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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 2001
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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Delaware 94-3278455
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
17 Computer Drive West 12205
Albany, New York (Zip Code)
(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 $.01 per share
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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 |_|
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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 20, 2002 was $594,110.*
The following documents are incorporated into this Form 10-K by reference:
None.
As of March 20, 2002, 2,086,475 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") provides automobile transport and
motor vehicle and equipment towing and recovery services. As of December 31,
2001, the Company operated a network of 12 transport divisions and 17 towing and
recovery divisions located in a total of 20 states. During 2001, approximately
60.8% of the Company's net revenue was derived from the provision of transport
services and approximately 39.2% 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 below in "Operations and
Services Provided" and in note 12 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'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'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.
Recent Developments
On January 16, 2002, the Company acquired Auction Transport, Inc. ("ATI")
from a subsidiary of Manheim Auction, Inc. ("Manheim") in a stock purchase
transaction. ATI, headquartered in Lee's Summit, Missouri, provides automobile
transport services to various Manheim auction locations and on a for hire basis.
ATI operates a fleet of approximately 185 vehicles and also provides integrated
vehicle logistics management services. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Acquisition of ATI."
Operations and Services Provided
Transport
The Company provides new and used automobile transport services for a wide
range of customers, including leasing companies, automobile manufacturers,
automobile dealers, automobile auction companies, insurance companies, brokers
and individuals. 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 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, 2001, one such customer, a big
three automobile manufacturer, represented approximately 10% 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
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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. The Company's other transport services, which
include transporting large numbers of used vehicles from automobile auctions
(where off-lease vehicles are sold) to individual dealers, transporting
automobiles for dealers who transfer new cars from one region to another, and
local collection and delivery support to long-haul automobile transporters, are
typically not subject to contracts.
Towing and Recovery
The Company provides a broad range of towing and recovery services for a
diverse group of commercial, government and individual customers in its local
markets. 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 division's vehicle fleet (at
times 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.
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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.
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
helps it attract and retain 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
The Company has experienced difficulties in implementing common operating
systems for its transport and towing and recovery divisions to perform vehicle
dispatch and other administrative functions, and currently relies on a
combination of common operating systems and systems used by acquired divisions
prior to their acquisition by the Company. Each of the operating systems used by
the Company's divisions is linked with the Company's enterprise system. The
Company has an information systems services agreement with Syntegra (USA) Inc.
("Syntegra") pursuant to which Syntegra provides data center, desktop and help
desk support services to the Company. The Syntegra agreement is terminable by
either party upon (i) 90 days notice and the payment by the terminating party of
an early termination fee of $950,000 or (ii) a material breach by the other
party. In conjunction with Syntegra, the Company intends to continue to
re-evaluate its information system needs and take appropriate action to improve
the utility and cost-effectiveness of its information systems.
The Company anticipates that it will need to update and expand its
information systems, or develop or purchase and implement new systems as it
re-evaluates its needs. The Company expects that any such upgrade, expansion of
existing systems or development, purchase or implementation of new systems will
require substantial capital expenditures.
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 to monitor compliance with
such laws and regulations. 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
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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, 2001, the Company had approximately 1,708 employees,
leased an additional 187 employees and used approximately 178 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 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 financial condition and results of
operations of the Company 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 financial condition and results of operations for 2002 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.
4
Limited Combined Operating History; Risks of Integrating and Operating
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 seven towing, recovery and transport businesses.
Between May 6, 1998 and May 5, 1999, the Company acquired a total of 49
additional businesses. Prior to their acquisition by the Company, such companies
were operated as independent entities. A number of these businesses, now
operating as divisions of the Company, have experienced performance difficulties
since being acquired by the Company. As a result, during 2000, the Company sold
one division and closed six other divisions and during 2001, the Company sold
two divisions and closed four other divisions. There can be no assurance that
the Company will be able to improve the profitability of its underperforming
businesses or that it will be able to operate the combined enterprise on a
profitable basis.
Risks Related to Improving Profitability
A key element of the Company's business strategy is to increase the revenue
and improve the profitability of the companies it has acquired. The Company is
seeking to enhance its revenue by increasing asset utilization, deploying new
equipment and drivers if and when appropriate 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 is also seeking to improve its profitability by various means,
including eliminating duplicative operating costs and overhead, decreasing
unnecessary administrative, systems and other costs, and capitalizing on its
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 business strategy will depend to a
great extent on the availability of capital. The Company has experienced, and
may continue to experience, a significant decrease in its cash flow from
operations. While management continues to explore opportunities to improve the
Company's cash flow from operations through, among other things, the closure or
divestiture of unprofitable divisions, consolidation of operating locations,
reduction of operating costs and the marketing of towing, recovery and transport
services to new customers in strategic market locations, there can be no
assurance that such efforts will be successful in improving the Company's cash
flow. The Company currently expects to be able to fund its liquidity needs for
at least the next twelve months through cash flow from operations and borrowings
of amounts available under its revolving credit facility under which General
Electric Capital Corporation ("GE Capital") acts as agent. However, any failure
by the Company to meet the financial covenants in its credit facility will,
unless waived by the banks, result in an inability to borrow and/or an immediate
obligation to repay all amounts outstanding under the credit facility. Also,
unless it is successful in improving its cash flow from operations, the Company
may not be able to fund its working capital needs or invest in its longer-term
growth strategy. In the event that the Company is not able to fund its liquidity
needs from cash flow from operations and/or borrowings under its credit
facility, it would be necessary for the Company to raise additional capital,
through the issuance of debt or equity securities, 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."
The Company's revolving credit facility requires the Company, among other
things, to comply with certain financial covenants, including minimum levels of
earnings before taxes, depreciation and amortization ("EBITDA"), minimum ratios
of EBITDA to fixed charges and minimum levels of liquidity. In October 2001, the
Company notified GE Capital that the Company had failed to meet the minimum
level of EBITDA and minimum ratio of
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EBITDA to fixed charges for the period ended September 30, 2001. In December
2001, the Company notified GE Capital that the Company would fail to meet the
minimum level of EBITDA and minimum ratio of EBITDA to fixed charges for the
period ended December 31, 2001, and that the Company was not expected to meet
the minimum liquidity requirement in the first quarter of 2002.
On February 14, 2002, the Company entered into an amendment to the revolving
credit facility under which the banks waived these financial covenant
violations, waived a covenant violation with respect to the banks' consent to
the ATI acquisition and provided for the addition of ATI as a borrower under the
credit facility. The amendment reduces the minimum required levels of EBITDA and
increases the minimum required ratios of EBITDA to fixed charges under the
revolving credit facility. The amendment also reduced the minimum liquidity
requirement for the period beginning February 15, 2002 and ending March 15,
2002. In addition, the amendment increases the maximum amount of annual
operating lease payments the Company and its subsidiaries may make in fiscal
years 2002 through 2004.
If the Company fails to comply with these amended provisions or violates
other covenants in the revolving credit facility, the Company will be required
to seek additional waivers, which may not be granted by the banks, or to enter
into amendments to the credit facility which may contain more stringent
conditions on the Company's borrowing capability or its activities, and may
require the Company to pay substantial fees to the banks. If such future waivers
were not granted and the banks were to elect to accelerate repayment of
outstanding balances under the credit facility, 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 debentures issued to Charter URS, LLC ("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 debentures would be required
only if the credit facility was paid in full or the banks under the credit
facility granted their express written consent.
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.
Information Systems
The Company has experienced difficulties in implementing common operating
systems in its towing and recovery and transport locations. As a result, the
Company currently relies on a combination of common operating systems and
systems used by acquired divisions prior to their acquisition by the Company.
The Company anticipates that it will need to update and expand its information
systems, or develop or purchase and implement new systems as it continues to
re-evaluate its needs. The Company expects that any update or expansion of its
existing systems or any development, purchase or implementation of new systems
will require the Company to make substantial capital expenditures, which could
have a material adverse effect on the Company's financial condition and results
of operations. In addition, the Company could encounter unexpected delays in
developing and implementing new systems, which could interfere with its
business. Any significant interruption 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 certain 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
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a year-to-year basis if it is satisfied with the Company's performance.
Otherwise, a new contract is awarded pursuant to competitive bidding. 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 usually have terms of five years or less, may be terminated at any
time for material breach, and typically are subject to competitive bidding upon
expiration. The Company has towing, recovery and transport contracts
representing approximately $1.7 million in annual revenue that are scheduled to
expire during 2002. 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 based upon prevailing economic conditions at
the time of renewal. 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.
During the year ended December 31, 2001, one of the Company's transport
customers, a big three automobile manufacturer, represented approximately 10% 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.
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 to monitor compliance with
such laws and regulations. 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.
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 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. Any such
liabilities or related investigations 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
7
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) workers'
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.
New Vehicle Manufacturers
A significant percentage of the Company's transport business is derived from
new vehicle manufacturers. A decrease in production rates of new vehicles by
such manufacturers may cause a decrease in the amount of new vehicle transport
business conducted by the Company. In addition, decreasing financial performance
by such new vehicle manufacturers may cause them to seek price and other
concessions from the Company. Any decrease in new vehicle transport business
conducted by the Company or any price or other concessions granted by the
Company to such manufacturers could have a material adverse effect on the
Company's business, financial condition and results of operations.
Fuel Prices
Fuel costs constitute a significant portion of the Company's operating
expenses. Although the Company attempts to pass fuel price increases onto its
customers in the form of fuel surcharges, the Company may not always be
successful in mitigating the effects of fuel price increases on its operations.
In addition, the cost of fuel is subject to many economic and political factors
which are beyond the Company's control. Significant fuel shortages or increases
in fuel prices could have a material adverse effect on the Company's business,
financial condition and results of operations.
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 Company's success in improving operating
efficiency and profitability, and in integrating its acquired businesses; (ii)
the loss of significant customers or contracts; (iii) the timing of expenditures
for new equipment and the disposition of used equipment; (iv) price changes in
response to competitive factors; (v) changes in the general level of demand for
towing, recovery and transport services; (vi) event-driven variations in the
demand for towing, recovery and transport services; (vii) the availability of
capital to fund operations, including expenditures for new and replacement
equipment; (viii) 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; (ix)
fluctuations in fuel, insurance, labor and other operating costs; and (x)
general economic conditions. As a result, operating results for any one quarter
should not be relied upon as an indication or guarantee of performance in future
quarters.
Seasonality
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.
8
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 operations as a result
of labor shortages.
OTC Bulletin Board Listing
Since the Company's common stock was delisted from the Nasdaq National
Market ("Nasdaq") on May 22, 2000, the common stock has been traded
over-the-counter and quoted on the Over-the-Counter Electronic Bulletin Board
(the "OTC Bulletin Board"). Trading of securities on the OTC Bulletin Board is
generally limited and trades are effected on a less regular basis than on other
exchanges or quotation systems (such as Nasdaq). Accordingly, investors who own
or purchase the Company's common stock will find that its liquidity or
transferability is limited. Investors may find it difficult to purchase or
dispose of, or obtain accurate quotations as to the market value of, the
Company's common stock. Additionally, the listing of the Company's common stock
on the OTC Bulletin Board may negatively affect the Company's ability to sell
additional securities or to secure additional financing.
Control by Principal Stockholder
Blue Truck Acquisition, LLC ("Blue Truck"), a Delaware limited liability
company controlled by KPS Special Situations Fund, L.P. ("KPS"), owns shares of
the Company's Series A Convertible Preferred Stock (the "Series A Preferred
Stock") convertible into approximately 76.6% of the Company's common stock. Blue
Truck is entitled to vote the shares of Series A Preferred Stock on an
as-converted basis on all matters submitted to a vote of the Company's
stockholders, except for certain elections of directors. In addition, Blue Truck
currently has the right to designate and elect a majority of the Board of
Directors. As a result, Blue Truck has effective control of the Company,
including the power to direct the Company's policies and to determine the
outcome of all matters submitted to a vote of the Company's stockholders. This
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company, including transactions in which stockholders
might otherwise receive a premium over current market prices for their shares.
9
ITEM 2. Properties
As of December 31, 2001, the Company operated 29 divisions, consisting of 64
facilities located in 20 states. These properties consisted of 38 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 26
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, 2001, the Company's headquarters consisted of
approximately 14,100 square feet of leased space in Albany, New York.
As of December 31, 2001, the Company operated a fleet of approximately 646
towing and recovery vehicles and approximately 589 transport vehicles. The
Company believes that its vehicles are generally well-maintained and adequate
for its current operations.
ITEM 3. Legal Proceedings
On April 27, 2001, David A. Caron, the former owner of Caron Auto Works,
Inc. and Caron Auto Brokers, Inc. (collectively, "Caron Auto"), one of the
businesses acquired by the Company in connection with the Company's initial
public offering, filed suit against the Company in the Supreme Court of the
State of New York, County of New York. In his complaint, Mr. Caron claimed that
the Company breached certain of its obligations under consulting and employment
agreements allegedly entered into between the Company and Mr. Caron in
connection with the Caron Auto acquisition. Mr. Caron claimed, among other
things, that the Company failed to pay certain advances and commissions for
acquisition related-consulting services allegedly provided by Mr. Caron. The
complaint sought unspecified damages. In November 2001, the Company and Mr.
Caron entered into a settlement agreement with respect to the claims made by Mr.
Caron in the suit. Pursuant to the settlement agreement, the suit was dismissed
with prejudice on December 16, 2001.
On October 17, 2001, David J. Floyd, the former owner of Falcon Towing and
Auto Delivery, Inc. ("Falcon"), one of the businesses acquired by the Company in
connection with the Company's initial public offering, filed suit against the
Company in the United Stated District Court, Northern District of New York. Mr.
Floyd is a beneficial owner of greater than 5% of the Company's common stock.
See "Security Ownership of Certain Beneficial Owners and Management." In his
complaint, Mr. Floyd claims that the Company failed to pay earnout payments
allegedly owed to Mr. Floyd under the merger agreement entered into with respect
to the Falcon acquisition. In November 2001, the Company filed an answer to the
complaint, denying Mr. Floyd's claims. In February 2002, the case was
transferred to the United States District Court, Southern District of New York.
No amount of damages was claimed in the complaint and discovery has not yet
commenced. Therefore, the Company has not yet determined the potential damages
to be claimed by the plaintiff. The Company intends to defend this action
vigorously.
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 does not believe that any such litigation in which the Company is
currently involved 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
(a) The annual meeting of the stockholders of the Company was held on
November 29, 2001.
(b) At the annual meeting, Edward W. Morawski, Kenneth K. Fisher, Eugene J.
Keilin and Brian J. Riley were elected as Class III directors of the Company for
terms expiring at the Company's 2004 annual meeting. Gerald R. Riordan, A.
Lawrence Fagan, Michael G. Psaros, and Stephen P. Presser continue to serve as
Class I directors with terms expiring at the Company's 2002 annual meeting.
David P. Shapiro, Raquel V. Palmer and Joseph S. Rhodes continue to serve as
Class II directors with terms expiring at the Company's 2003 annual meeting.
10
(c) Set forth below is the tabulation of the votes at the annual meeting
with respect to the election of the Class III directors:
Director Votes For Votes Withheld
- -------- --------- --------------
Edward W. Morawski 1,549,650 (1) 31,342 (1)
Kenneth K. Fisher 1,562,239 (1) 28,753 (1)
Eugene J. Keilin 662,119 (2) 0 (2)
Brian J. Riley 662,119 (2) 0 (2)
- ---------------
(1) Shares of Common Stock
(2) Shares of Series A Preferred Stock
11
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock was quoted on the Nasdaq National Market under
the symbol "URSI" from May 1, 1998 through May 22, 2000 when the Company was
delisted from Nasdaq. On May 22, 2000, the common stock began to be traded
over-the-counter and quoted on the OTC Bulletin Board under the symbol "URSI."
The table below sets forth the high and low sale prices for the Common Stock on
the Nasdaq National Market or the OTC Bulletin Board, as applicable, for the
periods indicated. All share prices have been adjusted to give effect to the
one-for-ten reverse split of the outstanding common stock effected as of May 4,
2000 (the "Reverse Stock Split"). The prices presented for the period from
January 1, 1999 through December 31, 2001 reflect inter-dealer prices without
retail mark-ups, mark-downs or commissions, and may not reflect actual
transactions.
1999 High Low
---- ---- ---
First Quarter ............................. 195.00 42.50
Second Quarter ............................ 80.00 45.625
Third Quarter ............................. 51.25 25.00
Fourth Quarter ............................ 36.25 10.00
2000 High Low
---- ---- ---
First Quarter ............................. 29.6875 12.50
Second Quarter ............................ 18.125 3.0625
Third Quarter ............................. 3.50 1.81
Fourth Quarter ............................ 2.23 0.45
2001 High Low
---- ---- ---
First Quarter ............................. 0.81 0.41
Second Quarter ............................ 0.53 0.24
Third Quarter ............................. 0.51 0.25
Fourth Quarter ............................ 0.45 0.23
As of March 20, 2002, there were 226 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 revolving credit
facility, the Certificate of Designations for its Series A Preferred Stock and
the Amended and Restated Purchase Agreement between the Company and Charterhouse
(the "Amended Charterhouse Purchase Agreement").
Sale of Unregistered Securities
On December 31, 2001, the Company issued approximately $1.9 million
aggregate principal amount of debentures to Charterhouse, which represented the
quarterly payment-in-kind interest payment due with respect to $92.9 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.
12
ITEM 6. Selected Financial Data
The following selected consolidated financial data as of December 31, 2001,
2000, 1999, 1998 and 1997 and for the years ended December 31, 2001, 2000, 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. (collectively, "Northland"), one of the companies
acquired by the Company in May 1998 in connection with its initial public
offering, has been designated as the Company's predecessor entity. The following
selected historical financial data for Northland as of December 31, 1997 and for
the year ended December 31, 1997 have been derived from the audited financial
statements of Northland.
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.
Period From
Year Ended December 31, July 25, 1997
----------------------- (inception) to
2001 2000 1999 1998 December 31, 1997
---- ---- ---- ---- -----------------
(In thousands, except per share amounts and share data)
Consolidated Statement of Operations
Data--United Road Services, Inc.:
Net revenue ................................ $ 226,529 $ 246,566 $ 255,112 $ 87,919 $ --
Cost of revenue ............................ 193,503 212,651 202,588 64,765 --
----------- ----------- ----------- ----------- -----------
Gross profit ............................... 33,026 33,915 52,524 23,154 --
Selling, general and administrative expenses 36,129 43,514 42,139 12,428 174
Goodwill amortization ...................... 2,063 3,710 5,439 1,745 --
Impairment charge .......................... -- 129,455 28,281 -- -----------
----------- ----------- ----------- ----------- --
Income (loss) from operations .............. (5,166) (142,764) (23,335) 8,981 -----------
Interest income (expense) and other, net ... (11,566) (14,322) (11,523) (1,086) (174)
----------- ----------- ----------- ----------- --
Income (loss) before income taxes .......... (16,732) (157,086) (34,858) 7,895 -----------
Income tax expense (benefit) ............... 3,073 1,846 (5,158) 3,503 (174)
=========== =========== =========== =========== --
Net income (loss) .......................... $ (13,659) $ (158,932) $ (29,700) $ 4,392 $ (174)
----------- ----------- ----------- ----------- ===========
Basic net income (loss) per share .......... $ (6.52) $ (81.95) $ (17.54) $ 4.30 $ (0.84)
=========== =========== =========== =========== ===========
Diluted net income (loss) per share ........ $ (6.52) $ (81.95) $ (17.54) $ 4.23 $ (0.84)
=========== =========== =========== =========== ===========
Shares used in computing basic net income
(loss) per share ........................... 2,096,248 1,939,337 1,693,311 1,022,181 205,530
=========== =========== =========== =========== ===========
Shares used in computing diluted net income
(loss) per share ........................... 2,096,248(1) 1,939,337(1) 1,693,311(1) 1,038,991(2) 205,530(2)
=========== =========== =========== =========== ===========
At December 31,
--------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data--United Road Services, Inc.:
Working capital (deficit) .......................... $ (32,390) $ (28,201) $ (34,208) $ 9,330 $ (104)
Total assets ....................................... 171,790 178,393 322,445 248,732 50
Long-term obligations, excluding current
Installments ................................... 94,855 88,115 82,758 65,255 --
Stockholders' equity (deficit) ..................... 17,222 32,606 166,413 163,766 (104)
13
Year Ended
December 31, 1997
-----------------
(In thousands)
Historical Statement of Operations
Data--Northland:
Net revenue......................... $ 10,159
Operating income.................... 1,438
Other expense, net.................. (49)
Net income.......................... 1,054
At December 31, 1997
--------------------
(In thousands)
Historical Balance Sheet
Data--Northland:
Working Capital...................... $ 399
Total assets......................... 5,465
Long-term obligations, excluding
current installments................. 1,074
Stockholders' equity................. 3,045
- ---------------
(1) Represents actual weighted average shares outstanding. The effect of
options, warrants, shares withheld in connection with acquisitions or
earn-out shares payable to the former owners of the businesses the Company
acquired in connection with its initial public offering and one other
acquired company have been excluded, as the effect would be anti-dilutive.
(2) 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
businesses the Company acquired in connection with its initial public
offering and one other acquired company.
14
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.
All share and per-share amounts in the discussion below and in the
accompanying consolidated financial statements have been restated to give effect
to the one-for-ten reverse stock split effected by the Company on May 4, 2000.
Forward-Looking Statements
From time to time, in written reports and oral statements, management may
discuss its expectations regarding the Company'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, risks related to the Company's limited operating history and its
ability to integrate acquired companies, risks related to the Company's ability
to successfully improve the profitability of its acquired businesses, the
availability of capital to fund operations, including expenditures for new and
replacement equipment, risks related to the adequacy, functionality, sufficiency
and cost of the Company's information systems, 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, potential
exposure to environmental and other unknown or contingent liabilities, risks
associated with the Company's labor relations, risks related to the adequacy of
the Company's insurance, changes in the general level of demand for towing,
recovery and transport services, price changes in response to competitive
factors, risks related to fuel, insurance, labor and other operating costs,
risks related to the loss of key personnel and the Company's ability to maintain
an adequate skilled labor force, seasonal and other event-driven variations in
the demand for towing, recovery and transport services, risks resulting from the
over-the-counter trading of the Company's common stock, 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 ("Forward-Looking 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 Forward-Looking Statements. Investors must recognize that events could turn
out to be significantly different from what management currently expects.
Overview
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. The Company's customers
include commercial entities, such as automobile manufacturers, 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.
15
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.
Selling, general and administrative expenses consist primarily of the
following: compensation and benefits to sales and administrative employees; fees
for professional services; computer costs; depreciation of administrative
equipment and software; advertising; and other general office expenses.
Between May 1998 and May 1999, the Company acquired a total of 56 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 its acquired businesses. Prior to the Company's acquisition
of ATI in January 2002, the Company had not completed any acquisitions since May
5, 1999. 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. As part of this business strategy,
the Company has closed, consolidated or sold several operating locations. As of
December 31, 2001, the Company operated a network of 12 transport divisions and
17 towing and recovery divisions located in a total of 20 states. During 2001,
approximately 60.8% of the Company's net revenue was derived from the provision
of transport services and approximately 39.2% of its net revenue was derived
from the provision of towing and recovery services.
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, 2001, 2000 and 1999. The
historical results for the year ended December 31, 1999 includes the results of
all businesses acquired prior to December 31, 1999 from their respective dates
of acquisition. The Company did not acquire any businesses in the years ending
December 31, 2001 and 2000.
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. From the
respective acquisition dates to December 31, 2001, this goodwill has been
amortized, using its estimated useful life of 40 years, as a non-cash charge to
operating income. Pursuant to a recently adopted accounting standard, the
Company will cease to amortize approximately $75.6 million of goodwill related
to its prior acquisitions. In lieu of amortization, the Company will be required
to perform an initial impairment review of its goodwill in 2002 and annual
impairment reviews thereafter. See "--Critical Accounting Policies -- Valuation
of long-lived assets and goodwill" and "--Recently Issued Accounting Standards"
below.
16
In the fourth quarter of 1999 and the second quarter of 2000, 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 under Accounting Principles Board ("APB") Opinion
No. 17, the Company recorded impairments of long-lived assets and goodwill of
$28.3 million at December 31, 1999 and $129.5 million at June 30, 2000.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles and related disclosure requires management to
make estimates and assumptions that affect:
. the amounts reported for assets and liabilities;
. the disclosure of contingent assets and liabilities at the date of the
financial statements; and
. the amounts reported for revenues and expenses during the reporting period.
Specifically, management must use estimates in determining the economic
useful lives of assets, provisions for uncollectable accounts receivable,
exposures under self-insurance plans and various other recorded or disclosed
amounts. Therefore, the Company's financial statements and related disclosure
are necessarily affected by these estimates. Management evaluates these
estimates on an ongoing basis, utilizing historical experience and other methods
considered reasonable in the particular circumstances. Nevertheless, actual
results may differ significantly from estimates. To the extent that actual
outcomes differ from estimates, or additional facts and circumstances cause
management to revise estimates, the Company's financial position as reflected in
its financial statements will be affected. Any effects on business, financial
position or results of operations resulting from revisions to these estimates
are recorded in the period in which the facts that give rise to the revision
become known.
Management believes that the following are the Company's most critical
accounting policies affected by the estimates and assumptions the Company must
make in the preparation of its financial statements and related disclosure:
Revenue. The Company derives revenue from towing, recovery and transport
services based on distance, time or fixed charges and from related impounding,
storage and other 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.
Allowance for doubtful accounts. Management must make estimates of the
uncollectability of accounts receivable. Management specifically analyzes
historical bad debt trends, customer concentrations, customer credit-worthiness
and current economic trends when evaluating the adequacy of the allowance for
doubtful accounts. The Company's accounts receivable balance as of December 31,
2001 was $18.2 million, net of an allowance for doubtful accounts of $1.6
million.
Accrued insurance. The Company is self-insured up to a certain stop-loss
limit for employee health, accident liability and workers' compensation
insurance. Therefore, management must make estimates of potential insurance
losses related to the then-current accounting period. Significant management
judgements and estimates must be made and used in connection with establishing
such an insurance accrual. Management analyzes historical claim trends and
current economic conditions in evaluating the adequacy of the insurance accrual.
Material differences could result in the amount and timing of insurance expenses
for any period if management were to make different judgements or utilize
different estimates. The Company's reserve for health insurance, workers
compensation and cargo losses at December 31, 2001 was $4.7 million.
Accounting for income taxes. As part of the process of preparing its
consolidated financial statements, the Company is required to estimate income
taxes for each of the jurisdictions in which it operates. This process
17
involves estimation of the actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items, such as
depreciation, goodwill and allowance for doubtful accounts, for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within the consolidated balance sheet. The
Company must then assess the likelihood that any deferred tax assets will be
recovered from future taxable income and, to the extent the Company believes
that recovery is not likely, a valuation allowance must be established. To the
extent a valuation allowance is established or increased in a period, expense is
recorded within the tax provision in the Company's consolidated statement of
operations.
Significant management judgment is required in determining the provision for
income taxes, deferred tax assets and liabilities and any valuation allowance
recorded against net deferred tax assets. At December 31, 2001, the Company had
a valuation allowance of $5.5 million, due to uncertainties related to the
Company's ability to utilize certain deferred tax assets (consisting primarily
of certain net operating losses carried forward) before they expire. The
valuation allowance is based on estimates of taxable income by jurisdiction and
the period over which the Company's deferred tax assets will be recoverable. In
the event that actual results differ from these estimates or the Company adjusts
these estimates in future periods, the Company may need to establish an
additional valuation allowance which could materially impact the Company's
financial position and results of operations. The Company's deferred tax asset
at December 31, 2001 was $5.5 million, which was offset by the valuation
allowance of $5.5 million, resulting in a net deferred tax asset of zero at
December 31, 2001.
Valuation of long-lived assets and goodwill. The Company accounts for
long-lived assets in accordance with the provisions of 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, specifically towing and transport vehicles,
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. Vehicles are recorded at the lower of cost or fair value as of the
date of purchase under purchase accounting. Replacements of engines and certain
other significant costs may be capitalized, if they extend the useful life of
the asset. 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. 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.
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.
In January 2002, SFAS No. 142, Goodwill and Other Intangible Assets, became
effective, and, as a result, the Company will cease to amortize approximately
$75.6 million of goodwill. In lieu of amortizing goodwill, SFAS No. 142 requires
the Company to perform an initial impairment review of its goodwill in 2002 and
annual impairment reviews thereafter. See "--Recently Issued Accounting
Standards" below.
Results of Operations
In the first quarter of 1999, the Company acquired nine transport businesses
and four towing and recovery businesses. In the second quarter of 1999, the
Company acquired one transport business and one towing and recovery business. In
the first quarter of 2000, the Company sold one towing and recovery division. In
the second
18
quarter of 2000, the Company closed two transport divisions and one towing and
recovery division, and in some cases allocated certain equipment to other
divisions. In the third quarter of 2000, the Company closed one towing and
recovery division and allocated certain equipment to other divisions. In the
fourth quarter of 2000, the Company closed two towing and recovery divisions and
allocated certain equipment to other divisions. In the second quarter of 2001,
the Company sold one towing and recovery division and closed three transport
divisions and allocated certain equipment to other divisions. In the third
quarter of 2001, the Company closed one towing and recovery division. In the
fourth quarter of 2001, the Company sold one towing and recovery division. The
transport closures were designed to combine certain management dispatch and
administrative functions, while maintaining existing vehicle fleets. The
Company's operating results for 2001 do not include the operating results of the
towing and recovery divisions sold or closed in 2000. The results of the towing
and recovery divisions closed or sold during 2001 are included for the period
prior to sale or closure. The Company's revenue, cost of revenue and selling,
general and administrative expenses were also affected by the closures and
reallocations described above that occurred during 2000 and 2001, as described
more fully below.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net Revenue. Net revenue decreased $20.1 million, or 8.2%, from $246.6
million for the year ended December 31, 2000 to $226.5 million for the year
ended December 31, 2001. Of the net revenue for the year ended December 31,
2001, 60.8% related to transport services and 39.2% related to towing and
recovery services. Transport net revenue decreased $13.7 million, or 9.1%, from
$151.3 million for the year ended December 31, 2000 to $137.6 million for the
year ended December 31, 2001. The decrease in transport net revenue was
primarily due to the closure of two transport divisions in the second quarter of
2000 and the closure of three transport divisions in the second quarter of 2001
and the weak performance of the majority of the Company's transport businesses
due to decreased demand for new and used vehicle transport services as compared
to the prior year, some of which was attributable to the events of September 11,
2001. The events of September 11, 2001 resulted in limited access to the New
York City and Long Island service areas from the Company's Newark, New Jersey
facility, a lack of movement throughout the country of test vehicles by a major
automobile manufacturing customer, reduced activity at certain automobile
auctions due to travel limitations and a slow down in the new and used car
markets associated with the growing sense of uncertainty about the future of the
economy. Towing and recovery net revenue decreased $6.4 million, or 6.7%, from
$95.3 million for the year ended December 31, 2000 to $88.9 million for the year
ended December 31, 2001. The decrease in towing and recovery net revenue was
primarily due to the closure of three towing and recovery divisions during the
last six months of 2000, the sale of two towing and recovery divisions and the
closure of another towing and recovery division during 2001 and the weak
performance of many of the Company's towing and recovery businesses due to
decreased demand for towing and recovery services as compared to the prior year,
some of which was attributable to the events of September 11, 2001. The events
of September 11, 2001 resulted in a reduction in impound activity in certain
metropolitan areas, reduced towing activity as a result of the substantial
reduction in tourism which impacted certain markets.
Cost of Revenue. Cost of revenue, including depreciation, decreased $19.2
million, or 9.0%, from $212.7 million for the year ended December 31, 2000 to
$193.5 million for the year ended December 31, 2001. Transport cost of revenue
decreased $10.7 million, or 8.1%, from $131.5 million for the year ended
December 31, 2000 to $120.8 million for the year ended December 31, 2001. The
principal components of the decrease in transport cost of revenue consisted of a
decrease in the costs of transport independent contractors, brokers and
subcontractors of $5.0 million, a decrease in costs of transport operating
salaries and wages of $2.7 million and a decrease in fuel costs of $2.6 million
(each of which was due, in part, to the closure of two transport divisions in
the second quarter of 2000 and the closure of three transport divisions in 2001
and the effect of the decrease in demand for transport services discussed
above), offset, in part, by an increase in insurance expense of $833,000. Towing
and recovery cost of revenue decreased $8.5 million, or 10.5%, from $81.2
million for the year ended December 31, 2000 to $72.7 million for the year ended
December 31, 2001. The principal components of the decrease in towing and
recovery cost of revenue consisted of a decrease in towing and recovery
operating labor costs of $2.0 million, a decrease in vehicle maintenance expense
of $1.0 million, a decrease in fuel costs of $958,000, a decrease in costs of
towing and recovery independent contractors, brokers and subcontractors of
$834,000, a decrease in insurance expense of $741,000 and a decrease in
facility, occupancy and related costs of $693,000 (each of which was due, in
part, to the sale of one towing and recovery division and the closure of four
other towing and recovery divisions during 2000, the sale of two towing and
recovery divisions and the closure of another towing and recovery division
during 2001
19
and the effect of the decreased demand for towing and recovery services
discussed above), combined with a decrease in the cost of scrap vehicle
purchases of $1.6 million.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $7.4 million, or 17.0%, from $43.5 million for
the year ended December 31, 2000 to $36.1 million for the year ended December
31, 2001. Transport selling, general and administrative expenses decreased $1.2
million, or 7.9%, from $15.1 million for the year ended December 31, 2000 to
$13.9 million for the year ended December 31, 2001. The principal components of
the decrease in transport selling, general and administrative expenses consisted
of a decrease in bad debt expense of $912,000, a decrease in other miscellaneous
administration costs of $449,000 and a decrease in computer and
telecommunications expenses of $266,000 (each of which was due, in part, to the
closure of two transport divisions in the second quarter of 2000 and the closure
of three transport divisions in 2001), offset, in part, by an increase in salary
and wages of $260,000 and an increase in professional fees of $192,000. Towing
selling, general and administrative expenses decreased $2.4 million, or 17.0%,
from $14.1 million for the year ended December 31, 2000 to $11.7 million for the
year ended December 31, 2001. The principal components of the decrease in towing
and recovery selling, general and administrative expenses consisted of a
decrease in bad debt expense of $1.3 million, a decrease in professional fees of
$631,000 and a decrease in miscellaneous administrative expenses of $356,000
(each of which was due, in part, to the sale of one towing and recovery division
and the closure of four other towing and recovery divisions during 2000 and the
sale of two towing and recovery divisions and the closure of another towing and
recovery division during 2001), offset, in part, by an increase in salary and
wages expense of $262,000.
Corporate selling, general and administrative expenses decreased $3.8
million, or 26.6%, from $14.3 million for the year ended December 31, 2000 to
$10.5 million for the year ended December 31, 2001. The decrease in corporate
selling, general and administrative expenses was primarily due to a 2000
non-recurring charge of $2.1 million related to contractual change of control
payments to certain members of management, a decrease in wages and benefits
expense of $700,000, a decrease in professional fees of $805,000 and a decrease
in travel and entertainment expenses of $249,000.
Amortization of Goodwill. Amortization of goodwill decreased $1.6 million,
or 44.4%, from $3.7 million for the year ended December 31, 2000 to $2.1 million
for the year ended December 31, 2001. The decrease in goodwill amortization was
the result of impairment charges of $118.1 million as of June 30, 2000
associated with the Company's ongoing review of the recorded value of its
long-lived assets and the recoverability of goodwill.
Impairment Charge. Impairment charges were $129.5 million for the year ended
December 31, 2000. These impairment charges consisted of a non-cash charge of
$118.1 million related to recoverability of goodwill under APB Opinion No. 17
and a non-cash charge of $11.4 million related to the Company's comprehensive
review of its long-lived assets in accordance with SFAS No. 121. The 2000
impairment charge recorded under APB Opinion No. 17 included $75.7 million
related to the recoverability of goodwill at the Company's transport divisions
and $42.4 million related to the recoverability of goodwill at the Company's
towing and recovery divisions. The 2000 impairment charge recorded under SFAS
No. 121 included impairment charges of $2.5 million on the recorded value of
vehicles and equipment at the Company's transport divisions and $2.1 million on
the recorded value of vehicles and equipment at the Company's towing and
recovery divisions and impairment charges of $2.9 million on the recoverability
of allocated goodwill at the Company's transport divisions and $3.9 million on
the recoverability of allocated goodwill at the Company's towing and recovery
divisions. No impairment charges were recorded in the year ended December 31,
2001.
Income (Loss) from Operations. Loss from operations decreased $137.6
million, or 96.4%, from a loss of $142.8 million for the year ended December 31,
2000 to a loss of $5.2 million for the year ended December 31, 2001. Excluding
the effect of impairment charges of $129.5 million in 2000, loss from operations
decreased $8.1 million, or 60.9%, from a loss of $13.3 million for the year
ended December 31, 2000 to a loss of $5.2 million for the year ended December
31, 2001. Transport income from operations increased $80.5 million, or 102.5%,
from a loss of $78.5 million for the year ended December 31, 2000 to income of
$2.0 million for the year ended December 31, 2001. Excluding the effect of
transport impairment charges of $81.1 million in 2000, transport income from
operations decreased $630,000, or 24.2%, from $2.6 million for the year ended
December 31, 2000 to $2.0 million the year ended December 31, 2001. The decrease
in transport income from operations was primarily due to decreased transport
revenue, offset, in part by, decreased cost of revenue and selling, general and
administrative
20
expenses related to the operation of the transport business segment as described
above. Towing and recovery income from operations increased $53.3 million, from
a loss of $50.0 million for the year ended December 31, 2000 to income of $3.3
million for the year ended December 31, 2001. Excluding the effect of towing and
recovery impairment charges of $48.4 million in 2000, towing and recovery income
from operations increased $5.3 million, from a loss of $1.6 million for the year
ended December 31, 2000 to income of $3.7 million for the year ended December
31, 2001. The increase in towing and recovery income from operations was
primarily due to decreased cost of revenue and selling, general and
administrative expenses related to the operation of the towing and recovery
business segment, as described above.
Interest Expense, Net. Interest expense decreased $2.7 million, or 19.0%,
from interest expense of $14.2 million for the year ended December 31, 2000 to
interest expense of $11.5 million for the year ended December 31, 2001. Interest
income decreased $244,000 from $284,000 for the year ended December 31, 2000 to
$40,000 for the year ended December 31, 2001. The decrease in interest expense,
net was related to a non-recurring charge of $1.7 million relating to the
refinancing of the Company's credit facility with a new group of lenders in
2000, a decrease in the effective interest rate for credit facility borrowings
of approximately 1.0% in the year ended December 31, 2001 as compared to the
year ended December 31, 2000 and lower levels of debt during the first six
months of 2001 as compared to the first six months of 2000.
Income Tax Expense (Benefit). Income tax expense decreased $4.9 million,
from an income tax expense of $1.8 million for the year ended December 31, 2000
to an income tax benefit of $3.1 million for the year ended December 31, 2001.
The decrease in income tax expense was largely due to an ownership change on
July 20, 2000 under Internal Revenue Code Section 382, resulting in the
limitation of all net operating losses generated by the Company from inception
through July 20, 2000. As a result of such limitation, the Company wrote off the
tax effect of net operating losses generated prior to 2000 in the amount of $7.1
million and did not record the tax benefit of net operating losses generated
from January 1, 2000 through July 20, 2000 in the amount of $6.9 million. During
2000, the Company generated net operating losses subsequent to the July 20, 2000
ownership change resulting in a tax benefit of $8.9 million. In addition, during
2000, the Company established a valuation allowance of $3.7 million against the
deferred tax assets. In the year ended December 31, 2001, the Company recorded a
tax benefit of $4.8 million, offset, in part, by an increase in the valuation
allowance of $1.1 million.
Net Income (Loss). Net loss decreased $145.2 million, from a net loss of
$158.9 million for the year ended December 31, 2000 to a net loss of $13.7
million for the year ended December 31, 2001. The decrease in net loss related
largely to the increase in income from operations of $137.6 million and the
decrease in income tax expense of $4.9 million for the year ended December 31,
2001 as compared to the year ended December 31, 2000.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net Revenue. Net revenue decreased $8.5 million, or 3.3%, from $255.1
million for the year ended December 31, 1999 to $246.6 million for the year
ended December 31, 2000. Of the net revenue for the year ended December 31,
2000, 61.4% related to transport services and 38.6% related to towing and
recovery services. Transport net revenue decreased $4.0 million, or 2.6%, from
$155.3 million for the year ended December 31, 1999 to $151.3 million for the
year ended December 31, 2000. The decrease in transport net revenue was largely
due to the impact of a decrease in demand for both new and used vehicle
transport services in the fourth quarter of 2000, the impact of the closure of
two transport divisions during 2000 and the weak performance of certain
transport businesses subsequent to the Company's consolidation of certain
divisions offset, in part, by the inclusion of a full year of operating results
of the ten transport businesses acquired during the first half of 1999. Towing
and recovery net revenue decreased $4.5 million, or 4.5%, from $99.8 million for
the year ended December 31, 1999 to $95.3 million for the year ended December
31, 2000. The decrease in towing and recovery net revenue was largely due to the
sale of one towing and recovery division and the closure of four other towing
and recovery divisions during 2000 and 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.
Such decrease in towing and recovery net revenue was offset, in part, by the
inclusion of a full year of operating results of the five towing and recovery
businesses acquired during the first half of 1999.
Cost of Revenue. Cost of revenue, including depreciation, increased $10.1
million, or 5.0%, from $202.6 million for the year ended December 31, 1999 to
$212.7 million for the year ended December 31, 2000. Transport
21
cost of revenue increased $8.7 million, or 7.1%, from $122.8 million for the
year ended December 31, 1999 to $131.5 million for the year ended December 31,
2000. The increase in transport cost of revenue was primarily due to the
inclusion of a full year of costs of the ten transport businesses acquired
during the first half of 1999 offset, in part, by reduced costs resulting from
the closure of two transport divisions during 2000. The principal components of
the increase in transport cost of revenue consisted of an increase in costs of
independent contractors, brokers and subcontractors of $2.5 million, an increase
in fuel costs of $1.7 million, an increase in insurance liabilities associated
with workers' compensation and other claims (that individually did not meet
insurance deductibles) of $1.9 million, an increase in labor costs of $1.0
million, an increase in depreciation expense of $678,000, an increase in vehicle
maintenance expenses of $673,000 and an increase in equipment rental expense of
$435,000. Towing and recovery cost of revenue increased $1.4 million, or 1.8%,
from $79.8 million for the year ended December 31, 1999 to $81.2 million for the
year ended December 31, 2000. The increase in towing and recovery cost of
revenue was primarily due to the inclusion of a full year of costs of the five
towing and recovery businesses acquired the first half of 1999 offset, in part,
by reduced costs resulting from the sale of one towing and recovery division and
the closure of four other towing and recovery divisions during 2000. The
principal components of the increase in towing and recovery cost of revenue
consisted of an increase in insurance liabilities associated with workers
compensation and other claims (that individually did not meet insurance
deductibles) of $1.2 million and an increase in fuel costs of $988,000 offset,
in part, by a decrease in expenses related to scrap vehicle purchases of $1.1
million.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.4 million, or 3.3%, from $42.1 million for
the year ended December 31, 1999 to $43.5 million for the year ended December
31, 2000. Transport selling, general and administrative expenses increased
$753,000 from $14.3 million for the year ended December 31, 1999 to $15.1
million for the year ended December 31, 2000. The principal components of the
increase in transport selling, general and administrative expenses consisted of
an increase in bad debt expense of $183,000, an increase in advertising expenses
of $221,000, an increase in computer and telecommunications expenses of $64,000
and an increase in miscellaneous transport selling general and administrative
expenses of $461,000, offset, in part, by a decrease in salary and wages expense
of $292,000 (which was due, in part, to the closure of two transport divisions
during 2000). Towing and recovery selling, general and administrative expenses
increased $365,000, from $13.8 million for the year ended December 31, 1999 to
$14.1 million for the year ended December 31, 2000. The principal components of
the increase in towing and recovery selling, general and administrative expenses
consisted of an increase in professional fees of $386,000, an increase in bad
debt expense of $761,000, an increase in miscellaneous administrative expenses
of $257,000 and increased costs associated with managing and integrating the
five towing and recovery businesses acquired during the first half of 1999,
offset, in part, by a decrease in salary and wages expense of $713,000 (which
was due, in part, to the sale of one towing and recovery division and the
closure of four other towing and recovery divisions during 2000).
Corporate selling, general and administrative expenses increased $257,000,
or 1.8%, from $14.0 million for the year ended December 31, 1999 to $14.3
million for the year ended December 31, 2000. The increase in corporate selling,
general and administrative expenses was primarily due to an increase in
professional fees of $1.2 million, an increase in bank service charges of
$280,000, and an increase in computer and telecommunications expenses of $93,000
offset, in part, by a decrease in salary and wage expenses of $477,000 and a
decrease in travel expenses of $587,000. The increase in corporate selling,
general and administrative expense includes a non-recurring charge of $2.1
million incurred in 2000 relating to contractual change of control payments to
certain members of management, non-recurring compensation charges and salary and
wage expense of $1.7 million incurred in 1999 associated with the 1999
departures of the Company's former Chief Executive Officer, President and Chief
Operating Officer and Chief Acquisition Officer and $1.1 million of professional
fees and compensation charges incurred in 1999 in connection with the
termination of the Company's acquisition program.
Amortization of Goodwill. Amortization of goodwill decreased $1.7 million,
or 31.5%, from $5.4 million for the year ended December 31, 1999 to $3.7 million
for the year ended December 31, 2000. The decrease in goodwill amortization was
the result of impairment charges of $118.1 million as of June 30, 2000 and $28.3
million as of December 31, 1999 associated with the Company's ongoing review of
the recorded value of its long-lived assets and the recoverability of goodwill
and the sale of one towing and recovery division in the first quarter of 2000.
Impairment Charge. Impairment charges were $129.5 million for the year ended
December 31, 2000. These impairment charges consisted of a non-cash charge of
$118.1 million related to recoverability of goodwill under
22
APB Opinion No. 17 and a non-cash charge of $11.4 million related to the
Company's comprehensive review of its long-lived assets in accordance with SFAS
No. 121. The 2000 impairment charge recorded under APB Opinion No. 17 included
$75.7 million related to the recoverability of goodwill at the Company's
transport divisions and $42.4 million related to the recoverability of goodwill
at the Company's towing and recovery divisions. The 2000 impairment charge
recorded under SFAS No. 121 included impairment charges of $2.5 million on the
recorded value of vehicles and equipment at the Company's transport divisions
and $2.1 million on the recorded value of vehicles and equipment at the
Company's towing and recovery divisions. The 2000 impairment charge recorded
under SFAS No. 121 also included impairment charges of $2.9 million on the
recoverability of allocated goodwill at the Company's transport divisions and
$3.9 million on the recoverability of allocated goodwill at the Company's towing
and recovery divisions.
Impairment charges were $28.3 million for the year ended December 31, 1999.
These impairment charges consisted of a non-cash charge of $21.7 million related
to recoverability of goodwill under 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 1999 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 1999 impairment charge recorded under SFAS No. 121 included
impairment expenses of $2.6 million on the recorded value 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. Loss from operations increased $119.5
million, or 513%, from a loss of $23.3 million for the year ended December 31,
1999 to a loss of $142.8 million for the year ended December 31, 2000. Excluding
the effect of impairment charges of $28.3 million in 1999 and $129.5 million in
2000, income from operations decreased $18.3 million, or 366%, from income of
$5.0 million for the year ended December 31, 1999 to a loss of $13.3 million for
the year ended December 31, 2000. Transport income from operations decreased
$83.8 million, or 1,607%, from income of $5.3 million for the year ended
December 31, 1999 to a loss of $78.5 million for the year ended December 31,
2000. Excluding the effect of transport impairment charges of $10.0 million in
1999 and $81.1 million in 2000, transport income from operations decreased $12.7
million, or 83.0%, from $15.3 million for the year ended December 31, 1999 to
$2.6 million the year ended December 31, 2000. The decrease in transport income
from operations was primarily due to a decline in revenue and increased labor
and fuel expenses, offset, in part, by the impact of a full year of revenues of
the ten transport businesses acquired during the first half of 1999 and the
decrease in costs resulting from closure of two transport divisions during 2000.
Towing and recovery income from operations decreased $35.4 million, or 243%,
from a loss of $14.6 million for the year ended December 31, 1999 to a loss of
$50.0 million for the year ended December 31, 2000. Excluding the effect of
towing and recovery impairment charges of $18.3 million in 1999 and $48.4
million in 2000, towing and recovery income from operations decreased $5.3
million, or 143.2%, from income of $3.7 million for the year ended December 31,
1999 to a loss of $1.6 million for the year ended December 31, 2000. The
decrease in towing and recovery income from operations was primarily due to
increased insurance, fuel and bad debt expenses offset, in part, by the
inclusion of a full year of revenues of the five towing and recovery businesses
acquired during the first half of 1999 and the decrease in costs resulting from
sale of one towing and recovery division and the closure of four other towing
and recovery divisions during 2000.
Interest Expense, Net. Interest expense increased $2.8 million, or 24.6%,
from interest expense of $11.4 million for the year ended December 31, 1999 to
interest expense of $14.2 million for the year ended December 31, 2000. Interest
income increased $207,000 from interest income of $77,000 for the year ended
December 31, 1999 to interest income of $284,000 for the year ended December 31,
2000. The increase in interest expense, net was related to a non-recurring
charge of $1.7 million relating to the refinancing of the Company's credit
facility with a new group of lenders, an increase in the effective interest rate
for credit facility borrowings of approximately 1.2% in the year ended December
31, 2000 as compared to the year ended December 31, 1999 and higher levels of
debt incurred to finance the acquisitions that occurred during the first half of
1999, offset, in part, by lower borrowings in third and fourth quarter of 2000
as a result of a $27.0 million equity investment in July 2000.
Income Tax Expense (Benefit). Income tax expense (benefit) increased $7.0
million, from an income tax benefit of $5.2 million for the year ended December
31, 1999 to an income tax expense of $1.8 million for the year ended December
31, 2000. The increase in income tax expense was largely due to an ownership
change on July 20,
23
2000 under Internal Revenue Code Section 382, resulting in the limitation of all
net operating losses generated by the Company from inception through July 20,
2000. As a result of such limitation, the Company wrote off the tax effect of
net operating losses generated prior to 2000 in the amount of $7.1 million and
did not record the tax benefit of net operating losses generated from January 1,
2000 through July 20, 2000 in the amount of $6.9 million. During 2000, the
Company generated net operating losses subsequent to the July 20, 2000 ownership
change resulting in a tax benefit of $8.9 million. In addition, during 2000, the
Company established a valuation allowance of $3.7 million against the deferred
tax assets.
Net Income (Loss). Net income decreased $129.2 million, from net loss of
$29.7 million for the year ended December 31, 1999 to a net loss of $158.9
million for the year ended December 31, 2000. The decrease in net income related
largely to the decrease in income from operations of $119.5 million and the
decrease in income tax benefit of $3.8 million for the year ended December 31,
2000 as compared to the year ended December 31, 1999.
Liquidity and Capital Resources
General
As of December 31, 2001, the Company had approximately:
. $1.7 million of cash and cash equivalents (representing deposits in
transit to GE Capital, as agent under the Company's revolving credit
facility) and another $4.3 million available for borrowing under the
revolving credit facility,
. a working capital deficit of approximately $32.4 million (including the
$37.4 million outstanding under the Company's credit facility which, due
to the factors described in note 2 to the Company's Consolidated
Financial Statements included elsewhere herein, is reflected as a
current liability), and
. $94.9 million of outstanding long-term indebtedness, excluding current
installments.
During the year ended December 31, 2001, the Company provided $1.3 million
in cash from operations and used $6.9 million of cash in investing activities.
Of the cash used in investing activities, $8.1 million related to purchases of
new vehicles and equipment, offset by proceeds of $1.4 million from the sale of
vehicles and equipment. During the year ended December 31, 2001, the Company
provided $4.7 million in cash from financing activities. Financing activities
consisted of the net borrowings under the Company's revolving credit facility of
$5.3 million and payments on long-term debt and payments of deferred financing
costs of $486,000.
Revolving Credit Facility
On July 20, 2000, the Company and its subsidiaries entered into a revolving
credit facility with a group of banks for which GE Capital acts as agent. On the
same date, the Company terminated its prior credit facility and repaid all
amounts outstanding thereunder.
The revolving credit facility has a term of five years and a maximum
borrowing capacity of $100 million. The facility includes a letter of credit
subfacility of up to $15 million. The Company's borrowing capacity under the
revolving credit facility is limited to the sum of (i) 85% of the Company's
eligible accounts receivable, (ii) 80% of the net orderly liquidation value of
the Company's existing vehicles for which GE Capital has received title
certificates and other requested documentation, (iii) 85% of the lesser of the
actual purchase price and the invoiced purchase price of new vehicles purchased
by the Company for which GE Capital has received title certificates and other
requested documentation, and (iv) either 60% of the purchase price or 80% of the
net orderly liquidation value of used vehicles purchased by the Company for
which GE Capital has received title certificates and other requested
documentation, depending upon whether an appraisal of such vehicles has been
performed, in each case less reserves. The amount of availability based on
vehicles amortizes on a straight line basis over a period of five to seven
years. Under the revolving credit facility, the banks have the right to conduct
an annual appraisal of the Company's vehicles. All cash receipts are forwarded
to GE Capital on a daily basis to pay down the revolver
24
balance, and all working capital and expenditure needs are funded through daily
borrowings. As of December 31, 2001, approximately $37.5 million was outstanding
under the revolving credit facility (excluding letters of credit of $13.6
million) and an additional $4.3 million was available for borrowing.
Interest accrues on amounts borrowed under the revolving credit facility, at
the Company's option, at either the Index Rate (as defined in the credit
facility) plus an applicable margin or the reserve adjusted LIBOR Rate (as
defined in the credit facility) plus an applicable margin. The effective
interest rate for the year ended December 31, 2001 was 7.3%. The rate is subject
to adjustment based upon the performance of the Company, the occurrence of an
event of default or certain other events.
The obligations of the Company and its subsidiaries under the revolving
credit facility are secured by a first priority security interest in the
existing and after-acquired real and personal, tangible and intangible assets of
the Company and its subsidiaries.
The revolving credit facility provides for payment by the Company of
customary fees and expenses, including an annual monitoring fee of $150,000. In
the year ended December 31, 2000, the Company paid approximately $3.0 million in
fees (including the monitoring fee) and expenses related to the revolving credit
facility and the Company's sale of Series A Preferred Stock to CFE, Inc. (now
known as GE Capital CFE, Inc.), an affiliate of GE Capital ("CFE"). In the year
ended December 31, 2001, the Company paid the monitoring fee of $150,000 and
paid $212,000 in other fees and expenses related to the revolving credit
facility. At December 31, 2001, $3.1 million of the fees and expenses paid in
connection with the revolving credit facility in 2000 and 2001 were recorded as
deferred financing costs and will be amortized over the five year term of the
credit facility.
The revolving credit facility requires the Company, among other things, to
comply with certain financial covenants, including minimum levels of EBITDA,
minimum ratios of EBITDA to fixed charges and minimum levels of liquidity. In
October 2001, the Company notified GE Capital that the Company had failed to
meet the minimum level of EBITDA and minimum ratio of EBITDA to fixed charges
for the period ended September 30, 2001. In December 2001, the Company notified
GE Capital that the Company would fail to meet the minimum level of EBITDA and
minimum ratio of EBITDA to fixed charges for the period ended December 31, 2001,
and that the Company was not expected to meet the minimum liquidity requirement
in the first quarter of 2002.
On February 14, 2002, the Company entered into an amendment to the revolving
credit facility under which the banks waived these financial covenant
violations, waived a covenant violation with respect to the banks' consent to
the ATI acquisition and provided for the addition of ATI as a borrower under the
credit facility. The amendment reduces the minimum required levels of EBITDA and
increases the minimum required ratios of EBITDA to fixed charges under the
revolving credit facility. The amendment also reduced the minimum liquidity
requirement for the period beginning February 15, 2002 and ending March 15,
2002. In addition, the amendment increases the maximum amount of annual
operating lease payments the Company and its subsidiaries may make in fiscal
years 2002 through 2004.
If the Company fails to comply with these amended provisions or violates
other covenants in the revolving credit facility, the Company will be required
to seek additional waivers, which may not be granted by the banks, or to enter
into amendments to the credit facility which may contain more stringent
conditions on the Company's borrowing capability or its activities, and may
require the Company to pay substantial fees to the banks. If such future waivers
were not granted and the banks were to elect to accelerate repayment of
outstanding balances under the credit facility, 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 debentures issued to 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 debentures would be required only if
the credit facility was paid in full or the banks under the credit facility
granted their express written consent.
Lease Arrangements and Letters of Credit
25
The Company finances a portion of its operations through operating leases.
These leases relate to transport and towing and recovery vehicles, equipment
(including information systems) and real property used by the Company to conduct
its business. The terms of the Company's operating leases range from one to
twenty years and certain lease agreements provide for price escalations.
Certain of the operating lease agreements are with the former
owners/shareholders of the businesses the Company has acquired, and cover the
facilities used in the acquired business' operations. The Company does not
believe that the terms of these lease arrangements with such former owners
differ from those which would likely be negotiated with clearly independent
third parties.
The following table shows, as of December 31, 2001, the Company's future
minimum lease payments under noncancelable operating leases (with initial or
remaining lease terms in excess of one year). This table does not include the
operating lease payments assumed by the Company in the ATI transaction described
below in "--Acquisition of ATI."
Operating leases