UNITED ROAD SERVICES INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

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(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the transition period from to

Commission file number: 000-24010

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UNITED ROAD SERVICES, INC.
(Exact name of registrant as specified in its charter)

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94-3278455
Delaware (I.R.S. Employer Identification No.)
(State or other jurisdiction of

incorporation or organization)

12205
17 Computer Drive West (Zip Code)
Albany, New York
(Address of principal executive
offices)

Registrant's telephone number, including area code:
(518) 446-0140

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Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.001 per share (the "Common Stock")

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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

The registrant estimates that the aggregate market value of the registrant's
Common Stock held by non-affiliates on March 22, 2000 was $24,991,495 million.*

The following documents are incorporated into this Form 10-K by reference:

None.

As of March 22, 2000, 17,851,649 shares of the registrant's Common Stock
were outstanding.
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* Without acknowledging that any individual director or executive officer of
the Company is an affiliate, the shares over which they have voting control
have been included as owned by affiliates solely for the purposes of this
computation.

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PART I

ITEM 1. Business

General

United Road Services, Inc. (the "Company") is a national provider of
automobile transport services and a regional provider of motor vehicle and
equipment towing and recovery services. At the time of the Company's initial
public offering in May 1998, the Company acquired seven businesses (the
"Founding Companies"), three of which provide transport services and four of
which provide towing and recovery services. Between May 6, 1998 and December
31, 1998, the Company acquired a total of 34 additional businesses, consisting
of 25 towing and recovery businesses and nine transport businesses. Between
January 1, 1999 and May 5, 1999, the Company acquired a total of 15 additional
businesses consisting of five towing and recovery businesses and ten transport
businesses. The Company has not completed any acquisitions since May 5, 1999.

As of December 31, 1999, the Company operated a network of 26 towing and
recovery service divisions and 17 transport divisions in a total of 22 states.
During 1999, approximately 60.9% of the Company's net revenue was derived from
the provision of transport services and approximately 39.1% of its net revenue
was derived from the provision of towing and recovery services. Further
information with respect to these segments of the Company's business may be
found in note 14 to the Company's Consolidated Financial Statements included
elsewhere herein.

The Company provides transport services for new and used vehicles throughout
the United States. The Company derives revenue from transport services
according to pre-set rates based on mileage or negotiated flat rates. The
Company's transport customers include commercial entities, such as automobile
leasing companies, insurance companies, automobile manufacturers, automobile
auction companies and automobile dealers, and individual motorists.

The Company offers a broad range of towing and recovery services in its
local markets, including towing, impounding and storing motor vehicles,
conducting lien sales and auctions of abandoned vehicles, towing heavy
equipment and recovering and towing heavy-duty commercial and recreational
vehicles. The Company derives revenue from towing and recovery services based
on distance, time or fixed charges and from related impounding and storage
fees. If impounded vehicles are not claimed by their owners within prescribed
time periods, the Company is entitled to be paid from the proceeds of lien
sales, scrap sales or auctions. The Company's towing and recovery customers
include commercial entities, such as automobile leasing companies, insurance
companies, automobile dealers, repair shops and fleet operators,
municipalities, law enforcement agencies such as police, sheriff and highway
patrol departments, and individual motorists.

Industry Background

The Company believes that most of the motor vehicle and equipment towing,
recovery and transport businesses in the United States are small, local and
owner-operated, with limited access to capital for modernization and expansion
and limited ability to service large customers and contracts. The Company
believes that demand for towing, recovery and transport services has been
impacted by the following factors: an increase in the number and average age of
registered vehicles, which increases demand for all types of towing, recovery
and transport services; a rise in government mandates (and increased
enforcement of such mandates) against unlicensed or uninsured drivers and
unregistered vehicles, which results in higher demand for towing and impounding
services; the growing popularity of leasing (which, according to the National
Automobile Dealers Association, has risen from 5% of all new auto sales in 1985
to 33% in 1998), which increases demand for transport services to move off-
lease vehicles to auctions and dealers for sale; the increasing mobility of the
United States workforce, which increases demand for automobile transport in
connection with career-related moves; and rising new and used auto sales, which
increases demand for automobile transport generally.

1

Strategy

The Company was formed in July 1997 to become a leading national provider of
motor vehicle and equipment towing, recovery and transport services in the
United States. Initially, a key component of the Company's growth strategy was
to enter new geographic markets and expand within its existing geographic
markets principally through the acquisition of towing, recovery and transport
businesses located in strategic markets throughout the United States. Between
May 6, 1998 and May 5, 1999, the Company acquired 56 towing, recovery and
transport businesses in various locations throughout the United States.

During 1999, the Company experienced a significant decline in the market
price of its common stock. As a result, its ability to complete acquisitions
using its common stock as currency in a manner that was not dilutive to current
stockholders was adversely affected. During the third quarter of 1999, the
Company made the strategic decision not to pursue its acquisition program in
the near term in order to allow the Company to focus primarily on integrating
and profitably operating the 56 businesses it had acquired within its first
year of operations. The goal of the Company's revised business strategy is to
improve the operational efficiency and profitability of its existing businesses
in order to build a stable platform for future growth, which may or may not
include additional acquisitions. The Company's ability to complete acquisitions
in the future will depend, to a great degree, upon its success in implementing
operational improvements and the availability of capital.

Key elements of the Company's revised business strategy include the
following:

Provide High Quality Service. The Company believes that timely,
professional and dependable service is the primary generator of repeat
towing, recovery and transport service business. The Company intends to
continue to utilize proven practices throughout its operations in areas
such as dispatching technology, driver training and professionalism,
preventive maintenance and safety. Through these practices, the Company
intends to continue to offer high quality service to all of its customers.

Expand Scope of Services and Customer Base. The Company believes that
its size and other resources will permit it to attract customers and
contracts that require greater towing, recovery, transport and storage
capabilities than those possessed by local owner-operators. The Company
intends to utilize its geographic diversity to pursue additional business
from new and existing customers that operate on a regional or national
basis, such as automobile manufacturers, leasing companies, insurance
companies and automobile auction companies. The Company also plans to
continue to explore ways to increase asset utilization in order to generate
additional revenue from existing and new customers.

Improve Operating Performance and Profitability. A central component of
the Company's strategy is to improve the profitability of its existing
businesses through improvements in its management structure, cost
reductions and reductions in receivables balances. The Company has recently
enacted programs to decrease certain operating and administrative costs,
including initiatives to reduce wage and benefits expenses and information
systems costs. The Company also intends to continue to use its size,
national scope and purchasing power to seek cost savings from national
vendors in areas such as fuel, tires, parts, telecommunications and
lodging.

Recent Developments

On April 14, 2000, the Company entered into a definitive agreement providing
for the issuance and sale to Blue Truck Acquisition LLC, a Delaware limited
liability company affiliated with KPS Special Situations Fund, L.P. ("KPS") of
shares of the Company's Series A Participating Convertible Preferred Stock, par
value $.01 per share (the "Series A Preferred Stock") for an aggregate purchase
price of $25.0 million (the "KPS Transaction"). Consummation of the sale of
Series A Preferred Stock to KPS is subject to a number of conditions, including
approval of the Company's stockholders and a refinancing or replacement of the
Company's existing credit facility providing for at least $25.0 million of
available borrowings in addition to the amounts currently outstanding under the
credit facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."

2

Management Changes and Corporate Restructuring

On June 21, 1999, Edward T. Sheehan, then Chairman and Chief Executive
Officer of the Company, resigned as Chief Executive Officer of the Company and
the Board of Directors commenced a search for his replacement. On October 11,
1999, Gerald R. Riordan was hired to replace Mr. Sheehan as Chief Executive
Officer.

In December 1999, the Company reorganized its management structure and
established separate operating units for its towing and recovery and transport
businesses. The business units are led by separate presidents, each of whom
reports directly to the Company's Chief Executive Officer. The Company believes
that the new management structure will allow each president to focus on the
unique opportunities and challenges of their respective businesses. Each of the
business units are or will be grouped geographically into regions, with the
regional managers reporting directly to the president of each division. By
making the regional managers directly responsible for the performance of the
businesses in their region, the Company intends to improve the management and
operational efficiency of its individual businesses.

In connection with this reorganization, Allan D. Pass, then President and
Chief Operating Officer of the Company, and Robert J. Adams, Jr., then Senior
Vice President and Chief Acquisition Officer of the Company, resigned from
their positions as officers of the Company effective as of December 15, 1999.
In January 2000, the Company appointed Michael A. Wysocki to serve as President
of the Company's Transport Division, and Harold W. Borhauer to serve as
President of the Company's Towing and Recovery Division.

Operations and Services Provided

Transport

The Company provides new and used automobile transport services for a wide
range of commercial customers. With respect to new automobiles, transport
services typically begin with a telephone call or other communication from an
automobile manufacturer or dealer requesting the transportation of a specified
number of vehicles between specified locations. A large percentage of the
Company's used automobile transport business derives from automobile auctions,
where an on-site Company representative negotiates with individual dealers and
auction representatives to transport vehicles to and from the auction. In each
case, the dispatcher or auction sales representative records the relevant
information, checks the location and status of the Company's vehicle fleet and
assigns the job to a particular vehicle. The automobiles are then collected and
transported to the requested destination or an intermediate location for pick
up by another Company vehicle.

The Company provides new and used automobile transport to leasing companies,
automobile manufacturers, automobile dealers, automobile auction companies,
insurance companies, brokers and individuals. The Company typically provides
services as needed by a customer and charges the customer according to pre-set
rates based on mileage or negotiated flat rates. The Company transports large
numbers of new vehicles for automobile manufacturers from ports and railheads
to individual dealers pursuant to contracts. During the year ended December 31,
1999, one such customer, General Motors Corporation, represented approximately
11% of the Company's total consolidated net revenue. The loss of this customer
could have a material adverse effect on the Company's business, financial
condition and results of operations if the Company were not able to replace the
lost revenue with revenue from other sources. The Company's contracts with
vehicle manufacturers typically have terms of three years or less and may be
terminated at any time for material breach. Upon expiration of the initial
term, the manufacturer may renew the contract on a year-to-year basis if it is
satisfied with the Company's performance. Otherwise a new contract is awarded
pursuant to competitive bidding. In addition, the Company transports large
numbers of used vehicles from automobile auctions (where off-lease vehicles are
sold) to individual dealers. The Company also provides transport services for
dealers who transfer new cars from one region to another and local collection
and delivery support to long-haul automobile transporters. These services are
typically not subject to contracts.

3

Towing and Recovery

The Company provides a broad range of towing and recovery services for a
diverse group of commercial, government and individual customers. Towing and
recovery services typically begin with a telephone call requesting assistance.
The call may come from a law enforcement officer, a commercial fleet
dispatcher, a private business or an individual. The dispatcher records the
relevant information regarding the vehicle or equipment to be towed or
recovered, checks the location and status of the Company's vehicle fleet
(typically using a computerized positioning system) and assigns the job to a
particular vehicle. The vehicle or equipment is then collected and towed to one
of several locations, depending on the nature of the customer.

Municipality and Law Enforcement Agency Towing. The Company provides towing
services to various municipalities and law enforcement agencies. In this
market, vehicles are typically towed to one of the Company's facilities where
the vehicle is impounded and placed in storage. The vehicle remains in storage
until its owner pays the Company the towing fee (which is typically based on an
hourly charge or mileage) and any daily storage fees, and pays any fines due to
the municipality or law enforcement agency. If the vehicle is not claimed
within a period prescribed by law (typically between 30 and 90 days), the
Company completes lien proceedings and sells the vehicle at auction or to a
scrap metal facility, depending on the value of the vehicle. Depending on the
jurisdiction, the Company may either keep all of the proceeds from vehicle
sales, or keep proceeds up to the amount of towing and storage fees and pay the
remainder to the municipality or law enforcement agency. The Company provides
services in some cases under contracts with municipalities or police, sheriff
and highway patrol departments, typically for terms of five years or less. Such
contracts often may be terminated for material breach and are typically subject
to competitive bidding upon expiration. In other cases, the Company provides
these services to municipalities or law enforcement agencies without a long-
term contract. Whether pursuant to a contract or an ongoing relationship, the
Company generally provides these services for a designated geographic area,
which may be shared with one or more other companies.

Private Impound Towing. The Company provides impound towing services to
private customers, such as shopping centers, retailers and hotels, which engage
the Company to tow vehicles that are parked illegally on their property. As in
law enforcement agency towing, the Company generates revenues through the
collection of towing and storage fees from vehicle owners, and from the sale of
vehicles that are not claimed.

Insurance Salvage Towing. The Company provides insurance salvage towing
services to insurance companies and automobile auction companies for a per-
vehicle fee based on the towing distance. This business involves secondary
towing, since the vehicles involved typically have already been towed to a
storage facility. For example, after an accident, a damaged or destroyed
vehicle is usually towed to a garage or impound yard. The Company's insurance
salvage towing operations collect these towed vehicles and deliver them to
repair shops, automobile auction companies or scrap metal facilities as
directed by the customer.

Commercial Road Service. The Company provides road services to a broad range
of commercial customers, including automobile dealers and repair shops. The
Company typically charges a flat fee and mileage premium for these towing
services. Commercial road services also include towing and recovery of heavy-
duty trucks, recreational vehicles, buses and other large vehicles, typically
for commercial fleet operators. The Company charges an hourly rate based on the
towing vehicle used for these specialized services.

Heavy Equipment Towing. The Company provides heavy equipment towing services
to construction companies, contractors, municipalities and equipment leasing
companies. The Company bases its fees for these services on the vehicle used
and the distance traveled.

Consumer Road Service. The Company also tows disabled vehicles for
individual motorists and national motor clubs. The Company generally tows such
vehicles to repair facilities for a flat fee paid by either the individual
motorist or the motor club.

4

Safety and Training

The Company uses a variety of programs to improve safety and promote an
accident-free environment. These programs include regular driver training and
certification, drug testing and safety bonuses. These programs are designed to
ensure that all employees comply with the Company's safety standards, the
Company's insurance carriers' safety standards and federal, state and local
laws and regulations. The Company believes that its emphasis on safety and
training will assist it in attracting and retaining quality employees.

Competition

The market for towing, recovery and transport services is extremely
competitive. Competition is based primarily on quality, service, timeliness,
price and geographic proximity. The Company competes with certain large
transport companies on a national and regional basis and with certain large
towing and recovery companies on a regional and local basis, some of which may
have greater financial and marketing resources than the Company. The Company
also competes with thousands of smaller local companies, which may have lower
overhead cost structures than the Company and may, therefore, be able to
provide their services at lower rates than the Company. The Company believes
that it is able to compete effectively because of its commitment to high
quality service, geographic scope, broad range of services offered, experienced
management and operational economies of scale.

Sales and Marketing

The Company's sales and marketing strategy is to expand market penetration
through strategically oriented direct sales techniques. The Company currently
focuses its sales and marketing efforts on large governmental and commercial
accounts, including automobile manufacturers, leasing companies, insurance
companies and governmental entities, with the goal of fostering long-term
relationships with these customers.

Dispatch and Information Systems

Prior to their acquisition by the Company, each of the businesses acquired
operated a local dispatch system and assigned individual towing, recovery and
transport vehicles to particular service calls, in some cases through the use
of computerized positioning systems to identify and track vehicle location and
status ("Legacy Systems").

In its first year of operations, the Company developed a proprietary
National Transportation Management System ("TMS") in an effort to maximize
truck utilization through centralized national dispatching. This system was
also designed to perform integrated order entry, load composition, invoicing,
payroll and other administrative functions. Initially, the Company planned to
install TMS at substantially all of its transport divisions. In its first year
of operations, the Company also planned to install a standardized towing and
recovery operating system at all of its towing and recovery locations. This
system was designed to perform order entry, dispatch, impound vehicle
inventory, lien processing and other administrative functions. The Company has
experienced unexpected performance difficulties, delays and costs in
implementing its common operating systems. As of December 31, 1999, TMS had
been installed at seven of the Company's transport locations and the
standardized towing and recovery operating system had been installed at four of
the Company's towing and recovery locations. The Company is currently in the
process of re-evaluating its information systems needs, including whether TMS
or the standardized towing and recovery operating system should be installed at
additional locations where such installation is feasible. Pending completion of
this analysis, those divisions that have not installed the common operating
systems continue to utilize their existing Legacy Systems.

The Company's accounting and financial reporting activities are centralized
at its headquarters in Albany, New York. The Company anticipates that it will
need to upgrade and expand its information systems on an ongoing basis as it
re-evaluates its needs and expands its operations. Any such upgrade will be
subject to the availability of additional capital.

5

Government Regulation and Environmental Matters

Towing, recovery and transport services are subject to various federal,
state and local laws and regulations regarding equipment, driver certification,
training, recordkeeping and workplace safety. The Company's vehicles and
facilities are subject to periodic inspection by the United States Department
of Transportation and similar state and local agencies. The Company's failure
to comply with such laws and regulations could subject the Company to
substantial fines and could lead to the closure of operations that are not in
compliance. Companies providing towing, recovery and transport services are
required to have numerous federal, state and local licenses and permits.
Failure by the Company to obtain or maintain such licenses and permits could
have a material adverse effect on the Company's business, financial condition
and results of operations.

The Company's operations are subject to a number of federal, state and local
laws and regulations relating to the storage of petroleum products, hazardous
materials and impounded vehicles, as well as safety regulations relating to the
upkeep and maintenance of the Company's vehicles. In particular, the Company's
operations are subject to federal, state and local laws and regulations
governing leakage from salvage vehicles, waste disposal, the handling of
hazardous substances, environmental protection, remediation, workplace exposure
and other matters. The Company believes that it is in substantial compliance
with all such laws and regulations. The Company does not currently expect to
spend any substantial amounts in the foreseeable future in order to meet
current environmental or workplace health and safety requirements. It is
possible that an environmental claim could be made against the Company or that
the Company could be identified by the Environmental Protection Agency, a state
agency or one or more third parties as a potentially responsible party under
federal or state environmental law. If the Company is subject to such a claim
or is so identified, the Company may incur substantial investigation, legal and
remediation costs. Such costs could have a material adverse effect on the
Company's business, financial condition and results of operations.

Seasonality

The demand for towing, recovery and transport services is subject to
seasonal and other variations. Specifically, the demand for towing and recovery
services is generally highest in extreme or inclement weather, such as heat,
cold, rain and snow. Although the demand for automobile transport tends to be
strongest in the months with the mildest weather, since extreme or inclement
weather tends to slow the delivery of vehicles, the demand for automobile
transport is also a function of the timing and volume of lease originations,
new car model changeovers, dealer inventories, and new and used auto sales.

Employees

As of December 31, 1999, the Company had approximately 2,300 employees,
leases an additional 223 employees and used approximately 350 independent
contractors. The Company believes that it has a satisfactory relationship with
its employees. None of the Company's employees are currently members of unions.

Factors Influencing Future Results and Accuracy of Forward-Looking Statements

In the normal course of its business, the Company, in an effort to help keep
its stockholders and the public informed about the Company's operations, may
from time to time issue or make certain statements, either in writing or
orally, that are or contain forward-looking statements, as that term is defined
in the federal securities laws. Generally, these statements relate to business
plans or strategies, projected or anticipated benefits or other consequences of
such plans or strategies or other actions taken or to be taken by the Company,
including the impact of such plans, strategies or actions on the Company's
results of operations or components thereof, projected or anticipated benefits
from operational changes, acquisitions or dispositions made or to be made by
the Company, or projections involving anticipated revenues, costs, earnings, or
other aspects of the Company's results of operations. The words "expect,"
"believe," "anticipate," "project," "estimate," "intend," and similar
expressions, and their opposites, are intended to identify forward-looking
statements. The Company cautions readers that such statements are not
guarantees of future performance or events and are subject to a

6

number of factors that may tend to influence the accuracy of the statements and
the projections upon which the statements are based, including but not limited
to those discussed below. As noted elsewhere in this Report, all phases of the
Company's operations are subject to a number of uncertainties, risks, and other
influences, many of which are outside the control of the Company, and any one
of which, or a combination of which, could materially affect the results of the
Company's operations and whether forward-looking statements made by the Company
ultimately prove to be accurate.

The following discussion outlines certain factors that could affect the
Company's consolidated results of operations for 2000 and beyond and cause them
to differ materially from those that may be set forth in forward-looking
statements made by or on behalf of the Company:

Limited Combined Operating History; Risks of Integrating Acquired Companies

The Company conducted no operations and generated no net revenue prior to
its initial public offering in May 1998. At the time of its initial public
offering, the Company purchased the seven Founding Companies. Between May 6,
1998 and May 5, 1999, the Company acquired a total of 49 additional businesses
(the "Acquired Companies"). Prior to their acquisition by the Company, such
companies were operated as independent entities. During 1999, the Company
experienced performance difficulties associated with the integration and
consolidation of certain of its operating divisions. There can be no assurance
that the Company will be able to successfully integrate the operations of its
acquired businesses or that it will be able to put it in place the necessary
management, systems and procedures (including accounting and financial
reporting systems) to operate the combined enterprise on a profitable basis.

Risks Related to Revised Business Strategy

A key element of the Company's revised business strategy is to increase the
revenue and improve the profitability of the companies it has acquired. The
Company intends to enhance its revenue by increasing asset utilization,
deploying new equipment and drivers and expanding both the scope of services
the Company offers and its customer base. The Company's ability to increase
revenue will be affected by various factors, including the availability of
capital to invest in new equipment, the demand for towing, recovery and
transport services, the level of competition in the industry, and the Company's
ability to attract and retain a sufficient number of qualified personnel.

The Company intends to improve its profitability by various means, including
eliminating duplicative operating costs and overhead, decreasing
administrative, systems and other costs and capitalizing on its enhanced
purchasing power. The Company's ability to improve profitability will be
affected by various factors, including unexpected increases in operating or
administrative costs, the Company's ability to benefit from the elimination of
redundant operations and the strength of the Company's management on a
national, regional and local level. Many of these factors are beyond the
Company's control. There can be no assurance that the Company will be
successful in increasing revenue or improving its profitability.

Availability of Capital

The Company's ability to execute its revised business strategy will depend
to a great extent on the availability of capital. Beginning in the fourth
quarter of 1999, the Company began to experience a significant decrease in its
cash flow from operations. The Company currently believes that it will be able
to fund its working capital needs through cash flow from operations at least
until January 1, 2001, as long as it does not experience significant decreases
in revenues or increases in costs. In the event the Company is unable to fund
its near-term working capital needs from cash flow from operations, it will be
required to secure alternative sources of capital through issuances of debt or
equity securities or sales of assets. There can be no assurance that additional
capital will be available to the Company on satisfactory terms or at all.

7

While the Company currently expects that its cash flow from operations will
be sufficient to fund its near-term working capital needs as long as it does
not experience significant decreases in revenues or increases in costs, the
current level of cash flow from operations is not expected to be sufficient to
fund the Company's medium or long-term working capital needs or its growth
strategy. Thus, in order to be able to successfully implement its revised
business strategy, it will be necessary for the Company to raise additional
capital, through issuances of debt or equity securities, additional bank debt
or sales of assets, which may not be possible on satisfactory terms, or at all.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

During 1999, the Company violated certain financial covenants in its credit
facility. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." In
return for temporary waivers of these defaults, the Company and its banks
agreed to reduce the amount available for borrowing under the credit facility
to $55.0 million, of which approximately $54.0 million, including letters of
credit of $3.4 million, was outstanding as of December 31, 1999. These
temporary waivers are currently scheduled to expire on April 28, 2000, at which
time there will be an immediate event of default and, absent a further waiver
or amendment, all amounts outstanding under the credit facility will be subject
to acceleration at the banks' discretion. Consequently, the total amount
outstanding under the revolving credit facility at December 31, 1999 has been
classified as a current liability. As a result of this reclassification, the
audit report on the Company's consolidated financial statements includes a
paragraph that states that the excess of current liabilities over current
assets raises substantial doubt about the Company's ability to continue as a
going concern. If the credit facility banks elect to accelerate, the Company
would be required to refinance its debt or obtain capital from other sources,
including sales of additional debt or equity securities or sales of assets, in
order to meet its repayment obligations, which may not be possible. If the
banks were to accelerate repayment of amounts due under the credit facility, it
would cause a default under the Company's 8% Convertible Subordinated
Debentures due 2008 (the "Debentures") issued to Charter URS, LLC, an affiliate
of Charterhouse Group International, Inc. ("Charterhouse"). In the event of a
default under the Debentures, Charterhouse could accelerate repayment of all
amounts outstanding under the Debentures, subject to the credit facility banks'
priority. In such event, repayment of the Charterhouse Debentures would be
required only if the credit facility was paid in full or the banks under the
credit facility granted their express prior written consent.

The Company's existing credit facility matures on October 31, 2001. The
Company's ability to refinance the credit facility upon maturity will depend to
a great degree on improved operating performance, particularly with respect to
the Company's cash flow to interest coverage ratio. If the Company cannot
successfully refinance the credit facility upon maturity, it will be required
to raise capital through the issuance of additional debt or equity securities
or sales of assets in order to meet its repayment obligations under the credit
facility.

The Company currently has a negative net tangible book value. Accordingly,
based upon the current market price of the Common stock, if the Company were
required to issue additional equity securities at this time, such issuance
would result in immediate and substantial dilution in net tangible book value
to existing investors.

Competition

The market for towing, recovery and transport services is extremely
competitive. Such competition is based primarily on quality, service,
timeliness, price and geographic proximity. The Company competes with certain
large transport companies on a national and regional basis and certain large
towing and recovery companies on regional and local basis, some of which may
have greater financial and marketing resources than the Company. The Company
also competes with thousands of smaller local companies, which may have lower
overhead cost structures than the Company and may, therefore, be able to
provide their services at lower rates than the Company.

8

Information Systems

The Company's original information systems strategy contemplated the
installation of common operating systems at all of its towing and recovery
locations and substantially all of its transport locations. The Company has
encountered unexpected performance difficulties, delays and costs in
implementing such systems. The Company is currently re-evaluating its
information systems needs, including whether these common operating systems
should be installed at additional transport and towing and recovery locations
where such installation is feasible. Pending completion of such analysis, those
divisions that have not installed the common operating systems continue to
utilize their existing Legacy Systems. The Company anticipates that it will
need to upgrade and expand its information systems on an ongoing basis as it
re-evaluates its needs and expands its operations. Any update or expansion of
these systems will be subject to the Company's ability to obtain additional
capital, which may not be available on terms acceptable to the Company, or at
all. Any damage to or failure of any of the Company's information systems that
causes significant interruptions in the Company's operations could have a
material adverse effect on the Company's business, financial condition and
results of operations.

Dependence on Customer Relationships and Contracts

The Company provides transport services to automobile manufacturers and
other commercial customers under contracts, which typically have terms of three
years or less and may be terminated at any time for material breach. Upon
expiration of the initial term of these contracts, the manufacturer typically
may renew the contract on a year-to-year basis if it is satisfied with the
Company's performance. Otherwise, a new contract is awarded pursuant to
competitive bidding. During the year ended December 31, 1999, one of the
Company's transport customers, General Motors Corporation, represented
approximately 11% of the Company's total consolidated net revenue. The loss of
this customer could have a material adverse effect on the Company's business,
financial condition and results of operations if the Company were not able to
replace the lost revenue with revenue from other sources. The Company also
provides towing and recovery services to certain municipalities and a number of
law enforcement agencies under contracts. These towing and recovery contracts
typically have terms of five years or less, may be terminated at any time for
material breach, and in some cases are subject to competitive bidding upon
expiration. It is possible that some or all of these transport or towing and
recovery contracts may not be renewed upon expiration or may be renewed on
terms less favorable to the Company. It is also possible that at some future
time more of the Company's customers may implement a competitive bidding
process for the award of transport or towing and recovery contracts. The
Company has no formal contract with a large number of its customers, and it is
possible that one or more customers could elect, at any time, to stop utilizing
the Company's services.

Regulation

Towing, recovery and transport services are subject to various federal,
state and local laws and regulations regarding equipment, driver certification,
training, recordkeeping and workplace safety. The Company's vehicles and
facilities are subject to periodic inspection by the United States Department
of Transportation and similar state and local agencies. The Company's failure
to comply with these laws and regulations could subject it to substantial fines
and could lead to the closure of operations that are not in compliance.
Companies providing towing, recovery and transport services are required to
have numerous federal, state and local licenses and permits. The Company's
failure to obtain or maintain such licenses and permits could have a material
adverse effect on the Company's business, financial condition and results of
operations.

Potential Exposure to Environmental Liabilities

The Company's operations are subject to a number of federal, state and local
laws and regulations relating to the storage of petroleum products, hazardous
materials and impounded vehicles, as well as safety regulations relating to the
upkeep and maintenance of vehicles. In particular, the Company's operations are
subject to federal, state and local laws and regulations governing leakage from
salvage vehicles, waste disposal, the handling of hazardous substances,
environmental protection, remediation, workplace exposure and other

9

matters. It is possible that an environmental claim could be made against the
Company or that the Company could be identified by the Environmental Protection
Agency, a state agency or one or more third parties as a potentially
responsible party under federal or state environmental laws. In such event, the
Company could be forced to incur substantial investigation, legal and
remediation costs. Such costs could have a material adverse effect on the
Company's business, financial condition and results of operations.

Potential Liabilities Associated with Acquired Businesses

The businesses that the Company has acquired could have liabilities that the
Company did not discover during its pre-acquisition due diligence
investigations. Such liabilities may include, but are not limited to,
liabilities arising from environmental contamination or non-compliance by prior
owners with environmental laws or regulatory requirements. As a successor owner
or operator, the Company may be responsible for such liabilities. The
businesses the Company acquires generally handle and store petroleum and other
hazardous substances at their facilities. There may have been or there may be
releases of these hazardous substances into the soil or groundwater which the
Company may be required under federal, state or local law to investigate and
clean up. Any such liabilities or related investigations or clean-ups could
have a material adverse effect on the Company's business, financial condition
and results of operations.

Labor Relations

Although currently none of the Company's employees are members of unions, it
is possible that some employees could unionize in the future. If the Company's
employees were to unionize, the Company could incur higher ongoing labor costs
and could experience a significant disruption of its operations in the event of
a strike or other work stoppage. Any of these possibilities could have a
material adverse effect on the Company's business, financial condition and
results of operations.

Liability and Insurance

From time to time, the Company is subject to various claims relating to its
operations, including (i) claims for personal injury or death caused by
accidents involving the Company's vehicles and service personnel; (ii) worker's
compensation claims and (iii) other employment related claims. Although the
Company maintains insurance (subject to deductibles), such insurance may not
cover certain types of claims, such as claims under specified dollar thresholds
or claims for punitive damages or for damages arising from intentional
misconduct (which are often alleged in third-party lawsuits). In the future,
the Company may not be able to maintain adequate levels of insurance on
reasonable terms. In addition, it is possible that existing or future claims
may exceed the level of the Company's insurance or that the Company may not
have sufficient capital available to pay any uninsured claims.

Quarterly Fluctuations of Operating Results

The Company has experienced, and may continue to experience, significant
fluctuations in quarterly operating results due to a number of factors. These
factors could include: (i) the availability of capital to fund operations,
including expenditures for new and replacement equipment; (ii) the Company's
success in improving operating efficiency and profitability, and in integrating
its acquired businesses; (iii) the loss of significant customers or contracts;
(iv) the timing of expenditures for new equipment and the disposition of used
equipment; (v) price changes in response to competitive factors; (vi) seasonal
and other variations in the demand for towing, recovery and transport services;
(vii) changes in applicable regulations, including but not limited to various
federal, state and local laws and regulations regarding equipment, driver
certification, training, recordkeeping and workplace safety; and (viii) general
economic conditions. As a result, operating results for any one quarter should
not be relied upon as an indication or guarantee of performance in future
quarters.

10

Seasonality

The demand for towing, recovery and transport services is subject to
seasonal and other variations. Specifically, the demand for towing and recovery
services is generally highest in extreme or inclement weather, such as heat,
cold, rain and snow. Although the demand for automobile transport tends to be
strongest in the months with the mildest weather, since extreme or inclement
weather tends to slow the delivery of vehicles, the demand for automobile
transport is also a function of the timing and volume of lease originations,
new car model changeovers, dealer inventories and new and used auto sales.

Reliance on Key Personnel

The Company is highly dependent upon the experience, abilities and continued
efforts of its senior management. The loss of the services of one or more of
the key members of the Company's senior management could have a material
adverse effect on the Company's business, financial condition and results of
operations if the Company is unable to find a suitable replacement in a timely
manner. The Company does not presently maintain "key man" life insurance with
respect to members of its senior management.

The Company's operating facilities are managed by regional and local
managers who have substantial knowledge of and experience in the local towing,
recovery and transport markets served by the Company. Such managers include
former owners and employees of businesses the Company has acquired. The loss of
one or more of these managers could have a material adverse effect on the
Company's business, financial condition and results of operations if the
Company is unable to find a suitable replacement in a timely manner.

The timely, professional and dependable service demanded by towing, recovery
and transport customers requires an adequate supply of skilled dispatchers,
drivers and support personnel. Accordingly, the Company's success will depend
on its ability to employ, train and retain the personnel necessary to meet its
service requirements. From time to time, and in particular areas, there are
shortages of skilled personnel. In the future, the Company may not be able to
maintain an adequate skilled labor force necessary to operate efficiently, the
Company's labor expenses may increase as a result of a shortage in supply of
skilled personnel, or the Company may have to curtail its growth as a result of
labor shortages.

Management of Growth

The Company's revised business strategy is to increase its profitability and
expand its operations through internal growth. The Company's systems,
procedures and controls may not be adequate to support its operations as they
expand. Any substantial future growth may impose significant added
responsibilities on members of the Company's senior management, including the
need to recruit and integrate new senior level managers and executives. The
Company may not be able to successfully recruit and retain such additional
management. The Company's failure to manage its growth effectively or its
inability to attract and retain additional qualified management could have a
material adverse effect on the Company's business, financial condition and
results of operations.

ITEM 2. Properties

As of December 31, 1999, the Company operated 43 divisions consisting of 92
facilities located in 22 states. These facilities consisted of 60 facilities
used to garage, repair and maintain towing and recovery vehicles, impound and
store towed vehicles, conduct lien sales and auctions and house administrative
and dispatch operations for the Company's towing and recovery operations, and
32 facilities used as marshalling sites and to garage, repair and maintain
transport vehicles and house administrative and dispatch operations for the
Company's transport operations. All of the Company's facilities are leased from
other parties. As of December 31, 1999, the Company's headquarters consisted of
approximately 14,100 square feet of leased space in Albany, New York.

11

As of December 31, 1999, the Company operated a fleet of approximately 870
towing and recovery vehicles and approximately 1,330 transport vehicles, which
the Company believes are generally well-maintained and adequate for its current
operations.

ITEM 3. Legal Proceedings

The Company is from time to time a party to litigation arising in the
ordinary course of its business (most of which involves claims for personal
injury or property damage incurred in connection with the Company's
operations). The Company is not currently involved in any litigation that it
believes will have a material adverse effect on its business, financial
condition or results of operations.

ITEM 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of the security holders of the Company,
through the solicitation of proxies or otherwise, during the fourth quarter of
1999.

12

PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters

The Company's Common Stock began trading on the Nasdaq National Market on
May 1, 1998 under the symbol "URSI." The table below sets forth the high and
low sale prices for the Common Stock on the Nasdaq National Market for the
periods indicated:

1998 High Low
---- ---- ----

Second Quarter (beginning May 1)........................... $19 $15 1/8
Third Quarter.............................................. 26 9 1/2
Fourth Quarter............................................. 19 1/4 5 3/4

1999 High Low
---- ---- ----

First Quarter.............................................. $19 1/2 $ 4 1/4
Second Quarter............................................. 8 4 9/16
Third Quarter.............................................. 5 1/8 2 1/2
Fourth Quarter............................................. 3 5/8 1

As of March 22, 2000, there were approximately 169 record holders of the
Company's Common Stock.

The Company has never paid any cash dividends on its Common Stock and
intends to retain its earnings to finance the development of its business for
the foreseeable future. Any future determination as to the payment of cash
dividends will depend upon such factors as earnings, capital requirements, the
Company's financial condition, restrictions in financing agreements and other
factors deemed relevant by the Company's Board of Directors. The payment of
dividends by the Company is restricted by the Company's credit facility and
the Purchase Agreement (the "Charterhouse Purchase Agreement") pursuant to
which the Company issued $75.0 million aggregate principal amount of
Debentures to Charterhouse.

Sale of Unregistered Securities

On December 31, 1999, the Company issued approximately $1.6 million
aggregate principal amount of Debentures to Charterhouse, which represented
the quarterly payment-in-kind interest payment due with respect to $79.3
million aggregate principal amount of Debentures previously issued to
Charterhouse.

The sale of the securities listed above was deemed to be exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act") in reliance on Section 4(2) of the Securities Act or Regulation D
promulgated thereunder as a transaction by an issuer not involving a public
offering. The recipient of the securities was an accredited investor and
represented its intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were attached to the certificate issued in such
transaction.

ITEM 6. Selected Financial Data

The Company purchased the seven Founding Companies simultaneously with its
initial public offering in May 1998. Between May 6, 1998 and May 5, 1999, the
Company purchased a total of 49 additional businesses. The following selected
consolidated financial data as of December 31, 1999, 1998 and 1997 and for the
years ended December 31, 1999 and 1998, and the period from July 25, 1997
(inception) to December 31, 1997, have been taken from the consolidated
financial statements of the Company. For financial statement presentation
purposes, Northland Auto Transporters, Inc. and Northland Fleet Leasing, Inc.,
("Northland"), one of the Founding Companies, has been designated as the
Company's predecessor entity. The following selected historical financial data
for Northland as of December 31, 1997 and 1996 and for each of the years in
the three-year period ended December 31, 1997 have been derived from the
audited financial statements of Northland.

13

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
July 25, 1997
Year Ended Year Ended (inception) to
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
(Dollars in thousands, except per share amounts and
share data)

Consolidated statement
of operations data--
United Road Services,
Inc.:

Net revenue............. $ 255,112 $ 87,919 $ --
Cost of revenue......... 202,588 64,765 --
-------------- -------------- --------------
Gross profit............ 52,524 23,154 --
Selling, general and
administrative
expenses(1)............ 42,139 12,428 174
Goodwill amortization... 5,439 1,745 --
Impairment charge(2).... 28,281 -- --
-------------- -------------- --------------
Income (loss) from
operations............. (23,335) 8,981 (174)
Interest income
(expense) and other,
net(3)................. (11,523) (1,086) --
-------------- -------------- --------------
Income (loss) before
income taxes........... (34,858) 7,895 (174)
Income tax expense
(benefit).............. (5,158) 3,503 --
-------------- -------------- --------------
Net income (loss)....... $ (29,700) $ 4,392 $ (174)
============== ============== ==============
Basic net income (loss)
per share $ (1.75) $ 0.43 $ (0.08)
============== ============== ==============
Diluted net income
(loss) per share....... $ (1.75) $ 0.42 $ (0.08)
============== ============== ==============
Shares used in computing
basic net income (loss)
per share.............. 16,933,114 10,221,810 2,055,300
============== ============== ==============
Shares used in computing
diluted net income
(loss) per share....... 16,933,114(4) 10,389,903(5) 2,055,300(5)
============== ============== ==============

At December 31,
---------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
(In thousands)

Balance sheet data--
United Road Services,
Inc.:
Working capital
(deficit)(6)........... $ (34,208) $ 9,330 $ (104)
Total assets............ 322,445 248,732 50
Long-term obligations,
excluding current
installments........... 82,758 65,255 --
Stockholders' equity
(deficit).............. 166,413 163,766 (104)

Years Ended December 31,
---------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
(In thousands)

Historical statement of
operations data--
Northland:
Net revenue............. $ 10,159 $ 6,353 $ 4,671
Operating income
(loss)................. 1,438 346 324
Other expense, net...... (49) -- (18)
Net income.............. 1,054 346 275

14

At December 31,
-----------------------
1997 1996 1995
------- ------- -------
(In thousands)

Historical balance sheet data--Northland:
Working Capital...................................... $ 399 $ 235 $ 375
Total assets......................................... 5,465 3,268 2,653
Long-term obligations, excluding current
installments........................................ 1,074 331 257
Stockholders' equity................................. 3,045 1,991 1,645

- --------
(1) During the year ended December 31, 1999, the Company recorded special
charges of $1.1 million related to the strategic decision not to pursue
its acquisition program in the near term and $1.7 million in severance
expense relating to the departure of senior members of management.
(2) During the year ended December 31, 1999, the Company recorded non-cash
impairment charges of $6.6 million and $21.7 million related to the value
of its long-lived assets and recoverability of goodwill, respectively.
(3) During the year ended December 31, 1999, the Company recorded, within
interest expense, $624,000 related to the termination of a $225.0 million
revolving credit agreement and $405,000 related to the decrease in
borrowing capacity under its current revolving credit facility.
(4) Represents actual weighted average shares outstanding. The effect of
options, warrants, shares withheld in connection with acquisitions or 1999
earn-out shares payable to the former owners of the Founding Companies and
one other acquired company have been excluded, as the effect would be
anti-dilutive.
(5) Represents actual weighted average outstanding shares, adjusted for any
incremental effect of options, warrants, shares withheld in connection
with acquisitions and 1998 earn-out shares payable to the former owners of
the Founding Companies and one other acquired company.
(6) On March 29, 2000, the Company entered into a letter agreement related to
its revolving credit facility which waived, through April 28, 2000, the
Company's non-compliance with certain financial covenants and provides
that, upon the expiration of the waiver, unless a new waiver or amendment
has been entered into, an immediate event of default shall exist under the
credit facility. The credit facility is then subject to acceleration at
any time. Consequently, the Company has classified its liability under the
credit facility of $50,650 as a current liability at December 31, 1999.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources".

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

The following information should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included
elsewhere in this Report.

Cautionary Statements

From time to time, in written reports and oral statements, management may
discuss its expectations regarding United Road Services, Inc.'s future
performance. Generally, these statements relate to business plans or
strategies, projected or anticipated benefits or other consequences of such
plans or strategies or other actions taken or to be taken by the Company,
including the impact of such plans, strategies or actions on the Company's
results of operations or components thereof, projected or anticipated benefits
from operational changes, acquisitions or dispositions made or to be made by
the Company, or projections, involving anticipated revenues, costs, earnings or
other aspects of the Company's results of operations. The words "expect,"
"believe," "anticipate," "project," "estimate," "intend" and similar
expressions, and their opposites, are intended to identify forward-looking
statements. These forward-looking statements are not guarantees of future
performance but rather are based on currently available competitive, financial
and economic data and management's operating plans. These forward-looking
statements involve risks and uncertainties that could render actual results
materially different from management's expectations. Such risks and
uncertainties include, without limitation, the availability of capital to fund
operations, including expenditures for new equipment,

15

risks related to the Company's limited operating history, risks related to the
Company's ability to successfully implement its revised business strategy, the
loss of significant customers and contracts, changes in applicable regulations,
including but not limited to, various federal, state and local laws and
regulations regarding equipment, driver certification, training, recordkeeping
and workplace safety, risks related to the Company's ability to integrate
acquired companies, risks related to the adequacy, functionality, sufficiency
and cost of the Company's information systems, potential exposure to
environmental and other unknown or contingent liabilities, risks associated
with the Company's labor relations, changes in the general level of demand for
towing, recovery and transport services, price changes in response to
competitive factors, seasonal and other variations in the demand for towing,
recovery and transport services, general economic conditions, and other risk
factors described from time to time in the Company's reports filed with the
Securities and Exchange Commission (the "Risk Factors"). All statements herein
that are not statements of historical fact are forward-looking statements.
Although management believes that the expectations reflected in such forward-
looking statements are reasonable, there can be no assurance that those
expectations will prove to have been correct. Certain other important factors
that could cause actual results to differ materially from management's
expectations ("Cautionary Statements") are disclosed in this Report. All
written forward-looking statements by or attributable to management in this
Report are expressly qualified in their entirety by the Risk Factors and the
Cautionary Statements. Investors must recognize that events could turn out to
be significantly different from what management currently expects.

Overview

The Company offers a broad range of towing, recovery and transport services.
These services include: towing, impounding and storing motor vehicles;
conducting lien sales and auctions of abandoned vehicles; recovering heavy-duty
commercial and recreational vehicles; towing heavy equipment; and transporting
new and used vehicles. The Company's customers include commercial entities,
such as automobile leasing companies, insurance companies, automobile auction
companies, automobile dealers, repair shops and fleet operators; law
enforcement agencies such as police, sheriff and highway patrol departments;
and individual motorists.

The Company derives revenue from towing, recovery and transport services
based on distance, time or fixed charges and from related impounding and
storage fees. If an impounded vehicle is not claimed within a period prescribed
by law (typically between 30 and 90 days), the Company initiates and completes
lien proceedings and the vehicle is sold at auction or to a scrap metal
facility, depending on the value of the vehicle. Depending on the jurisdiction,
the Company may either keep all the proceeds from the vehicle sales, or keep
the proceeds up to the amount of the towing and storage fees and pay the
remainder to the municipality or law enforcement agency. Services are provided
in some cases under contracts with towing, recovery and transport customers. In
other cases, services are provided to towing, recovery and transport customers
without a long-term contract. The prices charged for towing and storage of
impounded vehicles for municipalities or law enforcement agencies are limited
by contractual provisions or local regulation.

In the case of law enforcement and private impound towing, payment is
obtained either from the owner of the impounded vehicle when the owner claims
the vehicle or from the proceeds of lien sales, scrap sales or auctions. In the
case of the Company's other operations, customers are billed upon completion of
services provided, with payment generally due within 30 days. Revenue is
recognized as follows: towing and recovery revenue is recognized at the
completion of each engagement; transport revenue is recognized upon the
delivery of the vehicle or equipment to its final destination; revenue from
lien sales or auctions is recognized when title to the vehicle has been
transferred; and revenue from scrap sales is recognized when the scrap metal is
sold. Expenses related to the generation of revenue are recognized as incurred.

Cost of revenue consists primarily of the following: salaries and benefits
of drivers, dispatchers, supervisors and other employees; fees charged by
subcontractors; fuel; depreciation, repairs and maintenance; insurance; parts
and supplies; other vehicle expenses; and equipment rentals.

16

Selling, general and administrative expenses consist primarily of the
following: compensation and benefits to sales and administrative employees;
fees for professional services; depreciation of administrative equipment and
software; advertising; and other general office expenses.

At the time of its initial public offering in May 1998, the Company acquired
the seven Founding Companies. Between May 6, 1998 and May 5, 1999, the Company
acquired a total of 49 additional motor vehicle and equipment towing, recovery
and transport service businesses. During the third quarter of 1999, the Company
made the strategic decision not to pursue its acquisition program in the near
term in order to allow the Company to focus primarily on integrating and
profitably operating the 56 businesses it had acquired within its first year of
operations. The goal of the Company's revised business strategy is to improve
the operational efficiency and profitability of its existing businesses in
order to build a stable platform for future growth, which may or may not
include additional acquisitions. Key elements of the Company's revised business
strategy include providing high quality service, expanding the Company's scope
of services and customer base and improving operating performance and
profitability. The Company has not completed any acquisitions since May 5,
1999. The Company's ability to complete acquisitions in the future will depend,
to a great degree, upon its success in implementing operational improvements
and the availability of capital.

Management's discussion and analysis addresses the Company's historical
results of operations and financial condition as shown in its consolidated
financial statements for the years ended December 31, 1999 and 1998 and the
period from July 25, 1997 (inception) through December 31, 1997. The historical
results for each of the years ended December 31, 1999 and 1998 include the
results of all businesses acquired prior to December 31 of the relevant year
from their respective dates of acquisition.

If all of the companies acquired since inception were to be included in the
Company's pro forma results of operations as if these acquisitions had occurred
on January 1, 1998, net revenue, net income (loss) and basic and diluted net
income (loss) per share for the years ended December 31, 1999 and 1998 would
have been:

Year ended Year ended
December 31, 1999 December 31, 1998
----------------- -----------------
(In thousands)

Net revenue............................. $265,855 $283,278
======== ========
Net income (loss)....................... $(29,066) $ 15,179
======== ========
Basic net income (loss) per share....... $ (1.63) $ 0.89
======== ========
Diluted net income (loss) per share..... $ (1.63) $ 0.85
======== ========

This pro forma information assumes that the Company acquired the Founding
Companies and the Acquired Companies on January 1, 1998, with certain pro forma
adjustments as described elsewhere herein. The pro forma results of operations
are not necessarily indicative of the results the Company would have obtained
had these businesses been acquired on January 1, 1998 or the Company's future
results.

The owners of certain businesses that the Company has acquired agreed to
reductions in their compensation and benefits in connection with such
acquisitions. The aggregate amount of such reductions, had they been in effect
in 1999 and 1998, would have been $232,000 and $6.6 million, respectively.

All of the acquisitions completed by the Company to date have been accounted
for using the purchase method of accounting. As a result, the amount by which
the fair value of the consideration paid exceeds the fair value of the net
assets purchased by the Company has been recorded as goodwill. This goodwill
will be amortized over its estimated useful life of 40 years as a non-cash
charge to operating income.

In the fourth quarter of 1999, based upon a comprehensive review of the
Company's long-lived assets in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121 and an analysis of the

17

recoverability of goodwill using a cash flow approach consistent with SFAS No.
121, the Company recorded a $28.3 million impairment of long-lived assets and
goodwill.

Results of Operations

The Company operates in two reportable operating segments: (1) transport and
(2) towing and recovery. Through its transport segment, the Company provides
transport services for new and used vehicles to a broad range of customers
throughout the United States. Through its towing and recovery segment, the
Company provides a variety of towing and recovery services in its local
markets, including towing, impounding and storing motor vehicles, conducting
lien sales and auctions of abandoned vehicles, towing heavy equipment and
recovering and towing heavy-duty commercial and recreational vehicles.

For the year ended December 31, 1999, the Company's results of operations
were derived from 22 transport businesses and 34 towing and recovery businesses
acquired prior to December 31, 1999. For the year ended December 31, 1998, the
Company's results of operations were derived from 12 transport businesses and
29 towing and recovery businesses acquired prior to December 31, 1998. For the
year ended December 31, 1998, the Company's first year of operations, the
Company evaluated the performance of its operating segments based on income
(loss) before income taxes. During the year ended December 31, 1999, management
determined that a more appropriate measure of the performance of its operating
segments may be made through an evaluation of each segment's income (loss) from
operations. Accordingly, the Company's selected statement of operations data
regarding the Company's reportable segments is presented through income (loss)
from operations for the years ended December 31, 1999 and 1998.

The following tables set forth selected statement of operations data by
segment and for the Company as a whole, as well as such data as a percentage of
net revenue, for the periods indicated:

Year ended December 31, 1999
(Dollars in thousands)

Towing and
Transport Recovery Total
-------------- ---------------- ---------------

Net revenue............... $155,333 100.0% $ 99,779 100.0% $255,112 100.0%
Cost of revenue, including
depreciation............. 122,774 79.0 79,814 80.0 202,588 79.4
Selling, general and
administrative expenses
(1)...................... 14,311 9.2 13,783 13.8 42,139 16.5
Amortization of goodwill.. 2,914 1.9 2,525 2.5 5,439 2.1
Impairment charge......... 10,053 6.5 18,228 18.3 28,281 11.1
-------- ----- -------- ------ -------- -----
Income (loss) from
operations............... $ 5,281 3.4% $(14,571) (14.6)% (23,335) (9.1)
======== ===== ======== ======
Interest expense, net..... 11,342 4.4
Other expenses, net....... 181 0.1
-------- -----
Loss before income taxes.. (34,858) (13.6)
Income tax benefit........ (5,158) (2.0)
-------- -----
Net loss.................. $(29,700) (11.6)%
======== =====

18

Year ended December 31, 1998
(Dollars in thousands)

Towing and
Transport Recovery Total
------------- ------------- -------------

Net revenue...................... $46,908 100.0% $41,011 100.0% $87,919 100.0%
Cost of revenue, including
depreciation.................... 34,955 74.5 29,810 72.7 64,765 73.7
Selling, general and
administrative expenses (1)..... 3,385 7.2 5,432 13.2 12,428 14.1
Amortization of goodwill......... 682 1.5 1,063 2.6 1,745 2.0
------- ----- ------- ----- ------- -----
Income from operations........... $ 7,886 16.8% $ 4,706 11.5% 8,981 10.2
======= ===== ======= =====
Interest expense, net............ 930 1.0
Other expenses, net.............. 156 0.2
------- -----
Income before income taxes....... 7,895 9.0
Income tax expense............... 3,503 4.0
------- -----
Net income....................... $ 4,392 5.0%
======= =====

- --------
(1) Total selling, general and administrative expenses include corporate
selling, general and administrative expenses of $14,045 and $3,611 for the
years ended December 31, 1999 and 1998, respectively.

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

Net Revenue. Net revenue increased $167.2 million, or 190.2%, from $87.9
million for the year ended December 31, 1998 to $255.1 million for the year
ended December 31, 1999. Of the net revenue for the year ended December 31,
1999, 60.9% related to transport services and 39.1% related to towing and
recovery services. Transport net revenue increased $108.4 million, or 231.1%,
from $46.9 million for the year ended December 31, 1998 to $155.3 million for
the year ended December 31, 1999. The increase in transport net revenue was
largely due to the impact of the ten transport businesses acquired during the
first half of 1999 and the inclusion of a full year of operating results of the
nine transport businesses acquired during 1998 (eight of which were acquired in
the second half of 1998). During the year ended December 31, 1999, $103.4
million of the Company's total net revenue was generated from the transport
businesses acquired in 1998. The increase in transport net revenue was offset,
in part, by weak performance of certain transport businesses subsequent to the
Company's consolidation of divisions. Towing and recovery net revenue increased
$58.8 million, or 143.3%, from $41.0 million for the year ended December 31,
1998 to $99.8 million for the year ended December 31, 1999. The increase in
towing and recovery net revenue was largely due to the impact of the five
towing and recovery businesses acquired during the first half of 1999 and the
inclusion of a full year of operating results of the 29 towing and recovery
businesses acquired during 1998 (22 of which were acquired in the second half
of 1998). During the year ended December 31, 1999, $88.3 million of the
Company's towing and recovery net revenue was generated from towing and
recovery businesses acquired in 1998. The increase in towing and recovery net
revenue was offset, in part, by weak performance of certain towing and recovery
businesses subsequent to acquisition, which performance was, in some cases also
negatively affected by the Company's consolidation of divisions.

Cost of Revenue. Cost of revenue, including depreciation, increased $137.8
million, or 212.8%, from $64.8 million for the year ended December 31, 1998 to
$202.6 million for the year ended December 31, 1999. Transport cost of revenue
increased $87.8 million, or 251.2%, from $35.0 million for the year ended
December 31, 1998 to $122.8 million for the year ended December 31, 1999. The
increase in transport cost of revenue was primarily due to the increase in the
size of the Company's transport operations for the year ended December 31, 1999
as compared to the year ended December 31, 1998. The principal components of
the increase in transport cost of revenue consisted of an increase in transport
operating labor costs of $31.1 million; an increase in costs of independent
contractors, brokers and subcontractors of $22.0 million; an increase in fuel
costs of $9.8 million; an increase in vehicle maintenance costs of $6.7
million; and increased depreciation costs of $3.7 million. Towing and recovery
cost of revenue increased $50.0 million, or 167.7%, from $29.8 million for the
year ended December 31, 1998 to $79.8 million for the year ended December 31,
1999. The increase in

19

towing and recovery cost of revenue was primarily due to the increase in the
size of the Company's towing and recovery operations for the year ended
December 31, 1999 as compared to the year ended December 31, 1998. The
principal components of the increase in towing and recovery cost of revenue
consisted of an increase in towing operating labor costs of $21.8 million; an
increase in independent contractor, broker and subcontractor costs of $8.2
million; an increase in abandoned car purchases of $4.8 million; an increase in
vehicle maintenance costs of $4.4 million; and an increase in facility and
occupancy expenses of $2.7 million.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased $29.7 million, or 239.1%, from $12.4 million
for the year ended December 31, 1998 to $42.1 million for the year ended
December 31, 1999. Transport selling, general and administrative expenses
increased $10.9 million, or 322.8%, from $3.4 million for the year ended
December 31, 1998 to $14.3 million for the year ended December 31, 1999. The
increase in transport selling, general and administrative expenses was
primarily due to costs associated with the Company's acquisitions of transport
businesses during the first half of 1999, as described above, and costs
associated with managing and integrating the acquired companies. The principal
components of the increase in the Company's transport selling, general and
administrative expenses for the year ended December 31, 1999 as compared to the
year ended December 31, 1998, consisted of an increase in wages and benefits
expense of $7.3 million; an increase in bad debt expense of $1.5 million; and
an increase in computer and telecommunication expenses of $596,000. Towing and
recovery selling, general and administrative expenses increased $8.4 million,
or 154.6%, from $5.4 million for the year ended December 31, 1998 to $13.8
million for the year ended December 31, 1999. The increase in towing and
recovery selling, general and administrative expense was primarily due to costs
associated with the Company's acquisitions of towing and recovery businesses
during the first half of 1999, as described above, and costs associated with
managing and integrating the acquired companies. The principal components of
the increase in the Company's towing and recovery selling, general and
administrative expenses for the year ended December 31, 1999 as compared to the
year ended December 31, 1998, consisted of an increase in wages and benefits
expense of $4.8 million; an increase in bad debt expense of $726,000; an
increase in office and supplies costs of $488,000; and an increase in computer
and telecommunications expenses of $383,000.

Corporate selling, general and administrative expenses increased $10.4
million, or 289.0%, from $3.6 million for the year ended December 31, 1998 to
$14.0 million for the year ended December 31, 1999. The increase in corporate
selling, general and administrative expenses was primarily due to costs
associated with integrating and managing acquired businesses, and the write-off
of costs associated with the termination of certain pending acquisitions and
management severance arrangements. The principal components of the increase in
corporate selling, general and administrative costs for the year ended December
31, 1999 as compared to the year ended December 31, 1998, consisted of an
increase in wages and benefits expense of $2.2 million; an increase in computer
and telecommunications expense of $2.1 million; and an increase in professional
fees of $1.4 million. Additionally, the Company recorded special charges of
$2.8 million for the year ended December 31, 1999. These special charges
consisted of $1.1 million for professional fees and compensation contractually
required to be paid in connection with the termination of certain acquisition
consultants as a result of the Company's strategic decision not to pursue its
acquisition program in the near term, and $1.7 million associated with the June
1999 departure of the Company's former Chairman and Chief Executive Officer and
the December 1999 departures of the Company's former President and Chief
Operating Officer and former Chief Acquisition Officer.

Amortization of Goodwill. Amortization of goodwill increased $3.7 million,
or 211.7%, from $1.7 million for the year ended December 31, 1998 to $5.4
million for the year ended December 31, 1999. This increase in goodwill
amortization was the result of higher intangible asset balances resulting from
the acquisitions described above. The excess purchase price over the fair value
of the assets acquired, including direct costs associated with the
acquisitions, was $173.7 million at December 31, 1998 and $235.0 million at
December 31, 1999.

Impairment Charge. Impairment charges were $28.3 million for the year ended
December 31, 1999. The impairment charges consisted of a non-cash charge of
$21.7 million related to recoverability of goodwill under

20

Accounting Principles Board ("APB") Opinion No. 17 and a non-cash charge of
$6.6 million related to the Company's comprehensive review of its long-lived
assets in accordance with SFAS No. 121. The impairment charge recorded under
APB Opinion No. 17 included $10.0 million related to the recoverability of
goodwill at two of the Company's transport divisions and $11.7 million related
to the recovery of goodwill at seven of the Company's towing and recovery
divisions. The impairment charge recorded under SFAS No. 121 included
impairment expenses of $2.6 million on the recoverability of vehicles and
equipment and impairment expenses of $4.0 million on the recoverability of
goodwill at six of the Company's towing and recovery divisions (four of which
were included in the seven divisions noted above).

Income (loss) from Operations. Income from operations decreased $32.3
million, from income of $9.0 million for the year ended December 31, 1998 to a
loss of $23.3 million for the year ended December 31, 1999. Transport income
from operations decreased $2.6 million, or 33.0%, from $7.9 million for the
year ended December 31, 1998 to $5.3 million for the year ended December 31,
1999. The decrease in transport income from operations was primarily due to
increased labor and vehicle costs associated with transport cost of revenue,
increased goodwill amortization, impairment charges and increased
administrative wages, bad debt and computer and telecommunication expenses
related to the operation of the transport business segment offset, in part, by
the increase in the size of the Company's transport operations in the year
ended December 31, 1999 as compared to the year ended December 31, 1998. Towing
and recovery income from operations decreased $19.3 million, from income of
$4.7 million for the year ended December 31, 1998 to a loss of $14.6 million
for the year ended December 31, 1999. The decrease in towing and recovery
income from operations was primarily due to increased labor, vehicle
maintenance and facility expense, increased goodwill amortization, impairment
charges and increased administrative wages, bad debt, office and computer and
telecommunication expenses offset, in part, by the increase in the size of the
Company's towing and recovery operations for the year ended December 31, 1999
as compared to the year ended December 31, 1998.

Interest Expense, net. Interest expense increased $9.8 million, from
interest expense of $1.6 million for the year ended December 31, 1998 to
interest expense of $11.4 million for the year ended December 31, 1999.
Interest income decreased $581,000 from interest income of $658,000 for the
year ended December 31, 1998 to interest income of $77,000 for the year ended
December 31, 1999. The increase in interest expense, net was related to higher
levels of debt incurred to finance the acquisitions described above, a decline
in offsetting interest income in 1999 as compared to 1998 (1998 interest income
included interest income received on cash proceeds from the Company's initial
public offering), a charge of $624,000 in the year ended December 31, 1999
relating to the termination of the Company's $225.0 million credit agreement
and a charge of $405,000 in the year ended December 31, 1999 relating to the
reduction of the commitment amount under the Company's existing revolving
credit facility.

Income Tax Expense (benefit). Income tax expense (benefit) decreased $8.7
million, from an income tax expense of $3.5 million for the year ended December
31, 1998 to an income tax benefit of $5.2 million for the year ended December
31, 1999. The decrease in income tax expense was largely due to the net
operating loss generated by the Company during 1999, along with the impairment
charge described above, the utilization of tax credits for software development
and tax deductions for computer conversion costs.

Net Income (loss). Net income (loss) decreased $34.1 million, from net
income of $4.4 million for the year ended December 31, 1998 to a net loss of
$29.7 million for the year ended December 31, 1999. The decrease in net income
related to the decrease in income from operations of $32.3 million and
increased net interest expense of $10.4 million, offset in part by a decline in
income tax effect on pretax earnings of $8.7 million for the year ended
December 31, 1999 compared to the year ended December 31, 1998.

Historical Results for the Year Ended December 31, 1998

Net Revenue. Net revenue was $87.9 million for the year ended December 31,
1998, of which $46.9 million, or 53.4% of net revenue, related to transport
services and $41.0 million, or 46.6% of net

21

revenue, related to towing and recovery services. Transport revenue was derived
from three Founding Companies acquired in conjunction with the initial public
offering and nine additional transport businesses acquired prior to December
31, 1998. The Founding Companies involved in transport services experienced an
internal growth rate of 35.6% in net revenue in 1998 as compared to 1997 as a
result of incremental business development and enhanced capacity. Towing and
recovery revenue was derived from four Founding Companies acquired in
conjunction with the initial public offering and 25 additional towing and
recovery businesses acquired prior to December 31, 1998. The Founding Companies
involved in towing and recovery services experienced an internal growth rate of
16.1% in net revenue in 1998 as compared to 1997 as a result of an increased
focus on heavy-duty and higher margin services, coupled with limited price
increases.

Gross profit. Cost of revenue was $64.8 million, or 73.7% of net revenue,
for the year ended December 31, 1998, resulting in gross profit of $23.1
million, or 26.3% of net revenue. Transport cost of revenue was $35.0 million,
or 74.5% of transport net revenue, for the year ended December 31, 1998,
resulting in transport gross profit of $11.9 million. The most significant
components of transport cost of revenue consisted of labor,
subcontractor/broker costs, fuel, tires and other vehicle service and
maintenance costs. Towing and recovery cost of revenue was $29.8 million, or
72.7% of towing and recovery net revenue, for the year ended December 31, 1998,
resulting in towing and recovery gross profit of $11.2 million. The most
significant components of towing and recovery cost of revenue consisted of
labor, subcontractor/broker costs, fuel and preparation for auctions and lien
sales.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $12.4 million, or 14.1% of net revenue, for the
year ended December 31, 1998. Transport selling, general and administrative
expenses were $3.4 million, or 7.2% of transport net revenue, for the year
ended December 31, 1998. The most significant component of transport selling,
general and administrative expenses consisted of administrative salaries and
benefits of $2.4 million. Towing and recovery selling, general and
administrative expenses were $5.4 million, or 13.2% of towing and recovery net
revenue, for the year ended December 31, 1998. The most significant component
of towing and recovery selling, general and administrative expenses consisted
of administrative salaries and benefits of $4.1 million. Selling, general and
administrative expenses related to corporate headquarters were $3.6 million, or
4.1% of net revenue, for the year ended December 31, 1998. The most significant
components of corporate headquarters selling, general and administrative
expenses consisted of administrative salaries and benefits, data center
operational expenses, professional fees and travel.

Income from Operations. Income from operations was $9.0 million, or 10.2% of
net revenue, for the year ended December 31, 1998, of which $7.9 million
related to transport services and $4.7 million related to towing and recovery
services, offset by corporate headquarters selling, general and administrative
expenses of $3.6 million.

Historical Results for the Year Ended December 31, 1997

The Company conducted no operations and generated no net revenue or cost of
revenue for the period July 25, 1997 (inception) through December 31, 1997.
Selling, general and administrative expenses were $174,000 for this period. No
other income (expense) or tax benefit were generated, resulting in a net loss
of $174,000 for the period.

Liquidity and Capital Resources

As of December 31, 1999, the Company had approximately:

. $4.1 million of cash and cash equivalents,

. a working capital deficit of approximately $34.2 million, and

. $82.8 million of outstanding indebtedness, excluding current
installments.

22

During the year ended December 31, 1999, the Company generated $12.5 million
of cash from operations. Cash provided by operations was reduced by a net
increase in trade receivables of $3.7 million and a net decrease in accounts
payable of $2.6 million, offset by an impairment charge of $28.3 million,
depreciation of $9.3 million and amortization of goodwill of $5.4 million.
During the year ended December 31, 1999, the Company used $56.9 million of cash
in investing activities ($36.0 million of which related to acquisitions of
businesses and $20.2 million of which related to deposits and purchases
associated with new vehicles and equipment), and generated $45.0 million of
cash through financing activities. Financing activities consisted of proceeds
from the issuance to Charterhouse of $31.5 million aggregate principal amount
of Debentures and a net increase in borrowings under the Company's credit
facility of $31.9 million, offset in part by payments on long-term debt and
capital lease obligations assumed in acquisitions of $15.8 million and payments
of deferred financing costs of $2.5 million.

The Company has a revolving credit facility (the "Credit Facility") with a
group of banks that currently has an aggregate commitment amount of $58.0
million. As of December 31, 1999, the amount available for borrowing under the
Credit Facility was $55.0 million. Approximately $54.0 million, including
letters of credit of $3.4 million, was outstanding under the Credit Facility as
of such date. The Credit Facility terminates in October 2001, at which time all
outstanding indebtedness will be due. Borrowings under the Credit Facility bear
interest at the base rate (which is equal to the greater of (i) the federal
funds rate plus 0.5% and (ii) Bank of America's reference rate), plus an
applicable margin (resulting in a total interest rate of approximately 9.5% at
December 31, 1999). On June 14, 1999, the Company and the banks signed an
agreement in principle to expand the Company's credit facility to
$225.0 million to provide financing for future acquisitions. This agreement was
terminated on September 24, 1999 when it was determined that there would likely
be a significant decline in the Company's acquisition activity in the near
term.

Obligations under the Credit Facility are guaranteed by the Company's
subsidiaries. The Company's obligations and the obligations of the Company's
subsidiaries under the Credit Facility and related guarantees are secured by
substantially all of the assets of the Company and its subsidiaries. Under the
Credit Facility, the Company must comply with various loan covenants, including
maintenance of certain financial ratios, restrictions on additional
indebtedness, limits on operating leases, limits on amounts of cash and cash
equivalents, restrictions on liens, guarantees, advances and dividends, and
prior bank group approval of certain acquisitions and divestitures. The Credit
Facility also contains provisions requiring bank group approval of a new chief
executive officer within a stated period of time after the departure of an
existing chief executive officer and requiring that certain proceeds of asset
sales be used to permanently reduce the commitment amount under the Credit
Facility.

As of September 30, 1999, the Company was in violation of the covenants in
the Credit Facility relating to minimum consolidated net income and the ratio
of net income plus interest, tax and rental expense (EBITR) to interest expense
plus rental expense. In November 1999, the Company received a temporary waiver
of these defaults through February 29, 2000 pursuant to a Second Amendment to
the Credit Facility. The Second Amendment also strengthened certain financial
covenants in the Credit Facility. These amended financial covenants require the
Company to (i) maintain a specified minimum level of EBITDA during the period
from October 1, 1999 through February 28, 2000, (ii) obtain the prior written
consent of the bank group in order to pay cash consideration for any
acquisition, (iii) refrain from entering into operating leases providing for
aggregate rental payments in excess of $8.6 million in 1999, and (iv) refrain
from having greater than $1.5 million of cash in bank accounts outside of Bank
of America. In connection with the Second Amendment the Company and the banks
also agreed to decrease the commitment amount of the Credit Facility to $65.0
million and to decrease the amount available for borrowing to $58.0 million
through December 31, 1999 and $55.0 million after January 1, 2000.

In November 1999, the Company failed to meet the minimum EBITDA requirement
imposed by the Second Amendment to the Credit Facility. As a result, the
Company and the banks entered into a Third Amendment to the Credit Facility
dated January 31, 2000, which waived the existing covenant defaults through
March 31, 2000. The Third Amendment also set a new minimum EBITDA requirement
(not including certain

23

one-time charges) of $500,000 per month, limits the amount of cash equivalents
that the Company is entitled to have to $2.5 million, prohibits certain sales
of assets other than for cash without the banks' consent, and requires certain
proceeds of asset sales to be used to permanently reduce the commitment amount
under the Credit Facility (which requires the Company to make mandatory
prepayments of any amounts outstanding in excess of the commitment amount, as
so reduced). The Third Amendment also permanently reduced the commitment amount
of the Credit Facility to $58.0 million and the amount available for borrowing
to $55.0 million (unless the banks otherwise consent). On March 29, 2000, the
banks extended the temporary waivers of the existing defaults under the Credit
Facility until April 28, 2000, at which time there will be an immediate event
of default and, absent a further waiver or amendment, all amounts due
thereunder will be subject to acceleration at the banks' discretion. If the
banks elect to accelerate, the Company would be required to refinance its debt
or obtain capital from other sources, including sales of additional debt or
equity securities or sales of assets, in order to meet its repayment
obligations, which may not be possible. If the banks were to accelerate
repayment of outstanding amounts under the Credit Facility, such acceleration
would cause a default under the Charterhouse Debentures, and Charterhouse could
accelerate repayment of all amounts outstanding under the Charterhouse
Debentures, subject to the Credit Facility banks' priority. In such event,
repayment of amounts outstanding under the Charterhouse Debentures could only
be made if the Credit Facility was first paid in full or the bank group gave
its express prior written consent to such repayment.

On November 19, 1998, the Company entered into a Purchase Agreement with
Charterhouse providing for the issuance to Charterhouse of up to $75.0 million
aggregate principal amount of Debentures. The Debentures are convertible into
Common Stock at any time, at Charterhouse's option, at an initial exercise
price of $15.00 per share, subject to adjustment as provided in the Purchase
Agreement. The conversion price exceeded the fair market value of the Common
Stock on the date of execution of the Purchase Agreement. Following five years
after the date of first issuance, the Debentures are redeemable at the
Company's option at 100% of their principal amount if the average closing price
of the Company's Common Stock exceeds 150% of the conversion price over a
thirty day period. The Company issued $43.5 million aggregate principal amount
of Debentures to Charterhouse at a first closing on December 7, 1998. The
Company issued the remaining $31.5 million aggregate principal amount of
Debentures to Charterhouse at a second closing on March 16, 1999. The
Debentures bear interest at a rate of 8% annually, payable in kind for the
first five years following issuance, and thereafter either in kind or in cash,
at the Company's discretion. As of December 31, 1999, $80.9 million of
Debentures were outstanding. During the year ended December 31, 1999, the
Company recorded $7.1 million in interest expense and deferred financing fees
related to the Debentures. Pursuant to the Purchase Agreement, the Company paid
Charterhouse a fee of 1% of the principal amount of the Debentures issued at
each closing. The Company also agreed to pay certain fees and expenses incurred
by Charterhouse in connection with the transaction.

From inception of the Company through December 31, 1999, approximately $11.1
million had been spent to develop and install the Company's integrated
financial and information systems. Although it is expected that the Company
will need to upgrade and expand these systems in the future, the Company cannot
currently quantify the amount that will need to be spent to do so.

The Company spent $20.2 million on purchases of vehicles and equipment
(including $7.2 million spent in connection with installation of information
systems) during the year ended December 31, 1999. Other than expenditures
relating to the information systems, these expenditures were primarily for the
purchase of transport and towing and recovery vehicles. During the year ended
December 31, 1999, the Company made expenditures of $3.4 million on towing and
recovery vehicles and $6.7 million on transport vehicles. These expenditures
were financed primarily with cash flow from operations and debt. During the
first quarter of 1999, the Company committed to purchase up to 100 transport
vehicles, for delivery at various times throughout the year 2000, and in
connection therewith made a deposit of approximately $1.6 million to the
vehicle manufacturer. In March 2000, the Company amended the contract with the
vehicle manufacturer to reduce the commitment to 60 vehicles, to be delivered
at various times throughout 2000, and to apply $1.5 million of the $1.6 million
deposit toward the first 40 vehicles delivered. The Company's ability to take
delivery of these

24

vehicles will depend upon the availability of sufficient capital. If the
Company is unable to take delivery of any vehicles, it may lose the entire $1.6
million deposit.

During the period from January 1, 1999 to May 5, 1999, the Company acquired
15 businesses using a combination of Common Stock and cash. The total number of
shares issued in connection with these acquisitions was 2,065,068 with a
recorded fair value of $32.6 million. The cash portion of these acquisitions
was funded through cash flow from operations and debt. The Company has not
completed any acquisitions since May 5, 1999.

As of December 31, 1999, the Company had cash on hand of approximately $4.1
million. The Company is in the process of implementing programs to decrease
operating and administrative costs and to reduce receivable balances and
expedite billing for services rendered. While there can be no assurance,
management expects that these initiatives will serve to strengthen the
Company's cash position. In the meantime, the Company believes that it will be
able to fund its working capital needs through cash flow from operations at
least until January 1, 2001, as long as it does not experience significant
decreases in revenues or increases in costs. In the event the Company is unable
to fund its near-term working capital needs from cash flow from operations, it
will be required to secure alternative sources of capital through issuances of
debt or equity securities or sales of assets. There can be no assurance that
additional capital will be available to the Company on satisfactory terms, or
at all.

While the Company currently expects that its cash flow from operations will
be sufficient to fund its near-term working capital needs as long as it does
not experience significant decreases in revenues or increases in costs, the
current level of cash flow from operations is not expected to be sufficient to
fund the Company's medium or long-term working capital needs or its growth
strategy. Thus, in order to be able to successfully implement its revised
business strategy, it will be necessary for the Company to raise additional
capital, through issuances of debt or equity securities, additional bank debt
or sales of assets, which may not be possible on satisfactory terms, or at all.

Due to the temporary nature of the waivers of the existing defaults under
the Company's Credit Facility, the total amount outstanding under the Credit
Facility at December 31, 1999 has been classified as a current liability. As a
result of such reclassification, the audit report on the Company's consolidated
financial statements dated March 29, 2000, except as to Note 19(b), which is as
of April 12, 2000 and Note 19(c), which is as of April 14, 2000, includes a
statement that the excess of current liabilities over current assets raises
substantial doubt about the Company's ability to continue as a going concern.

On April 14, 2000, the Company entered into a Stock Purchase Agreement (the
"KPS Agreement") with KPS for the sale of shares of Series A Preferred Stock to
KPS for an aggregate purchase price of $25 million. Holders of Series A
Preferred Stock are entitled to cumulative dividends of 5.5% per annum for six
years after the closing date of the KPS Transaction and 5% per annum thereafter
payable, until 2005, either in cash or in shares of the Company's Series B
Participating Convertible Preferred Stock (the "Series B Preferred Stock") at
the option of the Company. After 2005, dividends are payable only in cash. The
obligation to pay dividends terminates in 2008, or earlier if the Company's
common stock trades above a specified price level.

The Series A Preferred Stock and Series B Preferred Stock (collectively, the
"Preferred Stock") are both convertible into the Company's common stock at any
time at the option of the holder. The per share conversion price for the Series
A Preferred Stock is generally the lesser of $2 or the average closing price of
the common stock for the 30 trading days prior to closing of the KPS
Transaction (the "Thirty Day Average"). However, if the Thirty Day Average is
greater than or equal to $0.84 and less than or equal to $1, the conversion
price will be $1, and if the Thirty Day Average is less than $0.84, the
conversion price will be 120% of the Thirty Day Average. The Series B
Preferred Stock is identical in all respects to the Series A Preferred Stock
except that its conversion price is 15% lower than the conversion price of the
Series A Preferred Stock. The Preferred Stock automatically converts into
common stock upon the occurrence of certain business combinations, unless the
holders elect to exercise their liquidation preference rights.

25

Upon consummation of the KPS Transaction, the Company has agreed to pay KPS
Management LLC, an entity affiliated with KPS, a one-time transaction fee of
$2.5 million and to reimburse KPS for its actual reasonable fees and expenses
in connection with negotiation and performance of the KPS Agreement. The
Company has also agreed to pay KPS Management LLC an annual management fee of
$1 million initially, which may be lowered to $500,000 and then to zero based
upon the amount of Preferred Stock held by KPS and its permitted transferees.
The holders of Preferred Stock have the right to designate six members of the
Company's Board of Directors, which constitutes a majority, for so long as KPS
and its permitted transferees continue to own specified amounts of Preferred
Stock. At lower levels of ownership, holders of Preferred Stock will be
entitled to appoint three directors, one director, or no directors.

In connection with the KPS Transaction, the Company and Charterhouse have
agreed that the Charterhouse Debentures will be redeemable at par under certain
circumstances. Charterhouse also agreed to waive its right to require the
Company to redeem the Debentures at 106.25% of the aggregate principal amount
of the Debentures upon consummation of the KPS Transaction in return for a
transaction fee of $750,000. Charterhouse has also agreed to waive certain
corporate governance rights that existed under its Investor's Agreement with
the Company in connection with the KPS Transaction. Consummation of the KPS
Transaction is subject to a number of conditions, including approval of the
Company's stockholders and the availability at closing of a refinancing or
replacement of the Company's Credit Facility providing for at least $25 million
of borrowing capacity in addition to the amounts currently outstanding under
the Credit Facility. There can be no assurance that these conditions will be
satisfied, or that the KPS Transaction, the refinancing of the Credit Facility,
or the restructuring of the Charterhouse Debentures will be consummated. If,
the KPS Transaction is consummated, management believes that it will provide
the Company with sufficient working capital to absorb any unanticipated
decreases in revenues or increases in costs in the near term as well as working
capital to help fund the Company's growth strategy.

The Company's existing Credit Facility matures on October 31, 2001. If the
Company is not successful in replacing the Credit Facility before maturity, its
ability to refinance the Credit Facility upon maturity will depend to a great
degree on improved operating performance, particularly with respect to the
Company's cash flow to interest coverage ratio. If the Company cannot
successfully refinance the Credit Facility upon maturity, it will be required
to raise capital through the issuance of additional debt or equity securities
or sales of assets in order to meet its repayment obligations under the Credit
Facility.

The Company currently has a negative net tangible book value. Accordingly,
based upon the current market price of the Common stock, if the Company were
required to issue additional equity securities at this time, such issuance
would result in immediate and substantial dilution in net tangible book value
to existing investors.

Disposition of Division

On February 11, 2000, the Company sold the capital stock of Northshore
Towing, Inc., North Shore Recycling, Inc. and Evanston Reliable Maintenance,
Inc. (collectively "Northshore") located in Chicago, Illinois, for cash
proceeds of $450,000 and a secured non-interest bearing promissory note in the
principal amount of $500,000. Northshore was a division within the Company's
towing and recovery segment.

Seasonality

The Company may experience significant fluctuations in its quarterly
operating results due to seasonal and other variations in the demand for
towing, recovery and transport services. Specifically, the demand for towing
and recovery services is generally highest in extreme or inclement weather,
such as heat, cold, rain and snow. Although the demand for automobile transport
tends to be strongest in the months with the mildest weather, since extreme or
inclement weather tends to slow the delivery of vehicles, the demand for
automobile transport is also a function of the timing and volume of lease
originations, new car model changeovers, dealer inventories and new and used
auto sales.

26

General Economic Conditions and Inflation

The Company's future operating results may be adversely affected by (i) the
availability of capital to fund operations, including expenditures for new and
replacement equipment, (ii) the Company's success in improving operating
efficiency and profitability and in integrating its acquired business (iii) the
loss of significant customers or contracts, (iv) the timing of expenditures for
new equipment and the disposition of used equipment (v) changes in applicable
regulations, including but not limited to, various federal, state and local
laws and regulations regarding equipment, driver certification, training,
recordkeeping and workplace safety, (vi) changes in the general level of demand
for towing and transport services, (vii) price changes in response to
competitive factors, (viii) event-driven variations in the demand for towing
and transport services and (ix) general economic conditions. Although the
Company cannot accurately anticipate the effect of inflation on its operations,
management believes that inflation has not had, and is not likely in the
foreseeable future to have, a material impact on its results of operations.

Year 2000 Disclosure

The Company's information systems and facilities successfully completed the
"roll-over" to the year 2000. The Company's transition to the year 2000 during
the first week of business in January 2000 resulted in no adverse or negative
impacts associated with the use of date sensitive software and equipment. The
Company believes that with its successful transition to the year 2000, the
preponderance of the risk associated with the year 2000 problem has been
identified and eliminated. The Company estimates the total cost of its year
2000 assessment and remediation plan has amounted to approximately $427,000,
which has been funded through cash flow from operations.

ITEM 7A. Quantitative and Qualitative Discussions