United Road Services, Inc.

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United Road Services, Inc.

10701 Middlebelt
Romulus, Michigan 48174
U.S.A.
Telephone: (734) 946-3232
Fax: (734) 947-7902
Web site: http://www.unitedroad.com

Public Company
Incorporated: 1997
Employees: 1,726
Sales: $248.7 million (2002)
Stock Exchanges: Pink Sheets
Ticker Symbol: URSI
NAIC: 488410 Motor Vehicle Towing

United Road Services, Inc. (URSI) is a Romulus, Michigan-based company that provides towing services from operations located across the United States and Canada. URSI offers a variety of towing services in addition to road service, including automobile transport, heavy equipment transport, law enforcement towing, insurance salvage towing, private impound towing, and repossession services. Customers include government agencies, automakers, auto dealers, corporate fleets, motor clubs, insurance companies, and lending institutions. Created as a consolidator of the highly fragmented towing industry, URSI has been stifled in its attempts to become a national powerhouse. Instead, it has gone through a series of management changes, and seen its shares delisted and reduced to penny stock status. The company is owned by KPS Special Situations Funds, a New York private equity firm known as a buyer of last resort. Its shares are now sold on a pink sheet basis.

Towing Industry Highly Fragmented in the 1990s

URSI was incorporated in July 1997 as a roll-up vehicle in the towing industry, as had been done in any number of industries in recent years. The idea was inviting, given that towing and transport services generated about $15 billion a year in North America, and it certainly appeared viable because the towing industry was composed of thousands of mom-and-pop operations, perhaps 90 percent of the 50,000 towing companies operating in the United States. Moreover, many of these companies were owned by people ready to retire and who were willing sellers. Some of the eight towing companies that joined forces to create URSI fell into this category. Other trends also favored launching a national towing and transport company. There were more cars on the road than ever, a factor that would naturally increase demand for towing services. Across the country police were cracking down on unlicensed, unregistered, uninsured, and intoxicated drivers and contracting towing companies to remove the vehicles involved. An increasing number of vehicles were now under lease, about one out of three, and after coming off lease they had to be trucked to dealerships or auction houses to be resold. Finally, automakers were turning to transport companies to deliver vehicles to market and were inclined to contract with a reliable national supplier.

Heading the new enterprise as CEO and chairman was Edward T. Sheehan, who came to the towing industry from United Waste Systems, Inc., where he was familiar with the nature of consolidation. During his tenure at United Waste from 1992 to 1997, when Sheehan served as president and chief operating officer, United Waste was rolled up by USA Waste Services, Inc. Sheehan also spent two years as the chief financial officer of Clean Harbors Inc., a Massachusetts environmental services company. Prior to that stint he served in a variety of financial and operational positions with General Electric Company.

URSI's eight founding firms were Northland Auto Transporters Inc./Northland Fleet Leasing Inc. of Detroit; Milne Tow & Transport Service of Reno, Nevada; Quality Towing of Las Vegas; Caron Auto Works Inc./Caron Auto Brokers Inc. of East Hartford, Connecticut; Absolute Towing and Transporting Inc. of Los Angeles; Keystone Towing Inc. of Los Angeles; Falcon Towing and Auto Delivery Inc. of Los Angeles; and ASC Transportation Services of Sacramento. All told, these companies maintained 17 operations in Arizona, California, Connecticut, Florida, Michigan, Nevada, and New Jersey. In 1997 their combined assets totaled $76 million, and together they generated revenues of $46.5 million. In February 1998 URSI filed to make an initial public offering (IPO) of stock. The company hoped to raise $66 million, of which $32.3 million was earmarked to purchase the founding firms. The idea of a towing company roll-up was so well received by investors, however, that URSI raised $86 million when the offering was completed in May 1998. The stock then began trading on the NASDAQ, where it soon rose from its IPO price of $13 to a peak of $19.50.

Torrid Acquisition Pace Following 1998 IPO

Although URSI had no towing operations in the area, it established corporate headquarters in Colonie, New York, close to Albany, where Sheehan made his home. The company took a "hub-and-spoke" approach, with Colonie serving as the centralized hub for management, administration, dispatch, and maintenance operations, essentially offering support to the individual towing companies. The owners of the founding firms stayed on to manage their local operations and became directors of United Road. But Sheehan's focus was not on running the business as much as it was on growing the business. He was eager to begin acquiring towing companies as well as transport businesses, with the goal of creating an integrated national transport network. In this way, the regional towing operations could serve as feeders for the transport services. On the day it completed its IPO, URSI spent $32 million to acquire seven more companies, adding 15 operations in six states. Then, in July, it spent $40 million for another 12 companies. In August 1998, URSI announced a slate of 11 acquisitions, including Central Service Inc. of Albany, a deal that added a local flavor to the company. It was a fast pace, one well ahead of schedule, yet Sheehan was far from finished for the year: He had signed letters of intent for more than 60 additional purchases. By the end of the year he added a total of 41 companies to the fold at a cost of $210 million.

In November 1998, Sheehan arranged a $75 million infusion of cash by selling convertible subordinated debentures to Char-terhouse Group International Inc., a New York City private investment firm. With these funds Sheehan was able to continue URSI's roll-up activity in 1999. In January of that month, the company bought four transport firms located in Montana, Tennessee, and Utah, and two towing companies located in Indiana and Tennessee. Moreover, Sheehan had another $265 million in additional acquisitions under discussion. But the buying spree would soon come to an end. The company was not performing up to expectations, quarterly earnings were poor, and investors responded by bidding down the price of URSI stock to around $4. In June the URSI board met, shortly after the announcement of disappointing second quarter numbers, and Sheehan was ousted as chairman and CEO. The company maintained that from the outset it anticipated that Sheehan would ultimately be replaced by a CEO who could make the assembled parts work more efficiently together, but no one expected the company to grow as quickly as it had nor perform so poorly. Instead of achieving a 15 percent profit margin on the towing side of the business, URSI managed just 8.4 percent. Transport services had an 18 percent margin instead of the desired 20 percent.

While board member Donald F. Moorehead stepped in as acting chairman, and President and COO Allan Pass handled the day-to-day running of the business, a New York City executive recruitment firm, Korn Ferry International, was hired to find a new chief executive. As the search lingered, the company put a hold on further acquisitions in order to begin digesting what URSI had already bought. In October URSI finally settled on its new CEO, hiring Gerald Riordan. In addition, Richard Molyneux, an outside director, replaced Moorehead as chairman. Riordan came to URSI from Ryder Systems Inc., where he spent 24 years and held major management positions in a number of business segments, including inventory control, marketing, operations, pricing, and quality. He became president of two business units, consumer truck rental and public student transportation, and was instrumental in the revitalization of Ryder's consumer truck rental business.

Once in charge of URSI, Riordan moved quickly to stop the bleeding. He terminated a $225 million credit facility Sheehan had arranged before leaving, thus ending URSI's acquisitive ways, at least temporarily. He then formed separate committees to examine the state of the towing business and the transport side. After hearing back that the two groups had their own sets of problems to address, in early 2000 he effected a reorganization of the business, creating two operating units: towing/recovery and transport. Effectively out of a job, Pass resigned, and Riordan subsequently hired unit presidents: Harold Borhauer for towing and recovery and Michael Wysocki for transport. Borhauer had 28 years of experience in the field and was the founder of one of URSI's acquisitions, Phoenix-based Towing Professionals Inc. Wysocki brought 27 years of experience in the trucking industry and was the founder of URSI's largest acquisition, vehicle carrier MPG Transport Ltd. of Charlestown, Massachusetts. Both men would operate out of their home cities—Borhauer in Phoenix and Wysocki in Detroit—while Riordan worked out of the Colonie office. Riordan then for the first time brought together in Las Vegas all of the company's 66 managers, many of whom had never even met. Riordan said of that meeting to Capital District Business Review, "The company didn't have that synergy, that 'team' feeling you want to draw on in good times and in bad. There were a lot of upset people in this company. Some of them own millions of shares of stock they got when they sold their companies, and they are as upset, if not more upset, than any outsider shareholders." By January 2000 URSI stock had fallen to about $1.50 per share.

Company Perspectives:

Our mission is to provide the highest standard of automobile and equipment towing, recovery, and transport services to customers on a local, regional, and national basis and to continuously strive for flexibility in servicing our customers' needs in an expedient and cost efficient manner.

During the Las Vegas gathering, URSI drew up a list of objectives, implemented a performance incentive program, and developed an action plan. A major objective was to become more efficient and to cut daily operating costs. To achieve this goal, URSI forged deals with suppliers to reduce the cost of gasoline, tires, and truck parts. To save money on workers' compensation claims, URSI also improved its safety training programs. The company also made some changes to the employee benefits program to cut costs. Riordan then took steps to shore up URSI's finances. He lined up a $25 million investment by Blue Truck Acquisition LLC, an affiliate of KPS Special Situations Fund, L.P. KPS specialized in small companies that were in need of operational, financial, or strategic restructuring. The private equity firm also pledged to bring in other lenders. Because KPS was entitled to name 6 of the 11 directors on the URSI board, it effectively controlled the company. Riordan faced another serious challenge in the price of the company's stock, which in early May 2000 was trading at 75 cents per share, a far cry from the $20 range of a year before. Now the company was in danger of being delisted by the NASDAQ. To boost the price to more than $5 in order to remain listed, Riordan engineered a reverse 1-for-10 stock split. The gambit failed, however, and the stock was delisted and relegated to over-the-counter status.

A GE Capital affiliate, CFE Inc., bought $2 million in preferred shares and provided URSI with a $93 million credit facility in the summer of 2000. With the company's financial situation in good shape, Riordan hoped that URSI could now turn the corner, but the business continued to slip. After losing $29.7 million on revenues of $255 million in 1999, the company reported a loss of $159 million (including a $129 million impairment charge) on revenues of $247 million in 2000. The company sold off a number of underperforming units and took several steps to control costs, but 2001 offered little improvement. Throughout the year, the price of its stock hovered between 25 cents and 50 cents—or less than a nickel if viewed in terms of the price before the reverse split. The company managed to reduce its loss to $13.7 million in 2001, but that was hardly positive news for investors.

In January 2002 URSI made its first acquisition in almost three years, buying Auction Transports Inc., a Missouri transport company. It was a hopeful sign, but little more. Despite selling off unprofitable units, or simply closing them down, and initiating further cost cuts, URSI offered another disappointing balance sheet when the results of 2002 were tallied. The company lost another $84.7 million, on sales of $248.7 million. The company continued to perform poorly in 2003, and in April, Riordan resigned in order "to pursue other opportunities." He was replaced as CEO by Wysocki, who then moved the company's headquarters to the Detroit suburb of Romulus. He was able to convert some debt to stock, which helped to cut URSI's significant debt load, but it remained very much in doubt whether he would ever be able to turn around the business. The thought of being an industry consolidator, for the time being at least, was simply out of the question.