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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
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Amendment No. 1
(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, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the transition period from to
Commission file number: 000-24010
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UNITED ROAD SERVICES, INC.
(Exact name of registrant as specified in its charter)
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94-3278455
Delaware (I.R.S. Employer Identification No.)
(State or other jurisdiction of
incorporation or organization)
12205
17 Computer Drive West (Zip Code)
Albany, New York
(Address of principal executive
offices)
Registrant's telephone number, including area code:
(518) 446-0140
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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")
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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. [_]
The registrant estimates that the aggregate market value of the registrant's
Common Stock held by non-affiliates on March 22, 2000 was $24,991,495 million.*
The following documents are incorporated into this Form 10-K by reference:
None.
As of March 22, 2000, 17,851,649 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") is a national provider of
automobile transport services and a regional provider of motor vehicle and
equipment towing and recovery services. At the time of the Company's initial
public offering in May 1998, the Company acquired seven businesses (the
"Founding Companies"), three of which provide transport services and four of
which provide towing and recovery services. Between May 6, 1998 and December
31, 1998, the Company acquired a total of 34 additional businesses, consisting
of 25 towing and recovery businesses and nine transport businesses. Between
January 1, 1999 and May 5, 1999, the Company acquired a total of 15 additional
businesses consisting of five towing and recovery businesses and ten transport
businesses. The Company has not completed any acquisitions since May 5, 1999.
As of December 31, 1999, the Company operated a network of 26 towing and
recovery service divisions and 17 transport divisions in a total of 22 states.
During 1999, approximately 60.9% of the Company's net revenue was derived from
the provision of transport services and approximately 39.1% of its net revenue
was derived from the provision of towing and recovery services. Further
information with respect to these segments of the Company's business may be
found in note 14 to the Company's Consolidated Financial Statements included
elsewhere herein.
The Company provides transport services for new and used vehicles throughout
the United States. The Company 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, insurance companies, automobile manufacturers, automobile
auction companies and automobile dealers, and individual motorists.
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.
Industry Background
The Company believes that most of the motor vehicle and equipment towing,
recovery and transport businesses in the United States are small, local and
owner-operated, with limited access to capital for modernization and expansion
and limited ability to service large customers and contracts. 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 33% in 1998), 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 was formed in July 1997 to become a leading national provider of
motor vehicle and equipment towing, recovery and transport services in the
United States. Initially, a key component of the Company's growth strategy was
to enter new geographic markets and expand within its existing geographic
markets principally through the acquisition of towing, recovery and transport
businesses located in strategic markets throughout the United States. Between
May 6, 1998 and May 5, 1999, the Company acquired 56 towing, recovery and
transport businesses in various locations throughout the United States.
During 1999, the Company experienced a significant decline in the market
price of its common stock. As a result, its ability to complete acquisitions
using its common stock as currency in a manner that was not dilutive to current
stockholders was adversely affected. During the third quarter of 1999, the
Company made the strategic decision not to pursue its acquisition program in
the near term in order to allow the Company to focus primarily on integrating
and profitably operating the 56 businesses it had acquired within its first
year of operations. The goal of the Company's revised business strategy is to
improve the operational efficiency and profitability of its existing businesses
in order to build a stable platform for future growth, which may or may not
include additional acquisitions. The Company's ability to complete acquisitions
in the future will depend, to a great degree, upon its success in implementing
operational improvements and the availability of capital.
Key elements of the Company's revised business strategy include the
following:
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 utilize 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 believes that
its size 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 also plans to
continue to explore ways to increase asset utilization in order to generate
additional revenue from existing and new customers.
Improve Operating Performance and Profitability. A central component of
the Company's strategy is to improve the profitability of its existing
businesses through improvements in its management structure, cost
reductions and reductions in receivables balances. The Company has recently
enacted programs to decrease certain operating and administrative costs,
including initiatives to reduce wage and benefits expenses and information
systems costs. The Company also intends to continue to use its size,
national scope and purchasing power to seek cost savings from national
vendors in areas such as fuel, tires, parts, telecommunications and
lodging.
Recent Developments
On April 14, 2000, the Company entered into a definitive agreement providing
for the issuance and sale to Blue Truck Acquisition LLC, a Delaware limited
liability company affiliated with KPS Special Situations Fund, L.P. ("KPS") of
shares of the Company's Series A Participating Convertible Preferred Stock, par
value $.01 per share (the "Series A Preferred Stock") for an aggregate purchase
price of $25.0 million (the "KPS Transaction"). Consummation of the sale of
Series A Preferred Stock to KPS is subject to a number of conditions, including
approval of the Company's stockholders and a refinancing or replacement of the
Company's existing credit facility providing for at least $25.0 million of
available borrowings in addition to the amounts currently outstanding under the
credit facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
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Management Changes and Corporate Restructuring
On June 21, 1999, Edward T. Sheehan, then Chairman and Chief Executive
Officer of the Company, resigned as Chief Executive Officer of the Company and
the Board of Directors commenced a search for his replacement. On October 11,
1999, Gerald R. Riordan was hired to replace Mr. Sheehan as Chief Executive
Officer.
In December 1999, the Company reorganized its management structure and
established separate operating units for its towing and recovery and transport
businesses. The business units are led by separate presidents, each of whom
reports directly to the Company's Chief Executive Officer. The Company believes
that the new management structure will allow each president to focus on the
unique opportunities and challenges of their respective businesses. Each of the
business units are or will be grouped geographically into regions, with the
regional managers reporting directly to the president of each division. By
making the regional managers directly responsible for the performance of the
businesses in their region, the Company intends to improve the management and
operational efficiency of its individual businesses.
In connection with this reorganization, Allan D. Pass, then President and
Chief Operating Officer of the Company, and Robert J. Adams, Jr., then Senior
Vice President and Chief Acquisition Officer of the Company, resigned from
their positions as officers of the Company effective as of December 15, 1999.
In January 2000, the Company appointed Michael A. Wysocki to serve as President
of the Company's Transport Division, and Harold W. Borhauer to serve as
President of the Company's Towing and Recovery Division.
Operations and Services Provided
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 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 automobiles are then collected and
transported 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,
insurance companies, 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. During the year ended December 31,
1999, one such customer, General Motors Corporation, represented approximately
11% of the Company's total consolidated net revenue. The loss of this customer
could have a material adverse effect on the Company's business, financial
condition and results of operations if the Company were not able to replace the
lost revenue with revenue from other sources. The Company's contracts with
vehicle manufacturers typically have terms 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.
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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 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 vehicle or equipment is then collected and towed to one
of several locations, depending on the nature of the customer.
Municipality and Law Enforcement Agency Towing. The Company provides towing
services to various municipalities and law enforcement agencies. In this
market, vehicles are typically towed to one of the Company's facilities where
the vehicle is impounded and placed in storage. The vehicle remains in storage
until its owner pays the Company the towing fee (which is typically based on an
hourly charge or mileage) and any daily storage fees, and pays any fines due to
the municipality or law enforcement agency. If the vehicle is not claimed
within a period prescribed by law (typically between 30 and 90 days), the
Company completes lien proceedings and sells the vehicle at auction or to a
scrap metal facility, depending on the value of the vehicle. Depending on the
jurisdiction, the Company may either keep all of the proceeds from vehicle
sales, or keep proceeds up to the amount of towing and storage fees and pay the
remainder to the municipality or law enforcement agency. The Company provides
services in some cases under contracts with municipalities or police, sheriff
and highway patrol departments, typically for terms of five years or less. Such
contracts often may be terminated for material breach and are typically subject
to competitive bidding upon expiration. In other cases, the Company provides
these services to municipalities or law enforcement agencies without a long-
term contract. Whether pursuant to a contract or an ongoing relationship, the
Company generally provides these services for a designated geographic area,
which may be shared with one or more other companies.
Private Impound Towing. The Company provides impound towing services to
private customers, such as shopping centers, retailers and hotels, which engage
the Company to tow vehicles that are parked illegally on their property. As in
law enforcement agency towing, the Company generates revenues through the
collection of towing and storage fees from vehicle owners, and from the sale of
vehicles that are not claimed.
Insurance Salvage Towing. The Company provides insurance salvage towing
services to insurance companies and automobile auction companies for a per-
vehicle fee based on the towing distance. This business involves secondary
towing, since the vehicles involved typically have already been towed to a
storage facility. For example, after an accident, a damaged or destroyed
vehicle is usually towed to a garage or impound yard. The Company's insurance
salvage towing operations collect these towed vehicles and deliver them to
repair shops, automobile auction companies or scrap metal facilities as
directed by the customer.
Commercial Road Service. The Company provides road services to a broad range
of commercial customers, including automobile dealers and repair shops. The
Company typically charges a flat fee and mileage premium for these towing
services. Commercial road services also include towing 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.
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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.
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 believes
that it is able to compete effectively because of its commitment to high
quality service, geographic scope, broad range of services offered, experienced
management and operational economies of scale.
Sales and Marketing
The Company's sales and marketing strategy is to expand market penetration
through strategically oriented direct sales techniques. The Company currently
focuses its sales and marketing efforts on large governmental and commercial
accounts, including automobile manufacturers, leasing companies, insurance
companies and governmental entities, with the goal of fostering long-term
relationships with these customers.
Dispatch and Information Systems
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 ("Legacy Systems").
In its first year of operations, the Company developed a proprietary
National Transportation Management System ("TMS") in an effort to maximize
truck utilization through centralized national dispatching. This system was
also designed to perform integrated order entry, load composition, invoicing,
payroll and other administrative functions. Initially, the Company planned to
install TMS at substantially all of its transport divisions. In its first year
of operations, the Company also planned to install a standardized towing and
recovery operating system at all of its towing and recovery locations. This
system was designed to perform order entry, dispatch, impound vehicle
inventory, lien processing and other administrative functions. The Company has
experienced unexpected performance difficulties, delays and costs in
implementing its common operating systems. As of December 31, 1999, TMS had
been installed at seven of the Company's transport locations and the
standardized towing and recovery operating system had been installed at four of
the Company's towing and recovery locations. The Company is currently in the
process of re-evaluating its information systems needs, including whether TMS
or the standardized towing and recovery operating system should be installed at
additional locations where such installation is feasible. Pending completion of
this analysis, those divisions that have not installed the common operating
systems continue to utilize their existing Legacy Systems.
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 systems on an ongoing basis as it
re-evaluates its needs and expands its operations. Any such upgrade will be
subject to the availability of additional capital.
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Government Regulation and Environmental Matters
Towing, recovery and transport services are subject to various federal,
state and local laws and regulations regarding equipment, driver certification,
training, recordkeeping and workplace safety. 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. Companies providing towing, recovery and transport services are
required to have numerous federal, state and local licenses and permits.
Failure by the Company to obtain or maintain such licenses and permits could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company's operations are subject to a number of federal, state and local
laws and regulations relating to the storage of petroleum products, hazardous
materials and impounded vehicles, as well as safety regulations relating to the
upkeep and maintenance of the Company's vehicles. In particular, the Company's
operations are subject to federal, state and local laws and regulations
governing leakage from salvage vehicles, waste disposal, the handling of
hazardous substances, environmental protection, remediation, workplace exposure
and other matters. The Company believes that it is in substantial compliance
with all such laws and regulations. The Company does not currently expect to
spend any substantial amounts in the foreseeable future in order to meet
current environmental or workplace health and safety requirements. It is
possible that an environmental claim could be made against the Company or that
the Company could be identified by the Environmental Protection Agency, a state
agency or one or more third parties as a potentially responsible party under
federal or state environmental law. If the Company is subject to such a claim
or is so identified, the Company may incur substantial investigation, legal and
remediation costs. Such costs could have a material adverse effect on the
Company's business, financial condition and results of operations.
Seasonality
The demand for towing, recovery and transport services is subject to
seasonal and other variations. Specifically, the demand for towing and recovery
services is generally highest in extreme or inclement weather, such as heat,
cold, rain and snow. Although the demand for automobile transport tends to be
strongest in the months with the mildest weather, since extreme or inclement
weather tends to slow the delivery of vehicles, the demand for automobile
transport is also a function of the timing and volume of lease originations,
new car model changeovers, dealer inventories, and new and used auto sales.
Employees
As of December 31, 1999, the Company had approximately 2,300 employees,
leases an additional 223 employees and used approximately 350 independent
contractors. The Company believes that it has a satisfactory relationship with
its employees. None of the Company's employees are currently members of unions.
Factors Influencing Future Results and Accuracy of Forward-Looking Statements
In the normal course of its business, the Company, in an effort to help keep
its stockholders and the public informed about the Company's operations, may
from time to time issue or make certain statements, either in writing or
orally, that are or contain forward-looking statements, as that term is defined
in the federal securities laws. Generally, these statements relate to business
plans or strategies, projected or anticipated benefits or other consequences of
such plans or strategies or other actions taken or to be taken by the Company,
including the impact of such plans, strategies or actions on the Company's
results of operations or components thereof, projected or anticipated benefits
from operational changes, acquisitions or dispositions made or to be made by
the Company, or projections involving anticipated revenues, costs, earnings, or
other aspects of the Company's results of operations. The words "expect,"
"believe," "anticipate," "project," "estimate," "intend," and similar
expressions, and their opposites, are intended to identify forward-looking
statements. The Company cautions readers that such statements are not
guarantees of future performance or events and are subject to a
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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 2000 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 May 5, 1999, the Company acquired a total of 49 additional businesses
(the "Acquired Companies"). Prior to their acquisition by the Company, such
companies were operated as independent entities. During 1999, the Company
experienced performance difficulties associated with the integration and
consolidation of certain of its operating divisions. There can be no assurance
that the Company will be able to successfully integrate the operations of its
acquired businesses or that it will be able to put it in place the necessary
management, systems and procedures (including accounting and financial
reporting systems) to operate the combined enterprise on a profitable basis.
Risks Related to Revised Business Strategy
A key element of the Company's revised business strategy is to increase the
revenue and improve the profitability of the companies it has acquired. The
Company intends to enhance its revenue by increasing asset utilization,
deploying new equipment and drivers and expanding both the scope of services
the Company offers and its customer base. The Company's ability to increase
revenue will be affected by various factors, including the availability of
capital to invest in new equipment, the demand for towing, recovery and
transport services, the level of competition in the industry, and the Company's
ability to attract and retain a sufficient number of qualified personnel.
The Company intends to improve its profitability by various means, including
eliminating duplicative operating costs and overhead, decreasing
administrative, systems and other costs and capitalizing on its enhanced
purchasing power. The Company's ability to improve profitability will be
affected by various factors, including unexpected increases in operating or
administrative costs, the Company's ability to benefit from the elimination of
redundant operations and the strength of the Company's management on a
national, regional and local level. Many of these factors are beyond the
Company's control. There can be no assurance that the Company will be
successful in increasing revenue or improving its profitability.
Availability of Capital
The Company's ability to execute its revised business strategy will depend
to a great extent on the availability of capital. Beginning in the fourth
quarter of 1999, the Company began to experience a significant decrease in its
cash flow from operations. The Company currently believes that it will be able
to fund its working capital needs through cash flow from operations at least
until January 1, 2001, as long as it does not experience significant decreases
in revenues or increases in costs. In the event the Company is unable to fund
its near-term working capital needs from cash flow from operations, it will be
required to secure alternative sources of capital through issuances of debt or
equity securities or sales of assets. There can be no assurance that additional
capital will be available to the Company on satisfactory terms or at all.
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While the Company currently expects that its cash flow from operations will
be sufficient to fund its near-term working capital needs as long as it does
not experience significant decreases in revenues or increases in costs, the
current level of cash flow from operations is not expected to be sufficient to
fund the Company's medium or long-term working capital needs or its growth
strategy. Thus, in order to be able to successfully implement its revised
business strategy, it will be necessary for the Company to raise additional
capital, through issuances of debt or equity securities, additional bank debt
or sales of assets, which may not be possible on satisfactory terms, or at all.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
During 1999, the Company violated certain financial covenants in its credit
facility. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." In
return for temporary waivers of these defaults, the Company and its banks
agreed to reduce the amount available for borrowing under the credit facility
to $55.0 million, of which approximately $54.0 million, including letters of
credit of $3.4 million, was outstanding as of December 31, 1999. These
temporary waivers are currently scheduled to expire on April 28, 2000, at which
time there will be an immediate event of default and, absent a further waiver
or amendment, all amounts outstanding under the credit facility will be subject
to acceleration at the banks' discretion. Consequently, the total amount
outstanding under the revolving credit facility at December 31, 1999 has been
classified as a current liability. As a result of this reclassification, the
audit report on the Company's consolidated financial statements includes a
paragraph that states that the excess of current liabilities over current
assets raises substantial doubt about the Company's ability to continue as a
going concern. If the credit facility banks elect to accelerate, the Company
would be required to refinance its debt or obtain capital from other sources,
including sales of additional debt or equity securities or sales of assets, in
order to meet its repayment obligations, which may not be possible. If the
banks were to accelerate repayment of amounts due under the credit facility, it
would cause a default under the Company's 8% Convertible Subordinated
Debentures due 2008 (the "Debentures") issued to Charter URS, LLC, an affiliate
of Charterhouse Group International, Inc. ("Charterhouse"). In the event of a
default under the Debentures, Charterhouse could accelerate repayment of all
amounts outstanding under the Debentures, subject to the credit facility banks'
priority. In such event, repayment of the Charterhouse Debentures would be
required only if the credit facility was paid in full or the banks under the
credit facility granted their express prior written consent.
The Company's existing credit facility matures on October 31, 2001. The
Company's ability to refinance the credit facility upon maturity will depend to
a great degree on improved operating performance, particularly with respect to
the Company's cash flow to interest coverage ratio. If the Company cannot
successfully refinance the credit facility upon maturity, it will be required
to raise capital through the issuance of additional debt or equity securities
or sales of assets in order to meet its repayment obligations under the credit
facility.
The Company currently has a negative net tangible book value. Accordingly,
based upon the current market price of the Common stock, if the Company were
required to issue additional equity securities at this time, such issuance
would result in immediate and substantial dilution in net tangible book value
to existing investors.
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.
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Information Systems
The Company's original information systems strategy contemplated the
installation of common operating systems at all of its towing and recovery
locations and substantially all of its transport locations. The Company has
encountered unexpected performance difficulties, delays and costs in
implementing such systems. The Company is currently re-evaluating its
information systems needs, including whether these common operating systems
should be installed at additional transport and towing and recovery locations
where such installation is feasible. Pending completion of such analysis, those
divisions that have not installed the common operating systems continue to
utilize their existing Legacy Systems. The Company anticipates that it will
need to upgrade and expand its information systems on an ongoing basis as it
re-evaluates its needs and expands its operations. Any update or expansion of
these systems will be subject to the Company's ability to obtain additional
capital, which may not be available on terms acceptable to the Company, or at
all. Any damage to or failure of any of the Company's information systems that
causes significant interruptions in the Company's operations could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Customer Relationships and Contracts
The Company provides transport services to 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. During the year ended December 31, 1999, one of the
Company's transport customers, General Motors Corporation, represented
approximately 11% of the Company's total consolidated net revenue. The loss of
this customer could have a material adverse effect on the Company's business,
financial condition and results of operations if the Company were not able to
replace the lost revenue with revenue from other sources. The Company also
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. It is possible that some or all of these transport or towing and
recovery 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 transport or towing and recovery contracts. The
Company has no formal contract with a large number of its customers, and it is
possible that one or more customers could elect, at any time, to stop utilizing
the Company's services.
Regulation
Towing, recovery and transport services are subject to various federal,
state and local laws and regulations regarding equipment, driver certification,
training, recordkeeping and workplace safety. 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.
Companies providing towing, recovery and transport services are required to
have numerous federal, state and local licenses and permits. The Company's
failure to obtain or maintain such licenses and permits could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Potential Exposure to Environmental Liabilities
The Company's operations are subject to a number of federal, state and local
laws and regulations relating to the storage of petroleum products, hazardous
materials and impounded vehicles, as well as safety regulations relating to the
upkeep and maintenance of vehicles. In particular, the Company's operations are
subject to federal, state and local laws and regulations governing leakage from
salvage vehicles, waste disposal, the handling of hazardous substances,
environmental protection, remediation, workplace exposure and other
9
<PAGE>
matters. It is possible that an environmental claim could be made against the
Company or that the Company could be identified by the Environmental Protection
Agency, a state agency or one or more third parties as a potentially
responsible party under federal or state environmental laws. In such event, the
Company could be forced to incur substantial investigation, legal and
remediation costs. Such costs could have a material adverse effect on the
Company's business, financial condition and results of operations.
Potential Liabilities Associated with Acquired Businesses
The businesses that the Company has acquired could have liabilities that the
Company did not discover during its pre-acquisition due diligence
investigations. Such liabilities may include, but are not limited to,
liabilities arising 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. If the Company's
employees were to unionize, the Company could incur higher ongoing labor costs
and could experience a significant disruption of its operations in the event of
a strike or other work stoppage. Any of these possibilities could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Liability and Insurance
From time to time, the Company is subject to various claims relating to its
operations, including (i) claims for personal injury or death caused by
accidents involving the Company's vehicles and service personnel; (ii) worker's
compensation claims and (iii) other employment related claims. Although the
Company maintains insurance (subject to deductibles), such insurance may not
cover certain types of claims, such as claims under specified dollar thresholds
or claims for punitive damages or for damages arising from intentional
misconduct (which are often alleged in third-party lawsuits). In the future,
the Company may not be able to maintain adequate levels of insurance on
reasonable terms. In addition, it is possible that existing or future claims
may exceed the level of the Company's insurance or that the Company may not
have sufficient capital available to pay any uninsured claims.
Quarterly Fluctuations of Operating Results
The Company has experienced, and may continue to experience, significant
fluctuations in quarterly operating results due to a number of factors. These
factors could include: (i) the availability of capital to fund operations,
including expenditures for new and replacement equipment; (ii) the Company's
success in improving operating efficiency and profitability, and in integrating
its acquired businesses; (iii) the loss of significant customers or contracts;
(iv) the timing of expenditures for new equipment and the disposition of used
equipment; (v) price changes in response to competitive factors; (vi) seasonal
and other variations in the demand for towing, recovery and transport services;
(vii) changes in applicable regulations, including but not limited to various
federal, state and local laws and regulations regarding equipment, driver
certification, training, recordkeeping and workplace safety; and (viii) 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.
10
<PAGE>
Seasonality
The demand for towing, recovery and transport services is subject to
seasonal and other variations. Specifically, the demand for towing and recovery
services is generally highest in extreme or inclement weather, such as heat,
cold, rain and snow. Although the demand for automobile transport tends to be
strongest in the months with the mildest weather, since extreme or inclement
weather tends to slow the delivery of vehicles, the demand for automobile
transport is also a function of the timing and volume of lease originations,
new car model changeovers, dealer inventories and new and used auto sales.
Reliance on Key Personnel
The Company is highly dependent upon the experience, abilities and continued
efforts of its senior management. The loss of the services of one or more of
the key members of the Company's senior management could have a material
adverse effect on the Company's business, financial condition and results of
operations if the Company is unable to find a suitable replacement in a timely
manner. The Company does not presently maintain "key man" life insurance with
respect to members of its senior management.
The Company's operating facilities are managed by regional and local
managers who have substantial 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 growth as a result of
labor shortages.
Management of Growth
The Company's revised business strategy is to increase its profitability and
expand its operations through internal growth. The Company's systems,
procedures and controls may not be adequate to support its operations as they
expand. Any substantial future growth may 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 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.
ITEM 2. Properties
As of December 31, 1999, the Company operated 43 divisions consisting of 92
facilities located in 22 states. These facilities consisted of 60 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
32 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, 1999, the Company's headquarters consisted of
approximately 14,100 square feet of leased space in Albany, New York.
11
<PAGE>
As of December 31, 1999, the Company operated a fleet of approximately 870
towing and recovery vehicles and approximately 1,330 transport vehicles, which
the Company believes are generally well-maintained and adequate for its current
operations.
ITEM 3. Legal Proceedings
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
1999.
12
<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 $15 1/8
Third Quarter.............................................. 26 9 1/2
Fourth Quarter............................................. 19 1/4 5 3/4
<CAPTION>
1999 High Low
---- ---- ----
<S> <C> <C>
First Quarter.............................................. $19 1/2 $ 4 1/4
Second Quarter............................................. 8 4 9/16
Third Quarter.............................................. 5 1/8 2 1/2
Fourth Quarter............................................. 3 5/8 1
</TABLE>
As of March 22, 2000, there were approximately 169 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
the Purchase Agreement (the "Charterhouse Purchase Agreement") pursuant to
which the Company issued $75.0 million aggregate principal amount of
Debentures to Charterhouse.
Sale of Unregistered Securities
On December 31, 1999, the Company issued approximately $1.6 million
aggregate principal amount of Debentures to Charterhouse, which represented
the quarterly payment-in-kind interest payment due with respect to $79.3
million aggregate principal amount of Debentures previously issued to
Charterhouse.
The sale of the securities listed above was deemed to be exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act") in reliance on Section 4(2) of the Securities Act or Regulation D
promulgated thereunder as a transaction by an issuer not involving a public
offering. The recipient of the securities was an accredited investor and
represented its intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were attached to the certificate issued in such
transaction.
ITEM 6. Selected Financial Data
The Company purchased the seven Founding Companies simultaneously with its
initial public offering in May 1998. Between May 6, 1998 and May 5, 1999, the
Company purchased a total of 49 additional businesses. The following selected
consolidated financial data as of December 31, 1999, 1998 and 1997 and for the
years ended December 31, 1999 and 1998, and the period from July 25, 1997
(inception) to December 31, 1997, 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, 1997 and 1996 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.
13
<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
Year Ended Year Ended (inception) to
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
(Dollars in thousands, except per share amounts and
share data)
<S> <C> <C> <C>
Consolidated statement
of operations data--
United Road Services,
Inc.:
Net revenue............. $ 255,112 $ 87,919 $ --
Cost of revenue......... 202,588 64,765 --
-------------- -------------- --------------
Gross profit............ 52,524 23,154 --
Selling, general and
administrative
expenses(1)............ 42,139 12,428 174
Goodwill amortization... 5,439 1,745 --
Impairment charge(2).... 28,281 -- --
-------------- -------------- --------------
Income (loss) from
operations............. (23,335) 8,981 (174)
Interest income
(expense) and other,
net(3)................. (11,523) (1,086) --
-------------- -------------- --------------
Income (loss) before
income taxes........... (34,858) 7,895 (174)
Income tax expense
(benefit).............. (5,158) 3,503 --
-------------- -------------- --------------
Net income (loss)....... $ (29,700) $ 4,392 $ (174)
============== ============== ==============
Basic net income (loss)
per share $ (1.75) $ 0.43 $ (0.08)
============== ============== ==============
Diluted net income
(loss) per share....... $ (1.75) $ 0.42 $ (0.08)
============== ============== ==============
Shares used in computing
basic net income (loss)
per share.............. 16,933,114 10,221,810 2,055,300
============== ============== ==============
Shares used in computing
diluted net income
(loss) per share....... 16,933,114(4) 10,389,903(5) 2,055,300(5)
============== ============== ==============
<CAPTION>
At December 31,
---------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
(In thousands)
<S> <C> <C> <C>
Balance sheet data--
United Road Services,
Inc.:
Working capital
(deficit)(6)........... $ (34,208) $ 9,330 $ (104)
Total assets............ 322,445 248,732 50
Long-term obligations,
excluding current
installments........... 82,758 65,255 --
Stockholders' equity
(deficit).............. 166,413 163,766 (104)
<CAPTION>
Years Ended December 31,
---------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
(In thousands)
<S> <C> <C> <C>
Historical statement of
operations data--
Northland:
Net revenue............. $ 10,159 $ 6,353 $ 4,671
Operating income
(loss)................. 1,438 346 324
Other expense, net...... (49) -- (18)
Net income.............. 1,054 346 275
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
At December 31,
-----------------------
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Historical balance sheet data--Northland:
Working Capital...................................... $ 399 $ 235 $ 375
Total assets......................................... 5,465 3,268 2,653
Long-term obligations, excluding current
installments........................................ 1,074 331 257
Stockholders' equity................................. 3,045 1,991 1,645
</TABLE>
- --------
(1) During the year ended December 31, 1999, the Company recorded special
charges of $1.1 million related to the strategic decision not to pursue
its acquisition program in the near term and $1.7 million in severance
expense relating to the departure of senior members of management.
(2) During the year ended December 31, 1999, the Company recorded non-cash
impairment charges of $6.6 million and $21.7 million related to the value
of its long-lived assets and recoverability of goodwill, respectively.
(3) During the year ended December 31, 1999, the Company recorded, within
interest expense, $624,000 related to the termination of a $225.0 million
revolving credit agreement and $405,000 related to the decrease in
borrowing capacity under its current revolving credit facility.
(4) Represents actual weighted average shares outstanding. The effect of
options, warrants, shares withheld in connection with acquisitions or 1999
earn-out shares payable to the former owners of the Founding Companies and
one other acquired company have been excluded, as the effect would be
anti-dilutive.
(5) Represents actual weighted average outstanding shares, adjusted for any
incremental effect of options, warrants, shares withheld in connection
with acquisitions and 1998 earn-out shares payable to the former owners of
the Founding Companies and one other acquired company.
(6) On March 29, 2000, the Company entered into a letter agreement related to
its revolving credit facility which waived, through April 28, 2000, the
Company's non-compliance with certain financial covenants and provides
that, upon the expiration of the waiver, unless a new waiver or amendment
has been entered into, an immediate event of default shall exist under the
credit facility. The credit facility is then subject to acceleration at
any time. Consequently, the Company has classified its liability under the
credit facility of $50,650 as a current liability at December 31, 1999.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources".
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Report.
Cautionary Statements
From time to time, in written reports and oral statements, management may
discuss its expectations regarding United Road Services, Inc.'s future
performance. Generally, these statements relate to business plans or
strategies, projected or anticipated benefits or other consequences of such
plans or strategies or other actions taken or to be taken by the Company,
including the impact of such plans, strategies or actions on the Company's
results of operations or components thereof, projected or anticipated benefits
from operational changes, acquisitions or dispositions made or to be made by
the Company, or projections, involving anticipated revenues, costs, earnings or
other aspects of the Company's results of operations. The words "expect,"
"believe," "anticipate," "project," "estimate," "intend" and similar
expressions, and their opposites, are intended to identify forward-looking
statements. These forward-looking statements are not guarantees of future
performance but rather are based on currently available competitive, financial
and economic data and management's operating plans. These forward-looking
statements involve risks and uncertainties that could render actual results
materially different from management's expectations. Such risks and
uncertainties include, without limitation, the availability of capital to fund
operations, including expenditures for new equipment,
15
<PAGE>
risks related to the Company's limited operating history, risks related to the
Company's ability to successfully implement its revised business strategy, the
loss of significant customers and contracts, changes in applicable regulations,
including but not limited to, various federal, state and local laws and
regulations regarding equipment, driver certification, training, recordkeeping
and workplace safety, risks related to the Company's ability to integrate
acquired companies, risks related to the adequacy, functionality, sufficiency
and cost of the Company's information systems, potential exposure to
environmental and other unknown or contingent liabilities, risks associated
with the Company's labor relations, changes in the general level of demand for
towing, recovery and transport services, price changes in response to
competitive factors, seasonal and other variations in the demand for towing,
recovery and transport services, general economic conditions, and other risk
factors described from time to time in the Company's reports filed with the
Securities and Exchange Commission (the "Risk Factors"). All statements herein
that are not statements of historical fact are forward-looking statements.
Although management believes that the expectations reflected in such forward-
looking statements are reasonable, there can be no assurance that those
expectations will prove to have been correct. Certain other important factors
that could cause actual results to differ materially from management's
expectations ("Cautionary Statements") are disclosed in this Report. All
written forward-looking statements by or attributable to management in this
Report are expressly qualified in their entirety by the Risk Factors and the
Cautionary Statements. Investors must recognize that events could turn out to
be significantly different from what management currently expects.
Overview
The Company offers a broad range of towing, recovery and transport services.
These services include: towing, impounding and storing motor vehicles;
conducting lien sales and auctions of abandoned vehicles; recovering heavy-duty
commercial and recreational vehicles; towing heavy equipment; and transporting
new and used vehicles. The Company's customers include commercial entities,
such as automobile leasing companies, insurance companies, automobile auction
companies, automobile dealers, repair shops and fleet operators; law
enforcement agencies such as police, sheriff and highway patrol departments;
and individual motorists.
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, recovery and transport customers. In
other cases, services are provided to towing, recovery and transport customers
without a long-term contract. The prices charged for towing and storage of
impounded vehicles for municipalities or law enforcement agencies are limited
by contractual provisions or local regulation.
In the case of law enforcement and private impound towing, payment is
obtained either from the owner of the impounded vehicle when the owner claims
the vehicle or from the proceeds of lien sales, scrap sales or auctions. In the
case of the Company's other operations, customers are billed upon completion of
services provided, with payment generally due within 30 days. Revenue is
recognized as follows: towing 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.
Cost of revenue consists primarily of the following: salaries and benefits
of drivers, dispatchers, supervisors and other employees; fees charged by
subcontractors; fuel; depreciation, repairs and maintenance; insurance; parts
and supplies; other vehicle expenses; and equipment rentals.
16
<PAGE>
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.
At the time of its initial public offering in May 1998, the Company acquired
the seven Founding Companies. Between May 6, 1998 and May 5, 1999, the Company
acquired a total of 49 additional motor vehicle and equipment towing, recovery
and transport service businesses. During the third quarter of 1999, the Company
made the strategic decision not to pursue its acquisition program in the near
term in order to allow the Company to focus primarily on integrating and
profitably operating the 56 businesses it had acquired within its first year of
operations. The goal of the Company's revised business strategy is to improve
the operational efficiency and profitability of its existing businesses in
order to build a stable platform for future growth, which may or may not
include additional acquisitions. Key elements of the Company's revised business
strategy include providing high quality service, expanding the Company's scope
of services and customer base and improving operating performance and
profitability. The Company has not completed any acquisitions since May 5,
1999. The Company's ability to complete acquisitions in the future will depend,
to a great degree, upon its success in implementing operational improvements
and the availability of capital.
Management's discussion and analysis addresses the Company's historical
results of operations and financial condition as shown in its consolidated
financial statements for the years ended December 31, 1999 and 1998 and the
period from July 25, 1997 (inception) through December 31, 1997. The historical
results for each of the years ended December 31, 1999 and 1998 include the
results of all businesses acquired prior to December 31 of the relevant year
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, 1998, net revenue, net income (loss) and basic and diluted net
income (loss) per share for the years ended December 31, 1999 and 1998 would
have been:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1999 December 31, 1998
----------------- -----------------
(In thousands)
<S> <C> <C>
Net revenue............................. $265,855 $283,278
======== ========
Net income (loss)....................... $(29,066) $ 15,179
======== ========
Basic net income (loss) per share....... $ (1.63) $ 0.89
======== ========
Diluted net income (loss) per share..... $ (1.63) $ 0.85
======== ========
</TABLE>
This pro forma information assumes that the Company acquired the Founding
Companies and the Acquired Companies on January 1, 1998, 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, 1998 or the Company's future
results.
The owners of certain businesses that the Company has acquired 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 1999 and 1998, would have been $232,000 and $6.6 million, respectively.
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 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.
In the fourth quarter of 1999, based upon a comprehensive review of the
Company's long-lived assets in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121 and an analysis of the recoverability of
goodwill using a cash flow approach consistent with SFAS No. 121, the Company
recorded a $28.3 million impairment of long-lived assets and goodwill.
17
<PAGE>
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.
For the year ended December 31, 1999, the Company's results of operations
were derived from 22 transport businesses and 34 towing and recovery businesses
acquired prior to December 31, 1999. For the year ended December 31, 1998, the
Company's results of operations were derived from 12 transport businesses and
29 towing and recovery businesses acquired prior to December 31, 1998. For the
year ended December 31, 1998, the Company's first year of operations, the
Company evaluated the performance of its operating segments based on income
(loss) before income taxes. During the year ended December 31, 1999, management
determined that a more appropriate measure of the performance of its operating
segments may be made through an evaluation of each segment's income (loss) from
operations. Accordingly, the Company's selected statement of operations data
regarding the Company's reportable segments is presented through income (loss)
from operations for the years ended December 31, 1999 and 1998.
The following tables set forth selected statement of operations data by
segment and for the Company as a whole, as well as such data as a percentage of
net revenue, for the periods indicated:
Year ended December 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Towing and
Transport Recovery Total
-------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net revenue............... $155,333 100.0% $ 99,779 100.0% $255,112 100.0%
Cost of revenue, including
depreciation............. 122,774 79.0 79,814 80.0 202,588 79.4
Selling, general and
administrative expenses
(1)...................... 14,311 9.2 13,783 13.8 42,139 16.5
Amortization of goodwill.. 2,914 1.9 2,525 2.5 5,439 2.1
Impairment charge......... 10,053 6.5 18,228 18.3 28,281 11.1
-------- ----- -------- ------ -------- -----
Income (loss) from
operations............... $ 5,281 3.4% $(14,571) (14.6)% (23,335) (9.1)
======== ===== ======== ======
Interest expense, net..... 11,342 4.4
Other expenses, net....... 181 0.1
-------- -----
Loss before income taxes.. (34,858) (13.6)
Income tax benefit........ (5,158) (2.0)
-------- -----
Net loss.................. $(29,700) (11.6)%
======== =====
</TABLE>
18
<PAGE>
Year ended December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Towing and
Transport Recovery Total
------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net revenue...................... $46,908 100.0% $41,011 100.0% $87,919 100.0%
Cost of revenue, including
depreciation.................... 34,955 74.5 29,810 72.7 64,765 73.7
Selling, general and
administrative expenses (1)..... 3,385 7.2 5,432 13.2 12,428 14.1
Amortization of goodwill......... 682 1.5 1,063 2.6 1,745 2.0
------- ----- ------- ----- ------- -----
Income from operations........... $ 7,886 16.8% $ 4,706 11.5% 8,981 10.2
======= ===== ======= =====
Interest expense, net............ 930 1.0
Other expenses, net.............. 156 0.2
------- -----
Income before income taxes....... 7,895 9.0
Income tax expense............... 3,503 4.0
------- -----
Net income....................... $ 4,392 5.0%
======= =====
</TABLE>
- --------
(1) Total selling, general and administrative expenses include corporate
selling, general and administrative expenses of $14,045 and $3,611 for the
years ended December 31, 1999 and 1998, respectively.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net Revenue. Net revenue increased $167.2 million, or 190.2%, from $87.9
million for the year ended December 31, 1998 to $255.1 million for the year
ended December 31, 1999. Of the net revenue for the year ended December 31,
1999, 60.9% related to transport services and 39.1% related to towing and
recovery services. Transport net revenue increased $108.4 million, or 231.1%,
from $46.9 million for the year ended December 31, 1998 to $155.3 million for
the year ended December 31, 1999. The increase in transport net revenue was
largely due to the impact of the ten transport businesses acquired during the
first half of 1999 and the inclusion of a full year of operating results of the
nine transport businesses acquired during 1998 (eight of which were acquired in
the second half of 1998). During the year ended December 31, 1999, $103.4
million of the Company's total net revenue was generated from the transport
businesses acquired in 1998. The increase in transport net revenue was offset,
in part, by weak performance of certain transport businesses subsequent to the
Company's consolidation of divisions. Towing and recovery net revenue increased
$58.8 million, or 143.3%, from $41.0 million for the year ended December 31,
1998 to $99.8 million for the year ended December 31, 1999. The increase in
towing and recovery net revenue was largely due to the impact of the five
towing and recovery businesses acquired during the first half of 1999 and the
inclusion of a full year of operating results of the 29 towing and recovery
businesses acquired during 1998 (22 of which were acquired in the second half
of 1998). During the year ended December 31, 1999, $88.3 million of the
Company's towing and recovery net revenue was generated from towing and
recovery businesses acquired in 1998. The increase in towing and recovery net
revenue was offset, in part, by weak performance of certain towing and recovery
businesses subsequent to acquisition, which performance was, in some cases also
negatively affected by the Company's consolidation of divisions.
Cost of Revenue. Cost of revenue, including depreciation, increased $137.8
million, or 212.8%, from $64.8 million for the year ended December 31, 1998 to
$202.6 million for the year ended December 31, 1999. Transport cost of revenue
increased $87.8 million, or 251.2%, from $35.0 million for the year ended
December 31, 1998 to $122.8 million for the year ended December 31, 1999. The
increase in transport cost of revenue was primarily due to the increase in the
size of the Company's transport operations for the year ended December 31, 1999
as compared to the year ended December 31, 1998. The principal components of
the increase in transport cost of revenue consisted of an increase in transport
operating labor costs of $31.1 million; an increase in costs of independent
contractors, brokers and subcontractors of $22.0 million; an increase in fuel
costs of $9.8 million; an increase in vehicle maintenance costs of $6.7
million; and increased depreciation costs of $3.7 million. Towing and recovery
cost of revenue increased $50.0 million, or 167.7%, from $29.8 million for the
year ended December 31, 1998 to $79.8 million for the year ended December 31,
1999. The increase in
19
<PAGE>
towing and recovery cost of revenue was primarily due to the increase in the
size of the Company's towing and recovery operations for the year ended
December 31, 1999 as compared to the year ended December 31, 1998. The
principal components of the increase in towing and recovery cost of revenue
consisted of an increase in towing operating labor costs of $21.8 million; an
increase in independent contractor, broker and subcontractor costs of $8.2
million; an increase in abandoned car purchases of $4.8 million; an increase in
vehicle maintenance costs of $4.4 million; and an increase in facility and
occupancy expenses of $2.7 million.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $29.7 million, or 239.1%, from $12.4 million
for the year ended December 31, 1998 to $42.1 million for the year ended
December 31, 1999. Transport selling, general and administrative expenses
increased $10.9 million, or 322.8%, from $3.4 million for the year ended
December 31, 1998 to $14.3 million for the year ended December 31, 1999. The
increase in transport selling, general and administrative expenses was
primarily due to costs associated with the Company's acquisitions of transport
businesses during the first half of 1999, as described above, and costs
associated with managing and integrating the acquired companies. The principal
components of the increase in the Company's transport selling, general and
administrative expenses for the year ended December 31, 1999 as compared to the
year ended December 31, 1998, consisted of an increase in wages and benefits
expense of $7.3 million; an increase in bad debt expense of $1.5 million; and
an increase in computer and telecommunication expenses of $596,000. Towing and
recovery selling, general and administrative expenses increased $8.4 million,
or 154.6%, from $5.4 million for the year ended December 31, 1998 to $13.8
million for the year ended December 31, 1999. The increase in towing and
recovery selling, general and administrative expense was primarily due to costs
associated with the Company's acquisitions of towing and recovery businesses
during the first half of 1999, as described above, and costs associated with
managing and integrating the acquired companies. The principal components of
the increase in the Company's towing and recovery selling, general and
administrative expenses for the year ended December 31, 1999 as compared to the
year ended December 31, 1998, consisted of an increase in wages and benefits
expense of $4.8 million; an increase in bad debt expense of $726,000; an
increase in office and supplies costs of $488,000; and an increase in computer
and telecommunications expenses of $383,000.
Corporate selling, general and administrative expenses increased $10.4
million, or 289.0%, from $3.6 million for the year ended December 31, 1998 to
$14.0 million for the year ended December 31, 1999. The increase in corporate
selling, general and administrative expenses was primarily due to costs
associated with integrating and managing acquired businesses, and the write-off
of costs associated with the termination of certain pending acquisitions and
management severance arrangements. The principal components of the increase in
corporate selling, general and administrative costs for the year ended December
31, 1999 as compared to the year ended December 31, 1998, consisted of an
increase in wages and benefits expense of $2.2 million; an increase in computer
and telecommunications expense of $2.1 million; and an increase in professional
fees of $1.4 million. Additionally, the Company recorded special charges of
$2.8 million for the year ended December 31, 1999. These special charges
consisted of $1.1 million for professional fees and compensation contractually
required to be paid in connection with the termination of certain acquisition
consultants as a result of the Company's strategic decision not to pursue its
acquisition program in the near term, and $1.7 million associated with the June
1999 departure of the Company's former Chairman and Chief Executive Officer and
the December 1999 departures of the Company's former President and Chief
Operating Officer and former Chief Acquisition Officer.
Amortization of Goodwill. Amortization of goodwill increased $3.7 million,
or 211.7%, from $1.7 million for the year ended December 31, 1998 to $5.4
million for the year ended December 31, 1999. This increase in goodwill
amortization was the result of higher intangible asset balances resulting from
the acquisitions described above. The excess purchase price over the fair value
of the assets acquired, including direct costs associated with the
acquisitions, was $173.7 million at December 31, 1998 and $235.0 million at
December 31, 1999.
Impairment Charge. Impairment charges were $28.3 million for the year ended
December 31, 1999. The impairment charges consisted of a non-cash charge of
$21.7 million related to recoverability of goodwill under
20
<PAGE>
Accounting Principles Board ("APB") Opinion No. 17 and a non-cash charge of
$6.6 million related to the Company's comprehensive review of its long-lived
assets in accordance with SFAS No. 121. The impairment charge recorded under
APB Opinion No. 17 included $10.0 million related to the recoverability of
goodwill at two of the Company's transport divisions and $11.7 million related
to the recovery of goodwill at seven of the Company's towing and recovery
divisions. The impairment charge recorded under SFAS No. 121 included
impairment expenses of $2.6 million on the recoverability of vehicles and
equipment and impairment expenses of $4.0 million on the recoverability of
goodwill at six of the Company's towing and recovery divisions (four of which
were included in the seven divisions noted above).
Income (loss) from Operations. Income from operations decreased $32.3
million, from income of $9.0 million for the year ended December 31, 1998 to a
loss of $23.3 million for the year ended December 31, 1999. Transport income
from operations decreased $2.6 million, or 33.0%, from $7.9 million for the
year ended December 31, 1998 to $5.3 million for the year ended December 31,
1999. The decrease in transport income from operations was primarily due to
increased labor and vehicle costs associated with transport cost of revenue,
increased goodwill amortization, impairment charges and increased
administrative wages, bad debt and computer and telecommunication expenses
related to the operation of the transport business segment offset, in part, by
the increase in the size of the Company's transport operations in the year
ended December 31, 1999 as compared to the year ended December 31, 1998. Towing
and recovery income from operations decreased $19.3 million, from income of
$4.7 million for the year ended December 31, 1998 to a loss of $14.6 million
for the year ended December 31, 1999. The decrease in towing and recovery
income from operations was primarily due to increased labor, vehicle
maintenance and facility expense, increased goodwill amortization, impairment
charges and increased administrative wages, bad debt, office and computer and
telecommunication expenses offset, in part, by the increase in the size of the
Company's towing and recovery operations for the year ended December 31, 1999
as compared to the year ended December 31, 1998.
Interest Expense, net. Interest expense increased $9.8 million, from
interest expense of $1.6 million for the year ended December 31, 1998 to
interest expense of $11.4 million for the year ended December 31, 1999.
Interest income decreased $581,000 from interest income of $658,000 for the
year ended December 31, 1998 to interest income of $77,000 for the year ended
December 31, 1999. The increase in interest expense, net was related to higher
levels of debt incurred to finance the acquisitions described above, a decline
in offsetting interest income in 1999 as compared to 1998 (1998 interest income
included interest income received on cash proceeds from the Company's initial
public offering), a charge of $624,000 in the year ended December 31, 1999
relating to the termination of the Company's $225.0 million credit agreement
and a charge of $405,000 in the year ended December 31, 1999 relating to the
reduction of the commitment amount under the Company's existing revolving
credit facility.
Income Tax Expense (benefit). Income tax expense (benefit) decreased $8.7
million, from an income tax expense of $3.5 million for the year ended December
31, 1998 to an income tax benefit of $5.2 million for the year ended December
31, 1999. The decrease in income tax expense was largely due to the net
operating loss generated by the Company during 1999, along with the impairment
charge described above, the utilization of tax credits for software development
and tax deductions for computer conversion costs.
Net Income (loss). Net income (loss) decreased $34.1 million, from net
income of $4.4 million for the year ended December 31, 1998 to a net loss of
$29.7 million for the year ended December 31, 1999. The decrease in net income
related to the decrease in income from operations of $32.3 million and
increased net interest expense of $10.4 million, offset in part by a decline in
income tax effect on pretax earnings of $8.7 million for the year ended
December 31, 1999 compared to the year ended December 31, 1998.
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
21
<PAGE>
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 74.5% 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.
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, 1999, the Company had approximately:
. $4.1 million of cash and cash equivalents,
. a working capital deficit of approximately $34.2 million, and
. $82.8 million of outstanding indebtedness, excluding current
installments.
22
<PAGE>
During the year ended December 31, 1999, the Company generated $12.5 million
of cash from operations. Cash provided by operations was reduced by a net
increase in trade receivables of $3.7 million and a net decrease in accounts
payable of $2.6 million, offset by an impairment charge of $28.3 million,
depreciation of $9.3 million and amortization of goodwill of $5.4 million.
During the year ended December 31, 1999, the Company used $56.9 million of cash
in investing activities ($36.0 million of which related to acquisitions of
businesses and $20.2 million of which related to deposits and purchases
associated with new vehicles and equipment), and generated $45.0 million of
cash through financing activities. Financing activities consisted of proceeds
from the issuance to Charterhouse of $31.5 million aggregate principal amount
of Debentures and a net increase in borrowings under the Company's credit
facility of $31.9 million, offset in part by payments on long-term debt and
capital lease obligations assumed in acquisitions of $15.8 million and payments
of deferred financing costs of $2.5 million.
The Company has a revolving credit facility (the "Credit Facility") with a
group of banks that currently has an aggregate commitment amount of $58.0
million. As of December 31, 1999, the amount available for borrowing under the
Credit Facility was $55.0 million. Approximately $54.0 million, including
letters of credit of $3.4 million, was outstanding under the Credit Facility as
of such date. The Credit Facility terminates in October 2001, at which time all
outstanding indebtedness will be due. Borrowings under the Credit Facility bear
interest at 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), plus an
applicable margin (resulting in a total interest rate of approximately 9.5% at
December 31, 1999). On June 14, 1999, the Company and the banks signed an
agreement in principle to expand the Company's credit facility to
$225.0 million to provide financing for future acquisitions. This agreement was
terminated on September 24, 1999 when it was determined that there would likely
be a significant decline in the Company's acquisition activity in the near
term.
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 assets of the Company and its subsidiaries. Under the
Credit Facility, the Company must comply with various loan covenants, including
maintenance of certain financial ratios, restrictions on additional
indebtedness, limits on operating leases, limits on amounts of cash and cash
equivalents, restrictions on liens, guarantees, advances and dividends, and
prior bank group approval of certain acquisitions and divestitures. The Credit
Facility also contains provisions requiring bank group approval of a new chief
executive officer within a stated period of time after the departure of an
existing chief executive officer and requiring that certain proceeds of asset
sales be used to permanently reduce the commitment amount under the Credit
Facility.
As of September 30, 1999, the Company was in violation of the covenants in
the Credit Facility relating to minimum consolidated net income and the ratio
of net income plus interest, tax and rental expense (EBITR) to interest expense
plus rental expense. In November 1999, the Company received a temporary waiver
of these defaults through February 29, 2000 pursuant to a Second Amendment to
the Credit Facility. The Second Amendment also strengthened certain financial
covenants in the Credit Facility. These amended financial covenants require the
Company to (i) maintain a specified minimum level of EBITDA during the period
from October 1, 1999 through February 28, 2000, (ii) obtain the prior written
consent of the bank group in order to pay cash consideration for any
acquisition, (iii) refrain from entering into operating leases providing for
aggregate rental payments in excess of $8.6 million in 1999, and (iv) refrain
from having greater than $1.5 million of cash in bank accounts outside of Bank
of America. In connection with the Second Amendment the Company and the banks
also agreed to decrease the commitment amount of the Credit Facility to $65.0
million and to decrease the amount available for borrowing to $58.0 million
through December 31, 1999 and $55.0 million after January 1, 2000.
In November 1999, the Company failed to meet the minimum EBITDA requirement
imposed by the Second Amendment to the Credit Facility. As a result, the
Company and the banks entered into a Third Amendment to the Credit Facility
dated January 31, 2000, which waived the existing covenant defaults through
March 31, 2000. The Third Amendment also set a new minimum EBITDA requirement
(not including certain
23
<PAGE>
one-time charges) of $500,000 per month, limits the amount of cash equivalents
that the Company is entitled to have to $2.5 million, prohibits certain sales
of assets other than for cash without the banks' consent, and requires certain
proceeds of asset sales to be used to permanently reduce the commitment amount
under the Credit Facility (which requires the Company to make mandatory
prepayments of any amounts outstanding in excess of the commitment amount, as
so reduced). The Third Amendment also permanently reduced the commitment amount
of the Credit Facility to $58.0 million and the amount available for borrowing
to $55.0 million (unless the banks otherwise consent). On March 29, 2000, the
banks extended the temporary waivers of the existing defaults under the Credit
Facility until April 28, 2000, at which time there will be an immediate event
of default and, absent a further waiver or amendment, all amounts due
thereunder will be subject to acceleration at the banks' discretion. If the
banks elect to accelerate, the Company would be required to refinance its debt
or obtain capital from other sources, including sales of additional debt or
equity securities or sales of assets, in order to meet its repayment
obligations, which may not be possible. If the banks were to accelerate
repayment of outstanding amounts under the Credit Facility, such acceleration
would cause a default under the Charterhouse Debentures, and Charterhouse could
accelerate repayment of all amounts outstanding under the Charterhouse
Debentures, subject to the Credit Facility banks' priority. In such event,
repayment of amounts outstanding under the Charterhouse Debentures could only
be made if the Credit Facility was first paid in full or the bank group gave
its express prior written consent to such repayment.
On November 19, 1998, the Company entered into a Purchase Agreement with
Charterhouse providing for the issuance to Charterhouse of up to $75.0 million
aggregate principal amount of Debentures. The Debentures are convertible into
Common Stock at any time, at Charterhouse's option, at an initial exercise
price of $15.00 per share, subject to adjustment as provided in the Purchase
Agreement. The conversion price exceeded the fair market value of the Common
Stock on the date of execution of the Purchase Agreement. Following five years
after the date of first issuance, the Debentures are redeemable at the
Company's option at 100% of their principal amount if the average closing price
of the 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. As of December 31, 1999, $80.9 million of
Debentures were outstanding. During the year ended December 31, 1999, the
Company recorded $7.1 million in interest expense and deferred financing fees
related to the Debentures. 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.
From inception of the Company through December 31, 1999, approximately $11.1
million had been spent to develop and install the Company's 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 need to be spent to do so.
The Company spent $20.2 million on purchases of vehicles and equipment
(including $7.2 million spent in connection with installation of information
systems) during the year ended December 31, 1999. Other than expenditures
relating to the information systems, these expenditures were primarily for the
purchase of transport and towing and recovery vehicles. During the year ended
December 31, 1999, the Company made expenditures of $3.4 million on towing and
recovery vehicles and $6.7 million on transport vehicles. These expenditures
were financed primarily with cash flow from operations and debt. During the
first quarter of 1999, the Company committed to purchase up to 100 transport
vehicles, for delivery at various times throughout the year 2000, and in
connection therewith made a deposit of approximately $1.6 million to the
vehicle manufacturer. In March 2000, the Company amended the contract with the
vehicle manufacturer to reduce the commitment to 60 vehicles, to be delivered
at various times throughout 2000, and to apply $1.5 million of the $1.6 million
deposit toward the first 40 vehicles delivered. The Company's ability to take
delivery of these
24
<PAGE>
vehicles will depend upon the availability of sufficient capital. If the
Company is unable to take delivery of any vehicles, it may lose the entire $1.6
million deposit.
During the period from January 1, 1999 to May 5, 1999, the Company acquired
15 businesses using a combination of Common Stock and cash. The total number of
shares issued in connection with these acquisitions was 2,065,068 with a
recorded fair value of $32.6 million. The cash portion of these acquisitions
was funded through cash flow from operations and debt. The Company has not
completed any acquisitions since May 5, 1999.
As of December 31, 1999, the Company had cash on hand of approximately $4.1
million. The Company is in the process of implementing programs to decrease
operating and administrative costs and to reduce receivable balances and
expedite billing for services rendered. While there can be no assurance,
management expects that these initiatives will serve to strengthen the
Company's cash position. In the meantime, the Company believes that it will be
able to fund its working capital needs through cash flow from operations at
least until January 1, 2001, as long as it does not experience significant
decreases in revenues or increases in costs. In the event the Company is unable
to fund its near-term working capital needs from cash flow from operations, it
will be required to secure alternative sources of capital through issuances of
debt or equity securities or sales of assets. There can be no assurance that
additional capital will be available to the Company on satisfactory terms, or
at all.
While the Company currently expects that its cash flow from operations will
be sufficient to fund its near-term working capital needs as long as it does
not experience significant decreases in revenues or increases in costs, the
current level of cash flow from operations is not expected to be sufficient to
fund the Company's medium or long-term working capital needs or its growth
strategy. Thus, in order to be able to successfully implement its revised
business strategy, it will be necessary for the Company to raise additional
capital, through issuances of debt or equity securities, additional bank debt
or sales of assets, which may not be possible on satisfactory terms, or at all.
Due to the temporary nature of the waivers of the existing defaults under
the Company's Credit Facility, the total amount outstanding under the Credit
Facility at December 31, 1999 has been classified as a current liability. As a
result of such reclassification, the audit report on the Company's consolidated
financial statements dated March 29, 2000, except as to Note 19(b), which is as
of April 12, 2000 and Note 19(c), which is as of April 14, 2000, includes a
statement that the excess of current liabilities over current assets raises
substantial doubt about the Company's ability to continue as a going concern.
On April 14, 2000, the Company entered into a Stock Purchase Agreement (the
"KPS Agreement") with KPS for the sale of shares of Series A Preferred Stock to
KPS for an aggregate purchase price of $25 million. Holders of Series A
Preferred Stock are entitled to cumulative dividends of 5.5% per annum for six
years after the closing date of the KPS Transaction and 5% per annum thereafter
payable, until 2005, either in cash or in shares of the Company's Series B
Participating Convertible Preferred Stock (the "Series B Preferred Stock") at
the option of the Company. After 2005, dividends are payable only in cash. The
obligation to pay dividends terminates in 2008, or earlier if the Company's
common stock trades above a specified price level.
The Series A Preferred Stock and Series B Preferred Stock (collectively, the
"Preferred Stock") are both convertible into the Company's common stock at any
time at the option of the holder. The per share conversion price for the Series
A Preferred Stock is generally the lesser of $2 or the average closing price of
the common stock for the 30 trading days prior to closing of the KPS
Transaction (the "Thirty Day Average"). However, if the Thirty Day Average is
greater than or equal to $0.84 and less than or equal to $1, the conversion
price will be $1, and if the Thirty Day Average is less than $0.84, the
conversion price will be 120% of the Thirty Day Average. The Series B Preferred
Stock is identical in all respects to the Series A Preferred Stock except that
its conversion price is 15% lower than the conversion price of the Series A
Preferred Stock. The Preferred Stock automatically converts into common stock
upon the occurrence of certain business combinations, unless the holders elect
to exercise their liquidation preference rights.
25
<PAGE>
Upon consummation of the KPS Transaction, the Company has agreed to pay KPS
Management LLC, an entity affiliated with KPS, a one-time transaction fee of
$2.5 million and to reimburse KPS for its actual reasonable fees and expenses
in connection with negotiation and performance of the KPS Agreement. The
Company has also agreed to pay KPS Management LLC an annual management fee of
$1 million initially, which may be lowered to $500,000 and then to zero based
upon the amount of Preferred Stock held by KPS and its permitted transferees.
The holders of Preferred Stock have the right to designate six members of the
Company's Board of Directors, which constitutes a majority, for so long as KPS
and its permitted transferees continue to own specified amounts of Preferred
Stock. At lower levels of ownership, holders of Preferred Stock will be
entitled to appoint three directors, one director, or no directors.
In connection with the KPS Transaction, the Company and Charterhouse have
agreed that the Charterhouse Debentures will be redeemable at par under certain
circumstances. Charterhouse also agreed to waive its right to require the
Company to redeem the Debentures at 106.25% of the aggregate principal amount
of the Debentures upon consummation of the KPS Transaction in return for a
transaction fee of $750,000. Charterhouse has also agreed to waive certain
corporate governance rights that existed under its Investor's Agreement with
the Company in connection with the KPS Transaction. Consummation of the KPS
Transaction is subject to a number of conditions, including approval of the
Company's stockholders and the availability at closing of a refinancing or
replacement of the Company's Credit Facility providing for at least $25 million
of borrowing capacity in addition to the amounts currently outstanding under
the Credit Facility. There can be no assurance that these conditions will be
satisfied, or that the KPS Transaction, the refinancing of the Credit Facility,
or the restructuring of the Charterhouse Debentures will be consummated. If,
the KPS Transaction is consummated, management believes that it will provide
the Company with sufficient working capital to absorb any unanticipated
decreases in revenues or increases in costs in the near term as well as working
capital to help fund the Company's growth strategy.
The Company's existing Credit Facility matures on October 31, 2001. If the
Company is not successful in replacing the Credit Facility before maturity, its
ability to refinance the Credit Facility upon maturity will depend to a great
degree on improved operating performance, particularly with respect to the
Company's cash flow to interest coverage ratio. If the Company cannot
successfully refinance the Credit Facility upon maturity, it will be required
to raise capital through the issuance of additional debt or equity securities
or sales of assets in order to meet its repayment obligations under the Credit
Facility.
The Company currently has a negative net tangible book value. Accordingly,
based upon the current market price of the Common stock, if the Company were
required to issue additional equity securities at this time, such issuance
would result in immediate and substantial dilution in net tangible book value
to existing investors.
Disposition of Division
On February 11, 2000, the Company sold the capital stock of Northshore
Towing, Inc., North Shore Recycling, Inc. and Evanston Reliable Maintenance,
Inc. (collectively "Northshore") located in Chicago, Illinois, for cash
proceeds of $450,000 and a secured non-interest bearing promissory note in the
principal amount of $500,000. Northshore was a division within the Company's
towing and recovery segment.
Seasonality
The Company may experience significant fluctuations in its quarterly
operating results due to seasonal 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 or inclement weather,
such as heat, cold, rain and snow. Although the demand for automobile transport
tends to be strongest in the months with the mildest weather, since extreme or
inclement weather tends to slow the delivery of vehicles, the demand for
automobile transport is also a function of the timing and volume of lease
originations, new car model changeovers, dealer inventories and new and used
auto sales.
26
<PAGE>
General Economic Conditions and Inflation
The Company's future operating results may be adversely affected by (i) the
availability of capital to fund operations, including expenditures for new and
replacement equipment, (ii) the Company's success in improving operating
efficiency and profitability and in integrating its acquired business (iii) the
loss of significant customers or contracts, (iv) the timing of expenditures for
new equipment and the disposition of used equipment (v) changes in applicable
regulations, including but not limited to, various federal, state and local
laws and regulations regarding equipment, driver certification, training,
recordkeeping and workplace safety, (vi) changes in the general level of demand
for towing and transport services, (vii) price changes in response to
competitive factors, (viii) event-driven variations in the demand for towing
and transport services and (ix) general economic conditions. Although the
Company cannot accurately anticipate the effect of inflation on its operations,
management believes that inflation has not had, and is not likely in the
foreseeable future to have, a material impact on its results of operations.
Year 2000 Disclosure
The Company's information systems and facilities successfully completed the
"roll-over" to the year 2000. The Company's transition to the year 2000 during
the first week of business in January 2000 resulted in no adverse or negative
impacts associated with the use of date sensitive software and equipment. The
Company believes that with its successful transition to the year 2000, the
preponderance of the risk associated with the year 2000 problem has been
identified and eliminated. The Company estimates the total cost of its year
2000 assessment and remediation plan has amounted to approximately $427,000,
which has been funded through cash flow from operations.
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 rates. The Company's
policy is to manage interest rates through the use of floating rate debt. The
Company's objective in managing its exposure to interest rate changes is to
limit the impact of interest rate changes on earnings and cash flow and to
lower its overall borrowing costs. The table below provides information about
the Company's financial instruments that are sensitive to interest rate
changes. The table presents principal cash flows by expected maturity dates
(assuming no further waivers of existing defaults under the Credit Facility are
granted and the banks elect to accelerate all amounts outstanding thereunder)
for floating rate debt instruments as of December 31, 1999. There were no
derivative financial instruments at December 31, 1999.
<TABLE>
<CAPTION>
Expected Maturity Date
------------------------------------------------------
Fair
2000 2001 2002 2003 2004 Thereafter Total Value
------- ---- ---- ---- ---- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable rate debt....... $50,650 -- -- -- -- -- $50,650 $50,650
</TABLE>
As of December 31, 1999, the average interest rate under the Company's
Credit Facility was the base rate (the higher of the Federal funds rate plus
0.5% or the reference rate, as defined) plus the base rate margin.
ITEM 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements included in this Report
beginning at page F-1 are incorporated in this Item 8 by reference.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
27
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The Company's Amended and Restated Certificate of Incorporation provides
that the Company's Board of Directors shall be divided into three classes, as
nearly equal in number as possible (including vacancies in any class), with one
class being elected each year for a three-year term. The Board of Directors has
fixed the number of directors at eleven persons. The nine individuals listed
below are currently serving on the Board of Directors, with two vacancies which
may be filled by the Board of Directors when suitable candidates are located.
The following table sets forth the name, age and position of the Company's
current directors and executive officers:
<TABLE>
<CAPTION>
Director
Name Age Position Class
---- --- -------- --------
<S> <C> <C> <C>
Richard A. Molyneux..... 49 Chairman of the Board and Director III
Gerald R. Riordan....... 51 Chief Executive Officer, Secretary and Director III
Grace M. Hawkins........ 54 Director II
Edward W. Morawski...... 51 Vice President and Director I
Todd Q. Smart........... 35 Director I
Mark J. Henninger....... 42 Director III
Merril M. Halpern....... 65 Director III
Michael S. Pfeffer...... 36 Director I
Robert L. Berner, III... 38 Director II
Donald J. Marr.......... 41 Senior Vice President and Chief Financial Officer --
Michael A. Wysocki...... 46 President, Transport Division --
Harold W. Borhauer...... 51 President, Towing and Recovery Division --
</TABLE>
Richard A. Molyneux has served as Chairman of the Company's Board of
Directors since September 30, 1999, and has been a director of the Company
since June 1998. Mr. Molyneux has been President and CEO of United Ventures
L.L.C., a venture capital company, since March 1998. From 1975 through 1997,
Mr. Molyneux served in various executive positions with KeyBank, N.A., and its
affiliates, most recently as its Vice Chairman.
Gerald R. Riordan has served as the Company's Chief Executive Officer and a
director since October 11, 1999 and as the Company's Secretary since November
2, 1999. Between December 1997 and October 1999, Mr. Riordan was an
entrepreneur pursuing private investments in real estate and other ventures.
From October 1996 to December 1997, Mr. Riordan was President and Chief
Operating Officer of Ryder TRS, Inc. (not owned by Ryder System, Inc.), a truck
rental company. From 1995 to October 1996, Mr. Riordan served as President of
Ryder Consumer Truck Rental and Ryder Student Transportation Services.
Grace M. Hawkins has served as a director since May 1998. Since 1991, Ms.
Hawkins has been the President and Chief Executive Officer of Lotus
Publications, Inc., a publishing and graphics design firm producing books and
marketing materials for the transportation industry.
Edward W. Morawski has served as a Vice President and director of the
Company since May 1998. In 1977, Mr. Morawski founded Northland Auto
Transporters, Inc. and Northland Fleet Leasing, Inc. (collectively,
"Northland"), one of the Founding Companies acquired by the Company in
connection with its initial public offering, and served as the President of
Northland from inception until its acquisition by the Company in May 1998.
Todd Q. Smart has been a director of the Company since May 1998. Mr. Smart
also provided the Company with acquisition-related consulting services from May
1998 through September 1999. In 1987, Mr.
28
<PAGE>
Smart founded Absolute Towing and Transporting, Inc. ("Absolute"), one of the
Founding Companies, and served as the President of Absolute from inception
until its acquisition by the Company in May 1998. Since June 1998, Mr. Smart
has also operated an official police garage in Los Angeles, California.
Mark J. Henninger has been a director of the Company since August 1998. Mr.
Henninger also provided the Company with acquisition-related consulting
services from August 1998 through September 1999. In 1991, Mr. Henninger
founded Keystone Towing, Inc. ("Keystone") and served as the President of
Keystone from inception until its acquisition by the Company in August 1998.
Mr. Henninger is currently seeking the award of a contract to operate an
official police garage in Los Angeles, California.
Merril M. Halpern has served as a director since December 1998. Mr. Halpern
founded Charterhouse Group International, Inc. in 1973 and serves as its
Chairman of the Board and Chief Executive Officer. Mr. Halpern also serves on
the boards of directors of Microwave Power Devices, Inc., a manufacturer of
highly linear power amplifiers primarily for the wireless telecommunications
market, and NetCare Health Systems, Inc., an integrated health provider
network.
Michael S. Pfeffer has served as a director since March 1999. Mr. Pfeffer
has been a Senior Vice President of Charterhouse Group International, Inc.
since May 1998. From September 1996 to May 1998, Mr. Pfeffer served in
executive positions in the equity capital group of General Electric Capital
Corporation, most recently as Senior Vice President. From August 1993 to
September 1996, Mr. Pfeffer was Vice President of Charterhouse Environmental
Capital Group.
Robert L. Berner, III has served as a director since December 1998. Mr.
Berner is a Managing Director of Charterhouse Group International, Inc. and a
member of its Investment Committee. Mr. Berner joined Charterhouse Group
International, Inc. in January 1997. From 1986 through December 1996, Mr.
Berner was a Principal in the Merger and Acquisitions Department at Morgan
Stanley & Co., Incorporated.
Donald J. Marr has served as Senior Vice President and Chief Financial
Officer of the Company since January 1998. From 1986 through 1997, Mr. Marr
held a series of management positions with KeyCorp, most recently as Senior
Vice President, Planning and Analysis.
Michael A. Wysocki has been President of the Company's Transport Division
since January 2000. Mr. Wysocki founded MPG Transco, Ltd., a Livonia, Michigan
based auto transport company ("MPG") in 1973, and served as its President and
Chief Executive Officer from inception until MPG was acquired by the Company in
January 1999. From January 1999 until January 2000, Mr. Wysocki served as
general manager of the Company's MPG division.
Harold W. Borhauer has been President of the Company's Towing and Recovery
Division since January 2000. In 1983, Mr. Borhauer founded Arizona's Towing
Professionals, Inc., which does business as Shamrock Towing ("Shamrock"), a
Phoenix, Arizona based towing and recovery company that was acquired by the
Company in March 1999. Mr. Borhauer served as Shamrock's Chief Executive
Officer from 1983 until its acquisition by the Company. From March 1999 until
January 2000, Mr. Borhauer served as general manager of the Company's Shamrock
division.
In connection with the purchase by Charterhouse of $43.5 million aggregate
principal amount of Debentures in December 1998, the Board of Directors was
expanded from eight members to ten members and Messrs. Berner and Halpern, both
designees of Charterhouse, were appointed to fill the resulting vacancies on
the Board. Further, in connection with the purchase by Charterhouse of an
additional $31.5 million aggregate principal amount of Debentures in March
1999, the Board of Directors was expanded to eleven members and an additional
Charterhouse nominee, Mr. Pfeffer, was added to the Board. Pursuant to the
Purchase Agreement with Charterhouse, the Company may not take any action that
would require stockholder approval without the approval of a majority of the
Charterhouse designees to the Board who are present at the relevant Board
meeting.
29
<PAGE>
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who beneficially own more than ten percent of
the Company's Common Stock, to file with the SEC initial reports of ownership
and reports of changes in ownership of Common Stock and other equity securities
of the Company. Officers, directors and stockholders beneficially holding
greater than ten percent of the Common Stock are also required by SEC
regulations to furnish the Company with copies of all Section 16(a) reports
that they file with the SEC.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and representations that no other reports were
required, during the fiscal year ended December 31, 1999, all Section 16(a)
filing requirements applicable to the Company's officers, directors and greater
than ten percent stockholders were complied with, except that Mr. Riordan was
late in filing a Form 3 in connection with his commencement of employment with
the Company.
ITEM 11. Executive Compensation
Summary Compensation Table
The following table presents summary information concerning the compensation
of (i) all individuals who served as the Company's Chief Executive Officer
("CEO") during 1999 and (ii) the Company's four most highly compensated
officers during 1999 other than the CEO (together, the "Named Executive
Officers") for services rendered to the Company and its subsidiaries during the
fiscal years 1998 and 1999. Other than the Named Executive Officers, no
executive officer of the Company received salary and bonus payments exceeding
$100,000 in the aggregate during fiscal year 1999. No compensation was paid by
the Company to the Named Executive Officers during fiscal year 1997.
<TABLE>
<CAPTION>
Securities
Underlying All Other
Name Year Salary Bonus Options Compensation
- ---- ---- -------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Gerald R. Riordan(1)............ 1999 $ 61,539 $ -- 750,000 $ 4,575(2)
Edward T. Sheehan(3)............ 1999 118,850 -- -- 196,539(4)
1998 141,678 -- 90,000 --
Donald J. Marr.................. 1999 74,827 66,042 50,000 --
1998 75,000 50,000 125,000 --
Allan D. Pass, Ph.D(5).......... 1999 222,115 -- -- --
1998 125,765 -- 155,000 8,887(2)
Robert J. Adams, Jr.(6)......... 1999 174,615 -- -- 7,692(7)
1998 110,002 -- 110,000 4,554(8)
</TABLE>
- --------
(1) Mr. Riordan's employment with the Company began as of October 11, 1999.
(2) Consists of housing expenses paid by the Company on behalf of the Named
Executive Officer.
(3) Mr. Sheehan was employed by the Company from October 1997 until June 21,
1999.
(4) Consists of (i) $26,923 representing previously unpaid salary for Mr.
Sheehan's service to the Company for the period from February 26, 1998 to
May 15, 1998, (ii) $17,308 representing reimbursement for vacation time
accrued but unused by Mr. Sheehan, and (iii) $152,308 in severance payments
made pursuant to the Employment Termination and Release Agreement between
the Company and Mr. Sheehan.
(5) Dr. Pass' employment with the Company began as of April 20, 1998. From
January 1, 1998 through April 19, 1998, Dr. Pass provided consulting
services to the Company. Dr. Pass terminated his employment agreement with
the Company effective as of December 15, 1999.
(6) Mr. Adams' employment with the Company began as of June 1, 1998. From
February 1, 1998 through June 1, 1998, Mr. Adams provided acquisition-
related consulting services to the Company. Mr. Adams terminated his
employment agreement with the Company effective as of December 15, 1999.
(7) Consists of severance payments made to Mr. Adams pursuant to his Amended
and Restated Employment Agreement.
(8) Consists of relocation expenses paid by the Company on behalf of the Named
Executive Officer.
30
<PAGE>
Option Grants in 1999
The following table sets forth information concerning stock option grants to
Mr. Riordan and Mr. Marr during 1999. None of the other Named Executive
Officers received grants of stock options during 1999.
<TABLE>
<CAPTION>
Value at Assumed
Annual Rates of
Number of Percentage of Stock Price
Shares Total Options Appreciation for
Underlying Granted to Option Term(1)
Options Employees in Exercise Price Expiration ---------------------
Name Granted Fiscal Year (per share) Date 5% 10%
- ---- ---------- ------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gerald R. Riordan....... 750,000(2) 66.0 $2.906 10/11/09 $1,370,250 $3,476,250
Donald J. Marr.......... 50,000(3) 4.4 3.313 9/1/09 104,200 $ 264,000
</TABLE>
- --------
(1) Represents the potential realizable value of each grant of options assuming
that the market price of the underlying securities appreciates in value
from the date of grant to the end of the option term at the rates of 5% and
10% compounded annually.
(2) All of such options were issued at fair market value on October 11, 1999
and vest over a period of three years at a rate of 33 1/3% per year
beginning on October 11, 2000.
(3) All of such options were granted pursuant to the Company's 1998 Stock
Option Plan, were issued at fair market value on September 1, 1999 and were
fully vested on the date of grant.
Fiscal Year-End Option Values
The following table sets forth information concerning the number of shares
of Common Stock underlying exercisable and unexercisable options held by the
Named Executive Officers as of December 31, 1999. The exercise price for each
of these options exceeded the fair market value of such options based on the
last reported sale price of the Common Stock on December 31, 1999 ($1.625 per
share) and, therefore, the options had no value as of such date. No options
were exercised by any of the Named Executive Officers during 1999.
<TABLE>
<CAPTION>
Exercisable Unexercisable
Name Options Options
---- ----------- -------------
<S> <C> <C>
Gerald R. Riordan................................ -- 750,000
Donald J. Marr................................... 91,667 83,333
Edward T. Sheehan................................ 30,000 60,000
Allan D. Pass, Ph.D.............................. 51,666 103,334
Robert J. Adams, Jr.............................. 36,666 73,334
</TABLE>
Employment Agreements
The Company's employment agreement with Mr. Riordan, which was effective as
of October 11, 1999, has an initial term of three years with an evergreen
extension continuing after the initial term unless either the Company or Mr.
Riordan provides ten days' notice of termination. Pursuant to this agreement,
Mr. Riordan is entitled to receive an annual salary of not less than $300,000.
The terms of the agreement require the Company to pay Mr. Riordan a termination
fee (over a period of 24 months) equal to approximately two times his annual
salary and bonus if (i) the agreement is terminated without "Cause" by the
Company, or (ii) the agreement is terminated by Mr. Riordan following the
Company's assignment to him of regular duties, responsibilities or status which
the Board of Directors determines, in good faith, to be materially inconsistent
with, or a reduction or alteration in the nature and status of, Mr. Riordan's
duties, responsibilities and status as set forth in the agreement. In addition,
all stock options pursuant to any of the Company's stock option plans granted
to Mr. Riordan prior to the effective date of such a termination will continue
to vest as if such termination had not occurred, and he will be entitled to
continue to receive health, life and disability insurance benefits for a period
of two years after termination. Upon the occurrence of a "Change of Control" of
the Company, Mr. Riordan
31
<PAGE>
has the option, exercisable within one year after the Change of Control, to
terminate his employment agreement and receive a lump sum payment equal to
approximately three times his base salary and bonus. In such event, he will be
entitled to continue to receive health, life and disability insurance benefits
for a period of three years after such termination. Regardless of whether Mr.
Riordan terminates his employment agreement after a "Change of Control", all of
his stock options that are unvested as of the effective date of a Change of
Control will become immediately vested and exercisable. The agreement contains
a covenant prohibiting Mr. Riordan from competing with the Company for a period
of one year following any expiration or termination of the agreement. The
agreement also provides for customary benefits and perquisites.
The Company's employment agreement with Mr. Marr, which was effective as of
September 8, 1999, expires on October 11, 2000. Pursuant to his employment
agreement, Mr. Marr is entitled to receive annual compensation of not less than
$180,000, subject to annual increase at the discretion of the Compensation
Committee of the Board of Directors. Mr. Marr is also entitled to an additional
annual bonus at the discretion of the Compensation Committee. The agreement
requires the Company to pay Mr. Marr a termination fee (over a period of one
year) equal to his base salary at the time of termination and his bonus, if
any, for the year immediately preceding termination, if (i) the agreement is
terminated without "Cause" by the Company, (ii) the agreement is terminated by
Mr. Marr following the Company's assignment to him of regular duties,
responsibilities or status which the Board of Directors determines, in good
faith, to be materially inconsistent with, or a reduction or alteration in the
nature and status of, Mr. Marr's duties, responsibilities and status in effect
prior to such assignment, or (iii) Mr. Marr terminates his employment within
one month following a relocation of the Company's headquarters more than 45
miles from its current location. In addition, all stock options granted to Mr.
Marr pursuant to any of the Company's stock option plans prior to the effective
date of such a termination will continue to vest as if such termination had not
occurred, and he will be entitled to continue to receive health, life and
disability insurance benefits for a period of two years after termination. If
after a "Change of Control" of the Company, (i) Mr. Marr is assigned duties
responsibilities or status inconsistent with his duties, responsibilities or
status prior to the Change of Control, (ii) Mr. Marr's salary or specified
bonus is reduced, (iii) the Company or its successor fails to continue the
Company's insurance, disability or option plans, or any other benefit plans,
policies, practices or arrangements in which Mr. Marr participated prior to the
Change of Control, or the Company or its successor fails to provide for Mr.
Marr's participation in such plans or arrangements on the same basis as existed
prior to the Change of Control, (iv) the Company fails to obtain a satisfactory
agreement from its successor to assume Mr. Marr's employment agreement, (v) Mr.
Marr's employment is terminated for any reason other than for "Cause," or (vi)
the persons who were directors of the Company immediately prior to the Change
of Control cease to constitute a majority of the Board of Directors of the
Company following such transaction, Mr. Marr has the option, exercisable until
October 11, 2000, to terminate his employment agreement and receive a lump sum
payment equal to approximately three times his base salary and bonus. In such
event, he will be entitled to continue to receive health, life and disability
insurance benefits for a period of three years after such termination.
Regardless of whether Mr. Marr terminates his employment agreement after a
"Change of Control", all of his stock options that are unvested as of the
effective date of a Change of Control will become immediately vested and
exercisable. The agreement contains a covenant prohibiting Mr. Marr from
competing with the Company for a period of one year following any expiration or
termination of his agreement. The agreement also provides for customary
benefits and perquisites.
The Company had an employment agreement with Mr. Sheehan that provided Mr.
Sheehan with an annual base salary of not less than $300,000. On June 21, 1999,
Mr. Sheehan's employment agreement was terminated and the Company and Mr.
Sheehan entered into an Employment Termination and Release Agreement. Under the
termination agreement, Mr. Sheehan received (i) a lump sum payment equal to
$26,923 representing previously unpaid salary for Mr. Sheehan's service to the
Company for the period of February 26, 1998 to May 15, 1998, and (ii) a lump
sum payment equal to $17,308 for unused vacation. Pursuant to the agreement,
Mr. Sheehan is entitled to a severance payment of $600,000 payable over a two
year period in equal installments. In addition, the agreement provides that all
stock options granted to Mr. Sheehan pursuant to any of the Company's stock
option plans prior to the termination of Mr. Sheehan's employment will continue
to
32
<PAGE>
vest as if such termination had not occurred, and that Mr. Sheehan is entitled
to continue to receive medical, life, dental and disability insurance benefits
for a period of five years after termination. The agreement further provides
that all shares of Common Stock purchased by Mr. Sheehan pursuant to the Stock
Purchase and Restriction Agreement dated November 1997 between the Company and
Mr. Sheehan shall be considered fully "vested" under such agreement as of the
date of termination, and that the Company shall have no right to repurchase
such shares. The agreement contains a covenant prohibiting Mr. Sheehan from
competing with the Company for a period of two years following the termination
of Mr. Sheehan's employment.
The Company had employment agreements with Dr. Pass and Mr. Adams which were
terminated by said individuals as of December 15, 1999. Each of these
agreements had an initial term of three years with an evergreen extension
continuing after the initial term unless either the Company or such individual
provided ten days' notice of termination. Pursuant to these employment
agreements, Dr. Pass and Mr. Adams were entitled to receive an annual salary of
not less than $250,000 and $200,000, respectively. The terms of the agreements
required the Company to pay Dr. Pass and Mr. Adams a termination fee equal to
approximately two times such individual's salary and bonus if (i) such
individual's agreement was terminated without "Cause" by the Company, (ii) the
Board of Directors determined in good faith that such individual had been
assigned duties, responsibilities or status materially inconsistent with the
duties, responsibilities and status set forth in his employment agreement, or
(iii) if such individual terminated his employment with the Company within six
months after any termination of Mr. Sheehan's employment with the Company. The
agreements also provided that, upon any such event, all stock options granted
to such individuals pursuant to any of the Company's stock option plans prior
to the effective date of termination would continue to vest as if such
termination had not occurred and such individuals would be entitled to continue
to receive health, life and disability insurance benefits for a period of two
years after termination. Each agreement also contained a covenant prohibiting
Dr. Pass and Mr. Adams from competing with the Company for a period of one year
following any expiration or termination of the agreement.
COMPENSATION OF THE BOARD OF DIRECTORS
As compensation for service as a director of the Company, each director who
is not an employee of the Company or any of its subsidiaries or affiliated with
Charterhouse is entitled to receive (i) upon election as a director and on the
date of each annual meeting of the Board of Directors thereafter, a grant of
options to purchase 20,000 shares of Common Stock at the fair market value on
the date of grant, and (ii) cash compensation of approximately $2,500 for each
meeting attended. In addition, all directors are reimbursed for their out-of-
pocket expenses incurred in connection with attending meetings of the Board of
Directors and committees thereof.
In addition, each director who is neither an officer nor an employee of the
Company (i) is entitled to receive upon accepting the position of chairman of a
committee of the Board of Directors (or, as of September 30, 1999, with respect
to directors who were committee chairmen on that date), a grant of options to
purchase 2,500 shares of the Company's Common Stock pursuant to the 1998 Stock
Option Plan, and (ii) who serves on a committee of the Board of Directors is
entitled to receive $500 in cash (the "Committee Fee") for each committee
meeting attended by such director; provided, however, that no Committee Fee
shall be payable to any director unless and until the closing price of the
Common Stock exceeds $5 per share for five consecutive trading days following
the date of the meeting to which the Committee Fee relates.
During 1999, Ms. Hawkins and Messrs. Henninger, Smart and Molyneux each
received options to purchase 20,000 shares of Common Stock in connection with
their service on the Board of Directors. Mr. Molyneux was also awarded, as of
September 30, 1999, (i) options to purchase 75,000 shares of Common Stock in
connection with his appointment as Chairman of the Board of Directors, and (ii)
options to purchase an aggregate of 7,500 shares of Common Stock in connection
with his service as Chairman of the Company's Audit, Compensation and
Independent Committees. As of September 30, 1999, Mr. Smart was also awarded
options to purchase 2,500 shares of Common Stock in connection with his service
as Chairman of the Company's Executive Committee. The Company also has
consulting or employment agreements with certain directors. See "Certain
Relationships and Related Transactions."
33
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As of December 31, 1999, the Compensation Committee of the Board of
Directors consisted of Ms. Hawkins, Mr. Henninger and Mr. Molyneux. Mr.
Henninger was appointed to the Compensation Committee after the resignation of
Donald J. Moorehead, Jr. from the Board of Directors as of September 30, 1999.
No member of the Compensation Committee was an officer or employee of the
Company or its subsidiaries during 1999, or an officer of the Company or its
subsidiaries at any time prior to 1999. During 1999, none of the Named
Executive Officers served as a director or member of the Compensation Committee
of another entity, one of whose executive officers served as a director or
member of the Compensation Committee of the Company. Mr. Henninger has certain
agreements with the Company described in Item 13, "Certain Relationships and
Related Transactions."
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial ownership of the Company's
Common Stock as of March 22, 2000 by (i) each stockholder known by the Company
to be the beneficial owner of more than 5% of the outstanding shares of Common
Stock, (ii) each director of the Company, (iii) each executive officer named in
the Summary Compensation Table, and (iv) all current directors and executive
officers as a group. Unless otherwise indicated, each such person (alone or
with family members) has sole voting and dispositive power with respect to the
shares listed opposite such person's name. Except as otherwise indicated, the
address of each such person is c/o United Road Services, Inc., 17 Computer
Drive West, Albany, New York 12205.
<TABLE>
<CAPTION>
Number of Percent
Beneficially- of
Name Owned Shares Class(1)
- ---- ------------- --------
<S> <C> <C>
Gerald R. Riordan.................................... 30,770 *
Richard A. Molyneux.................................. 13,334(2) *
Grace M. Hawkins..................................... 20,000(2) *
Mark J. Henninger.................................... 384,291(3) 2.2
Edward W. Morawski................................... 692,277 3.9
Todd Q. Smart........................................ 309,279(4) 1.7
Merril M. Halpern(5)................................. -- --
Robert L. Berner, III(5)............................. -- --
Michael S. Pfeffer(5)................................ -- --
Donald J. Marr....................................... 119,999(2) *
Edward T. Sheehan(6)................................. 758,569(7) 4.2
Allan D. Pass, Ph.D(8)............................... 90,000(2) *
Robert J. Adams, Jr.(9).............................. 45,000(2) *
Charter URS LLC...................................... 5,391,760(10) 23.2
All current directors and executive officers as a
group (12 persons).................................. 2,493,306 14.0
</TABLE>
- --------
*Less than one percent.
(1) The applicable percentage of ownership is based upon 17,851,649 shares of
Common Stock outstanding as of March 22, 2000.
(2) Consists entirely of shares issuable pursuant to options exercisable
within 60 days.
(3) Includes 6,667 shares issuable pursuant to options exercisable within 60
days and 377,624 shares held of record by the Henninger Family Revocable
Trust dated January 21, 1999.
(4) Includes 6,667 shares issuable pursuant to options exercisable within 60
days.
(5) The address of this director is c/o Charterhouse Group International,
Inc., 535 Madison Avenue, New York, New York 10022.
(6) The address of this stockholder is 6 East Ridge Road, Loudonville, NY
12211.
34
<PAGE>
(7) Includes 11,235 shares held by children of Mr. Sheehan. Mr. Sheehan
disclaims beneficial ownership of such shares. Also includes 704,000
shares held of record by the Edward T. Sheehan 1992 Revocable Trust and
43,334 shares issuable pursuant to options exercisable within 60 days.
(8) The address of this stockholder is 10775 Babcock Blvd., Gibsonia, PA
15044.
(9) The address of this stockholder is 885 Beaverbrook Drive, Atlanta, GA
30318.
(10) Consists entirely of shares issuable upon conversion of the Charterhouse
Debentures. According to a Schedule 13D, dated as of December 7, 1998 and
amended as of March 16, 1999, Charterhouse Equity Partners III, L.P., a
Delaware limited partnership ("CEP III"), is the principal member of
Charterhouse. The general partner of CEP III is CHUSA Equity Investors
III, L.P., whose general partner is Charterhouse Equity III, Inc., a
wholly-owned subsidiary of Charterhouse Group International, Inc., a
Delaware corporation ("Charterhouse International"). Each of Charterhouse
and CEP III has shared voting and dispositive power over the shares held
of record by Charterhouse and may be deemed to beneficially own these
shares. Mr. Halpern serves as Chairman of the Board and Chief Executive
Officer of Charterhouse International. Mr. Berner serves as Managing
Director of Charterhouse International. Mr. Pfeffer serves as Senior Vice
President of Charterhouse International. Messrs. Halpern, Berner and
Pfeffer disclaim beneficial ownership with respect to the shares held of
record by Charterhouse. The address of Charterhouse is c/o Charterhouse
Group International, Inc., 535 Madison Avenue, New York, New York 10022.
ITEM 13. Certain Relationships and Related Transactions
Each of Messrs. Henninger, Morawski and Smart is a former owner of a
business acquired by the Company during 1998. The Company is required to make
earn-out payments to these individuals for each of the years 1998 through 2002,
if their respective businesses achieve target levels of net revenue. The target
level of net revenue for each business, for the years 1999 through 2002, is
generally 110% of the greater of its actual net revenue or its target net
revenue for the prior year. If the target net revenue is achieved for a
particular year, the Company must make an initial payment generally equal to 5%
of the excess of actual net revenue over the target level. In addition, once
the target level of net revenue for a particular year is met, the Company must
make subsequent and equal payments for each year through 2002, but only if the
actual net revenue for the respective subsequent year exceeds the actual net
revenue for the year that the earn-out target was first achieved. None of Mr.
Morawski, Mr. Smart or Mr. Henninger is expected to receive an earn-out payment
in excess of $60,000 based on the performance of their respective businesses
during 1999.
Pursuant to the agreements entered into in connection with the Company's
acquisitions of Northland, Absolute and Keystone, Messrs. Morawski, Smart and
Henninger have agreed not to compete with the Company for a period of five
years from the date of the Company's initial public offering in defined
business and geographic areas.
In connection with the Company's purchases of Absolute and Keystone, the
Company entered into consulting agreements with Mr. Smart and Mr. Henninger.
Pursuant to these agreements, Mr. Smart and Mr. Henninger were each entitled to
receive a consulting fee equal to two percent (2%) of the gross revenue of each
business they assisted the Company in acquiring, with the fee to be based on
the acquired business' gross revenue for the twelve months immediately
preceding its acquisition by the Company. The consulting agreements with Mr.
Smart and Mr. Henninger were terminated in September 1999. The Company made no
payments to either Mr. Smart or Mr. Henninger under their consulting agreements
during 1999.
In connection with the Company's acquisition of Northland, the Company
entered into an employment agreement with Mr. Morawski pursuant to which he
serves as one of the Company's vice presidents for a term of three years, with
an annual base salary of $150,000.
The employment and consulting agreements described above also contain
covenants not to compete for one year after termination of the relevant
agreement.
35
<PAGE>
In June 1998, Mr. Smart was awarded a contract for police towing in a police
district in Los Angeles. Mr. Smart conducts these operations through a business
that he controls. The Company has the option, exercisable until May 1, 2001, to
buy Mr. Smart's business. The purchase price under this option is equal to 13
times the after-tax income of the business for the 12 month period prior to the
exercise of the option. Mr. Henninger is also seeking the award of a contract
for police towing in another district in Los Angeles. If Mr. Henninger is
awarded this contract, the Company will have the right, exercisable until
August 7, 2001 to buy this business on the same terms described above relating
to Mr. Smart's business.
In January 1999, the Company paid approximately $5.4 million in cash and
issued approximately 508,354 shares of Common Stock to Michael A. Wysocki in
consideration of the Company's acquisition of MPG. In connection with this
acquisition, the Company entered into an employment agreement with Mr. Wysocki
pursuant to which he served as general manager of the Company's MPG division
from January 1999 until January 2000. Mr. Wysocki received a salary of $110,000
for his services under this agreement. Mr. Wysocki is the majority owner of
Translesco, Inc., a corporation from which the Company leases employees to
provide services to the Company's MPG division. During 1999, the Company paid
Translesco approximately $10.5 million in connection with the lease of such
employees. In January 2000, the Company entered into a new employment agreement
with Mr. Wysocki pursuant to which Mr. Wysocki agreed to serve as President of
the Company's Transport Division for a term of 18 months at an annual salary of
$150,000. This agreement may be extended by mutual agreement of the parties and
prohibits Mr. Wysocki from competing with the Company during the term of the
agreement and for a period of two years after termination. In connection with
his employment agreement, the Company granted Mr. Wysocki options to purchase
75,000 shares of Common Stock at an exercise price of $2.00 per share.
In March 1999, the Company paid approximately $785,000 in cash and issued
approximately 81,943 shares of Common Stock to Harold W. Borhauer and his wife,
Lynda A. Borhauer, in connection with the Company's acquisition of Shamrock. In
consideration for this acquisition, the Company entered into two lease
agreements with Mr. and Mrs. Borhauer pursuant to which the Company leases
property used to conduct the Shamrock business. Mr. and Mrs. Borhauer received
aggregate lease payments of $91,903 under these lease agreements in 1999. In
January 2000, the Company entered into an employment agreement with Mr.
Borhauer pursuant to which Mr. Borhauer agreed to serve as President of the
Company's Towing and Recovery Division for a term of 18 months at an annual
salary of $125,000. This agreement may be extended by mutual agreement of the
parties and prohibits Mr. Borhauer from competing with the Company during the
term of the agreement and for a period of two years after termination. In
connection with this agreement, the Company granted Mr. Borhauer options to
purchase 60,000 shares of Common Stock at an exercise price of $2.375 per
share.
36
<PAGE>
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)).
</TABLE>
37
<PAGE>
<TABLE>
<C> <S>
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)).
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)).
</TABLE>
38
<PAGE>
<TABLE>
<C> <S>
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)).*
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)).
</TABLE>
39
<PAGE>
<TABLE>
<C> <S>
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)).
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)).
10.28 Amendment Number One to Amended and Restated Executive Employment
Agreement, dated as of March 30, 1999, between the Company and Edward T.
Sheehan (incorporated by reference to the same-numbered exhibit to Post-
Effective Amendment No. 2 to the Company's Registration Statement on
Form S-1 (Registration No. 333-65563).*
10.29 Amendment Number One to Amended and Restated Executive Employment
Agreement, dated as of March 30, 1999, between the Company and Allan D.
Pass (incorporated by reference to the same-numbered exhibit to Post-
Effective Amendment No. 2 to the Company's Registration Statement on
Form S-1 (Registration No. 333-65563).*
10.30 Amendment Number One to Amended and Restated Executive Employment
Agreement, dated as of March 30, 1999, between the Company and Robert J.
Adams, Jr. (incorporated by reference to the same-numbered exhibit to
Post-Effective Amendment No. 2 to the Company's Registration Statement
on Form S-1 (Registration No. 333-65563).*
10.31 Form of Letter Agreement, dated as of June 22, 1999, by and among the
Company, various financial institutions and Bank of America National
Trust and Savings Association, as Agent, relating to the Company's
Amended and Restated Credit Agreement, dated as of November 2, 1998
(incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1999).
10.32 Form of Letter Agreement, dated as of July 12, 1999, by and among the
Company, various financial institutions and Bank of America National
Trust and Savings Association, as Agent, relating to the Company's
Amended and Restated Credit Agreement, dated as of November 2, 1998
(incorporated by reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1999).
</TABLE>
40
<PAGE>
<TABLE>
<C> <S>
10.33 Form of Letter Agreement, dated as of August 13, 1999, by and among the
Company, various financial institutions, and Bank of America, N.A.
(f/k/a Bank of America National Trust and Savings Association), as Agent
relating to the Company's Amended and Restated Credit Agreement, dated
as of November 2, 1998 (incorporated by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the period ended June 30,
1999).
10.34 Employment Termination Agreement and Release Agreement, dated as of June
21, 1999, by and between the Company and Edward T. Sheehan (incorporated
by reference to Exhibit 10.6 to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1999).*
10.35 Executive Employment Agreement, dated as of October 11, 1999, by and
between the Company and Gerald R. Riordan (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1999).*
10.36 Amended and Restated Executive Employment Agreement, dated as of
September 8, 1999, by and among the Company and Donald J. Marr
(incorporated by reference to the Company's Quarterly Report on Form 10-
Q for the period ended September 30, 1999).*
10.37 Second Amendment, dated as of November 12, 1999, to Amended and Restated
Credit Agreement, dated as of November 2, 1998 among the Company,
various financial institutions and Bank of America, N.A., as Agent
(incorporated by reference to Exhibit 10.4 to the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1999).
10.38 Executive Employment Agreement, dated as of January 17, 2000, between
the Company and Michael A. Wysocki (previously filed).*
10.39 Executive Employment Agreement, dated as of January 21, 2000, between
the Company and Harold W. Borhauer (previously filed).*
10.40 Third Amendment, dated as of January 31, 2000, to Amended and Restated
Credit Agreement, dated as of November 2, 1998, by and among the
Company, various financial institutions and Bank of America, N.A., as
Agent (previously filed).
10.41 Letter Agreement, dated as of February 21, 2000, relating to the Amended
and Restated Credit Agreement, dated as of November 2, 1998, by and
among the Company, various financial institutions and Bank of America,
N.A., as Agent (previously filed).
10.42 Amendment effective as of March 9, 2000, to Executive Employment
Agreement, dated as of October 11, 1999, by and between the Company and
Gerald R. Riordan (previously filed).*
10.43 Amendment effective as of March 9, 2000, to Executive Employment
Agreement, dated as of January 17, 2000, by and between the Company and
Michael A. Wysocki (previously filed).*
10.44 Amendment effective as of March 9, 2000, to Executive Employment
Agreement, dated as of January 21, 2000, by and between the Company and
Harold W. Borhauer (previously filed).*
10.45 Letter Agreement, dated as of April 12, 2000, relating to the Amended
and Restated Credit Agreement, dated as of November 2, 1998, by and
among the Company, various financial institutions and Bank of America,
N.A., as Agent (previously filed).
11.1 Statement regarding Computation of Earnings per Share (previously
filed).
21.1 Subsidiaries of the Registrant (previously filed).
23.1 Consent of KPMG LLP (previously filed).
27.1 Financial Data Schedule (previously filed).
99.1 Agreement for Auto Pound Management and Towing Services, dated as of
July 31, 1997, by and between the City of Chicago and Environmental Auto
Removal, Inc. (previously filed).
99.2 Contract for Motor Transportation, dated as of January 1, 1998, between
MPG Transport, Inc. and General Motors Corporation (previously filed).
99.3 Contract for Motor Transportation, dated as of January 1, 1998, between
Pilot Transport, Inc. and General Motors Corporation (previously filed).
</TABLE>
- --------
* Indicates management agreement or compensatory plan or arrangement.
41
<PAGE>
(b) Reports on Form 8-K
The Company filed the following report on Form 8-K during the quarterly
period ended December 31, 1999:
Current Report on Form 8-K, dated October 12, 1999 and filed October 20,
1999, to report under Item 5 that the Company had appointed Gerald R.
Riordan as its new Chief Executive Officer and a member of its Board of
Directors and that Richard A. Molyneux had assumed the position of Chairman
of the Company's Board of Directors following the resignation from the
Board of Donald F. Moorehead, Jr. for personal reasons. The Company also
reported the termination of its previously announced $225.0 million senior
secured credit facility, the retention of a management consulting firm and
an anticipated loss for the third quarter of 1999.
42
<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 amendment to be
signed on its behalf by the undersigned, thereunto duly authorized.
United Road Services, Inc.
/s/ Gerald R. Riordan
By: _________________________________
Gerald R. Riordan
Chief Executive Officer and
Secretary
Date: April 21, 2000
43
<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, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the years ended December 31, 1999 and 1998, and the period
from July 25, 1997 (inception) through December 31, 1997. 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, 1999 and 1998, and the
results of their operations and their cash flows for the years ended December
31, 1999 and 1998, and for the period from July 25, 1997 (inception) through
December 31, 1997, 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.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements, the Company has received a
waiver of the existing defaults under its revolving credit facility to April
28, 2000, at which time the revolving credit facility will be subject to
acceleration at the election of the bank group absent a further waiver or
amendment. Consequently, the total amount outstanding under the revolving
credit facility at December 31, 1999 has been classified as a current
liability. After giving effect to this reclassification, the excess of current
liabilities over current assets raises substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Notes 2 and 19(c). The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ KPMG LLP
Albany, New York
March 29, 2000, except as to
Note 19(b), which is as
of April 12, 2000 and Note 19(c),
which is as of April 14, 2000
F-1
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(In thousands, except share amounts)
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................................. $ 4,115 3,381
Trade receivables, net of allowance for doubtful accounts
of $2,539 in 1999
and $1,132 in 1998........................................ 23,709 16,440
Other receivables, net of allowance for doubtful accounts
of $262 in 1999 and
$0 in 1998................................................ 1,161 1,495
Prepaid income taxes....................................... 3,534 465
Prepaid expenses and other current assets.................. 2,274 1,752
Current portion of rights to equipment under finance
contracts................................................. 435 547
-------- -------
Total current assets..................................... 35,228 24,080
Vehicles and equipment, net.................................. 78,212 46,814
Rights to equipment under finance contracts, excluding
current portion............................................. 1,480 2,025
Deferred financing costs, net................................ 4,109 3,552
Goodwill, net................................................ 203,337 171,953
Other non-current assets..................................... 79 308
-------- -------
Total assets............................................. $322,445 248,732
======== =======
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of obligations under capital leases... $ 268 338
Current installments of obligations for equipment under
finance contracts......................................... 435 547
Revolving credit facility.................................. 50,650 --
Notes payable.............................................. -- 17
Accounts payable........................................... 7,464 6,904
Accrued expenses........................................... 9,489 4,328
Due to related parties..................................... 1,130 2,616
-------- -------
Total current liabilities................................ 69,436 14,750
Obligations under capital leases, excluding current portion.. 402 698
Obligations for equipment under finance contracts, excluding
current installments........................................ 1,480 2,025
Long-term debt............................................... 80,876 62,532
Deferred income taxes........................................ 2,666 4,961
Other long-term liabilities.................................. 1,172 --
-------- -------
Total liabilities........................................ 156,032 84,966
-------- -------
Stockholders' equity:
Preferred stock; 5,000,000 shares authorized; no shares
issued or outstanding..................................... -- --
Common stock, $0.001 par value; 35,000,000 shares
authorized; 17,820,879 shares issued and 17,594,164 shares
outstanding at December 31, 1999 and 15,707,085 shares
issued and 15,466,004 shares outstanding at December 31,
1998...................................................... 18 16
Additional paid-in capital................................. 191,877 159,532
Retained earnings (deficit)................................ (25,482) 4,218
-------- -------
Total stockholders' equity............................... 166,413 163,766
-------- -------
Total liabilities and stockholders' equity............... $322,445 248,732
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<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)
Year ended Year ended through
December 31, December 31, December 31,
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
Net revenue.............................................. $ 255,112 87,919 --
Cost of revenue.......................................... 202,588 64,765 --
--------- ------ ----
Gross profit........................................... 52,524 23,154 --
Selling, general and administrative expenses (includes
special charges of $2,819 in 1999)...................... 42,139 12,428 174
Amortization of goodwill................................. 5,439 1,745 --
Impairment charge........................................ 28,281 -- --
--------- ------ ----
Income (loss) from operations.......................... (23,335) 8,981 (174)
Other income (expense):
Interest income........................................ 77 658 --
Interest expense (includes $1,029 of deferred fi-
nancing costs written off in 1999).................... (11,419) (1,588) --
Other expense, net..................................... (181) (156) --
--------- ------ ----
Income (loss) before income taxes...................... (34,858) 7,895 (174)
Income tax expense (benefit)............................. (5,158) 3,503 --
--------- ------ ----
Net income (loss)...................................... $ (29,700) 4,392 (174)
========= ====== ====
Per share amounts:
Basic earnings (loss).................................. $ (1.75) .43 (.08)
========= ====== ====
Diluted earnings (loss)................................ $ (1.75) .42 (.08)
========= ====== ====
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the period from July 25, 1997 (inception) through December 31, 1997
and for the years ended December 31, 1998 and 1999
(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
Stock issued in connection with:
1999 acquisitions, net of cer-
tain registration costs
(1,883,171 shares)............. 2 28,988 -- 28,990
Holdback shares issued for 1998
acquisitions (196,263 shares).. -- 3,129 -- 3,129
Exercise of options (1,000
shares)........................ -- 5 -- 5
Earn-out payments (47,726
shares)........................ -- 223 -- 223
Net loss--1999.................... -- -- (29,700) (29,700)
--- ------- ------- -------
Balance at December 31, 1999...... $18 191,877 (25,482) 166,413
=== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the
period from
July 25, 1997
(inception)
Year ended Year ended through
December 31, December 31, December 31,
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
Net (loss) income...................... $ (29,700) 4,392 (174)
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Depreciation.......................... 9,287 3,292 --
Amortization of goodwill.............. 5,439 1,745 --
Impairment charge..................... 28,281 -- --
Amortization of deferred financing
costs................................ 901 219 --
Write off of deferred financing
costs................................ 1,029 -- --
Provision for doubtful accounts....... 2,413 183 --
Deferred income taxes................. (3,541) 1,659 --
Interest expense, paid-in-kind........ 5,644 232 --
Loss on sale of vehicles and
equipment............................ 304 -- --
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Increase in trade receivables....... (3,681) (2,427) --
Decrease in other receivables....... 791 171 --
Increase in prepaid income taxes.... (5,322) (381) --
Decrease in prepaid expenses and
other current assets............... 105 724 --
Decrease in other non-current
assets............................. 229 105 --
Decrease in notes payable........... (17) -- --
Increase (decrease) in accounts
payable............................ (2,570) (1,608) 62
Increase (decrease) in accrued
expenses........................... 2,317 (242) --
Increase in other long-term
liabilities........................ 640 -- --
--------- -------- ----
Net cash provided by (used in)
operating activities............. 12,549 8,064 (112)
--------- -------- ----
Investing activities:
Acquisitions, net of cash acquired.... (36,008) (118,161) --
Purchases of vehicles and equipment... (20,188) (11,297) --
Proceeds from sale of vehicles and
equipment............................ 1,141 387 --
Amounts payable to related parties.... (1,837) 2,162 92
--------- -------- ----
Net cash provided by (used in)
investing activities............. (56,892) (126,909) 92
--------- -------- ----
Financing activities:
Proceeds from issuance of common
stock, net........................... 5 90,235 70
Proceeds from issuance of convertible
subordinated debentures.............. 31,500 43,500 --
Borrowings on revolving credit
facility............................. 65,850 59,800 --
Repayments on revolving credit
facility............................. (34,000) (41,000) --
Payments of deferred financing
costs................................ (2,487) (3,302) --
Payments on long-term debt and
capital leases assumed in
acquisitions......................... (15,791) (27,057) --
--------- -------- ----
Net cash provided by financing
activities....................... 45,077 122,176 70
--------- -------- ----
Increase in cash and cash equivalents.. 734 3,331 50
Cash and cash equivalents at beginning
of period............................. 3,381 50 --
--------- -------- ----
Cash and cash equivalents at end of
period................................ $ 4,115 3,381 50
========= ======== ====
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest............................ $ 3,671 1,137 --
========= ======== ====
Income taxes........................ $ 2,074 2,309 --
========= ======== ====
Supplemental disclosure of non-cash
investing and financing activity:
Issuance of common stock for
acquisitions......................... $ 32,870 69,355 --
========= ======== ====
Warrant issued to lender as partial
loan fee............................. $ -- 469 --
========= ======== ====
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<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. (the "Company"), a Delaware corporation, was
formed in July 1997 to become a national provider of motor vehicle and
equipment towing, recovery and transport services. From inception through
December 31, 1999, the Company acquired 56 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 operate under a common management
structure that evaluates each of the Company's 61 service locations located in
22 states. 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 a flat fee. Customers
include automobile manufacturers, leasing and insurance companies, automobile
auction companies, automobile dealers, as well as individual motorists.
The Towing and recovery segment provides towing, impounding and storing
services, 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 shops and fleet operators, law enforcement agencies,
municipalities and individual motorists.
(b)Basis of Presentation
The accompanying 1999 and 1998 consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
The financial statements for the period from July 25, 1997 (inception)
through December 31, 1997, present the activities of management in preparation
for the Company's initial public offering and the acquisition of the seven
original founding companies, and do not reflect the conduct of any operations.
(c) Revenue Recognition
The Company's revenue is derived from the provision of motor vehicle or
equipment towing, recovery or transport services and fees related to vehicles
towed, such as impound, storage, repair, abandoned car purchases or auction
fees. Transport revenue is recognized upon the delivery of vehicles or
equipment to their final destination, towing revenue is recognized at the
completion of each towing engagement and revenues from impounding, storage,
lien sales, repairs and auctions are recorded when the service is performed or
when title to the vehicles has been transferred. Expenses related to the
generation of revenue are recognized as incurred.
F-6
<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 $1,651 and $611 at December 31, 1999 and 1998,
respectively, 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 the 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> <C>
Transportation and towing equipment........................... 10-15 years
Machinery and other equipment................................. 5-10 years
Computer software and related equipment....................... 3-7 years
Furniture and fixtures........................................ 5 years
Leasehold improvements........................................ 3-10 years
</TABLE>
(f) Long-Lived Assets
The Company accounts for long-lived assets in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Long-lived assets acquired as part of a business combination
accounted for using the purchase method are evaluated along with the allocated
goodwill in the determination of recoverability. Goodwill is allocated based on
the proportion of the fair value of the long-lived assets acquired to the
purchase price of the business acquired. Recoverability of assets, including
allocated goodwill, to be held and used is measured by a comparison of the
carrying amount of those assets to the undiscounted future operating cash flows
expected to be generated by those assets.
(g) 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,
recovery 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 the customer base. In addition, the Company has acquired well
established businesses that have generally been in existence for many years.
F-7
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
In accordance with Accounting Principles Board ("APB") Opinion No. 17,
Intangible Assets, the Company continually evaluates whether events and
circumstances, that may affect the characteristics or comparable data discussed
above, warrant revised estimates of the useful lives or recognition of a
charge-off of the carrying amounts of the associated goodwill.
The Company performs an analysis of the recoverability of goodwill using a
cash flow approach consistent with the Company's analysis of impairment of
long-lived assets under SFAS No. 121. This approach considers the estimated
undiscounted future operating cash flows of the Company. The amount of goodwill
impairment, if any, is measured on estimated fair value based on the best
information available. The Company generally estimates fair value by
discounting estimated future cash flows using a discount rate reflecting the
Company's average cost of funds.
Accumulated amortization at December 31, 1999 and 1998 was $7,184 and
$1,745, respectively.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and tax loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered in
income in the period that includes the enactment date.
(i) Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. The Company does not presently have any elements of other
comprehensive income as outlined in SFAS No. 130, and consequently, there is no
difference between net income (loss) and comprehensive income (loss).
(j) Stock-Based Compensation
The Company applies the intrinsic value-based method of accounting
prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations, in accounting for its fixed plan stock options. As
such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price.
(k) Per Share Amounts
Basic earnings per share excludes dilution and is computed by dividing
income (loss) available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in the earnings of
the Company (such as stock options and warrants).
F-8
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
The following tables provide calculations of basic and diluted earnings per
share:
Year ended December 31, 1999
<TABLE>
<CAPTION>
Weighted
average Per share
Net loss shares amounts
-------- ---------- ---------
<S> <C> <C> <C>
Basic loss per share........................ $(29,700) 16,933,114 $(1.75)
======== ========== ======
Diluted loss per share...................... $(29,700) 16,933,114 $(1.75)
======== ========== ======
The effect of options and warrants, earnout shares and shares held in
escrow have been excluded at December 31, 1999, as the effect would be
antidilutive. Additionally, shares issuable upon conversion of the
convertible subordinated debentures have been excluded at December 31,
1999, as the effect would be antidilutive due to the adjustment (decrease
in net loss) for interest expense.
Year ended December 31, 1998
<CAPTION>
Weighted
Net average Per 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 10,389,903 $ .42
======== ========== ======
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.
For the period July 25, 1997 (inception) through December 31, 1997
<CAPTION>
Weighted
average Per 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>
(l) Advertising Costs
Advertising costs are expensed as incurred and amounted to $1,398, $490 and
$0 in 1999, 1998 and 1997, respectively.
(m) 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.
F-9
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(n) Concentrations of Credit Risk
The financial instruments which potentially subject the Company to credit
risk consist primarily of cash, cash equivalents, and trade receivables.
The Company maintains cash and cash equivalents with various financial
institutions. Cash equivalents include investments in money market securities
and Certificates of Deposit. At times, such amounts may exceed the Federal
Deposit Insurance Corporation limits. The Company attempts to limit the amount
of credit exposure with any one financial institution and believes that no
significant concentration of credit risk exists with respect to cash
investments.
Concentrations of credit risk with respect to receivables are limited, due
to the wide variety of customers and markets in which the Company's services
are provided, as well as their dispersion across many different geographic
areas. To mitigate credit risk, the Company applies credit approvals and credit
limits, and performs ongoing evaluations of its customers' financial condition.
No single customer accounted for greater than 10% of trade receivables at
December 31, 1999 and 1998.
(o) 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 has subsequently been amended by SFAS No. 137 which
delays the effective date for implementation of SFAS No. 133 until fiscal years
beginning after June 15, 2000. Management is currently evaluating the impact of
SFAS No. 133 on the Company's consolidated financial statements.
(p) Reclassifications
Certain reclassifications of the prior year consolidated financial
statements have been made to conform to current year presentation.
(2) Liquidity
During the year ended December 31,1999, the Company incurred a loss from
operations of $23,335 and a net loss of $29,700, and as of December 31, 1999
had an accumulated deficit of $25,482. In addition, the Company experienced a
decline in cash flow from operations during the fourth quarter of 1999, as
compared to the first three quarters of 1999.
As discussed in note 10(a), during 1999, the Company obtained several
amendments that waived existing technical defaults under its Amended and
Restated Credit Agreement ("Amended Credit Agreement") and provided for
specific limitations on the aggregate outstanding borrowings, as set forth in
the Amended Credit Agreement.
On March 29, 2000, the Company entered into a letter agreement related to
the Amended Credit Agreement which waived, through April 28, 2000, the
Company's non-compliance with certain financial covenants and provides that,
upon the expiration of the waiver, unless a new waiver or amendment has been
agreed to by the financial institutions ("bank group"), an immediate event of
default shall exist under the Amended Credit Agreement. The Amended Credit
Agreement is then subject to acceleration at any time. Consequently, the
Company has classified its liability under the revolving credit agreement as a
current liability in the accompanying consolidated balance sheets as of
December 31, 1999. If the bank group elects to accelerate payment of the
amounts due, the Company would be required to refinance its debt or obtain
capital from other sources, including sales of assets or additional debt or
equity securities, in order to meet its repayment obligations under the credit
facility.
F-10
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
Management is currently pursuing various means of refinancing or replacing
the Amended Credit Agreement. In addition, the Company has hired a new Chief
Executive Officer who has reorganized the Company and implemented a number of
initiatives designed to improve the Company's operating performance.
(3) Impairment Charge
The Company periodically reviews the recorded value of its long-lived assets
to determine if the carrying amount of those assets may not be recoverable
based upon the future operating cash flows expected to be generated by those
assets. In accordance with SFAS No. 121, during the fourth quarter of 1999,
based upon a comprehensive review of the Company's long-lived assets, the
Company recorded a non-cash impairment charge of $6,559 related to the write-
down of a portion of the recorded asset values, including allocated goodwill,
of six of the Company's divisions within the Towing and Recovery segment. The
impairment charge was recognized when the future undiscounted cash flows of
these divisions were estimated to be insufficient to recover their related
carrying values. As such, the carrying values of these assets were written down
to the Company's estimates of fair value. Fair value was based on the recent
sale price of one of the divisions and by discounting estimated future cash
flows associated with other divisions using a discount rate reflecting the
Company's average cost of funds.
Additionally, in connection with its analysis of the recoverability of
goodwill as described in note 1(g), the Company recorded an impairment charge
of $21,722 related to seven of the Company's divisions (four of the six
divisions noted above and three additional divisions) within the Towing and
Recovery segment and two of the Company's divisions within the Transport
segment.
(4) Acquisitions
On May 6, 1998, the Company acquired 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 May 5, 1999, the Company acquired 49 other
businesses, referred to as the "Acquired Companies," for aggregate
consideration (excluding assumed indebtedness) of $110,074 in cash and
4,983,676 shares of common stock valued at $77,294. The Company has not
completed any acquisitions since May 5, 1999. 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, has been recorded as goodwill and is being amortized on a
straight-line basis over 40 years. 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.
As discussed in note 16(a), contingent consideration is due on certain
acquired companies. 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.
F-11
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
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, 1999, had occurred as of January 1, 1998,
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, 1999 Year ended December 31, 1998
------------------------------- -----------------------------------
(Unaudited)
Proforma
Combined
(Unaudited) Founding
United Proforma Companies
Road Combined United And
Services, Acquired Road Acquired
Inc. Companies Total Services, Inc. Companies Total
--------- ----------- -------- -------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Net revenue............. $255,112 10,743 265,855 $87,919 195,359 283,278
======== ====== ======== ======= ======= ========
Net income (loss)....... $(29,700) 634 (29,066) $ 4,392 10,787 15,179
======== ====== ======== ======= ======= ========
Diluted income (loss)
per common share....... $ (1.63) $ .85
======== ========
</TABLE>
(5) 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 its
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.
As part of the financing of certain acquisitions discussed in note 4, the
Company issued 5,053,268 shares of common stock at various dates during 1998.
The net consideration for these issuances, after deducting applicable
registration costs of $581, was $68,774, which has been recorded as purchase
price for the applicable acquisitions.
On April 7, 1999, 47,726 shares of common stock were issued as earn-out
payments to the former owners of certain Founding Companies and one other
acquired company. These earn-out payments were based on the
F-12
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
achievement of certain net revenue targets (see note 16(a)). Included in due to
related parties at December 31, 1998, was $362 representing the fair value of
19,519 shares of common stock, payable pursuant to these earn-out arrangements,
based upon the December 31, 1998 closing price of the Company's common stock.
The additional 28,207 shares were issued as a result of the decline in the
Company's common stock price subsequent to December 31, 1998 that resulted in
additional shares of common stock being issued under the contractual provisions
of the earn-out agreements.
At various dates during 1999, an additional 196,263 shares of common stock
were issued as additional consideration for certain 1998 acquisitions. These
shares represented withheld purchase price that was released based upon the
achievement of certain financial ratios, or other contingencies, by certain
acquired companies after a contractually defined period of time as discussed in
note 16(d). The recorded consideration for these issuances was $3,129.
As part of the financing of certain 1999 acquisitions discussed in note 4,
the Company issued an additional 1,883,171 shares of common stock at various
dates. The net consideration for these issuances, after deducting applicable
registration costs of $528, was $28,990, which has been recorded as purchase
price for the applicable acquisitions.
During 1998, the United Road Services, Inc. 1998 Stock Option Plan was
adopted by the Company. Under the plan, options to purchase common stock may be
granted to directors, executive officers, key employees and consultants of the
Company. The maximum number of shares of common stock that may be subject to
options granted under the plan may not exceed, in the aggregate, 1,278,847
shares. Shares of common stock that are attributable to grants that have
expired or been terminated, cancelled or forfeited are available for issuance
in connection with future grants. Stock options expire after ten years from the
date granted and are generally exercisable in one-third increments per year
beginning one year from the date of grant. Outstanding options may be canceled
and reissued under terms specified in the plan. During 1999, 1,000 shares of
common stock were issued upon exercise of options under 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, cancelled 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 October 11, 1999, 750,000 options to purchase common stock were granted
to the Company's Chief Executive Officer under an executive option agreement.
The stock options expire after ten years from the date granted and are
exercisable in one-third increments per year beginning one year from the date
of grant.
F-13
<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 activity under the Company's stock option
plans:
Year ended December 31, 1999
<TABLE>
<CAPTION>
Number of Weighted-average
shares exercise price
--------- ----------------
<S> <C> <C>
Options outstanding at beginning of year..... 1,077,900 $ 12.22
Granted...................................... 1,134,150 4.14
Exercised.................................... (1,000) 4.69
Forfeited.................................... (231,700) 11.25
--------- -------
Options outstanding at end of year........... 1,979,350 $ 7.70
========= =======
Options exercisable at December 31, 1999..... 410,663
=========
Weighted-average fair value of options
granted during the year..................... $ 3.82
=======
Year ended December 31, 1998
<CAPTION>
Number of Weighted-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 values of stock options granted during
1999 and 1998 were determined using the Black-Scholes option-pricing model
with the following weighted average assumptions: (i) risk-free interest rate
of approximately 6.3% and 4.5%, respectively, (ii) expected life of 5 years,
(iii) volatility of approximately 108% and 50%, respectively, and (iv)
expected dividend yield of 0%.
The following table summarizes information about stock options outstanding
as of December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding
-------------------------------------------------------------------------------
Range of Weighted-average
exercise Number Weighted-average remaining
prices outstanding exercise price contractual life
-------- ----------- ---------------- ----------------
<S> <C> <C> <C>
$ 2.75-4.00 899,500 $ 3.01 9.8 years
4.01-10.25 606,400 8.18 8.6 years
10.26-16.00 357,250 14.87 8.5 years
16.01-25.50 116,200 19.58 8.7 years
---------
1,979,350
=========
</TABLE>
F-14
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
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, 1999:
<TABLE>
<CAPTION>
Number of Exercise price
shares per share
--------- --------------
<S> <C> <C>
1998 Stock Option Plan........................... 894,450 $3.31-25.50
1998 Non-Qualified Stock Option Plan............. 334,900 2.75-18.38
Executive option agreement....................... 750,000 2.91
Convertible subordinated debentures.............. 5,391,760
Warrants......................................... 117,789
---------
Shares reserved for issuance................... 7,488,899
=========
</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 (loss) and earnings (loss) per share for the years ended December 31,
1999 and 1998 would have resulted in the following pro forma amounts:
<TABLE>
<CAPTION>
1999 1998
-------- -----
<S> <C> <C>
Net income (loss):
As reported............................................. $(29,700) 4,392
======== =====
Pro forma............................................... (33,930) 3,321
======== =====
Per share amounts:
Basic earnings (loss) per share:
As reported............................................. $ (1.75) .43
======== =====
Pro forma............................................... (2.00) .32
======== =====
Diluted earnings (loss) per share:
As reported............................................. $ (1.75) .42
======== =====
Pro forma............................................... (2.00) .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.
F-15
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(6) Vehicles and Equipment
Vehicles and equipment at December 31, 1999 and 1998 consists of the
following:
<TABLE>
<CAPTION>
1999 1998
-------- ------
<S> <C> <C>
Transportation and towing equipment...................... $ 74,675 42,806
Machinery and other equipment............................ 1,782 1,399
Computer software and related equipment.................. 10,850 3,888
Furniture and fixtures................................... 1,071 587
Leasehold improvements................................... 1,982 1,426
-------- ------
90,360 50,106
Less accumulated depreciation and amortization........... (12,148) (3,292)
-------- ------
$ 78,212 46,814
======== ======
</TABLE>
Depreciation and amortization expense of vehicles and equipment was $9,287,
$3,292 and $0 in 1999, 1998 and 1997, respectively.
Included in vehicles and equipment at December 31, 1999 and 1998 are costs
of $1,348 and $1,107, respectively, and accumulated amortization of $183 and
$70, respectively, relating to certain transport and towing equipment recorded
as capital leases. Amortization expense of $129 and $70 relating to transport
and towing equipment capital leases was included in depreciation and
amortization expense at December 31, 1999 and 1998, respectively.
(7) 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 the
equipment 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, 1999 :
<TABLE>
<S> <C>
Year ending December 31:
2000.......................................................... $ 569
2001.......................................................... 705
2002.......................................................... 429
2003.......................................................... 400
2004.......................................................... 66
------
Total minimum obligations (includes residual guarantees
of $550)..................................................... 2,169
Less: imputed interest (at rates from 7.25% to 10.50%)........ (254)
------
Present value of future minimum obligations, $435 of which is
included in current assets and liabilities at December 31,
1999......................................................... $1,915
======
</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 1999 and 1998, installment payments of $670 and $470, respectively,
related to the obligations for equipment under financing contracts are included
in cost of revenue in the accompanying consolidated statements of operations.
Of these amounts, $153 and $140 represent interest charges which were withheld
from the amounts paid to the respective independent contractors and remitted
directly to the financing companies during 1999 and 1998, respectively. At
December 31, 1999, the restricted amount of $73 was included in cash and cash
equivalents in the accompanying consolidated balance sheet.
(8) Deferred Financing Costs
Deferred financing costs at December 31, 1999 and 1998 are associated with
the Company's revolving credit facility and the convertible subordinated
debentures, and consist of the following:
<TABLE>
<CAPTION>
1999 1998
------ -----
<S> <C> <C>
Revolving credit facility, net of accumulated amortization
of $753 and $201 in 1999 and 1998, respectively............. $ 778 1,358
Convertible subordinated debentures, net of accumulated
amortization
of $367 and $18 in 1999 and 1998, respectively.............. 3,331 2,194
------ -----
$4,109 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.
As discussed in note 10 (a), the Company's allowable outstanding principal,
plus the stated amount of all letters of credit, under its revolving credit
agreement was reduced from $90,000 to $58,000 on November 12, 1999 and was
further reduced to $55,000 effective January 1, 2000. As a result of these
reductions in borrowing capacity, the Company has recorded a write-off of
previously recorded deferred financing costs in the amount of $405. In
addition, the Company wrote off costs of $624 representing deferred financing
costs related to an increased credit facility which was terminated during 1999.
These amounts have been included in interest expense on the consolidated
statement of operations for the year ended December 31, 1999.
(9) Accrued Expenses
Accrued expenses at December 31, 1999 and 1998 consist of:
<TABLE>
<CAPTION>
1999 1998
------ -----
<S> <C> <C>
Accrued payroll and related costs............................ $3,790 2,412
Accrued insurance............................................ 2,940 1,362
Accrued severance............................................ 790 --
Other accrued liabilities.................................... 1,969 554
------ -----
$9,489 4,328
====== =====
</TABLE>
F-17
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(10) Debt
Debt obligations at December 31, 1999 and 1998 consists of the following:
<TABLE>
<CAPTION>
1999 1998
--------- ------
<S> <C> <C>
Revolving credit facility, interest at the Base rate, as
defined, (9.50% at December 31, 1999), secured by
substantially all of the net tangible assets of the
Company (a)............................................ $ 50,650 18,800
Convertible subordinated debentures bearing interest at
8% annually, maturing in 2008 (b)...................... 80,876 43,732
--------- ------
Total debt obligations................................ $ 131,526 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.
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.
On November 2, 1998 and December 3, 1998, the Credit Agreement was amended
and restated. The Amended Credit Agreement provided for an increase in the
amount available under the revolving credit facility to $90,000 and permitted
additional debt, as defined in the agreement, outside of the credit facility
including the Company's 8% convertible subordinated debentures.
On November 12, 1999, the Amended Credit Agreement was further amended
("Second Amendment") to decrease the amount of allowable aggregate outstanding
principal, plus the stated amount of all letters of credit, to $58,000 through
December 31, 1999, and $55,000 after January 1, 2000. The Second Amendment also
provided for an increase in the interest base rate margin from 0.5% to 1%, the
amendment of certain financial covenants, and the waiver of the Company's non-
compliance with specific financial covenants as defined in the Amended Credit
Agreement.
On January 31, 2000, the third amendment ("Third Amendment") to the Amended
Credit Agreement was executed. This amendment increased the interest base rate
margin to 1.25% through March 31, 2000, and provided for additional and
increased fees along with changes to certain financial covenants. The Third
Amendment also waived the Company's non-compliance with certain financial
covenants through March 31, 2000.
On March 29, 2000, a letter agreement ("Fourth Amendment") related to the
Amended Credit Agreement was executed which extended the waiver of the
Company's non-compliance with certain financial covenants through April 28,
2000. As discussed in note 2, unless a new waiver or amendment is received or
the amounts outstanding under the credit facility are refinanced on or before
April 28, 2000, an immediate event of default shall exist under the Amended
Credit Agreement resulting in any amounts due under the credit facility being
subject to acceleration at the election of the bank group. There can be no
assurance that the Company will be granted additional waivers or obtain
additional sources of funds to enable the refinancing of the Amended Credit
Agreement. Therefore, all amounts due under the Amended Credit Agreement have
been reclassified as a current liability on the accompanying consolidated
balance sheet as of December 31, 1999.
F-18
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
The interest rate on outstanding borrowings is the Base rate (higher of the
Federal funds rate plus 0.5% or the reference rate, as defined) plus the Base
rate margin. A non-use fee is payable on the unused portion of the credit
facility at the rate of 0.5% per year, payable quarterly. As part of the Third
Amendment discussed above, a variable usage fee based on the daily average
amounts of principal outstanding, plus amounts subject to letters of credit, is
payable at a maximum rate of 0.75% per year, payable monthly. Also included in
the Third Amendment is an earnings shortfall fee which will be assessed if the
Company does not meet certain defined monthly earnings before interest, taxes,
depreciation and amortization ("EBITDA") levels beginning with the month ended
December 1999. The maximum amount of this earnings shortfall fee is 0.08% of
the commitment amount.
The Amended Credit Agreement provides for various covenants, including
requirements for the Company to achieve certain consolidated net income and
EBITDA 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 noted above, the Third and Fourth Amendments waived the non-
compliance with certain financial covenants as of December 31, 1999 through
April 28, 2000, respectively.
In addition, the Third Amendment to the Amended Credit Agreement requires
that asset dispositions in excess of $500 in any fiscal year result in a
permanent reduction in the commitment amount in an amount equal to 75% of the
net cash proceeds derived from these asset dispositions. Any principal amounts
outstanding, plus outstanding letters of credit, exceeding the reduced
commitment amount shall be payable by the Company immediately.
As of December 31, 1999 and 1998, the Company had a total of $50,650 and
$18,800 outstanding under the revolving credit facility and had utilized
approximately $3,388 and $1,850 of the credit facility for letters of credit,
respectively. The letters of credit were established to secure certain
insurance obligations and performance bonds and expire at various dates during
2000. As of December 31, 1999 and 1998, the borrowing availability under the
revolving credit facility was $962 and $69,350, respectively.
(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. On March 16, 1999, the Company completed an additional sale of
Debentures with a principal amount of $31,500. The Debentures have a maturity
date of December 7, 2008, unless converted or redeemed earlier. The sales were
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 Debentures. The net proceeds from the sales
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.
Under the provisions of the Purchase Agreement, Charterhouse may, at any
time, at its option, declare the Debentures then outstanding to be immediately
due and payable if the Company is in default in the performance of or
compliance with any term of any indebtedness with aggregate outstanding
principal of at least $1,000 and, as a consequence of such default, such
indebtedness has become, or has been declared due and payable before its stated
maturity or before its regularly scheduled dates of payment. The Company has
received a waiver of non-compliance with specific covenants under the Amended
Credit Agreement through April 28, 2000. Should amounts outstanding under the
Amended Credit Agreement be declared due and payable by the bank group at that
time or subsequently, Charterhouse could accelerate repayment of all
F-19
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
amounts outstanding under the Debentures, subject to the interests of the bank
group under the Amended Credit Agreement which are senior to those of
Charterhouse. Until all amounts outstanding under the Amended Credit Agreement
have been paid in full, or without express prior written consent of the bank
group under the Amended Credit Agreement, Charterhouse may not demand or
receive payment from the Company.
The Debentures are convertible, by the holder, 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, and $5,644 representing interest for the period
January 1, 1999 through December 31, 1999. 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.
At December 31, 1999, debt maturities, assuming no further waivers of the
existing defaults are granted under the Amended Credit Agreement and the bank
group elect to accelerate repayment of amounts outstanding thereunder, are as
follows:
<TABLE>
<S> <C>
2000............................... $ 50,650
2001-2004.......................... --
Thereafter......................... 80,876
---------
$ 131,526
=========
</TABLE>
(11) 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 $8,386,
$2,518 and $0 in 1999, 1998 and 1997, respectively. Included within rent
expense was $2,542, $1,024 and $0 in 1999, 1998 and 1997, respectively, that
was paid to the former owners/shareholders.
F-20
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
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, 1999 are as follows:
<TABLE>
<CAPTION>
Operating leases
Capital ---------------------
lease Related
Year ending December 31 obligations party Other Total
----------------------- ----------- ------- ------ ------
<S> <C> <C> <C> <C>
2000................................... $ 329 2,675 5,281 7,956
2001................................... 213 2,639 4,363 7,002
2002................................... 174 2,590 2,880 5,470
2003................................... 47 1,826 1,547 3,373
2004................................... -- 691 1,289 1,980
Thereafter............................. -- 4,648 679 5,327
----- ------ ------ ------
Future minimum lease payments.......... 763 15,069 16,039 31,108
====== ====== ======
Less: imputed interest................. (93)
-----
Present value of minimum lease
payments.............................. $ 670
=====
</TABLE>
(12) Income Taxes
Income tax (benefit) expense at December 31, 1999 and 1998 consists of the
following:
<TABLE>
<CAPTION>
1999 1998
-------- -----
<S> <C> <C>
Current:
Federal................................................ $ (1,501) 1,555
State.................................................. (116) 289
-------- -----
(1,617) 1,844
-------- -----
Deferred:
Federal................................................ (3,287) 1,408
State.................................................. (254) 251
-------- -----
(3,541) 1,659
-------- -----
$ (5,158) 3,503
======== =====
</TABLE>
The following table reconciles the expected tax (benefit) expense at the
Federal statutory rate to the effective tax rate for the year ended December
31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------------- ------------
Amount % Amount %
--------- ----- ------- ----
<S> <C> <C> <C> <C>
Pre-tax income (loss) at statutory rate... $ (11,852) (34.0) $ 2,684 34.0
State taxes, net of federal benefit....... (372) (1.1) 356 4.5
Non-deductible goodwill................... 1,344 4.1 431 5.5
Impairment of non-deductible goodwill..... 5,634 15.9 -- --
Other..................................... 88 0.3 32 0.4
--------- ----- ------- ----
$ (5,158) (14.8)% $ 3,503 44.4%
========= ===== ======= ====
</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 tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- ------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, due to allowance for doubtful
accounts.............................................. $ 915 72
Non-deductible accruals................................ -- 79
Intangible assets...................................... 658 305
Goodwill, due to impairment charge associated with tax
deductible portion.................................... 4,291 --
Net operating loss carryforward........................ 5,572 --
Other, net............................................. 191 188
-------- ------
Total gross deferred tax assets...................... 11,627 644
Less valuation allowance............................. -- --
-------- ------
11,627 644
Deferred tax liabilities:
Vehicles and equipment, due to differences in
depreciation lives and methods........................ (8,914) (4,168)
Computer software, due to acceleration of research and
experimentation credit................................ (1,156) (596)
Goodwill, due to differences in amortization lives
associated with tax deductible portion................ (1,633) (463)
Goodwill, due to acceleration of certain acquisition
costs for tax purposes................................ (1,872) --
Other taxable temporary differences, due to differences
in basis of accounting for companies acquired......... (671) (378)
Other, net............................................. (47) --
-------- ------
Net deferred tax liability........................... $ (2,666) (4,961)
======== ======
</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 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 and the amount of tax loss carryback available,
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. At December 31, 1999, the
Company has a $15.2 million net operating loss carryforward which expires if
unused in 2019.
Under the Internal Revenue Code, the use of loss carryforwards may be
limited if a change in ownership of the Company occurs under Section 382 of the
Internal Revenue Code. The change in ownership determination is a specific
calculation and must take into consideration all changes in ownership,
including but not limited to changes in the percentage ownership or composition
of the stockholder group. The Company
F-22
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
does not believe that it has experienced an ownership change to date. However,
the Company may experience an ownership change as a result of future
transactions affecting its direct and/or indirect stock ownership. An ownership
change could limit the Company's ability to use its existing net operating loss
carryforward.
(13) Special Charges
In September 1999, the Company recorded a special charge of $1,138 relating
to the strategic decision not to pursue its acquisition program in the near
term. This charge, included within selling, general and administrative
expenses, represents professional fees and compensation contractually required
to be paid in connection with the termination of certain acquisition
consultants. At December 31, 1999, $16 of this compensation accrual is included
in accrued expenses within the accompanying consolidated balance sheet.
In June 1999, the Company recorded a special charge of $735 relating to the
resignation of its then Chairman and Chief Executive Officer. Additionally, in
December 1999, the Company recorded a special charge of $946 relating to the
departure of two members of senior management. These charges, included in
selling, general and administrative expenses, consisted of guaranteed
compensation and related fringe benefits. At December 31, 1999, $774 of this
compensation accrual is included in accrued expenses and $640 is included in
other long-term liabilities within the accompanying consolidated balance sheet.
(14) 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 division's 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).
Net revenue from one customer was in excess of 10% of the Company's
consolidated net revenue for the year ended December 31, 1999. Net revenue
generated from this customer was $26,701 (10.5% of net revenue) and is
attributable to the Company's Transport segment. For the year ended December
31, 1998, no individual customer represented 10% or more of the Company's
consolidated net revenue.
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. For the year ended December 31, 1998, the Company's first year of
operations, the Company evaluated the performance of its operating segments
based on income (loss) before income taxes. During the year ended December 31,
1999, management has determined that a more appropriate measure of the
performance of its operating segments may be made through an evaluation of each
segment's income (loss) from operations. Accordingly, the Company's summarized
financial information regarding the Company's reportable segments have been
presented through income (loss) from operations for the years ended December
31, 1999 and 1998. Intersegment revenues and transfers are not significant.
F-23
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
Summarized financial information for the years ended December 31, 1999 and
1998 concerning the Company's reportable segments is shown in the following
table:
Year ended December 31, 1999
<TABLE>
<CAPTION>
Towing and
Transport Recovery Other Total
--------- ---------- ------- -------
<S> <C> <C> <C> <C>
Net revenues from external
customers........................ $155,333 99,779 -- 255,112
Cost of revenue, (including
depreciation).................... 122,774 79,814 -- 202,588
Impairment charge................. 10,053 18,228 -- 28,281
Income (loss) from operations..... 5,281 (14,571) (14,045) (23,335)
Interest income................... 19 -- 58 77
Interest expense.................. 51 11 11,357 11,419
Total assets...................... 190,506 119,272 12,667 322,445
Capital expenditures.............. 10,064 4,127 5,997 20,188
Depreciation and amortization..... 7,789 6,590 1,248 15,627
</TABLE>
Year ended December 31, 1998
<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, (including
depreciation)...................... 34,955 29,810 -- 64,765
Income from operations.............. 7,886 4,706 (3,611) 8,981
Interest income..................... 25 19 614 658
Interest expense.................... 160 69 1,359 1,588
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>
The following are reconciliations of the information used by the chief
operating decision maker for the years ended December 31, 1999 and 1998 to the
Company's consolidated totals:
<TABLE>
<CAPTION>
1999 1998
--------- -------
<S> <C> <C>
Reconciliation of income (loss) before income taxes:
Total profit (loss) from reportable segments........ $ (9,290) 12,592
Unallocated amounts:
Interest income................................... 77 658
Interest expense.................................. (11,419) (1,588)
Depreciation and amortization..................... (1,248) (413)
Other selling, general and administrative costs... (12,797) (3,198)
Other expense, net................................ (181) (156)
--------- -------
Income (loss) before income taxes............... $ (34,858) 7,895
========= =======
Reconciliation of total assets:
Total assets from reportable segments............... 309,778 241,803
Unallocated amounts:
Prepaid income taxes.............................. 3,534 465
Vehicles and equipment, net....................... 4,945 2,604
Deferred financing costs, net..................... 4,109 3,552
Other non-current assets.......................... 79 308
--------- -------
Total assets.................................... $ 322,445 248,732
========= =======
</TABLE>
F-24
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(15) Commitments and Contingencies
(a) Purchase Commitments
As of December 31, 1999, the Company had entered into commitments to
purchase 104 Transport and Towing and Recovery vehicles for approximately
$17,075. Included in these amounts is an agreement for 100 vehicles for
approximately $16,742 with one vehicle manufacturer. In March, 2000, this
agreement was amended, resulting in a reduced commitment to purchase 60
vehicles for approximately $10,038.
(b) Employment Contracts
During 1998 and 1999, 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 whereby, if the individual is discharged, the remaining term of the
severance payments are required to be made throughout the remaining term of the
agreement. The terms of these noncancelable agreements range through May 2003.
(c) Claims and Lawsuits
The Company is subject to certain claims and lawsuits arising in the normal
course of business, most of which involve claims for personal injury and
property damage incurred in connection with its operations. The Company
maintains various insurance coverages in order to minimize financial risk
associated with the claims. In the opinion of management, uninsured losses, if
any, resulting from the ultimate resolution of these matters will not have
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 $863 and $35 to these plans during the years ended December 31,
1999 and 1998, respectively.
(16) 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 is 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, 1999 and 1998, the Company has recorded additional goodwill
and a liability within due to related parties on the accompanying consolidated
balance sheets in the amount of $450 and $362, respectively, related to these
earn-out arrangements. The accrued amount represents the fair value of 277,225
F-25
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
and 19,519 shares of common stock at December 31, 1999 and 1998, respectively,
payable pursuant to such arrangements. During 1999, earn-out payments were made
in the form of $267 in cash and the issuance of 47,726 shares of the Company's
common stock valued at $223. These amounts differ from the amount accrued at
December 31, 1998, as a consequence of the decline in the Company's common
stock price subsequent to December 31, 1998, that resulted in additional shares
of common stock being issued.
(b) Employment and Consultant Agreements with Directors
In 1998, the Company entered into consultant agreements with two directors.
Pursuant to these agreements, each of the directors were entitled to receive
from the Company a consulting fee equal to two percent of the gross revenue of
each company that the respective director assisted the Company in acquiring,
with the fee being based upon such acquired company's gross revenue for the
twelve months immediately preceding the acquisition. These consultant
agreements were terminated in September 1999. In addition, the Company entered
into an employment agreement, in 1998, 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 agreements.
(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 years ended
December 31, 1999 and 1998, the Company has recorded $2,539 and $404,
respectively, 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 1999 and 1998, the Company has withheld consideration in connection
with certain acquisitions 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, 1999 the Company had cash and shares
of common stock withheld of $884 and 226,715, respectively. At December 31,
1998, the Company had cash and shares of common stock withheld of $1,461 and
241,081 shares, respectively.
(e) Lease Agreements
As described in note 11, concurrent with the acquisition of certain
companies, the Company has entered into 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.
(f) Employee Lease Agreement
During 1999, the Company paid $10,500 to Translesco, Inc. ("Translesco"), in
connection with an agreement whereby the Company leases employees from
Translesco to provide services to one of the divisions within the Company's
Transport Division. The President of the Company's Transport Division is the
majority owner of Translesco. The Company may continue to lease employees from
Translesco until such time as the Company determines otherwise.
F-26
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(17) 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 due to 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, 1999, management estimates that the
fair value of the convertible subordinated debentures approximates
$59,926. This amount was estimated based upon rates currently available
to the Company for indebtedness with similar terms and maturities.
Letters of Credit--The letters of credit reflect fair value as a
condition of their underlying purpose and are subject to fees
competitively determined in the market place. The contract value and
fair value of the letters of credit at December 31, 1999 and 1998 was
$3,388 and $1,850, respectively.
(b) Off-Balance Sheet Risk
In the normal course of business, the Company is a party to letters of
credit which are not reflected in the accompanying consolidated balance sheets.
Such financial instruments are to be valued based on the amount of exposure
under the instrument and the likelihood of performance being requested. No
claims have been made against these letters of credit and management does not
expect any material losses to result from these off-balance sheet instruments.
At December 31, 1999 and 1998, the Company has letters of credit outstanding
totaling $3,388 and $1,850, respectively.
(18) Quarterly Consolidated Financial Data (Unaudited)
The table below sets forth the unaudited consolidated operating results by
quarter for the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 Quarterly period ended
-------------------------------------------------
March 31 June 30(b) September 30(c) December 31(d)
-------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
Net revenues............... $59,453 65,482 64,150 66,027
Income (loss) from
operations................ 5,876 4,009 (1,643) (31,577)
Net income (loss).......... 2,010 470 (3,687) (28,493)
Basic earnings (loss) per
common share (a).......... $ .12 .03 (.22) (1.66)
======= ====== ====== =======
Diluted earnings (loss) per
common share (a).......... $ .12 .03 (.22) (1.66)
======= ====== ====== =======
</TABLE>
F-27
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
1998 Quarterly period ended
---------------------------------
June September December
March 31 30 30 31
-------- ----- --------- --------
<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 shares issued in conjunction with certain
acquisitions as discussed at note 4.
(b) During the quarterly period ended June 30, 1999, the Company recorded
severance expense of $735 related to the departure of its then Chairman and
Chief Executive Officer.
(c) During the quarterly period ended September 30, 1999, the Company recorded
a special charge of approximately $1,138 relating to the strategic decision
not to pursue its acquisition program in the near term. These costs
represented professional fees and compensation paid in connection with the
termination of certain acquisition consultants. Also related to the
decision not to pursue its acquisition program was the termination of a
$225,000 revolving credit agreement resulting in $624 being expensed as
discussed in note 8. The aggregate effect of these entries resulted in a
pretax loss of $1,762 during the quarterly period ended September 30, 1999.
(d) During the quarterly period ended December 31, 1999, the Company recorded
an impairment charge of $28,281 (see note 3). The Company also recorded
$946 in severance expense related to the departures of two members of
senior management during the quarterly period ended December 31, 1999. As a
result of the decrease in borrowing capacity under the revolving credit
agreement, as discussed at notes 8 and 10(a), a write-off of $405 was
recorded. The aggregate effect of these entries resulted in a pretax loss
of $29,632 during the quarterly period ended December 31, 1999.
(19) Subsequent Events
(a) Disposition
On February 11, 2000, the Company sold the capital stock of Northshore
Towing, Inc., North Shore Recycling, Inc. and Evanston Reliable Maintenance,
Inc. (collectively "Northshore") located in Chicago, Illinois, for cash
proceeds of $450 and a secured non-interest bearing promissory note in the
principal amount of $500. Northshore was a division within the Company's Towing
and Recovery segment.
(b) Amended Credit Agreement Waiver
On April 12, 2000, the Company received a waiver from the bank group with
respect to the Company's failure to deliver the required audited consolidated
financial statements within 90 days after the close of the Company's year ended
December 31, 1999.
(c) Stock Purchase Agreement
On April 14, 2000, the Company entered into a Stock Purchase Agreement (the
"KPS Agreement") with KPS for the sale of shares of Series A Preferred Stock to
KPS for an aggregate purchase price of $25 million. Holders of Series A
Preferred Stock are entitled to cumulative dividends of 5.5% per annum for six
years after the closing date of the KPS Transaction and 5% per annum thereafter
payable, until 2005, either in cash or in shares of the Company's Series B
Participating Convertible Preferred Stock (the "Series B Preferred Stock") at
the option of the Company. After 2005, dividends are payable only in cash. The
obligation to pay dividends terminates in 2008, or earlier if the Company's
common stock trades above a specified price level.
F-28
<PAGE>
UNITED ROAD SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
The Series A Preferred Stock and Series B Preferred Stock (collectively, the
"Preferred Stock") are both convertible into the Company's common stock at any
time at the option of the holder. The per share conversion price for the Series
A Preferred Stock is generally the lesser of $2 or the average closing price of
the common stock for the 30 trading days prior to closing of the KPS
Transaction (the "Thirty Day Average"). However, if the Thirty Day Average is
greater than or equal to $0.84 and less than or equal to $1, the conversion
price will be $1, and if the Thirty Day Average is less than $0.84, the
conversion price will be 120% of the Thirty Day Average. The Series B Preferred
Stock is identical in all respects to the Series A Preferred Stock except that
its conversion price is 15% lower than the conversion price of the Series A
Preferred Stock. The Preferred Stock automatically converts into common stock
upon the occurrence of certain business combinations, unless the holders elect
to exercise their liquidation preference rights.
Upon consummation of the KPS Transaction, the Company has agreed to pay KPS
Management LLC, an entity affiliated with KPS, a one-time transaction fee of
$2.5 million and to reimburse KPS for its actual reasonable fees and expenses
in connection with negotiation and performance of the KPS Agreement. The
Company has also agreed to pay KPS Management LLC an annual management fee of
$1 million initially, which may be lowered to $500,000 and then to zero based
upon the amount of Preferred Stock held by KPS and its permitted transferees.
The holders of Preferred Stock have the right to designate six members of the
Company's Board of Directors, which constitutes a majority, for so long as KPS
and its permitted transferees continue to own specified amounts of Preferred
Stock. At lower levels of ownership, holders of Preferred Stock will be
entitled to appoint three directors, one director, or no directors.
In connection with the KPS Transaction, the Company and Charterhouse have
agreed that the Charterhouse Debentures will be redeemable, by the Company, at
par under certain circumstances. Charterhouse also agreed to waive its right to
require the Company to redeem the Debentures at 106.25% of the aggregate
principal amount of the Debentures upon consummation of the KPS Transaction in
return for a transaction fee of $750,000. Charterhouse has also agreed to waive
certain corporate governance rights that existed under its Investor's Agreement
with the Company in connection with the KPS Transaction. Consummation of the
KPS Transaction is subject to a number of conditions, including approval of the
Company's stockholders and the availability at closing of a refinancing or
replacement of the Company's Credit Facility providing for at least $25 million
of borrowing capacity in addition to the amounts currently outstanding under
the Credit Facility. There can be no assurance that these conditions will be
satisfied, or that the KPS Transaction, the refinancing of the Credit Facility,
or the restructuring of the Charterhouse Debentures will be consummated.
F-29
<PAGE>
SCHEDULE II
UNITED ROAD SERVICES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to
Beginning of Costs and Balance at
Period Expenses Other (a) Deductions End of Period
------------ ---------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
December 31, 1999..... $1,131,788 2,413,000 568,370 1,362,455 2,800,703
December 31, 1998..... -- 183,000 1,263,006 314,218 1,131,788
</TABLE>
- --------
(a) Represents allowance for doubtful accounts recorded through purchase
accounting adjustments related to acquisitions.
