorporated organization, or a
government or agency or political subdivision thereof.
"PLAN" means an "employee benefit plan" (as defined in section 3(3) of
ERISA) that is or, within the preceding six years, has been established or
maintained, or to which contributions are or, within the preceding six years,
have been made or required to be made, by the Company or any ERISA Affiliate or
with respect to which the Company or any ERISA Affiliate may have any liability.
<PAGE>
"PREFERRED STOCK" means any class of capital stock of a corporation
that is preferred over any other class of capital stock of such corporation as
to the payment of dividends or the payment of any amount upon liquidation or
dissolution of such corporation.
"PROPERTY" or "PROPERTIES" means, unless otherwise specifically
limited, real or personal property of any kind, tangible or intangible, choate
or inchoate.
"PROSKAUER" is defined in Section 4.1.
"REAL PROPERTY" means any real property presently or formerly owned,
used, leased, occupied, managed or operated by the Company.
"REDEMPTION DATE: is defined in Section 9.2.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated as of the date hereof, between the Company and Charterhouse, as
amended, supplemented, changed or modified from time to time.
"REGULAR RECORD DATE" means the date that is fifteen days prior to an
Interest Payment Date.
"REQUIRED HOLDER(S)" means, at any time, the holder(s) of at least 50%
in principal amount of the Debentures at the time outstanding (exclusive of
Debentures then owned by the Company or any of its Affiliates).
"RESPONSIBLE OFFICER" means any Senior Financial Officer and any other
officer of the Company with responsibility for the administration of the
relevant portion of this Agreement.
"SEC" means the Securities and Exchange Commission.
"SECOND CLOSING" is defined in Section 4.2.
"SECOND ISSUE DATE" is defined in Section 4.2.
"SECURITIES ACT" means the Securities Act of 1933, as amended from time
to time.
"SENIOR FINANCIAL OFFICER" means the chief financial officer, principal
accounting officer, treasurer or comptroller of the Company.
"SIGNIFICANT SUBSIDIARY" means at any time any Subsidiary that would at
such time constitute a "significant subsidiary" (as such term is defined in
Regulation S-X of the Securities and Exchange Commission as in effect on the
date of the Closing) of the Company.
"SPECIAL MEETING" is defined in Section 5.2.
<PAGE>
"SUBSIDIARY" means, as to any Person, any corporation, association or
other business entity in which such Person or one or more of its Subsidiaries or
such Person and one or more of its Subsidiaries owns sufficient equity or voting
interests to enable it or them (as a group) ordinarily, in the absence of
contingencies, to elect a majority of the directors (or Persons performing
similar functions) of such entity, and any partnership or joint venture if more
than a 50% interest in the profits or capital thereof is owned by such Person or
one or more of its Subsidiaries or such Person and one or more of its
Subsidiaries (unless such partnership can and does ordinarily take major
business actions without the prior approval of such Person or one or more of its
Subsidiaries). Unless the context otherwise clearly requires, any reference to a
"Subsidiary" is a reference to a Subsidiary of the Company.
"TAX RETURN" means each and every report, return, declaration,
information return, statement or other information required to be supplied to a
taxing or governmental authority with respect to any Tax or Taxes, including
without limitation any combined or consolidated return for any group of entities
including the Company.
"TAXES" (or "TAX" where the context requires) means all national,
local, foreign and other taxes (including, without limitation, income, profits,
value added, premium, estimated, excise, sales, use, occupancy, gross receipts,
franchise, ad valorem, severance, capital levy, production, transfer,
withholding, employment and payroll related and property taxes and other
governmental charges and assessments), whether attributable to statutory or
nonstatutory rules and whether or not measured in whole or in part by net
income, and including without limitation interest, additions to tax or interest,
charges and penalties with respect thereto, and expenses associated with
contesting any proposed adjustment related to any of the foregoing.
"VOTING AGREEMENTS" means the Voting Agreements dated as of the First
Closing among the Company, Charterhouse and each of Ross Berner, Mark McKinney,
Todd Smart, Ed Morawski and Mark Henninger, as amended, supplemented, changed or
modified from time to time.
"YEAR 2000 COMPLIANT" means that the computer systems (1) are capable
of recognizing, processing, managing, representing, interpreting, and
manipulating correctly date related data for dates earlier and later than
January 1, 2000, including, but not limited to, calculating, comparing, sorting,
storing, tagging and sequencing, without resulting in or causing logical or
mathematical errors or inconsistencies in any user-interface functionalities or
otherwise, including data input and retrieval, data storage, data fields,
calculations, reports, processing, or any other input or output, (2) have the
ability to provide date recognition for any data element without limitation
(including, but not limited to, date-related data represented without a century
designation, date-related data whose year is represented by only two digits and
date fields assigned special values), (3) have the ability to automatically
function into and beyond the year 2000 without human intervention and without
any change in operations associated with the advent of the year 2000, (4) have
the ability to correctly interpret data, dates and time into and beyond the year
2000, (5) have the ability not to produce noncompliance in existing information,
nor otherwise corrupt such data into and beyond the year 2000, (6) have the
ability to correctly
<PAGE>
process after January 1, 2000 data containing dates before that date, (7) have
the ability to recognize all "leap years," including February 29, 2000.
<PAGE>
TABLE OF CONTENTS
PAGE NO.
1. AUTHORIZATION OF DEBENTURES...........................................2
2. SALE AND PURCHASE OF DEBENTURES.......................................2
3. INTENTIONALLY OMITTED.................................................3
4. CLOSINGS..............................................................3
4.1. FIRST CLOSING................................................3
4.2. THE SECOND CLOSING...........................................3
5. CONDITIONS TO THE CLOSINGS.................................................4
5.1. CONDITIONS TO FIRST CLOSING.................................4
5.2. CONDITIONS TO SECOND CLOSING.................................6
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.........................8
6.1. ORGANIZATION; POWER AND AUTHORITY............................8
6.2. AUTHORIZATION, ETC...........................................8
6.3. CAPITALIZATION...............................................9
6.4. ORGANIZATION AND OWNERSHIP OF SHARES OF SUBSIDIARIES.........9
6.5. FILED DOCUMENTS AND FINANCIAL STATEMENTS....................10
6.6. COMPLIANCE WITH LAW, ETC....................................10
6.7. GOVERNMENTAL AUTHORIZATIONS, ETC............................11
6.8. LITIGATION; OBSERVANCE OF STATUTES AND ORDERS...............11
6.9. TAXES.......................................................11
6.10. CONTRACTS AND COMMITMENTS...................................12
6.11. ENVIRONMENTAL MATTERS .....................................12
6.12. ABSENCE OF CERTAIN CHANGES OR EVENTS........................13
6.13. ABSENCE OF UNDISCLOSED LIABILITIES .........................14
6.14. TITLE TO PROPERTY; LEASES...................................14
6.15. LICENSES, PERMITS, ETC......................................14
6.16. COMPLIANCE WITH ERISA .....................................15
6.17. MARGIN REGULATIONS..........................................16
6.18. EXISTING INDEBTEDNESS.......................................16
6.19. STATUS UNDER CERTAIN STATUTES...............................16
6.20. FOREIGN CORRUPT PRACTICES ACT; NO UNLAWFUL PAYMENTS.........16
6.21. PROXY STATEMENT AND REQUIRED VOTE...........................17
6.22. YEAR 2000 COMPLIANCE........................................17
6.23. NO BROKERS OR FINDERS.......................................17
7. REPRESENTATIONS OF THE PURCHASER.....................................17
<PAGE>
7.1. AUTHORIZATION, ETC..........................................17
7.2. PURCHASE FOR INVESTMENT.....................................18
8. INFORMATION AS TO THE COMPANY........................................18
8.1. FINANCIAL AND BUSINESS INFORMATION..........................18
8.2. INSPECTION..................................................20
9. OPTIONAL REDEMPTION OF THE DEBENTURES................................21
10. OPTIONAL CONVERSION..................................................21
10.1. INTENTIONALLY OMITTED.......................................21
10.2. CONVERSION BY THE HOLDER........................... ........21
10.3. CONVERSION PRICE............................................22
10.4. FRACTIONS OF SHARES.........................................23
10.5. ADJUSTMENT OF CONVERSION PRICE .............................23
10.6. NOTICE OF ADJUSTMENTS OF CONVERSION PRICE...................27
10.7. NOTICE OF CERTAIN CORPORATE ACTION..........................27
10.8. COMPANY TO RESERVE COMMON STOCK.............................28
10.9. INTENTIONALLY OMITTED.......................................28
10.10. COVENANT AS TO COMMON STOCK.................................28
10.11. CANCELLATION OF CONVERTED DEBENTURES........................28
10.12. PROVISIONS IN CASE OF CONSOLIDATION, MERGER OR SALE OF
ASSETS......................................................29
11. AFFIRMATIVE COVENANTS................................................29
11.1. COMPLIANCE WITH LAW.........................................29
11.2. INSURANCE...................................................29
11.3. MAINTENANCE OF PROPERTIES...................................30
11.4. PAYMENT OF TAXES............................................30
11.5. CORPORATE EXISTENCE, ETC....................................30
11.6. REPURCHASE OF THE DEBENTURES AT THE OPTION OF THE HOLDER
UPON A CHANGE OF CONTROL....................................30
11.7. DEBENTURES SUBORDINATE TO SENIOR OBLIGATIONS................32
12. NEGATIVE COVENANTS...................................................35
12.1. MERGER, CONSOLIDATION, ETC..................................35
12.2. NO DIVIDENDS................................................36
12.3. FORBEARANCE FROM RESTRICTIONS ON RIGHTS OF HOLDERS OF
DEBENTURES..................................................36
13. EVENTS OF DEFAULT ...................................................36
14. REMEDIES ON DEFAULT, ETC.............................................38
14.1. ACCELERATION. ..............................................38
<PAGE>
14.2. OTHER REMEDIES..............................................38
14.3. RESCISSION..................................................39
14.4. NO WAIVERS OR ELECTION OF REMEDIES, EXPENSES, ETC...........39
15. REGISTRATION; EXCHANGE; SUBSTITUTION OF DEBENTURES...................39
15.1. REGISTRATION OF DEBENTURES..................................39
15.2. TRANSFER AND EXCHANGE OF DEBENTURES.........................40
15.3. REPLACEMENT OF DEBENTURES...................................40
16. PAYMENTS ON DEBENTURES...............................................41
16.1. PLACE OF PAYMENT............................................41
16.2. HOME OFFICE PAYMENT.........................................41
16.3. INTEREST....................................................41
17. EXPENSES, ETC........................................................42
17.1. TRANSACTION EXPENSES........................................42
17.2. SURVIVAL....................................................42
18. INDEMNIFICATION......................................................42
18.1. INDEMNIFICATION BY THE COMPANY..............................42
18.2. TERMS AND CONDITIONS OF INDEMNIFICATION.....................43
19. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.........44
20. AMENDMENT AND WAIVER.................................................44
20.1. REQUIREMENTS................................................44
20.2. SOLICITATION OF HOLDERS OF DEBENTURES.......................45
20.3. BINDING EFFECT, ETC.........................................45
20.4. DEBENTURES HELD BY COMPANY, ETC.............................45
21. NOTICES..............................................................46
22. REPRODUCTION OF DOCUMENTS............................................46
23. STOCKHOLDER APPROVALS, ETC...........................................47
24. SUBSTITUTION OF PURCHASER............................................47
25. MISCELLANEOUS........................................................48
25.1. SUCCESSORS AND ASSIGNS......................................48
25.2. PAYMENTS DUE ON NON-BUSINESS DAYS...........................48
25.3. SEVERABILITY................................................48
25.4. CONSTRUCTION................................................48
25.5. COUNTERPARTS................................................48
<PAGE>
25.6. GOVERNING LAW...............................................49
25.7. FURTHER ASSURANCES..........................................49
............................................................50
<PAGE>
United Road Services, Inc.
$75,000,000
8% Convertible Subordinated
Debentures due 2008
-------------------------
Purchase Agreement
-------------------------
Dated as of November ___, 1998
<PAGE>
APPENDIX B
INVESTORS AGREEMENT
INVESTORS AGREEMENT, dated as of November 19, 1998 (this "Agreement"),
between United Road Services, Inc., a Delaware corporation (the "Company") and
Charter URS LLC ("Charterhouse").
WHEREAS, the Company and Charterhouse have entered into the Purchase
Agreement, dated of even date herewith (the "Purchase Agreement"), pursuant to
which the Company is issuing and selling $43,500,000 aggregate principal amount
of 8% Convertible Subordinated Debentures due 2008 of the Company (the
"Debentures") to Charterhouse at the First Closing (as defined in the Purchase
Agreement) and, subject to the approval of the stockholders of the Company, the
Company will issue and sell an additional $31,500,000 aggregate principal amount
of Debentures at the Second Closing (as defined in the Purchase Agreement) so
that $75 million in aggregate principal amount of Debentures will be
outstanding;
WHEREAS, the Debentures are convertible at any time at the option of
the Holder, in part or in whole, into shares of common stock, par value $.001
per share, of the Company (the "Common Stock") as provided for in the Purchase
Agreement; and
WHEREAS, the execution and delivery of this Agreement is a condition to
the closing of the Purchase Agreement.
NOW, THEREFORE, in consideration of the mutual promises and agreements
set forth herein, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree as follows:
1. Definitions.
As used in this Agreement, the following terms shall have the
meanings set forth below:
1.1 Capitalized terms used herein but not otherwise defined
shall have the meanings ascribed to them in the Purchase Agreement.
1.2 "Converted Shares" means the shares of Common Stock
actually received by Charterhouse upon conversion of some or all of the
Debentures.
1.3 "Initial Interest" means the aggregate number of shares of
Common Stock into which the Debentures held by Charterhouse or its Permitted
Transferees may be converted as of the Second Closing, provided, however, that
if the Second Closing does not occur "Initial Interest" shall mean the aggregate
number of shares of Common Stock into which the Debentures held by Charterhouse
or its Permitted Transferees may be converted as of the First Closing.
<PAGE>
1.4 "Investor Nominee" means any person nominated by
Charterhouse or its Permitted Transferee to serve as a director on the Company
Board pursuant to this Agreement.
1.5 "Liquidation" means the liquidation under applicable
bankruptcy or reorganization legislation, or the dissolution or winding up, of
the Company.
1.6 "Permitted Transferee" means any person to whom
Charterhouse may transfer the Debentures or the Converted Shares pursuant to
Section 4.2 provided that such Debentures or Converted Shares are transferred in
a transaction that is not registered pursuant to the Securities Act.
1.7 "Shares" means, at any time, the aggregate amount of (i)
the Converted Shares then held by Charterhouse or its Permitted Transferees,
(ii) the Converted Shares Charterhouse or its Permitted Transferees then have
the right to receive upon a conversion of all Debentures then held by them,
(iii) any other shares of Common Stock then held by Charterhouse and its
Permitted Transferees and (iv) any shares of Common Stock Charterhouse or its
Permitted Transferees have the right to receive upon the exercise of options or
warrants or upon the conversion of convertible securities of the Company (other
than the Debentures) then held by them.
1.8 "Share Price" means, as of any date, the closing price of
the Common Stock as reported in The Wall Street Journal on the last day of
trading immediately preceding such date.
1.9 "Stockholders" mean all the holders of Common Stock and
"Stockholder" shall mean any such Person.
1.10 "Transfer" means to sell, assign, transfer (voluntarily
or involuntarily) exchange (by merger or otherwise) or otherwise dispose of or
to grant a lien, encumbrance, pledge or other form of security interest.
2. Corporate Governance.
2.1 Initial Composition.
2.1.1 Effective at the First Closing, the Company
shall cause theCompany Board to be increased from eight directorships to ten
directorships (one of which new directorships shall be for an initial term
expiring at the Company's annual meeting of Stockholders in 2000 and the other
shall be for an initial term expiring at the Company's annual meeting of
Stockholders in 2001). Effective at the First Closing, the Company Board shall
appoint the Investor Nominees to fill the two vacancies created in accordance
with this Section 2.1.1.
2.1.2 Effective at the Second Closing, the Company
shall cause the Company Board to be increased from ten directorships to eleven
directorships (which new
<PAGE>
directorship shall be for an initial term expiring at the Company's annual
meeting of Stockholders in 2001). Effective at the Second Closing, the Company
Board shall appoint an Investor Nominee to fill the vacancy created in
accordance with this Section 2.1.2.
2.2 Election of Directors.
2.2.1 If the Second Closing does not occur:
(a) So long as Charterhouse and its Permitted
Transferees beneficially own Shares that represent at least 50% in the aggregate
of the Initial Interest, Charterhouse and its Permitted Transferees collectively
shall have the right to nominate two persons for election to the Company Board;
(b) So long as Charterhouse and its Permitted
Transferees beneficially own Shares that represent at least 17% but less than
50% in the aggregate of the Initial Interest, Charterhouse and its Permitted
Transferees collectively shall have the right to nominate one person for
election to the Company Board;
(c) If at any time Charterhouse and its
Permitted Transferees beneficially own Shares that represent less than 17% in
the aggregate of the Initial Interest, Charterhouse and its Permitted
Transferees shall no longer be entitled to nominate any persons for election to
the Company Board.
2.2.2 If the Second Closing does occur:
(a) So long as Charterhouse and its Permitted
Transferees beneficially own Shares that represent at least 50% in the aggregate
of the Initial Interest, Charterhouse and its Permitted Transferees collectively
shall have the right to nominate three persons for election to the Company
Board;
(b) So long as Charterhouse and its Permitted
Transferees beneficially own Shares that represent at least 25% but less than
50% in the aggregate of the Initial Interest, Charterhouse and its Permitted
Transferees collectively shall have the right to nominate two persons for
election to the Company Board;
(c) So long as Charterhouse and its Permitted
Transferees beneficially own Shares that represent at least 10% but less than
25% in the aggregate of the Initial Interest, Charterhouse and its Permitted
Transferees collectively shall have the right to nominate one person for
election to the Company Board;
(d) If at any time Charterhouse and its
Permitted Transferees beneficially own Shares that represent less than 10% in
the aggregate of the Initial Interest, Charterhouse and its Permitted
Transferees shall no longer be entitled to nominate any persons for election to
the Company Board.
<PAGE>
2.2.3 If at any time more Investor Nominees are
serving on the Company Board than are entitled to serve on the Company Board
pursuant to this Section 2.2, the requisite number of Investor Nominees shall
immediately resign from the Company Board so that the correct number of Investor
Nominees are serving on the Company Board.
2.2.4 Notwithstanding anything herein or in the
Purchase Agreement to the contrary, at any time that Charterhouse and its
Permitted Transferees are no longer entitled to nominate persons for election to
the Company Board, the Company Board may be reduced or increased at the option
of the Company.
2.3 Removal and Replacement of Directors.
2.3.1 Removal of Investor Nominees. If at any time
Charterhouse notifies the Company Board of its wish to remove any Investor
Nominee, the Company Board shall vote so as to remove such Investor Nominee
provided that such Investor Nominee can be removed in accordance with the
Company's Bylaws and the Delaware General Corporation Law. Removal of an
Investor Nominee by the Company Board requires the prior written consent of
Charterhouse unless such removal is based upon the gross negligence or wilfull
misconduct of the Investor Nominee.
2.3.2 Replacement of Directors. If at any time, a
vacancy is created on the Company Board by reason of the incapacity, death,
removal (other than by action of the Company's Stockholders) or resignation of
any Investor Nominee, then Charterhouse shall designate an individual to fill
such vacancy. If Charterhouse nominates an Investor Nominee for election to the
Company Board and the Stockholders fail to elect such Investor Nominee,
Charterhouse shall be entitled to designate a substitute Investor Nominee to
fill any vacancy created thereby.
2.3.3 Stockholder Meetings. At each meeting of
Stockholders of the Company at which directors are elected, the nominees for
directors proposed by the Company Board shall include the Investor Nominees
required pursuant to this Agreement.
2.4 Investor Nominees.
2.4.1 The Investor Nominees shall receive notice of
each meeting of the Company Board at the same time and in the same
manner as other members of the Company Board.
2.4.2 The Investor Nominees shall be entitled to
compensation and indemnification rights similar to those of other
non-employee directors of the Company. The Company shall at all times
maintain a directors' and officers' insurance policy covering the
Investor Nominees that provides in the aggregate substantially no less
coverage than the policy covering the current directors of the Company
as of the date of this Agreement.
<PAGE>
3. Certain Actions of the Company.
3.1 Actions of the Company. Subject to Section 3.3, the
Company shall not take, approve or otherwise ratify any of the following actions
(whether occurring in one or a series of related transactions) without the
approval of a majority of the Investor Nominees present at a meeting of the
Company Board duly called:
3.1.1 any declaration or payment of any dividend or
other payment to
holders of securities junior in right of payment to the Debentures (other than
scheduled interest and principal payments with respect to any Indebtedness of
the Company);
3.1.2 an increase in the size of the Company Board
(other than pursuant to Section 2.2)
3.1.3 any action (other than the election of
directors) which would require the approval of the Stockholders of the Company
under Delaware General Corporation Law or the rules and regulations of the
National Association of Securities Dealers, Inc. (or, in the event the shares of
common stock are listed on a national securities exchange, the rules and
regulations of such exchange).
3.1.4 adoption of a shareholder rights plan;
provided, however, that approval of a shareholder rights plan by a majority of
the Investor Nominees shall not be unreasonably withheld; and provided further
that Charterhouse agrees that with respect to each of Charterhouse and its
Permitted Transferees, the triggering event under such shareholder rights plan
shall be the beneficial ownership of more than 35.00% of the outstanding Common
Stock of the Company by such entity, unless Charterhouse and such Permitted
Transferees are acting in concert, in which case, the triggering event with
respect to Charterhouse and its Permitted Transferees shall be the beneficial
ownership by Charterhouse and its Permitted Transferees collectively of an
aggregate of more than 35.00% of the outstanding Common Stock.
3.2 Transactions with Affiliates. Subject to Section 3.3, the
Company shall not take, approve or otherwise ratify any transaction entered into
after the date hereof between the Company, on the one hand, and any Affiliate of
the Company (other than a subsidiary of the Company), on the other hand, without
the approval of the Company Board acting by a majority of the disinterested
directors.
3.3 The rights contained in Sections 3.1 and 3.2 shall
terminate on the earlier of (x) the date on which Charterhouse and its Permitted
Transferee beneficially own Shares that represent less than 10% of the Initial
Interest and (y) the date on which all of the Debentures have been converted
into Common Stock.
4. Standstill; Restriction on Transfer
4.1 Unless previously agreed in writing by the Company, until
the earlier of (x) the date on which Charterhouse or its Permitted Transferees
no longer beneficially owns any
<PAGE>
Shares or (y) the maturity date of the Debentures, Charterhouse and its
Permitted Transferees shall not (a) acquire any securities of the Company if,
after such acquisition, Charterhouse would beneficially own more than 35% of the
voting power of the Company's outstanding securities; or (b) except as permitted
pursuant to subsection (a) above, acquire, or attempt to acquire, directly or
indirectly, control of the Company (through a proxy contest or otherwise) or any
of the Company's businesses or assets.
The Company shall be entitled to equitable relief including
injunction, in the event of any breach of the provisions of this Section 4, and
neither Charterhouse nor the Investor Nominees shall oppose the granting of such
relief.
4.2 Except for transfers to an Affiliate of Charterhouse,
Charterhouse shall not Transfer the Debentures or the Converted Shares to any
Person without the prior written consent of the Company, (which consent will not
be unreasonably withheld), and unless any proposed Permitted Transferee agrees
in writing to be bound by the provisions of this Agreement (other than the
provisions of Section 4). A Permitted Transferee of Debentures or the Converted
Shares shall be entitled to all the rights set forth in this Agreement.
5. Miscellaneous.
5.1 Notices. All notices or other communications required or
permitted hereunder shall be in writing and shall be delivered personally, or
sent by facsimile, certified, registered or express mail, postage prepaid. Any
such notice shall be deemed given when so delivered personally, or sent by
facsimile, certified, registered or express mail or, if mailed, five days after
the date of deposit in the United States mail, as follows:
(a) if to the Company:
United Road Services, Inc.
8 Automation Lane
Albany, NY 12205
Attn: Edward T. Sheehan
Facsimile: (518) 446-0676
with a copy to:
McDermott, Will & Emery
600 13th Street, N. W.
Washington, D.C. 20005
Attn: Karen A. Dewis, Esq.
Facsimile: 202-756-8087
<PAGE>
(b) If to Charterhouse:
c/o Charterhouse Group International, Inc.
535 Madison Avenue
New York, NY 10022
Attn: President
Facsimile: (212) 750-9704
with a copy to:
Proskauer Rose LLP
1585 Broadway
New York, NY 10036-8299
Attn: Stephen W. Rubin, Esq.
Facsimile: (212) 969-2900
Any party may, by notice given in accordance with this Section 5.1, designate
another address or person for receipt of notices hereunder.
5.2 Amendment and Waiver.
5.2.1 No failure or delay on the part of any party
hereto in exercising any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy. The remedies provided for herein are
cumulative and are not exclusive of any remedies that may be available to the
parties hereto at law, in equity or otherwise.
5.2.2 Any amendment, supplement or modification of or
to any provision of this Agreement, any waiver of any provision of this
Agreement, and any consent to any departure by any party from the terms of any
provision of this Agreement, shall be effective (i) only if it is made or given
in writing and signed by the Company and Charterhouse and (ii) only in the
specific instance and for the specific purpose for which made or given.
5.3 Specific Performance. The parties hereto intend that each
of the parties has the right to seek damages or specific performance in the
event that any other party hereto wilfully fails to perform such party's
obligations hereunder. Therefore, if any party shall institute any action or
proceeding to enforce the provisions hereof, any party against whom such action
or proceeding is brought hereby waives any claim or defense therein that the
plaintiff party has an adequate remedy at law.
5.4 Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
5.5 Severability. If any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions hereof shall not be in any way impaired, unless the
<PAGE>
provisions held invalid, illegal or unenforceable shall substantially impair the
benefits of the remaining provisions hereof.
5.6 Entire Agreement. This Agreement is intended by the
parties as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties hereto
in respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein. This Agreement supersedes all prior agreements and understandings
between the parties with respect to such subject matter.
5.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
5.8 Further Assurances. Each of the parties shall, and shall
cause their respective Affiliates to, execute such instruments and take such
action as may be reasonably required or desirable to carry out the provisions
hereof and the transactions contemplated hereby.
5.9 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective permitted
successors and assigns. This Agreement is not assignable by the Company and may
be assigned by Charterhouse to any Permitted Transferee.
5.10 No Third Party Beneficiaries. This Agreement is not
intended to, and does not, create any rights or benefits of any Person other
than the parties hereto.
5.11 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, and all of which
taken together shall constitute one and the same instrument.
5.12 Effectiveness. Notwithstanding anything to the contrary
contained in this Agreement, this Agreement shall not become effective, and
Charterhouse shall have no rights hereunder, unless and until the First Closing
has occurred.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed, or have
caused to be executed, this Agreement on the date first written above.
UNITED ROAD SERVICES, INC.
By:_________________________________
Name:
Title:
CHARTER URS LLC
By:__________________________________
Name:
Title:
<PAGE>
INVESTORS AGREEMENT
between
UNITED ROAD SERVICES, INC.
AND
CHARTER URS LLC
--------------------------------------------
Dated as of November 19, 1998
--------------------------------------------
<PAGE>
APPENDIX C
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as
of November 19, 1998 among United Road Services, Inc., a Delaware corporation
(the "Company"), and Charter URS LLC (the "Investor").
WHEREAS, the Company and the Investor have entered into the
Purchase Agreement, dated of even date herewith (the "Purchase Agreement"),
pursuant to which the Company is issuing and selling $43,500,000 aggregate
principal amount of 8% Convertible Subordinated Debentures due 2008, of the
Company (the "Debentures") to the Investor at the First Closing (as defined in
the Purchase Agreement) and, subject to the approval of the stockholders of the
Company, the Company will issue and sell an additional $31,500,000 aggregate
principal amount of the Debentures at the Second Closing (as defined in the
Purchase Agreement) so that $75 million in aggregate principal amount of
Debentures will be outstanding;
<PAGE>
WHEREAS, the execution and delivery of this Agreement is a
condition to the closing of the Purchase Agreement.
NOW, THEREFORE, in consideration of the mutual promises and
agreements set forth herein, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
1. Definitions. For purposes of this Agreement:
(a) "Common Stock" means the common stock, par value $.001
per share, of the Company.
(b) "Exchange Act" means the Securities Exchange Act of
1934, as amended.
(c) "Form S-3" means such form under the Securities Act as
in effect on the date hereof or any similar "short form" registration statement
subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by the Company
with the SEC.
(d) "Holder" means any Person owning or having the right
to acquire Registrable Securities, or any assignee thereof in accordance with
Section 11 hereof.
(e) "Initiating Holders" means the Holder(s) initiating a
registration request under Section 2(a) hereof.
(f) "Investor Request" means a request from Holders that
in the aggregate beneficially own at least fifty percent (50%) of the
Registrable Securities outstanding as of the date of such request.
(g) "majority in interest of the Initiating Holders" means
Initiating Holders holding a majority of the Registrable Securities held by all
Initiating Holders.
(h) "Person" means any individual, partnership, limited
liability company, joint venture, corporation, association, trust or any other
entity or organization.
(i) "Register," "registered," and "registration" refer to
a registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act, and the declaration or
ordering of effectiveness of such registration statement or document.
(j) "Registrable Securities" means (1) any shares of
Common Stock directly or indirectly issuable or issued upon conversion of the
Debentures, (2) any shares of Common Stock hereafter acquired by any Investor
(or any assignee thereof in accordance with Section 11) and (3) any shares of
Common Stock issued to any Investor (or any asssignee thereof in accordance with
Section 11) as (or issuable upon the conversion or exercise of any warrant,
right or other security which is issued as) a dividend or other distribution
with respect to, or in exchange for or in replacement of, such Common Stock or
other warrants, rights or securities; provided, however, that any Registrable
Securities sold by the Investor in a transaction in which the Investor's rights
under this Agreement are not assigned pursuant to Section 11 below shall cease
to be Registrable Securities from and after the time of such sale.
(k) "SEC" means the Securities and Exchange Commission.
(l) "Securities Act" means the Securities Act of 1933, as
amended.
(m) "Violation" means any of the following statements,
omissions or violations: (i) any untrue statement or alleged untrue statement of
<PAGE>
a material fact contained in a registration statement under this Agreement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto or any documents filed under state
securities or "blue sky" laws in connection therewith, (ii) the omission or
alleged omission to state therein a material fact required to be stated therein,
or necessary to make the statements therein not misleading, or (iii) any
violation or alleged violation by the Company of the Securities Act, the
Exchange Act, any state securities law or any rule or regulation promulgated
under the Securities Act, the Exchange Act or any state securities law.
2. Request for Registration .
(a) If at any time after the first anniversary of the First Issue
Date, the Company shall receive a written Investor Request that the Company file
a registration statement under the Securities Act, then the Company shall,
within ten (10) days of the receipt thereof, give written notice of such request
to all Holders and, subject to the limitations of Section 2(b) below, shall file
(as expeditiously as practicable, and in any event within sixty (60) days after
the receipt of such request), and use its best efforts to have declared
effective a registration statement under the Securities Act with respect to all
Registrable Securities which the Holders request to be registered by the giving
of notice to the Company within twenty (20) days after the mailing of the
Company's notice referred to above, each such notice to be given in accordance
with Section 19 below.
(b) If the Initiating Holders intend to distribute the
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
this Section 2 and the Company shall include such information in the written
notice referred to in Section 2(a); provided, however, that notwithstanding
anything herein to the contrary, in no event shall the Company be required to
effect more than two underwritten offerings in any 12 month period. In the event
of an underwritten offering, the right of any Holder to include such Holder's
Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed by
a majority in interest of the Initiating Holders and such Holder) to the extent
provided herein. All Holders proposing to distribute their securities through
such underwriting shall (together with the Company as provided in Section 4(e))
enter into an underwriting agreement in customary form with the underwriter or
underwriters so selected for such underwriting by a majority in interest of the
Initiating Holders; provided, however, that no Holder shall be required to make
any representations, warranties or indemnities except as they relate to such
Holder's ownership of shares and authority to enter into the underwriting
agreement and to such Holder's intended method of distribution, and the
liability of such Holder (whether by indemnification, contribution or otherwise)
shall be limited to an amount equal to the net proceeds from the offering
received by such Holder. Notwithstanding any other provision of this Section 2,
if the underwriter advises the Initiating Holders that marketing factors require
a limitation of the number of shares to be underwritten, then the Initiating
Holders shall so advise the Company and the Company shall so advise all Holders
of Registrable Securities which would otherwise be underwritten pursuant hereto,
and the number of shares of Registrable Securities that may be included in the
underwriting shall be allocated as follows: (i) first, among the Initiating
Holders, in proportion (as nearly as practicable) to the aggregate amount of
Registrable Securities held by all such Holders, until such Holders have
included in the underwriting all shares requested by such Holders to be
included, (ii) second, among all other Holders of Registrable Securities that
have elected to participate in such underwritten offering, in proportion (as
nearly as practicable) to the amount of Registrable Securities owned by such
Holders until such holders have included in the underwriting all shares
requested by such holders to be included and (iii) thereafter among any other
holders of Common Stock who have exercised their piggyback registration rights
with respect to such registration.
<PAGE>
(c) The Company shall be obligated to effect only two (2)
registrations pursuant to an Investor Request under this Section 2 (an offering
which is not consummated shall not be counted for this purpose); provided,
however, that the Company shall be obligated to effect as many registrations
(but not more than one (1) per quarter) as may be requested by Holders of
Registrable Securities pursuant to any Investor Request in the event and so long
as registration pursuant to Form S-3 or any similar "short-form" registration
statement is available. Notwithstanding anything to the contrary, the Company
shall not be obligated to effect more than one (1) registration (other than
"short-form" registrations on Form S-3) pursuant to this Section 2 in any six
(6) month period.
(d) Notwithstanding the foregoing, if the Company shall furnish
to the Initiating Holders a certificate signed by the President of the Company
stating that in the good faith judgment of the Board of Directors of the
Company, it would be detrimental to the Company and its stockholders for such
registration statement to be filed and it is therefore essential to defer the
filing of such registration statement, the Company shall have the right to defer
such filing for up to one hundred twenty (120) days after receipt of the request
of the Initiating Holders; provided, however, that the Company may not utilize
this right for more than an aggregate of one hundred twenty (120) days in any
twelve (12) month period; and provided further that, if at the time of any
Investor Request for a registration pursuant to this Section 2, the Company has
fixed plans to file within sixty (60) days after such request a registration
statement covering the sale of any of its securities in a public offering under
the Securities Act, no registration shall be required to be initiated pursuant
to this Section 2 until ninety (90) days after the effective date of such
Company registration unless the Company is no longer proceeding diligently to
effect such registration and so long as the Company shall provide the Holders
with the right to participate in such public offering pursuant to, and subject
to, Section 3.
3. Company Registration. If (but without any obligation to do so)
the Company proposes to register (including for this purpose a registration
effected by the Company for stockholders other than Holders of Registrable
Securities) any of its Common Stock under the Securities Act in connection with
the public offering of such Common Stock solely for cash (other than a
registration on Form S-8 (or similar or successor form) relating solely to the
sale of securities to participants in a Company stock plan or to other
compensatory arrangements to the extent includable on Form S-8 (or similar or
successor form), or a registration on Form S-4 (or similar or successor form)),
the Company shall, at such time, promptly give each Holder written notice of
such registration. Upon the written request of each Holder given within twenty
(20) days after mailing of such notice by the Company in accordance with Section
19, the Company shall, subject to the provisions of Section 8, use its best
efforts to cause to be registered under the Securities Act all of the
Registrable Securities that each such Holder has requested to be registered. The
Company shall have no obligation under this Section 3 to make any offering of
its securities, or to complete an offering of its securities that it proposes to
make.
4. Obligations of the Company. Whenever required under this
Agreement to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities being registered thereunder,
keep such registration statement effective for up to one hundred twenty (120)
days or until the Holders have completed the distribution referred to in such
registration statement, whichever occurs first (but in any event for at least
any period required under the Securities Act); provided that before filing such
registration statement or any amendments thereto, the Company will furnish to
the Holders copies of all such registration statement or amendments thereto
<PAGE>
proposed to be filed.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to the Holders such number of copies of such
registration statement and of each amendment and supplement thereto (in each
case without exhibits unless requested by such Holders), such number of copies
of the prospectus contained in such registration statement (including each
preliminary prospectus and any summary prospectus) and any other prospectus
filed under Rule 424 under the Securities Act, in conformity with the
requirements of the Securities Act, and such other documents as Holders may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
"blue sky" laws of such states or jurisdictions as shall be reasonably requested
by the Holders, provided that the Company shall not be required in connection
therewith or as a condition thereto (i) to qualify to do business in any state
or jurisdiction where it would not otherwise be required to qualify but for the
requirements of this clause (d), or (ii) to file a general consent to service of
process in any such state or jurisdiction.
(e) In the event of any underwritten public offering,
enter into and perform its obligations under an underwriting agreement, in usual
and customary form, with the managing underwriter of such offering.
(f) Notify each Holder of Registrable Securities covered
by such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
(g) Notify each Holder of Registrable Securities covered
by such registration statement and such Holder's underwriters, if any, and
confirm such advice in writing: (i) when the registration statement has become
effective, (ii) when any post-effective amendment to the registration statement
becomes effective and (iii) of any request by the SEC for any amendment or
supplement to the registration statement or prospectus or for additional
information.
(h) Notify each Holder of Registrable Securities if at any
time the SEC should institute or threaten to institute any proceedings for the
purpose of issuing, or should issue, a stop order suspending the effectiveness
of the Registration Statement. Upon the occurrence of any of the events
mentioned in the preceding sentence, the Company will use its best efforts to
prevent the issuance of any such stop order or to obtain the withdrawal thereof
as soon as possible. The Company will advise each Holder of Registrable
Securities promptly of any order or communication of any public board or body
addressed to the Company suspending or threatening to suspend the qualification
of any Registrable Securities for sale in any jurisdiction.
(i) In connection with a registration pursuant to which
securities are being sold through underwriters (i) on the date that such
Registrable Securities are delivered to the underwriters for sale, an opinion,
dated such date, of the counsel representing the Company for the purposes of
such registration, in form and substance as is customarily given to underwriters
in an underwritten public offering, addressed to the underwriters, and (ii) on
<PAGE>
the date that the registration statement with respect to such securities becomes
effective, a "comfort" letter dated such date, from the independent certified
public accountants of the Company, in form and substance as is customarily given
by independent certified public accountants to underwriters in an underwritten
public offering, addressed to the underwriters, and, a reaffirmation of such
letter on the date that such Registrable Securities are delivered to the
underwriters for sale.
(j) As soon as practicable after the effective date of the
registration statement, and in any event within sixteen (16) months thereafter,
have "made generally available to its security holders" (within the meaning of
Rule 158 under the Securities Act) an earning statement (which need not be
audited) covering a period of at least twelve (12) months beginning after the
effective date of the registration statement and otherwise complying with
Section 11(a) of the Securities Act.
5. Amendments, Supplements to Prospectus. Immediately upon
receipt of a notice referred to in Section 4(f) hereof, each Holder agrees to
(i) cease making sales of securities pursuant to any then effective registration
statement or any Prospectus contained therein until it has received from the
Company an amendment or supplement to the registration statement or Prospectus
and (ii) to promptly deliver to the Company any copies of the registration
statement or such Prospectus then in its possession.
6. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder's Registrable
Securities. If any registration statement or comparable statement under the
Securities Act refers to an Investor or any of its affiliates, by name or
otherwise, as the holder of any securities of the Company then, unless counsel
to the Company advises the Company that the Securities Act requires that such
reference be included in any such statement, the Investor shall have the right
to require the deletion of such reference to itself and its affiliates.
7. Expenses of Registration.
(a) Demand Registration. All expenses, other than underwriting
discounts and commissions relating to Registrable Securities, incurred in
connection with registrations, filings or qualifications pursuant to Section 2,
including without limitation all registration, filing and qualification fees,
printers' fees, fees and disbursements of counsel and accountants for the
Company, and the reasonable fees and disbursements of one counsel (selected by a
majority in interest of the Initiating Holders) for the selling Holders shall be
borne by the Company.
(b) Company Registration. The Company shall bear and pay all
expenses incurred in connection with any registration, filing or qualification
of Registrable Securities with respect to the registrations pursuant to Section
3 for each Holder, including without limitation all registration, filing and
qualification fees, printers' fees relating or apportionable thereto and the
fees and disbursements of one counsel for the selling Holders (selected by the
Holders of a majority of the Registrable Securities being registered), but
excluding underwriting discounts and commissions relating to Registrable
Securities.
8. Intentionally Omitted.
9. Underwriting Requirements. In connection with any offering
initiated by the Company involving an underwriting of shares being issued by the
Company, the Company shall not be required under Section 3 to include any
Holder's securities in such underwriting unless such Holder accepts the terms of
the underwriting as agreed upon between the Company and the underwriters
<PAGE>
selected by the Company, and then only in such quantity as will not, in the
opinion of the underwriters, exceed the largest number of securities requested
to be included in such offering which can be sold without having an adverse
effect on such offering by the Company; provided, however, that no Holder
participating in such underwriting shall be required to make any
representations, warranties or indemnities except as they relate to such
Holder's ownership of shares and authority to enter into the underwriting
agreement and to such Holder's intended method of distribution, and the
liability of such Holder (whether by indemnification, contribution or otherwise)
shall be limited to an amount equal to the net proceeds from the offering
received by such Holder. If the total number of securities, including
Registrable Securities, requested by stockholders to be included in such
offering exceeds the largest number of securities that the underwriters
reasonably believe can be sold without having an adverse effect on such
offering, then the Company shall be required to include in the offering only
that number of such securities, including Registrable Securities, which the
underwriters believe will not have an adverse effect on such offering. The
securities of the Holders so included shall be allocated as follows: (i) among
the Holders of Registrable Securities that have elected to participate in such
offering and other holders of Common Stock listed on Schedule I hereto, pro rata
according to the number of Registrable Securities held by each such holder of
Registrable Securities (in the case of the Holders) or Common Stock (in the case
of the holders of Common Stock listed on Schedule I) and (ii) thereafter, to the
extent additional securities may be included in such offering, to other selling
stockholders, pro rata according to the total number of securities entitled to
be included therein owned by each such other selling stockholder or in such
other proportions as shall mutually be agreed to by such other selling
stockholders.
10. Indemnification. In the event any Registrable Securities are
included in a registration statement under this Agreement:
(a) The Company will indemnify and hold harmless each
Holder, its heirs, personal representatives and assigns, each of such Holder's
partners, each of such Holder's, and each of such Holder's partners', officers,
directors, partners, employees and affiliates, any underwriter (as defined in
the Securities Act) for such Holder and each Person, if any, who controls such
Holder or underwriter within the meaning of the Securities Act or the Exchange
Act against any losses, claims, damages or liabilities (joint or several) to
which they may become subject under the Securities Act, the Exchange Act or
other federal or state securities law, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon a
Violation; and the Company will pay to each such indemnified party, as incurred,
any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the indemnity agreement contained in this Section 9(a)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case to a particular indemnified party for any
such loss, claim, damage, liability or action to the extent that it arises out
of or is based upon a Violation which occurs in reliance upon and in conformity
with written information furnished expressly for use in connection with such
registration by such indemnified party.
(b) Each selling Holder will indemnify and hold harmless
the Company, each of its directors, each of its officers who has signed the
registration statement, each Person, if any, who controls the Company within the
meaning of the Securities Act, any underwriter, any other Holder selling
securities in such registration statement and any controlling Person of any such
underwriter or other Holder, against any losses, claims, damages or liabilities
(joint or several) to which any of the foregoing Persons may become subject,
under the Securities Act, the Exchange Act or other federal or state securities
law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case to
<PAGE>
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by such Holder expressly
for use in connection with such registration; and each such Holder will pay, as
incurred, any legal or other expenses reasonably incurred by any Person intended
to be indemnified pursuant to this Section 9(b), in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the indemnity agreement contained in this Section 9(b)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Holder, which consent shall not be unreasonably withheld; and provided further,
that, in no event shall the liability of any Holder under this Section 9(b)
exceed the net proceeds from the offering received by such Holder.
(c) Promptly after receipt by an indemnified party under
this Section 9 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 9, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if in the reasonable opinion of counsel to an
indemnified party, representation of such indemnified party by the counsel
retained by the indemnifying party would be inappropriate due to actual or
potential differing interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any such action shall not relieve such indemnifying party of any liability to
the indemnified party under this Section 9 except if, and only to the extent
that, the indemnifying party is actually prejudiced thereby.
(d) The obligations of the Company and Holders under this
Section 9 shall survive the completion of any offering of Registrable Securities
in a registration statement under this Agreement, and otherwise.
(e) Any indemnity agreements contained herein shall be in
addition to any other rights to indemnification or contribution which any
indemnified party may have pursuant to law or contract and shall remain
operative and in full force and effect regardless of any investigation made or
omitted by or on behalf of any indemnified party.
(f) If for any reason the foregoing indemnity is
unavailable, then the indemnifying party shall contribute to the amount paid or
payable by the indemnified party as a result of such losses, claims, damages,
liabilities or expenses (i) in such proportion as is appropriate to reflect the
relative benefits received by the indemnifying party on the one hand and the
indemnified party on the other or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law or provides a lesser sum to the
indemnified party than the amount hereinafter calculated, in such proportion as
is appropriate to reflect not only the relative benefits received by the
indemnifying party on the one hand and the indemnified party on the other but
also the relative fault of the indemnifying party and the indemnified party as
well as any other relevant equitable considerations. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to in-formation supplied by or on behalf of the
indemnifying party or the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. No Person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation. Notwithstanding anything to the contrary in this Section 9,
no Holder shall be required, pursuant to this Section 9, to contribute any
<PAGE>
amount in excess of the net proceeds received by such indemnifying party from
the sale of Common Stock in the offering to which the losses, claims, damages,
liabilities or expenses of the indemnified party relate.
11. Reports Under the Exchange Act. With a view to making
available to the Holders the benefits of Rule 144 under the Securities Act and
any other rule or regulation of the SEC that may at any time permit a Holder to
sell securities of the Company to the public without registration or pursuant to
a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act;
(b) take such action as is necessary to enable the Holders to
utilize Form S-3 for the sale of their Registrable Securities;
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144 or that
it qualifies as a registrant whose securities may be resold pursuant to Form S-3
(at any time it so qualifies), (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.
12. Assignment of Registration Rights. The rights to cause the
Company to register Registrable Securities pursuant to this Agreement may be
assigned in whole or in part by a Holder to one or more Permitted Transferees
under the Investors Agreement of not less than 10% of the Registrable Securities
owned by such Holder, provided that such transferee or assignee delivers to the
Company a written instrument by which such transferee or assignee agrees to be
bound by the obligations imposed on Holders under this Agreement to the same
extent as if such transferee or assignee was a party hereto.
13. Limitations on Subsequent Registration Rights. From and after
the date of this Agreement, the Company shall not, without the prior written
consent of Holders holding a majority of the Registrable Securities then
outstanding, enter into any agreement with any holder or prospective holder of
any securities of the Company which would allow such holder or prospective
holder to include such securities in any registration filed under this
Agreement, unless under the terms of such agreement, such holder or prospective
holder may include such securities in any such registration only to the extent
that the inclusion of such holder's securities will not reduce the amount of the
Registrable Securities of any Holder which is included therein.
14. Amendment; Waiver. Any provision of this Agreement may be
amended only with the written consent of the Company and the Holders of a
majority of the Registrable Securities then outstanding. The observance of any
provision of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively) only with the written
consent of the party to be charged, provided that the Holders of a majority of
the Registrable Securities then outstanding may act on behalf of all Holders of
Registrable Securities. Any amendment or waiver effected in accordance with this
Section 14 shall be binding upon each Holder of Registrable Securities at the
time outstanding, each future Holder of all such securities, and the Company.
15. Changes in Registrable Securities. If, and as often as, there
are any changes in the Registrable Securities by way of stock split, stock
dividend, combination or reclassification, or through merger, consolidation,
reorganization or recapitalization, or by any other means, appropriate
<PAGE>
adjustment shall be made in the provisions of this Agreement, as may be
required, so that the rights and privileges granted hereby shall continue with
respect to the Registrable Securities as so changed. Without limiting the
generality of the foregoing, the Company will require any successor by merger or
consolidation to assume and agree to be bound by the terms of this Agreement, as
a condition to any such merger or consolidation.
16. Entire Agreement. This Agreement constitutes the full and
entire understanding and agreement among the parties with regard to the subject
matter hereof. Nothing in this Agreement, express or implied, is intended to
confer upon any Person, other than the parties hereto and their respective
successors and assigns, any rights, remedies, obligations, or liabilities under
or by reason of this Agreement, except as expressly provided herein.
17. Governing Law. This Agreement shall be governed in all
respects by the laws of the State of New York as such laws are applied to
agreements between New York residents entered into and to be performed entirely
within New York.
18. Successors and Assigns. The provisions hereof shall inure to
the benefit of, and be binding upon, the successors, permitted assigns (as
provided in Section 11), heirs, executors and administrators of the parties
hereto.
19. Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon receipt by the party to be notified (including by
telecopier, receipt confirmed) or three (3) days after deposit with the United
States Post Office, by registered or certified mail, postage prepaid and
addressed to the party to be notified (a) if to a party other than the Company,
at such party's address set forth at the end of this Agreement or at such other
address as such party shall have furnished the Company in writing, or, until any
such party so furnishes an address to the Company, then to and at the address of
the last holder of the shares covered by this Agreement who has so furnished an
address to the Company, or (b) if to the Company, at its address set forth at
the end of this Agreement, or at such other address as the Company shall have
furnished to the parties in writing.
20. Effectiveness. Notwithstanding anything to the contrary
contained in this Agreement, this Agreement shall not become effective, and the
Investor shall have no rights hereunder, unless and until the First Closing has
occurred.
21. Severability. Any invalidity, illegality or limitation on the
enforceability of this Agreement or any part thereof, by any party whether
arising by reason of the law of the respective party's domicile or otherwise,
shall in no way affect or impair the validity, legality or enforceability of
this Agreement with respect to other parties. If any provision of this Agreement
shall be judicially determined to be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
22. Titles and Subtitles. The titles of the Sections of this
Agreement are for convenience of reference only and are not to be considered in
construing this Agreement.
23. Delays or Omissions; Remedies Cumulative. It is agreed that
no delay or omission to exercise any right, power or remedy accruing to the
parties, upon any breach or default of the Company under this Agreement, shall
impair any such right, power or remedy, nor shall it be construed to be a waiver
of any such breach or default, or any acquiescence therein, or of any similar
breach or default thereafter occurring; nor shall any waiver of any single
breach or default be deemed a waiver of any other breach or default theretofore
or thereafter occurring. It is further agreed that any waiver, permit, consent
or approval of any kind or character by a party of any breach or default under
<PAGE>
this Agreement, or any waiver by a party of any provisions or conditions of this
Agreement must be in writing and shall be effective only to the extent
specifically set forth in writing and that all remedies, either under this
Agreement, or by law or otherwise afforded to a party, shall be cumulative and
not alternative.
24. Attorneys' Fees. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorney's fees, costs and necessary
disbursements in addition to any other relief to which such party may be
entitled.
25. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
[END OF TEXT. SIGNATURE PAGE TO FOLLOW]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Registration
Rights Agreement as of the date first above written.
COMPANY:
UNITED ROAD SERVICES, INC.
Address:
8 Automation Lane By: /s/ Edward T. Sheehan
Albany, NY 12205 Edward T. Sheehan
Attn: President Chief Executive Officer
Telecopy: (212) _________
INVESTORS:
Address: CHARTER URS LLC
c/o Charterhouse Group International, Inc. By: /s/ Michael S. Pfeffer
535 Madison Avenue Michael S. Pfeffer
New York, NY 10022
Attn: President
Telecopy: (212) 750-9704
SCHEDULE I TO REGISTRATION RIGHTS AGREEMENT
Edward T. Sheehan
Ross Berner
Mark McKinney
All holders of Common Stock issued by the Company in connection
with its private placement of securities completed in January 1998.
All holders of Common Stock issued by the Company in connection
with its acquisitions completed on May 6, 1998.
<PAGE>
PROXY CARD
United Road Services, Inc.
Special Meeting of Stockholders
, 1999
The undersigned hereby appoints [ ] and [ ]
(the "Proxies"), and each of them, attorneys and proxies of the undersigned,
each with power of substitution and resubstitution, to attend, vote and act for
the undersigned at the Special Meeting of Stockholders (the "Meeting") of
United Road Services, Inc. (the "Company") to be held on [DATE], at [TIME] at
[LOCATION]. The Proxies shall cast votes according to the number of shares of
the Company which the undersigned may be entitled to vote with respect to the
proposal set forth below, in accordance with the specification indicated, if
any, and shall have all the powers which the undersigned would possess if
personally present. The undersigned hereby revokes any prior proxy to vote at
the Meeting, and hereby ratifies and confirms all that said Proxies, or any of
them, may lawfully do by virtue hereof or thereof.
THIS PROXY WILL BE VOTED AS SPECIFIED BELOW WITH RESPECT TO THE ACTIONS TO BE
TAKEN ON THE FOLLOWING PROPOSAL. IN THE ABSENCE OF ANY SPECIFICATION, THIS
PROXY WILL BE VOTED IN FAVOR OF THE PROPOSAL.
1. ISSUANCE OF SECOND TRANCHE OF $31,500,000 PRINCIPAL AMOUNT OF THE COMPANY'S
8% SUBORDINATED CONVERTIBLE DEBENTURES DUE 2008.
[_] FOR [_] AGAINST [_] ABSTAIN
If any other matters properly come before the meeting or any adjournment
thereof, this proxy will be voted according to the judgment of the persons
named above as proxies.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF SPECIAL MEETING
OF SHAREHOLDERS OF THE COMPANY AND THE PROXY STATEMENT DATED
.
THIS PROXY IS SOLICITED AND PROPOSED BY THE BOARD OF DIRECTORS OF THE
COMPANY, WHICH UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF THE PROPOSALS.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
