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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-24010
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UNITED ROAD SERVICES, INC.
(Exact name of registrant as specified in its charter)
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Delaware 94-3278455
(I.R.S. Employer
(State or other jurisdiction of Identification No.)
incorporation or organization)
8 Automation Lane 12205
Albany, New York (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code:
(518) 446-0140
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(the "Common Stock")
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The registrant estimates that the aggregate market value of the registrant's
Common Stock held by non-affiliates on March 22, 1999 was $144.4 million.*
The following documents are incorporated into this Form 10-K by reference:
Certain portions of the registrant's Proxy Statement for its Annual
Meeting of Stockholders to be held on May 24, 1999 are incorporated by
reference into Part III of this Report.
As of March 22, 1999, 17,662,225 shares of the registrant's Common Stock
were outstanding.
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* Without acknowledging that any individual director or executive officer of
the Company is an affiliate, the shares over which they have voting control
have been included as owned by affiliates solely for the purposes of this
computation.
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PART I
ITEM 1. Business
General
United Road Services, Inc. (the "Company") was formed in July 1997 to become
a leading national provider of motor vehicle and equipment towing, recovery
and transport services. At the time of the Company's initial public offering
in May 1998, the Company acquired four towing and recovery businesses and
three transport businesses (the "Founding Companies"). Between May 6, 1998 and
December 31, 1998, the Company acquired 25 additional towing and recovery
businesses and nine additional transport businesses (the "Acquired
Companies"). Among the companies acquired during 1998 were E&R Towing and
Garage, Inc. and Environmental Auto Removal, Inc. (collectively, "E&R"), which
the Company acquired on August 21, 1998 for an aggregate purchase price of
approximately $26.0 million, and Pilot Transport, Inc. ("Pilot"), which the
Company acquired on December 9, 1998 for a purchase price of approximately
$25.0 million.
As of December 31, 1998, the Company operated a network of 36 towing and
recovery service locations and 14 transport locations in a total of 17 states.
The Company believes that it is one of the largest providers of motor vehicle
and equipment towing, recovery and transport services in the United States.
During 1998, approximately 46.6% of the Company's net revenue was derived from
the provision of towing and recovery services and approximately 53.4% was
derived from the provision of transport services. Further information with
respect to these segments of the Company's business may be found in Note 11 to
the Company's Consolidated Financial Statements included elsewhere herein.
The Company offers a broad range of towing and recovery services in its
local markets, including towing, impounding and storing motor vehicles,
conducting lien sales and auctions of abandoned vehicles, towing heavy
equipment and recovering and towing heavy-duty commercial and recreational
vehicles. The Company derives revenue from towing and recovery services based
on distance, time or fixed charges and from related impounding and storage
fees. If impounded vehicles are not claimed by their owners within prescribed
time periods, the Company is entitled to be paid from the proceeds of lien
sales, scrap sales or auctions. The Company's towing and recovery customers
include commercial entities, such as automobile leasing companies, insurance
companies, automobile dealers, repair shops and fleet operators,
municipalities, law enforcement agencies such as police, sheriff and highway
patrol departments and individual motorists.
The Company provides transport services for new and used vehicles throughout
the United States. The Company derives revenue from transport services
according to pre-set rates based on mileage or negotiated flat rates. The
Company's transport customers include commercial entities, such as automobile
leasing companies, automobile auction companies and automobile dealers, and
individual motorists.
Industry Background
The Company estimates that motor vehicle and equipment towing and transport
services generated net revenue in excess of $14 billion in the United States
in 1997. Based on available data, the Company believes that there are over
36,000 motor vehicle and equipment towing and transport businesses in the
United States, most of which are small, local and owner-operated, with limited
access to capital for modernization and expansion. The Company believes that
demand for towing, recovery and transport services has been impacted by the
following factors: an increase in the number and average age of registered
vehicles, which increases demand for all types of towing, recovery and
transport services; a rise in government mandates (and increased enforcement
of such mandates) against unlicensed or uninsured drivers and unregistered
vehicles, which results in higher demand for towing and impounding services;
the growing popularity of leasing (which, according to the National Automobile
Dealers Association, has risen from 5% of all new auto sales in 1985 to 30% in
1996), which increases demand for transport services to move off-lease
vehicles to auctions and dealers for sale; the increasing mobility of the
United States workforce, which increases demand for automobile transport in
connection with career-related moves; and rising new and used auto sales,
which increases demand for automobile transport generally.
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Strategy
The Company believes there are significant opportunities for a national
provider of towing, recovery and transport services with high quality service
to increase revenue and profitability by expanding its scope of services and
customer base, achieving operating efficiencies and expanding through
acquisitions. As certain areas within the automobile industry experience
growth and consolidation, such as new and used automobile dealerships, rental
car companies and automobile auction companies, the Company believes that the
demand will increase for a provider of towing, recovery and transport services
with the resources and geographic coverage to serve the expanding needs of
these businesses. The Company further believes that effective implementation
of its operating and acquisition strategies as described below will position
the Company to secure operating and competitive advantages over smaller
competitors.
The Company also believes that the fragmented nature of the towing, recovery
and transport markets presents an attractive opportunity for consolidation.
The Company's management team includes executives with experience in
implementing acquisition programs and effectively integrating acquired
businesses as well as local managers who have significant contacts and
experience in towing, recovery and transport services. The Company believes
that this combination and the fragmented nature of the towing, recovery and
transport markets provides the Company with the capability and opportunity to
implement an effective consolidation strategy, assuming that it has access to
sufficient capital to pursue this strategy.
Operating Strategy
Provide High Quality Service. The Company believes that timely, professional
and dependable service is the primary generator of repeat towing, recovery and
transport service business. The Company intends to continue to implement
proven practices throughout its operations in areas such as dispatching
technology, driver training and professionalism, preventive maintenance and
safety. Through these practices, the Company intends to continue to offer high
quality service to all of its customers.
Expand Scope of Services and Customer Base. The Company intends to continue
to expand the scope of its services by introducing certain capabilities of the
businesses it acquires into other markets where the Company believes such
services can be successfully marketed. The Company believes that its size and
financial and other resources will permit it to attract customers and
contracts that require greater towing, recovery, transport and storage
capabilities than those possessed by local owner-operators. The Company
intends to utilize its geographic diversity to pursue additional business from
new and existing customers that operate on a regional or national basis, such
as automobile manufacturers, leasing companies, insurance companies and
automobile auction companies. The Company will also seek to develop additional
capabilities and services to complement its existing operations. For example,
as part of the Company's development of a national network of transport
operations, the Company intends to utilize its operating locations as
marshalling yards, which will enable the Company to collect vehicles in one
location and allocate them to particular transport vehicles and routes to
maximize asset utilization.
Achieve Operating Efficiencies. The Company will seek to achieve operating
efficiencies through improved asset utilization by implementing a "hub-and-
spoke" strategy within identified towing markets, with a centralized "hub" for
management, dispatch and maintenance operations that supports multiple
satellite truck and impound yards. The Company believes that this strategy
will allow it to provide timely service throughout a particular market, while
also enabling it to consolidate certain duplicative systems and facilities.
Through this practice, the Company expects to spread certain fixed costs over
the larger vehicle fleet. With respect to its transport operations, the
Company intends to utilize its proprietary National Transportation Management
System to maximize truck utilization through centralized dispatching and to
perform integrated invoicing and other administrative functions. The Company
also expects to continue to realize cost savings by continuing to centralize
certain administrative functions at its headquarters in Albany, New York and
by using its purchasing power to seek improved pricing in areas such as fuel,
vehicles and parts.
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Maintain Local Expertise. The Company anticipates that management of the
companies it has acquired and companies it acquires in the future will
continue to maintain local control of their daily operations. The Company
believes that this strategy will allow it to take advantage of the local and
regional market knowledge, name recognition and customer relationships
possessed by each company it acquires.
Acquisition Strategy
A key component of the Company's growth strategy has been to acquire other
towing, recovery and transport businesses in strategic markets and locations.
Depending on market conditions and the availability of financing, the Company
intends to continue to pursue its acquisition strategy.
Enter New Geographic Markets. As part of its "hub-and-spoke" operating
strategy, the Company intends to acquire established, high-quality towing
companies in markets where it can establish a leading market position to serve
as "hubs" into which additional operations may be consolidated. The Company
also intends to acquire transport businesses with complementary transport
routes and capabilities in markets across North America in order to create an
integrated national transport network. The Company further believes that by
virtue of its regional towing and storage operations it will accumulate many
vehicles that need to be delivered to auctions, repair shops or scrap metal
facilities, and that these operations will feed its transport services.
Expand Within Existing Geographic Markets. Once the Company has established
a core presence in a market, it will seek to strengthen its market position by
acquiring additional large companies that offer similar services. The Company
will also pursue "tuck-in" acquisitions of smaller companies, whose businesses
can be integrated into the Company's operations, thereby utilizing its
existing infrastructure over a broader vehicle fleet and revenue base. In
addition, the Company may seek to vertically integrate its operations by
acquiring companies which offer complementary services that the Company does
not currently offer. In cases where acquired companies have developed a local
or regional identity and customer relationships, the Company may continue to
maintain the existing business names and identities.
The Company believes that businesses it seeks to purchase may regard the
Company as an attractive acquirer because of the following factors: the
Company's strategy for creating a national, comprehensive and professionally
managed towing, recovery and transport service company; the Company's
decentralized operating strategy, which emphasizes an ongoing role for owners,
management and key personnel of the businesses it acquires, as well as
meaningful equity positions for such personnel which will enable them to
participate in the Company's growth; the Company's visibility and access to
financial resources as a public company; and the potential for increasing the
profitability of the acquired businesses as a result of the Company's
centralization of administrative functions, access to increased marketing
resources and purchasing economies.
In the past, the Company has financed its acquisitions by using a
combination of Common Stock, cash and debt. Recently, the Company has
experienced a significant decline in the market price of its Common Stock. As
a result, its ability to complete acquisitions using Common Stock as currency
in a manner that is not dilutive to current stockholders has been adversely
affected. If the Common Stock does not maintain a sufficient market value, or
if the owners of the businesses the Company wishes to acquire are unwilling to
accept Common Stock as part of the purchase price, the Company may be required
to use more of its cash resources, if available, or seek additional capital,
in order to pursue its acquisition program. The consideration for each future
acquisition will vary on a case-by-case basis, with the major factors in
establishing the purchase price being the historical operating results and
future prospects of the business to be bought and the ability of that business
to complement the services the Company offers. It is possible that the Company
will not be able to successfully consummate acquisitions in the future. If the
Company is unable to pursue an acquisition strategy in the future, it will be
required to rely on internal growth to expand its business.
Operations and Services Provided
Towing and Recovery
The Company provides a broad range of towing and recovery services for a
diverse group of commercial, government and individual customers. Towing and
recovery services typically begin with a telephone call
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requesting assistance. The call may come from a law enforcement officer, a
commercial fleet dispatcher, a private business or an individual. The
dispatcher records the relevant information regarding the vehicle or equipment
to be towed or recovered, checks the location and status of the Company's
vehicle fleet (typically using a computerized positioning system) and assigns
the job to a particular vehicle. The driver collects the vehicle or equipment
and tows it to one of several locations, depending on the nature of the
customer.
Municipality and Law Enforcement Agency Towing. The Company provides towing
services to various municipalities and law enforcement agencies. In this
market, vehicles are typically towed to one of the Company's facilities where
the vehicle is impounded and placed in storage. The vehicle remains in storage
until its owner pays the Company the towing fee (which is typically based on
an hourly charge or mileage) and any daily storage fees, and pays any fines
due to the municipality or law enforcement agency. If the vehicle is not
claimed within a period prescribed by law (typically between 30 and 90 days),
the Company completes lien proceedings and sells the vehicle at auction or to
a scrap metal facility, depending on the value of the vehicle. Depending on
the jurisdiction, the Company may either keep all of the proceeds from vehicle
sales, or keep proceeds up to the amount of towing and storage fees and pay
the remainder to the municipality or law enforcement agency. The Company
provides services in some cases under contracts with municipalities or police,
sheriff and highway patrol departments, typically for terms of five years or
less. Such contracts often may be terminated for material breach and are
typically subject to competitive bidding upon expiration. In other cases, the
Company provides these services to municipalities or law enforcement agencies
without a long-term contract. Whether pursuant to a contract or an ongoing
relationship, the Company generally provides these services for a designated
geographic area, which may be shared with one or more other companies.
Insurance Salvage Towing. The Company provides insurance salvage towing
services to insurance companies and automobile auction companies for a per-
vehicle fee based on the towing distance. This business involves secondary
towing, since the vehicles involved typically have already been towed to a
storage facility. For example, after an accident, a damaged or destroyed
vehicle is usually towed to a garage or impound yard. The Company's insurance
salvage towing operations collect these towed vehicles and deliver them to
repair shops, automobile auction companies or scrap metal facilities as
directed by the customer.
Private Impound Towing. The Company provides impound towing services to
private customers, such as shopping centers, retailers and hotels, which
engage the Company to tow vehicles that are parked illegally on their
property. As in law enforcement agency towing, the Company generates revenues
through the collection of towing and storage fees from vehicle owners, and
from the sale of vehicles that are not claimed.
Commercial Road Service. The Company provides road services to a broad range
of commercial customers, including automobile dealers and repair shops. The
Company typically charges a flat fee and mileage premium for these towing
services. Commercial road services also include towing and recovery of heavy-
duty trucks, recreational vehicles, buses and other large vehicles, typically
for commercial fleet operators. The Company charges an hourly rate based on
the towing vehicle used for these specialized services.
Heavy Equipment Towing. The Company provides heavy equipment towing services
to construction companies, contractors, municipalities and equipment leasing
companies. The Company bases its fees for these services on the vehicle used
and the distance traveled.
Consumer Road Service. The Company also tows disabled vehicles for
individual motorists and national motor clubs. The Company generally tows such
vehicles to repair facilities for a flat fee paid by either the individual
motorist or the motor club.
Transport
The Company provides new and used automobile transport services for a wide
range of commercial customers. With respect to new automobiles, transport
services typically begin with a telephone call or other
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communication from an automobile manufacturer or dealer requesting the
transportation of a specified number of vehicles between specified locations.
A large percentage of the Company's used automobile transport business derives
from automobile auctions, where an on-site Company representative negotiates
with individual dealers and auction representatives to transport vehicles to
and from the auction. In each case, the dispatcher or auction sales
representative records the relevant information, checks the location and
status of the Company's vehicle fleet and assigns the job to a particular
vehicle. The driver then collects the automobiles and transports them to the
requested destination or an intermediate location for pick up by another
Company vehicle.
The Company provides new and used automobile transport to leasing companies,
automobile manufacturers, automobile dealers, automobile auction companies,
long-distance transporters, brokers and individuals. The Company typically
provides services as needed by a customer and charges the customer according
to pre-set rates based on mileage or negotiated flat rates. The Company
transports large numbers of new vehicles for automobile manufacturers from
ports and railheads to individual dealers pursuant to contracts. These
contracts typically have terms of three years or less and may be terminated at
any time for material breach. Upon expiration of the initial term, the
manufacturer may renew the contract on a year-to-year basis if it is satisfied
with the Company's performance. Otherwise a new contract is awarded pursuant
to competitive bidding. In addition, the Company transports large numbers of
used vehicles from automobile auctions (where off-lease vehicles are sold) to
individual dealers. The Company also provides transport services for dealers
who transfer new cars from one region to another and local collection and
delivery support to long-haul automobile transporters. These services are
typically not subject to contracts.
Sales and Marketing
The Company believes that its commitment to consistent high quality service
has provided long-term relationships with many existing customers. The Company
believes that this positions the Company to expand market penetration through
the use of enhanced sales and marketing efforts. Prior to joining the Company,
the businesses the Company has acquired have largely focused on building and
maintaining personal relationships with customers, while also using limited
print advertising in newspapers and industry periodicals. The Company
currently focuses its marketing efforts on large governmental and commercial
accounts, including automobile manufacturers, leasing companies, insurance
companies and law enforcement agencies.
Dispatch and Information Systems
Prior to their acquisition by the Company, each of the businesses acquired
operated a local dispatch system and assigned individual towing, recovery and
transport vehicles to particular service calls, in some cases through the use
of computerized positioning systems to identify and track vehicle location and
status.
The Company is in the process of implementing its proprietary National
Transportation Management System to maximize truck utilization in its
transport operations through centralized national dispatching. This system
also performs integrated order entry, load composition, invoicing, payroll and
other administrative functions. The Company is also in the process of
standardizing its towing and recovery operating system at substantially all of
its locations. This system performs order entry, dispatch, impound vehicle
inventory, lien processing and other administrative functions. The Company
currently expects that these systems will be operational at all of its current
transport locations and substantially all of its current towing and recovery
locations by the end of 1999. However, there can be no assurance that this
will be the case.
The Company's accounting and financial reporting activities are centralized
at its headquarters in Albany, New York. The Company anticipates that it will
need to upgrade and expand its information technology systems on an ongoing
basis as it expands its operations and to the extent it completes future
acquisitions.
For a discussion of year 2000 issues as they relate to the Company's systems
and operations, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Year 2000 Readiness."
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Competition
The market for towing, recovery and transport services is extremely
competitive. Competition is based primarily on quality, service, timeliness,
price and geographic proximity. The Company competes with certain large
transport companies on a national and regional basis and with certain large
towing and recovery companies on a regional and local basis, some of which may
have greater financial and marketing resources than the Company. The Company
also competes with thousands of smaller local companies, which may have lower
overhead cost structures than the Company and may, therefore, be able to
provide their services at lower rates than the Company.
The Company may also face competition for businesses it seeks to acquire
from companies which are attempting to consolidate towing and recovery or
transport service providers. Some of the Company's competitors may be better
positioned than the Company to finance acquisitions, to pay higher prices for
the businesses the Company pursues or to finance their internal operations.
The Company believes that it is able to compete effectively because of its
high quality service, geographic scope, broad range of services offered,
experienced management and operational economies of scale. The Company seeks
to differentiate itself from its competition in terms of service and quality
by investing in training, systems and equipment and by offering a broad range
of products and services. The Company also seeks to differentiate itself in
terms of timeliness and geographic proximity by establishing facilities and
vehicles in targeted geographic markets so that the Company is positioned to
provide timely responses to service calls.
Government Regulation and Environmental Matters
Towing, recovery and transport services are subject to various federal,
state and local laws and regulations regarding equipment, driver
certification, training and recordkeeping, and workplace safety. The Company's
vehicles and facilities are subject to periodic inspection by the United
States Department of Transportation and similar state and local agencies. The
Company's failure to comply with such laws and regulations could subject the
Company to substantial fines and could lead to the closure of operations that
are not in compliance. In addition, certain government contracting laws and
regulations may affect the Company's ability to acquire complementary
businesses in a given city or county. Companies providing towing, recovery and
transport services are required to have numerous federal, state and local
licenses and permits. When the Company acquires such businesses, it must
transfer or apply for such licenses and permits in order to conduct the
business. Any failure to obtain such licenses and permits or any delay in the
Company's receipt of such licenses and permits could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company's operations are subject to a number of federal, state and local
laws and regulations relating to the storage of petroleum products, hazardous
materials and impounded vehicles, as well as safety regulations relating to
the upkeep and maintenance of the Company's vehicles. In particular, the
Company's operations are subject to federal, state and local laws and
regulations governing leakage from salvage vehicles, waste disposal, the
handling of hazardous substances, environmental protection, remediation,
workplace exposure and other matters. The Company believes that it is in
substantial compliance with all such laws and regulations. The Company does
not currently expect to spend any substantial amounts in the foreseeable
future in order to meet current environmental or workplace health and safety
requirements. It is possible that an environmental claim could be made against
the Company or that the Company could be identified by the Environmental
Protection Agency, a state agency or one or more third parties as a
potentially responsible party. If the Company is subject to such a claim or is
so identified, the Company may incur substantial investigation, legal and
remediation costs. Such costs could have a material adverse effect on the
Company's business, financial condition and results of operations.
Seasonality; Cyclicality
The demand for towing, recovery and transport services is subject to
seasonal, cyclical and other variations. Specifically, the demand for towing
and recovery services is generally highest in extreme weather, such as heat,
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cold, rain and snow. Although the demand for automobile transport tends to be
strongest in the months with the mildest weather, since inclement weather
tends to slow the delivery of vehicles, the demand for automobile transport is
also a function of the timing and volume of lease originations, dealer
inventories, and new and used auto sales.
Safety and Training
The Company uses a variety of programs to improve safety and promote an
accident-free environment. These programs include regular driver training and
certification, drug testing and safety bonuses. These programs are designed to
ensure that all employees comply with the Company's safety standards, the
Company's insurance carriers' safety standards and federal, state and local
laws and regulations. The Company believes that its emphasis on safety and
training will assist it in attracting and retaining quality employees.
Employees
As of December 31, 1998, the Company had approximately 1,750 employees and
used approximately 400 independent contractors. The Company believes that it
has a satisfactory relationship with its employees. None of the Company's
employees are members of unions.
Factors Influencing Future Results and Accuracy of Forward-Looking Statements
In the normal course of its business, the Company, in an effort to help keep
its stockholders and the public informed about the Company's operations, may
from time to time issue or make certain statements, either in writing or
orally, that are or contain forward-looking statements, as that term is
defined in the federal securities laws. Generally, these statements relate to
business plans or strategies, projected or anticipated benefits or other
consequences of such plans or strategies, projected or anticipated benefits
from acquisitions made by or to be made by the Company, or projections
involving anticipated revenues, earnings, or other aspects of operating
results. The words "expect," "believe," "anticipate," "project," "estimate,"
"intend," and similar expressions are intended to identify forward-looking
statements. The Company cautions readers that such statements are not
guarantees of future performance or events and are subject to a number of
factors that may tend to influence the accuracy of the statements and the
projections upon which the statements are based, including but not limited to
those discussed below. As noted elsewhere in this report, all phases of the
Company's operations are subject to a number of uncertainties, risks, and
other influences, many of which are outside the control of the Company, and
any one of which, or a combination of which, could materially affect the
results of the Company's operations and whether forward-looking statements
made by the Company ultimately prove to be accurate.
The following discussion outlines certain factors that could affect the
Company's consolidated results of operations for 1999 and beyond and cause
them to differ materially from those that may be set forth in forward-looking
statements made by or on behalf of the Company:
Limited Combined Operating History; Risks of Integrating Acquired Companies
The Company conducted no operations and generated no net revenue prior to
its initial public offering in May 1998. At the time of its initial public
offering, the Company purchased the seven Founding Companies. Between May 6,
1998 and December 31, 1998, the Company acquired a total of 34 additional
businesses. Prior to their acquisition by the Company, such companies were
operated as independent entities, and there can be no assurance that the
Company will be able to integrate the operations of these businesses
successfully into its operations or to institute the necessary systems and
procedures (including accounting and financial reporting systems) to manage
the combined enterprise on a profitable basis. The Company's management group
has been assembled only recently, and there can be no assurance that the
management group will be able to successfully manage the combined entity or to
implement effectively the Company's operating strategy and acquisition
program. The Company's inability to integrate these companies successfully
would have a material adverse effect on its business, financial condition and
results of operations.
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Risks Related to Acquisition Strategy
A key component of the Company's growth strategy has been to acquire other
towing, recovery and transport businesses in strategic markets and locations.
In the past, the Company financed these acquisitions by using a combination of
Common Stock, cash and debt. Recently, the Company has experienced a
significant decline in the market price of its Common Stock. As a result, its
ability to complete acquisitions using Common Stock as currency in a manner
that is not dilutive to current stockholders has been adversely affected. If
the Common Stock does not maintain a sufficient market value, or if the owners
of the businesses the Company wishes to acquire are unwilling to accept Common
Stock as part of the purchase price, the Company may be required to use more
of its cash resources, if available, or seek additional capital, in order to
pursue its acquisition program. The consideration for each future acquisition
will vary on a case-by-case basis, with the major factors in establishing the
purchase price being the historical operating results and future prospects of
the business to be bought and the ability of that business to complement the
services the Company offers. It is possible that the Company will not be able
to successfully consummate acquisitions in the future. If the Company is
unable to pursue an acquisition strategy in the future, it will be required to
rely on internal growth to expand its business.
Any acquisitions that the Company makes may result in potentially dilutive
issuances of equity securities, the incurrence of additional debt and the
amortization of expenses related to goodwill and other intangible assets, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations. Also, there can be no assurance
that the Company will be able to identify, acquire or manage profitably
additional businesses or integrate successfully any acquired businesses
without substantial costs, delays or other operational or financial problems.
Further, acquisitions involve a number of special risks, including failure of
the acquired business to achieve expected results, diversion of management's
attention, failure to retain key personnel of the acquired business and risks
associated with unanticipated events or liabilities. Some or all of these
additional risks could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company may
consider acquiring complementary businesses that provide services that the
Company does not currently provide. The Company may not be able to
successfully integrate these complementary businesses. In addition, the
businesses that the Company has already acquired or other businesses it may
acquire in the future may not achieve anticipated revenues and earnings.
Risks Related to Operating Strategy
A key element of the Company's operating strategy is to increase the revenue
and improve the profitability of the companies it acquires. The Company
intends to increase revenue by continuing to provide high quality service and
by expanding both the scope of services the Company offers and its customer
base. The Company's ability to increase revenue will be affected by various
factors, including the demand for towing, recovery and transport services, the
level of competition in the industry, the Company's ability to expand the
range of services it offers to existing customers, the Company's ability to
attract new customers and its ability to attract and retain a sufficient
number of qualified personnel.
The Company intends to improve profitability by various means, including
eliminating duplicative operating costs and overhead, improving its asset
utilization and capitalizing on its enhanced purchasing power. The Company's
ability to improve profitability will be affected by various factors,
including the costs associated with centralizing its administrative functions,
its ability to benefit from the elimination of redundant operations, and its
ability to benefit from enhanced purchasing power. Many of these factors are
beyond the Company's control, and the Company's operating strategy may not be
successful.
Management of Growth
The Company's strategy is to expand its operations through acquisitions and
internal growth. The Company's systems, procedures and controls may not be
adequate to support its operations as they expand. Any future growth will
impose significant added responsibilities on members of the Company's senior
management, including the need to recruit and integrate new senior level
managers and executives. The Company may not be able to successfully recruit
and retain such additional management. The Company's failure to manage its
growth
8
<PAGE>
effectively or its inability to attract and retain additional qualified
management could have a material adverse effect on the Company's business,
financial condition and results of operations.
Competition
The market for towing, recovery and transport services is extremely
competitive. Such competition is based primarily on quality, service,
timeliness, price and geographic proximity. The Company competes with certain
large transport companies on a national and regional basis and certain large
towing and recovery companies on regional and local basis, some of which may
have greater financial and marketing resources than the Company. The Company
also competes with thousands of smaller local companies, which may have lower
overhead cost structures than the Company and may, therefore, be able to
provide their services at lower rates than the Company. The Company may also
face competition for acquisition candidates from companies that are attempting
to consolidate towing, recovery and transport service providers. Some of the
Company's current or future competitors may be better positioned than the
Company to finance acquisitions, to pay higher prices for businesses or to
finance their internal operations.
Need for Integrated Information Technology Systems
The Company's accounting and financial reporting activities are centralized
at its headquarters in Albany, New York. The Company is in the process of
implementing a proprietary National Transportation Management System at all of
its transport locations and a standardized towing and recovery operating
system at substantially all of its towing and recovery locations. The Company
anticipates that it will need to upgrade and expand its information technology
systems on an ongoing basis as it expands its operations and to the extent it
completes future acquisitions. The Company may encounter unexpected delays and
costs in implementing such systems. Additionally, these systems, when
installed, may not function as the Company expects.
Dependence on Customer Relationships and Contracts
The Company provides towing and recovery services to certain municipalities
and a number of law enforcement agencies under contracts. These towing and
recovery contracts typically have terms of five years or less, may be
terminated at any time for material breach, and in some cases are subject to
competitive bidding upon expiration. The Company also provides transport
services to automobile manufacturers and other commercial customers under
contracts, which typically have terms of three years or less and may be
terminated at any time for material breach. Upon expiration of the initial
term of these contracts, the manufacturer typically may renew the contract on
a year-to-year basis if it is satisfied with the Company's performance.
Otherwise, a new contract is awarded pursuant to competitive bidding. It is
possible that some or all of these towing and recovery or transport contracts
may not be renewed upon expiration or may be renewed on terms less favorable
to the Company. It is also possible that at some future time more of the
Company's customers may implement a competitive bidding process for the award
of towing and recovery or transport contracts. The Company has no formal
contract with a large number of its towing, recovery and transport customers,
and it is possible that one or more customers could elect, at any time, to
stop utilizing the Company's services.
Regulation
Towing, recovery and transport services are subject to various federal,
state and local laws and regulations regarding equipment, driver
certification, training and recordkeeping and workplace safety. The Company's
vehicles and facilities are subject to periodic inspection by the United
States Department of Transportation and similar state and local agencies. The
Company's failure to comply with these laws and regulations could subject it
to substantial fines and could lead to the closure of operations that are not
in compliance. In addition, certain government contracting laws and
regulations may affect the Company's ability to acquire complementary
businesses in a given city or county. Companies providing towing, recovery and
transport services are required to have numerous federal, state and local
licenses and permits. When the Company acquires towing, recovery and transport
businesses, it must transfer or apply for such licenses and permits in order
to conduct the acquired
9
<PAGE>
business. Any failure to obtain such licenses and permits or any delay in the
Company's receipt of such licenses and permits could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Potential Exposure to Environmental Liabilities
The Company's operations are subject to a number of federal, state and local
laws and regulations relating to the storage of petroleum products, hazardous
materials and impounded vehicles, as well as safety regulations relating to
the upkeep and maintenance of vehicles. In particular, the Company's
operations are subject to federal, state and local laws and regulations
governing leakage and salvage vehicles, waste disposal, the handling of
hazardous substances, environmental protection, remediation, workplace
exposure and other matters. It is possible that an environmental claim could
be made against the Company or that the Company could be identified by the
Environmental Protection Agency, a state agency or one or more third parties
as a potentially responsible party under federal or state environmental laws.
In such event, the Company could be forced to incur substantial investigation,
legal and remediation costs. Such costs could have a material adverse effect
on the Company's business, financial condition and results of operations.
Potential Liabilities Associated with Acquisitions
The businesses that the Company has acquired or those that it may acquire in
the future could have liabilities that the Company did not or may not discover
during its pre-acquisition due diligence investigations. Such liabilities may
include liabilities arising from environmental contamination or non-compliance
by prior owners with environmental laws or regulatory requirements. As a
successor owner or operator, the Company may be responsible for such
liabilities. The businesses the Company acquires generally handle and store
petroleum and other hazardous substances at their facilities. There may have
been or there may be releases of these hazardous substances into the soil or
groundwater which the Company may be required under federal, state or local
law to investigate and clean up. Any such liabilities or related
investigations or clean-ups could have a material adverse effect on the
Company's business, financial condition and results of operations.
Labor Relations
Although currently none of the Company's employees are members of unions, it
is possible that some employees could unionize in the future or that the
Company could acquire businesses with unionized employees. If the Company's
employees were to unionize or the Company were to acquire a business with
unionized employees, the Company could incur higher ongoing labor costs and
could experience a significant disruption of its operations in the event of a
strike or other work stoppage. Any of these possibilities could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Liability and Insurance
From time to time, the Company could be subject to various claims relating
to its operations, including (i) claims for personal injury or death caused by
accidents involving the Company's vehicles and service personnel; (ii)
worker's compensation claims and (iii) other employment related claims.
Although the Company maintains insurance (subject to customary deductibles),
such insurance may not cover certain types of claims, such as claims for
punitive damages or for damages arising from intentional misconduct (which are
often alleged in third-party lawsuits). In the future, the Company may not be
able to maintain adequate levels of insurance on reasonable terms. In
addition, it is possible that existing or future claims may exceed the level
of the Company's insurance or that the Company may not have sufficient capital
available to pay any uninsured claims.
Quarterly Fluctuations of Operating Results
The Company may experience significant fluctuations in quarterly operating
results due to a number of factors. These factors could include: (i) the
timing of acquisitions and related costs; (ii) the Company's success in
integrating acquired companies; (iii) the loss of significant customers or
contracts; (iv) the timing of
10
<PAGE>
expenditures for new equipment and the disposition of used equipment; (v)
price changes in response to competitive factors; (vi) seasonal, cyclical and
other variations in the demand for towing, recovery and transport services;
and (vii) general economic conditions. As a result, operating results for any
one quarter should not be relied upon as an indication or guarantee of
performance in future quarters.
Seasonality; Cyclicality
The demand for towing, recovery and transport services is subject to
seasonal, cyclical and other variations. Specifically, the demand for towing
and recovery services is generally highest in extreme weather, such as heat,
cold, rain and snow. Although the demand for automobile transport tends to be
strongest in the months with the mildest weather, since inclement weather
tends to slow the delivery of vehicles, the demand for automobile transport is
also a function of the timing and volume of lease originations, dealer
inventories and new and used auto sales.
Reliance on Key Personnel
The Company is highly dependent upon the experience, abilities and continued
efforts of its senior management. The loss of the services of one or more of
the key members of the Company's senior management could have a material
adverse effect on the Company's business, financial condition and results of
operations if the Company is unable to find a suitable replacement in a timely
manner. The Company does not presently maintain "key man" life insurance with
respect to members of its senior management.
The Company's operating facilities are managed by regional and local
managers who have substantial knowledge of and experience in the local towing,
recovery and transport markets served by the Company. Such managers include
former owners and employees of businesses the Company has acquired. The loss
of one or more of these managers could have a material adverse effect on the
Company's business, financial condition and results of operations if the
Company is unable to find a suitable replacement in a timely manner.
The timely, professional and dependable service demanded by towing, recovery
and transport customers requires an adequate supply of skilled dispatchers,
drivers and support personnel. Accordingly, the Company's success will depend
on its ability to employ, train and retain the personnel necessary to meet its
service requirements. From time to time, and in particular areas, there are
shortages of skilled personnel. In the future, the Company may not be able to
maintain an adequate skilled labor force necessary to operate efficiently, the
Company's labor expenses may increase as a result of a shortage in supply of
skilled personnel, or the Company may have to curtail its planned growth as a
result of labor shortages.
Lack of Senior Management Experience in Towing, Recovery and Transport
Services
The Company's senior management has no prior experience in towing, recovery
and transport services. As a result, such senior management may not be able to
conduct the Company's operations profitably, effectively integrate the
operations of acquired companies or hire and retain personnel with relevant
experience. Any failure by the Company's senior management to accomplish any
such things could have a material adverse effect on the Company's business,
financial condition and results of operations.
Year 2000 Compliance
The Company has identified certain systems, equipment, and applications,
including embedded systems and other "non-information technology," that are
utilized in its towing and transport operations, or in its finance, payroll,
and administration departments and that are necessary to operate its business
without disruption. These mission critical systems include servers, desktop
and notebook computers, data communication equipment, peripherals, network and
desktop operating systems, desktop application suites, payroll and financial
software, towing and transportation applications, and interfaces with the
Company's financial systems.
11
<PAGE>
Included among these mission critical systems are a proprietary National
Transportation Management System, which the Company intends to install at all
of its transport locations prior to December 31, 1999, and a standard towing
and recovery operating system, which the Company intends to install at
substantially all of its towing and recovery locations prior to December 31,
1999. With respect to the remaining towing locations, the Company plans to
continue to utilize existing systems and supply an interface to the Company's
standardized operating system. The Company believes, based upon assurances
from third parties, that its mission critical systems will be Year 2000 ready.
However, there can be no assurance that this will be the case.
The Company and its various divisions also utilize certain other hardware
and software, operating systems, relationships and services in their day-to-
day operations which are not necessarily critical to their operations. The
Company is in the process of identifying and evaluating these systems and
functions and will include in its Year 2000 readiness project any systems that
are deemed material to the Company's business.
Installation of the Company's information systems may not be completed at
all of its locations before December 31, 1999. In addition, it is possible
that the systems, when installed, may not function properly. In such event,
the Company would be forced to rely on manual performance of its central
administrative functions along with the local dispatch and operating systems
utilized by its acquired businesses prior to their acquisition by the Company.
There can be no assurance that such systems will be Year 2000 ready, or that
the vendors and other service providers associated with such businesses will
be Year 2000 ready. If the local dispatch and operating systems utilized by
its acquired businesses do not function properly after December 31, 1999, the
Company will be required to perform all critical functions on a manual basis.
Any resulting inefficiency could have a material adverse effect on the
Company's business, financial condition and results of operations.
Because the Company has not yet received responses to its Year 2000
Questionnaires from all of its business partners, it is uncertain as to
whether all of its business partners will be Year 2000 ready before December
31, 1999. The Company is unable to predict the impact that Year 2000 problems
at vendors, customers or financial institutions may have on the Company. The
Company intends to continue to address Year 2000 issues with its business
partners, and will implement contingency plans to the extent necessary.
No one knows the extent of the potential impact of the Year 2000 problem
generally and the Company cannot predict the likelihood that Year 2000
problems will cause a significant disruption in the economy as a whole. For
additional information regarding the Company's Year 2000 readiness, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Readiness."
The foregoing constitutes a Year 2000 statement and readiness disclosure
subject to the protections afforded it by the federal Year 2000 Information
and Readiness Disclosure Act of 1998.
ITEM 2. Properties
As of December 31, 1998, the Company operated approximately 50 facilities
located in 17 states. These facilities consisted of 36 facilities used to
garage, repair, and maintain towing and recovery vehicles, impound and store
towed vehicles, conduct lien sales and auctions, and house administrative and
dispatch operations for the Company's towing and recovery operations, and 14
facilities used as marshalling sites and to garage, repair and maintain
transport vehicles and house administrative and dispatch operations for the
Company's transport operations. All of the Company's facilities are leased
from other parties. As of December 31, 1998, the Company's headquarters
consisted of approximately 6,050 square feet of leased space in Albany, New
York.
As of December 31, 1998, the Company operated a fleet of approximately 770
towing and recovery vehicles and approximately 400 transport vehicles, which
the Company believes are generally well-maintained and adequate for its
current operations. However, the Company expects to continue to make
investments in additional equipment and property for expansion, replacement of
assets and, depending on market conditions, in connection with future
acquisitions.
12
<PAGE>
ITEM 3. Legal Proceedings
The Company's primary liability risks include bodily injury, property
damage, workers' compensation claims and, potentially, environmental and land
use claims. The Company maintains insurance on a company-wide basis, subject
to customary deductibles.
The Company is from time to time a party to litigation arising in the
ordinary course of its business (most of which involves claims for personal
injury or property damage incurred in connection with the Company's
operations). The Company is not currently involved in any litigation that it
believes will have a material adverse effect on its business, financial
condition or results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders of the Company,
through the solicitation of proxies or otherwise, during the fourth quarter of
1998.
Executive Officers of the Registrant
The following table and biographical data below set forth certain
information concerning the Company's executive officers as of the date of this
report.
<TABLE>
<CAPTION>
Name Age Present Position
- ---- --- ----------------
<S> <C> <C>
Edward T. Sheehan....... 56 Chairman, Chief Executive Officer and Secretary
Allan D. Pass, Ph.D..... 49 President and Chief Operating Officer
Donald J. Marr.......... 40 Senior Vice President and Chief Financial Officer
Robert J. Adams, Jr..... 36 Senior Vice President and Chief Acquisition Officer
</TABLE>
Edward T. Sheehan has served as the Company's Chairman of the Board, Chief
Executive Officer and Secretary since October 1997. Mr. Sheehan was President
of United Waste Systems, Inc. ("United") from December 1992 to August 1997,
and Chief Operating Officer of United from 1994 to August 1997, when United
was sold to USA Waste Services, Inc. He was Senior Vice President and Chief
Financial Officer of Clean Harbors, Inc., a publicly-held environmental
services company, from September 1990 to April 1992. From 1966 to 1990, Mr.
Sheehan held several financial and operating positions with General Electric
Company ("GE"), including Manager-Finance for GE's power generation service
businesses, factory automation operations and Europe, Africa and Middle East
Divisions. Mr. Sheehan currently serves as a director of Gundle/SLT
Environmental, Inc., an environmental products company.
Allan D. Pass, Ph.D has served as the Company's President and Chief
Operating Officer since September 1998. From January 1998 until September
1998, he served as the Company's Senior Vice President and Chief Operating
Officer. From 1986 until January 1998, Dr. Pass served as the Chief Executive
Officer and President of National Behavioral Science Consultants, Inc., a
consulting firm specializing in innovative productivity and profitability
enhancement and human resource programs. From September 1991 until June 1995,
Dr. Pass also served as a Corporate Vice President for Chambers Development
Corporation.
Donald J. Marr has served as the Company's Senior Vice President and Chief
Financial Officer since January 1998. From 1986 through 1997, he held a series
of management positions with KeyCorp, most recently as Senior Vice President,
Planning and Analysis. From January 1984 to October 1986, he held various
positions at the accounting firm of Coopers & Lybrand. Mr. Marr is a certified
public accountant.
Robert J. Adams, Jr. has served as the Company's Senior Vice President and
Chief Acquisition Officer since June 1998. From February 1998 to May 1998, Mr.
Adams provided acquisition-related consulting services to the Company. From
April 1996 through January 31, 1998, Mr. Adams served as a Manager of
Corporate Development for Republic Industries, Inc. From October 1995 through
March 1996, Mr. Adams was employed by RJA, Inc. and from June 1990 through
September 1995 he was employed by Waste Management, Inc. as an operations
manager.
13
<PAGE>
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock began trading on the Nasdaq National Market on
May 1, 1998 under the symbol "URSI." The table below sets forth the high and
low sale prices for the Common Stock on the Nasdaq National Market for the
periods indicated:
<TABLE>
<CAPTION>
1998 High Low
---- ---- -------
<S> <C> <C>
Second Quarter (beginning May 1)............................ $19 9/16 $15 1/8
Third Quarter............................................... 26 9 1/2
Fourth Quarter.............................................. 19 1/4 5 3/4
</TABLE>
As of March 22, 1999, there were approximately 122 record holders of the
Company's Common Stock.
The Company has never paid any cash dividends on its Common Stock, and
intends to retain its earnings to finance the development of its business for
the foreseeable future. Any future determination as to the payment of cash
dividends will depend upon such factors as earnings, capital requirements, the
Company's financial condition, restrictions in financing agreements and other
factors deemed relevant by the Company's Board of Directors. The payment of
dividends by the Company is restricted by the Company's credit facility and
its Purchase Agreement (the "Charterhouse Purchase Agreement") with Charter
URS LLC ("Charterhouse") pursuant to which the Company issued $75.0 million
aggregate principal amount of 8% Convertible Subordinated Debentures due 2008
(the "Debentures") to Charterhouse.
During the fourth quarter of 1998, the Company issued and sold the following
unregistered securities, the purchasers of which were all accredited
investors:
(1) On October 14, 1998, the Company issued an aggregate of 41,346 shares
of Common Stock to Bobby D. Freeman and Dorothy Freeman in connection with
its acquisition of Freeman's Transporting, Inc.
(2) On December 7, 1998, the Company issued $43,500,000 aggregate
principal amount of its Debentures to Charterhouse pursuant to the
Charterhouse Purchase Agreement. Such Debentures are convertible into the
Company's Common Stock at a conversion price of $15.00 per share, subject
to adjustment as set forth in the Charterhouse Purchase Agreement.
The sales of the securities listed above were deemed to be exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act") in reliance on Section 4(2) of the Securities Act or Regulation D
promulgated thereunder as transactions by an issuer not involving a public
offering. The recipients of securities in each such transaction represented
their intention to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof.
ITEM 6. Selected Financial Data
The Company purchased the Founding Companies simultaneously with its initial
public offering in May 1998. During the remainder of 1998, the Company
purchased a total of 34 additional businesses. The following selected
consolidated financial data as of December 31, 1997 and December 31, 1998 and
for the period from July 25, 1997 (inception) to December 31, 1997 and for the
year ended December 31, 1998 have been taken from the consolidated financial
statements of the Company. For financial statement presentation purposes,
Northland Auto Transporters, Inc. and Northland Fleet Leasing, Inc.,
("Northland"), one of the Founding Companies, has been designated as the
Company's predecessor entity. The following selected historical financial data
for Northland as of December 31, 1996 and 1997 and for each of the years in
the three-year period ended December 31, 1997 have been derived from the
audited financial statements of Northland.
14
<PAGE>
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the consolidated financial statements and the related notes
included elsewhere in this Report.
<TABLE>
<CAPTION>
Period From
July 25, 1997
(inception) to Year Ended
December 31, 1997 December 31, 1998
------------------- --------------------
(Dollars in thousands, except per share
amounts and share data)
<S> <C> <C>
Consolidated statement
of operations data--
United Road Services,
Inc.:
Net revenue............. $ -- $ 87,919
Cost of revenue......... -- 64,765
------------------- --------------------
Gross profit............ -- 23,154
Selling, general and ad-
ministrative expenses.. 174 12,428
Goodwill amortization... -- 1,745
------------------- --------------------
Income (loss) from oper-
ations................. (174) 8,981
Interest income (ex-
pense) and other, net.. -- (1,086)
------------------- --------------------
Income (loss) before in-
come taxes............. (174) 7,895
Income tax expense...... -- 3,503
------------------- --------------------
Net income (loss)....... $ (174) $ 4,392
=================== ====================
Diluted net income
(loss) per share....... $ (0.08) $ 0.42
=================== ====================
Shares used in computing
diluted net income
(loss) per share....... 2,055,300(1) 10,389,903(1)
=================== ====================
</TABLE>
<TABLE>
<CAPTION>
At At
December 31, 1997 December 31, 1998
----------------- -----------------
(In thousands)
<S> <C> <C>
Balance sheet data--United Road Services,
Inc.:
Working capital (deficit)................. $(104) $ 9,330
Total assets.............................. 50 248,732
Long-term obligations, excluding current
installments............................. -- 65,255
Stockholders' equity (deficit)............ (104) 163,766
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1994 1995 1996 1997
------ ------ ------ -------
(In thousands)
<S> <C> <C> <C> <C>
Historical statement of operations data--
Northland:
Net revenue................................... $3,769 $4,671 $6,353 $10,159
Operating income (loss)....................... (44) 324 346 1,438
Other income (expense), net................... 117 (18) -- (49)
Net income.................................... 67 275 346 1,054
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
At December 31,
-----------------------
1994 1995 1996 1997
----- ----- ----- -----
(In thousands)
<S> <C> <C> <C> <C>
Historical balance sheet data--Northland:
Working capital....................................... $ 52 $ 375 $ 235 $ 399
Total assets.......................................... 2,368 2,653 3,268 5,465
Long-term obligations, excluding current install-
ments................................................ 205 257 331 1,074
Stockholders' equity.................................. 1,369 1,645 1,991 3,045
</TABLE>
- --------
(1) Represents actual weighted average outstanding shares, adjusted for any
incremental effect of options, warrants, shares withheld in connection
with acquisitions or 1998 earn-out shares payable to the former owners of
the Founding Companies and one other acquired company.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and "Selected Financial Data" included
elsewhere in this Report. In addition to the historical information provided,
this discussion 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 elsewhere in this
document should be considered as being applicable to all related forward-
looking statements wherever they appear herein. 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 in "Factors Influencing Future Results and Accuracy of
Forward-Looking Statements."
Introduction
The Company provides a broad range of towing, recovery and transport
services. The services that the Company offers include:
. towing, impounding and storing motor vehicles;
. conducting lien sales and auctions of abandoned vehicles;
. towing and recovering heavy-duty commercial and recreational vehicles;
. towing heavy equipment; and
. transporting new and used vehicles.
The Company derives revenue from towing, recovery and transport services
based on distance, time or fixed charges and from related impounding and
storage fees. If an impounded vehicle is not claimed within a period
prescribed by law (typically between 30 and 90 days), the Company initiates
and completes lien proceedings and the vehicle is sold at auction or to a
scrap metal facility, depending on the value of the vehicle. Depending on the
jurisdiction, the Company may either keep all the proceeds from the vehicle
sales, or keep the proceeds up to the amount of the towing and storage fees
and pay the remainder to the municipality or law enforcement agency. Services
are provided in some cases under contracts with towing and transport
customers. In other cases, services are provided to towing and transport
customers without a long-term contract. The prices charged for towing and
storage of impounded vehicles for municipalities or law enforcement agencies
are limited by contractual provisions or local regulation.
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;
16
<PAGE>
. other vehicle expenses; and
. equipment rentals.
Selling, general and administrative expenses consist primarily of the
following:
. compensation and benefits to sales and administrative employees;
. fees for professional services;
. depreciation of administrative equipment and software;
. advertising; and
. other general office expenses.
In the case of law enforcement and private impound towing, payment is
obtained either from the owner of the impounded vehicle when the owner claims
the vehicle or from the proceeds of lien sales, scrap sales or auctions. With
respect to other operations, customers are billed upon completion of services
provided, with payment generally due within 30 days. Revenue is recognized as
follows:
. towing and recovery revenue is recognized at the completion of each
engagement;
. transport revenue is recognized upon the delivery of the vehicle or
equipment to its final destination;
. revenue from lien sales or auctions is recognized when title to the
vehicle has been transferred; and
. revenue from scrap sales is recognized when the scrap metal is sold.
Expenses related to the generation of revenue are recognized as incurred.
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.
Management's discussion and analysis addresses the Company's historical
results of operations and financial condition as shown in its consolidated
financial statements for the period from July 25, 1997 (inception) through
December 31, 1997 and for the year ended December 31, 1998. The historical
results for the year ended December 31, 1998 include the results of all
businesses acquired prior to December 31, 1998 from their respective dates of
acquisition.
If all of the companies acquired since inception were to be included in the
Company's pro forma results of operations as if these acquisitions had
occurred on January 1, 1997, net sales, net income and diluted net income per
share for the year ended December 31, 1997 and 1998 would have been:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1997 1998
------------ ------------
(In thousands)
<S> <C> <C>
Net revenue........................................ $163,024 $196,509
======== ========
Net income......................................... $ 8,947 $ 11,571
======== ========
Diluted net income per share....................... $ 0.58 $ 0.74
======== ========
</TABLE>
This pro forma information assumes that the Company acquired the Founding
Companies and the Acquired Companies on January 1, 1997, with certain pro
forma adjustments as described elsewhere herein. The pro forma results of
operations are not necessarily indicative of the results the Company would
have obtained had these businesses been acquired on January 1, 1997 or of the
Company's future results.
17
<PAGE>
All of the acquisitions completed by the Company to date have been accounted
for using the purchase method of accounting. As a result, the amount by which
the fair value of the consideration paid exceeds the fair value of the net
assets purchased by the Company ($173.7 million) has been recorded as
goodwill. This goodwill will be amortized over its estimated useful life of 40
years as a non-cash charge to operating income.
The owners of certain businesses that the Company has acquired have agreed
to reductions in their compensation and benefits in connection with such
acquisitions. The aggregate amount of such reductions, had they been in effect
in 1997 and 1998, would have been $8.6 million and $5.2 million, respectively.
Results of Operations
The Company operates in two reportable operating segments: (1) transport and
(2) towing and recovery. Through its transport segment, the Company provides
transport services for new and used vehicles to a broad range of customers
throughout the United States. Through its towing and recovery segment, the
Company provides a variety of towing and recovery services in its local
markets, including towing, impounding and storing motor vehicles, conducting
lien sales and auctions of abandoned vehicles, towing heavy equipment and
recovering and towing heavy-duty commercial and recreational vehicles.
Historical Results for the Year Ended December 31, 1998
Net Revenue. Net revenue was $87.9 million for the year ended December 31,
1998, of which $46.9 million, or 53.4% of net revenue, related to transport
services and $41.0 million, or 46.6% of net revenue, related to towing and
recovery services. Transport revenue was derived from three Founding Companies
acquired in conjunction with the initial public offering and nine additional
transport businesses acquired prior to December 31, 1998. The Founding
Companies involved in transport services experienced an internal growth rate
of 35.6% in net revenue in 1998 as compared to 1997 as a result of incremental
business development and enhanced capacity. Towing and recovery revenue was
derived from four Founding Companies acquired in conjunction with the initial
public offering and 25 additional towing and recovery businesses acquired
prior to December 31, 1998. The Founding Companies involved in towing and
recovery services experienced an internal growth rate of 16.1% in net revenue
in 1998 as compared to 1997 as a result of an increased focus on heavy-duty
and higher margin services, coupled with limited price increases.
Gross Profit. Cost of revenue was $64.8 million, or 73.7% of net revenue,
for the year ended December 31, 1998, resulting in gross profit of $23.1
million, or 26.3% of net revenue. Transport cost of revenue was $35.0 million,
or 74.6% of transport net revenue, for the year ended December 31, 1998,
resulting in transport gross profit of $11.9 million. The most significant
components of transport cost of revenue consisted of labor,
subcontractor/broker costs, fuel, tires and other vehicle service and
maintenance costs. Towing and recovery cost of revenue was $29.8 million, or
72.7% of towing and recovery net revenue, for the year ended December 31,
1998, resulting in towing and recovery gross profit of $11.2 million. The most
significant components of towing and recovery cost of revenue consisted of
labor, subcontractor/broker costs, fuel and preparation for auctions and lien
sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $12.4 million, or 14.1% of net revenue, for the
year ended December 31, 1998. Transport selling, general and administrative
expenses were $3.4 million, or 7.2% of transport net revenue, for the year
ended December 31, 1998. The most significant component of transport selling,
general and administrative expenses consisted of administrative salaries and
benefits of $2.4 million. Towing and recovery selling, general and
administrative expenses were $5.4 million, or 13.2% of towing and recovery net
revenue, for the year ended December 31, 1998. The most significant component
of towing and recovery selling, general and administrative expenses consisted
of administrative salaries and benefits of $4.1 million. Selling, general and
administrative expenses related to corporate headquarters were $3.6 million,
or 4.1% of net revenue, for the year ended December 31, 1998. The most
significant components of corporate headquarters selling, general and
administrative expenses consisted of administrative salaries and benefits,
data center operational expenses, professional fees and travel.
18
<PAGE>
Income from Operations. Income from operations was $9.0 million, or 10.2% of
net revenue for the year ended December 31, 1998, of which $7.9 million
related to transport services and $4.7 million related to towing and recovery
services, offset by corporate headquarters selling, general and administrative
expenses of $3.6 million.
Historical Results for the Year Ended December 31, 1997
The Company conducted no operations and generated no net revenue or cost of
revenue 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.
Liquidity and Capital Resources
As of December 31, 1998, the Company had approximately:
. $3.4 million of cash and cash equivalents,
. $9.3 million of working capital, and
. $63.2 million of outstanding indebtedness, excluding current
installments.
In the year ended December 31, 1998, the Company generated $8.1 million of
cash from operations. The Company believes its cash flow was enhanced by
increased utilization of vehicles, a favorable mix of services toward higher
margin activities, savings relating to the centralization of certain services
and purchasing economies such as insurance and fuel. Cash provided by
operations was offset by an increase in accounts receivable of $2.4 million
and a decrease in accounts payable of $1.6 million. During 1998, the Company
used $126.9 million of cash in investing activities ($118.2 million of which
related to acquisitions of businesses and $11.3 million of which related to
purchases of new vehicles and equipment), and generated $122.2 million of cash
through financing activities. Financing activities consisted of payments on
long-term debt and capital lease obligations assumed in acquisitions of $27.1
million and payments of deferred financing costs of $3.3 million, offset by
net cash proceeds from issuance of Common Stock and debt of $152.6 million.
The Company has a credit facility with a group of banks that enables the
Company 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).
Obligations under the credit facility are guaranteed by the Company's
subsidiaries. The Company's obligations and the obligations of the Company's
subsidiaries under the credit facility and related guarantees are secured by
substantially all of the Company's assets, the assets of the Company's
subsidiaries and the stock of the Company's 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 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. 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 Agreement. 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
19
<PAGE>
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 Company's 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.
The Company issued the remaining $31.5 million aggregate principal amount of
Debentures to Charterhouse at a second closing on March 16, 1999. The
Debentures bear interest at a rate of 8% annually, payable in kind for the
first five years following issuance, and thereafter either in kind or in cash,
at the Company's discretion. Pursuant to the Purchase Agreement, the Company
paid Charterhouse a fee of 1% of the principal amount of the Debentures issued
at each closing. The Company 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
in Albany, New York. The Company is in the process of implementing its
proprietary National Transportation Management System for its transport
operations and a standardized operating system for its towing and recovery
operations. As of December 31, 1998, approximately $3.9 million had been spent
to develop and install the integrated financial and information systems.
Although it is expected that the Company will need to upgrade and expand these
systems in the future, the Company cannot currently quantify the amount that
will be spent to do so.
The Company spent $11.3 million on purchases of vehicles and equipment
(including the $3.9 million spent in connection with installation of the
information systems) during the year ended December 31, 1998. Other than
expenditures relating to the information systems, these expenditures were
primarily for transport and towing and recovery vehicles. During 1998, the
Company made expenditures of $2.2 million on towing and recovery vehicles and
$3.7 million on transport vehicles. These expenditures were financed primarily
with cash flow from operations and debt.
Between May 6, 1998, when the Company completed its initial public offering
and the acquisitions of 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 were funded
through proceeds from the initial public offering and long-term borrowings. At
December 31, 1998, the Company had entered into a definitive agreement to
acquire one additional transport business for aggregate consideration of
approximately $29.5 million.
The Company expects to fund 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.
In the past, the Company has financed its acquisitions by using a
combination of Common Stock, cash and debt. If the Common Stock does not
maintain a sufficient market value, or if the owners of the businesses the
Company wishes to acquire are unwilling to accept Common Stock as part of the
purchase price, the Company may be required to use more of its cash resources,
if available, or seek additional capital, in order to pursue its acquisition
program. The consideration for each future acquisition will vary on a case-by-
case basis, with the major factors in establishing the purchase price being
the historical operating results and future prospects of the business to be
bought and the ability of that business to complement the services the Company
offers.
Seasonality; Cyclicality
The Company may experience significant fluctuations in its quarterly
operating results due to seasonal, cyclical and other variations in the demand
for towing, recovery and transport services. Specifically, the demand for
towing and recovery services is generally highest in extreme weather, such as
heat, cold, rain and snow. Although the demand for automobile transport tends
to be strongest in the months with the mildest weather, since inclement
weather tends to slow the delivery of vehicles, the demand for automobile
transport is also a function of the timing and volume of lease originations,
dealer inventories and new and used auto sales.
20
<PAGE>
Year 2000 Readiness
The "Year 2000 problem" exists because many computer programs, embedded
systems and components were designed to refer to a year by the last two digits
of the year, such as "99" for "1999." As a result, certain of these systems
may not properly recognize that the year that follows "1999" is "2000" and not
"1900." If the Year 2000 problems are not corrected, such systems could fail
or produce erroneous results. No one knows the extent of the potential impact
of the Year 2000 problem generally.
The Company's State of Readiness.
The Company has implemented an enterprise-wide Year 2000 readiness project
consisting of the following phases:
Assessment and Impact Analysis
The Company has identified certain systems, equipment, and applications,
including embedded systems and other "non-information technology," that are
utilized in its towing and transport operations, or in its finance, payroll,
and administration departments and that are necessary to operate its business
without disruption (the "Mission Critical Systems"). These Mission Critical
Systems include servers, desktop and notebook computers, data communication
equipment, peripherals, network and desktop operating systems (collectively,
"IT Infrastructure"), desktop application suites, payroll and financial
software, towing and transportation applications, and interfaces with the
Company's financial systems.
The Company and its various divisions also utilize certain other hardware
and software, operating systems, relationships and services in their day-to-
day operations which are not necessarily critical to their operations. The
Company is in the process of identifying and evaluating these systems and
functions and will include in its Year 2000 readiness project any systems that
are deemed material to the Company's business (collectively, "Important
Functions").
The Company is in the process of sending Year 2000 Questionnaires to all of
its significant suppliers, customers, service providers and other business
partners. As the responses are received, they will be catalogued and assessed
for possible impact on the Company's operations. The Company has sent
approximately 200 questionnaires to suppliers and has received approximately
seven responses. The Company has also sent approximately 60 questionnaires to
customers and has received no responses to date.
As of the date of this Report, the Company has identified and assessed the
impact of Year 2000 problems with respect to all of its Mission Critical
Systems. By the end of July 1999, it expects to have determined which of its
other systems and functions should be deemed Important Functions and included
within the Year 2000 readiness project and to have assessed the impact of all
related responses to Year 2000 Questionnaires that have been returned by that
date. With respect to the remaining Year 2000 Questionnaires and any
additional acquisitions that the Company may complete during 1999, this phase
is expected to continue throughout the year.
Test Planning
Based on the results of its Impact Analysis, the Company and its outside
Year 2000 consultant will identify the steps necessary to ensure Year 2000
readiness of all Mission Critical Systems and Important Functions. This
analysis will determine whether the system or function will be tested using
Year 2000 scanning software, manually tested or checked through website or
personal letter confirmation. The Company has completed this process with
respect to its Mission Critical Systems and expects to complete this process
with respect to Important Functions at all of its existing locations by the
end of June 1999. With respect to any additional acquisitions that the Company
may complete during 1999, this process is expected to continue throughout the
year.
Testing
This phase consists of implementing the testing procedures that were
developed during the Test Planning phase with respect to all Mission Critical
Systems and Important Functions. The Company is in various stages of
21
<PAGE>
completion of this phase with respect to its Mission Critical Systems, as more
fully described below. With respect to Important Functions at its existing
locations, the Company expects that this phase will be complete by the end of
September 1999. With respect to any additional acquisitions that the Company
may complete during 1999, this process is expected to continue throughout the
year.
When the Company was formed, management assessed the appropriateness of
various computer hardware and software technologies in light of the Company's
strategic objectives. Because this occurred in the latter half of 1998,
management was able to select hardware and financial software that was
represented by the vendors to be Year 2000 ready.
The software that the Company uses to operate its centralized accounting and
financial reporting functions has been tested by the supplier, and the
supplier has provided preliminary indications that the software will be Year
2000 ready. With the assistance of its outside Year 2000 consultant, the
Company plans to confirm the Year 2000 readiness of these systems through
additional testing prior to September 30, 1999.
The Company's payroll operations are managed by a national payroll
processor, which has provided the Company with written assurances that its
systems are Year 2000 ready.
In order to increase the functionality of its transport operations systems,
the Company has developed a National Transportation Management System to
replace the local systems that are currently in use at its transport
locations. The software consultant that assisted the Company in developing the
National Transportation Management System has provided the Company with
written assurances that the system is designed to be Year 2000 ready and has
advised the Company that it will fully test the software and provide written
certification of Year 2000 readiness by the end of September 1999. The Company
has begun installing this software at several locations, and currently expects
to install it at all of its existing transport locations prior to December 31,
1999.
In order to increase the functionality of its towing operations systems, the
Company intends to replace substantially all of the local operating systems
utilized at its towing locations with standardized operational software. The
vendor that developed this software has provided the Company with written
assurances that this software is Year 2000 ready. The Company has completed
installation of this software at several locations, and currently expects to
complete installation at substantially all of its existing towing locations
before December 31, 1999. With respect to the remaining towing locations, the
Company plans to continue to utilize the existing systems and supply an
interface to the Company's standardized operating system.
The Company has also installed interfaces between its various software
applications and its financial systems. The Company's outside Year 2000
consultant will test these interfaces for Year 2000 readiness and provide
written certification of such readiness by the end of September 1999.
The Company's IT Infrastructure has both centralized, datacenter elements
and remote elements at each location. Datacenter infrastructure is comprised
of equipment and software that is all less than one year old, and the Company
has received written assurances from its infrastructure vendors that these
systems are Year 2000 ready. The Company's outside Year 2000 consultant will
also test the Company's datacenter infrastructure and provide written
certification of Year 2000 readiness by the end of September 1999.
In order to improve the efficiency of its acquired businesses and to include
their systems within the Company's wide area network, the Company upgrades or
replaces the remote infrastructure of its acquired entities to meet corporate
standards as soon as reasonably practicable following the Company's
acquisition of such entities. Remote infrastructure upgrades and replacements
for all locations acquired on or before December 31, 1998 are expected to be
completed by the end of May 1999.
The Company plans to survey and, where appropriate, conduct website
confirmation, of the Year 2000 readiness of its telecommunications equipment
and service vendors. The Company expects that this process will be complete by
the end of September 1999.
22
<PAGE>
Remediation
During this phase, the Company intends to develop and implement appropriate
corrective procedures for those Mission Critical Systems and Important
Functions that it determines during the Testing phase are not Year 2000 ready.
The Company will determine, on a case-by-case basis, whether such systems and
functions should be upgraded or replaced, or whether a custom remediation plan
should be implemented. In the case of the Company's business partners,
remediation may involve the designation of alternative service providers.
Contingency Planning
As part of the Contingency Planning phase of its Year 2000 readiness
project, the Company intends to develop and test manual contingency plans for
its dispatch operations and for certain of its financial operations. While
computerized systems make the Company more efficient, the Company believes it
can perform all necessary functions manually, although not as efficiently. In
the past, certain of the Company's divisions have operated successfully on a
manual basis. In addition, the Company has successfully interacted with
certain of its vendors and customers on a manual basis.
In the event that any of the Company's other Mission Critical Systems or
Important Functions will not be Year 2000 ready by December 31, 1999, the
Company will identify, consider, and determine appropriate alternatives. The
Company expects that any such contingency plans will be implemented during the
fourth quarter of 1999.
The Costs to Address the Company's Year 2000 Issues
Through December 31, 1998, the Company has incurred costs of approximately
$3.9 million to develop and install its information systems described above.
Because these systems were developed and installed during the latter half of
1998, management was able to take Year 2000 readiness into account in
selecting hardware and software technologies that would meet the Company's
objectives. As a result, the Company has not incurred, and does not expect to
incur, material costs to upgrade or replace its information systems to address
Year 2000 issues. The Company currently expects to incur up to $300,000 of
consulting fees and other costs related to its Year 2000 readiness project
during 1999.
The Risks of the Company's Year 2000 Issues
Installation of the Company's information systems may not be completed at
all of its locations before December 31, 1999. In addition, it is possible
that the systems, when installed, may not function properly. In such event,
the Company would be forced to rely on manual performance of its central
administrative functions along with the local dispatch and operating systems
utilized by its acquired businesses prior to their acquisition by the Company.
There can be no assurance that such systems will be Year 2000 ready, or that
the vendors and other service providers associated with such businesses will
be Year 2000 ready. If the local dispatch and operating systems utilized by
its acquired businesses do not function properly after December 31, 1999, the
Company will be required to perform all critical functions on a manual basis.
Any resulting inefficiency could have a material adverse effect on the
Company's business, financial condition and results of operations.
Because the Company has not yet received responses to its Year 2000
Questionnaires from all of its business partners, it is uncertain as to
whether all of its business partners will be Year 2000 ready before December
31, 1999. The Company is unable to predict the impact that Year 2000 problems
at vendors, customers or financial institutions may have on the Company. The
Company intends to continue to address Year 2000 issues with its business
partners, and will implement contingency plans to the extent necessary.
The foregoing constitutes a Year 2000 statement and readiness disclosure
subject to the protections afforded it by the federal Year 2000 Information
and Readiness Disclosure Act of 1998.
ITEM 7A. Quantitative and Qualitative Discussions about Market Risk.
The table below provides information about the Company's market sensitive
financial instruments and constitutes a "forward-looking statement." The
Company's major market risk exposure is changing interest
23
<PAGE>
rates. The Company's policy is to manage interest rates through use of
floating rate debt. The Company's objective in managing its exposure to
interest rate changes is to limit the impact of interest rate changes on
earnings and cash flow and to lower its overall borrowing costs. The table
below provides information about the Company's financial instruments that are
sensitive to interest rate changes. The table presents principal cash flows by
expected maturity dates for floating rate debt instruments as of December 31,
1998. There were no derivative financial instruments at December 31, 1997.
<TABLE>
<CAPTION>
Expected Maturity Date
------------------------------------------------------
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
---- ---- ------- ---- ---- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt
Variable rate............ -- -- $18,800 -- -- -- $18,800 $18,800
</TABLE>
Average interest rate will be at the base rate (the higher of the Federal
funds rate plus 0.5% or the reference rate, as defined) plus the base rate
margin, or the bank's Eurodollar rate plus a margin of 1.5% to 2.5%.
ITEM 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements and the Financial Statements
of the Founding Companies included in this Report beginning at page F-1 are
incorporated in this Item 8 by reference.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information required by this Item with respect to the identity and
business experience of the Company's directors is set forth in Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 24, 1999,
under the caption "Election of Directors," which information is hereby
incorporated herein by reference.
The information required by this Item with respect to the identity and
business experience of the Company's executive officers is set forth on page
13 of this Report under the caption "Executive Officers of the Registrant."
The information required by this Item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is set forth in the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
May 24, 1999, under the Caption "Section 16(a) Beneficial Ownership Reporting
Compliance," which information is hereby incorporated herein by reference.
ITEM 11. Executive Compensation
The information required by this Item is set forth in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 24, 1999,
under the captions "Executive Compensation," "Compensation Committee
Interlocks and Insider Participation" and "Organization and Renumeration of
the Board of Directors," which information is hereby incorporated herein by
reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is set forth in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 24, 1999
under the caption "Securities Beneficially Owned by Principal Stockholders and
Management," which information is hereby incorporated herein by reference.
24
<PAGE>
ITEM 13. Certain Relationships and Related Transactions
The information required by this Item is set forth in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 24, 1999
under the caption "Certain Relationships and Related Transactions," which
information is hereby incorporated herein by reference.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
See Index to Financial Statements on Page F-1 of this Report
(2) Financial Statement Schedules
Schedule II-Valuation and Qualifying Accounts
Other schedules have been omitted as they are not applicable or the
required or equivalent information has been included in the consolidated
financial statements or the notes thereto.
(3) Exhibits
<TABLE>
<CAPTION>
Number Description of Document
------ -----------------------
<C> <S>
2.1 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Northland Auto Transporters, Inc. and the
Stockholder named therein (incorporated by reference to the same-
numbered Exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-46925)).
2.2 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Northland Fleet Leasing, Inc. and the
Stockholder named therein (incorporated by reference to the same-
numbered Exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-46925)).
2.3 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Falcon Towing and Auto Delivery, Inc. and the
Stockholder named therein (incorporated by reference to the same-
numbered Exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-46925)).
2.4 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Smith-Christensen Enterprises, Inc., City
Towing, Inc. and the Stockholders named therein (incorporated by
reference to the same-numbered Exhibit to the Company's Registration
Statement on Form S-1 (Registration No. 333-46925)).
2.5 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Caron Auto Works, Inc. and the Stockholders
named therein (incorporated by reference to the same-numbered Exhibit
to the Company's Registration Statement on Form S-1 (Registration
No. 333-46925)).
2.6 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Caron Auto Brokers, Inc. and the Stockholder
named therein (incorporated by reference to the same-numbered Exhibit
to the Company's Registration Statement on Form S-1 (Registration
No. 333-46925)).
2.7 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Absolute Towing and Transporting, Inc. and the
Stockholder named therein (incorporated by reference to the same-
numbered Exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-46925)).
2.8 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Keystone Towing, Inc. and the Stockholder named
therein (incorporated by reference to the same-numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 333-
46925)).
2.9 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, ASC Transportation Services, Auto Service Center
and the Stockholder named therein (incorporated by reference to the
same-numbered Exhibit to the Company's Registration Statement on Form
S-1 (Registration No. 333-46925)).
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Number Description of Document
------ -----------------------
<C> <S>
2.10 Agreement and Plan of Reorganization dated as of February 23, 1998, by
and among the Company, Silver State Tow & Recovery, Inc. and the
Stockholder named therein (incorporated by reference to the same-
numbered Exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-46925)).
2.11 Form of Amendment Number One to Agreement and Plan of Reorganization
dated as of February 23, 1998, by and among the Company, Keystone
Towing, Inc. and the Stockholder named therein (incorporated by
reference to the same-numbered Exhibit to Amendment No. 3 to the
Company's Registration Statement on Form S-1 (Registration No. 333-
46925)).
2.12 Stock Purchase Agreement, dated as of August 21, 1998, by and among the
Company, E & R Towing and Garage, Inc., Gerald J. Corcoran, Edward V.
Corcoran, Jr. and David Corcoran (incorporated by reference to Exhibit
2.1 to the Company's Current Report on Form 8-K dated August 21, 1998).
2.13 Stock Purchase Agreement, dated as of August 21, 1998, by and among the
Company, Environmental Auto Removal, Inc., Gerald J. Corcoran and
Edward V. Corcoran (incorporated by reference to Exhibit 2.2 to the
Company's Current Report on Form 8-K dated August 21, 1998).
2.14 Merger Agreement, dated as of November 5, 1998, by and among the
Company, URS Transport, Inc., Pilot Transport, Inc. and the
Shareholders named therein (incorporated by reference to Exhibit 2.1 to
the Company's Current Report on Form 8-K dated December 9, 1998).
2.15 First Amendment to Merger Agreement, dated as of December 2, 1998, by
and among the Company, URS Transport, Inc., Pilot Transport, Inc. and
the Shareholders named therein (incorporated by reference to Exhibit
2.2 to the Company's Current Report on Form 8-K dated December 9,
1998).
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to the same numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration
No. 333-46925)).
3.2 Amended and Restated Bylaws of the Company (incorporated by reference
to the same-numbered Exhibit to the Company's Registration Statement on
Form S-1 (Registration No. 333-46925)).
4.1 Specimen Common Stock Certificate (incorporated by reference to the
same-numbered Exhibit to Amendment No. 3 to the Company's Registration
Statement on Form S-1 (Registration No. 33-46925)).
4.2 Form of 8% Convertible Subordinated Debenture due 2008 (incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-K
dated November 19, 1998).
10.1 United Road Services, Inc. 1998 Stock Option Plan (incorporated by
reference to the same-numbered Exhibit to the Company's Registration
Statement on Form S-1 (Registration No. 333-46925)).*
10.2 Stock Purchase and Restriction Agreement between the Company and Edward
T. Sheehan (incorporated by reference to the same-numbered Exhibit to
the Company's Registration Statement on Form S-1 (Registration No. 333-
46925)).*
10.3 Executive Employment Agreement between the Company and Edward T.
Sheehan (incorporated by reference to the same-numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 333-
46925)).*
10.4 Resignation letter from Mark McKinney in favor of the Company
(incorporated by reference to the same-numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration
No. 333-56603)).
10.5 Resignation letter from Ross Berner in favor of the Company
(incorporated by reference to the same-numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration
No. 333-56603)).
10.6 Executive Employment Agreement between the Company and Allan D. Pass
(incorporated by reference to the same-numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 333-
46925)).*
10.7 Executive Employment Agreement between the Company and Donald J. Marr
(incorporated by reference to the same-numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 333-
46925)).*
10.8 Employment Agreement between the Company and Edward W. Morawski
(incorporated by reference to the same-numbered Exhibit to Amendment
No. 1 to the Company's Registration Statement on Form S-1 (Registration
No. 333-46925)).*
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Number Description of Document
------ -----------------------
<C> <S>
10.9 Consulting Agreement between the Company and Todd Q. Smart
(incorporated by reference to the same-numbered Exhibit to Amendment
No. 1 to the Company's Registration Statement on Form S-1 (Registration
No. 333-46925)).*
10.10 Credit Agreement dated as of May 8, 1998 among the Company, various
financial institutions and Bank of America National Trust and Savings
Association, as Agent (incorporated by reference to the same-numbered
Exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-56603)).
10.11 Amended and Restated Executive Employment Agreement, dated as of May 1,
1998, between the Company and Donald J. Marr (incorporated by reference
to the same-numbered Exhibit to the Company's Registration Statement on
Form S-1 (Registration No. 333-56603)).*
10.12 [Reserved]
10.13 Form of Registration Rights Agreement between the Company and the
Stockholders named therein (incorporated by reference to the same-
numbered Exhibit to Amendment No. 1 to the Company's Registration
Statement on Form S-1 (Registration No. 333-46925)).
10.14 Form of Indemnification Agreement between the Company and each of the
Company's executive officers and directors (incorporated by reference
to the same-numbered Exhibit to Amendment No. 2 to the Company's
Registration Statement on Form S-1 (Registration No. 333-46925)).*
10.15 Lease between the Company and Edward W. Morawski (incorporated by
reference to the same-numbered Exhibit to Amendment No. 1 to the
Company's Registration Statement on Form S-1 (Registration No. 333-
46925)).
10.16 Consulting Agreement, dated as of May 7, 1998, by and between the
Company and Mark J. Henninger (incorporated by reference to the same-
numbered Exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-65563)).*
10.17 Employment Agreement, dated as of June 1, 1998, between the Company and
Robert Joseph Adams, Jr. (incorporated by reference to Exhibit 10.7 to
the Company's Quarterly Report on Form 10-Q for the period ended June
30, 1998).*
10.18 First Amendment to Credit Agreement, dated as of June 26, 1998, by and
among the Company, various financial institutions and Bank of America
National Trust and Savings Association, as Agent (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-
Q for the period ended June 30, 1998).
10.19 Second Amendment to Credit Agreement, dated as of July 15, 1998, by and
among the Company, various financial institutions and Bank of America
National Trust and Savings Association, as Agent (incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-
Q for the period ended June 30, 1998).
10.20 Third Amendment to Credit Agreement, dated as of September 30, 1998, by
and among the Company, various financial institutions and Bank of
America National Trust and Savings Association, as Agent (incorporated
by reference to the same-numbered Exhibit to the Company's Registration
Statement on Form S-1 (Registration No. 333-65563)).
10.21 Stock Purchase Warrant, dated as of June 16, 1998, issued by the
Company to Bank of America National Trust and Savings Association
(incorporated by reference to the same-numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 333-
65563)).
10.22 Amended and Restated Credit Agreement, dated as of November 2, 1998, by
and among the Company, various financial institutions, BankBoston,
N.A., as Documentation Agent and Bank of America National Trust and
Savings Association, as Agent (incorporated by reference to the same-
numbered Exhibit to Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-1 (Registration No. 333-65563)).
10.23 First Amendment to Amended and Restated Credit Agreement, dated as of
December 4, 1998, by and among the Company, various financial
institutions, BankBoston, N.A., as Documentation Agent and Bank of
America National Trust and Savings Association, as Agent (incorporated
by reference to the same-numbered Exhibit to Post-Effective Amendment
No. 1 to the Company's Registration Statement on Form S-1 (Registration
No. 333-65563)).
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Number Description of Document
------ -----------------------
<C> <S>
10.24 Purchase Agreement, dated as of November 19, 1998, by and between
Charter URS LLC and the Company (incorporated by reference to Exhibit
99.1 to the Company's Current Report on Form 8-K dated November 19,
1998).
10.25 Registration Rights Agreement, dated as November 19, 1998, by and
between Charter URS LLC and the Company (incorporated by reference to
Exhibit 99.2 to the Company's Current Report on Form 8-K dated November
19, 1998).
10.26 Investors Agreement, dated as of November 19, 1998, by and between
Charter URS LLC and the Company (incorporated by reference to Exhibit
99.3 to the Company's Current Report on Form 8-K dated November 19,
1998).
10.27 Merger Agreement dated as of November 12, 1998, by and among the
Company, URS Transport, Inc., MPG Transco, Ltd., Michael A. Wysocki,
Patrick M. Riley and Gary R. Sienkiewicz (incorporated by reference to
the same-numbered Exhibit to Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-1 (Registration No. 333-
65563)).
11.1 Statement regarding Computation of Earnings per Share (filed herewith).
21.1 Subsidiaries of the Registrant (incorporated by reference to the same-
numbered Exhibit to Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-1 (Registration No. 333-65563)).
23.1 Consent of KPMG LLP (filed herewith).
27.1 Financial Data Schedule (filed herewith).
</TABLE>
- --------
* Indicates management agreement or compensatory plan or arrangement.
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the quarterly
period ended December 31, 1998:
(i) Amended Current Report on Form 8-K/A, dated August 21, 1998, filed by
the Company on October 26, 1998 to include, under Item 5, historical
financial statements and unaudited pro forma combined financial information
with respect to seven businesses the Company acquired between May 6, 1998
and October 8, 1998.
(ii) Current Report on Form 8-K, dated November 19, 1998, filed by the
Company on December 8, 1998 to report, under Item 5, that on November 19,
1998, the Company entered into a Purchase Agreement with Charter URS LLC,
relating to the Company's sale to Charter URS LLC of up to $75.0 million
aggregate principal amount of the Company's 8% Convertible Subordinated
Debentures due 2008.
(iii) Current Report on Form 8-K, dated December 9, 1998, filed by the
Company on December 24, 1998 to report, under Item 2, that on December 9,
1998, the Company acquired all of the capital stock of Pilot Transport,
Inc. from the stockholders thereof.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
UNITED ROAD SERVICES, INC.
/s/ Edward T. Sheehan
Date: March 29, 1999 By: _________________________________
Edward T. Sheehan
Chairman of the Board, Chief
Executive Officer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Edward T. Sheehan Chairman of the Board, March 29, 1999
______________________________________ Chief Executive Officer
Edward T. Sheehan and Secretary (principal
executive officer)
/s/ Donald J. Marr Senior Vice President and March 29, 1999
______________________________________ Chief Financial Officer
Donald J. Marr (principal financial and
accounting officer)
/s/ Edward W. Morawski Vice President and March 29, 1999
______________________________________ Director
Edward W. Morawski
/s/ Grace W. Hawkins Director March 29, 1999
______________________________________
Grace W. Hawkins
/s/ Todd Q. Smart Director March 29, 1999
______________________________________
Todd Q. Smart
/s/ Richard A. Molyneux Director March 29, 1999
______________________________________
Richard A. Molyneux
/s/ Mark J. Henninger Director March 29, 1999
______________________________________
Mark J. Henninger
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Merril M. Halpern Director March 29, 1999
______________________________________
Merril M. Halpern
/s/ Robert L. Berner, III Director March 29, 1999
______________________________________
Robert L. Berner, III
/s/ Michael S. Pfeffer Director March 29, 1999
______________________________________
Michael S. Pfeffer
/s/ Donald F. Moorehead, Jr. Director March 29, 1999
______________________________________
Donald F. Moorehead, Jr.
</TABLE>
30
<PAGE>
INDEX OF EXHIBITS
FILED HEREWITH*
<TABLE>
<CAPTION>
Number Description of Document
------ -----------------------
<C> <S>
11.1 Statement regarding Computation of Earnings per Share
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule
</TABLE>
- --------
* For a complete list of Exhibits to this Report, see Item 14(a)(3).
31
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
UNITED ROAD SERVICES, INC.
Independent Auditors' Report ............................................ F-4
Consolidated Balance Sheets ............................................. F-5
Consolidated Statements of Operations ................................... F-6
Consolidated Statements of Stockholders' Equity (Deficit) ............... F-7
Consolidated Statements of Cash Flows ................................... F-8
Notes to Consolidated Financial Statements .............................. F-9
FOUNDING COMPANIES
NORTHLAND AUTO TRANSPORTERS, INC. AND NORTHLAND FLEET LEASING, INC.
Independent Auditors' Report ............................................ F-27
Combined Balance Sheets ................................................. F-28
Combined Statements of Income ........................................... F-29
Combined Statements of Stockholder's Equity ............................. F-30
Combined Statements of Cash Flows ....................................... F-31
Notes to Combined Financial Statements .................................. F-32
FALCON TOWING AND AUTO DELIVERY, INC.
Independent Auditors' Report ............................................ F-40
Balance Sheets .......................................................... F-41
Statements of Operations ................................................ F-42
Statements of Stockholder's Equity ...................................... F-43
Statements of Cash Flows ................................................ F-44
Notes to Financial Statements ........................................... F-45
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
Independent Auditors' Report ............................................ F-50
Consolidated Balance Sheets ............................................. F-51
Consolidated Statements of Operations ................................... F-52
Consolidated Statements of Stockholders' Equity ......................... F-53
Consolidated Statements of Cash Flows ................................... F-54
Notes to Consolidated Financial Statements .............................. F-55
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
Independent Auditors' Report ............................................ F-62
Combined Balance Sheets ................................................. F-63
Combined Statements of Operations ....................................... F-64
Combined Statements of Stockholders' Equity ............................. F-65
Combined Statements of Cash Flows ....................................... F-66
Notes to Combined Financial Statements .................................. F-67
ABSOLUTE TOWING AND TRANSPORTING, INC.
Independent Auditors' Report ............................................ F-76
Balance Sheets .......................................................... F-77
Statements of Operations ................................................ F-78
Statements of Stockholder's Equity ...................................... F-79
Statements of Cash Flows ................................................ F-80
Notes to Financial Statements ........................................... F-81
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
Independent Auditors' Report ........................................... F-86
Consolidated Balance Sheets ............................................ F-87
Consolidated Statements of Operations .................................. F-88
Consolidated Statements of Stockholder's Deficit ....................... F-89
Consolidated Statements of Cash Flows .................................. F-90
Notes to Consolidated Financial Statements ............................. F-91
MILNE TOW AND TRANSPORT SERVICES
Independent Auditors' Report ........................................... F-97
Balance Sheet .......................................................... F-98
Statement of Operations ................................................ F-99
Statement of Stockholder's Equity (Deficit) ............................ F-100
Statement of Cash Flows ................................................ F-101
Notes to Financial Statements .......................................... F-102
</TABLE>
F-2
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1998
(With Independent Auditors' Report Thereon)
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
United Road Services, Inc.:
We have audited the accompanying consolidated balance sheets of United Road
Services, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the period from July 25, 1997 (inception) through December
31, 1997 and for the year ended December 31, 1998. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the Index at Item 14(a)(2). These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of United
Road Services, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for the period from July 25,
1997 (inception) through December 31, 1997 and for the year ended December 31,
1998, in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Albany, New York
March 5, 1999, except as to
Note 16(b), which is as of
March 16, 1999
F-4
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1998
(In thousands, except share amounts)
<TABLE>
<CAPTION>
1997 1998
----- -------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................................... $ 50 3,381
Trade receivables, net of allowance for doubtful accounts of
$1,132....................................................... -- 16,440
Other receivables............................................. -- 1,495
Prepaid income taxes.......................................... -- 465
Prepaid expenses and other current assets..................... -- 1,752
Current portion of rights to equipment under finance
contracts.................................................... -- 547
----- -------
Total current assets........................................ 50 24,080
Vehicles and equipment, net..................................... -- 46,814
Rights to equipment under finance contracts, excluding current
portion........................................................ -- 2,025
Deferred financing costs, net................................... -- 3,552
Goodwill, net................................................... -- 171,953
Other non-current assets........................................ -- 308
----- -------
Total assets................................................ $ 50 248,732
===== =======
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of obligations under capital leases...... $ -- 338
Current installments of obligations for equipment under
finance contracts............................................ -- 547
Notes payable................................................. -- 17
Accounts payable.............................................. 62 6,904
Accrued expenses.............................................. -- 4,690
Due to related parties........................................ 92 2,254
----- -------
Total current liabilities................................... 154 14,750
Obligations under capital leases, excluding current portion..... -- 698
Obligations for equipment under finance contracts, excluding
current installments........................................... -- 2,025
Long-term debt.................................................. -- 62,532
Deferred income taxes........................................... -- 4,961
----- -------
Total liabilities........................................... 154 84,966
----- -------
Stockholders' equity (deficit):
Preferred stock; 5,000,000 shares authorized; no shares issued
or outstanding............................................... -- --
Common stock, $0.001 par value; 35,000,000 shares authorized;
15,707,085 shares issued and 15,466,004 shares outstanding at
December 31, 1998; 2,604,000 shares issued and outstanding at
December 31, 1997............................................ 3 16
Additional paid-in capital.................................... 67 159,532
Retained earnings (deficit)................................... (174) 4,218
----- -------
Total stockholders' equity (deficit)........................ (104) 163,766
----- -------
Total liabilities and stockholders' equity.................. $ 50 248,732
===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the
period from
July 25, 1997
(inception) through Year ended
December 31, 1997 December 31, 1998
------------------- -----------------
<S> <C> <C>
Net revenue............................. $ -- 87,919
Cost of revenue......................... -- 64,765
----- ------
Gross profit.......................... -- 23,154
Selling, general and administrative
expenses............................... 174 12,428
Amortization of goodwill................ -- 1,745
----- ------
Income (loss) from operations......... (174) 8,981
Other income (expense):
Interest income....................... -- 658
Interest expense...................... -- (1,588)
Other................................. -- (156)
----- ------
Income (loss) before income taxes..... (174) 7,895
Income tax expense...................... -- 3,503
----- ------
Net income (loss)..................... $(174) 4,392
===== ======
Per share amounts:
Basic earnings (loss)................. $(.08) $ .43
===== ======
Diluted earnings (loss)............... $(.08) $ .42
===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the period from July 25, 1997 (inception) through December 31, 1997
and for the year ended December 31, 1998
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Additional Retained Total
Common paid-in earnings stockholders'
stock capital (deficit) equity (deficit)
------ ---------- --------- ----------------
<S> <C> <C> <C> <C>
Initial capitalization........... $ 3 67 -- 70
Net loss--1997................... -- -- (174) (174)
--- ------- ----- -------
Balance at December 31, 1997..... 3 67 (174) (104)
Issuance of common stock (218,736
shares)......................... -- 735 -- 735
Stock issued in connection with:
Initial public offering, net of
offering costs
(7,590,000 shares)............ 8 89,492 -- 89,500
Acquisitions, net of certain
registration costs
(5,053,268 shares)............ 5 68,769 -- 68,774
Issuance of warrant to acquire
117,789 shares
of common stock................. -- 469 -- 469
Net income--1998................. -- -- 4,392 4,392
--- ------- ----- -------
Balance at December 31, 1998..... $16 159,532 4,218 163,766
=== ======= ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the
period from
July 25, 1997
(inception) through Year ended
December 31, 1997 December 31, 1998
-------------------- -----------------
<S> <C> <C>
Net income (loss)...................... $(174) 4,392
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation.......................... -- 3,292
Amortization of goodwill.............. -- 1,745
Amortization of deferred financing
costs................................ -- 219
Provision for doubtful accounts....... -- 183
Deferred income taxes................. -- 1,659
Interest expense, paid-in-kind........ -- 232
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Increase in trade receivables......... -- (2,427)
Decrease in other receivables......... -- 171
Increase in prepaid income taxes...... -- (381)
Decrease in prepaid expenses and other
current assets....................... -- 724
Decrease in other non-current assets.. -- 105
Increase (decrease) in accounts
payable.............................. 62 (1,608)
Decrease in accrued expenses.......... -- (242)
----- --------
Net cash (used in) provided by
operating activities................ (112) 8,064
----- --------
Investing activities:
Acquisitions, net of cash acquired.... -- (118,161)
Purchases of vehicles and equipment... -- (11,297)
Proceeds from sale of vehicles and
equipment............................ -- 387
Amounts payable to related parties.... 92 2,162
----- --------
Net cash provided by (used in)
investing activities................ 92 (126,909)
----- --------
Financing activities:
Proceeds from issuance of common
stock, net........................... 70 90,235
Proceeds from issuance of convertible
subordinated debentures.............. -- 43,500
Borrowings on revolving credit
facility............................. -- 59,800
Repayments on revolving credit
facility............................. -- (41,000)
Payments of deferred financing costs.. -- (3,302)
Payments on long-term debt and capital
leases assumed in acquisitions....... -- (27,057)
----- --------
Net cash provided by financing
activities.......................... 70 122,176
----- --------
Increase in cash and cash equivalents.. 50 3,331
Cash and cash equivalents at beginning
of period............................. -- 50
----- --------
Cash and cash equivalents at end of
period................................ $ 50 3,381
===== ========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest.............................. $ -- 1,137
===== ========
Income taxes.......................... $ -- 2,309
===== ========
Supplemental disclosure of non-cash
investing and financing activity:
Issuance of common stock for
acquisitions......................... $ -- 69,355
===== ========
Warrant issued to lender as partial
loan fee............................. $ -- 469
===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(1) Summary of Significant Accounting Policies
(a) Organization and Business
United Road Services, Inc. ("Company"), a Delaware corporation, was formed
in July 1997 to become a leading national provider of motor vehicle and
equipment towing, recovery and transport services. From inception through
December 31, 1998, the Company acquired 41 businesses, seven of which were
acquired simultaneously with the consummation of an initial public offering of
its common stock on May 6, 1998. Consideration for these businesses consisted
of cash, common stock and the assumption of indebtedness. All of these
acquisitions were accounted for utilizing the purchase method of accounting.
The Company operates in two reportable operating segments: (1) Transport and
(2) Towing and Recovery. Both segments are operated under a common management
structure that evaluates each of the 50 service locations located in 17
states. Presently, the service locations are divided into two regions within
the United States; the Western and Eastern Regions.
The Transport segment provides transport services to a broad range of
customers in the new and used vehicle markets. Revenue from Transport services
is derived according to pre-set rates based on mileage or negotiated flat
rates. Customers include automobile manufacturers, leasing and insurance
companies, automobile auction companies, automobile dealers, as well as
individual motorists. During 1998, the Company derived 53.4% of its revenue
from Transport services of which 64.5% was generated from the Western Region
and 35.5% from the Eastern Region operations.
The Towing and Recovery segment provides towing, impounding and storing,
lien sales and auto auctions of abandoned vehicles. In addition, the Towing
and Recovery segment provides recovery and relocation services for heavy-duty
commercial vehicles and construction equipment. Revenue from Towing and
Recovery services is principally derived from rates based on distance, time or
fixed charges, and any related impound and storage fees. Customers include
automobile dealers, repair and fleet operations, law enforcement agencies,
municipalities and individual motorists. During 1998, the Company derived
46.6% of its revenue from Towing and Recovery services, of which 62.4% was
generated from the Western Region and 37.6% from the Eastern Region
operations.
(b) Basis of Presentation
The financial statements for the period from July 25, 1997 (inception)
through December 31, 1997, present the activities of management in preparation
for the offering and the acquisition of the seven original founding companies,
and do not reflect the conduct of any operations.
The accompanying 1998 consolidated financial statements include the accounts
of the Company and its subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation.
(c) Revenue Recognition
The Company's revenue is derived from customers who require transport of
vehicles and equipment or towing and recovery service, and fees related to
vehicles, such as impound, storage, repair or auction. Transport revenue is
recognized upon the delivery of the vehicles and equipment to their final
destination, towing and recovery revenue is recognized at the completion of
each engagement, and fees are recorded when the service is performed or when
title to the vehicles has been transferred. Expenses related to the generation
of revenue are recognized as incurred.
F-9
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(d) Cash Equivalents
Cash equivalents of $611 at December 31, 1998 consisted of money market
funds and interest-bearing certificates of deposit. For purposes of the
consolidated statements of cash flows, the Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents.
(e) Vehicles and Equipment
Vehicles and equipment are recorded at cost, or fair value as of date of
purchase under purchase accounting. Vehicles and equipment under capital
leases are stated at the present value of minimum lease payments. Replacement
of engines and certain other significant costs are capitalized. Expenditures
for maintenance and repairs are expensed as costs are incurred.
Depreciation is determined using the straight-line method over the remaining
estimated useful lives of the individual assets. Accelerated methods of
depreciation have been used for income tax purposes. Vehicles and equipment
held under capital leases and leasehold improvements are amortized straight-
line over the shorter of the remaining lease term or estimated useful life of
the asset.
The Company provides for depreciation and amortization of vehicles and
equipment over the following estimated useful lives:
<TABLE>
<S> <C>
Transportation and towing equipment.............................. 10-15 years
Machinery and other equipment.................................... 5 years
Computer software and related equipment.......................... 3-7 years
Furniture and fixtures........................................... 5 years
Leasehold improvements........................................... 3-10 years
</TABLE>
(f) Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally 40 years. The Company considers 40 years as
a reasonable life for goodwill in light of characteristics of the towing and
transport industry, such as the lack of dependence on technological change,
the many years that the industry has been in existence, the current trend
towards outsourcing, recent double digit growth rate and stable nature of
customer base. In addition, the Company has acquired well established
businesses that have generally been in existence for many years.
Accumulated amortization at December 31, 1998 was $1,745.
(g) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(h) Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes standards for reporting and presentation of
F-10
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
comprehensive income and its components in a full set of financial statements.
The Company does not presently have any elements of comprehensive income as
outlined in SFAS No. 130, and consequently, there is no difference between net
income (loss) and comprehensive income (loss).
(i) Stock-Based Compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations, in accounting for
its fixed plan stock options. As such, compensation expense would be recorded
on the date of grant only if the current market price of the underlying stock
exceeded the exercise price.
(j) Per Share Amounts
Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted
in the issuance of common stock that then shared in the earnings of the
Company (such as stock options and warrants).
The following tables provide calculations of basic and diluted earnings per
share:
For the period July 25, 1997 (inception) through December 31, 1997
<TABLE>
<CAPTION>
Weighted Per
average share
Net loss shares amounts
-------- --------- -------
<S> <C> <C> <C>
Basic loss per share......................... $(174) 2,055,300 $(.08)
===== ========= =====
Diluted loss per share....................... $(174) 2,055,300 $(.08)
===== ========= =====
</TABLE>
Year ended December 31, 1998
<TABLE>
<CAPTION>
Weighted Per
Net average share
income shares amounts
------ ---------- -------
<S> <C> <C> <C>
Basic earnings per share........................ $4,392 10,221,810 $.43
====
Effect of dilutive securities:
Options and warrants.......................... -- 123,569
Earnout shares................................ -- 4,880
Shares held in escrow......................... -- 39,645
------ ----------
Diluted earnings per share...................... $4,392 10,389,904 $.42
====== ========== ====
</TABLE>
Shares issuable upon conversion of the convertible subordinated debentures
have been excluded at December 31, 1998, as the effect would be antidilutive
due to the adjustment (increase in net income) for interest expense.
F-11
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(k) Advertising Costs
Advertising costs are expensed as incurred and amounted to $0 and $490 in
1997 and 1998, respectively.
(l) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, and the disclosure of
contingent assets and liabilities, to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(m) Concentrations of Credit Risk
The financial instruments which potentially subject the Company to credit
risk consist primarily of cash, cash equivalents, and trade receivables.
The Company maintains cash and cash equivalents with various financial
institutions. Cash equivalents include investments in money market securities
and Certificates of Deposit. At times, such amounts may exceed the Federal
Deposit Insurance Corporation limits. The Company limits the amount of credit
exposure with any one financial institution and believes that no significant
concentration of credit risk exists with respect to cash investments.
Concentrations of credit risk with respect to receivables are limited, due
to the wide variety of customers and markets in which the Company's services
are provided, as well as their dispersion across many different geographic
areas. To mitigate credit risk, the Company applies credit approvals and
credit limits, and performs ongoing evaluations of its customers' financial
conditions. No single customer accounted for greater than 10% of trade
receivables at December 31, 1998.
(n) Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Management is currently evaluating
the impact of SFAS No. 133 on the Company's consolidated financial statements.
(2) Acquisitions
On May 6, 1998, the Company acquired the seven businesses, referred to as
the "Founding Companies", for aggregate consideration (excluding assumed
indebtedness) of $27,809 in cash and 2,375,741 shares of common stock valued
at $24,708. Between May 7, 1998 and December 31, 1998, the Company acquired 34
other businesses, referred to as the "Acquired Companies", for aggregate
consideration of $79,600 in cash and 2,918,608 shares of common stock valued
at $44,647. The Acquired Companies are located throughout the United States,
with the majority located in the Western Region of the country. The
acquisitions have been accounted for using the purchase method of accounting,
and accordingly, the assets and liabilities of the Acquired Companies have
been recorded at their estimated fair values at the dates of acquisition. The
excess of the purchase price over the fair value of the net assets acquired,
including certain direct costs associated with the acquisitions, of $173,698
has been recorded as goodwill and is being amortized on a straight-line basis
over 40 years. However, the Company has not completed its valuation of all of
its purchases and, accordingly, the purchase price allocations are subject to
change when additional information concerning asset and liability valuations
are completed. The results of operations of the Founding Companies and the
Acquired Companies have been included in the Company's results of operations
from their respective acquisition dates.
F-12
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
As discussed in note 13(a), contingent consideration is due on certain
companies acquired. In some cases, consideration is based on specific net
revenue goals over each of the next five years. In other cases, contingent
consideration is determined from the Company's evaluation of certain financial
ratios or other contingencies, for a specific period of time subsequent to the
dates of respective acquisitions. Contingent purchase price consideration is
capitalized when earned and amortized over the remaining life of the goodwill
associated with the respective acquisition.
The following unaudited pro forma financial information presents the
combined results of operations as if all the acquisitions that have been made
by the Company through December 31, 1998, had occurred as of January 1, 1997,
after giving effect to certain adjustments including amortization of goodwill,
additional depreciation expense, agreed-upon reductions in salaries and
bonuses to former owners/shareholders and related income tax effects. This pro
forma financial information does not necessarily reflect the results of
operations that would have occurred had a single entity operated during such
periods.
<TABLE>
<CAPTION>
Year ended December 31, 1997 Year ended December 31, 1998
----------------------------------- -----------------------------------
Proforma Proforma
Combined Combined
Founding Founding
United Companies United Companies
Road And Acquired Road And Acquired
Services, Inc. Companies Total Services, Inc. Companies Total
-------------- ------------ ------- -------------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Net revenue............. $ -- 163,024 163,024 87,919 108,590 196,509
===== ======= ======= ====== ======= =======
Net income (loss)....... $(174) 9,121 8,947 4,392 7,179 11,571
===== ======= ======= ====== ======= =======
Diluted income per
common share........... $ .58 $ .74
======= =======
</TABLE>
At December 31, 1998, the Company is committed to acquire one business with
a purchase price of $10,400 in cash, 996,351 shares of common stock and an
assumption of approximately $4,400 of debt.
(3) Stockholders' Equity
The Company effected a 100-for-one stock split on December 18, 1997 for each
share of common stock then outstanding. In addition, the Company increased
authorized shares of common stock to 1,000,000 shares with a $.001 par value.
Subsequently, and pursuant to an amended and restated certificate of
incorporation of United Road Services, Inc., filed on February 23, 1998, the
authorized number of shares was increased to 40,000,000 (35,000,000 common
shares and 5,000,000 preferred shares). Also on February 23, 1998, the Company
effected a 3.72 for 1 stock split for all outstanding common shares. Common
stock has been retroactively reflected in the accompanying consolidated
financial statements and related notes.
On December 18, 1997, the Company authorized the issuance of 188,976 shares
pursuant to the terms and conditions of a subscription agreement. These shares
were issued and fully paid on January 1, 1998 for $3.36 per share.
Additionally, during January 1998, the Company issued 29,760 shares of common
stock to a member of the board of directors for a purchase price of $3.36 per
share.
On May 1, 1998, the Company completed the initial public offering of its
common stock by issuing 7,590,000 shares, 990,000 of which were issued
pursuant to an underwriters' over-allotment provision, at a price of $13.00
per share. Prior to the offering, there was no public market for the Company's
common stock. The net proceeds of the offering, after deducting applicable
offering costs of $9,170, were $89,500. The net proceeds were used by the
Company to finance acquisitions and for general corporate purposes.
F-13
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
At various dates during 1998, as part of the financing of certain
acquisitions, discussed in note 2, the Company issued 5,053,268 shares of
common stock. The net consideration of these issuances, after deducting
applicable registration costs of $581, was $68,774 which has been recorded as
the purchase price for the applicable acquisitions.
On January 23, 1998, the United Road Services, Inc. 1998 Stock Option Plan
was adopted by the Company. Under the plan, options to purchase common stock
may be granted to directors, executive officers, key employees, and
consultants of the Company. The maximum number of shares of common stock that
may be subject to options granted under the plan may not exceed, in the
aggregate, 1,278,847 shares. Shares of common stock that are attributable to
grants that have expired or been terminated, canceled or forfeited are
available for issuance in connection with future grants. Stock options expire
after ten years from the date granted and are exercisable in one-third
increments per year beginning one year from the date of grant. Outstanding
options may be canceled and reissued under terms specified in the plan.
On September 23, 1998, the United Road Services, Inc. 1998 Non-Qualified
Stock Option Plan was adopted by the Company. Under the plan, options to
purchase common stock may be granted to key employees and consultants who are
neither directors nor executive officers of the Company. The maximum number of
shares of common stock that may be subject to options granted under the plan
may not exceed, in the aggregate, 500,000 shares. Shares of common stock that
are attributable to grants that have expired or been terminated, canceled or
forfeited are available for issuance in connection with future grants. Stock
options expire after ten years from the date granted and are exercisable in
one-third increments per year beginning one year from the date of grant.
Outstanding options may be canceled and reissued under terms specified in the
plan.
The following table summarizes activity under the Company's stock option
plans as of December 31, 1998:
<TABLE>
<CAPTION>
Weighted-
Number of average
shares exercise price
--------- --------------
<S> <C> <C>
Options outstanding at beginning of year...... -- $ --
Granted....................................... 1,080,850 12.22
Forfeited..................................... (2,950) 15.11
--------- ------
Options outstanding at end of year............ 1,077,900 $12.22
========= ======
Options exercisable at December 31, 1998...... --
=========
Weighted-average fair value of options granted
during the year.............................. $ 5.95
======
</TABLE>
The per share weighted-average fair value of stock options granted during
1998 was determined using the Black-Scholes option-pricing model with the
following weighted average assumptions: (i) risk-free interest rate of
approximately 4.6%, (ii) expected life of 5 years, (iii) volatility of
approximately 50%, and (iv) expected dividend yield of 0%.
F-14
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
The following table summarizes information about stock options outstanding
as of December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding
----------------------------------------------------------------------------
Weighted-
Weighted- average
Range of Number average remaining
exercise prices outstanding exercise price contractual life
--------------- ----------- -------------- ----------------
<S> <C> <C> <C>
$7.00-10.50 537,800 $ 8.72 9.7 years
10.51-15.75 259,450 13.73 9.5 years
15.76-23.64 270,250 17.22 9.6 years
23.65-25.50 10,400 25.45 9.6 years
---------
1,077,900
=========
</TABLE>
Following are the shares of common stock reserved for issuance and the
related exercise prices for the outstanding stock options, convertible
subordinated debentures and warrants at December 31, 1998:
<TABLE>
<CAPTION>
Number of Exercise price
shares per share
--------- --------------
<S> <C> <C>
1998 Stock Option Plan.............................. 874,350 $9.00-25.50
1998 Non-Qualified Stock Option Plan................ 203,550 7.00-18.375
Convertible subordinated debentures................. 2,915,467
Warrants............................................ 117,789
---------
Shares reserved for issuance...................... 4,111,156
=========
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its stock option
plans and, since the exercise price of stock options granted under the
Company's stock option plans is not less than the market price of the
underlying stock on the date of grant, no compensation cost has been
recognized for such grants. Under SFAS No. 123, Accounting for Stock Based
Compensation, compensation cost for stock option grants would be based on the
fair value at the grant date, and the resulting compensation expense would be
shown as an expense on the consolidated statements of operations. Had
compensation cost for these plans been determined consistent with SFAS No.
123, the Company's net income and earnings per share for the year ended
December 31, 1998 would have been reduced to the following pro forma amounts:
<TABLE>
<S> <C>
Net income:
As reported........................................................... $4,392
======
Pro forma............................................................. $3,321
======
Per share amounts:
Basic earnings per share:
As reported........................................................... $ .43
======
Pro forma............................................................. $ .32
======
Diluted earnings per share:
As reported........................................................... $ .42
======
Pro forma............................................................. $ .32
======
</TABLE>
The effects of applying SFAS No. 123 in the pro forma disclosure may not be
indicative of future amounts as additional awards in future years are
anticipated. The fair value of each option grant is estimated on the date
F-15
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
of grant using the Black-Scholes option-pricing model with the following
assumptions for 1998: (i) risk-free interest rates ranging from 4.5% to 4.6%,
(ii) expected life of 5 years, (iii) average volatility of 50%, and (iv)
expected dividend yield of 0%.
(4) Vehicles and Equipment
Vehicles and equipment at December 31, 1998 consists of the following:
<TABLE>
<S> <C>
Transportation and towing equipment................................. $42,806
Machinery and other equipment....................................... 1,399
Computer software and related equipment............................. 3,888
Furniture and fixtures.............................................. 587
Leasehold improvements.............................................. 1,426
-------
50,106
Less accumulated depreciation and amortization...................... (3,292)
-------
$46,814
=======
</TABLE>
Depreciation and amortization expense of vehicles and equipment was $0 and
$3,292 in 1997 and 1998, respectively.
Included in vehicles and equipment at December 31, 1998 are costs of $1,107
and accumulated amortization of $70, relating to certain transportation and
towing equipment recorded as capital leases. Amortization expense of $70
relating to transportation and towing equipment capital leases was included in
depreciation and amortization expense at December 31, 1998.
(5) Equipment Under Financing Contracts
The Company has guaranteed lease obligations for certain independent
carriers who lease equipment from financing companies. The guarantee includes
payment of the monthly installments should the primary lessee default, as well
as a specified minimum residual value at the end of the lease term. In return
for the lease guarantee, the independent carrier agrees to subcontract to the
Company for the duration of the lease term. For accounting purposes, the
Company has recorded the rights to the equipment and the corresponding
obligation under the equipment financing contracts. The recorded value of both
the asset and liability related to the financing contracts is determined based
on the present value of the future minimum installment payments and the
guaranteed residual value using the rate implicit in the lease agreements.
The following is a summary of obligations under equipment financing
contracts at December 31, 1998 :
<TABLE>
<S> <C>
Year ending December 31:
1999.............................................................. $ 783
2000.............................................................. 763
2001.............................................................. 667
2002.............................................................. 828
------
Total minimum obligations (includes residual guarantees of $730).. 3,041
Less: imputed interest (at rates from 7.25% to 10.50%)............ (469)
------
Present value of future minimum obligations, $547 of which is
included in current assets and liabilities at December 31, 1998.. $2,572
======
</TABLE>
F-16
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
During 1998, installment payments of $470 related to the obligations for
equipment under financing contracts are included in cost of revenue in the
accompanying consolidated statements of operations. Of this amount, $140
represents interest charges which were withheld from the amounts paid to the
respective independent contractors and remitted directly to the financing
companies. At December 31, 1998, the restricted amount of $140 was included in
cash and cash equivalents in the accompanying consolidated balance sheet.
(6) Deferred Financing Costs
Deferred financing costs at December 31, 1998 are associated with the
Company's revolving credit facility and the convertible subordinated
debentures, and consist of the following:
<TABLE>
<S> <C>
Revolving credit facility, net of accumulated amortization of $201.. $1,358
Convertible subordinated debentures, net of accumulated amortization
of $18............................................................. 2,194
------
$3,552
======
</TABLE>
Included within the deferred financing costs associated with the revolving
credit facility is a non-cash amount of $469 for the issuance of 117,789
warrants at an exercise price of $13.00 per share as consideration for
services rendered in establishing the revolving credit facility. The
compensatory amount was determined using the Black-Scholes option-pricing
model.
(7) Accrued Expenses
Accrued expenses at December 31, 1998 consist of:
<TABLE>
<S> <C>
Accrued payroll and related costs.................................... $2,412
Accrued insurance.................................................... 1,362
Other accrued liabilities............................................ 916
------
$4,690
======
</TABLE>
(8) Long-Term Debt
Long-term debt at December 31, 1998 consists of the following:
<TABLE>
<S> <C>
Revolving credit facility, interest at either the Base rate or
Eurodollar rate, as defined, plus 2.25% (7.75% at December 31,
1998), secured by substantially all of the net tangible assets of
the Company (a).................................................... $18,800
Convertible subordinated debentures bearing interest at 8% annually,
maturing in 2008 (b)............................................... 43,732
-------
Total long-term obligations....................................... $62,532
=======
</TABLE>
(a) Revolving Credit Facility
On May 8, 1998, the Company entered into a revolving credit agreement
("Credit Agreement") with a group of financial institutions enabling the
Company to borrow up to $50,000 on a revolving basis, based upon a defined
borrowing base comprised of specific assets of the Company.
On November 2, 1998 and December 3, 1998, the Credit Agreement was amended
and restated. As amended and restated, the Credit Agreement provides for a
revolving credit facility of $90,000. The Credit
F-17
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
Agreement allows for additional debt, as defined in the agreement, outside of
the credit facility and up to $75,000 in convertible subordinated debt. The
proceeds of the credit facility are to be used to finance working capital,
capital expenditures, permitted acquisitions as defined in the Credit
Agreement, and for other general corporate purposes. The Credit Agreement
matures on October 31, 2001, at which time all amounts then outstanding become
due. The interest rates on the outstanding borrowings are at the Base rate
(the higher of the Federal funds rate plus 0.5% or the reference rate, as
defined) plus the Base rate margin, or the bank's Eurodollar rate plus a
margin of 1.5% to 2.5%. The interest rate margins are dependent upon the
Company's funded debt to EBITDA ratio, as defined. A non-use fee is also
payable on the unused portion of the credit facility at the rate of 0.5% per
year, payable quarterly.
The Credit Agreement provides for various covenants, including requirements
for the Company to achieve certain consolidated net income levels, the
maintenance of defined financial ratios, and the prohibition of the
declaration or payment of any cash dividends or stock purchases or
redemptions. As anticipated by management and the financial institutions party
to the Credit Agreement, the Company was not in compliance with a covenant
limiting capital expenditures for the year ended December 31, 1998 and on
February 17, 1999, the Company received a waiver related specifically to this
event of default.
As of December 31, 1998, the Company had a total of $18,800 outstanding
under the revolving credit facility and had utilized approximately $1,850 of
the credit facility for letters of credit. The letters of credit were
established to secure certain insurance obligations and performance bonds and
expire at various dates during 1999. As of December 31, 1998, the borrowing
availability under the revolving credit facility was $69,350.
(b) Convertible Subordinated Debentures
On December 7, 1998, the Company completed the initial sale of 8%
convertible subordinated debentures ("Debentures") with a principal amount of
$43,500 and a maturity date of December 7, 2008, unless converted or redeemed
earlier. The sale was completed subject to a Purchase Agreement with Charter
URS LLC ("Charterhouse") dated November 19, 1998 which provides for the
issuance to Charterhouse of up to $75,000 of 8% convertible subordinated
debentures. The net proceeds from the sale were used to repay amounts owed
under the aforementioned revolving credit facility and to finance acquisitions
and working capital. The Debentures are subordinate to all existing and future
senior indebtedness including amounts outstanding under the revolving credit
facility. The Debentures are convertible into shares of the Company's common
stock at any time through the maturity date at a conversion price of $15.00
per share. The conversion price is adjustable for certain events as defined in
the Purchase Agreement. The conversion price exceeded the fair market value of
the Company's common stock on the date of execution of the Purchase Agreement.
As part of the Purchase Agreement, the Company is restricted from declaring or
paying a dividend.
At the option of the Company, the Debentures may be redeemed at any time on
or after December 7, 2003, if the average closing price of the Company's
common stock exceeds, for a period of 30 consecutive trading days, 150% of the
conversion price. The Debentures may be redeemed at a price equal to 100% of
the outstanding principal amount plus accrued interest as of the redemption
date. The Company's right of redemption is subject to the Debenture holder's
right to first convert the Debentures into shares of the Company's common
stock.
The Debentures bear interest at a rate of 8% per annum. Until December 7,
2003, such interest shall be paid by the issuance of additional debentures in
the principal amount of the interest payable. The Company has recorded
additional principal of $232, representing interest for the period December 8,
1998 through December 31, 1998. Subsequent to December 7, 2003, interest shall
be paid, at the Company's discretion, by the issuance of additional debentures
in the principal amount of the interest payable or in cash.
F-18
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
At December 31, 1998, long-term debt maturities are as follows:
<TABLE>
<S> <C>
1999................................................................. $ --
2000................................................................. --
2001................................................................. 18,800
2002................................................................. --
2003................................................................. --
Thereafter........................................................... 43,732
-------
$62,532
=======
</TABLE>
(9) Leases
The Company leases both facilities and equipment used in its operations and
classifies those leases as either operating or capital leases following the
provisions of SFAS No. 13, Accounting for Leases. Concurrent with certain
acquisitions, the Company has entered into various noncancelable agreements
with the former owners/shareholders of the companies acquired to lease
facilities used in the Company's operations. The terms of the Company's
operating leases range from one to twenty years and certain lease agreements
provide for price escalations. Rent expense incurred by the Company was $0 and
$2,518 in 1997 and 1998, respectively. Included within rent expense was $0 and
$1,024 in 1997 and 1998, respectively, that was paid to the former
owners/shareholders.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Operating leases
---------------------
Capital
Yar endinge lease Related
Dcember 31e obligations party Other Total
- ----------- ----------- ------- ------ ------
<S> <C> <C> <C> <C>
1999........................................ $ 338 $ 2,250 3,884 6,134
2000........................................ 339 2,239 3,610 5,849
2001........................................ 223 2,247 3,169 5,416
2002........................................ 177 2,214 1,371 3,585
2003........................................ 45 1,651 501 2,152
Thereafter.................................. -- 3,168 -- 3,168
------ ------- ------ ------
$13,769 12,535 26,304
======= ====== ======
Future minimum lease payments............... 1,122
Less: imputed interest...................... (86)
------
Present value of minimum lease payments..... $1,036
======
</TABLE>
F-19
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(10) Income Taxes
Income tax expense at December 31, 1998 consists of the following:
<TABLE>
<S> <C>
Current:
Federal............................................................. $1,555
State............................................................... 289
------
1,844
------
Deferred:
Federal............................................................. 1,408
State............................................................... 251
------
1,659
------
$3,503
======
</TABLE>
The following table reconciles the expected tax expense at the Federal
statutory rate to the effective tax rate for the year ended December 31, 1998:
<TABLE>
<CAPTION>
Amount %
------ ----
<S> <C> <C>
Pre-tax income at statutory rate................................ $2,684 34.0%
State taxes, net of federal benefit............................. 356 4.5
Non-deductible goodwill......................................... 431 5.5
Other........................................................... 32 0.4
------ ----
$3,503 44.4%
====== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1998 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Accounts payable and non-deductible accruals..................... $ 295
Intangible assets................................................ 305
Other, net....................................................... 188
-------
Total gross deferred tax assets................................ 788
Less valuation allowance....................................... --
-------
788
-------
Deferred tax liabilities:
Vehicles and equipment........................................... (4,764)
Amortization of goodwill......................................... (463)
Accounts receivable.............................................. (522)
-------
Net deferred tax liability..................................... $(4,961)
=======
</TABLE>
At December 31, 1997, there were no deferred tax assets or liabilities.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
F-20
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
assets is dependent upon the generation of future taxable income and the
taxable income in the two previous tax years to which tax loss carryback can
be applied. Management considers the scheduled reversal of deferred tax
liabilities, projected future income, taxable income in the carryback period
and tax planning strategies in making this assessment. Based upon the level of
projected future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not that the
Company will realize the benefits of those deductible differences. The amount
of the deferred tax asset considered realizable could be reduced if estimates
of future taxable income during the carryforward period are reduced.
(11) Segment and Related Information
During 1998, the Company adopted SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. Prior to 1998, the Company had no
segment or related information to report.
The Company's divisions operate under a common management structure that
evaluates each divisions' performance. The Company's divisions have been
aggregated into two reportable segments: (1) Transport and (2) Towing and
Recovery. The reportable segments are considered by management to be strategic
business units that offer different services and each of whose respective
long-term financial performance is affected by similar economic conditions.
The Transport segment provides transport services to a broad range of
customers in the new and used vehicle markets. The Towing and Recovery segment
provides towing, impounding and storing, lien sales and auto auctions of
abandoned vehicles. In addition, the Towing and Recovery segment provides
recovery and relocation services for heavy-duty commercial vehicles and
construction equipment. Information regarding the Company's operating segments
is also described in note 1(a).
The accounting policies of each of the segments are the same as those
described in the summary of significant accounting policies, as outlined in
note 1. The Company evaluates the performance of its operating segments based
on income before income taxes. Intersegment revenues and transfers are not
significant.
Summarized financial information concerning the Company's reportable
segments is shown in the following table:
<TABLE>
<CAPTION>
Towing and
Transport Recovery Other Total
--------- ---------- ------ -------
<S> <C> <C> <C> <C>
Net revenues from external customers...... $46,908 41,011 -- 87,919
Cost of revenue........................... 34,955 29,810 -- 64,765
Interest income........................... 25 19 614 658
Interest expense.......................... 160 69 1,359 1,588
Income before income taxes................ 7,796 4,674 (4,575) 7,895
Total assets.............................. 115,324 126,479 6,929 248,732
Capital expenditures...................... 5,177 3,322 2,798 11,297
Depreciation and amortization............. 1,948 2,895 413 5,256
</TABLE>
F-21
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
The following are reconciliations of the information used by the chief
operating decision maker to the Company's consolidated totals:
<TABLE>
<S> <C>
Reconciliation of income before income taxes:
Total profit from reportable segments............................... $ 12,470
Unallocated amounts:
Interest income................................................... 614
Interest expense.................................................. (1,359)
Depreciation and amortization..................................... (413)
Other selling, general and administrative costs................... (3,417)
--------
Income before income taxes....................................... $ 7,895
========
Reconciliation of total assets:
Total assets from reportable segments............................... $241,803
Unallocated amounts:
Prepaid income taxes.............................................. 465
Vehicles and equipment, net....................................... 2,604
Deferred financing costs, net..................................... 3,552
Other non-current assets.......................................... 308
--------
Total assets..................................................... $248,732
========
</TABLE>
(12) Commitments and Contingencies
(a) Purchase Commitments
As of December 31, 1998, the Company had entered into commitments to
purchase 30 Transport and Towing and Recovery vehicles for approximately
$4,100.
(b) Employment Contracts
During 1998, the Company entered into certain employment agreements with
members of senior management, as well as previous owners or key employees of
the companies acquired. Certain of these agreements represent noncancelable
contracts whereas if the individual is discharged, the remaining term of the
agreement is payable as severance. The terms of these noncancelable agreements
range through May 2003. At December 31, 1998, the Company had future
noncancelable employment commitments of $4,300.
(c) Claims and Lawsuits
The Company is subject to certain claims and lawsuits arising in the normal
course of business, most of which involve claims for personal injury and
property damage incurred in connection with its operations. The Company
maintains various insurance coverages in order to minimize financial risk
associated with the claims. In the opinion of management, uninsured losses, if
any, resulting from the ultimate resolution of these matters will not have
material effect on the Company's consolidated financial position or results of
operations.
(d) Employee Benefit Plans
The Company maintains certain 401(k) plans that enable eligible employees to
defer a portion of their income through contributions to the plans. The
Company contributed $35 to these plans during the year ended December 31,
1998.
F-22
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(13) Related Party Transactions
(a) Earn-out Payments
The Company is obligated to make certain earn-out payments to the former
owners of the Founding Companies and one other acquired company. For each of
the years 1998 through 2002, the Company will be required to make an earn-out
payment to the former owners of each of these companies that achieves certain
net revenue targets. The net revenue target for 1998 was generally 110% of
1997 net revenue of the particular company, and for the years 1999 through
2002 the net revenue target is 110% of the greater of the prior year's actual
net revenue or target net revenue. If the net revenue target is achieved for a
particular year, an initial payment in shares of common stock, generally equal
to 5% of the excess of actual net revenue over the net revenue target, is due.
In addition, upon achievement of the net revenue target for a particular year,
subsequent and equal payments will also be due for each year through 2002,
provided that the actual net revenue for the respective subsequent year
exceeds the actual net revenue for the year that the net revenue target was
first achieved. At December 31, 1998, the Company has recorded additional
goodwill and a liability within accrued expenses on the accompanying
consolidated balance sheet in the amount of $362, which represents the fair
value of 19,519 shares of common stock at December 31, 1998.
(b) Employment and Consultant Agreements with Directors
The Company entered into consultant agreements with two directors. Pursuant
to these agreements, each of the directors is entitled to receive from the
Company a consulting fee equal to two percent of the gross revenue of each
company that the respective director assists the Company in acquiring, with
the fee being based upon such acquired company's gross revenue for the twelve
months immediately preceding the acquisition. Each consultant agreement is for
a term of three years. In addition, the Company entered into an employment
agreement with a third director pursuant to which the director serves as a
Vice President of the Company for a term of three years, with an annual base
salary of $150,000. The employment and consultant agreements described above
also contain covenants not to compete with the Company for one year after the
termination of the agreement.
(c) Employment and Consultant Agreements With Former Owners
Upon consummation of certain acquisitions, the Company has entered
employment or consultant agreements with certain former owners of the
companies acquired. These agreements range from a term of one to five years,
and vary on a case-by-case basis, relative to compensation, duties and
compensation guarantees. Under certain negotiated agreements, the Company has
agreed on compensation amounts in excess of the current market value. For the
year ended December 31, 1998, the Company has recorded $404 of the excess
compensation as additional purchase price consideration and will amortize this
amount over the remaining life of the goodwill associated with the company
acquired.
(d) Holdback
During 1998, the Company has withheld purchase price consideration in the
form of cash and/or common stock that will be released based on the
achievement of certain financial ratios, or other contingencies, after a
contractually defined period of time. The Company does not record a liability
for the cash withheld or consider the shares of common stock issued, but held
in escrow, to be outstanding until the satisfaction of the defined
contingencies. At December 31, 1998, the Company had cash and shares of common
stock withheld in the amount of $1,461 and 241,081 shares, respectively.
F-23
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(e) Lease Agreements
As described in note 9, concurrent with the acquisition of certain
companies, the Company has entered various agreements with former owners to
lease land and buildings used in the Company's operations. In the opinion of
management, these agreements were entered into at a fair market value of the
property being leased.
(14) Financial Instruments
(a) Fair Value
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of information about the fair value of certain financial
instruments for which it is practicable to estimate that value. For purposes
of the following disclosure, the fair value of a financial instrument is the
amount at which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced sale or liquidation.
The following methods and assumptions were used to estimate fair value of
each class of financial instruments for which it is practicable to estimate
that value:
Cash and Cash Equivalents, Receivables, Notes Payable, and Accounts
Payable--The carrying amount approximates fair value because of the short
maturity of these instruments.
Long-term Debt--The carrying amount of the Company's bank borrowings
under the revolving credit facility approximate the fair value because the
interest rates are based on floating rates identified by reference to
market rates. At December 31, 1998, management estimates that the fair
value of the convertible subordinated debentures approximates the carrying
value of $43,732.
Letters of Credit--The letters of credit reflect fair value as a
condition of their underlying purpose and are subject to fees competitively
determined in the market place. The contract value and fair value of the
letters of credit at December 31, 1998 was $1,850.
(b) Off-Balance Sheet Risk
In the normal course of business, the Company is a party to letters of
credit which are not reflected in the accompanying consolidated balance
sheets. Such financial instruments are to be valued based on the amount of
exposure under the instrument and the likelihood of performance being
requested. No claims have been made against these letters of credit and
management does not expect any material losses to result from these off-
balance sheet instruments. At December 31, 1998, the Company has letters of
credit outstanding totaling $1,850.
F-24
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(15) Quarterly Consolidated Financial Data (Unaudited)
The table below sets forth the unaudited consolidated operating results by
quarter for the year ended December 31, 1998:
<TABLE>
<CAPTION>
Quarterly period ended
-----------------------------------------------------------------
March 31, 1998 June 30, 1998 September 30, 1998 December 31, 1998
-------------- ------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Net revenues............ $ -- 8,468 36,374 43,077
Income (loss) from
operations............. (390) 544 4,167 4,660
Net income (loss)....... (232) 457 1,970 2,197
Basic earnings (loss)
per common share (a)... $(.08) .05 .14 .15
===== ===== ====== ======
Diluted earnings (loss)
per common share (a)... $(.08) .05 .14 .15
===== ===== ====== ======
</TABLE>
- --------
(a) Earnings per share are computed independently for each of the quarters
presented. The sum of the quarterly earnings (loss) per common share does
not equal the total computed for the year as a result of the increase in
outstanding common shares due to the initial public offering and shares
issued in conjunction with certain acquisitions.
(16) Subsequent Events
(a) Acquisitions
Since January 1, 1999, the Company has acquired 12 additional businesses for
aggregate consideration of approximately $23,500 in cash, 1,955,140 shares of
common stock and the assumption of approximately $14,300 of indebtedness.
(b) Convertible Subordinated Debentures
On February 23, 1999, the additional issuance of 8% convertible subordinated
debentures with a principal amount of $31,500, as described in note 8(b), to
Charterhouse was approved by the stockholders of the Company. At the second
closing on March 16, 1999, the Company issued the remaining Debentures to
Charterhouse.
F-25
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
COMBINED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
and May 5, 1998
(With Independent Auditors' Report Thereon)
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholder and Board of Directors
Northland Auto Transporters, Inc. and
Northland Fleet Leasing, Inc.:
We have audited the accompanying combined balance sheets of Northland Auto
Transporters, Inc. and Northland Fleet Leasing, Inc. (collectively
"Northland") as of December 31, 1996 and 1997 and May 5, 1998, and the related
combined statements of operations, stockholder's equity, and cash flows for
each of the years in the three-year period ended December 31, 1997 and for the
period from January 1, 1998 through May 5, 1998. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Northland
Auto Transporters, Inc. and Northland Fleet Leasing, Inc. as of December 31,
1996 and 1997 and May 5, 1998, and the results of their combined operations
and their combined cash flows for each of the years in the three-year period
ended December 31, 1997 and for the period from January 1, 1998 through May 5,
1998, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Albany, New York
July 31, 1998
F-27
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC.
AND NORTHLAND FLEET LEASING, INC.
COMBINED BALANCE SHEETS
December 31, 1996 and 1997 and May 5, 1998
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ ---------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents................ $ 432,949 407,309 359,880
Trade accounts receivable, net of
allowance for doubtful accounts of
$40,000 in 1996, $75,000 in 1997
and $30,000 in 1998..................... 416,220 942,432 1,053,908
Accounts receivable from employees....... 4,955 3,445 19,907
Notes receivable......................... 35,068 17,453 66,115
Income tax receivable (note 7)........... 37,584 -- --
Prepaid and other current assets (note
2)...................................... 74,302 113,558 423,345
Deferred income taxes--current (note 7).. 9,000 17,000 11,000
---------- --------- ---------
Total current assets................... 1,010,078 1,501,197 1,934,155
Property and equipment, net (notes 3, 5,
and 6).................................... 2,204,802 3,924,055 3,768,576
Notes receivable--noncurrent............... 44,044 31,468 28,624
Other noncurrent assets, net (note 4)...... 8,862 8,426 8,426
---------- --------- ---------
Total assets........................... $3,267,786 5,465,146 5,739,781
========== ========= =========
Liabilities and Stockholder's Equity
Current liabilities:
Current installments of notes payable
(note 5)................................ 282,824 346,859 262,265
Current installments of capital lease
obligations (note 6).................... 4,408 147,538 160,846
Payable to related parties (note 8)...... 159,505 53,849 50,972
Accounts payable......................... 210,998 188,064 260,735
Income taxes payable (note 7)............ -- 261,933 201,000
Accrued payroll and related costs........ 18,062 52,676 216,385
Other accrued liabilities................ 98,914 51,300 67,165
---------- --------- ---------
Total current liabilities.............. 774,711 1,102,219 1,219,368
Long-term liabilities:
Notes payable, excluding current
installments (note 5)................... 318,382 279,963 219,019
Capital lease obligations, excluding
current installments
(note 6)................................ 12,833 793,774 694,309
Deferred income taxes--noncurrent (note
7)...................................... 171,000 244,000 272,000
---------- --------- ---------
Total liabilities...................... 1,276,926 2,419,956 2,404,696
Stockholder's equity:
Common stock, $1 par value, authorized,
issued and outstanding 2,000 shares in
1996, 1997 and 1998..................... 2,000 2,000 2,000
Retained earnings........................ 1,988,860 3,043,190 3,333,085
---------- --------- ---------
Total stockholder's equity............. 1,990,860 3,045,190 3,335,085
---------- --------- ---------
Total liabilities and stockholder's
equity................................ $3,267,786 5,465,146 5,739,781
========== ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-28
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC.
AND NORTHLAND FLEET LEASING, INC.
COMBINED STATEMENTS OF INCOME
Years ended December 31, 1995, 1996 and 1997 and
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
December 31, December 31, December 31, May 5,
1995 1996 1997 1998
------------ ------------ ------------ ---------
<S> <C> <C> <C> <C>
Revenue..................... $4,671,164 6,353,290 10,159,113 4,235,357
Cost of revenue............. 3,683,119 5,132,828 7,341,748 2,946,829
---------- --------- ---------- ---------
Gross profit................ 988,045 1,220,462 2,817,365 1,288,528
Selling, general, and
administrative expenses.... 663,723 874,559 1,378,872 747,452
---------- --------- ---------- ---------
Income from operations...... 324,322 345,903 1,438,493 541,076
Other income (expense):
Interest expense.......... (48,825) (79,384) (139,099) (49,863)
Interest income........... 16,624 37,701 35,723 15,172
Loss on sale of assets.... (14,540) -- (34,568) (20,304)
Other..................... 29,078 41,282 88,781 38,814
---------- --------- ---------- ---------
Income before income taxes.. 306,659 345,502 1,389,330 524,895
Income tax expense (benefit)
(note 7)................... 31,400 (710) 335,000 235,000
---------- --------- ---------- ---------
Net income.................. $ 275,259 346,212 1,054,330 289,895
========== ========= ========== =========
</TABLE>
See accompanying notes to combined financial statements.
F-29
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC.
AND NORTHLAND FLEET LEASING, INC.
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
Years ended December 31, 1995, 1996 and 1997
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
Total
Common Retained stockholder's
stock earnings equity
------ --------- -------------
<S> <C> <C> <C>
Balance at December 31, 1994................... $2,000 1,367,389 1,369,389
Net income--1995............................... -- 275,259 275,259
------ --------- ---------
Balance at December 31, 1995................... 2,000 1,642,648 1,644,648
Net income--1996............................... -- 346,212 346,212
------ --------- ---------
Balance at December 31, 1996................... 2,000 1,988,860 1,990,860
Net income--1997............................... -- 1,054,330 1,054,330
------ --------- ---------
Balance at December 31, 1997................... 2,000 3,043,190 3,045,190
Net income--period from January 1, 1998 through
May 5, 1998................................... -- 289,895 289,895
------ --------- ---------
Balance at May 5, 1998......................... $2,000 3,333,085 3,335,085
====== ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-30
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC.
AND NORTHLAND FLEET LEASING, INC.
COMBINED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1996 and 1997
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
December 31, December 31, December 31, May 5,
1995 1996 1997 1998
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income.................. $275,259 346,212 1,054,330 289,895
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization............. 181,634 224,637 289,479 129,692
(Decrease) increase in
deferred income taxes.... (11,000) (6,000) 65,000 34,000
Loss on retirement of
property and equipment... 14,540 -- 34,568 20,304
(Increase) decrease in
trade accounts
receivable............... (115,982) 138,452 (526,212) (111,476)
Decrease (increase) in
other accounts
receivable............... 1,185 (4,100) 1,510 --
Decrease in income tax
receivable............... -- -- 37,584 --
(Increase) decrease in
prepaid and other current
assets................... (17,892) 16,331 (39,256) (326,249)
Increase (decrease) in
accounts payable......... 716 23,236 (22,934) 72,671
Increase (decrease) in
income taxes payable..... -- 261,933 (60,933)
(Decrease) increase in
accrued payroll and
related costs............ (85,348) (14,137) 34,614 163,709
Increase (decrease) in
amounts payable to
related parties.......... 20,552 16,410 (105,656) (2,877)
Increase (decrease) in
other accrued
liabilities.............. 25,946 2,880 (47,614) 15,865
-------- -------- --------- --------
Net cash provided by operating
activities................... 289,610 743,921 1,037,346 224,601
-------- -------- --------- --------
Cash flows from investing
activities:
Purchase of plant and
equipment.................. (229,888) (395,881) (762,597) (169,467)
Proceeds from sale of
equipment.................. 53,044 -- 67,656 174,950
Decrease (increase) in notes
receivable................. 8,159 (30,984) 30,191 (45,818)
-------- -------- --------- --------
Net cash used in investing
activities................... (168,685) (426,865) (664,750) (40,335)
-------- -------- --------- --------
Cash flows from financing
activities:
Proceeds from long-term
debt....................... -- -- 24,629 --
Principal payments on long-
term debt and capital
leases..................... (139,745) (157,971) (422,865) (231,695)
-------- -------- --------- --------
Net cash used in financing
activities................... (139,745) (157,971) (398,236) (231,695)
-------- -------- --------- --------
Net increase (decrease) in
cash......................... (18,820) 159,085 (25,640) (47,429)
Cash at beginning of period... 292,684 273,864 432,949 407,309
-------- -------- --------- --------
Cash at end of period......... $273,864 432,949 407,309 359,880
======== ======== ========= ========
Supplemental disclosure of
cash flow information:
Cash paid during the period
for:
Interest.................. $ 48,825 79,384 139,099 49,863
======== ======== ========= ========
Income taxes.............. $ 7,024 79,835 6,480 275,064
======== ======== ========= ========
Supplemental disclosure of
noncash investing and
financing activities:
Issuance of notes for
financing of capital
leases................... $200,000 360,523 1,347,423 --
======== ======== ========= ========
</TABLE>
See accompanying notes to combined financial statements.
F-31
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997 and May 5, 1998
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Northland Auto Transporters, Inc. and Northland Fleet Leasing, Inc.
(referred to collectively as "Northland") were founded in 1977 and 1992,
respectively. Northland's primary business is transporting vehicles for auto
auctions, leasing companies, auto dealers, manufacturers and individuals,
primarily in the Midwestern United States. Northland has three facilities in
Detroit. It operates approximately 55 vehicles. Northland Fleet Leasing, Inc.
owns a fleet of trucks and trailers and contracts out work primarily with
Northland Auto Transporters, Inc., and to a limited extent, third party
contractors.
(b) Principles of Combination
The combined financial statements include the financial statements of
Northland Auto Transporters, Inc., the auto hauling company, and Northland
Fleet Leasing, Inc., a truck leasing company. Northland Auto Transporters,
Inc. is a C-Corporation while Northland Fleet Leasing, Inc. is an S-
Corporation. All sales relating to intercompany leasing arrangements have been
eliminated. Both entities have the same management and principal stockholder
ownership.
(c) Cash Equivalents
Cash equivalents of $432,949, $407,309, and $359,880 at December 31, 1996
and 1997 and at May 5, 1998, respectively, consist of bank accounts and
certificates of deposit with an initial term of less than three months. For
purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments with original maturities of three months or less to be
cash equivalents.
(d) Revenue Recognition
Northland operates as one segment related to the transportation of vehicles
and equipment for customers.
Northland's revenue is derived from customers who require transportation of
vehicles and equipment. Transport revenue is recognized upon the delivery of
the vehicles to their final destination. Expenses related to the generation of
revenue are recognized as incurred.
(e) Property and Equipment
Property and equipment are stated at cost. Plant and equipment under capital
leases are stated at the present value of minimum lease payments. Depreciation
is determined for financial statement purposes using the straight-line method
over the estimated useful lives of the individual assets. Accelerated methods
of depreciation have been used for income tax purposes. For financial
statement purposes, the Company provides for depreciation of property and
equipment over the following estimated useful lives:
<TABLE>
<S> <C>
Transportation equipment......................................... 10-20 years
Furniture and fixtures........................................... 7 years
Office equipment................................................. 5 years
Automobiles...................................................... 5 years
</TABLE>
F-32
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997 and May 5, 1998
(f) Fair Value of Financial Instruments
Due to the short-term nature of various financial instruments and the
current incremental borrowing rates available to the Company on bank loans
with similar terms and maturities, the fair value of the Company's financial
instruments approximates their carrying values.
(g) Other Assets
Other assets consist principally of prepaid insurance and short-term
deposits to purchase equipment.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method for
Northland Auto Transporters, Inc. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases, and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Northland Fleet Leasing, Inc. is a Subchapter S corporation. As such, all
taxable events are recorded by the shareholders currently on their personal
tax returns and no deferrals are recorded.
(i) Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues, gains, and expenses during the reporting period. Actual results
could differ from those estimates.
(2) Prepaid and Other Current Assets
Prepaid and other current assets at December 31, 1996 and 1997 and May 5,
1998 consists of:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ -------
<S> <C> <C> <C>
Prepaid insurance.......................... $14,818 28,172 114,527
Prepaid vehicle registration............... 25,978 35,778 19,877
Deposits on trucks......................... 12,403 16,633 279,967
Miscellaneous advances..................... 12,716 9,320 5,501
Prepaid property and other taxes........... 8,387 23,655 3,473
------- ------- -------
$74,302 113,558 423,345
======= ======= =======
</TABLE>
F-33
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997 and May 5, 1998
(3) Property and Equipment
Property and equipment at December 31, 1996 and 1997 and May 5, 1998 consist
of the following:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ ---------
<S> <C> <C> <C>
Transportation equipment................ $2,745,094 4,457,178 4,344,681
Furniture and fixtures.................. 123,585 147,035 145,544
Office equipment........................ 34,449 34,244 34,244
Automobiles............................. 64,781 126,926 157,906
---------- --------- ---------
Total................................... 2,967,909 4,765,383 4,682,375
Less accumulated depreciation........... (763,107) (841,328) (913,800)
---------- --------- ---------
Property and equipment, net............. $2,204,802 3,924,055 3,768,575
========== ========= =========
</TABLE>
Depreciation of property and equipment in 1995, 1996, 1997 and 1998 totaled
$181,198, $224,201, $289,043 and $129,692, respectively.
(4) Other Noncurrent Assets
Other noncurrent assets at December 31, 1996 and 1997 and May 5, 1998 consist
of the following:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ ------
<S> <C> <C> <C>
Deposits.................................... $4,672 4,672 4,672
Goodwill.................................... 3,936 3,500 3,500
Mortgage commitment fee..................... 254 254 254
------ ----- -----
$8,862 8,426 8,426
====== ===== =====
</TABLE>
F-34
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997 and May 5, 1998
(5) Indebtedness
The Company's long-term debt consisted of the following at December 31, 1996
and 1997 and May 5, 1998:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ --------
<S> <C> <C> <C>
Note payable to Navistar Financial Corp.,
payable in monthly installments of $1,188,
including interest at 8.755%, maturing
June 2000. Secured by equipment........... $ 43,095 31,081 --
Note payable to First of America Bank,
payable in monthly installments of
$11,029, including interest at 8.25%,
maturing May 1999. Secured by equipment... 288,698 176,248 136,325
Note payable to First of America Bank,
payable in monthly principal installments
of $7,320, plus interest at 0.75% above
the prime lending rate (9.0%, 9.25% and
7.75% at December 31, 1996 and 1997 and
May 5, 1998), maturing July 1998. Secured
by equipment.............................. 141,143 49,628 17,376
Note payable to First of America Bank,
payable in monthly installments of $6,290,
including interest at 8.25%, maturing
October 1998. Secured by equipment........ 128,270 60,948 37,125
Various notes payable secured by
equipment................................. -- 20,261 18,743
-------- -------- --------
Total long-term debt....................... 601,206 626,822 481,284
-------- -------- --------
Less installments due within one year...... (282,824) (346,859) (262,265)
-------- -------- --------
Long-term debt, excluding current
installments.............................. $318,382 279,963 219,019
======== ======== ========
</TABLE>
Note payable to First of America Bank,
payable in monthly principal installments
of $6,771, including interest at the
Bank's base lending rate (8.50% at May 5,
1998 and December 31, 1997), maturing
April 10, 2001. Secured by equipment...... -- 288,656 271,715
Annual maturities of long-term debt for each of the four years subsequent to
May 5, 1998 are as follows:
<TABLE>
<S> <C>
1999................................................................ $262,265
2000................................................................ 74,779
2001................................................................ 108,308
2002................................................................ 35,932
--------
$481,284
========
</TABLE>
(6) Leases
The Company leases equipment under a capital leases expiring from 2000 to
2002. The asset and liability under the capital lease recorded at the present
value of the minimum lease payments. Amortization of equipment under the
capital lease is included in depreciation expense in the accompanying
statements of operations.
Northland leases its operating facility from a third-party under a
cancelable operating lease rent expense in 1995, 1996, 1997 and 1998 was
$40,054, $58,515, $41,700 and $14,782.
F-35
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997 and May 5, 1998
Following is a summary of property held under the capital leases at December
31, 1996 and 1997 and May 5, 1998:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ --------
<S> <C> <C> <C>
Equipment............................... $18,000 1,047,298 977,949
Less accumulated amortization......... (3,600) (298,619) (385,141)
------- --------- --------
Net assets held under capital leases.... $14,400 748,679 592,808
======= ========= ========
</TABLE>
The present value of capital lease payments and minimum future rental
payments to be paid on all noncancelable operating leases for each of the next
five years are as follows:
<TABLE>
<CAPTION>
Years ending December 31, Capital leases
------------------------- --------------
<S> <C>
1998.......................................................... $ 136,268
1999.......................................................... 217,219
2000.......................................................... 208,195
2001.......................................................... 197,277
2002.......................................................... 271,073
---------
Total......................................................... 1,030,032
Less amount representing interest............................. (174,877)
---------
Present value of capital lease payments....................... $ 855,155
=========
</TABLE>
(7) Income Taxes
Income tax expense (benefit) for the year ended December 31, 1995, 1996 and
1997 and for the period from January 1 through May 5, 1998 consists of:
<TABLE>
<CAPTION>
December 31, December 31, December 31, May 5,
1995 1996 1997 1998
------------ ------------ ------------ -------
<S> <C> <C> <C> <C>
Current:
Federal..................... $42,400 5,290 270,000 201,000
Deferred.................... (11,000) (6,000) 65,000 34,000
------- ------ ------- -------
$31,400 (710) 335,000 235,000
======= ====== ======= =======
</TABLE>
The following table reconciles the expected federal statutory tax rate to
the effective tax rate:
<TABLE>
<CAPTION>
December 31, December 31, December 31, May 5,
1995 1996 1997 1998
------------ ------------ ------------ -------
<S> <C> <C> <C> <C>
Computed expected tax
expense.................... $104,264 117,471 472,372 178,464
Effect of earnings from S-
Corporation................ (77,750) (123,441) (141,644) 56,536
Non-deductible meals and
entertainment expense...... 4,886 5,260 4,272 --
-------- -------- -------- -------
$ 31,400 (710) 335,000 235,000
======== ======== ======== =======
</TABLE>
F-36
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997 and May 5, 1998
The tax effect of temporary differences that give rise to deferred tax
assets and deferred tax liabilities as of December 31, 1996 and 1997 and May
5, 1998 and are presented below:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ --------
<S> <C> <C> <C>
Deferred tax asset:
Allowance for doubtful accounts...... $ 9,000 17,000 11,000
Deferred tax liability:
Property and equipment, due to
differences in depreciation lives
and methods......................... (171,000) (244,000) (272,000)
--------- -------- --------
Net deferred tax liability............. $(162,000) (227,000) (261,000)
========= ======== ========
</TABLE>
At December 31, 1995, the net deferred tax liability was $168,000.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion of all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the projected future taxable income and tax planning strategies, as
well as carryback opportunities, in making this assessment. Based upon the
level of historical taxable income, projections for future taxable income, and
carryback opportunities over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences. The amount of the
deferred tax asset considered realizable, however, could be reduced in the
near term if estimates of future taxable income are reduced.
(8) Related Party
The Company has borrowed funds from its principal shareholder and has an
outstanding payable for December 31, 1996 and 1997 and for the period from
January 1, 1998 through May 5, 1998 of $159,505, $53,849, and $50,972,
respectively.
(9) Employee Benefits
The Company has a retirement savings plan, pursuant to section 401(k) of the
Internal Revenue Code, that is available to all employees with at least 1 year
of service to the Company and that are at least 21 years of age. Eligible
participants may contribute up to 15% of their compensation. The Company
provides discretionary matching contributions to the Plan, which amounted to
$12,985, $64,196, $0, and $88,329 in 1995, 1996, 1997, and the period from
January 1, 1998 through May 5, 1998, respectively.
(10) Business Risks
Two customers accounted for a combined 11% and 16% of the Company's sales in
1996 and 1997, respectively.
Four customers accounted for more than 44% of the Company's sales as of
period end May 5, 1998. At May 5, 1998, the Company had $418,924 of trade
accounts receivable due from these companies.
F-37
<PAGE>
NORTHLAND AUTO TRANSPORTERS, INC. AND
NORTHLAND FLEET LEASING, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997 and May 5, 1998
(11) Contingent Liabilities
Various legal claims arise against Northland during the normal course of
business. In the opinion of management, liabilities, if any, arising from
proceedings would not have a material effect on the financial statements.
(12) Subsequent Event
On May 5, 1998 the stockholder sold the companies to United Road Services,
Inc. as part of the initial public offering of the common stock of United Road
Services, Inc.
F-38
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997 and May 5, 1998
(With Independent Auditors' Report Thereon)
F-39
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholder
Falcon Towing and Auto Delivery, Inc.:
We have audited the accompanying balance sheets of Falcon Towing and Auto
Delivery, Inc. (Falcon) as of December 31, 1996 and 1997 and May 5, 1998 and
the related statement of operations, stockholder's equity, and cash flows for
each of the years in the three-year period ended December 31, 1997 and the
period from January 1, 1998 through May 5, 1998. These financial statements
are the responsibility of Falcon's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Falcon Towing and Auto
Delivery, Inc. as of December 31, 1996 and 1997 and May 5, 1998 and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 1997 and the period from January 1, 1998
through May 5, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Albany, New York
July 27, 1998
F-40
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
BALANCE SHEETS
December 31, 1996 and 1997 and May 5, 1998
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ ---------
<S> <C> <C> <C>
Assets
Current assets:
Cash..................................... $ 23,505 3,527 8,090
Trade accounts receivable, net of
allowance for doubtful accounts of
$67,650 in 1996 and $188,500 in 1997 and
1998.................................... 476,896 717,560 499,074
Inventories.............................. 24,868 26,068 28,172
Prepaid and other current assets......... 46,537 131,328 131,331
---------- --------- ---------
Total current assets................... 571,806 878,483 666,667
Property and equipment, net (notes 2, 3 and
4)........................................ 1,656,635 2,423,368 2,440,528
---------- --------- ---------
Total assets........................... $2,228,441 3,301,851 3,107,195
========== ========= =========
Liabilities
Current liabilities:
Current installments of long-term debt
(note 3)................................ $ 123,722 264,081 407,992
Current installments of obligations under
capital leases (note 4)................. 252,527 368,590 414,628
Borrowings under lines of credit (note
3)...................................... 36,150 47,121 50,378
Accounts payable......................... 178,357 546,301 272,172
Accrued payroll and related costs........ 57,000 67,701 100,494
Income taxes payable (note 5)............ 98,698 207,399 250,723
Other accrued liabilities................ 137,600 214,979 163,443
---------- --------- ---------
Total current liabilities.............. 884,054 1,716,172 1,659,830
Long-term liabilities:
Long-term debt, excluding current
installments (note 3)................... 225,386 250,196 --
Obligations under capital leases,
excluding current installments (note
4)...................................... 630,677 716,288 685,204
Deferred income taxes (note 5)........... 11,733 10,555 42,253
---------- --------- ---------
Total liabilities...................... 1,751,850 2,693,211 2,387,287
Stockholder's equity:
Common stock, no par or stated value.
Authorized 1,000 shares; issued and
outstanding 750 shares.................. -- -- --
Retained earnings........................ 476,591 608,640 719,908
---------- --------- ---------
Total stockholder's equity............. 476,591 608,640 719,908
---------- --------- ---------
Total liabilities and stockholder's
equity................................ $2,228,441 3,301,851 3,107,195
========== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
STATEMENTS OF OPERATIONS
Years ended December 31, 1995, 1996 and 1997 and
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
December 31, December 31, December 31, May 5,
1995 1996 1997 1998
------------ ------------ ------------ ---------
<S> <C> <C> <C> <C>
Net revenue................. $4,351,847 6,203,104 7,784,766 2,848,353
Cost of revenue............. 3,492,248 4,638,239 5,955,423 2,134,217
---------- --------- --------- ---------
Gross profit............ 859,599 1,564,865 1,829,343 714,136
Selling, general and
administrative expenses.... 952,260 1,190,631 1,614,386 479,501
---------- --------- --------- ---------
Income (loss) from oper-
ations................. (92,661) 374,234 214,957 234,635
Other income (expense):
Interest expense.......... (77,176) (129,150) (147,700) (48,345)
Gain (loss) on sale of
equipment................ (417) -- 98,735 --
Other..................... 38,508 12,167 73,580 --
---------- --------- --------- ---------
Income (loss) before in-
come taxes............. (131,746) 257,251 239,572 186,290
Income tax expense (note
5)......................... 15,707 94,723 107,523 75,022
---------- --------- --------- ---------
Net income (loss)....... $ (147,453) 162,528 132,049 111,268
========== ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-42
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
Years ended December 31, 1995, 1996 and 1997 and
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
Total
Common Retained stockholder's
stock earnings equity
------ -------- -------------
<S> <C> <C> <C>
Balance at December 31, 1994................... $-- 461,516 461,516
Net loss--1995................................. -- (147,453) (147,453)
---- -------- --------
Balance at December 31, 1995................... -- 314,063 314,063
Net income--1996............................... -- 162,528 162,528
---- -------- --------
Balance at December 31, 1996................... -- 476,591 476,591
Net income--1997............................... -- 132,049 132,049
---- -------- --------
Balance at December 31, 1997................... -- 608,640 608,640
Net income--period from January 1, 1998 through
May 5, 1998................................... -- 111,268 111,268
---- -------- --------
Balance at May 5, 1998......................... $-- 719,908 719,908
==== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-43
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1996 and 1997 and
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
December 31, December 31, December 31, May 5,
1995 1996 1997 1998
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss).......... $(147,453) 162,528 132,049 111,268
Adjustment to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and
amortization............ 343,595 431,828 621,673 257,178
Deferred income tax
(benefit) expense....... 15,707 (3,975) (1,178) 31,698
Gain on sale of
equipment............... 417 -- (98,735) --
(Increase) decrease in
trade accounts
receivable.............. (1,169) (236,557) (240,664) 218,486
Increase in inventories.. -- -- (1,200) (2,104)
Increase in prepaid and
other current assets.... (10,524) (9,236) (84,791) (3)
Increase (decrease) in
accounts payable........ 104,440 (8,097) 367,944 (274,129)
Increase in accrued
payroll and related
costs................... 71,443 53,937 10,701 32,793
(Decrease) increase in
income taxes payable.... (20,542) 98,698 108,701 43,324
Increase (decrease) in
other accrued
liabilities............. 7,434 (12,591) 77,379 (51,536)
--------- -------- -------- --------
Net cash provided by
operating activities.. 363,348 476,535 891,879 366,975
--------- -------- -------- --------
Cash flows used in investing
activities:
Purchases of property and
equipment................. (290,177) (169,861) (919,049) (274,338)
Proceeds from sale of
property and equipment.... -- -- 141,100 --
--------- -------- -------- --------
Net cash used in
investing activities.. (290,177) (169,861) (777,949) (274,338)
--------- -------- -------- --------
Cash flows from financing
activities:
Net proceeds from long-term
debt...................... 75,047 -- 384,609 --
Net repayments on long term
debt...................... (120,031) (282,833) (529,488) (91,331)
Net borrowing under lines
of credit................. (36,066) (2,784) 10,971 3,257
--------- -------- -------- --------
Net cash used in
financing activities.. (81,050) (285,617) (133,908) (88,074)
--------- -------- -------- --------
Net increase (decrease) in
cash........................ (7,879) 21,057 (19,978) 4,563
Cash at beginning of period.. 10,327 2,448 23,505 3,527
--------- -------- -------- --------
Cash at end of period........ $ 2,448 23,505 3,527 8,090
========= ======== ======== ========
Supplemental disclosure of
cash flow information:
Cash paid during the period
for:
Interest................. $ 74,280 125,435 144,806 48,345
========= ======== ======== ========
Income taxes............. $ -- 12,591 -- 31,698
========= ======== ======== ========
Supplemental disclosure of
noncash investing and
financing activities:
Issuance of notes for
financing of capital
leases.................... $ 571,137 671,086 511,722 156,990
========= ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-44
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997 and May 5, 1998
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Falcon Towing and Auto Delivery, Inc. (Falcon) was founded in 1985. Falcon's
primary business is transporting vehicles for dealers, leasing companies,
auction companies and long-haul transporters in the Western United States.
Falcon has facilities in Los Angeles, San Francisco and Phoenix. It operates
approximately 50 vehicles.
(b) Revenue Recognition
Falcon operates as one segment related to the transportation of vehicles and
equipment for customers.
Falcon's revenue is derived from customers who require transport of vehicles
and equipment. Transport revenue is recognized upon the delivery of the
vehicles and equipment to their final destination. Expenses related to the
generation of revenue are recognized as incurred.
(c) Inventories
Inventories, which consist principally of replacement tires and truck parts,
are stated at the lower of cost or market.
(d) Property and Equipment
Property and equipment are stated at cost. Depreciation is determined for
financial statement purposes using the straight-line method over the estimated
useful lives of the individual assets or, for leasehold improvements, over the
terms of the related leases if shorter. Accelerated methods of depreciation
have been used for income tax purposes. For financial statement purposes,
Falcon provides for depreciation of property and equipment over the following
estimated useful lives:
<TABLE>
<S> <C>
Transportation and towing equipment.................................. 5 years
Machinery and equipment.............................................. 5 years
Leasehold improvements............................................... 5 years
Furniture and fixtures............................................... 5 years
Office equipment..................................................... 5 years
</TABLE>
(e) Fair Value of Financial Instruments
Due to the short-term nature of various financial instruments and the
current incremental borrowing rates available to Falcon on bank loans with
similar terms and maturities, the fair value of Falcon's financial instruments
approximates their carrying values.
(f) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
F-45
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997 and May 5, 1998
(g) Use of Estimates
Management of Falcon has made a number of estimates and assumptions relating
to the reporting of assets and liabilities and the disclosure of contingent
assets and liabilities to prepare these financial statements in conformity
with generally accepted accounting principles. Actual results could differ
from those estimates.
(2) Property and Equipment
Property and equipment at December 31, 1996 and 1997 and May 5, 1998 consist
of the following:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ ----------
<S> <C> <C> <C>
Transportation and towing
equipment.......................... $ 2,970,070 4,124,483 4,370,183
Machinery and equipment............. 70,296 104,411 108,388
Leasehold improvements.............. 26,489 43,653 43,653
Furniture and fixtures.............. 10,448 14,298 14,298
Office equipment.................... 19,225 19,225 43,886
Construction-in-progress............ -- 33,000 33,000
----------- ---------- ----------
3,096,528 4,339,070 4,613,408
Less accumulated depreciation and
amortization....................... (1,439,893) (1,915,702) (2,172,880)
----------- ---------- ----------
$ 1,656,635 2,423,368 2,440,528
=========== ========== ==========
</TABLE>
Depreciation and amortization of property and equipment in 1995, 1996 and
1997 and for the period ended May 5, 1998 totaled $343,595, $431,828, $621,673
and $257,178, respectively.
(3) Indebtedness
Falcon has available a $50,000 line of credit with $50,378 outstanding at
May 5, 1998, secured by the assets of Falcon and a guarantee by Falcon's
stockholder. Outstanding borrowing bear interest at 11.5%. Subsequent to May
5, 1998, Falcon repaid the outstanding balance in full.
Falcon has various notes payable to banks aggregating $407,992 and payable
in monthly installments ranging from $1,024 to $2,909, including interest
ranging from 9.0% to 10.5%. The notes mature at dates ranging from April, 1998
to April, 2000 and are secured by vehicles and equipment. These notes have
been classified as current as subsequent to May 5, 1998, all outstanding notes
payable were paid in full.
(4) Leases
The Company is obligated under capital lease arrangements for certain
vehicles, which expire at various dates through November 2000.
Following is a summary of equipment held under capital leases at December
31, 1996, 1997 and May 5, 1998:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ ----------
<S> <C> <C> <C>
Transportation and towing
equipment................ $1,612,687 2,124,409 2,281,399
Less accumulated
amortization........... (703,928) (1,036,670) (1,281,130)
---------- ---------- ----------
$ 908,759 1,087,739 1,000,269
========== ========== ==========
</TABLE>
F-46
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997 and May 5, 1998
Falcon leases the land and buildings used for its operations at the El Monte
and Phoenix locations under lease agreements with its sole stockholder. Rent
paid to the stockholder in 1995, 1996, 1997 and for the period ended May 5,
1998 was $0, $24,000, $319,000 and $129,500, respectively. Additionally,
Falcon has a cancelable lease for the land and building used for its
operations at the Newark, CA location from an unrelated third party for annual
rental payments of approximately $48,000. Rent expense for the period ended
May 5, 1998 was $16,000. Falcon is responsible for all operating costs related
to the properties.
Subsequent to May 5, 1998, United Road Services, Inc. entered into
agreements with the stockholder to lease the land and buildings used in
Falcon's operations. Accordingly, the Company is not obligated with respect to
future operating lease commitments.
Future minimum capital lease payments as of May 5, 1998 are:
<TABLE>
<S> <C>
1998............................................................. $ 464,548
1999............................................................. 402,427
2000............................................................. 245,115
Thereafter....................................................... --
----------
Total future minimum lease payments............................ 1,112,090
Less amounts representing interest............................... (12,258)
----------
Present value of net minimum capital lease payments............ $1,099,832
==========
</TABLE>
(5) Income Taxes
Income tax expense for the years ended December 31, 1995, 1996 and 1997 and
the period from January 1, 1998 through May 5, 1998 consists of:
<TABLE>
<CAPTION>
December 31, December 31, December 31, December 31,
1995 1996 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Current:
Federal............... $ -- 77,500 86,271 34,384
State................. -- 21,198 22,430 8,940
------- ------ ------- ------
-- 98,698 108,701 43,324
Deferred................ 15,707 (3,975) (1,178) 31,698
------- ------ ------- ------
$15,707 94,723 107,523 75,022
======= ====== ======= ======
</TABLE>
F-47
<PAGE>
FALCON TOWING AND AUTO DELIVERY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1995, 1996 and 1997 and May 5, 1998
The following table reconciles the expected tax expense at the Federal
statutory tax rate to the effective tax rate:
<TABLE>
<CAPTION>
December 31, December 31, December 31, May 5,
1995 1996 1997 1998
------------ ------------ ------------ ------
<S> <C> <C> <C> <C>
Computed expected tax
(benefit) expense........... $(44,794) 87,465 81,454 63,339
State income taxes (benefit),
net of Federal benefit...... (8,087) 13,991 14,803 10,869
Non-deductible meals and
entertainment expenses...... 1,428 354 2,116 814
Tax penalties and
disallowances............... -- 5,724 3,898 --
Net operating loss
carryforward for which no
benefit will be derived..... 73,039 -- -- --
Basis difference in fixed
assets which will not result
in a tax benefit or loss.... (5,879) (12,811) 5,252 --
-------- ------- ------- ------
$ 15,707 94,723 107,523 75,022
======== ======= ======= ======
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
liabilities at December 31, 1995, 1996 and 1997 and May 5, 1998 relate to
depreciation of property, plant and equipment. At December 31, 1995, 1996,
1997 and May 5, 1998, deferred tax liabilities amounted to $15,707, $11,733,
$10,555, and $42,253, respectively.
(6) Employee Benefits
Falcon has a retirement savings plan pursuant to section 401(k) of the
Internal Revenue Code that is available to all employees with at least one
year of service to Falcon and that are at least twenty-one years of age.
Falcon provides matching funds of 25% of eligible contributions to the Plan
which amounted to $0, $0, $18,000, and $12,000 in 1995, 1996 and 1997 and for
the period ended May 5, 1998, respectively.
(7) Subsequent Event
On May 5, 1998, the stockholder successfully completed the sale of Falcon to
United Road Services, Inc. The sales transaction is affected through a
combination of cash and common stock of United Road Services, Inc. The selling
price of Falcon exceeds its nets assets as of May 5, 1998. Certain of the
assets of Falcon, in the amount of $65,000, will be retained by the
stockholder.
F-48
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
January 31, 1996 and 1997, December 31, 1997
and May 5, 1998
(With Independent Auditors' Report Thereon)
F-49
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholder and Board of Directors
Smith-Christensen Enterprises, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of Smith-
Christensen Enterprises, Inc. and Subsidiary (City Towing, Inc. d/b/a Quality
Towing ("Quality")) as of January 31, 1997, December 31, 1997 and May 5, 1998
and the related consolidated statements of operations, stockholder's equity
and cash flows for the years ended January 31, 1996 and 1997, the twelve-month
period ended December 31, 1997, and the period from January 1, 1998 through
May 5, 1998. These consolidated financial statements are the responsibility of
Quality's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Smith-
Christensen Enterprises, Inc. and Subsidiary (City Towing, Inc. d/b/a Quality
Towing) as of January 31, 1997, December 31, 1997 and May 5, 1998, the results
of their operations and cash flows for the years ended January 31, 1996 and
1997, the twelve-month period ended December 31, 1997, and the period from
January 1, 1998 through May 5, 1998, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Albany, New York
August 14, 1998
F-50
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
January 31, 1997, December 31, 1997 and May 5, 1998
<TABLE>
<CAPTION>
January
31, December 31, May 5,
1997 1997 1998
---------- ------------ ---------
<S> <C> <C> <C>
Assets
Current assets:
Cash....................................... $ 180,269 266,687 691,294
Trade accounts receivable, net of allowance
for doubtful accounts of $26,850, $75,850
and $75,850, respectively................. 88,518 277,966 313,210
Accounts receivable from related parties... 10,665 50,151 116,582
Due from employees......................... 19,124 22,053 14,599
Inventories................................ 20,661 9,950 --
Prepaid expenses........................... 30,048 19,680 51,979
Other current assets....................... 900 900 --
---------- --------- ---------
Total current assets..................... 350,185 647,387 1,187,664
Property and equipment, net................ 2,653,243 2,877,229 1,952,495
Accounts receivable from related party..... 157,294 831,733 --
Other assets............................... 118,908 98,905 92,056
---------- --------- ---------
Total assets............................. $3,279,630 4,455,254 3,232,215
========== ========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt..... $ 447,875 541,836 2,330,070
Accounts payable........................... 38,278 68,203 149,034
Accrued payroll and related costs.......... 28,757 85,563 119,442
Income taxes payable....................... 60,863 345,339 77,710
Other accrued expenses..................... 5,305 3,110 6,416
---------- --------- ---------
Total current liabilities................ 581,078 1,044,051 2,682,672
Long-term liabilities:
Long-term debt, excluding current
installments.............................. 2,415,340 2,188,038 --
Deferred income taxes...................... 193,379 312,721 301,601
---------- --------- ---------
Total liabilities........................ 3,189,797 3,544,810 2,984,273
---------- --------- ---------
Stockholders' equity:
Common stock, no par value. Authorized
2,500 shares,
issued and outstanding 2,425 shares....... 20,000 20,000 20,000
Retained earnings.......................... 69,833 890,444 227,942
---------- --------- ---------
Total stockholders' equity............... 89,833 910,444 247,942
---------- --------- ---------
Total liabilities and stockholders'
equity.................................. $3,279,630 4,455,254 3,232,215
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-51
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended January 31, 1996 and 1997,
Twelve month period ended December 31, 1997, and
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
January January 31, December 31, May 5,
31, 1996 1997 1997 1998
---------- ----------- ------------ ---------
(Note 1)
<S> <C> <C> <C> <C>
Net revenue................... $4,395,762 5,395,475 6,802,474 2,664,208
Cost of revenue 2,579,463 3,214,772 3,849,138 1,646,968
---------- --------- --------- ---------
Gross profit.............. 1,816,299 2,180,703 2,953,336 1,017,240
Selling, general and
administrative expenses...... 1,436,488 1,194,716 1,389,707 336,447
---------- --------- --------- ---------
Income from operations.... 379,811 985,987 1,563,629 680,793
---------- --------- --------- ---------
Other income (expense):
Interest expense............ (258,554) (325,370) (277,436) (79,176)
Interest income............. -- -- 4,524 --
Other....................... (25,005) 131,721 (27,375) (278,549)
---------- --------- --------- ---------
(283,559) (193,649) (300,287) (357,725)
---------- --------- --------- ---------
Income before income
taxes.................... 96,252 792,338 1,263,342 323,068
Income tax expense............ 103,752 277,623 440,978 111,590
---------- --------- --------- ---------
Net income (loss)......... $ (7,500) 514,715 822,364 211,478
========== ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-52
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended January 31, 1996,
Eleven months ended December 31, 1997 and
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
Total
Common Retained stockholders'
stock earnings equity
------- -------- -------------
<S> <C> <C> <C>
Balance at January 31, 1995................... $20,000 (437,382) (417,382)
Net loss--year ended January 31, 1996......... -- (7,500) (7,500)
------- -------- --------
Balance at January 31, 1996................... 20,000 (444,882) (424,882)
Net income--year ended January 31, 1997....... -- 514,715 514,715
------- -------- --------
Balance at January 31, 1997................... 20,000 69,833 89,833
Net income--twelve months ended December 31,
1997......................................... -- 822,364 822,364
Net loss-month of January 1997................ -- (1,753) (1,753)
------- -------- --------
Balance at December 31, 1997.................. 20,000 890,444 910,444
Net income--period from January 1, 1998
through May 5, 1998.......................... -- 211,478 211,478
Distributions to shareholders................. -- (873,980) (873,980)
------- -------- --------
Balance at May 5, 1998........................ $20,000 227,942 247,942
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-53
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended January 31, 1996 and 1997,
Twelve month period ended December 31, 1997, and
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
January 31, January 31, December 31, May 5,
1996 1997 1997 1998
----------- ----------- ------------ --------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss).............. $ (7,500) 514,715 822,364 211,478
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Net loss for the month of
January 1997.................. -- -- (1,753) --
Depreciation and amortization.. 237,118 322,628 268,732 106,014
Loss on disposal of equipment.. -- -- -- 18,190
Deferred income tax expense
(benefit)..................... 151,090 106,198 119,342 (11,120)
Decrease (increase) in trade
accounts receivable........... (74,638) 63,597 (189,448) (35,244)
Increase in due from related
parties....................... (6,512) (10,285) (39,486) (66,431)
(Increase) decrease in due from
employees..................... -- -- (2,929) 7,454
(Increase) decrease in
inventories................... -- (20,661) 10,711 9,950
Decrease (increase) in prepaid
expenses...................... (29,858) 7,609 10,368 (32,299)
(Increase) decrease in
receivables from related
parties....................... (34,549) (297,009) (674,439) 831,733
(Decrease) increase in accounts
payable....................... 65,853 (49,744) 29,925 36,207
Decrease in other current
assets........................ -- -- -- 900
(Decrease) increase in accrued
payroll and related costs..... 62,316 (58,732) 56,806 33,879
Increase (decrease) in income
taxes payable................. (30,809) 75,650 284,476 (267,629)
(Decrease) increase in other
accrued expenses.............. 6,130 (1,785) (2,195) 3,306
--------- -------- -------- --------
Net cash provided by operating
activities................... 338,641 652,181 692,474 846,388
--------- -------- -------- --------
Cash flows from investing
activities:
Purchases of property, plant
and equipment................. (700,708) (493,663) (472,715) (108,053)
Purchase of Custom Towing...... (200,000) -- -- --
Proceeds from sale of
equipment..................... -- -- -- 8,000
--------- -------- -------- --------
Net cash used in investing
activities................... (900,708) (493,663) (472,715) (100,053)
--------- -------- -------- --------
Cash flows from financing
activities:
Proceeds from long-term debt... 424,979 -- -- --
Principal payments on long-term
debt.......................... -- (104,014) (133,341) (388,558)
Proceeds from borrowings under
lines-of credit............... -- -- -- 66,830
Distribution to shareholder.... 150,000 120,000 -- --
--------- -------- -------- --------
Net cash provided by (used in)
financing activities......... 574,979 15,986 (133,341) (321,728)
--------- -------- -------- --------
Net increase in cash............ 12,912 174,504 86,418 424,607
Cash at beginning of period..... (7,147) 5,765 180,269 266,687
--------- -------- -------- --------
Cash at end of period........... $ 5,765 180,269 266,687 691,294
========= ======== ======== ========
Supplemental disclosures of
financing activities and cash
flow information:
Noncash distribution to
shareholders:
Property and equipment......... $ -- -- -- 907,432
========= ======== ======== ========
Long-term debt................. $ -- -- -- 78,076
========= ======== ======== ========
Accounts payable............... $ -- -- -- 44,624
========= ======== ======== ========
Retained earnings.............. $ -- -- -- 873,980
========= ======== ======== ========
Cash paid during the period
for:
Interest....................... $ 258,554 325,370 253,242 79,033
========= ======== ======== ========
Income taxes................... $ 58,439 61,656 37,160 45,000
========= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-54
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 1996 and 1997, December 31, 1997 and May 5, 1998
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Smith-Christensen Enterprises, Inc. and Subsidiary and its wholly-owned
subsidiary City Towing, Inc. d/b/a Quality Towing, collectively referred to
herein as "Quality", were founded in 1988 and 1968 respectively. Quality's
primary business is towing, impounding and storing vehicles for municipal,
governmental and commercial customers in Southern Nevada. Quality has two
facilities in Las Vegas. It operates approximately 40 vehicles.
(b) Period Presented
Because Quality has a fiscal year end of January 31, the statements of
operations, stockholder's equity and cash flows for Quality's most recent
twelve-month period includes the results of operations for the month of
January 1997, which is also included in the prior fiscal year ended January
31, 1997. The following represents the condensed results of operations for the
month of January 1997 which is included in the twelve-month period ended
December 31, 1997 and in the fiscal year ended January 31, 1997:
<TABLE>
<S> <C>
Net income........................................................ $440,053
Cost of revenues.................................................. 242,564
--------
Gross profit.................................................. 197,489
Selling, general and administrative expenses...................... 174,187
--------
Income from operations........................................ 23,302
Other expenses:
Interest expense................................................ (24,193)
Other........................................................... (862)
--------
Loss before income taxes...................................... (1,753)
Income tax expense................................................ --
--------
Net loss...................................................... $ (1,753)
========
</TABLE>
(c) Principles of Consolidation
The consolidated financial statements include the financial statements of
Smith-Christensen Enterprises, Inc. and its wholly-owned subsidiary City
Towing, Inc. All significant intercompany balances and transactions have been
eliminated in consolidation.
(d) Revenue Recognition
Quality operates as one segment related to the transportation of vehicles
and equipment for customers.
Quality's revenue is derived from customers who require a towing service,
fees related to the storage of vehicles that have been towed, transport of
vehicles and equipment, and auction sales of unclaimed vehicles. Towing
revenue is recognized at the completion of each towing engagement, storage
fees are accrued over the period the vehicles are held in the impound
facility, transport revenue is recognized upon the delivery of the
vehicles/equipment to their final destination, and revenue from auction sales
are recorded when title to the vehicle has been transferred. Expenses related
to the generation of revenue are recognized when incurred.
F-55
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
January 31, 1996 and 1997, December 31, 1997 and May 5, 1998
(e) Inventories
Inventories consist of vehicles that will be offered for auction.
Inventories are stated at the lower of cost or market.
(f) Property and Equipment
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the individual assets or for leasehold improvements over the
terms of the related leases if shorter using the straight-line method.
Estimated useful lives are as follows:
<TABLE>
<S> <C>
Buildings........................................................ 28-30 years
Leasehold improvements........................................... 15-30 years
Transportation and towing equipment.............................. 5-15 years
Office equipment................................................. 3-5 years
Machinery and equipment.......................................... 5 years
</TABLE>
(g) Fair Value of Certain Financial Instruments
The carrying amount of receivables and all current liabilities approximates
fair value due to the short-term nature of various financial instruments and
the current incremental borrowing rates available to Quality on bank loans
with similar terms and maturities.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(i) Long-Lived Assets
Management of Quality reviews all long-lived assets for impairment on an
annual basis. The carrying value is compared to future net undiscounted cash
flows expected to be generated by the assets to ascertain whether or not the
carrying value can be recovered during the expected life of the assets. If an
impairment exists, the write down will be recorded during the current period.
(j) Use of Estimates
Management of Quality has made a number of estimates and assumptions related
to the reporting of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods to
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
F-56
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
January 31, 1996 and 1997, December 31, 1997 and May 5, 1998
(2) Prepaid Expenses
Prepaid expenses consist of the following:
<TABLE>
<CAPTION>
January 31, December 31, May 5,
1997 1997 1998
----------- ------------ ---------
<S> <C> <C> <C>
Prepaid insurance....................... $ 28,010 19,680 44,479
Prepaid rent............................ 2,038 -- 7,500
---------- --------- ---------
Total................................. $ 30,048 19,680 51,979
========== ========= =========
(3) Property, Plant and Equipment
Property, plant and equipment consists of the following:
<CAPTION>
January 31, December 31, May 5,
1997 1997 1998
----------- ------------ ---------
<S> <C> <C> <C>
Land.................................... $ 600,000 600,000 --
Buildings............................... 156,225 156,225 --
Vehicles................................ 2,109,893 2,481,396 2,508,948
Office equipment........................ 123,691 212,066 222,089
Machinery and equipment................. 112,889 125,726 172,463
Leasehold improvements.................. 278,925 278,925 --
---------- --------- ---------
3,381,623 3,854,338 2,903,500
Less accumulated depreciation........... (728,380) (977,109) (951,005)
---------- --------- ---------
Property, plant and equipment........... $2,653,243 2,877,229 1,952,495
========== ========= =========
Depreciation of property, plant and equipment for the years ended January
31, 1996 and 1997, for the twelve-month period ended December 31, 1997 and for
the period from January 1, 1998 through May 5, 1998 totaled $140,910,
$224,196, $271,341 and $99,165, respectively.
(4) Other Assets
Other assets consist of the following:
<CAPTION>
January 31, December 31, May 5,
1997 1997 1998
----------- ------------ ---------
<S> <C> <C> <C>
Metro contract.......................... $ 705,850 705,850 705,850
Non-compete agreement................... 25,000 25,000 25,000
Goodwill................................ 225,048 225,048 225,048
---------- --------- ---------
955,898 955,898 955,898
Less accumulated amortization........... (836,990) (856,993) (863,842)
---------- --------- ---------
Other assets, net....................... $ 118,908 98,905 92,056
========== ========= =========
</TABLE>
Metro contract costs, non-compete agreement and goodwill are amortized over
nine, five and fifteen years, respectively. Amortization expense totaled
$96,208, $98,432, $20,003 and $6,849 for the years ended January 31, 1996 and
1997, for the twelve-month period ended December 31, 1997, and for the period
from January 1, 1998 through May 5, 1998, respectively.
F-57
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
January 31, 1996 and 1997, December 31, 1997 and May 5, 1998
(5) Indebtedness
The Company's long-term debt at January 31, 1997, December 31, 1997 and May
5, 1998 consisted of the following:
<TABLE>
<CAPTION>
January
31, December 31, May 5,
1997 1997 1998
---------- ------------ ----------
<S> <C> <C> <C>
Note payable to Navistar, payable in
monthly installments of $563, including
interest at 11.5% maturing August 28,
1997. Secured by equipment............... $ 3,796 -- --
Notes payable to bank, payable in
aggregate monthly installments of
$20,312, plus interest ranging from 9% to
9.25% over periods ranging from 36 to 48
months, maturing between September 5,
1998 and June 2001. Secured by vehicles
and equipment............................ 428,678 596,105 572,014
Note payable to former owner, payable in
varied monthly installments, including
interest at 10%, with a final lump sum
payment of $1,396,556, maturing March 1,
1999. Secured by stock City Towing,
Inc. .................................... 1,682,529 1,562,530 1,502,553
Note payable to former owner, payable in
monthly installments of $3,800, including
interest at 9%, maturing July 1, 2003.
Secured by land and building. Paid in
full May 1998............................ 226,489 202,485 --
Note payable to Navistar, payable in
monthly installments of $1,433, including
interest at 10.5%, maturing May 4, 1999.
Secured by equipment..................... 35,444 22,540 17,906
Note payable to bank, payable in monthly
installments of $6,716, including
interest at 8%, maturing July 1, 2000.
Secured by equipment..................... 245,316 187,529 166,844
---------- --------- ----------
2,863,216 2,729,874 2,330,070
Less installments due within one year..... (447,875) (541,836) (2,330,070)
---------- --------- ----------
Long-term debt, excluding current
installments............................. $2,415,341 2,188,038 --
========== ========= ==========
</TABLE>
Notes payable to Navistar, payable in
monthly installments of $6,110 and
$2,900, respectively, including interest
at 9%, maturing May 12, 1999 and August
11, 1999, respectively. Secured by
equipment................................ 240,964 158,685 70,753
(6) Leases
The Company leases land and building used as part of its operations under a
lease agreement with Nevada Recycling Corporation, an affiliated entity owned
by the owners of the Company. The lease is classified as an operating lease.
The agreement provides for monthly rental payment of $8,000 with an automatic
renewal for additional consecutive periods of one year beginning every
October, unless either party gives no less than 30 days written notice of the
intent to terminate. The Company is responsible for all operating costs
related to the property.
Rent expense was $96,000 and $32,000 for the twelve-month period ended
December 31, 1997 and for the period from January 1, 1998 through May 5, 1998,
respectively.
F-58
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
January 31, 1996 and 1997, December 31, 1997 and May 5, 1998
(7) Income Taxes
Income tax expense for the years ended January 31, 1996 and 1997, for the
twelve-month period ended December 31, 1997, and for the period from January 1,
1998 through May 5, 1998, consists of:
<TABLE>
<CAPTION>
January 31, January 31, December 31, May 5,
1996 1997 1997 1998
----------- ----------- ------------ -------
<S> <C> <C> <C> <C>
Current:
Federal....................... $(47,338) 171,425 321,636 122,710
Deferred...................... 151,090 106,198 119,342 (11,120)
-------- ------- ------- -------
$103,752 277,623 440,978 111,590
======== ======= ======= =======
The following table reconciles the expected tax expense at the Federal
statutory tax rate to the effective tax rate:
<CAPTION>
January 31, January 31, December 31, May 5,
1996 1997 1997 1998
----------- ----------- ------------ -------
<S> <C> <C> <C> <C>
Computed expected tax expense... $ 32,726 269,395 429,536 109,843
Meals and entertainment......... 1,114 6,345 6,341 --
Nondeductible goodwill.......... 5,101 5,101 5,101 1,747
Adjustment to prior years' tax-
es............................. 64,811 -- -- --
Other........................... -- (3,218) -- --
-------- ------- ------- -------
$103,752 277,623 440,978 111,590
======== ======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities for the year ended January 31, 1997, for
the twelve-month period ended December 31, 1997 and for the period from January
1, 1998 through May 5, 1998 are presented below:
<TABLE>
<CAPTION>
January 31, December 31, May 5,
1997 1997 1998
----------- ------------ -------
<S> <C> <C> <C>
Deferred tax assets:
Covenant-not-to-compete.................... $ 2,031 (3,164) (3,557)
Contract/intangible........................ 13,733 -- --
Allowance for doubtful accounts............ -- -- (25,789)
-------- ------- -------
Total gross deferred tax assets.......... 15,764 (3,164) (29,346)
Less valuation allowance................... -- -- --
-------- ------- -------
15,764 (3,164) (29,346)
Deferred tax liabilities:
Property and equipment, due to differences
in depreciation lives and methods......... 209,143 315,885 330,947
-------- ------- -------
Net deferred tax liability............... $193,379 312,721 301,601
======== ======= =======
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
projected future taxable income and tax planning
F-59
<PAGE>
SMITH-CHRISTENSEN ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
January 31, 1996 and 1997, December 31, 1997 and May 5, 1998
strategies, as well as carryback opportunities, in making this assessment.
Based upon the level of historical taxable income, projections for future
taxable income and carryback opportunities over the periods in which the
deferred tax assets are deductible, management believes it is more likely than
not that Company will realize the benefits of these deductible differences.
The amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income are reduced.
(8) Related Party Transactions
Accounts receivable from related parties are amounts due from four companies
under the common control of Quality's stockholders. The amounts receivable
totaled $167,959, $881,884 and $116,582 as of January 31, 1997, December 31,
1997 and May 5, 1998, respectively.
Quality leases land and building from an affiliated entity owned by the
owners of the shareholder of Quality.
(9) Contingent Liabilities
Various legal claims arise against Quality during the normal course of
business. In the opinion of management, liabilities, if any, arising from
proceedings would not have a material effect on the financial statements.
(10) Subsequent Event
During February 1998, the stockholder entered into a definitive agreement to
sell Quality to United Road Services, Inc. The sales transaction, affected
through a combination of cash and common stock of United road Services, Inc.,
was effective May 6, 1998 upon the consummation of the initial public offering
of the common stock of United Road Services, Inc.
F-60
<PAGE>
CARON AUTO WORKS, INC. AND
CARON AUTO BROKERS, INC.
COMBINED FINANCIAL STATEMENTS
September 30, 1995, 1996 and 1997
and May 5, 1998
(With Independent Auditors' Report Thereon)
F-61
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders
Caron Auto Works, Inc. and
Caron Auto Brokers, Inc.:
We have audited the accompanying combined balance sheets of Caron Auto
Works, Inc. and Caron Auto Brokers, Inc. (collectively, "Caron") as of
September 30, 1996 and 1997 and May 5, 1998, and the related combined
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended September 30, 1997 and for the period
from October 1, 1997 through May 5, 1998. These combined financial statements
are the responsibility of Caron's management. Our responsibility is to express
an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall combined financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Caron
Auto Works, Inc. and Caron Auto Brokers, Inc. as of September 30, 1996 and
1997 and May 5, 1998 and the results of their combined operations and their
combined cash flows for each of the years in the three-year period ended
September 30, 1997 and for the period from October 1, 1997 through May 5, 1998
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Albany, New York
August 21, 1998
F-62
<PAGE>
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
COMBINED BALANCE SHEETS
September 30, 1996, 1997 and May 5, 1998
<TABLE>
<CAPTION>
September 30, September 30, May 5,
1996 1997 1998
------------- ------------- ---------
<S> <C> <C> <C>
Assets
Current assets:
Cash.................................. $ 29,370 108,163 --
Trade accounts receivable, net of
allowance for doubtful accounts of
$26,793, $45,079 and $57,382,
respectively......................... 633,736 746,332 888,292
Accounts receivable from related
parties (note 7)..................... 98,056 49,754 12,113
Accounts receivable from employees.... -- 6,500 --
Notes receivable...................... -- 44,539 15,000
Inventories........................... 24,185 30,040 56,070
Prepaid and other current assets...... 38,685 5,142 80,528
---------- --------- ---------
Total current assets................ 824,032 990,470 1,052,003
---------- --------- ---------
Property and equipment, net (notes 2, 3
and 4)................................. 1,241,097 2,278,962 4,129,407
Stockholder loan receivable............. -- -- 258,521
Deferred income taxes (note 5).......... -- -- 35,541
Other assets............................ 2,500 22,736 62,156
---------- --------- ---------
Total assets........................ $2,067,629 3,292,168 5,537,628
========== ========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt
(note 3)............................. $ 83,297 263,093 708,103
Current installments under capital
lease obligations (note 4)........... 181,272 177,932 211,900
Borrowings under lines of credit (note
3)................................... 18,839 225,000 250,000
Payable to related parties (note 7)... 185,920 9,500 14,034
Accounts payable...................... 130,282 332,544 699,467
Accrued payroll and related costs..... 16,058 40,870 74,875
Income taxes payable (note 5)......... 101,128 92,447 214,041
Other accrued liabilities............. 24,021 48,277 112,857
---------- --------- ---------
Total current liabilities........... 740,817 1,189,663 2,285,277
Long-term liabilities:
Long-term debt, excluding current
installments (note 3)................ 56,982 1,010,856 2,183,809
Obligations under capital lease,
excluding current installments (note
4)................................... 428,862 437,789 458,603
Deferred income taxes (note 5)........ 160,342 54,019 --
---------- --------- ---------
Total liabilities................... 1,387,003 2,692,327 4,927,689
---------- --------- ---------
Stockholders' equity:
Common stock, $10 par value.
Authorized 10,000 shares; issued and
outstanding 200 shares............... 2,000 2,000 2,000
Additional paid-in capital............ 10,225 10,225 10,225
Retained earnings..................... 698,401 617,616 627,714
Less treasury stock, 3,000 common
shares at cost....................... (30,000) (30,000) (30,000)
---------- --------- ---------
Total stockholders' equity.......... 680,626 599,841 609,939
---------- --------- ---------
Total liabilities and stockholders'
equity............................. $2,067,629 3,292,168 5,537,628
========== ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-63
<PAGE>
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
COMBINED STATEMENTS OF OPERATIONS
Years ended September 30, 1995, 1996 and 1997 and
Period from October 1, 1997 through May 5, 1998
<TABLE>
<CAPTION>
September 30, September 30, September 30, May 5,
1995 1996 1997 1998
------------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
Net revenue.............. $4,624,155 5,575,257 6,626,850 5,291,796
Cost of revenue.......... 4,044,834 5,083,883 6,303,546 4,282,412
---------- --------- --------- ---------
Gross profit......... 579,321 491,374 323,304 1,009,384
Selling, general and
administrative
expenses................ 238,006 237,943 511,510 762,880
---------- --------- --------- ---------
Income (loss) from
operations.......... 341,315 253,431 (188,206) 246,504
---------- --------- --------- ---------
Other income (expense):
Interest expense....... (77,693) (108,069) (141,000) (194,868)
Interest income........ 810 5,706 8,360 4,074
Gain (loss) on sale of
assets................ 7,457 16,985 114,966 (26)
Other.................. 25,570 22,526 29,460 --
---------- --------- --------- ---------
Income (loss) before
income taxes........ 297,459 190,579 (176,420) 55,684
Income tax expense
(benefit) (note 5)...... 103,020 61,838 (95,635) 45,586
---------- --------- --------- ---------
Net income (loss).... $ 194,439 128,741 (80,785) 10,098
========== ========= ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-64
<PAGE>
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 1995, 1996 and 1997 and
Period from October 1, 1997 through May 5, 1998
<TABLE>
<CAPTION>
Additional Total
Common paid-in Retained Treasury stockholders'
stock capital earnings stock equity
------ ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at September 30,
1994..................... $2,000 10,225 375,221 (30,000) 357,446
Net income-1995........... -- -- 194,439 -- 194,439
------ ------ ------- ------- -------
Balance at September 30,
1995..................... 2,000 10,225 569,660 (30,000) 551,885
Net income-1996........... -- -- 128,741 -- 128,741
------ ------ ------- ------- -------
Balance at September 30,
1996..................... 2,000 10,225 698,401 (30,000) 680,626
Net loss-1997............. -- -- (80,785) -- (80,785)
------ ------ ------- ------- -------
Balance at September 30,
1997..................... 2,000 10,225 617,616 (30,000) 599,841
Net income-period from
October 1, 1997 through
May 5, 1998.............. -- -- 10,098 -- 10,098
------ ------ ------- ------- -------
Balance at May 5, 1998.... $2,000 10,225 627,714 (30,000) 609,939
====== ====== ======= ======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-65
<PAGE>
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
COMBINED STATEMENTS OF CASH FLOWS
Years ended September 30, 1995, 1996, and 1997 and Period from October 1, 1997
through May 5, 1998
<TABLE>
<CAPTION>
September 30, September 30, September 30, May 5,
1995 1996 1997 1998
------------- ------------- ------------- --------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)......... $194,437 128,741 (80,785) 10,098
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating activities:
Depreciation and
amortization........... 158,790 196,937 213,290 177,258
Deferred income tax
expense (benefit)...... 41,924 18,467 (106,323) (89,560)
(Gain) loss on sale of
assets................. (7,457) (16,985) (114,966) 26
Increase in trade
accounts receivable.... (63,618) (119,278) (112,596) (141,960)
(Increase) decrease in
receivables from
related parties........ (12,056) (66,885) 48,302 32,310
(Increase) decrease in
accounts receivable
from employees......... -- -- (6,500) 6,500
Increase in
inventories............ 4,705 (23,766) (5,855) (26,030)
(Increase) decrease in
prepaid expenses....... 4,758 (19,644) 33,543 (75,386)
Increase in other
assets................. 191 -- (20,236) (39,420)
(Decrease) increase in
amounts payable to
related parties........ (10,702) (22,889) (176,420) 4,534
Increase in accounts
payable................ (44,731) 16,036 202,262 366,923
(Decrease) increase in
accrued payroll and
related costs.......... (119,686) (1,670) 24,812 34,005
Increase in other
accrued liabilities.... 447 86,401 15,575 186,174
-------- -------- -------- --------
Net cash provided by
(used in) operating
activities........... 147,002 175,465 (85,897) 445,472
-------- -------- -------- --------
Cash flows from investing
activities:
Purchases of property and
equipment................ (142,383) (54,909) (333,277) (243,960)
Proceeds from sale of
assets................... 123,913 56,011 341,196 14,000
(Increase) decrease in
notes receivable......... -- -- (44,539) 29,539
-------- -------- -------- --------
Net cash provided by
(used in) investing
activities........... (18,470) 1,102 (36,620) (200,421)
-------- -------- -------- --------
Cash flows from financing
activities:
Proceeds from long-term
debt..................... 100,000 70,345 456,500 236,000
Principal payments on
long-term debt and
capital leases........... (174,880) (300,175) (461,351) (361,024)
Borrowings under line of
credit, net.............. (35,000) 18,839 206,161 25,000
Increase in shareholder
loan, net ............... -- -- -- (253,190)
-------- -------- -------- --------
Net cash (used in)
provided by financing
activities........... (109,880) (210,991) 201,310 (353,214)
-------- -------- -------- --------
Net increase (decrease) in
cash....................... 18,652 (34,424) 78,793 (108,163)
Cash at beginning of
period..................... 45,142 63,794 29,370 108,163
-------- -------- -------- --------
Cash at end of period....... $ 63,794 29,370 108,163 --
======== ======== ======== ========
Supplemental disclosure of
cash flow information:
Cash paid during the
period for:
Interest................ $124,505 110,038 143,639 194,868
======== ======== ======== ========
Income taxes............ $ -- 61,096 43,371 2,983
======== ======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-66
<PAGE>
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
September 30, 1995, 1996 and 1997
and May 5, 1998
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Caron Auto Works, Inc. and Caron Auto Brokers, Inc. (collectively, "Caron")
were founded in 1976 and 1993, respectively. Caron's primary business is
transporting vehicles for leasing companies, long-haul transporters and
individuals in the Northeastern United States. It also provides towing
services for commercial and private customers in the Hartford, Connecticut
region. Caron has two facilities in East Hartford and one facility in New
Jersey. It operates approximately 60 vehicles.
(b) Principles of Combination
The combined financial statements include the financial statements of Caron
Auto Works, Inc. and Caron Auto Brokers, Inc. All significant intercompany
balances and transactions have been eliminated in combination. Both entities
have the same management and principal stockholder ownership.
(c) Revenue Recognition
Caron operates as one segment related to the transportation of vehicles and
equipment for customers.
Caron's revenue is derived from customers who require a towing service,
transport of vehicles and equipment, fees related to repair of vehicles that
have been towed, and auction sales of unclaimed vehicles. Towing revenue is
recognized at the completion of each towing engagement, transport revenue is
recognized upon the delivery of the vehicles/equipment to their final
destination, repair fees are recorded when the service is performed, and
revenue from auction sales are recorded when title to the vehicles has been
transferred. Expenses related to the generation of revenue are recognized as
incurred.
(d) Inventories
Inventories include spare parts used in the repair of vehicles, used
vehicles and fuel. Inventories are stated at the lower of cost or market.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation is determined for
financial statement purposes using the straight-line method over the estimated
useful lives of the individual assets or, for leasehold improvements, over the
terms of the related leases if shorter. Accelerated methods of depreciation
have been used for income tax purposes. For financial statement purposes,
Caron provides for depreciation of property and equipment over the following
estimated useful lives:
<TABLE>
<S> <C>
Automobiles and transportation
equipment............................. 5 years
Furniture and fixtures................. 5-7 years
Machinery and equipment................ 5-7 years
Leasehold improvements................. 7-39 years
</TABLE>
F-67
<PAGE>
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
September 30, 1995, 1996 and 1997
and May 5, 1998
(f) Fair Value of Financial Instruments
Due to the short-term nature of various financial instruments and the
current incremental borrowing rates available to Caron on bank loans with
similar terms and maturities, the fair value of Caron's financial instruments
approximates their carrying values.
(g) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(h) Use of Estimates
Management of Caron has made a number of estimates and assumptions relating
to the reporting of assets and liabilities and the disclosure of contingent
assets and liabilities to prepare these financial statements in conformity
with generally accepted accounting principles. Actual results could differ
from those estimates.
(2) Property and Equipment
Property and equipment at September 30, 1996, 1997 and May 5, 1998 consists
of the following:
<TABLE>
<CAPTION>
September 30, September 30, May 5,
------------- ------------- ---------
1996 1997 1998
------------- ------------- ---------
<S> <C> <C> <C>
Vehicles............................ $ 16,608 42,258 25,650
Office equipment.................... 75,590 112,455 149,392
Transportation and towing
equipment.......................... 1,663,407 2,604,541 4,508,408
Leasehold improvements.............. 262,276 313,011 377,026
----------- --------- ---------
Total............................. 2,017,881 3,072,265 5,060,476
Less accumulated depreciation and
amortization....................... (776,784) (793,303) (931,069)
----------- --------- ---------
$ 1,241,097 2,278,962 4,129,407
=========== ========= =========
</TABLE>
Depreciation and amortization of property and equipment in 1995, 1996 and
1997 and for the period from October 1, 1997 to May 5, 1998 totaled
$158,790, $196,937, $213,290 and $177,258, respectively.
(3) Indebtedness
Caron has available a $250,000 line of credit with Bank of South Windsor,
secured by all corporate assets and a personal guarantee by Caron's primary
stockholder. Interest is payable at the prime lending rate plus 1% (9.5% at
May 5, 1998). The outstanding balance of $250,000 at May 5, 1998 is due on
demand.
F-68
<PAGE>
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
September 30, 1995, 1996 and 1997
and May 5, 1998
Caron's long-term debt at September 30, 1996, 1997 and May 5, 1998 consists of
the following:
<TABLE>
<CAPTION>
September 30, September 30, May 5,
------------- ------------- -------
1996 1997 1998
------------- ------------- -------
<S> <C> <C> <C>
Note payable to Bank of South Windsor,
payable in monthly installments of
$3,203, including interest at 9.5%.
Secured by assets of Caron and the
personal guarantee by the primary
stockholders............................. $40,498 -- --
Note payable to Bank of South Windsor
payable in monthly installments of
$1,633, including interest at 9.5%.
Matured in October, 1996. Secured by one
tractor and three trailers. ............. 1,844 -- --
Note payable to Ford Motor Credit Company,
payable in monthly installments of $959,
including interest at 8.5%. Secured by
equipment. .............................. 16,150 -- --
Note payable to Savings Bank of
Manchester, payable in monthly principal
payments of $2,500, plus interest at
prime plus 1% (9.5% at May 5, 1998),
maturing August, 2002. Secured by a car
and the personal guarantee of the primary
stockholder. ............................ -- 147,500 130,000
Note payable to Savings Bank of
Manchester, payable in monthly
installments of $692, including interest
at 8.25%, maturing August, 2000. Secured
by a car. ............................... -- 21,459 17,585
Note payable to unrelated individual,
payable in monthly installments of $580,
including interest at 12.5%, maturing
October, 2000............................ 22,364 17,947 15,105
Note payable to Norwest Equipment Finance,
payable in monthly installments of
$3,398, including interest at 10.25%,
maturing April, 2002. Secured by tractor,
trailer and equipment. .................. -- -- 131,079
Note payable to Bank of South Windsor,
payable in monthly principal payments of
$1,111, plus interest at prime plus 1%
(9.5% at May 5, 1998), maturing April,
1999. Secured by assets of Caron and the
personal guarantee of the primary
stockholder. ............................ 34,444 21,111 13,333
Note payable to Bank of South Windsor,
payable in monthly installments of
$8,904, including interest at 9.25%,
maturing March, 2002. Secured by twelve
tractors, twelve trailers and the
personal guarantee of the primary
stockholder. ............................ -- 390,878 349,582
Note payable to Bank of South Windsor,
payable in monthly interest installments
only at prime plus 1% (9.5% at May 5,
1998), maturing June, 1998. Secured by
the assets of Caron and the personal
guarantee of the primary stockholder. ... -- -- 100,000
Note payable to Savings Bank of
Manchester, payable in monthly principal
payments of $1,085, plus interest at
8.25%, maturing September 29, 2000.
Secured by a car and the personal
guarantee of the primary stockholder. ... -- 34,500 --
Note payable to Chase Manhattan Bank,
payable in monthly installments of
$2,082, including interest at 9%,
maturing November, 2002. Unsecured. ..... -- -- 93,265
</TABLE>
F-69
<PAGE>
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
September 30, 1995, 1996 and 1997
and May 5, 1998
<TABLE>
<CAPTION>
September 30, September 30, May 5,
------------- ------------- ---------
<S> <C> <C> <C>
Note payable to Chase Manhattan Bank,
payable in monthly installments of
$741, including interest at 8.5%,
maturing December, 2002. Unsecured. ... -- -- 34,525
Note payable to Peoples Bank, payable in
monthly principal payments of $1,786,
plus interest at prime plus 1.5% (10%
at May 5, 1998), maturing August, 2004.
Secured by the assets of Caron and the
personal guarantee of the primary
stockholder and affiliated
companies. ............................ -- 148,214 135,712
Note payable to Orix Credit Alliance,
payable in monthly installments of
$3,719, including interest at 9.56%.
Secured by tractor, trailer and the
guarantee of affiliated companies. .... -- -- 142,759
Note payable to Ford Motor Credit
Company, payable in monthly
installments of $770, including
interest at 10%, maturing November,
2000. Secured by a truck. ............. 24,979 17,924 13,472
Note payable to Newcourt Financial,
payable in monthly installments of
$3,320, including interest at 10.75%.
Secured by tractor and trailer. ....... -- -- 135,452
Note payable to Navistar Financial
Corp., payable in monthly installments
ranging from $1,632 to $6,788,
including interest at rates of 9.9% and
10.3%, maturing between 2001 and 2002.
Secured by tractors and trailers. ..... -- 474,416 559,584
Note payable to Green Tree Financial
Servicing Corporation, payable in
monthly installments of $10,649,
including interest at 10.75%, maturing
July, 2002. Secured by tractors,
trailers and the personal guarantee of
the primary stockholder. .............. -- -- 434,410
Note payable to Paccar Financial,
payable in monthly installments of
$10,249, including interest at 10.71%,
maturing August, 2002. Secured by
tractors and trailers. ................ -- -- 423,798
Note payable to GE Capital in monthly
installments of $2,383, including
interest at 10.25%, maturing March,
2003. Secured by tractor. ............. -- -- 111,489
Note payable to GE Capital in monthly
installments of $1,091, including
interest at 10.5%, maturing March,
2003. Secured by trailer. ............. -- -- 50,762
-------- --------- ---------
Total long-term debt................ 140,279 1,273,949 2,891,912
Less installments due within one year... (83,297) 263,093 708,103
-------- --------- ---------
Long-term debt, excluding current
Installments....................... $ 56,982 1,010,856 2,183,809
======== ========= =========
</TABLE>
F-70
<PAGE>
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
September 30, 1995, 1996 and 1997
and May 5, 1998
The aggregate maturities of long-term debt for each of the five years
subsequent to May 5, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................... $ 708,103
2000........................................................... 635,805
2001........................................................... 683,274
2002........................................................... 650,463
2003........................................................... 185,715
Thereafter..................................................... 28,552
----------
$2,891,912
==========
</TABLE>
(4) Leases
Caron is obligated under various capital leases for transportation and
towing equipment that expire at various dates over the next six years.
Following is a summary of equipment held under the capital leases at
September 30, 1996, 1997 and May 5, 1998:
<TABLE>
<CAPTION>
September 30, September 30, May 5,
1996 1997 1998
------------- ------------- ---------
<S> <C> <C> <C>
Transportation and towing
equipment......................... $ 885,356 741,628 1,199,927
Less accumulated amortization...... (186,143) (198,826) (326,092)
--------- -------- ---------
$ 699,213 542,802 873,835
========= ======== =========
</TABLE>
Amortization of assets held under capital leases is included with
depreciation expense.
Caron leases the facility used for its operations from its primary
shareholder. The lease is for a twenty-year term expiring in 2017 and has been
classified as an operating lease. Caron also leases additional office space
and storage lot on a month-to-month basis from its primary shareholder. The
lease is classified as an operating lease. Caron is responsible for all
operating costs related to the properties under both leases. Rent paid to the
shareholder in 1995, 1996, 1997 and for the period from October 1, 1997 to May
5, 1998 was $84,382, $86,181, $117,096, and $51,919, respectively.
Total rent expense for 1995, 1996 and 1997 and the period from October 1,
1997 to May 5, 1998 was $84,382, $86,181, $126,096, and $75,991, respectively.
F-71
<PAGE>
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
September 30, 1995, 1996 and 1997
and May 5, 1998
Future minimum lease payments under noncanceleable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of May 5, 1998 are:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- -----------
<S> <C> <C>
Period Ending May 5,
--------------------
1999............................................. $ 280,713 $ 93,000
2000............................................. 251,100 98,200
2001............................................. 158,849 100,655
2002............................................. 84,381 103,171
2003............................................. 31,818 105,751
Thereafter....................................... -- 1,803,040
--------- -----------
Total minimum lease payments................... 806,861 $ 2,303,817
===========
Less amount representing interest (at rates
ranging from 8.2% to 16.77%).................... (136,358)
---------
Present value of net minimum capital lease
payments...................................... 670,503
Less current installments of obligations under
capital leases.................................. (211,900)
---------
Obligations under capital leases, excluding
current installment........................... $ 458,603
=========
</TABLE>
(5)Income Taxes
Income tax expense (benefit) for the years ended September 30, 1995, 1996
and 1997 and the period from October 1, 1997 to May 5, 1998 consists of:
<TABLE>
<CAPTION>
September 30, September 30, September 30, May 5,
1995 1996 1997 1998
------------- ------------- ------------- -------
<S> <C> <C> <C> <C>
Current:
Federal.................... $ 38,174 26,900 5,789 90,087
State...................... 22,922 16,471 4,899 45,059
--------- ------ -------- -------
61,096 43,371 10,688 135,146
Deferred..................... 41,924 18,467 (106,323) (89,560)
--------- ------ -------- -------
$ 103,020 61,838 (95,635) 45,586
========= ====== ======== =======
</TABLE>
F-72
<PAGE>
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
September 30, 1995, 1996 and 1997
and May 5, 1998
The following table reconciles the expected tax expense at the Federal
statutory tax rate to the effective tax rate.
<TABLE>
<CAPTION>
September 30, September 30, September 30, May 5,
1995 1996 1997 1998
------------- ------------- ------------- -------
<S> <C> <C> <C> <C>
Computed expected tax
expense (benefit)...... $ 101,136 64,797 (59,983) 18,933
State income taxes, net
of Federal benefit..... 15,129 10,871 3,233 29,739
Officer's life
insurance.............. 427 -- -- 694
Non-deductible meals and
entertainment
expenses............... 512 998 1,647 3,373
Non-deductible fines and
penalties.............. -- -- -- 9,813
Effect of graduated tax
rates.................. (16,262) (14,980) (34,847) (18,021)
Other................... 2,078 152 (5,685) 1,055
--------- ------- ------- -------
$ 103,020 61,838 (95,635) 45,586
========= ======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities as of September 30, 1996 and 1997 and May
5, 1998 are presented below:
<TABLE>
<CAPTION>
September 30, September 30, May 5,
1996 1997 1998
------------- ------------- --------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for bad debts............ $ 10,091 19,830 23,581
Net operating loss carryforwards... -- 186,261 338,983
---------- -------- --------
Total gross deferred tax asset... 10,091 206,091 362,564
Less valuation allowance -- -- --
---------- -------- --------
Net deferred tax asset........... 10,091 206,091 362,564
Deferred tax liabilities:
Property and equipment, due to
differences in depreciation lives
and methods....................... (170,133) (260,110) (327,023)
---------- -------- --------
Net deferred tax (liability)
asset........................... $ (160,042) (54,019) 35,541
========== ======== ========
</TABLE>
The net operating loss carryforward approximates $825,000, of which $453,000
expires in 2017 and $372,000 in 2018.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the projected future taxable income and tax planning strategies, as
well as carryback opportunities, in making this assessment. Based upon the
level of historical taxable income, projections for future taxable income and
carryback opportunities over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not Caron will realize
the benefits of these deductible differences. The amount of the deferred tax
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income are reduced.
F-73
<PAGE>
CARON AUTO WORKS, INC. AND CARON AUTO BROKERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
September 30, 1995, 1996 and 1997
and May 5, 1998
(6)Non-Cash Transactions
During 1995, 1996, 1997 and for the period from October 1, 1997 to May 5,
1998, Caron financed $0, $0, $1,144,108 and $1,797,769, respectively, of
various transportation and towing equipment through several lending
institutions (see note 3).
(7)Related Party Transactions
As of May 5, 1998, the primary stockholder is indebted to Caron under an
unsecured note, bearing interest at 7%. The loan receivable consists of
personal expenses paid by Caron on the stockholder's behalf, net of advances
received and expenses incurred by Caron payable to the stockholder. The net
stockholder loan receivable totaled $258,521 as of May 5, 1998.
Included in accounts receivable and accounts payable from related parties
are amounts due to and from two companies under the common control of Caron's
primary stockholder. The amounts receivable and payable totaled $12,113 and
$14,034, respectively, as of May 5, 1998.
Caron leases two buildings located in East Hartford, Connecticut, from the
primary stockholder (see note 4).
(8)Subsequent Event
During February 1998, the stockholders entered into a definitive agreement
to sell Caron to United Road Services, Inc. The sales transaction, affected
through a combination of cash and common stock of United Road Services, Inc.,
was effective May 6, 1998 upon the consummation of the initial public offering
of the common stock of United Road Services, Inc. The selling price of Caron
exceeded its net assets as of May 5, 1998.
F-74
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, INC.
FINANCIAL STATEMENTS
December 31, 1996 and 1997 and May 5, 1998
(With Independent Auditors' Report Thereon)
F-75
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholder
Absolute Towing and Transporting, Inc.:
We have audited the accompanying balance sheets of Absolute Towing and
Transporting, Inc. ("Absolute") as of December 31, 1996 and 1997 and May 5,
1998 and the related statements of operations, stockholder's equity and cash
flows for the years ended December 31, 1996 and 1997 and for the period from
January 1, 1998 through May 5, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As described in note 6, 99%, 99% and 92% of Absolute's revenue is derived
from one customer, and all of Absolute's trade accounts receivable at December
31, 1996 and 1997 and May 5, 1998 is due from this single customer.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Absolute Towing and
Transporting, Inc. as of December 31, 1996 and 1997 and May 5, 1998 and the
results of its operations and its cash flows for the years ended December 31,
1996 and 1997 and the period from January 1, 1998 through May 5, 1998 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Albany, New York
July 24, 1998
F-76
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, INC.
BALANCE SHEETS
December 31, 1996 and 1997 and May 5, 1998
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ ---------
<S> <C> <C> <C>
Assets
Current assets:
Cash..................................... $ -- 10,935 416,506
Trade accounts receivable (note 3)....... 268,818 593,679 445,755
Income taxes receivable (note 5)......... 9,731 55,324 10,269
Prepaid expenses......................... 23,613 30,587 25,309
-------- --------- ---------
Total current assets................... 302,162 690,525 897,839
Property and equipment, net (notes 2 and
3)........................................ 265,934 306,153 414,882
Deferred income taxes (note 5)............. 6,436 31,331 16,260
-------- --------- ---------
$574,532 1,028,009 1,328,981
======== ========= =========
Liabilities and Stockholder's Equity
Current liabilities:
Current installments of long-term debt
(note 3)................................ 15,737 16,218 16,906
Borrowings under lines of credit (note
3)...................................... -- 212,403 760,317
Bank overdraft........................... 98,012 312,217 --
Accounts payable......................... 79,468 124,573 106,873
-------- --------- ---------
Total current liabilities.............. 193,217 665,411 884,096
-------- --------- ---------
Long-term liabilities:
Long-term debt, excluding current
installments (note 3) .................. -- 83,782 75,890
-------- --------- ---------
Total liabilities...................... 193,217 749,193 959,986
-------- --------- ---------
Stockholder's equity:
Common stock, $42.86 par value.
Authorized, issued and outstanding 1,000
shares.................................. 42,860 42,860 42,860
Retained earnings........................ 338,455 235,956 326,135
-------- --------- ---------
Total stockholder's equity............. 381,315 278,816 368,995
-------- --------- ---------
Total liabilities and stockholder's
equity................................ $574,532 1,028,009 1,328,981
======== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-77
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, INC.
STATEMENTS OF OPERATIONS
Years ended December 31, 1996 and 1997 and
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ ---------
<S> <C> <C> <C>
Net revenue.............................. $3,464,623 4,779,901 2,006,600
Cost of revenue.......................... 2,756,327 3,766,564 1,634,112
---------- --------- ---------
Gross profit......................... 708,296 1,013,337 372,488
Selling, general and administrative
expenses................................ 635,595 1,095,416 201,295
---------- --------- ---------
Income (loss) from operations........ 72,701 (82,079) 171,193
---------- --------- ---------
Other income (expenses):
Interest expense....................... (1,440) (15,018) (20,888)
(Loss) gain on sale of assets.......... (2,842) 9,254 --
---------- --------- ---------
Income (loss) before income taxes.... 68,419 (87,843) 150,305
---------- --------- ---------
Income tax (benefit) expense (note 5).... (12,667) (24,095) 60,126
---------- --------- ---------
Net income (loss).................... $ 81,086 (63,748) 90,179
========== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-78
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
Years ended December 31, 1996 and 1997 and
Period from January 1, 1998 to May 5, 1998
<TABLE>
<CAPTION>
Total
Common Retained stockholder's
stock earnings equity
------- -------- -------------
<S> <C> <C> <C>
Balance at December 31, 1995.................. $42,860 262,370 305,230
Distributions to stockholder.................. -- (5,001) (5,001)
Net income--1996.............................. -- 81,086 81,086
------- ------- -------
Balance at December 31, 1996.................. 42,860 338,455 381,315
Distributions to stockholder.................. -- (38,751) (38,751)
Net loss--1997................................ -- (63,748) (63,748)
------- ------- -------
Balance at December 31, 1997.................. 42,860 235,956 278,816
Net income--period from January 1, 1998
through May 5, 1998.......................... -- 90,179 90,179
------- ------- -------
Balance at May 5, 1998........................ $42,860 326,135 368,995
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-79
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1996 and 1997 and
Period from January 1, 1998 to May 5, 1998
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................ $ 81,086 (63,748) 90,179
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization.......... 110,327 127,960 69,933
Deferred income tax (benefit) expense.. (24,253) (24,895) 15,071
Loss (gain) from sale of property and
equipment............................. 2,842 (9,254) --
(Decrease) increase in trade accounts
receivable............................ (75,514) (324,861) 147,924
Decrease (increase) in income taxes
receivable............................ 8,086 (45,593) 45,055
Decrease (increase) in prepaid
expenses.............................. 2,718 (6,974) 5,278
Increase (decrease) in accounts
payable............................... 29,252 45,105 (17,700)
--------- -------- --------
Net cash provided by (used in)
operating activities................ 134,544 (302,260) 355,740
--------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment...... (143,215) (192,675) (178,662)
Proceeds from sale of property and
equipment............................... 11,749 33,750 --
--------- -------- --------
Net cash used in investing
activities.......................... (131,466) (158,925) (178,662)
--------- -------- --------
Cash flows from financing activities:
Net increase in borrowings under line of
credit.................................. -- 212,403 547,914
(Decrease) increase in bank overdraft.... (20,890) 214,205 (312,217)
Proceeds from long-term debt............. 15,737 100,000 --
Principal payments on long term debt..... -- (15,737) (7,204)
Stockholder distributions................ (5,001) (38,751) --
--------- -------- --------
Net cash (used in) provided by
financing activities................ (10,154) 472,120 228,493
Net (decrease) increase in cash...... (7,076) 10,935 405,571
Cash at beginning of period................ 7,076 -- 10,935
--------- -------- --------
Cash at end of period...................... $ -- 10,935 416,506
========= ======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest................................. $ 1,439 15,018 4,059
========= ======== ========
Income taxes............................. $ 3,500 46,393 25,340
========= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-80
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997 and May 5, 1998
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Absolute Towing and Transporting, Inc. ("Absolute") was founded in 1987.
Absolute's primary business is towing salvage vehicles for auction companies
in Southern California. Absolute has one facility in Los Angeles. It operates
approximately 25 vehicles.
(b) Revenue Recognition
Absolute operates as one segment related to the transportation of vehicles
and equipment for customers.
Absolute's revenue is derived from customers who require towing services.
Revenue is recognized at the completion of each towing engagement. Expenses
related to the generation of revenue are recognized as incurred.
(c) Property and Equipment
Property and equipment are stated at cost. Depreciation is determined for
financial statement purposes using the straight line method over the estimated
useful lives of the individual assets or, for leasehold improvements, over the
terms of the related leases, if shorter. Accelerated methods of depreciation
have been used for income tax purposes. For financial statement purposes,
Absolute provides for depreciation of property and equipment over the
following estimated useful lives:
<TABLE>
<S> <C>
Transportation and towing
equipment......................... 3-5 years
Leasehold improvements............. 5 years
Furniture and fixtures............. 5 years
</TABLE>
(d) Fair Value of Financial Instruments
Due to the short-term nature of various financial instruments and the
current incremental borrowing rates available to Absolute on bank loans with
similar terms and maturities, the fair value of Absolute's financial
instruments approximates their carrying values.
(e) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(f) Use of Estimates
Management of Absolute has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
F-81
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997 and May 5, 1998
(2) Property and Equipment
Property and equipment at December 31, 1996 and 1997 and May 5, 1998 consist
of the following:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ ---------
<S> <C> <C> <C>
Transportation and towing equipment... $ 920,210 974,036 1,145,546
Leasehold improvements................ 3,740 27,110 27,110
Furniture and fixtures................ 1,060 1,060 1,060
--------- --------- ---------
Total............................... 925,010 1,002,206 1,173,716
Less accumulated depreciation and
amortization......................... (659,076) (696,053) (758,834)
--------- --------- ---------
$ 265,934 306,153 414,882
========= ========= =========
</TABLE>
Depreciation and amortization of property and equipment in 1996, 1997 and
1998 totaled $110,327, $127,960 and $69,933, respectively.
(3) Indebtedness
Absolute has a line of credit with a bank permitting borrowings up to
$300,000 and is secured by accounts receivable, inventory, and equipment.
Outstanding borrowings bear interest at the bank's prime rate plus 1% (9.5% at
May 5, 1998). Borrowings under this non-revolving credit agreement aggregated
$212,403 at December 31, 1997 and $301,050 at May 5, 1998 and is secured by
accounts receivable, inventory, and equipment. The outstanding balance was
subsequently repaid during May 1998.
Absolute has a non-revolving credit agreement with a bank that provides for
maximum borrowings of $600,000. Outstanding borrowings bear interest at the
bank's prime rate plus 1% (9.5% at May 5, 1998). Borrowings under this non-
revolving credit agreement are $459,267 at May 5, 1998. The outstanding
balance was subsequently repaid during May 1998.
Absolute's long-term debt consists of the following at December 31, 1996 and
1997 and May 5, 1998:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ -------
<S> <C> <C> <C>
Note payable to bank, payable in monthly
installments of $2,125, including
interest at 10%, maturing December 1,
2002. Secured by personal property...... $ 15,737 100,000 92,796
Less installments due within one year.... (15,737) (16,218) (16,906)
-------- ------- -------
Long-term debt, excluding current
installments.......................... $ -- 83,782 75,890
======== ======= =======
</TABLE>
Aggregate maturities of long-term debt subsequent to May 5, 1998 are as
follows:
<TABLE>
<S> <C>
1999............................................................ $16,906
2000............................................................ 18,674
2001............................................................ 20,631
2002............................................................ 22,790
2003............................................................ 13,795
-------
$92,796
=======
</TABLE>
F-82
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997 and May 5, 1998
(4) Leases
Absolute leases the building used for its operations under a month-to-month
lease agreement. The lease is classified as an operating lease. The agreement
provides for monthly rental payments of $1,446. Absolute is responsible for
all operating costs related to the property.
Total rent expense for 1996, 1997 and 1998 was $24,442, $18,800 and $5,784,
respectively.
(5) Income Taxes
Income tax expense (benefit) for the years ended December 31, 1996 and 1997
and the period from January 1, 1998 through May 5, 1998 consists of:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ ------
<S> <C> <C> <C>
Current:
Federal................................... $ 10,786 -- 43,164
State..................................... 800 800 1,891
-------- ------- ------
11,586 800 45,055
Deferred.................................... (24,253) (24,895) 15,071
-------- ------- ------
$(12,667) (24,095) 60,126
======== ======= ======
</TABLE>
The following table reconciles the expected tax expense at Federal statutory
tax rate to the effective tax rate:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ ------
<S> <C> <C> <C>
Computed expected tax expense............. $ 23,262 (29,867) 51,104
Effect of graduated tax rates............. (10,018) 6,656 --
State income taxes, net of Federal
benefit.................................. 3,695 (1,626) 8,769
Los Angeles Revitalization Zone (LARZ)
credit................................... (33,371) -- --
Non-deductible meals and entertainment
expenses................................. 3,765 742 253
-------- ------- ------
$(12,667) (24,095) 60,126
======== ======= ======
</TABLE>
F-83
<PAGE>
ABSOLUTE TOWING AND TRANSPORTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997 and May 5, 1998
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities as of December 31, 1996 and 1997 and May
5, 1998 are presented below:
<TABLE>
<CAPTION>
December 31, December 31, May 5,
1996 1997 1998
------------ ------------ ------
<S> <C> <C> <C>
Deferred tax assets:
Accrued salaries........................ $ -- -- 8,015
Los Angeles Revitalization Zone credit.. 12,927 12,927 --
Property and equipment due to
differences in depreciation lives and
methods................................ -- -- 8,245
Net operating loss carryforward......... -- 20,524 --
------- ------ ------
Total gross deferred tax assets....... 12,927 33,451 16,260
Less valuation allowance................ -- -- --
------- ------ ------
12,927 33,451 16,260
Deferred tax liabilities:
Property and equipment due to
differences in depreciation lives and
methods................................ (6,491) (2,120) --
------- ------ ------
$ 6,436 31,331 16,260
======= ====== ======
</TABLE>
The net operating loss carryforward of approximately $60,000 expires in 2017
and LARZ credit of approximately $12,900 expires in 2011.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the projected future taxable income and tax planning strategies, as
well as carryback opportunities, in making this assessment. Based upon the
level of historical taxable income, projections for future taxable income and
carryback opportunities over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not Absolute will
realize the benefits of these deductible differences. The amount of the
deferred tax asset considered realizable, however, could be reduced in the
near term if estimates of future income are reduced.
(6) Concentration of Business Risks
For the period ended May 5, 1998, 92% of Absolute's revenues were derived
from one customer, Insurance Auto Auctions (IAA). The loss of this customer
could significantly effect Absolute's performance.
(7) Subsequent Event
On May 5, 1998, the stockholder successfully completed the sale of Absolute
to United Road Services, Inc. The sales transaction is affected through a
combination of cash and common stock of United Road Services, Inc. The selling
price of Absolute exceeds its net assets as of May 5, 1998. Certain of the
assets of Absolute, in the amount of $65,000, will be retained by the
stockholder.
F-84
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and May 5, 1998
(With Independent Auditors' Report Thereon)
F-85
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholder
ASC Transportation Services:
We have audited the accompanying consolidated balance sheets of ASC
Transportation Services and subsidiary (Auto Service Center d/b/a ASC Truck
Service) as of December 31, 1997 and May 5, 1998, and the related consolidated
statements of operations, stockholder's deficit, and cash flows for the year
ended December 31, 1997 and for the period from January 1, 1998 through May 5,
1998. These consolidated financial statements are the responsibility of Auto
Service's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ASC
Transportation Services and subsidiary (Auto Service Center d/b/a ASC Truck
Service) as of December 31, 1997 and May 5, 1998, and the results of their
operations and their cash flows for the year ended December 31, 1997 and the
period from January 1, 1998 through May 5, 1998, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Albany, New York
July 31, 1998
F-86
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and May 5, 1998
<TABLE>
<CAPTION>
December 31, May 5,
1997 1998
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................. $ 138,213 51,983
Trade accounts receivable, (net of allowance for
doubtful accounts of $0 and $10,000, respectively).. 225,364 182,597
Income taxes receivable.............................. -- 9,642
Accounts receivable, other........................... 4,977 --
Due from employees................................... 715 --
Inventories.......................................... 18,167 12,508
Prepaid expenses..................................... 69,535 43,840
---------- ---------
Total current assets............................... 456,971 300,570
Property and equipment, net (notes 2 and 4)............ 806,503 726,430
Other assets........................................... 10,986 1,905
---------- ---------
Total assets....................................... $1,274,460 1,028,905
========== =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current installments of long-term debt (note 3)...... 20,275 16,512
Current installments of obligations under capital
leases (note 4)..................................... 247,845 234,874
Accounts payable..................................... 121,245 72,083
Accrued payroll related costs........................ 45,759 20,242
Income taxes payable (note 5)........................ 62,051 --
Other accrued liabilities............................ 16,961 33,732
---------- ---------
Total current liabilities.......................... 514,136 377,443
Long-term liabilities:
Long-term debt, excluding current installments (note
3).................................................. 209,326 205,073
Obligations under capital leases, excluding current
installments (note 4)............................... 491,680 417,675
Deferred income taxes (note 5)....................... 82,965 71,185
---------- ---------
Total liabilities.................................. 1,298,107 1,071,376
---------- ---------
Stockholder's deficit:
Common stock, no par value. Authorized 10,000 shares;
issued and outstanding 25 shares.................... 24,000 24,000
Additional paid-in capital........................... 33,325 33,325
Accumulated deficit.................................. (80,972) (99,796)
---------- ---------
Total stockholder's deficit........................ (23,647) (42,471)
---------- ---------
Total liabilities and stockholder's deficit........ $1,274,460 1,028,905
========== =========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-87
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, 1997 and
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
December 31, May 5,
1997 1998
------------ ---------
<S> <C> <C>
Net revenue............................................. $3,310,464 1,264,558
Cost of revenue......................................... 2,364,355 878,290
---------- ---------
Gross profit........................................ 946,109 386,268
Selling, general, and administrative expenses........... 764,778 384,096
---------- ---------
Income from operations.............................. 181,331 2,172
---------- ---------
Other income (expense):
Interest expense...................................... (71,947) (30,397)
Gain (loss) on sale of assets......................... 18,670 (9,652)
Other................................................. 34,834 8,121
---------- ---------
Income (loss) before income taxes................... 162,888 (29,756)
Income tax expense (benefit) (note 5)................... 49,096 (25,932)
---------- ---------
Net income (loss)................................... $ 113,792 (3,824)
========== =========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-88
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
Year ended December 31, 1997 and
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
Additional Total
Common paid-in Accumulated stockholder's
stock capital deficit deficit
------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997........ $24,000 33,325 (194,764) (137,439)
Net income--1997.................. -- -- 113,792 113,792
------- ------ -------- --------
Balance at December 31, 1997...... 24,000 33,325 (80,972) (23,647)
Distributions..................... -- -- (15,000) (15,000)
Net loss--period from January 1,
1998 through
May 5, 1998...................... -- -- (3,824) (3,824)
------- ------ -------- --------
Balance at May 5, 1998............ $24,000 33,325 (99,796) (42,471)
======= ====== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-89
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 1997 and
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
December 31, May 5,
1997 1998
------------ ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ 113,792 (3,824)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization...................... 177,150 80,079
Deferred income tax benefit........................ (6,786) (11,780)
(Gain) loss on sale of property and equipment...... (18,670) 9,652
(Increase) decrease in trade accounts receivable... (88,313) 42,767
(Increase) decrease in due from employees.......... (1,376) 715
(Increase) decrease in other accounts receivable... (1,366) 4,977
Increase in income taxes receivable................ -- (9,642)
(Increase) decrease in inventories................. (5,006) 5,659
Decrease in prepaid expenses....................... 28,383 25,695
Decrease in other assets........................... -- 9,081
Decrease in accounts payable....................... (11,932) (49,162)
Increase (decrease) in accrued payroll related
costs............................................. 17,020 (25,517)
Increase (decrease) in income taxes payable........ 38,517 (62,051)
Increase in other accrued liabilities.............. 7,191 16,771
--------- ---------
Net cash provided by operating activities........ 248,604 33,420
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment.................. (268,647) (22,731)
Proceeds from sale of property and equipment......... 52,938 13,073
--------- ---------
Net cash used in investing activities............ (215,709) (9,658)
--------- ---------
Cash flows from financing activities:
Proceeds net of principal payments on long-term debt
and capital leases................................... 240,673 (94,992)
Distribution to owner................................ (211,134) (15,000)
--------- ---------
Net cash provided by (used in) financing
activities...................................... 29,539 (109,992)
--------- ---------
Net increase (decrease) in cash........................ 62,434 (86,230)
Cash at beginning of period............................ 75,779 138,213
--------- ---------
Cash at end of period.................................. $ 138,213 51,983
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest........................................... $ 72,183 30,678
========= =========
Income taxes....................................... $ 57,541 14,260
========= =========
</TABLE>
See accompanying notes to financial statements.
F-90
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and May 5, 1998
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
ASC Transportation Services and its wholly-owned subsidiary, Auto Service
Center (d/b/a ASC Truck Service), collectively referred to herein as "Auto
Service", were founded in 1993 and 1965, respectively. Auto Service is a
commercial and police towing company with two facilities based in Sacramento,
California. One facility concentrates in the towing of commercial and personal
vehicles primarily contracting with law enforcement agencies and motor clubs.
The other location concentrates on the towing of larger commercial vehicles
and maintains a repair shop also for commercial vehicles. It operates
approximately 28 vehicles.
(b) Principles of Consolidation
The consolidated financial statements include the financial statements of
ASC Transportation Services and its wholly-owned subsidiary, Auto Service
Center. All significant intercompany balances and transactions have been
eliminated in consolidation.
(c) Revenue Recognition
Auto Service operates as one segment related to the transportation of
vehicles and equipment for customers.
Auto Service's revenue is derived from customers who require a towing
service, transport of vehicles and equipment, and fees related to the repair
of vehicles that have been towed. Towing revenue is recognized at the
completion of each towing engagement, transport revenue is recognized upon the
delivery of the vehicles and equipment to their final destination, and repair
fees are recorded when the service is performed. Expenses related to the
generation of revenue are recognized as incurred.
(d) Inventories
Inventories consist principally of spare parts used for repair and
maintenance. Inventories are stated at the lower of cost or market.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation is determined for
financial statement purposes using the straight-line method over the estimated
useful lives of the individual assets or, for leasehold improvements, over the
terms of the related leases if shorter. Accelerated methods of depreciation
have been used for income tax purposes. For financial statement purposes, Auto
Service provides for depreciation of property and equipment over the following
estimated useful lives:
<TABLE>
<S> <C>
Transportation and towing equipment............................ 5 years
Machinery and other equipment.................................. 7 years
Leasehold improvements......................................... 7-20 years
Furniture and fixtures......................................... 7 years
</TABLE>
(f) Fair Value of Financial Instruments
Due to the short-term nature of various financial instruments and the
current incremental borrowing rates available to Auto Service on bank loans
with similar terms and maturities, the fair value of Auto Service's financial
instruments approximates their carrying values.
F-91
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and May 5, 1998
(g) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(h) Use of Estimates
Management of Auto Service has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(2) Property and Equipment
Property and equipment at December 31, 1997 and May 5, 1998 consists of the
following:
<TABLE>
<CAPTION>
December 31, May 5,
1997 1998
------------ ---------
<S> <C> <C>
Transportation and towing equipment.................. $1,425,655 1,415,326
Machinery and other equipment........................ 169,403 157,859
Leasehold improvements............................... 29,614 31,811
Furniture and fixtures............................... 39,175 40,442
---------- ---------
Total.............................................. 1,663,847 1,645,438
Less accumulated depreciation and amortization....... (857,344) (919,008)
---------- ---------
$ 806,503 726,430
========== =========
</TABLE>
Depreciation and amortization of property and equipment during the year
ended December 31, 1997 and the period from January 1, 1998 through May 5,
1998 totaled $177,150 and $80,079, respectively.
(3) Indebtedness
Auto Service's long-term debt consisted of the following at December 31,
1997 and May 5, 1998:
<TABLE>
<CAPTION>
December 31, May 5,
1997 1998
------------ -------
<S> <C> <C>
Note payable to bank, payable in monthly installments
of $1,042, including interest at 10.5%, maturing
August 1998.......................................... $ 8,333 4,167
Note payable to unrelated individuals payable in
monthly installments of $2,794, including interest at
10%, maturing November 2008. Guaranteed by the owners
of Auto Service and secured by a Pledge Agreement for
all authorized shares of stock of Auto Service....... 221,268 217,418
-------- -------
Total long-term debt................................ 229,601 221,585
Less installments due within one year................. (20,275) (16,512)
-------- -------
Long-term debt, excluding current installments...... $209,326 205,073
======== =======
</TABLE>
F-92
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and May 5, 1998
Annual maturities of long-term debt for the next five years subsequent to
May 5, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................... $ 16,512
2000........................................................... 13,638
2001........................................................... 15,066
2002........................................................... 16,644
2003........................................................... 18,386
Thereafter..................................................... 141,339
--------
$221,585
========
</TABLE>
(4)Leases
Auto Service is obligated under various capital leases for vehicles,
equipment and furniture and fixtures that expire at various dates ranging
between January 1998 to August 2003.
Auto Service is obligated to the stockholder under a capital lease for a
vehicle through December 1999.
Following is a summary of property and equipment held under the capital
leases at December 31, 1997 and May 5, 1998.
<TABLE>
<CAPTION>
December 31, May 5,
1997 1998
------------ ---------
<S> <C> <C>
Transportation and towing equipment.................. $1,136,544 1,127,808
Other equipment...................................... 55,350 53,248
Furniture and fixtures............................... 18,240 18,240
---------- ---------
1,210,134 1,199,296
Less accumulated amortization........................ (519,886) (601,176)
---------- ---------
$ 690,248 598,120
========== =========
</TABLE>
Auto Service leases the office building and a vehicle used for its
operations from the stockholder. These leases are classified as operating
leases and have been included in the data presented below. The building lease
expires April 2003 and the vehicle lease has indefinite terms with a 30 day
cancellation notice. Auto Service is responsible for all operating costs
related to these properties.
Auto Service also leases another building used for its operations from an
unrelated party. This lease is classified as an operating lease and is
included in the data presented below. The lease expires October 2002.
Total rent expense for the year ended December 31, 1997 was $151,393,
including $64,654 paid to stockholder, and was $52,091 for the period from
January 1, 1998 through May 5, 1998, including $21,708 paid to the
stockholder.
F-93
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and May 5, 1998
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of May 5, 1998 are:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- ---------
<S> <C> <C>
1999................................................... $ 291,626 106,800
2000................................................... 212,813 106,800
2001................................................... 116,623 106,800
2002................................................... 79,919 106,800
2003................................................... 55,268 77,150
Thereafter............................................. 19,197 --
--------- -------
Total................................................ 775,446 504,350
=======
Less amount representing interest...................... (122,897)
---------
Present value of net minimum capital lease payments.... $ 652,549
=========
</TABLE>
(5) Income Taxes
Income tax expense (benefit) for the year ended December 31, 1997 and the
period from January 1, 1998 through May 5, 1998 consists of:
<TABLE>
<CAPTION>
December 31, May 5,
1997 1998
------------ -------
<S> <C> <C>
Current:
Federal.............................................. $42,934 (9,672)
State................................................ 12,948 (4,480)
------- -------
55,882 (14,152)
Deferred............................................... (6,786) (11,780)
------- -------
$49,096 (25,932)
======= =======
</TABLE>
The following table reconciles the expected tax expense (benefit) at the
Federal statutory tax rate to the effective tax rate.
<TABLE>
<CAPTION>
December 31, May 5,
1997 1998
------------ -------
<S> <C> <C>
Computed expected tax expense.......................... $ 55,382 (13,074)
State income taxes, net of Federal benefit............. 8,546 1,056
Meals and entertainment................................ 1,372 --
Adjustment to prior years' taxes....................... (17,770) 2,350
Bad debts.............................................. -- (11,409)
Depreciation........................................... -- (4,945)
Other.................................................. 1,566 90
-------- -------
$ 49,096 (25,932)
======== =======
</TABLE>
F-94
<PAGE>
ASC TRANSPORTATION SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and May 5, 1998
The tax effects of temporary differences that give rise to deferred tax
liabilities as of December 31, 1997 and May 5, 1998 are presented below:
<TABLE>
<CAPTION>
December 31, May 5,
1997 1998
------------ ------
<S> <C> <C>
Deferred tax liability:
Property and equipment, due to differences in
depreciation lives and methods..................... $82,965 80,872
Bad debt allowance.................................. -- (4,284)
State income taxes.................................. -- (5,403)
------- ------
Net deferred tax liability........................ $82,965 71,185
======= ======
</TABLE>
At December 31, 1996, the net deferred tax liability was $89,751 and there
was no recorded valuation allowance.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the projected future taxable income and tax planning strategies, as
well as carryback opportunities, in making this assessment. Based upon the
level of historical taxable income, projections for future taxable income and
carryback opportunities over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not Auto Service will
realize the benefits of these deductible differences. The amount of the
deferred tax asset considered realizable, however, could be reduced in the
near term if estimates of future taxable income are reduced.
(6) Subsequent Event
During February 1998, the stockholder entered into a definitive agreement to
sell Auto Service to United Road Services, Inc. The sales transaction,
affected through a combination of cash and common stock of United Road
Service, Inc., was effective May 6, 1998 upon the consummation of the initial
public offering of the common stock of United Road Service, Inc. The selling
price of Auto Service exceeded its net assets as of May 5, 1998.
Concurrently with the acquisition, United Road Service, Inc. entered into
agreements with the stockholder to lease land and buildings used in Auto
Service's operations for negotiated amounts and terms.
For the period from January 1, 1998 through May 5, 1998, 36% of Auto
Service's revenues were derived from one customer, Automobile Association of
America (AAA). Subsequent to May 5, 1998, the contract with this customer was
terminated.
F-95
<PAGE>
MILNE TOW AND TRANSPORT SERVICES
FINANCIAL STATEMENTS
May 5, 1998
(With Independent Auditors' Report Thereon)
F-96
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholder:
We have audited the accompanying balance sheet of Silver State Tow and
Recovery, Inc. (d/b/a Milne Tow and Transport Services) ("Milne") as of May 5,
1998, and the related statement of operations, stockholder's deficit, and cash
flows for the period from January 1, 1998 through May 5, 1998. These financial
statements are the responsibility of Milne's management. Our responsibility is
to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Milne Tow and Transport
Services as of May 5, 1998, and the results of its operations and its cash
flows for the period from January 1, 1998 through May 5, 1998 in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Albany, New York
August 14, 1998
F-97
<PAGE>
MILNE TOW AND TRANSPORT SERVICES
BALANCE SHEET
May 5, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash.............................................................. $ 2,530
Trade accounts receivable (less allowance of $25,000)............. 142,259
Due from employees................................................ 451
Inventories....................................................... 9,500
Prepaid expenses.................................................. 22,269
----------
Total current assets............................................ 177,009
Property and equipment, net (note 2)................................ 749,705
Deferred taxes (note 4)............................................. 60,597
----------
Total assets.................................................... $ 987,311
==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Bank overdraft.................................................... $ 81,148
Current installments of notes payable (note 3).................... 27,182
Borrowings under line of credit (note 3).......................... 49,301
Accounts payable.................................................. 130,926
----------
Total current liabilities....................................... 288,557
Long-term liabilities:
Notes payable, excluding current installments (note 3)............ 746,409
----------
Total liabilities............................................... 1,034,966
----------
Stockholder's deficit:
Common stock, no par value. Authorized 2,500 shares; issued and
outstanding 2,500 shares......................................... 25,000
Additional paid-in capital........................................ 3,000
Accumulated deficit............................................... (75,655)
----------
Total stockholder's deficit..................................... (47,655)
----------
Total liabilities and stockholder's deficit..................... $ 987,311
==========
</TABLE>
See accompanying notes to the financial statements.
F-98
<PAGE>
MILNE TOW AND TRANSPORT SERVICES
STATEMENT OF OPERATIONS
Period from January 1, 1998 through May 5, 1998
<TABLE>
<S> <C>
Net revenue......................................................... $ 725,778
Cost of revenue..................................................... (624,662)
---------
Gross profit.................................................... 101,116
Selling, general, and administrative expenses....................... 426,911
---------
Loss from operations............................................ (325,795)
---------
Other income (expense):
Interest expense.................................................. (27,832)
Gain on sale of assets............................................ 6,099
---------
Loss before income taxes........................................ (347,528)
Income tax benefit (note 4)......................................... 101,745
---------
Net loss........................................................ $(245,783)
=========
</TABLE>
See accompanying notes to the financial statements.
F-99
<PAGE>
MILNE TOW AND TRANSPORT SERVICES
STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
Period from January 1, 1998 through May 5, 1998
<TABLE>
<CAPTION>
Additional Total
Common paid-in Accumulated stockholder's
stock capital equity (deficit) equity (deficit)
------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C>
Balance at December 31,
1997................... $25,000 3,000 170,128 198,128
Net loss--period from
January 1, 1998 through
May 5, 1998............ -- -- (245,783) (245,783)
------- ----- -------- --------
Balance at May 5, 1998.. $25,000 3,000 (75,655) (47,655)
======= ===== ======== ========
</TABLE>
See accompanying notes to the financial statements.
F-100
<PAGE>
MILNE TOW AND TRANSPORT SERVICES
STATEMENT OF CASH FLOWS
Period from January 1, 1998 through May 5, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss for period from January 1, 1998 through May 5, 1998.. $(245,783)
Adjustments to reconcile net loss to net cash from operating
activities:
Depreciation and amortization............................... 94,200
Gain on sale of property and equipment...................... (6,099)
Deferred income taxes....................................... (101,745)
Decrease in trade accounts receivable....................... 195,599
Decrease in due from employees.............................. 5,355
Decrease in inventories..................................... 7,750
Increase in prepaid expenses................................ (22,269)
Increase in accounts payable................................ 25,695
Decrease in accrued payroll and related costs............... (36,171)
---------
Net cash used in operating activities..................... (83,468)
---------
Cash flows from investing activities:
Proceeds from sale of property and equipment.................. 44,170
---------
Net cash provided by investing activities................. 44,170
---------
Cash flows from financing activities:
Bank overdraft................................................ 66,228
Principal payments on notes payable........................... (34,492)
---------
Net cash provided by financing activities................. 31,736
---------
Net decrease in cash............................................ (7,562)
Cash, January 1, 1998........................................... 10,092
---------
Cash, May 5, 1998............................................... $ 2,530
=========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest.................................................... $ 27,832
=========
Income taxes................................................ $ --
=========
</TABLE>
See accompanying notes to the financial statements.
F-101
<PAGE>
MILNE TOW AND TRANSPORT SERVICES
NOTES TO FINANCIAL STATEMENTS
May 5, 1998
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Silver State Tow and Recovery, Inc. (d/b/a Milne Tow and Transport
Services), referred to herein as "Milne", were founded in 1984. Milne is a
towing and transport company which provides services to commercial
dealerships, rental car companies, municipalities and construction companies.
The Company's primary location is located in Sparks, Nevada. They operate a
satellite office in Lovelock, Nevada to service the northern Nevada area.
(b) Revenue Recognition
Milne's revenue is derived primarily from commercial customers who require a
towing service, transport of vehicles and equipment. Towing revenue is
recognized at the completion of each towing engagement and transport revenue
is recognized upon the delivery of the vehicles and equipment to their final
destination. Expenses related to the generation of revenue are recognized as
incurred.
(c) Inventories
Inventories consist principally of spare tires used for trucks. Inventories
are stated at the lower of cost or market.
(d) Property and Equipment
Property and equipment are stated at cost. Depreciation is determined for
financial statement purposes using the straight-line method over the estimated
useful lives of the individual assets. Accelerated methods of depreciation
have been used for income tax purposes. For financial statement purposes,
Milne provides for depreciation of property and equipment over the following
estimated useful lives:
<TABLE>
<S> <C>
Transportation and towing equipment............................. 5 years
Machinery and other equipment................................... 5 years
Leasehold improvements.......................................... 31 years
Office equipment................................................ 3-7 years
</TABLE>
(e) Fair Value of Financial Instruments
Due to the short-term nature of various financial instruments and the
current incremental borrowing rates available to Milne on bank loans with
similar terms and maturities, the fair value of Milne's financial instruments
approximates their carrying values.
(f) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
F-102
<PAGE>
MILNE TOW AND TRANSPORT SERVICES
NOTES TO FINANCIAL STATEMENTS--(Continued)
May 5, 1998
(g) Use of Estimates
Management of Milne has made a number of estimates and assumptions relating
to the reporting of assets and liabilities and the disclosure of contingent
assets and liabilities to prepare these financial statements in conformity
with generally accepted accounting principles. Actual results could differ
from those estimates.
(2) Property and Equipment
Property and equipment at May 5, 1998 consists of the following:
<TABLE>
<S> <C>
Transportation and towing equipment.............................. $1,367,667
Machinery and other equipment.................................... 12,824
Leasehold improvements........................................... 19,823
Office equipment................................................. 34,819
----------
Total.......................................................... 1,435,133
Less accumulated depreciation and amortization................... (685,428)
----------
$ 749,705
==========
</TABLE>
Depreciation and amortization of property and equipment for the period from
January 1, 1998 through May 5, 1998, totaled $94,200.
(3) Notes Payable
Milne has available a $50,000 line of credit with a bank, expiring on June
6, 1998. Interest is payable at 11%. Total borrowings under this line of
credit at May 5, 1998 amounted to $49,301.
Milne's notes payable consisted of the following at May 5, 1998:
<TABLE>
<S> <C>
Notes payable to various third parties, payable in monthly
installments ranging from $462 to $2,774, including interest at
rates from 8.75% to 13.00%, maturing between 1999 and 2002.
Secured by property and equipment................................ $773,591
Less installments due within one year............................. (27,182)
--------
Notes payable, excluding current installments................... $746,409
========
</TABLE>
Aggregate maturities of notes payable subsequent to May 5, 1998, are as
follows:
<TABLE>
<S> <C>
1999................................................................ $ 27,182
2000................................................................ 244,981
2001................................................................ 244,833
2002................................................................ 256,595
--------
$773,591
========
</TABLE>
See footnote (6) regarding paydowns of certain notes payable subsequent to
May 5, 1998.
(4) Income Taxes
Income tax benefit for the period from January 1, 1998 through May 5, 1998
consists of:
<TABLE>
<S> <C>
Current:
Federal......................................................... $ --
---------
--
Deferred.......................................................... (101,745)
---------
$(101,745)
=========
</TABLE>
F-103
<PAGE>
MILNE TOW AND TRANSPORT SERVICES
NOTES TO FINANCIAL STATEMENTS--(Continued)
May 5, 1998
Milne is incorporated in the state of Nevada which imposes no corporate
income tax.
The following table reconciles the expected tax benefit at the Federal
statutory tax rate to the effective tax rate.
<TABLE>
<S> <C>
Computed expected tax benefit................................. $(118,160)
Other......................................................... 16,415
---------
$(101,745)
=========
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets as of May 5, 1998 are presented below:
<TABLE>
<S> <C>
Deferred tax asset:
Net operating loss.......................................... $114,086
Property and equipment, due to differences in depreciation
lives and methods.......................................... (67,017)
Other....................................................... 13,528
--------
Net deferred tax asset.................................... $ 60,597
========
</TABLE>
At December 31, 1997, the net deferred tax liability was $41,148 and there
was no recorded valuation allowance.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the projected future taxable income and tax planning strategies, as
well as carryback opportunities, in making this assessment. Based upon the
level of historical taxable income, projections for future taxable income and
carryback opportunities over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not Milne will realize
the benefits of these deductible differences. The amount of the deferred tax
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income are reduced.
(5) Subsequent Event
During February 1997, the stockholder entered into a definitive agreement to
sell Milne to United Road Services, Inc. The sales transaction, affected
through a combination of cash and common stock of United Road Services, Inc.,
was effective May 6, 1998 upon the consummation of the initial public offering
of the common stock of United Road Services, Inc. The selling price of Milne
exceeded its net assets as of May 5, 1998.
Concurrently with the acquisition, United Road Services, Inc. entered into
agreements with the stockholder to lease land and buildings used in Milne's
operations for negotiated amounts and terms.
Subsequent to May 5, 1998, United Road Services, Inc. paid down
approximately $766,932 of Milne's outstanding borrowings on the line of credit
and notes payable as of May 5, 1998.
F-104
<PAGE>
United Road Services, Inc.
Schedule II--Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Charged to
Beginning of Costs and Balance at
Description Period Expenses Other Deductions End of Period
- ----------- ------------ ---------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Year ended
December 31, 1998:
Allowance for
doubtful accounts.. $ -- 183,000 1,263,006(a) 314,218 1,131,788
</TABLE>
- --------
(a) Represents allowance for doubtful accounts recorded through purchase
accounting adjustments related to acquisitions.
<PAGE>
Exhibit 11.1
<TABLE>
<CAPTION>
Weighted Average Shares
Period ended December 31, 1998
--------------------------------
Three Months Twelve Months
--------------- ---------------
<S> <C> <C> <C> <C>
Shares outstanding at beginning of period 2,604,000 2,604,000 2,604,000
January 1, 1998 Subscription agreement shares issued 188,976 188,976 188,976
January 1, 1998 Sale of shares to board member 29,760 29,760 29,760
May 1, 1998 Public offering of 6,600,000 6,600,000 6,600,000 4,412,055
May 6, 1998 Issuance of shares as offering overallotments 990,000 990,000 648,247
May 6, 1998 Issuance of shares for acquisition of founders 2,375,741 2,375,741 1,555,622
June 12, 1998 Issuance of shares for acquisition 190,821 190,821 105,605
June 22, 1998 Issuance of shares for acquisition 84,512 84,512 44,456
June 29, 1998 Issuance of shares for acquisition 21,312 21,312 10,802
June 30, 1998 Issuance of shares for acquisition 22,023 22,023 11,102
July 2, 1998 Issuance of shares for acquisition 19,805 19,805 9,875
July 2, 1998 Issuance of shares for acquisition 124,102 124,102 61,881
July 2, 1998 Issuance of shares for acquisition 29,778 29,778 14,848
July 2, 1998 Issuance of shares for acquisition 112,500 112,500 56,096
July 14, 1998 Issuance of shares for acquisition 36,657 36,657 17,073
July 20, 1998 Issuance of shares for acquisition 99,602 99,602 44,753
July 21, 1998 Issuance of shares for acquisition 15,443 15,443 6,896
July 22, 1998 Issuance of shares for acquisition 100,624 100,624 44,661
July 31, 1998 Issuance of shares for acquisition 5,834 5,834 2,445
August 3, 1998 Issuance of shares for acquisition 29,148 29,148 11,979
August 6, 1998 Issuance of shares for acquisition 73,193 73,193 29,478
August 7, 1998 Issuance of shares for acquisition 377,624 377,624 151,050
August 12, 1998 Release of escrow shares 21,202 21,202 8,190
August 14, 1998 Issuance of shares for acquisition 21,132 21,132 8,048
August 21, 1998 Issuance of shares for acquisition 173,498 173,498 62,744
August 26, 1998 Issuance of shares for acquisition 9,424 9,424 3,279
September 8, 1998 Issuance of shares for acquisition 34,195 34,195 10,680
October 14, 1998 Issuance of shares for acquisition 33,077 28,044 7,069
November 30, 1998 Issuance of shares for acquisition 17,545 5,912 1,490
November 30, 1998 Issuance of shares for acquisition 111,528 37,580 9,472
December 9, 1998 Issuance of shares for acquisition 807,692 193,144 48,683
December 21, 1998 Issuance of shares for acquisition 15,184 1,650 416
December 29, 1998 Release of escrow shares 14,644 318 80
--------------- ---------------
Weighted average shares outstanding for basic earnings per share 14,657,554 10,221,810
Options outstanding at December 31, 1998: 1,077,900 shares; total
exercise proceeds: $13,169,372; average price of option $12.22 143,771 108,851
Warrants outstanding at December 31, 1998: 117,789 shares; exercise
price: $12.91 per share; average market value of Company stock
$17.17/$17.19; shares deemed issued 10,914 14,718
Earnout shares held at December 31, 1998; stock price $18.375 19,519 4,880
Shares held in escrow related to acquisitions 110,633 39,645
--------------- ---------------
Total shares outstanding for fully diluted earnings per share 14,942,391 10,389,904
=============== ===============
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration statement
on Form S-8 (No. 333-72271) of United Road Services, Inc. of our report dated
March 5, 1999, except as to Note 16(b), which is as of March 16, 1999,
relating to the consolidated balance sheets of United Road Services, Inc. and
subsidiaries as of December 31, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for
the period from July 25, 1997 (inception) through December 31, 1997 and for
the year ended December 31, 1998, and the related schedule, which report
appears in the December 31, 1998 annual report on Form 10-K of United Road
Services, Inc.
/s/ KPMG LLP
Albany, New York
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3381
<SECURITIES> 0
<RECEIVABLES> 17572
<ALLOWANCES> 1132
<INVENTORY> 0
<CURRENT-ASSETS> 24080
<PP&E> 50106
<DEPRECIATION> 3292
<TOTAL-ASSETS> 248732
<CURRENT-LIABILITIES> 14750
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 163750
<TOTAL-LIABILITY-AND-EQUITY> 248732
<SALES> 87919
<TOTAL-REVENUES> 87919
<CGS> 64765
<TOTAL-COSTS> 78938
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1588
<INCOME-PRETAX> 7895
<INCOME-TAX> 3503
<INCOME-CONTINUING> 3503
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4392
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.42
</TABLE>
