-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PpK9zdbRoULEf45V7G9o9DX3ujGjC95TbbN6Pk3HqYd8L9YF2J0M0QwIptXkGY5U 7jg9Ax2ypEA9ycS4SeratA== 0000950144-00-004167.txt : 20000331 0000950144-00-004167.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950144-00-004167 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEAFNER TIRE GROUP INC CENTRAL INDEX KEY: 0001068152 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MOTOR VEHICLE SUPPLIES & NEW PARTS [5013] IRS NUMBER: 560754594 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-61713 FILM NUMBER: 585817 BUSINESS ADDRESS: STREET 1: 2105 WATER RIDGE PARKWAY STREET 2: SUITE 500 CITY: CHARLOTTE STATE: NC ZIP: 28217 BUSINESS PHONE: 7044238989 MAIL ADDRESS: STREET 1: 2105 WATER RIDGE PARKWAY STREET 2: SUITE 500 CITY: CHARLOTTE STATE: NC ZIP: 28217 FORMER COMPANY: FORMER CONFORMED NAME: J H HEAFNER CO INC DATE OF NAME CHANGE: 19980817 10-K405 1 HEAFNER TIRE GROUP, INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 333-61713 HEAFNER TIRE GROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 56-0754594 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number)
2105 WATER RIDGE PARKWAY, SUITE 500 CHARLOTTE, NORTH CAROLINA 28217 (Address, including zip code, of principal executive offices) (704) 423-8989 (Registrant's telephone number, including area code) Securities registered pursuant To Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant: NONE Number of common shares outstanding at March 14, 2000: 5,286,917 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
PAGE ---- PART I ITEM 1. Description of Business..................................... 1 ITEM 2. Description of Properties................................... 8 ITEM 3. Legal Proceedings........................................... 11 ITEM 4. Submission of Matters to a Vote of Security Holders......... 11 PART II ITEM 5. Market for Registrant's Common Stock and Related Security Holder Matters.............................................. 11 ITEM 6. Selected Financial Data..................................... 12 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 13 ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk... 18 ITEM 8. Financial Statements and Supplementary Data................. 18 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 41 PART III ITEM 10. Directors and Executive Officers of the Registrant.......... 41 ITEM 11. Executive Compensation...................................... 44 ITEM 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 50 ITEM 13. Certain Relationships and Related Transactions.............. 51 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 54 Signatures.................................................. 59
3 PART I ITEM 1. DESCRIPTION OF BUSINESS. This report contains trademarks, tradenames or registered marks of Heafner including Regul(R) tires, Winston(R) tires, Pacer(R) custom wheels, ICW(R) custom wheels and Magnum(R)automotive lifts. GENERAL DEVELOPMENT OF BUSINESS Founded in 1935, Heafner Tire Group, Inc. (formerly The J.H. Heafner Company, Inc.) (together with its subsidiaries, "Heafner") has become one of the leading tire distributors and retailers in the United States in terms of sales and number of tires distributed. On May 24, 1999, the majority owners of Heafner's Class A and Class B common stock sold their shares to Charlesbank Equity Fund IV ("Charlesbank"), a Massachusetts limited partnership. This transaction marked the end of over sixty years of continuous ownership of Heafner by members of the Heafner and Gaither families. On August 20, 1999, the Company reincorporated in Delaware (previously incorporated in North Carolina) and simultaneously changed its name from The J.H. Heafner Company, Inc. to Heafner Tire Group, Inc. The development of the historical Heafner operations has been marked by consistent growth in revenues exceeding industry average, the addition of eleven warehouses in the Southeast, increased emphasis on its private-label brand strategy, development of electronic data interlinks with its customers and suppliers and by the construction of a mixing warehouse close to its North Carolina headquarters. With Heafner's acquisition of Winston Tire Company (formerly Oliver & Winston) ("Winston") in 1997, it entered the retail tire distribution market in California, becoming one of the nation's largest tire retailers in terms of number of outlets. With the acquisitions of Speed Merchant, d/b/a Competition Parts Warehouse, and its subsidiary ("CPW") in 1998, the merger of ITCO Logistics Corporation and its subsidiaries ("ITCO") in 1998 and the acquisition of California Tire Company ("California Tire") in 1999, Heafner expanded its West Coast distribution network and solidified its position in the Southeastern wholesale tire distribution market. Heafner's wholesale and retail operations are divided among four principal corporate entities: - Heafner, organized in 1935 and into which ITCO was merged in 1998, and Heafner's subsidiaries: - Winston, founded in 1962 and acquired by Heafner in 1997, - CPW, founded in 1971 and acquired by Heafner in 1998, and - California Tire, founded in 1933 and acquired by Heafner in 1999. With the acquisitions of ITCO, CPW and California Tire, Heafner is one of the largest independent suppliers of tires to the replacement tire market in the United States in terms of sales and number of tires distributed. Heafner's wholesale distribution operations accounted for approximately 83.9% of Heafner's total net sales in 1999. With 65 distribution centers servicing all or parts of 26 states, Heafner believes that it is the largest independent distributor of new replacement tires in terms of number of tires shipped in the Southeast and in California. Through this distribution network, Heafner's wholesale divisions supplied over 14 million tires in 1999 and currently serve an average of 30,000 customers each month. Through its retail division, Heafner operates over 200 retail tire and automotive service outlets in California and Arizona which sold over 1.2 million tires in 1999. Winston, which operates 203 of Heafner's retail tire and automotive service outlets, was the fifth largest independent tire dealer in the United States in 1999 based on number of company-owned retail stores. Heafner generally stocks approximately 12,000 stock keeping units, or "SKUs," of tires in its distribution centers. Heafner supplies premium, economy and private-label brands of tires manufactured by the major tire manufacturers, including Michelin, which manufactures the B.F. Goodrich and Uniroyal brands, Goodyear, which manufactures the Goodyear, Kelly-Springfield and Dunlop brands, Bridgestone/Firestone and Pirelli. Heafner's private-label tires are sold under the Winston and Regul trademarks. In addition to its tire sales, Heafner is a significant independent distributor and retailer of aftermarket wheels, automotive replacement parts and accessories and automotive service equipment. 1 4 Heafner believes that the combination of its operations and the acquired businesses has provided a distinct opportunity to broaden product offerings, strengthen manufacturer relationships, develop new competencies in its organization and strengthen its presence in the Southeast and the West. Heafner believes that the ITCO merger has enabled its Southeastern wholesale division to provide more cost-effective service and has increased its distribution capacity, positioning it for expansion into new geographic areas. Heafner believes that the acquisition of CPW, including CPW's distribution facilities, has established a broader supply network with more frequent delivery capabilities for Winston retail stores, improving Heafner's ability to restock inventory and obtain customer-requested products on a more timely basis. In addition, Heafner expects to continue to realize significant cost savings and operating efficiencies and improvements that will contribute to its goal of increasing future profitability. In fiscal 1999, on a consolidated basis, Heafner generated net sales of $1.0 billion, EBITDA of $36.2 million and a net loss of $6.6 million. In 1999, sales of tires accounted for approximately 79.6% of Heafner's consolidated sales, while sales of automotive service and parts accounted for 9.4% of Heafner's consolidated sales, sales of custom wheels accounted for 6.3%, sales of automotive service equipment accounted for 4.0%, and sales of other products accounted for 0.7%. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The business of Heafner is principally conducted in three industry segments: Southeastern Wholesale, Western Wholesale and Western Retail. The financial statements for the years ended December 31, 1999, 1998 and 1997, which are included in Item 8 of this report, reflect the information relating to these segments for each of Heafner's last three fiscal years. NARRATIVE DESCRIPTION OF BUSINESS SOUTHEASTERN WHOLESALE Following the acquisition of ITCO in 1998, ITCO and its subsidiaries were merged into Heafner. Heafner's historical wholesale operations and ITCO's business became the Heafner-ITCO Tires & Products division (Heafner-ITCO). Heafner-ITCO had net sales for 1999 of approximately $662.5 million and shipped more than 9.0 million passenger and light truck tires and 300,000 medium truck tires. Heafner-ITCO's products include flag brands manufactured by Michelin, including the B.F. Goodrich and Uniroyal brands, Bridgestone/Firestone and Dunlop. House brands include Monarch, manufactured by Goodyear, as well as other house brands manufactured by Michelin, Bridgestone/Firestone, Kelly-Springfield and Dunlop. Private label products include Regul Tires, Winston tires, Pacer and ICW custom wheels. Tire sales represented approximately 84.4% of Heafner-ITCO's total sales in 1999 and 84.7% of pro forma total sales in 1998. WESTERN RETAIL Heafner entered the retail tire business with its acquisition of Winston in 1997. Winston has grown to become the fifth largest independent tire dealer in the country in 1999, based on the number of company-owned retail stores. In October 1999, Heafner acquired the assets and business of Tri-Valley/Dorman's Tire ("Tri-Valley"), a tire retail chain of 17 stores in Southern California which are now operated by Winston. Winston sold more than 1.2 million tires in 1999 as well as other automotive products through its chain of 203 retail stores in California and Arizona and generated net sales in 1999 of $164.0 million. Each Winston store offers customers multiple choices of flag brands manufactured by Michelin, including the B.F. Goodrich and Uniroyal brands, Pirelli and Goodyear, as well as the Winston tire private-label brand and related automotive products and services, including Quaker State oil products and Monroe and Raybestos ride control products. Through Winston's retail locations, which average approximately 4,500 square feet, Heafner also provides automotive repair and service, such as wheel alignment, oil changes and brake repair. Tire sales represented approximately 58.3% and 58.5% of Winston's 1999 and 1998 total sales, respectively and automotive repair and service sales represented approximately 41.7% and 41.5% for the same periods. 2 5 WESTERN WHOLESALE Heafner acquired CPW in 1998 and California Tire in January 1999. CPW and California Tire are primarily wholesale distributors specializing in replacement market sales of tires, parts, wheels and equipment. CPW's flag brand tire offerings include Michelin, Dunlop, B.F. Goodrich, Uniroyal and Pirelli. CPW also distributes the company's private brand Regul and the Lee custom brand. CPW believes that it is one of the largest distributors of high performance tires in California. CPW also sells parts, wheels, and equipment built by nationally recognized manufacturers. California Tire's products include flag brands manufactured by Bridgestone/Firestone and Yokohama. Net sales for 1999 for CPW and California Tire combined were approximately $190.1 million, shipping more than 2.5 million passenger and light truck tires. Tire sales in the Western Wholesale segment represented approximately 81.2% and 83.5% of total sales for 1999 and pro forma total sales for 1998, respectively. INDUSTRY OVERVIEW Purchasers in the United States spent approximately $19.9 billion on new replacement tires in 1999. Of that amount, passenger tires accounted for approximately 57% of sales, light truck tires accounted for approximately 17%, truck tires accounted for approximately 22% and farm, specialty and other types of tires accounted for approximately 4%. The number of new replacement tires shipped in the United States for passenger cars and light trucks increased from 164.6 million tires in 1986 to 226.0 million tires in 1999. Heafner believes that the factors that have contributed to this growth include increases in both the number and average age of cars as well as passenger miles driven in the United States. Consumers of new replacement tires in the United States obtain them from several principal sources, including independent tire dealers, manufacturer-owned retail stores, mass merchandisers such as Sears and Wal-Mart, auto supply chain stores and wholesale clubs and discounters. Independent tire dealers, which represent the largest customer base served by Heafner, are the largest suppliers of new replacement passenger tires in the United States. Independent tire dealers accounted for approximately 60% of retail sales of domestic replacement passenger tires in 1999. Independent tire dealers obtain their inventory of new replacement tires through three principal sources: tire manufacturers, independent wholesale distributors like Heafner, and dealer-owned warehouses. Other sources include discount or price clubs and other tire outlet chains. Heafner believes that, in recent years, certain tire manufacturers have reduced their supply to small independent tire dealers due to the inefficiencies of supplying small quantities of product to a large number of locations. At the same time, manufacturers have increased their supplies to independent wholesale distributors, such as Heafner, who are able to deliver tires to a large number of independent tire dealers with greater efficiency. The replacement tire market for passenger cars and light trucks consists of three primary types of tires: "flag" brands, which are premium tires made by the major tire manufacturers; associate or "house" brands, which are primarily economy brand tires made by the major tire manufacturers; and private-label brands, which are brands made by tire manufacturers generally for independent tire wholesale distributors and retailers. In 1999, flag brands constituted approximately 54% of the United States passenger and light truck replacement tire markets, private-label brands constituted approximately 25% of those markets and house brands made up approximately 20% of those markets. OPERATIONS Wholesale Divisions. The wholesale divisions of Heafner accounted for approximately 83.9% of Heafner's net sales in 1999. With 65 distribution centers servicing all or parts of 26 states, Heafner believes that it is the largest independent distributor of replacement tires in the Southeast and in California. Through this distribution network, Heafner supplied over 14 million tires in 1999. Heafner's distribution network provides daily delivery to its tire dealer customers in most areas and, in major markets, provides delivery two to four times a day. Heafner has been able to offer reliable, timely and 3 6 frequent deliveries to its customers by utilizing its inventory management systems that link its distribution facilities to its major customers and electronic data links directly with Michelin and Goodyear, its two largest suppliers. This level of just-in-time service is intended to allow Heafner's customers to reduce investment in inventories while still enabling them to provide a full range of products to consumers. Heafner believes that software and on-line programs, such as Heafner's "HeafNet" electronic interlink service, will play an increasingly important role for its distribution customers. See "-- Information Systems and Technology." Heafner's fleet of approximately 500 trucks also facilitates frequent deliveries to its distribution customers. In order to improve efficiency in its Southeastern operations, Heafner utilizes a large mixing warehouse located in Lincolnton, North Carolina where products are sorted for shipments to customers located outside the territories typically served by the distribution network. The mixing warehouse also enables Heafner to make volume purchases from suppliers when advantageous and ship the resulting inventory to its distribution centers. Heafner believes that this mixing and accessibility of inventory enables Heafner's customers to expand sales opportunities without the burden and expense of large investments in inventory. As an additional service to its customers, Heafner may pass through to its distribution customers all or a portion of credits from tire manufacturers for advertising or special promotions on tires or other products. These credits assist Heafner's customers in budgeting for their advertising and similar operating expenses. Heafner also participates in and sponsors dealer conferences among its customers in order to keep them informed of industry trends and new product offerings. In addition, as Heafner's retail expertise grows, Heafner intends to continue to make this expertise available to its independent tire retailer customers in order to enhance customer relations. Retail Division. Heafner's retail division operates over 200 retail tire and service outlets in California and Arizona, including 203 tire and automotive service outlets operated by Winston. Winston was the fifth largest independent tire dealer in the United States in 1999 based on number of company-owned retail stores. Heafner believes that the strength of the Winston retail franchise in California may make it suitable for expansion in the West. The following chart shows the geographical distribution of Heafner's retail locations as of December 31, 1999:
REGION WINSTON CPW TOTAL ------ ------- --- ----- Southern California......................................... 104 1 105 Northern California......................................... 85 7 92 Arizona..................................................... 14 0 14 --- -- --- Totals............................................ 203 8 211
Winston provides its customers with a guarantee on all products and services and believes that its emphasis on customer service distinguishes it from many of its competitors. Winston also conducts an eight-week training course for its store managers and mechanics and routinely monitors the performance of its customer service representatives. Through its strong consumer protection program, which includes sending mystery shoppers to store locations, Winston seeks to ensure that services and sales tactics comply with California consumer protection regulations covering the automotive services industry. Winston's programs have been highlighted by the California Bureau of Automotive Repair in its publications as examples of how compliance with such regulations can and should be achieved. PRODUCTS Heafner sells a broad selection of tires, custom wheels, automotive service equipment and related products manufactured by the leading manufacturers of those products. Heafner's products include flag brand tires manufactured by Michelin, including the B.F. Goodrich and Uniroyal brands, private-label products such as Regul tires, Winston tires and Pacer custom wheels, and house brand products such as Monarch tires, manufactured by Goodyear. Heafner generally stocks approximately 12,000 SKUs of tires in its distribution centers. Heafner also distributes alignment service equipment manufactured by Hunter Engineering Company and tire changers and balancers built by Hennessey Industries, Inc. (a division of the Danaher Corporation), 4 7 both leading manufacturers in their respective fields. Heafner sells many other products, including tires for the medium truck, farm and industrial markets, automotive service equipment, wheel weights and tubes. In addition, through CPW's operations, Heafner supplies automotive parts and accessories. Through Winston's retail tire and automotive service outlets, Heafner offers other automotive products such as Quaker State oil products and Monroe and Raybestos ride control products. Heafner believes that products sold by ITCO and CPW have complemented Heafner's previous product line and, in the case of CPW, have increased Heafner's sales of high-performance tires and automotive parts and accessories. Heafner intends to continue to provide its customers with a broad choice of flag and private-label products. In 1999, sales of tires accounted for approximately 79.6% of Heafner's consolidated sales, while sales of automotive service and parts accounted for 9.4% of Heafner's consolidated sales, sales of custom wheels accounted for 6.3%, sales of automotive service equipment accounted for 4.0%, and sales of other products accounted for 0.7%. SUPPLIERS Heafner purchases its products from all major tire manufacturers and other suppliers. In 1999, Heafner purchased in excess of 14 million tires. Heafner's purchases of passenger and light truck tires represented approximately 6% of the total U.S. replacement passenger and light truck tire market. Approximately 88% of Heafner's total tire purchases, in units, in 1999 were supplied by Michelin, Goodyear and Bridgestone/Firestone. Of the total 1999 U.S. new replacement passenger tire market, Michelin flag brands (including the B.F. Goodrich and Uniroyal brands) accounted for 15%, Bridgestone/Firestone flag brands accounted for 14% and the leader, Goodyear brand, accounted for 16%. Of the total 1999 U.S. replacement light truck tire market, Michelin (including the B.F. Goodrich and Uniroyal brands) accounted for 17%, Bridgestone/Firestone accounted for 14% and Goodyear accounted for 13%. Of Heafner's principal private-label brands, Winston tires are manufactured exclusively by Goodyear and Regul tires are manufactured by both Michelin and Goodyear. There are a number of worldwide manufacturers of wheels and other automotive products and equipment. Most of the wheels purchased by Heafner are private-label custom brands, such as Pacer and ICW, and are produced by a variety of manufacturers. Heafner purchases equipment and other products from multiple sources, including industry leaders such as Hunter Engineering Company and Hennessey Industries, Inc. (a division of the Danaher Corporation). With the exception of a long-term contract with Kelly-Springfield (the "Winston Private Brand Supply Agreement"), Heafner's supply arrangements with its major suppliers generally are oral or written arrangements which are renegotiated annually. Although there can be no assurance that these arrangements will be renewed, or renewed on favorable terms, Heafner has conducted business with its major tire suppliers for many years and believes that it has strong relationships with all of its major suppliers. Heafner purchases certain private-label and house brand tires, including the Winston and Monarch products, from Kelly-Springfield. Purchases under the Winston Private Brand Supply Agreement are made at prices specified from time to time in the manufacturer's pricing schedule. Under the terms of the Winston Private Brand Supply Agreement, Heafner purchases substantially all of its requirements of Winston brand tires from Kelly-Springfield. The initial term of the Winston Private Brand Supply Agreement expires on May 7, 2007 and the agreement is automatically renewable for successive three-year terms thereafter. The Winston Private Brand Supply Agreement may be terminated by either party upon twelve months' advance notice. Kelly-Springfield is the sole holder of Heafner's Series A preferred stock and Series B preferred stock, as discussed below under "Certain Relationships and Related Transactions -- Preferred Stock." CUSTOMERS Wholesale. Through its wholesale divisions, Heafner distributes tires and related automotive products principally to independent tire dealers. Heafner's other customers include national retail chains, service stations, general automotive repair facilities, auto parts stores, automobile dealers and specialty automotive repair facilities. Heafner generally requires payment from its customers within 30 days, although it may tailor 5 8 programs for its larger customers. In 1999, Heafner's wholesale divisions served an average of more than 30,000 customers each month. Heafner's largest customer accounted for less than 1% of Heafner's net sales in 1999 and Heafner's top 25 customers accounted for less than 5% of Heafner's net sales in 1999. Retail. Heafner's retail operations attract a variety of individual consumers in the areas they serve. Through the Winston retail chain, Heafner also offers accounts to its corporate retail customers. Winston's corporate accounts represent approximately 20% of its tire business. COMPETITION The industry in which Heafner operates is highly competitive, and many of Heafner's competitors have resources significantly greater than Heafner's. Tire manufacturers distribute tires to the retail market by direct shipments to independent tire dealers, national retail chains such as Sears and Wal-Mart and manufacturer-owned retail stores as well as through shipments to independent wholesale distributors. A number of independent wholesale tire distributors also compete in the regions in which Heafner operates. In its retail business, Heafner also faces competition from national chains and department stores, other independent tire stores, tire manufacturer-owned stores, discount and warehouse clubs and other automotive product retailers. Heafner believes that the principal competitive factors in its business are reputation, breadth of product offering, delivery frequency, price and service. Heafner believes that it competes effectively in all aspects of its business due to its ability to offer a broad selection of flag and private-label branded products, its competitive prices and its ability to provide quality services in a timely manner. TRADEMARKS The private brand names under which Heafner markets its products are trademarks of Heafner. Those brand names are considered to be of material importance to Heafner's business because they both develop brand identification and foster customer loyalty. All of Heafner's trademarks are of perpetual duration so long as periodically renewed, and Heafner currently intends to maintain all of them in force. The private brand names under which Heafner markets its products are: - Regul tires, - Winston tires, - DynaTrac, - Pacer custom wheels, - ICW custom wheels, and - Magnum automotive lifts. SEASONALITY AND INVENTORY Heafner's wholesale distribution and retail service operations typically experience their highest levels of sales from March through October of each fiscal year, with the period from November through February generally experiencing the lowest levels of sales. Heafner's inventories generally fluctuate with anticipated seasonal sales volumes. Heafner believes it maintains levels of inventory that are adequate to meet its customers' needs on short notice. The average of beginning- and end-of-year inventories of Heafner in 1999 was $141.0 million. Since customers look to Heafner to fulfill their needs on short notice, backlog of orders is not a meaningful statistic. WORKING CAPITAL PRACTICES Heafner must maintain substantial inventories in connection with its wholesale distribution and retail service operations throughout the year, which fluctuate with anticipated seasonal sales volume. These 6 9 inventories are generally financed through borrowings under Heafner's credit facility. The amount of borrowings under the credit facility fluctuates throughout the year. On December 31, 1999, $74.7 million of borrowing was outstanding and an additional $16.2 million could have been borrowed under the credit facility. On March 6, 2000, Heafner amended its credit facility to provide for borrowings up to $200.0 million. Both the maintenance of substantial inventories and the practice of seasonal borrowing are common to the wholesale tire distribution and retail tire and automotive service industry. INFORMATION SYSTEMS AND TECHNOLOGY Heafner believes that software and on-line programs will play an increasingly important role in linking Heafner to its distribution and retail customers and improving Heafner's management of inventories of tires, wheels and related products. Heafner is able to offer reliable, timely and frequent deliveries to its customers by utilizing inventory-management systems that link directly to its major customers and among its distribution facilities and electronic data interlinks directly with Michelin and Kelly-Springfield, its two largest suppliers. Heafner supplies a number of customers with its proprietary "HeafNet" system, which gives customers electronic access to Heafner's warehouses to locate, price and order inventory. Heafner believes this system allows its customers to respond more quickly and efficiently to retail customers' requests for products. Heafner intends to implement a company-wide inventory management system based on the strongest attributes of its existing systems in order to improve the operation of its overall distribution network. Heafner is currently implementing a software product called Wheel Wizard in its retail stores and independent tire dealers throughout Heafner's coverage area. Wheel Wizard allows consumers to visually install a variety of wheels, tires, and performance springs on their vehicle. Wheel Wizard integrates with HeafNet to allow a dealer to visually select wheels and tires with a consumer then check inventory, pricing and place an order. Heafner believes that interactive software programs such as these enhance its ability to market wheels by providing retail dealers devices that take up little floor space, are relatively easy to use and are customer oriented. ENVIRONMENTAL MATTERS Heafner's operations and properties are subject to federal, state and local laws, regulations and ordinances relating to the use, storage, handling, generation, transportation, treatment, emission, release, discharge and disposal of certain materials, substances and wastes under which Heafner could be held strictly, jointly and severally liable for costs associated with the investigation and clean-up of contaminated properties. The nature of Heafner's existing and historical operations exposes it to the risk of liabilities or claims with respect to environmental matters, including off-site disposal matters. For example, in its automotive service operations Heafner handles waste motor oil and hydraulic brake fluid, the storage and disposal of which is strictly regulated by federal and state authorities. Heafner contracts with outside services to handle disposal of these materials. Heafner believes that it currently complies with all relevant environmental regulations and it does not incur significant costs maintaining compliance with those laws. However, Heafner could incur material costs in connection with environmental liabilities or claims. In addition, future events such as changes in existing laws and regulations or in their interpretation, could give rise to additional compliance costs or liabilities that could have a material effect on Heafner's business or earnings. Expenditures related to environmental matters have not had, and are not expected to have, a material effect on Heafner's business or earnings. EMPLOYEES Heafner employed approximately 3,686 people as of December 31, 1999, of whom approximately 1,734 were employed in its wholesale divisions and approximately 1,952 were employed in its retail division. None of Heafner's employees are represented by a union. Heafner believes its employee relations are satisfactory. 7 10 BUSINESS SUBJECT TO GOVERNMENTAL CONTRACTS No material portion of the business of Heafner is subject to renegotiation of contracts with, or termination by, any governmental agency. CAUTIONARY STATEMENTS ON FORWARD-LOOKING INFORMATION This report contains "forward looking statements," which are statements other than statements of historical facts. These forward-looking statements are principally contained under Items 1 and 7 and in statements using phrases such as "expects" or "anticipates" located throughout this report. The forward- looking statements include, among other things, Heafner's expectations and estimates about its business operations, strategy, future cost savings and integration of ITCO, CPW and California Tire, and its expectations and estimates about its future financial performance, including its financial position, cash flows from operations, capital expenditures and ability to refinance indebtedness. The forward-looking statements are subject to risks, uncertainties and assumptions about Heafner and about the future, and could prove not to be correct. Cautionary statements describing factors that could cause actual results to differ materially from Heafner's expectations are discussed in this report, including in conjunction with the forward-looking statements included in this report. All subsequent written or oral forward-looking statements attributable to Heafner or to persons acting on behalf of Heafner are expressly qualified in their entirety by those cautionary statements. Heafner undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report may not occur. ITEM 2. DESCRIPTION OF PROPERTIES. Heafner's principal properties are geographically situated to meet sales and operating requirements. All of Heafner's properties are considered to be both suitable and adequate to meet current operating requirements. During 1999, Heafner closed seven distribution warehouses in the Southeast and is planning to close six more in 2000 in order to eliminate redundancies within its Southeastern Wholesale division. Although there can be no assurance that it will be successful in doing so, Heafner believes that, particularly with respect to its distribution centers, it may obtain cost savings and efficiencies as a result of these closures and consolidations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 8 11 Distribution Centers. The following table sets forth certain information regarding Heafner's warehouse and distribution facilities as of December 31, 1999:
OWNED/ LOCATION COMPANY LEASED -------- ------------ ------ Alabama: Birmingham............................................. Heafner-ITCO Leased Cullman................................................ Heafner-ITCO Leased Mobile................................................. Heafner-ITCO Leased Montgomery............................................. Heafner-ITCO Leased Arizona: Mesa................................................... CPW Leased Phoenix................................................ CPW Leased Arkansas: Little Rock............................................ Heafner-ITCO Leased Texarkana.............................................. Heafner-ITCO Owned California: Fresno................................................. CPW Owned Fresno................................................. California Tire Leased Hayward................................................ California Tire Leased Moorpark............................................... CPW Leased Morgan Hill............................................ CPW Leased Rancho Cucamonga....................................... CPW Leased Sacramento............................................. CPW Leased Sacramento............................................. California Tire Leased San Jose............................................... CPW Leased Santa Fe Springs....................................... CPW Leased Florida: Fort Myers............................................. Heafner-ITCO Leased Jacksonville........................................... Heafner-ITCO Leased Medley................................................. Heafner-ITCO Leased Orlando................................................ Heafner-ITCO Leased Pensacola.............................................. Heafner-ITCO Owned Tallahassee............................................ Heafner-ITCO Owned Tampa.................................................. Heafner-ITCO Leased West Palm Beach........................................ Heafner-ITCO Leased Georgia: Augusta................................................ Heafner-ITCO Leased Byron.................................................. Heafner-ITCO Leased Rome................................................... Heafner-ITCO Owned Savannah............................................... Heafner-ITCO Leased Tucker................................................. Heafner-ITCO Leased Kentucky: Lexington.............................................. Heafner-ITCO Leased Louisville............................................. Heafner-ITCO Leased Maryland: Baltimore.............................................. Heafner-ITCO Leased Landover............................................... Heafner-ITCO Leased Salisbury.............................................. Heafner-ITCO Owned Mississippi: Jackson................................................ Heafner-ITCO Leased Missouri: Springfield............................................ Heafner-ITCO Leased
9 12
OWNED/ LOCATION COMPANY LEASED -------- ------------ ------ North Carolina: Asheville.............................................. Heafner-ITCO Owned Burlington............................................. Heafner-ITCO Leased Charlotte.............................................. Heafner-ITCO Owned Charlotte.............................................. Heafner-ITCO Owned Fayetteville........................................... Heafner-ITCO Leased Greensboro............................................. Heafner-ITCO Leased Lincolnton............................................. Heafner-ITCO Owned Lumberton.............................................. Heafner-ITCO Owned Raleigh................................................ Heafner-ITCO Owned Wilmington............................................. Heafner-ITCO Leased Wilson................................................. Heafner-ITCO Leased Winston-Salem.......................................... Heafner-ITCO Leased South Carolina: Charleston............................................. Heafner-ITCO Leased Columbia............................................... Heafner-ITCO Leased Columbia............................................... Heafner-ITCO Leased Florence............................................... Heafner-ITCO Leased Mauldin................................................ Heafner-ITCO Owned Mauldin................................................ Heafner-ITCO Owned Tennessee: Chattanooga............................................ Heafner-ITCO Leased Johnson City........................................... Heafner-ITCO Leased Knoxville.............................................. Heafner-ITCO Owned Knoxville.............................................. Heafner-ITCO Leased Memphis................................................ Heafner-ITCO Leased Nashville.............................................. Heafner-ITCO Leased Nashville.............................................. Heafner-ITCO Leased Virginia: Harrisonburg........................................... Heafner-ITCO Leased Norfolk................................................ Heafner-ITCO Owned Norfolk................................................ Heafner-ITCO Leased Richmond............................................... Heafner-ITCO Owned Richmond............................................... Heafner-ITCO Leased Roanoke................................................ Heafner-ITCO Owned Wytheville............................................. Heafner-ITCO Leased
Retail Stores. As of December 31, 1999, Heafner operated over 200 retail tire and service outlets in California and Arizona, including 203 tire and automotive service outlets operated by Winston. All of these retail outlets are leased. 10 13 Corporate and Executive Offices. In addition to its principal executive offices, Heafner currently has corporate offices in four other locations. California Tire's corporate offices are expected to be consolidated into CPW's corporate offices in San Jose, California. All of Heafner's corporate and executive offices are leased.
LOCATION DIVISION USE -------- ------------ ----------------- Charlotte, North Carolina........................ Corporate Executive offices Lincolnton, North Carolina....................... Heafner-ITCO Corporate offices Burbank, California.............................. Winston Corporate offices San Jose, California............................. CPW Corporate offices Hayward, California.............................. California Corporate offices Tire
ITEM 3. LEGAL PROCEEDINGS. In the third quarter 1999, Heafner, without admitting any fault, entered into a settlement agreement with plaintiffs in a class action lawsuit filed in 1998 on behalf of Winston store managers. The settlement has received tentative approval by the Court and is expected to be effective on or before May 30, 2000. The lawsuit alleged that Winston violated certain California wage and business practice regulations. Winston denied these allegations. As a result of this agreement, the Company recorded a pre-tax nonrecurring charge of $3.5 million in the third quarter 1999. The nonrecurring charge includes the payment of $3.0 million to the plaintiff class members and their attorneys, which payment is expected to be made as follows: (i) $1,128,058 payable into an interest bearing account after entry of judgment expected to be March 21, and (ii) Balance of $1,871,942 payable by 70 days after the entry of judgment by the Court which will be May 30, 2000. The Company has filed a claim of indemnification against the previous Winston shareholders pursuant to the original purchase agreement under which the Company acquired Winston. The indemnification provisions of the purchase agreement provide that recoveries are limited to 72% of such costs and related fees. The sellers have disputed the Company's right to indemnification. Approximately $4.6 million is held in escrow to secure all of the sellers' indemnification obligations to the Company. The Company is not able at this time to predict the outcome of this claim for indemnification and has not recorded any recovery in its financial statements. The agreements related to the acquisition of CPW, including employment agreements, contained various provisions, which required the Company to make certain calculations regarding results of operations (as defined therein) and make payments based on certain formulas. The parties mediated the various issues involved in these matters on January 20, 2000, and resolved all issues except for one. The Company does not believe that the amounts involved in this issue are significant to the financial condition of the Company. The parties have agreed to binding arbitration before a single accountant arbitrator to resolve the remaining issue. In addition to the aforementioned contingencies, Heafner is also involved in various lawsuits arising out of the ordinary conduct of its business. Although no assurances can be given, management does not expect that any of these matters will have a material adverse effect on its business or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS. Not applicable. 11 14 ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth selected historical consolidated financial data of Heafner for the periods indicated. The selected historical financial data as of and for the years ended December 31, 1995 through 1999 are derived from the historical consolidated financial statements of Heafner as of and for those years, which have been audited by Arthur Andersen LLP, independent certified public accountants. The consolidated financial statements of Heafner for each of the years in the three-year period ended December 31, 1999 are included in Item 8 of this report. The following selected historical consolidated financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," included as Item 7, and the consolidated financial statements of Heafner and the related notes, included as Item 8, in this report.
FISCAL YEARS ENDED DECEMBER 31, ------------------------------------------------------ 1995 1996 1997(a) 1998(b) 1999(c) -------- -------- -------- -------- ---------- (DOLLARS IN THOUSANDS) STATEMENTS OF OPERATIONS DATA: Net sales................................................... $169,031 $190,535 $311,839 $716,485 $1,016,589 Costs of goods sold......................................... 140,811 158,880 233,941 550,848 787,480 -------- -------- -------- -------- ---------- Gross profit................................................ 28,220 31,655 77,898 165,637 229,109 Selling, general and administrative expenses................ 26,584 29,660 74,441 153,743 212,739 Special and nonrecurring charges............................ -- -- -- 1,409 3,500 -------- -------- -------- -------- ---------- Income from operations...................................... 1,636 1,995 3,457 10,485 12,870 Interest and other expense, net............................. 946 944 3,711 12,704 19,806 -------- -------- -------- -------- ---------- Income (loss) from operations before provision (benefit) for income taxes and extraordinary charge..................... 690 1,051 (254) (2,219) (6,936) Provision (benefit) for income taxes........................ -- -- (240) 289 (348) -------- -------- -------- -------- ---------- Net income (loss) from operations before extraordinary charge.................................................... 690 1,051 (14) (2,508) (6,588) Extraordinary charge........................................ -- -- -- (2,216) -- -------- -------- -------- -------- ---------- Net income (loss)........................................... 690 1,051 (14) (4,724) (6,588) Pro forma provision for income taxes........................ 325 439 -- -- -- -------- -------- -------- -------- ---------- Pro forma net income (loss)................................. $ 365 $ 612 $ (14) $ (4,724) $ (6,588) ======== ======== ======== ======== ========== CASH FLOWS DATA: Net cash provided by (used in) operating activities......... $ (363) $ 4,008 $ 6,703 $ (9,684) $ (23,732) Net cash used in investing activities....................... (2,200) (7,626) (46,459) (58,070) (20,688) Net cash provided by financing activities................... 2,630 3,711 41,252 71,900 44,269 Depreciation and amortization............................... 1,062 1,331 5,399 12,316 18,521 Capital expenditures........................................ 2,205 7,865 4,908 8,697 11,218 BALANCE SHEET DATA Working capital............................................. $ 19,148 $ 16,913 $ 20,582 $ 56,562 $ 89,661 Total assets................................................ 55,458 59,551 146,508 430,821 459,246 Total debt.................................................. 15,632 21,003 64,658 185,336 236,592 Total preferred stock....................................... -- -- 11,500 11,353 11,094 Stockholders' equity........................................ 11,719 11,574 7,659 18,124 10,521 OTHER DATA: EBITDA(d)................................................... $ 3,060 $ 3,847 $ 9,987 $ 24,233 $ 36,189 Ratio of earnings to fixed charges(e)....................... 1.4x 1.5x -- -- --
- --------------- (a) In May 1997, Heafner acquired Winston. The transaction was accounted for using the purchase method of accounting. (b) In May 1998, the ITCO merger and the CPW acquisition occurred. Each transaction was accounted for using the purchase method of accounting. (c) In January 1999, Heafner acquired California Tire and in October 1999, Heafner acquired Tri-Valley. Each transaction was accounted for using the purchase method of accounting. (d) EBITDA represents net income before extraordinary item plus income taxes, depreciation and amortization and interest expense. Interest expense for the years ended December 31, 1999 and 1998 includes $0.9 million and $0.7 million, respectively, related to amortization of deferred financing charges. EBITDA for the year ended December 31, 1998 excludes the effects of the extraordinary item related to the extinguishment of debt ($3.7 million) and the special charge of $1.4 million. EBITDA for the year ended December 31, 1999 excludes the impact of the nonrecurring charge of $3.5 million. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to generate cash flow and to service or incur indebtedness. EBITDA should not be considered an alternative to net income as a measure of operating results or to cash flows from operations as a measure of liquidity in accordance with generally accepted accounting principles. EBITDA as calculated and presented here may not be comparable to EBITDA as calculated and presented by other companies. (e) In calculating the ratio of earnings to fixed charges, earnings consist of income before income taxes plus fixed charges. Fixed charges consist of interest expense (which includes amortization of deferred financing costs and debt issuance cost) and one-third of rental expense, deemed representative of that portion of rental expense estimated to be attributable to interest. For the years ended December 31, 1998 and 1999, earnings were insufficient to cover fixed charges by $2.2 million and $6.9 million, respectively. 12 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis of the results of operations, financial condition and liquidity of Heafner should be read in conjunction with the financial statements and the related notes included in this report. OVERVIEW Heafner sells its products to a variety of markets, both in terms of end-users and geography. Heafner's distribution channels consist of (a) Southeastern Wholesale, (b) Western Wholesale, and (c) Western Retail tires and automotive service. In 1999, net sales through such channels accounted for approximately 65.2%, 18.7% and 16.1%, respectively, of consolidated net sales. Heafner believes that the diversity of its markets helps stabilize its sales and earnings. RESULTS OF OPERATIONS Heafner acquired Winston on May 7, 1997; CPW on May 20, 1998; California Tire on January 12, 1999, and Tri-Valley on October 28, 1999. The ITCO merger occurred on May 20, 1998. Therefore, results for 1999 include the operations of California Tire after January 12, 1999 and Tri-Valley after October 28, 1999. The results for 1998 exclude the results of California Tire and Tri-Valley, and include ITCO and CPW only after May 20, 1998. Results for 1997 exclude results of California Tire, ITCO, and CPW, and include the operations of Winston after May 7, 1997. The following table sets forth each category of statements of operations data as a percentage of net sales:
FISCAL YEAR ENDED DEC. 31, -------------------------- 1999 1998 1997 ------ ------ ------ Net sales................................................... 100.0% 100.0% 100.0% Cost of goods sold.......................................... 77.5 76.9 75.0 Gross profit................................................ 22.5 23.1 25.0 Selling, general and administrative expenses................ 21.3 21.7 23.9 Income from operations...................................... 1.3 1.5 1.1 Interest and other expense.................................. 1.9 1.8 1.2 Loss from operations before benefit for income taxes........ (0.7) (0.3) (0.1) Income taxes................................................ (0.0) (0.0) (0.1) Net income (loss) before extraordinary charge............... (0.6) (0.4) 0.0 Extraordinary charge........................................ -- (0.3) -- Net income (loss)........................................... (0.6) (0.7) 0.0
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 Consolidated net sales increased by $300.1 million, or 41.9% to $1.02 billion in 1999 from $716.5 million in 1998. Approximately $210.4 million of the $300.1 million increase over 1998 sales can be attributed to 12 months of sales for CPW and ITCO in 1999 (versus 7 months in 1998), and $38.8 million of the increase can be attributed to 12 months of sales for California Tire (versus none in 1998). Other net sales growth was $51.0 million or 7.1%. Sales growth slowed in 1999 due to management and personnel focusing on the consolidation and conversion efforts resulting from the merger and acquisitions, and a slower retail market in the third and fourth quarters of 1999. Gross profit increased from $165.6 million in 1998 to $229.1 million in 1999, although gross profit as a percentage of sales decreased from 23.1% to 22.5%. The decrease in gross profit margin was anticipated due to a higher proportion of wholesale distribution sales that have lower gross profit margins than retail operations. In 1999, wholesale distribution sales were 83.9% of total sales versus 78.7% in 1998. Selling, general, and administrative expenses increased by $61.1 million in 1999 representing 21.3% as a percentage of sales compared to 21.7% in 1998. The decrease in expenses as a percentage of sales is due to cost 13 16 savings as a result of the consolidation of operations between Heafner and ITCO completed in 1999. Interest and other expenses increased in 1999 by $7.1 million to $19.8 million. Included in the income from operations for 1999 is a charge of $3.5 million representing the cost of settlement of the class action lawsuit filed in 1998 on behalf of Winston store managers alleging certain violations of California wage and business practice regulations by Winston. Heafner settled this matter without any admission of fault in order to avoid the effects of protracted litigation. Heafner has filed a claim for indemnification of this cost against the previous Winston Shareholders pursuant to the Winston purchase agreement. The previous Winston Shareholders have disputed Heafner's right to indemnification. The indemnification provisions of the purchase agreement provide that recoveries are limited to 72% of such costs and related fees. Approximately $4.6 million is held in escrow to secure all of the sellers' indemnification obligations to Heafner. Heafner is not able at this time to predict the outcome of this claim for indemnification and has not recorded any recovery in its financial statements. Interest expense increased by $8.6 million due to increased borrowings utilized in the acquisitions of California Tire and Tri-Valley, capital expenditures, and increased levels of working capital. The income tax benefit in 1999 was $0.3 million representing an effective tax rate of 5.0% compared to (13.0%) tax provision for 1998. The effective tax rate yielded a lower than expected tax benefit due to non-deductible goodwill amortization. The net loss for 1999 was $6.6 million or (0.6)% of net sales compared to $4.7 million or (0.7)% of net sales in 1998. The following table sets forth certain selected information regarding the Company's segments (in millions):
FISCAL YEAR ENDED DEC. 31, -------------------------- 1999 1998 1997 -------- ------ ------ Net sales Southeastern Wholesale.................................... $ 662.5 $478.1 $210.8 Western Wholesale......................................... 190.1 85.5 -- Western Retail............................................ 164.0 152.8 101.1 -------- ------ ------ Consolidated.............................................. $1,016.6 $716.5 $311.8 ======== ====== ====== EBITDA Southeastern Wholesale.................................... $ 29.9 $ 13.7 $ 5.0 Western Wholesale......................................... 11.3 5.7 0.0 Western Retail............................................ -- 4.9 5.0 Corporate................................................. (5.1) -- -- -------- ------ ------ Consolidated.............................................. $ 36.2 $ 24.2 $ 10.0 ======== ====== ======
Southeastern Wholesale Distribution. Net sales in the Southeastern Wholesale Distribution segment increased $184.3 million, or 38.6% from net sales of $478.1 million in 1998 to $662.5 million in 1999. Of this sales increase, $149.1 million is attributable to 12 months sales for ITCO in 1999 compared to 7 months in 1998. Other sales growth totaled $35.2 million, or 7.4%, in 1999. EBITDA increased from $13.7 million in 1998 to $29.9 million in 1999 as a result of an improvement in gross profit margin percentage in 1999 and the inclusion for all of 1999 of the results of operations of ITCO. The increase in gross margin is the result of improved sales mix, and more effective purchasing practices in 1999. Selling prices have remained relatively stable in 1999 compared to 1998. Selling, general, and administrative expenses declined in 1999 as a percentage of sales from 14.6% of sales in 1998 to 13.8% of sales in 1999. The cost reduction can be attributed to the consolidation of the Heafner and ITCO corporate offices and several distribution centers. Western Wholesale Distribution. Net sales in the Western Wholesale Distribution segment grew from $85.5 million net sales in 1998 to $190.1 million net sales in 1999 or 122.3%. The California Tire acquisition in January 1999 accounted for $38.8 million of the sales growth. The inclusion of 12 months of sales in 1999 14 17 versus 7 months in 1998 for CPW accounted for $61.2 million of the increase. Other sales growth totaled $4.5 million, or 5.3%, in 1999. Although CPW and California Tire operate in the same areas, little or no loss of the customer base following the California Tire acquisition was realized due to the distinctly different product lines offered. EBITDA increased from $5.7 million in 1998 to $11.3 million in 1999 as a result of the higher level of net sales in the segment and a decline in selling, general, and administrative expenses from 24.1% of sales in 1998 to 21.7% of sales in 1999. Western Retail. The Western Retail segment experienced an increase in net sales of $11.1 million or a 7.3% increase from $152.8 million in 1998 to $164.0 million in 1999. Sales growth was aided in 1999 by the acquisition of 17 Tri-Valley store locations in October 1999. EBITDA fell in 1999 from $4.9 million in 1998 to break-even in 1999. Gross profit margins remained relatively constant in 1999, however Winston operated, on average, 15 more stores in 1999 than during 1998. This, combined with the many changes taking place within the segment's infrastructure, has contributed to higher operating costs in 1999. The executive and operating management team has been strengthened through a number of additions and changes. Management has taken a more aggressive stance regarding store closures, and has closed a number of underperforming stores in 1999. In addition, Winston began to reposition itself with a new advertising campaign set to release in 2000, and has moved away from competing in the marketplace based solely on price. Heafner expects that the many initiatives put in place during 1999 will have a positive impact on operating earnings and cash flow in the future. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Net sales were $716.5 million for 1998, an increase of $404.6 million, or 129.8%, from $311.8 million in 1997. The inclusion of sales for Winston (12 months versus 8), ITCO (7 months), and CPW (7 months) accounted for $364.3 million, or 90.0%, of the increase in sales in 1998. Distribution sales were strong throughout 1998, increasing by almost 13.0% due to continued market share gains in Heafner's primary service areas, aided somewhat by strong market conditions. Gross profit was $165.6 million in 1998, an increase of $87.7 million, or 112.6%, from $77.9 million in 1997. As a percentage of net sales, gross profit was 23.1% and 25.0%, respectively, for 1998 and 1997. The increase in gross profit dollars was also due to the inclusion of the acquired operations, which accounted for $78.4 million, or 89.4%, of the gross dollar increase. The decrease in overall gross margins in 1998 was due to a higher proportion of distribution sales, which generally result in lower margins than retail sales. The percentage of distribution sales was 78.7% and 67.6%, respectively, for 1998 and 1997. Selling, general and administrative expenses were $155.2 million in 1998, an increase of $80.7 million, or 108.4%, from $74.4 million in 1997. As a percentage of net sales, these expenses were 21.7% and 23.9%, respectively, for 1998 and 1997. The inclusion of the acquired operations accounted for $72.2 million, or 89.4%, of the increase in selling, general and administrative expenses in 1998. The decrease in selling, general and administrative costs as a percent of sales was due to a higher proportion of distribution sales, which generally have lower expense percentages than retail operations. Offsetting this business mix change somewhat was slightly higher selling and administrative costs in Heafner's distribution operations as a percent of sales. Interest and other expense increased from $3.7 million in 1997 to $12.7 million in 1998. Interest expense increased by $8.6 million as a result of increased borrowings incurred in connection with the acquisitions of Winston, ITCO and CPW. The results from operations for 1998 include a special charge of $1.4 million in June 1998, which was taken into account in determining income from operations, in connection with the costs of closing certain duplicative Heafner distribution centers. These costs relate to lease commitments, asset writedowns, severance and employee-related costs, and other costs to shut down these facilities. A non-recurring extraordinary charge of $3.7 million ($2.2 million net of taxes) was also recorded for the write-off of unamortized financing expenses and discounts, and the payment of prepayment penalties. 15 18 Income taxes on pre-tax income before extraordinary charge were $0.3 million in 1998 compared to $(0.2) million in 1997. The effective income tax rate for 1998 was (13.0)% and was increased from the statutory rate due to non-deductible goodwill amortization. The net loss for 1998 was $(4.7) million, or (0.7)%, of net sales compared to a net loss of $(14,000), or 0.0%, of net sales in 1997, as a result of the factors discussed above. Southeastern Wholesale Distribution. Southeastern Wholesale Distribution experienced a 126.8% increase in net sales from $210.8 million in 1997 to $478.1 million primarily due to the addition of ITCO sales in 1998 (7 months). EBITDA increased from $5.0 million in 1997 to $13.7 million in 1998 as a result of this increase in net sales and management's focus on corporate, warehouse, and systems consolidation. Selling, general, and administrative expenses declined from 15.5% of sales in 1997 to 14.7% in 1998. Western Retail. Western Retail operations began in May 1997 with the acquisition of Winston. The net sales growth of $51.8 million from $101.1 million in 1997 to $152.8 million in 1998 was primarily the result of 12 months of sales in 1998 versus 7 months in 1997. Winston organic sales growth for 1998 was $3.2 million or 3.2% over 1997. Gross profit margins as a percent of sales remained constant from 1997 to 1998 and selling, general, and administrative expenses increased from 41.3% to 42.0% from 1997 to 1998. As a result, EBITDA decreased $0.1 million from $5.0 million to $4.9 million. LIQUIDITY AND CAPITAL RESOURCES In 1999, Heafner required approximately $4.1 million of financing in connection with the California Tire acquisition, and approximately $3.8 million of financing in connection with the Tri-Valley acquisition. Additional financing was required for 1999 payments under provisions of the CPW Acquisition Agreement dated May 20, 1998. Heafner obtained the necessary funds from, among other sources, the outstanding borrowings under the credit facility. At December 31, 1999 the combined net indebtedness (net of cash) of Heafner was $230.1 million compared to $178.7 million (net of cash) for Heafner at December 31, 1998. Financing committed by the lenders as of December 31, 1999 under the credit facility was $100.0 million under a revolving line of credit. As of December 31, 1999, $74.7 million was outstanding and $16.2 million was available for additional borrowings under the credit facility. On March 6, 2000 the credit facility was amended to provide, among other things, maximum borrowings thereunder up to $200.0 million or a borrowing base comprised of specified percentages of accounts receivable and inventory, whichever is less. Heafner's principal sources of cash during 1999, 1998, and 1997 came from operations, borrowings under revolving credit facilities, issuance of long-term subordinated debt and preferred stock in connection with the acquisition of Winston, and issuance of long-term debt in connection with the acquisition of CPW and the ITCO merger. Cash generated from (used in) operating activities totaled $(23.7) million, $(9.7) million, and $6.7 million, respectively, during each of those periods. Net working capital increased in 1999 by $38.5 million (other than through acquisition and special charge), primarily due to increases in inventories and decreases in accounts payable and accrued expenses totaling $12.7 million and $22.8 million, respectively. Net working capital increased in 1998 by $18.3 million (excluding extraordinary charge, special charges and deferred taxes), primarily due to increases in accounts receivable and inventories totaling $13.9 million and $12.2 million, respectively, offset by an increase in accounts payable and accrued expenses of $7.1 million. Cash generated in 1997 was primarily due to improved vendor payment programs that resulted in an increase in accounts payable and accrued expenses of $9.6 million. Capital expenditures during the years ended 1999, 1998 and 1997 amounted to $11.2 million, $8.7 million, and $4.9 million, respectively. Capital expenditures in 1999 included $5.7 million in the Western Retail segment for new store equipment, remodeling existing stores, new store locations and information technology. Information system upgrades include Oracle Financials and a new "Point of Sale" system in 1999. The Southeastern Wholesale Distribution segment utilized $3.4 million in warehouse expansion and maintenance, information technology and corporate office facility expansion. Ten distribution warehouses were expanded during 1999 adding approximately 500,000 square feet of capacity. Other capital expenditures 16 19 during 1998 and 1997 were primarily for Winston retail facility maintenance and equipment, information technology, and Western and Southeastern Wholesale Distribution locations and facility maintenance. Loans under the credit facility bear interest at a floating rate based upon federal funds or Eurodollar rates plus an applicable margin. Loans under the credit facility are guaranteed by all subsidiaries of Heafner and collateralized by liens on inventory and accounts receivable. Heafner has entered into interest rate swap agreements from time to time to manage exposure to fluctuations in interest rates. As of December 31, 1999, interest rate swap agreements were in place covering notional amounts of approximately $20.0 million of indebtedness expiring in October 2002, at an average interest rate of 7.53%. Heafner does not anticipate entering into additional swap agreements or hedging arrangements at this time. Heafner anticipates that its principal use of cash going forward will be to meet working capital and debt service requirements and to make capital expenditures. Based upon current and anticipated levels of operations, Heafner believes that its cash flow from operations, together with amounts available under the credit facility, will be adequate to meet its anticipated requirements. There can be no assurance, however, that Heafner's business will continue to generate sufficient cash flow from operations in the future to meet these requirements or to service its debt, and Heafner may be required to refinance all or a portion of its existing debt, or to obtain additional financing. These increased borrowings may result in higher interest payments. In addition, there can be no assurance that any such refinancing would be possible or that any additional financing could be obtained. The inability to obtain additional financing could have a material adverse effect on Heafner. Certain minority stockholders of Heafner have been granted redemption rights commencing in 2004, subject to certain conditions, which if exercised would obligate Heafner to redeem the shares of capital stock held by such stockholders at agreed valuations (based upon a multiple of EBITDA formula). See "Certain Relationships and Related Party Transactions -- Warrants" and "-- Preferred Stock." There can be no assurance that sufficient funds will be available to redeem the shares of capital stock held by such stockholders if Heafner is required to do so or whether the terms of its outstanding indebtedness at such time will permit such redemption. YEAR 2000 COMPLIANCE Portions of some of the accounting and operational systems and software used by Heafner in its business identify years with two digits instead of four. If not corrected, these information technology systems may recognize the year 2000 as the year 1900, which might cause system failures or inaccurate reporting of data that disrupts operations. Heafner completed an internal assessment of all of the business applications and related software used in its information technology systems in order to identify where "Year 2000" problems exist. As a result of this review, Heafner identified a limited number of remediation steps that were completed prior to January 1, 2000. In addition, Heafner contacted non-information technology vendors to ensure that any of their products currently used in Heafner's business adequately address Year 2000 issues. Areas reviewed include warehouse equipment, telephone and voice mail systems, security systems and other office and site support systems. Although there can be no assurance, Heafner believes based on its review that Year 2000 problems in its non-information technology systems will not cause a material disruption in Heafner's business. Heafner also may be vulnerable to business interruptions caused by unremedied Year 2000 problems of its significant suppliers of products or services. Heafner initiated formal communications with significant suppliers, including the country's major tire manufacturers, to determine the extent to which Heafner's operations may be affected by such third parties' Year 2000 non-compliance. Each of the major tire manufacturers informed Heafner that it anticipates no disruption of tire supply or provision of significant business information as a result of Year 2000 problems. Heafner's wholesale and retail customer base is highly fragmented, with no single customer accounting for a significant portion of Heafner's business. Accordingly, 17 20 although it has not attempted to survey its customers, Heafner believes that no significant risk exists in connection with Year 2000 problems on the part of any of its customers. Heafner has not incurred nor does it expect to incur material costs associated with bringing its information technology and non-information technology systems into Year 2000 compliance, including software modification, equipment replacement and payments to outside solution providers. However, if Year 2000 issues in Heafner's information technology and non-information technology systems have not been remedied, or if Year 2000 problems on the part of Heafner's customers and suppliers exist and have not been remedied, there can be no assurance that significant business interruptions or increased costs having a material adverse effect on the business, financial condition or results of operations of Heafner will not occur. Risks of Year 2000 non-compliance on the part of Heafner or any of its significant suppliers could include interruptions in supply from tire manufacturers, disruption of Heafner's internal and external distribution network, reduced customer service capabilities, breakdown of inventory control and fulfillment systems and impairment of essential information technology systems used by management. Heafner has not established nor does it plan to establish a contingency plan for Year 2000 compliance issues. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. Heafner does not consider its exposure to market risk to be material. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- HEAFNER TIRE GROUP, INC. -- CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants.................... 19 Consolidated Balance Sheets as of December 31, 1999 and 1998...................................................... 20 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997.......................... 21 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997.............. 22 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997.......................... 23 Notes to Consolidated Financial Statements.................. 24
18 21 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Heafner Tire Group, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Heafner Tire Group, Inc. (a Delaware Corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Heafner Tire Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. Arthur Andersen LLP Charlotte, North Carolina, March 20, 2000. 19 22 HEAFNER TIRE GROUP, INC. CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1999 AND 1998 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1999 1998 -------- -------- ASSETS Current assets: Cash and cash equivalents................................. $ 6,497 $ 6,648 Accounts receivable, net of allowances of $2,385 and $2,220 in 1999 and 1998, respectively.................. 114,732 109,471 Inventories, net.......................................... 148,865 133,221 Other current assets...................................... 13,407 13,319 -------- -------- Total current assets.............................. 283,501 262,659 -------- -------- Property and equipment: Land...................................................... 3,908 3,945 Buildings and leasehold improvements...................... 23,190 22,583 Machinery and equipment................................... 25,102 18,581 Furniture and fixtures.................................... 8,659 7,368 Vehicles and other........................................ 2,669 2,013 Construction in progress.................................. 1,324 1,162 -------- -------- Total property and equipment...................... 64,852 55,652 Less -- Accumulated depreciation.......................... (17,228) (12,850) -------- -------- Property and equipment, net....................... 47,624 42,802 -------- -------- Goodwill, net............................................... 107,112 104,405 Other intangible assets, net................................ 7,968 8,376 Other assets................................................ 13,041 12,579 -------- -------- $459,246 $430,821 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $160,271 $169,847 Accrued expenses.......................................... 30,027 33,239 Current maturities of long-term debt...................... 3,542 3,011 -------- -------- Total current liabilities......................... 193,840 206,097 -------- -------- Revolving credit facility................................... 74,688 21,925 Long-term debt.............................................. 158,362 160,400 Other liabilities........................................... 9,604 11,785 Preferred stock series A -- 4% cumulative, 7,000 shares authorized, issued and outstanding........................ 7,000 7,000 Preferred stock series B -- variable rate cumulative, 4,500 shares authorized, issued and outstanding................. 4,094 4,353 Warrants.................................................... 1,137 1,137 Commitments and contingencies Stockholders' equity: Class A Common stock, par value $.01 per share; authorized 10,000,000 shares in 1999 and 1998; 5,286,917 and 3,697,000 shares issued and outstanding in 1999 and 1998, respectively..................................... 53 37 Class B Common stock, par value $.01 per share; authorized 20,000,0000 shares and 1,400,667 shares issued and outstanding in 1998.................................... -- 14 Additional paid-in capital................................ 23,981 22,360 Notes receivable from sale of stock....................... (1,092) (177) Retained deficit.......................................... (12,421) (4,110) -------- -------- Total stockholders' equity........................ 10,521 18,124 -------- -------- $459,246 $430,821 ======== ========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. 20 23 HEAFNER TIRE GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
1999 1998 1997 ---------- -------- -------- Net sales................................................... $1,016,589 $716,485 $311,839 Cost of goods sold.......................................... 787,480 550,848 233,941 ---------- -------- -------- Gross profit.............................................. 229,109 165,637 77,898 Selling, general and administrative expenses................ 212,739 153,743 74,441 Special and nonrecurring charges............................ 3,500 1,409 -- ---------- -------- -------- Income from operations.................................... 12,870 10,485 3,457 ---------- -------- -------- Other income (expense): Interest expense, net..................................... (22,053) (13,460) (4,842) Other income.............................................. 2,247 756 1,131 ---------- -------- -------- Loss from operations before provision (benefit) for income taxes..................................................... (6,936) (2,219) (254) Provision (benefit) for income taxes...................... (348) 289 (240) ---------- -------- -------- Net loss from operations before extraordinary charge........ (6,588) (2,508) (14) Extraordinary charge from early extinguishment of debt, net of income tax benefits of $1,478.......................... -- (2,216) -- ---------- -------- -------- Net loss.................................................... $ (6,588) $ (4,724) $ (14) ========== ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. 21 24 HEAFNER TIRE GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK NOTES ---------------------------------------- RECEIVABLE CLASS A CLASS B ADDITIONAL FROM RETAINED ------------------ ------------------- PAID IN SALE EARNINGS SHARES AMOUNT SHARES AMOUNT CAPITAL OF STOCK (DEFICIT) TOTAL --------- ------ ---------- ------ ---------- ---------- --------- ------- Balance, December 31, 1996............. 2,080 $ 208 -- $ -- $ -- $ -- $ 11,366 $11,574 Net loss............................. -- -- -- -- -- -- (14) (14) Dividends............................ -- -- -- -- -- -- (1,193) (1,193) Repurchase of common shares.......... (1,024) (102) -- -- -- -- (2,606) (2,708) Stock split.......................... 3,464,944 (71) -- -- 71 -- -- -- Shares issued for notes receivable... 225,000 2 -- -- 245 (247) -- -- Reclassification of S Corporation retained earnings to additional paid-in capital.................... -- -- -- -- 6,939 -- (6,939) -- --------- ----- ---------- ---- ------- ------- -------- ------- Balance, December 31, 1997............. 3,691,000 37 -- -- 7,255 (247) 614 7,659 Net loss............................. -- -- -- -- -- -- (4,724) (4,724) Issuance of Class B Common stock..... -- -- 1,400,667 14 14,945 -- -- 14,959 Issuance of Class A Common stock..... 16,000 -- -- -- 171 -- -- 171 Forgiveness of note receivable....... -- -- -- -- -- 62 -- 62 Repurchase of Class A Common stock... (10,000) -- -- -- (11) 8 -- (3) --------- ----- ---------- ---- ------- ------- -------- ------- Balance, December 31, 1998............. 3,697,000 37 1,400,667 14 22,360 (177) (4,110) 18,124 Net loss............................. -- -- -- -- -- -- (6,588) (6,588) Issuance of Class A Common stock..... 175,000 2 -- -- 1,573 (1,000) -- 575 Exchange of Class B for Class A Common stock....................... 1,400,667 14 (1,400,667) (14) -- -- -- -- Forgiveness of note receivable....... -- -- -- -- -- 59 -- 59 Costs associated with change in control............................ -- -- -- -- -- -- (1,697) (1,697) Exercise of stock options............ 24,250 -- -- -- 58 -- -- 58 Payment on Notes Receivable.......... -- -- -- -- -- 21 -- 21 Repurchase of Class A Common stock... (10,000) -- -- -- (10) 5 (26) (31) --------- ----- ---------- ---- ------- ------- -------- ------- Balance, December 31, 1999............. 5,286,917 $ 53 -- $ -- $23,981 $(1,092) $(12,421) $10,521 ========= ===== ========== ==== ======= ======= ======== =======
The accompanying notes to consolidated financial statements are an integral part of these statements. 22 25 HEAFNER TIRE GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
1999 1998 1997 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $ (6,588) $ (4,724) $ (14) Adjustments to reconcile net loss to net cash provided by (used in) operating activities, net of mergers and acquisitions -- Depreciation and amortization of goodwill and other intangibles.......................................... 17,572 11,583 5,399 Amortization of other assets.......................... 949 733 -- Extraordinary charge.................................. -- 3,694 -- Special and nonrecurring charges...................... 3,500 1,409 -- Deferred taxes........................................ (348) (4,162) (528) Other................................................. (348) 117 (114) Change in assets and liabilities: Accounts receivable, net.............................. (1,710) (13,923) (5,758) Inventories, net...................................... (12,682) (12,242) (2,377) Other current assets.................................. (811) 1,967 200 Accounts payable and accrued expenses................. (22,790) 7,090 9,581 Other................................................. (476) (1,226) 314 -------- -------- -------- Net cash provided by (used in) operating activities.......................................... (23,732) (9,684) 6,703 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of California Tire, net of cash acquired...... (4,082) -- -- Acquisition of Tri Valley, net of cash acquired........... (3,750) -- -- Acquisition of CPW, net of cash acquired.................. (3,045) (36,074) -- Merger of ITCO, net of cash acquired...................... (1,214) (17,125) -- Acquisition of Winston, net of cash acquired.............. -- -- (42,195) Purchase of property and equipment........................ (11,218) (8,697) (4,908) Proceeds from sale of property and equipment.............. 786 3,826 363 Other..................................................... 1,835 -- 281 -------- -------- -------- Net cash used in investing activities............... (20,688) (58,070) (46,459) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt.................. -- 150,000 28,000 Net proceeds (repayments) from revolving credit facility................................................ 52,763 (38,071) 18,405 Proceeds from issuance of preferred stock................. -- -- 11,500 Principal payments on long-term debt...................... (5,506) (32,714) (10,558) Cash paid for stock repurchase............................ (31) (11) (2,708) Cash paid for financing costs............................. (1,915) (8,030) (2,378) Cash paid for costs associated with change in control..... (1,697) -- -- Cash dividends paid....................................... -- -- (1,193) Proceeds from issuance of common stock.................... 575 -- -- Other..................................................... 80 726 184 -------- -------- -------- Net cash provided by financing activities........... 44,269 71,900 41,252 -------- -------- -------- NET INCREASE (DECREASE) IN CASH............................. (151) 4,146 1,496 CASH, BEGINNING OF YEAR..................................... 6,648 2,502 1,006 -------- -------- -------- CASH, END OF YEAR........................................... $ 6,497 $ 6,648 $ 2,502 ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -- Cash payments for interest................................ $ 21,574 $ 10,495 $ 3,585 ======== ======== ======== Cash payments for taxes................................... $ 1,334 $ 1,963 $ -- ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS: In 1998, in connection with the ITCO Merger (Note 2), the Company issued 1,400,667 shares of Class B Common Stock at a fair value of approximately $15.0 million. During 1997, the Company received $2.6 million in accounts payable credits from a vendor in exchange for a note payable. The accompanying notes to consolidated financial statements are an integral part of these statements. 23 26 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES: NATURE OF BUSINESS Heafner Tire Group, Inc. and subsidiaries (the "Company" or "Heafner") (formerly The J. H. Heafner Company, Inc.), is a Delaware corporation primarily engaged in the wholesale distribution of tires and tire accessories and the operation of retail tire and auto service stores. On May 24, 1999, Charlesbank Equity Fund IV, Limited Partnership, ("Charlesbank") a Massachusetts limited partnership, purchased approximately 97.8% of the Company's then issued and outstanding shares of Class A common stock and approximately 96.8% of its then issued and outstanding shares of Class B common stock for a purchase price of approximately $44.7 million. On August 20, 1999, the Company reincorporated in Delaware (previously incorporated in North Carolina) and simultaneously changed its name from The J. H. Heafner Company, Inc. to Heafner Tire Group, Inc. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS The Company includes cash, demand deposits and highly liquid investments with maturities of less than three months in cash and cash equivalents in its consolidated financial statements. REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK For its wholesale operations, the Company recognizes revenue upon shipment from its distribution centers/warehouse to the customer. For its retail operations, the Company recognizes revenue at the point of sale. In the normal course of business, the Company extends credit, on open accounts, to its customers after performing a credit analysis based on a number of financial and other criteria. The Company performs ongoing credit evaluations of its customers' financial condition and does not normally require collateral; however, letters of credit and other security are occasionally required for certain new and existing customers. Allowances are maintained for potential credit losses and such losses have been within management's expectations. FAIR VALUE OF FINANCIAL INSTRUMENTS Cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued expenses are reflected in the financial statements at fair value because of the short-term maturity of those instruments. The fair value of the Company's revolving credit facility is disclosed in Note 4 and the fair values of the Company's debt and interest rate swaps are disclosed in Note 5. INVENTORIES Inventories consist primarily of automotive tires, wheels, parts and accessories and are valued at the lower of cost, determined on the first-in, first-out (FIFO) method or market. During 1997, the Company changed its method of determining the cost of inventories from the last-in, first-out (LIFO) method to FIFO method. This change has been applied by retroactively restating retained earnings as of December 31, 1996. 24 27 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 PROPERTY AND EQUIPMENT Depreciation is determined by using a combination of the straight-line method and declining-balance method based on the following estimated useful lives: Buildings................................................... 20-30 years Machinery and equipment..................................... 3-10 years Furniture and fixtures...................................... 3-7 years Vehicles and other.......................................... 3-5 years
Leasehold improvements are amortized over the lesser of the lease term or the estimated useful lives of the improvements. Expenditures for repairs and maintenance are charged to expense as incurred. Renewals or improvements of significant items are capitalized. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the respective accounts and any resulting gain or loss is recognized. DEFERRED FINANCING COSTS Costs incurred in connection with financing activities (Notes 4, 5 and 6), are capitalized and amortized using the effective interest method and charged to interest expense over the life of the associated debt in the accompanying consolidated statements of operations. The unamortized balance of these deferred costs included in the accompanying consolidated balance sheets were $7.8 million and $7.4 million at December 31, 1999 and 1998, respectively. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill, which represents the excess of the purchase price over the fair value of the net assets of the acquired entities is being amortized on a straight-line basis over a period of 15 years. Amortization of goodwill was $7.8 million, $5.3 million and $1.5 million in 1999, 1998 and 1997, respectively. Accumulated amortization at December 31, 1999 and 1998 was $14.7 million and $6.8 million, respectively. The carrying amount of goodwill will be reviewed periodically based on the nondiscounted cash flows and pretax income of the acquired entity over the remaining amortization period. Should this review indicate that the goodwill balance will not be fully recoverable, the Company's carrying value of the goodwill will be reduced. At December 31, 1999, the Company believes net goodwill of $107.1 million is fully recoverable. Other intangible assets, which represent noncompete agreements, stayput agreements and other intangibles is being amortized on a straight-line basis over periods ranging from two to six years. Amortization of other intangibles was $2.9 million and $1.6 million in 1999 and 1998, respectively. Accumulated amortization at December 31, 1999 and 1998 was $4.5 million and $1.6 million, respectively. INCOME TAXES In connection with the acquisition of Winston Tire Company (formerly, Oliver & Winston, Inc.) ("Winston") in May 1997, the Company terminated its S Corporation status for federal and state income tax purposes. Accordingly, the Company has adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes." This statement requires the use of the asset and liability method of accounting for deferred income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes, at the applicable enacted tax rates. The pro forma effect of income taxes for the period from January 1, 1997 to May 7, 1997 was not significant. 25 28 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 In connection with the Company's S Corporation termination, the Company reclassified its undistributed S Corporation earnings of $6.9 million as of May 7, 1997, to additional paid-in capital. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137 which defers the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, design and assess the effectiveness of transactions that receive hedge accounting. The Company has not yet quantified the impacts of adopting SFAS No. 133 but does not anticipate a material impact on the financial statements. However, SFAS No. 133 could increase the volatility in earnings and other comprehensive income. INFORMATION CONCERNING BUSINESS SEGMENTS On January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 established revised standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also established standards for related disclosures about products and services and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain 1998 and 1997 amounts have been reclassified to conform with the 1999 presentation. 2. ACQUISITIONS: On October 28, 1999, the Company acquired all the assets and business of Tri-Valley/Dorman's, Inc. ("Tri-Valley"), a tire retail chain in southern California. The purchase price totaled $3.8 million in cash and the assumption of operating leases for 17 retail tires stores in the Los Angeles and San Diego areas. The transaction has been accounted for under the purchase method. Accordingly, results of operations for the acquired business have been included in the consolidated statement of operations from the date of acquisition. The acquisition was primarily funded through available cash resources. The purchase price has been allocated 26 29 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 to the acquired net assets based upon their fair market values. The excess of the purchase price over the net tangible assets acquired was allocated to an intangible asset and is being amortized over the terms of the related leases, including expected renewals, which averages approximately six years. On January 12, 1999, the Company entered into a Stock Purchase Agreement with the stockholders of California Tire Company ("California Tire"), a wholesaler and retailer of tires, parts and accessories located in California. The total consideration paid to the stockholders was $4.0 million in cash. The transaction has been accounted for under the purchase method. Accordingly, results of operations for the acquired business have been included in the consolidated statement of operations from the date of acquisition. The acquisition was primarily funded through available cash resources. The purchase price has been allocated to the acquired net assets based upon their fair market values. The excess of the purchase price over the net tangible assets acquired was allocated to goodwill and is being amortized over 15 years. On May 20, 1998, the Company acquired all of the common stock of ITCO Logistics Corporation and Subsidiaries ("ITCO") for $18.0 million in cash and 1,400,667 newly issued shares of the Company's Class B Common Stock with an appraised value of approximately $15.0 million. In addition, the Company assumed obligations on stock appreciation rights totaling $1.4 million. Following the merger, ITCO's subsidiaries were merged into ITCO and ITCO was merged into the Company. The acquisition has been accounted for as a purchase and, accordingly, the operating results of ITCO have been included in the Company's consolidated financial statements since the date of acquisition. The acquisition was funded primarily through proceeds from issuance of Series A Senior Notes ("Series A Notes"). The purchase price has been allocated to the acquired net assets based upon their fair market values. The excess of the purchase price over the net tangible assets acquired was allocated to goodwill and is being amortized over 15 years. In connection with the ITCO merger, the Company recorded a $3.5 million liability for estimated costs related to employee severance, facilities closing expense and other related exit costs in accordance with EITF 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination." During the year ended December 31, 1999, the Company revised its estimate, reducing goodwill by $0.7 million, and charged approximately $0.9 million to this reserve. During the year ended December 31, 1998, the Company charged approximately $0.4 million to this reserve. On May 20, 1998, the Company acquired all of the outstanding common stock of The Speed Merchant, Inc. ("CPW") for $45.0 million in cash, of which $35.0 million was paid on May 20, 1998, with $7.4 million payable in installments over five years in consideration for noncompete agreements and $2.6 million payable in the form of contingent payments to CPW stockholders. The purchase agreement also includes contingent payments based on earnings levels for the 12 month period ended May 20, 1999. As of December 31, 1999, a total of $2.2 million has been recorded as additional purchase price relative to the contingent payments. These contingent payments have been recorded as additional purchase price and will be amortized over the remaining amortization period for goodwill. The acquisition has been accounted for as a purchase and, accordingly, the operating results of CPW have been included in the Company's consolidated financial statements since the date of acquisition. The acquisition was funded primarily through proceeds from issuance of Series A Notes. The purchase price has been allocated to the acquired assets based upon their fair market values. The excess purchase price over the net tangible assets acquired was allocated to goodwill which is being amortized over a 15 year period and to other intangible assets which are being amortized over a two to five year period. In connection with the CPW acquisition, the Company recorded a $1.7 million liability for estimated costs related to employee severance, facilities closing expense and other related exit costs in accordance with EITF 95-3. During the year ended December 31, 1999, the Company revised its estimate, reducing goodwill by $0.6 million, and charged approximately $0.3 million to this reserve. During the year ended December 31, 1998, the Company charged approximately $0.2 million to this reserve. 27 30 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 On May 7, 1997, the Company acquired all outstanding shares of common stock of Winston, a California-based operation of retail tire and automotive service centers, for approximately $43.1 million, consisting of $42.4 million in cash and $0.7 million in direct acquisition costs. The acquisition has been accounted for as a purchase and, accordingly, the operating results of Winston have been included in the Company's consolidated financial statements since the date of acquisition. The acquisition was funded primarily through proceeds from a revolving credit facility with a bank ($3.6 million), proceeds from a term loan with a bank ($12.0 million), issuance of 12% Senior Subordinated Notes ($16.0 million) and issuance of Series A and Series B preferred stock ($11.5 million). The purchase price has been allocated to the acquired assets based upon their fair market values. The excess of the purchase price over the net tangible assets acquired was allocated to goodwill and is being amortized over 15 years. In connection with the acquisition, the Company recorded a $2.9 million liability for estimated costs related to employee severance and other exit costs in accordance with EITF 95-3. During the years ended December 31, 1999, 1998 and 1997, the Company charged approximately $0.6 million, $1.4 million and $0.4 million, respectively to this reserve. Prior to the acquisitions and merger, Winston and ITCO had a fiscal year-end of September 30 and CPW had a fiscal year end of October 31. Winston, ITCO and CPW results have been restated to conform with the Company's year-end. The following unaudited pro forma summary information, which is not covered by the report of independent accountants, presents information for the years ended December 31, 1998 and 1997, as if the Winston acquisition, the ITCO merger and the CPW acquisition occurred as of January 1, 1997 (in thousands). The impact of the California Tire and Tri-Valley acquisitions was not material to the Company's results of operations and consequently, pro forma information is not presented.
YEAR ENDED DECEMBER 31 -------------------- 1998 1997 -------- -------- Net sales................................................... $924,000 $831,000 Loss from continuing operations before extraordinary charge.................................................... (5,075) (5,111) Net loss.................................................... (7,291) (5,111)
The unaudited pro forma information is provided for informational purposes only and is not necessarily indicative of the actual results that would have occurred had the acquisition taken place on January 1, 1997, nor is it indicative of future results of the combined companies. 3. INCOME TAXES: Through May 7, 1997, the Company was an S Corporation for federal and state income tax purposes. Accordingly, all income and losses of the Company through May 7, 1997, were recognized by the Company's stockholders in their individual income tax returns. The Company terminated its S Corporation status upon completion of the Winston acquisition. In accordance with SFAS No. 109, the effect of the Company's change in tax status has been recorded in the income tax provision for the year ended December 31, 1997. The accompanying financial statements reflect the provision for income taxes for the years ended December 31, 1999, 1998 and 1997. The pro forma effect of income taxes for the period from January 1, 1997 to May 7, 1997 was not significant. 28 31 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 The following historical income tax information summarizes the components of the Company's income tax provision (benefit) on loss from operations for the years ended December 31, 1999, 1998 and 1997 (000's):
YEAR ENDED DECEMBER 31, ------------------------- 1999 1998 1997 ----- ------- ----- Federal -- Current provision...................................... $ -- $ 1,765 $ 252 Deferred provision (benefit)........................... (270) (1,519) (473) ----- ------- ----- (270) 246 (221) State -- Current provision...................................... -- 311 65 Deferred provision (benefit)........................... (78) (268) (84) ----- ------- ----- (78) 43 (19) ----- ------- ----- Total provision (benefit).............................. $(348) $ 289 $(240) ===== ======= =====
As discussed in Note 8, the Company incurred an extraordinary charge in May 1998 related to the early extinguishment of debt resulting in an income tax benefit of $1.5 million. Actual income tax expense differs from the amounts computed by applying the statutory federal income tax rate of 34% as a result of the following (000's):
YEAR ENDED DECEMBER 31, ------------------------ 1999 1998 1997 ------- ------ ----- Income tax provision computed at the federal statutory rate...................................................... $(2,358) $ (754) $ (85) Amortization of nondeductible goodwill...................... 1,755 1,091 109 Adoption of SFAS No. 109 upon termination of S Corporation status.................................................... -- -- (383) State income taxes, net of federal income tax benefit....... (51) 277 65 Other....................................................... 306 (325) 54 ------- ------ ----- Income tax provision (benefit).............................. $ (348) $ 289 $(240) ======= ====== =====
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes and (b) operating loss and tax credit carryforwards. The tax effects of the significant temporary 29 32 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 differences which comprise deferred tax assets and liabilities at December 31, 1999 and 1998, are as follows (000's):
1999 1998 ------- ------- Deferred tax assets -- Accrued expenses and liabilities.......................... $ 7,966 $ 7,639 Employee benefits, including post retirement benefits..... 2,344 2,848 Uniform capitalization.................................... 1,570 1,223 Net operating loss........................................ 995 -- AMT tax credit............................................ 217 -- Other..................................................... -- 760 ------- ------- Gross deferred tax assets.............................. 13,092 12,470 ------- ------- Deferred tax liabilities -- Section 481 adjustments................................... (296) (378) Other..................................................... (717) (361) ------- ------- Gross deferred tax liabilities......................... (1,013) (739) ------- ------- Net deferred tax asset............................... $12,079 $11,731 ======= =======
The above amounts have been classified in the consolidated balance sheet as follows (000's):
1999 1998 ------- ------- Deferred tax assets -- Current, included in other current assets................. $ 9,353 $10,470 Noncurrent, included in other assets...................... 2,726 1,261 ------- ------- $12,079 $11,731 ======= =======
Management believes that the realization of the deferred tax assets is more likely than not, based on the expectations that the Company will generate sufficient taxable income in future periods. 4. REVOLVING CREDIT FACILITY: On May 20, 1998, the Company replaced its existing loan and security agreement with a new credit facility that provides for a senior secured revolving credit facility (the "Revolver"). The Revolver provides for borrowings in the aggregate principal amount of up to the lesser of $100.0 million or the Borrowing Base, as defined in the agreement, based on 85% of eligible accounts receivable and 65% of eligible tire inventory and 50% of all other eligible inventory (of which up to $10.0 million may be utilized in the form of letters of credit). During 1999, average borrowings under the Revolver were approximately $60.5 million. At December 31, 1999, the maximum loan amount available was $90.9 million of which $74.7 million was outstanding. The Revolver has a five-year term expiring in May 2003, extendable by the Company and the banks for an additional five years. Indebtedness under the new credit facility bears interest, at the Company's option, (i) at the Base Rate, as defined, plus the applicable margin or (ii) at the Eurodollar Rate, as defined, plus the applicable margin. The applicable margin for base rate loans will be 0.25% and the applicable margin for Eurodollar Rate Loans will be 1.75%, subject in each case to performance based step-downs. At December 31, borrowings outstanding under the Revolver were at a weighted average interest rate of 8.2%. The Revolver requires the Company to meet certain financial requirements, including minimum net worth and minimum loan availability and contains certain covenants which, among other things, restrict the ability of the Company to incur additional indebtedness; enter into guarantees; make loans and investments; 30 33 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 make capital expenditures; declare dividends; engage in mergers, consolidations and asset sales; enter into transactions with affiliates; create liens and encumbrances; enter into sale/leaseback transactions; modify material agreements; and change the business it conducts. The Company's obligations under the Revolver are secured by all inventory and accounts receivable. In March 2000, the Company revised the Revolver by amending the credit facility (the "New Revolver"). The New Revolver provides for borrowings in the aggregate principal amount of up to the lessor of $200.0 million or the Borrowing Base, as defined. The terms of the New Revolver and the provisions of the Borrowing Base are identical in all material respects to the form and terms of the Revolver. The New Revolver requires the Company to meet certain financial requirements, including minimum net worth and minimum loan availability and contains certain covenants similar in all material respects to those under the Revolver. The Company's obligations under the New Revolver will be secured by all inventories and accounts receivable. The New Revolver expires March 6, 2005. 5. LONG-TERM DEBT: Long-term debt consists of the following (000's):
1999 1998 -------- -------- Series D Senior Notes, interest due semiannually at 10%, commencing on November 15, 1999, due May 2008............. $150,000 $ -- Series B Senior Notes, interest due semiannually at 10%, commencing on November 15, 1998, due May 2008............. -- 100,000 Series C Senior Notes, interest due semiannually at 10%, commencing on May 15, 1999, due May 2008.................. -- 50,000 Other....................................................... 11,904 13,411 -------- -------- 161,904 163,411 Less -- Current maturities.................................. (3,542) (3,011) -------- -------- $158,362 $160,400 ======== ========
Aggregate maturities required on long-term debt at December 31, 1999, are as follows (000's): 2000........................................................ $ 3,542 2001........................................................ 1,932 2002........................................................ 2,368 2003........................................................ 2,245 2004........................................................ 261 Thereafter.................................................. 151,556 -------- $161,904 ========
SENIOR NOTES On May 20, 1998, the Company sold $100.0 million of Series A Notes due May 15, 2008, resulting in net proceeds of approximately $97.0 million. The Series A Notes had an annual coupon of 10% and were redeemable at the Company's option, in whole or in part, at any time, on or after May 15, 2003, at certain redemption prices. In addition, the Company could redeem up to 35% of the original principal amount of the Series A Notes at 110% of par with one or more public equity offerings. Interest on the Series A Notes was payable semiannually on May 15 and November 15 of each year commencing November 15, 1998. 31 34 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 On November 16, 1998, the $100.0 million Series A Notes were exchanged for Series B Senior Notes ("Series B Notes"). The form and terms of the Series B Notes were identical in all material respects to the form and terms of the Series A Senior Notes, except for certain transfer restrictions and registration and other rights relating to the exchange of the Series A Notes for Series B Notes. The Series B Notes evidenced the same debt as the Series A Notes and were issued under the indenture governing the Series A Notes. On December 8, 1998, the Company sold $50.0 million of Series C Senior Notes ("Series C Notes") due May 15, 2008, resulting in net proceeds of approximately $49.0 million. The Series C Notes had an annual coupon of 10% and were redeemable at the Company's option, in whole or in part, at any time, on or after May 15, 2003, at certain redemption prices. In addition, the Company could redeem up to 35% of the original principal amount of the Notes at 110% of par with one or more public equity offerings. Interest on the Series C Notes was payable semiannually on May 15 and November 15 of each year, commencing May 15, 1999. On March 31, 1999, the $100.0 million Series B Notes and the $50.0 million Series C Notes were exchanged for Series D Senior Notes ("Series D Notes"). The form and terms of the Series D Notes are identical in all material respects to the form and terms of the Series B and Series C Notes. Like the Series B Notes, the Series D Notes will be freely transferable and will not have any covenants regarding exchange and registration rights. The Series D Notes evidence the same debt as the Series B and Series C Notes and were issued under the indenture governing the Series B and Series C Notes. See Note 10 for subsidiary guarantor information. The Series D Senior Notes contain certain covenants that, among other things, limits the ability of the Company to incur indebtedness, make restricted payments, make certain distributions, sell assets and subsidiary stock, enter into certain affiliate transactions, sell or issue capital stock of restricted subsidiaries, incur liens, enter into sale/leaseback transactions, and engage in mergers and consolidations. Using a discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements, the carrying amount of the Company's debt, excluding the Series D Notes, at December 31, 1999, approximates fair value. The fair value of the Series D Notes approximated $135.0 million. INTEREST RATE SWAP AGREEMENTS The Company periodically enters into interest rate swap agreements ("Swaps") to manage exposure to fluctuations in interest rates. The Swaps represent contracts to exchange floating rate for fixed interest payments periodically over the life of the agreements without exchange of the underlying notional amounts. The notional amounts of Swaps are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The differential paid or received on the Swaps is recognized as an adjustment to interest expense. At December 31, 1999, Swaps were in place covering notional amounts of approximately $20.0 million of indebtedness expiring in October 2002, at an interest rate of 7.53%. The fair value of the Swaps is the estimated amount that the Company would pay or receive to terminate the agreement at the reporting date, taking into account current interest rates. The estimated fair value of the Swaps at December 31, 1999 is approximately $88,000 which does not necessarily reflect the potential income that would be realized on an actual settlement of the agreements. 6. WARRANTS: In May 1997, the Company issued $16.0 million of 12% Senior Subordinated Debt ("Subordinated Debt") due on May 7, 2004, with interest payable quarterly. In connection with the issuance of Subordinated Debt, the Company issued detachable warrants which permit the holder to acquire up to 1,034,000 shares (13.1% on a fully diluted basis) of the Company's common stock at $.01 per share. The warrants became exercisable immediately upon issuance and expire on May 7, 2007. The warrants may be exercised in whole or 32 35 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 in part, but in no event later than the date of an initial public offering or a sale transaction. The Company has recorded the warrants at fair value, which resulted in a discount on the Subordinated Debt in the same amount, which was being amortized over the term of the Subordinated Debt. The Subordinated Debt was paid in full with the proceeds from the Series A Senior Notes Offering. The unamortized discount at the time of repayment was written off and is included as an extraordinary charge in the accompanying statement of operations for the year ended December 31, 1998 (see Note 8). 7. SPECIAL AND NONRECURRING CHARGES: In the third quarter 1999, Heafner, without admitting any fault, entered into a settlement agreement with plaintiffs in a class action lawsuit filed in 1998 on behalf of Winston store managers. The settlement has received tentative approval by the Court and is expected to be effective on or before May 30, 2000. The lawsuit alleged that Winston violated certain California wage and business practice regulations. Winston denied these allegations. As a result of this agreement, the Company recorded a pre-tax nonrecurring charge of $3.5 million in the third quarter 1999. The nonrecurring charge includes the payment of $3.0 million to the plaintiff class members and their attorneys, which payment is expected to be made as follows: (i) $1.1 payable into an interest bearing account after entry of judgment expected to be March 21, 2000 and (ii) Balance of $1.9 payable by 70 days after the entry of judgment by the Court which will be May 30, 2000. The Company has filed a claim of indemnification against the previous Winston shareholders pursuant to the original purchase agreement under which the Company acquired Winston. The indemnification provisions of the purchase agreement provide that recoveries are limited to 72% of such costs and related fees. The sellers have disputed the Company's right to indemnification. Approximately $4.6 million is held in escrow to secure all of the sellers' indemnification obligations to the Company. The Company is not able at this time to predict the outcome of this claim for indemnification and has not recorded any recovery in its financial statements. In the second quarter 1998, the Company recorded special charges of $1.4 million related to the restructuring of its eastern wholesale business, which was established for costs relating to the closing of selected distribution centers. As of December 31, 1999, seven warehouses have been closed. The charges include lease commitments for certain distribution centers, asset writedowns, severance and employee related costs and costs to shut down certain facilities. For the years ended December 31, 1999 and 1998, the Company charged approximately $0.7 million and $0.2 million, respectively, against these reserves. 8. EXTRAORDINARY CHARGE: The Company recorded an extraordinary charge in the second quarter 1998 related to the early extinguishment of debt resulting in a noncash write-off of deferred financing fees and unamortized discount of subordinated debt of $1.7 million, net of applicable income tax benefits of $1.2 million. The Company also had prepayment penalties associated with the extinguishment of debt that resulted in a charge of $0.5 million net of applicable income tax benefits of $0.3 million. 9. SEGMENT INFORMATION: The Company classifies its business interests into three fundamental segments: southeastern wholesale distribution of tires and products, western wholesale distribution of tires and products and western retail sales of tires, products and services. In 1999, the Company segregated its corporate function from the Southeastern Wholesale segment. Therefore, for 1999, corporate results are shown in the table below as a separate segment. For 1998 and 1997, corporate results could not be segregated from the results of the Southeastern Wholesale segment. The Company evaluates performance based on several factors, of which the primary financial measure is income (loss) before interest expense, income taxes, noncash amortization of intangible assets and 33 36 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 depreciation (EBITDA). The accounting policies of the segments are the same as those described in the summary of significant accounting policies (Note 1). The operating results of the Company reflect the acquisitions of Winston effective as of May 7, 1997, CPW and ITCO effective as of May 20, 1998, California Tire effective as of January 12, 1999 and Tri Valley effective as of October 28, 1999 (000's):
SOUTHEASTERN WESTERN WESTERN WHOLESALE RETAIL WHOLESALE CORPORATE ELIMINATIONS TOTALS ------------ -------- --------- --------- ------------ ---------- 1999 -- Revenues..................... $662,456 $163,982 $190,065 $ 86 $ -- $1,016,589 EBITDA(1).................... 29,945 21 11,290 (5,067) -- 36,189 Segment assets............... 259,348 84,084 124,549 312,071 (320,806) 459,246 Expenditures for segment assets.................... 3,434 5,692 1,985 107 -- 11,218 1998 -- Revenues..................... $478,120 $152,848 $ 85,517 $ -- $ -- $ 716,485 EBITDA(1).................... 13,690 4,877 5,666 -- -- 24,233 Segment assets............... 502,081 80,088 120,351 -- (271,699) 430,821 Expenditures for segment assets.................... 1,810 5,654 1,233 -- -- 8,697 1997 -- Revenues..................... $210,781 $101,058 $ -- $ -- $ -- $ 311,839 EBITDA(1).................... 5,016 4,971 -- -- -- 9,987 Segment assets............... 125,098 71,151 -- -- (49,741) 146,508 Expenditures for segment assets.................... 2,941 1,967 -- -- -- 4,908
- --------------- (1) EBITDA represents income (loss) before interest expense, income taxes, noncash amortization of intangible assets and depreciation. For the years ended December 31, 1999 and 1998, interest expense in the consolidated statement of operations includes $0.9 million and $0.7 million, respectively, of amortization expense related to deferred transaction fees. EBITDA for the year ended December 31, 1998 excludes the effects of the extraordinary item related to the extinguishment of debt of $3.7 million and the special charge of $1.4 million. For the year ended December 31, 1999, EBITDA excludes the impact of the nonrecurring charge of $3.5 million. 10. SUBSIDIARY GUARANTOR FINANCIAL INFORMATION: The Series D Notes are guaranteed on a full, unconditional and joint and several basis by all of the Company's direct subsidiaries, each of which is wholly owned. The combined summarized information of these subsidiaries is as follows (000's):
AS OF AND FOR AS OF AND FOR THE YEAR THE YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, 1999 1998 ------------- ------------- Current assets............................................. $104,036 $ 82,660 Noncurrent assets.......................................... 104,597 94,127 Current liabilities........................................ 61,140 59,262 Noncurrent liabilities..................................... 5,850 7,999 Net sales.................................................. 354,047 238,365 Gross margin............................................... 115,740 87,474 Net loss................................................... (3,916) (2,784)
34 37 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 The above information excludes $53.3 and $24.6 million of net intercompany payable and $55.9 and $30.3 million of intercompany sales of the Company's subsidiary guarantors as of and for the years ended December 31, 1999 and 1998, respectively. In the preparation of the Company's consolidated financial statements, all intercompany accounts are eliminated. 11. EMPLOYEE BENEFITS: 401(k) PLANS The Company maintains a qualified profit-sharing and 401(k) plan for eligible employees. There is a separate benefits formula for employees of the Southeastern Wholesale and Corporate segments and a separate benefits formula for employees of the Western Wholesale and Western Retail segments. All accounts are funded based on employee contributions to the plans, with the limits of such contributions determined by the Board of Directors. The plan for the Southeastern Wholesale and Corporate segments matches 50% of the participant's contributions up to 6% of their compensation. The plan for the Western Wholesale and Western Retail segments match 50% of the first 2% of participant contributions and 6% of the remaining contribution up to a total of 6% of their compensation. Heafner's plan also provides for contributions in such amounts as the Board of Directors may annually determine for the profit-sharing portion of the plan. The amount charged to expense during the years ended December 31, 1999, 1998 and 1997, was $0.9 million, $0.5 million and $0.4 million, respectively. STOCK OPTION PLANS In 1997, the Company adopted a Stock Option Plan (the "1997 Plan") in order to attract and retain key employees of the Company. The 1997 Plan authorized the issuance of up to 265,000 shares of voting common stock to be issued to officers and key employees under terms and conditions to be set by the Company's Board of Directors. During 1997, 256,000 options were granted to various members of management at a fair value price of $1.10 per share, as determined by an independent appraisal. In the third quarter of 1998, the 1997 Plan was amended to authorize the issuance of an additional 262,500 shares, for a total of 527,500 shares, of voting common stock to be issued under the plan. In 1998, 283,400 options were granted to various members of management at a fair value price of $7.48 per share, as determined by an independent appraisal. In 1999, 300 options were granted to a member of management at a fair value price of $7.48 per share. All options expire 10 years from the date of grant. In connection with the Charlesbank purchase (see Note 14), which constituted a change in control under the 1997 stock option plan, all outstanding options became fully vested. Through December 31, 1999, 24,250 options had been exercised under the 1997 Plan. In the second quarter of 1999, the Company adopted the 1999 Stock Option Plan (the "1999 Plan") in order to attract and retain employees (including officers), directors and independent contractors of the Company. The 1999 Plan authorizes the issuance of up to 1,050,000 shares of voting common stock to be issued to employees (including officers), directors and independent contractors of the Company under terms and conditions to be set by the Company's Board of Directors. In November 1999, the Board approved an additional 53,550 options to be available for grant, which includes all remaining available options under the 1997 Plan. In May 1999, the Company granted 500,000 options to various members of management at a fair value price of $9.00 per share, as determined by independent appraisal. The options are divided into three tiers that vest over varying periods of time or upon the occurrence of certain events. In November 1999, the Company granted 145,800 options to various members of management at a fair value price of $9.00 per share. These options generally vest over 4 years from the date of grant. All options expire 10 years from the date of grant. Under the 1999 Plan, 22,727 options vested; however, no options were exercised as of December 31, 1999. 35 38 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 Stock option activity under the plans is as follows:
WEIGHTED AVERAGE NUMBER EXERCISE OF SHARES PRICE --------- -------- Outstanding at December 31, 1996............................ 0 $ 0 Granted................................................... 256,000 1.10 Exercised................................................. 0 0 Forfeited................................................. 0 0 --------- ----- Outstanding at December 31, 1997............................ 256,000 1.10 Granted................................................... 283,400 7.48 Exercised................................................. 0 0 Forfeited................................................. (45,750) 1.10 --------- ----- Outstanding at December 31, 1998 (24,000 exercisable)....... 493,650 4.76 Granted................................................... 646,100 9.00 Exercised................................................. (24,250) 2.42 Forfeited................................................. (11,500) 1.10 Cancelled................................................. (4,000) 7.48 --------- ----- Outstanding at December 31, 1999 (476,927 exercisable)...... 1,100,000 $7.33 ========= =====
The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and its related interpretations. Pursuant to APB No. 25, compensation expense is recognized for financial reporting purposes using the intrinsic value method when it becomes probable that the options will be exercisable. The amount of compensation expense to be recognized is determined by the excess of the fair value of common stock over the exercise price of the related option at the measurement date and accordingly, no compensation expense has been recorded in the consolidated statements of operations as a result of the stock option plans. SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), establishes an alternative method of expense recognition for stock-based compensation awards to employees based on fair values. The Company has elected not to adopt SFAS No. 123 for expense recognition purposes, but is required to provide certain pro forma disclosures. The following information is presented as if the Company had accounted for its employee stock options under the fair value method prescribed by SFAS No. 123 (000's):
1999 1998 1997 ------- ------- ---- Net loss................................................. $(6,588) $(4,724) $(14) Pro forma................................................ (7,899) (4,873) (42)
The weighted average fair value of options granted during 1999, 1998 and 1997 estimated on the date of grant using the Black-Scholes option pricing model was $5.11, $4.68 and $.58, respectively. The fair value of options granted in 1999, 1998 and 1997 were determined using the following assumptions: a risk-free interest rate of 5.65%, 4.69% and 6.42%, respectively, no dividend yield, expected life of 10 years which equals the lives of the grants, and no expected volatility. 36 39 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 The following is summary information about the Company's stock options outstanding at December 31, 1999:
WEIGHTED WEIGHTED WEIGHTED OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE EXERCISE DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE PRICE 1999 TERM (YEARS) PRICE 1999 PRICE ---------- -------------- ------------ -------- -------------- -------- $ 1.10 179,500 7.42 $1.10 179,500 $1.10 7.48 274,700 8.73 7.48 274,700 7.48 9.00 645,800 9.51 9.00 22,727 9.00 ---------- --------- ---- ----- ------- ----- $1.10-9.00 1,100,000 8.97 $7.33 476,927 $5.15 ========== ========= ==== ===== ======= =====
DEFERRED COMPENSATION PLAN In 1999, the Company established a deferred compensation plan for its top executives and divisional employees covered by the executive bonus plan to encourage each participant to promote the long-term interests of Heafner. Each participant is allowed to defer portions of their annual salary as well as bonuses received into the plan. In addition to employee deferrals, the Company makes contributions on behalf of its top executives and certain of the divisional employees in varying amounts. The plan provides that an employee who becomes a participant on or before November 23, 1998, shall be fully vested in all amounts credited to such participant's account. Those who become a participant after November 23, 1998 shall be at all times fully vested in elective deferrals into such participant's account and, as to contributions made by Heafner, shall vest at a rate of twenty percent (20%) per year as long as such participant is an employee on January 1 of each year. The deferred compensation plan may be altered and amended by Heafner's Board of Directors. 12. COMMITMENTS AND CONTINGENCIES: LEASES The Company leases land, buildings, equipment and vehicles under various operating leases which expire between 2000 and 2019. The Company also has obligations totaling $0.7 million related to properties which have been subleased. Future minimum lease commitments at December 31, 1999 (excluding subleased properties) are as follows (000's): 2000........................................................ $ 27,511 2001........................................................ 23,036 2002........................................................ 18,995 2003........................................................ 15,932 2004........................................................ 12,201 Thereafter.................................................. 37,016 -------- $134,691 ========
Rent expense under these operating leases was $26.3 million in 1999, $19.6 million in 1998 and $9.0 million in 1997. Obligations under capital leases are not significant. PURCHASE COMMITMENTS In May 1997, the Company entered into a purchase agreement with a supplier (the "Tire Supply Agreement" -- see Note 13) which expires May 2007. Under the terms of the agreement, the Company has 37 40 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 agreed to purchase all requirements of its "Winston" brand tires at a negotiated price specified in the agreement. LEGAL PROCEEDINGS In the third quarter 1999, the Company, without admitting any fault, entered into a settlement agreement with plaintiffs in a class action lawsuit filed in 1998 on behalf of Winston store managers. See Note 7 for further discussion. The agreements related to the acquisition of CPW, including employment agreements, contained various provisions, which required the Company to make certain calculations regarding results of operations (as defined therein) and make payments based on certain formulas. The parties mediated the various issues involved in these matters on January 20, 2000, and resolved all issues except for one. The Company does not believe that the amounts involved in this issue are significant to the financial condition of the Company. The parties have agreed to binding arbitration before a single accountant arbitrator to resolve the remaining issue. In addition to the aforementioned contingencies, the Company is also involved in various other proceedings incidental to the ordinary course of its business. The Company believes that none of these other proceedings will have a material adverse effect on its business or financial condition. 13. REDEEMABLE PREFERRED STOCK: On May 2, 1997, the Company issued 11,500 shares of preferred stock with par value of $.01 per share to a supplier (the "Supplier"). Of the 11,500 shares, 7,000 shares are designated Series A Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock") and 4,500 shares are designated Series B Cumulative Redeemable Preferred Stock (the "Series B Preferred Stock"). The Series A and B Preferred Stock each contain a provision whereby upon the termination of the Tire Supply Agreement (see Note 12), the Company shall redeem all shares of Preferred Stock outstanding at a price equal to the sum of the stated value and the applicable premium, as defined, plus all accrued and unpaid dividends. If at any time a change of control occurs, as defined, the Supplier may request redemption of all outstanding shares. The Company may not make payment in respect of any of the above redemption requirements, so long as amounts are outstanding under the Loan and Security Agreement, the Senior Notes and other agreements entered into in connection therewith, including any replacement agreement which results in a greater principal amount outstanding. SERIES A PREFERRED STOCK The stated value of Series A Preferred Stock is $1,000 per share. Holders of Series A Preferred Stock are entitled to receive, when and if declared by the Board of Directors, cumulative cash dividends at an annual rate of 4%, subject to adjustment based on the volume of purchases from the Supplier. Additional dividends will accrue, when and if declared by the Board of Directors, and are payable on the last business day of January, beginning in 1999. For the years ended December 31, 1999, 1998 and 1997, the Company declared a dividend based on a 4% rate. These amounts are included in interest expense in the accompanying consolidated statements of operations. The Series A Preferred Stock will be redeemed by the Company, beginning on the last business day of December 2002 and on the last business day of each June and December thereafter, through June 2007. SERIES B PREFERRED STOCK The stated value of Series B Preferred Stock is initially $1,000 per share, to be adjusted based on tire purchase credits as determined by the number of units purchased under the Tire Supply Agreement (see 38 41 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 Note 12). Dividends on Series B Preferred Stock are payable, when and if declared by the Board of Directors, at the prime rate if the Company does not meet certain tire purchase requirements. The remaining value of Series B Preferred Stock shall be redeemed by the Company on the last business day of June 2007 at a price equal to the adjusted stated value plus all accrued and unpaid dividends. During 1999, based on the Company's purchases, the stated value of the Series B Preferred Stock was reduced by $0.3 million. 14. COMMON STOCK: CHANGE OF CONTROL On May 24, 1999, Charlesbank Equity Fund IV, Limited Partnership, a Massachusetts limited partnership, purchased approximately 97.8% of the Company's issued and outstanding shares of Class A common stock and approximately 96.8% of its issued and outstanding shares of Class B common stock for a purchase price of approximately $44.7 million. Approximately $1.7 million in fees related to this transaction has been reflected as a charge to retained earnings in the accompanying financial statements. CLASS A AND CLASS B COMMON STOCK On May 12, 1998, the Company's Board of Directors amended their Articles of Incorporation to create two classes of common stock. At December 31, 1998, the Company has authorized for issuance 10,000,000 shares that have been designated Class A Common Stock ("Class A") and 20,000,000 shares that have been designated Class B Common Stock ("Class B"). Class A and Class B have equal rights related to dividends and distributions and liquidation, dissolution or winding up. However, Class A is entitled to 20 votes per share and Class B is entitled to one vote per share. Class B shall automatically convert into one share of Class A without the requirement of any further action on the part of the Corporation or it stockholders upon the earliest of (i) an initial public offering of the Class A in connection with the registration of the Class A under the Securities Act of 1933, as amended (ii) the occurrence of any condition or event which results in the acceleration of the maturity of the indebtedness evidenced by the debt documents, or (iii) an order for relief under Title 11 of the United States Code is entered against the Company. In August 1999, the Board of Directors resolved that the Company is authorized to offer all holders of Class B common stock the opportunity to exchange their shares for a like number of shares of Class A common stock. As of December 31, 1999, all Class B shares have been exchanged for Class A shares. RESTRICTED STOCK The Company has given designated employees, officers, directors and independent contractors of Heafner the opportunity to acquire restricted shares of Class A common stock. Heafner's board of directors administers the restricted stock arrangements, selects eligible participants, determines the number of shares to be offered to each participant and sets other applicable terms and conditions. As of December 31, 1999, directors and executives of Heafner owned a total of 280,000 restricted shares of Class A common stock. Shares of restricted stock are issued by the Company at the fair market value at the date of issuance. Some or all of the purchase price may be paid in the form of a promissory note given by the purchaser of the shares. In some cases, the principal of the notes is forgiven over time by the Company depending upon the attainment of certain earnings targets. All shares of restricted stock are subject to the terms and conditions of a securities purchase and stockholders' agreement entered into by each recipient. 39 42 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 STOCK REPURCHASE AND STOCK SPLIT At December 31, 1996, the Company had 5,000 shares of $100 par value common stock authorized with 2,080 shares issued and outstanding. On May 2, 1997, the Company amended its Articles of Incorporation to authorize 10,000,000 shares of common stock, and reduce the par value of common stock from $100 to $.01 per share. On May 7, 1997, the Board of Directors approved the repurchase and subsequent cancellation and retirement of 1,024 outstanding shares of common stock at a price equal to $2,644 per share on a pre-stock split basis. On the same date, the Board of Directors authorized a 3,281-for-1 stock split on all outstanding shares of common stock at the close of business on that date. 40 43 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The following table contains information regarding the directors and executive officers of Heafner. Directors hold their positions until the annual meeting of the stockholders at which their term expires or until their respective successors are elected and qualified. Executive officers hold their positions until the annual meeting of the Board of Directors or until their respective successors are elected and qualified.
NAME AGE POSITION ---- --- -------- William H. Gaither..................... 44 Chairman Donald C. Roof......................... 48 President, Chief Executive Officer and Director David H. Taylor........................ 44 Senior Vice President, Chief Financial Officer and Treasurer J. Michael Gaither..................... 47 Executive Vice President, General Counsel and Secretary Daniel K. Brown........................ 46 Senior Vice President/Sales and Marketing Richard P. Johnson..................... 52 President, Heafner-ITCO Division P. Douglas Roberts..................... 52 President, Winston Tires Ray C. Barney.......................... 45 President, CPW Joseph P. Donlan....................... 53 Director Kim G. Davis........................... 46 Director Tim R. Palmer.......................... 42 Director Mark A. Rosen.......................... 49 Director Jon M. Biotti.......................... 31 Director
William H. Gaither -- Chairman. Mr. Gaither joined Heafner in 1978 as a management trainee, subsequently serving as an Assistant Manager in various locations. In 1986, Mr. Gaither was named Executive Vice President, a position he held until 1989. He served as President of Heafner from 1989 to 1999. Mr. Gaither also served as the Chief Executive Officer of Heafner from 1996 to 1999 and has been a Director of Heafner since 1986. Mr. Gaither became Chairman of Heafner in 1999. He holds a B.A. from Davidson College. Donald C. Roof -- President, Chief Executive Officer and Director. Mr. Roof became President, Chief Executive Officer and a Director of Heafner in May 1999, and prior to that time had served as Heafner's Senior Vice President, Chief Financial Officer and Treasurer since April 1997. Prior to that time, from 1987 to November 1996, he served in a variety of positions with Yale International/Spreckels Industries, a global industrial manufacturing and food processing company. From 1994 to 1996, Mr. Roof was Senior Vice President and Chief Financial Officer of Yale International/Spreckels Industries. He received his B.B.A. from Eastern Michigan University. David H. Taylor -- Senior Vice President, Chief Financial Officer and Treasurer. Mr. Taylor joined Heafner in 1999. Prior to that time, from 1988 to 1998, he held various financial positions at JPS Textile Group, Inc., a diversified textile manufacturer, serving as its Executive Vice President - Finance and Chief Financial Officer from 1991 to 1998. Mr. Taylor holds a B.A. from Furman University. 41 44 J. Michael Gaither -- Executive Vice President, General Counsel and Secretary. Mr. Gaither became Executive Vice President in May 1999, and prior to that time served as Heafner's Senior Vice President, General Counsel and Secretary since joining Heafner in 1991. Prior to that time, he was a lawyer in private practice for several years. He holds a B.A. from Duke University and received his J.D. from the University of North Carolina-Chapel Hill. Mr. Gaither also serves on the board of directors of Ridgeview, Inc. Daniel K. Brown -- Senior Vice President/Sales and Marketing. Mr. Brown joined Heafner in 1975 and held various field sales assignments before becoming Marketing Manager in 1979. He advanced to Director of Marketing and to Vice President of Marketing during the 1980's and was named Vice President of Sales and Marketing in 1991 assuming responsibility for distribution center operations. In 1997 he was named Senior Vice President of Sales and Marketing with responsibility for vendor relations and program negotiations as well as the sales and marketing activities for Heafner. Mr. Brown holds a B.A., cum laude, from Western Carolina University. Richard P. Johnson -- President, Heafner-ITCO. Mr. Johnson joined ITCO as President and Chief Operating Officer in February 1997. He served as Senior Vice President of Albert Fisher Distribution from 1991 to 1994, and as its President and Chief Operating Officer from 1994 to 1996. Prior to that time, Mr. Johnson held a variety of management positions with Leprino Foods, Sargento Cheese and Kraft Foods. He holds an A.A. from Palm Beach College. P. Douglas Roberts -- President, Winston Tires. Mr. Roberts joined Winston as President -- Winston Tires in November 1998. He served with Frazee Industries as Vice President -- Sales, Development, Marketing & Store Operations from 1992 until the time he joined Winston. Prior to that time, Mr. Roberts headed a variety of management positions with Libbey-Owens-Ford, Tenneco Automotive, and Taco Bell. Mr. Roberts holds a B.A. from Western Carolina University. Ray C. Barney -- President, CPW. Mr. Barney joined the Heafner Tire Group at the time when CPW was acquired by Heafner in May 1998. At that time Mr. Barney served as Chief Operating Officer for CPW. On November 1, 1999, Mr. Barney was named as President of the CPW division. Mr. Barney has been with the CPW organization since 1991. Prior to that Mr. Barney had spent 14 years with the BFGoodrich Company with various positions in Sales and Sales Management. He holds a B.A. degree from the Business School at the University of Illinois. Joseph P. Donlan -- Director. Mr. Donlan has been a Director since May 1997. He is Managing Director of Brown Brothers Harriman & Co. and Co-Manager of its 1818 Mezzanine Fund, Mr. Donlan joined Brown Brothers Harriman & Co. in 1970 in the firm's Trade Finance Group. Prior to organizing the 1818 Mezzanine Fund, Mr. Donlan managed Brown Brothers Harriman & Co.'s New York commercial banking activities. Previously, Mr. Donlan served as the firm's Senior Credit Officer and became a member of the firm's Credit Committee on which he continues to serve. He is a graduate of Georgetown University and received an M.B.A. from Rutgers University. Mr. Donlan also serves on the board of directors of National Auto Finance Company, Inc., One Call Medical, Inc. and System One Services. Kim G. Davis -- Director. Mr. Davis has been a Director since May 1999. He is a Managing Director and co-founder of Charlesbank Capital Partners, LLC and serves as a director of Bell Sports, Inc. and Westinghouse Air Brake Company. Prior to July 1998, Mr. Davis was a Managing Director of Charlesbank's predecessor firm, Harvard Private Capital Group, Inc., the private equity and real estate investment unit of Harvard Management Company. From 1995 through 1997, Mr. Davis was engaged in personal investing activities. From 1988 through 1994 he was a General Partner at Kohlberg & Co. Mr. Davis holds both B.A. and M.B.A. degrees from Harvard University. Tim R. Palmer -- Director. Mr. Palmer has been a Director since May 1999. He is a Managing Director and co-founder of Charlesbank Capital Partners, LLC. From 1990 through June 1998, Mr. Palmer was a Managing Director of Harvard Private Capital Group, Inc. Mr. Palmer serves as a director of Bell Sports, Inc. and The WMF Group Ltd. Previously, he was Manager, Business Development at The Field Corporation, a privately held investment company. Mr. Palmer holds a B.A. from Purdue University, a J.D. from the University of Virginia and an M.B.A. from the University of Chicago. 42 45 Mark A. Rosen -- Director. Mr. Rosen has been a Director since May 1999. He is a Managing Director and co-founder of Charlesbank Capital Partners, LLC. From 1994 through June 1998, Mr. Rosen was a Managing Director of Harvard Private Capital Group, Inc. Mr. Rosen serves as a director of CCC Information Services Group, Inc. Previously, Mr. Rosen was a Principal of The Conifer Group, a strategy consulting firm, President of Morningside/North America Limited, a private investment company, and a Senior Partner in the law firm of Hale and Dorr. Mr. Rosen earned a B.A., magna cum laude, from Amherst College, and holds a J.D. from Yale University. Jon M. Biotti -- Director. Mr. Biotti has been a Director since May 1999. He is a Senior Associate at Charlesbank Capital Partners, LLC. Prior to joining Charlesbank in July 1998, Mr. Biotti pursued postgraduate research studies in principal investing and entrepreneurship as an Entrepreneurial Studies Research Fellow at the Harvard Graduate School of Business Administration. Previously, he was affiliated with Brown Brothers Harriman & Co., the Walt Disney Company and Wasserstein Perella & Co. Mr. Biotti holds a B.A. from Harvard University, an M.P.A. from the Kennedy School & Government, and an M.B.A. with distinction from Harvard University. 43 46 ITEM 11. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE The following table contains information concerning the compensation for services in all capacities to Heafner for the years ended December 31, 1999, 1998 and 1997 of the following "Named Executive Officers," who are those persons who (a) served during the fiscal year ended December 31, 1999 as the Chief Executive Officer of Heafner, (b) were, at December 31, 1999, the other four most highly compensated executive officers of Heafner who earned more than $100,000 in salary and bonus in 1999 and (c) one person for whom disclosure would have been provided as among the most highly compensated executive officers but for the fact that he was not serving as an executive officer as December 31, 1999.
LONG-TERM COMPENSATION ANNUAL COMPENSATION ------------ ----------------------------------- SECURITIES FISCAL OTHER ANNUAL UNDERLYING ALL OTHER YEAR SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION NAME AND PRINCIPAL POSITION ENDED ($) ($) ($)(A) (#)(B) ($) --------------------------- -------- --------- ------- ------------ ------------ ------------ Donald C. Roof............... 12/31/99 334,588 135,372 50,500 200,000 -- President, Chief Executive 12/31/98 231,840 122,688 25,500 15,000 -- Officer 12/31/97 161,253(e) 60,000 25,000 25,000 -- William H. Gaither........... 12/31/99 221,254 -- -- -- -- Chairman 12/31/98 342,684 109,912 26,000 -- 71,436(c) 12/31/97 318,000 49,000 25,000 62,500 41,741(c) J. Michael Gaither........... 12/31/99 236,885 71,882 41,153 75,000 -- Executive Vice President, 12/31/98 213,924 113,174 15,500 15,000 -- General Counsel and 12/31/97 191,883 60,000 15,000 25,000 -- Secretary Daniel K. Brown.............. 12/31/99 202,085 61,322 113,909 75,000 -- Senior Vice President/ 12/31/98 182,490 96,571 15,500 15,000 -- Sales and Marketing 12/31/97 164,499 51,000 15,000 25,000 24,935(d) P. Douglas Roberts........... 12/31/99 229,992 34,897 15,500 75,000 -- President, Winston Tires 12/31/98 31,944(f) -- -- 25,000 -- 12/31/97 -- -- -- -- -- Richard P. Johnson........... 12/31/99 280,166 121,780 15,500 75,000 -- President, Heafner-ITCO 12/31/98 125,004(g) 42,512 -- 25,000 37,131(h) 12/31/97 -- -- -- -- -- Arthur C. Soares............. 12/31/99 207,926(i) 640,008 -- -- -- Former President, CPW 12/31/98 129,810(i) 199,399 -- -- -- 12/31/97 -- -- -- -- --
- --------------- (a) This column includes nothing for perquisites and other personal benefits because in no case did the aggregate amount of perquisites and other personal benefits exceed the reporting threshold (the lesser of $50,000 or 10% of total annual salary and bonus), but includes amounts for the annual contribution for deferred compensation for such Named Executive Officer for the year. (b) This column includes stock options granted in 1997, 1998 and 1999 under Heafner's stock option plans, which is discussed below under "-- Stock Option Plans." All options granted in 1997 and 1998 are vested and 19,480 of the options granted in 1999 vested as of December 31, 1999. The remaining options vest as described in "-- Stock Option Plans," below. (c) Consists of certain board-designated discretionary compensation paid in 1998. (d) Consists of taxable amounts reported in connection with vendor-sponsored trips. (e) Mr. Roof joined Heafner in April 1997. Salary represents payments to Mr. Roof during the period of his employment in 1997. On an annualized basis, Mr. Roof's salary for 1997 would have been $215,000. (f) Mr. Roberts joined Heafner in November 1998. Salary represents payments to Mr. Roberts during the period of his employment in 1998. On an annualized basis, Mr. Robert's salary for 1998 would have been $230,000. 44 47 (g) Mr. Johnson joined Heafner in May 1998 when Heafner acquired ITCO. Salary represents payments to Mr. Johnson during the period of his employment in 1998. On an annualized basis, Mr. Johnson's salary for 1998 would have been $250,000. (h) Consists of taxable amounts reported in connection with reimbursement of relocation costs. (i) Mr. Soares was the President and Chief Operating Officer of CPW, which was acquired by Heafner in May 1998. He resigned in October 1999. Salary for 1999 and 1998 represents payments to Mr. Soares during the period of his employment. On an annualized basis, Mr. Soares' salary would have been $268,704 and $259,600 for 1999 and 1998, respectively. OPTION/SAR GRANTS IN 1999 No stock appreciation rights were granted during 1999. The following table contains information concerning the grant of stock options to each of the Named Executive Officers during 1999:
INDIVIDUAL GRANTS ----------------------------------------------- PERCENT OF TOTAL OPTIONS POTENTIAL REALIZABLE VALUE AT NUMBER OF GRANTED ASSUMED ANNUAL RATES OF SECURITIES TO EXERCISE STOCK PRICE APPRECIATION FOR UNDERLYING EMPLOYEES OR BASE OPTION TERM(b) OPTIONS IN FISCAL PRICE EXPIRATION ----------------------------- NAME GRANTED(a) YEAR ($/SH) DATE 5%($) 10%($) - ---- ---------- ---------- -------- ---------- ------------- ------------- Donald C. Roof.............. 200,000 31.0% $9.00 5/24/09 $1,132,010 $2,868,736 William H. Gaither.......... -- -- -- -- -- -- J. Michael Gaither.......... 75,000 11.6 9.00 5/24/09 424,504 1,075,776 Daniel K. Brown............. 75,000 11.6 9.00 5/24/09 424,504 1,075,776 P. Douglas Roberts.......... 75,000 11.6 9.00 5/24/09 424,504 1,075,776 Richard P. Johnson.......... 75,000 11.6 9.00 5/24/09 424,504 1,075,776 Arthur C. Soares............ -- -- -- -- -- --
- --------------- (a) The securities underlying the options, which were granted under the stock option plan, are shares of Class A common stock. Under the stock option plan, 19,480 of the options granted to each of the Named Executive Officers vested as of December 31, 1999. The options vest as described in "-- Stock Option Plan," below. (b) The potential realizable value columns illustrate the value that might be realized upon exercise of the options immediately prior to the expiration of their term, assuming the specified compound rates of appreciation of the Class A common stock over the term of the options. These amounts represent certain assumed rates of appreciation only, assuming a fair market value on the date of grant of $9.00 per share. Because the Class A common stock is privately held, a per-share fair market value on the date of grant of the options equal to $9.00 was assumed based on a stock appraisal as of May 1999. Actual gains on the exercise of the options are dependent on the future performance of the Class A common stock. The potential values reflected in this table may not be the actual values ultimately realized. All amounts have been rounded to the nearest whole dollar. No options to purchase common stock were exercised by the Named Executive Officers during the 12 months ended December 31, 1999. STOCK OPTION PLANS Heafner has adopted two stock option plans, the Amended and Restated 1997 Stock Option Plan and the 1999 Stock Option Plan, both of which are designed to motivate designated employees, officers, directors and independent contractors of Heafner by encouraging them to acquire a proprietary interest in Heafner. Heafner's board of directors, acting through a "plan committee" of at least two members of the board, administers the stock option plans, selects eligible participants, determines the number of shares subject to each option granted under the stock option plans and sets other terms and conditions applicable to participants 45 48 in the stock option plans. The maximum aggregate number of shares which may be issued under the stock option plans is 1,557,750 shares of Class A common stock. The stock option plans provide for the grant to designated employees, officers, directors and independent contractors of Heafner of options to purchase shares of Class A common stock. The plan committee has sole authority to select those individuals to whom options may be granted and to determine the number of shares of Class A common stock that will be issuable upon exercise of the options granted. The purchase price for shares of Class A common stock issuable upon exercise of the options granted is fixed by the plan committee, but cannot be less than the fair market value of the Class A common stock, as determined in good faith by Heafner's board of directors, if the corresponding option is intended to qualify as an incentive stock option under the Internal Revenue Code. As of December 31, 1999, options to purchase an aggregate of 1,100,000 shares of Class A common stock, at prices ranging from $1.10 to $9.00 per share, were outstanding under the stock option plans. All options granted under the stock option plans are subject to the terms and conditions of a stock option agreement entered into by each option recipient. The stock option agreement generally requires each recipient to be bound by the terms of a stockholder agreement with Heafner in the event the recipient elects to exercise options. Options granted under the 1997 stock option plan generally vest on the first four anniversaries of the date of grant, in installments of either (a) 10%, 20%, 30% and 40% or (b) 20%, 20%, 20% and 40%, of the total number of underlying shares. Options granted under the 1999 stock option plan generally vest based on time, performance or the occurrence of specified events, such as an initial public offering or company sale. Time based options vest on the first four anniversaries of the date of grant in installments of 25% per year. Performance based options vest at the end of each year based on the achievement of EBITDA targets for the year. Options that vest on the basis of events such as an initial public offering or company sale do so only to the extent that Charlesbank has earned a specified return on its initial investment in shares of Heafner. All time based and performance based options vest in any event on the seventh anniversary of the date of grant. Options granted under the stock option plans are generally not transferable by the recipient other than by a will or by the laws of descent and distribution and, during the recipient's lifetime, may only be exercised by the recipient. Under the terms of the stock option plans, options expire no later than the tenth anniversary of the date of grant. Options are also subject to adjustment to avoid dilution in the event of stock splits, stock dividends, reclassifications or other similar changes in the capital structure of Heafner. Upon the termination of an option holder's employment the stock option agreement typically provides that all or a portion of the option lapses unless exercised by the option holder or his or her personal representative within a specified period of time after the termination. In connection with the Charlesbank purchase, which constituted a "change of control" under the 1997 stock option plan, all outstanding options under the 1997 option plan became fully vested and are currently exercisable by the option holders. Under the 1999 stock option plan, each of the following events would constitute a "change of control": - at any time after an initial public offering, a person or entity not controlled by Heafner's existing stockholders acquires more than 30% of the combined voting power of the then outstanding shares of Heafner's common stock, - all or substantially all of the assets of Heafner are sold, - the majority of Heafner's board of directors no longer comprises persons currently serving on the board or persons designated by the current board majority, - at any time prior to an initial public offering, Charlesbank and its affiliates collectively own less than 50% of the combined voting power of the then outstanding shares of common stock of Heafner, - the adoption of a plan relating to the liquidation or dissolution of Heafner in connection with an equity investment or sale or a business combination transaction, or - any other event or transaction that the Board of Heafner deems to be a Change of Control. 46 49 Options outstanding under the stock option plans will become fully vested and immediately exercisable upon any change of control to the extent provided in the relevant stock option agreements. RESTRICTED STOCK Heafner has given designated employees, officers, directors and independent contractors of Heafner the opportunity to acquire restricted shares of Class A common stock. Heafner's board of directors administers the restricted stock arrangements, selects eligible participants, determines the number of shares to be offered to each participant and sets other applicable terms and conditions. As of December 31, 1999, directors and executives of Heafner owned a total of 280,000 restricted shares of Class A common stock. Shares of restricted stock are issued by Heafner at the fair market value at the date of issuance. Some or all of the purchase price may be paid in the form of a promissory note given by the purchaser of the shares. In some cases, the principal of the notes is forgiven over time by Heafner depending upon the attainment of certain earnings targets. All shares of restricted stock are subject to the terms and conditions of a securities purchase and stockholders' agreement (the "restricted stock agreement") entered into by each option recipient. The restricted stock agreement prohibits the transfer of restricted shares except for transfers: - to Heafner upon the termination of employment of a participating stockholder, - to other management employees who have executed and delivered agreements substantially similar to the restricted stock agreement, - by will or by the laws of descent or distribution, or - if and to the extent repurchase rights in favor of Heafner on termination of employment have not been exercised, to third parties, subject to rights of first refusal in favor of Heafner and the other holders of restricted stock. Heafner has the right to repurchase all of a participating stockholder's shares upon the termination of that stockholder's employment by Heafner due to cause or by the stockholder other than for good reason (each as defined in the restricted stock agreement) or the death of the participating stockholder. A participating stockholder may require Heafner to repurchase all of such stockholder's shares if that stockholder is terminated by Heafner without cause or terminates his or her employment for good reason (as defined in the restricted stock agreement). The repurchase price for shares of stock subject to the restricted stock agreement is generally their original purchase price or a price derived from Heafner's "Net Equity Value" (as defined in the restricted stock agreement) at the time of repurchase, whichever is lower, in the case where a stockholder is terminated for certain specified cause events or violates his or her confidentiality or non-compete obligations, or whichever is higher, in all other cases, except that the repurchase price is the original purchase price where a stockholder leaves without good reason within 24 months after the date the shares were acquired or is terminated for other cause events. Under the restricted stock agreements entered into in May 1999, the repurchase rights described in this paragraph are exercisable by Charlesbank and other principal stockholders to the extent not exercised by Heafner. The restricted stock agreements terminate on the earlier to occur of a public offering that meets specified conditions and the tenth anniversary of the date of the agreement. COMPENSATION OF DIRECTORS During the year ended December 31, 1999, directors who were not members of the Gaither family, nominees of The 1818 Mezzanine Fund, L.P. or Wingate Partners II, L.P. or Charlesbank Capital were paid a fee of $2,500 for each board meeting attended. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1999, William H. Gaither, Donald C. Roof, and J. Michael Gaither served on an executive committee of Heafner which reviewed and recommended executive compensation for the Named Executive 47 50 Officers and other executives of Heafner. All compensation recommendations of the executive committee were reviewed by and subject to the approval of the full board of directors of Heafner. BOARD REPORT ON EXECUTIVE COMPENSATION The executive committee, at the direction of the board of directors of Heafner, recommends the compensation of the Named Executive Officers and other executives of Heafner. In addition, the executive committee administers Heafner's compensation and stock option plans. The key components of the compensation packages of Heafner's executive officers are annual salary, bonuses dependent upon Heafner's performance, and long-term, stock-based incentives. In addition, Heafner's executive officers receive health, accident, and life insurance, retirement, and other personal benefits typically offered to executives by other corporations equivalent in size. Historically, Heafner has entered into executive severance agreements with its senior executive officers which fix their minimum annual salaries and bonuses. The compensation philosophy of Heafner's board of directors is that the compensation of Heafner's executives and key managers should be designed to promote achievement of Heafner's business and financial objectives; to provide pay that is externally competitive and internally equitable, which will allow Heafner to attract, retain, and motivate the executives and key managers necessary to accomplish its business objectives; and to reward exceptional performance. The executive committee reviews the salaries provided for in the employment agreements with its senior executive officers, as well as the salaries of Heafner's other officers, once a year, and recommends changes to the board of directors. Bonuses are payable based upon performance measures recommended by the executive committee for each participant. The executive committee recommends a threshold, target, and maximum performance objective for each performance measure. Each of the executive committee's recommendations must be approved by the board of directors. No payment with respect to a performance measure is made if performance is below the threshold performance objective established for that performance measure. If the target performance objective is reached, the participant is entitled to receive 100% of the bonus attributable to that performance measure. If the maximum performance objective is reached, the participant receives 200% of the bonus attributable to that performance measure. As a result, if the maximum performance objectives for all performance measures are reached, a participant will receive a bonus equal to 200% of his or her targeted bonus. No participant may receive more than 200% of his or her targeted bonus. Bonuses are subject to reduction or cancellation on the basis of a participant's individual performance or in the event of conduct by a participant detrimental to Heafner. Bonuses are payable in cash. THE BOARD OF DIRECTORS William H. Gaither Donald C. Roof Joseph P. Donlan Kim G. Davis Tim R. Palmer Mark A. Rosen Jon M. Biotti INDEMNIFICATION OF OFFICERS AND DIRECTORS Heafner's articles of incorporation provide for the release of any person serving as a director of Heafner from liability to Heafner or its stockholders for damages for breach of fiduciary duty and for the indemnification by Heafner of any person serving as a director, officer, employee or agent or other authorized person to the fullest extent permissible under the North Carolina Business Corporation Act. In addition, Heafner has purchased a directors' and officers' insurance policy covering officers and directors of Heafner for liabilities that they may incur as a result of any action, or failure to act, by such officers and directors in their capacity as officers and directors. 48 51 EMPLOYMENT AND SEVERANCE AGREEMENTS Heafner has entered into executive severance agreements with each of Messrs. Roof, Taylor, J. Michael Gaither, Brown, Johnson, Barney and Roberts, providing for annual base salaries of approximately $400,000, $234,000, $246,000, $230,000, $275,000, $230,000 and $250,000, respectively, for the current year. Heafner also pays William H. Gaither an annual fee of $125,000 for serving as Chairman of the Board under a consulting agreement that terminates in May 2002. The agreements with Messrs. J. Michael Gaither, Brown, Johnson and Roberts provide for additional compensation in the form of a minimum annual bonus through 2001, participation in Heafner's executive bonus plan and participation in Heafner's deferred compensation program. The agreements with Messrs. Roof and Taylor provide for participation in Heafner's executive bonus plan and deferred compensation program but no minimum annual bonus. The severance agreements may be terminated at any time by Heafner or the employee. Upon termination of employment for any reason, the employee is entitled to receive a basic termination payment equal to (a) his base salary earned through the date of termination, (b) the previous year's bonus if the termination is after December 31 and before bonus has been awarded and (c) the fixed bonus, if any, payable under the agreement prorated through the date of termination. If the employee is terminated by Heafner without cause or if the employee leaves for good reason (each as defined in his severance agreement), he is entitled to an additional severance payment based on a multiple of his base salary and plan bonus. The multiple used for determining the additional severance payment is increased if termination occurs in connection with a change of control of Heafner (as defined in his severance agreement). The severance agreements each contain confidentiality and non-compete provisions. In conjunction with the CPW acquisition, Heafner entered into employment agreements with each of Arthur C. Soares, the former President of CPW, and Ray C. Barney, the current President of CPW. Mr. Soares' employment agreement provided for a two year term and an annual base salary of $250,000, a stay-put bonus of $2,000,000, payable in installments of $1,250,000 at the end of the first year and $750,000 at the end of the second year after the closing of the CPW acquisition. It also provided for a "synergy" bonus payable at the end of the first year based on the attainment of specified performance targets for CPW and an annual incentive and performance bonus to be determined in good faith by Heafner's board of directors. Mr. Barney's employment agreement provided for a three-year term and an annual base salary of $140,000, a stay-put bonus of $600,000, payable in installments of $200,000 at the end of each of the first three years after the closing of the CPW acquisition. Mr. Barney's employment agreement (with Speed Merchant) also provided for a "synergy" bonus payable at the end of the first year based on the attainment of specified performance targets for CPW and an annual incentive and performance bonus to be determined in good faith by Heafner's board of directors. Both employment agreements contained non-compete, non-solicitation and confidentiality provisions. Heafner settled all issues outstanding regarding the employment contract and all issues outstanding under the CPW acquisition documents involving Mr. Barney pursuant to the terms of that certain Settlement Agreement and Release dated the 16th day of September 1999. Mr. Barney entered a new executive severance agreement in November 1999, reference above. Mr. Soares resigned effective October 1999. Pursuant to a Settlement Agreement dated January 20, 2000, Heafner and Mr. Soares resolved all outstanding issues save one component of the "synergy" bonus which was a part of the employment agreement referenced above. That issue is to be submitted by the parties to binding arbitration before an accountant arbitrator for resolution. EXECUTIVE BONUS PLAN Heafner awards annual cash bonuses to its top executives and divisional employees. Bonuses are payable only if Heafner attains specified annual performance targets. Bonuses can range from up to 20% of salary for executives in the lowest bonus bracket to up to 80% of salary for those in the highest. Within each bonus bracket, the percentage bonus also varies depending on the particular performance targets met by Heafner or 49 52 the corporate division in which the executive works. The executive bonus plan may be altered in the discretion of Heafner's board of directors. DEFERRED COMPENSATION PLAN In 1999, Heafner established a deferred compensation plan for its top executives and divisional employees covered by the executive bonus plan to encourage each participant to promote the long-term interests of Heafner. Each participant is allowed to defer portions of their annual salary as well as bonuses received into the plan. In addition to employee deferrals, Heafner makes contributions on behalf of its top executives and certain of the divisional employees in varying amounts. The plan provides that an employee who becomes a participant on or before November 23, 1998, shall be fully vested in all amounts credited to such participant's account. Those who become a participant after November 23, 1998 shall be at all times fully vested in elective deferrals into such participant's account and as to contributions made by Heafner shall vest at a rate of twenty percent (20%) per year as long as such participant is an employee on January 1 of each year. The deferred compensation plan may be altered and amended by Heafner's board of directors. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding the beneficial ownership of Heafner's common stock as of December 31, 1999 of: - each person known by Heafner to own beneficially more than 5% of the Class A common stock, - each director, - the Named Executive Officers, and - all directors and executive officers of Heafner as a group.
NUMBER OF SHARES PERCENT OF BENEFICIALLY CLASS A COMMON NAME AND ADDRESS OF BENEFICIAL OWNER(a) OWNED STOCK(b) - --------------------------------------- ---------------- -------------- Charlesbank Equity Fund IV, Limited Partnership............. 4,961,734(c) 93.8% The 1818 Mezzanine Fund, L.P................................ 1,034,000(d) 16.4 Jon M. Biotti............................................... --(e) Kim G. Davis................................................ 4,961,734(c) 93.8 Joseph P. Donlan............................................ 1,034,000(d) 16.4 William H. Gaither.......................................... 62,500(f) 1.2 Tim R. Palmer............................................... 4,961,734(c) 93.8 Mark A. Rosen............................................... 4,961,734(c) 93.8 Daniel K. Brown............................................. 93,247(g) 1.7 J. Michael Gaither.......................................... 93,247(g) 1.7 Richard P. Johnson.......................................... 80,357(h) 1.5 P. Douglas Roberts.......................................... 53,247(h) 1.0 Donald C. Roof.............................................. 121,493(i) 2.3 Arthur C. Soares............................................ -- All directors and executive officers of Heafner as a group (13 persons).............................................. 6,524,824 99.3
- --------------- (a) Unless otherwise indicated, the address for each person listed in the table is in care of Heafner Tire Group, Inc., 2105 Water Ridge Parkway, Suite 500, Charlotte, North Carolina 28217. (b) Shares beneficially owned, as recorded in this table, are expressed as a percentage of the shares of Class A common stock. For purposes of computing the percentage of outstanding shares held by each person or group of persons named in this table, any securities which that person or group of persons has the right to acquire within 60 days of March 31, 2000 are deemed to be outstanding for purposes of computing the percentage ownership of such person or persons, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. As of December 31, 1999, 5,286,917 shares of Class A common were issued and outstanding. 50 53 (c) Represents (i) 4,846,179 shares of Class A common stock owned by Charlesbank Equity Fund IV, Limited Partnership, (ii) 4,444 shares of Class A common stock owned by its affiliate, Charlesbank Coinvestment Partners, LLC, and (iii) 111,111 shares of Class A common stock owned by an affiliate of Bain Capital and voted by Charlesbank pursuant to an irrevocable proxy. Messrs. Davis, Palmer and Rosen are Managing Directors of Charlesbank Capital Partners, LLC, which has the indirect authority to vote and exercise investment power over shares of Class A common stock beneficially owned by Charlesbank. Since none of Messrs. Davis, Palmer and Rosen individually have the power to vote and exercise investment power over the shares, each of them disclaims beneficial ownership of the shares. (d) Represents shares issuable upon the exercise of Warrants, as discussed below. Mr. Donlan is the co-manager of The 1818 Mezzanine Fund, L.P. and in that capacity will have authority to vote and exercise investment power over the shares. See "Certain Relationships and Related Transactions -- Warrants." (e) Mr. Biotti is a Senior Associate of Charlesbank capital Partners, LLC and has no authority to vote or exercise investment power over shares of Class A common stock beneficially owned by Charlesbank. (f) Consists of 62,500 shares of Class A common stock issuable upon the exercise of options which are exercisable within 60 days. (g) Includes 43,247 shares of Class A common stock issuable upon the exercise of options which are exercisable within 60 days. (h) Includes 28,247 shares of Class A common stock issuable upon the exercise of options which are exercisable within 60 days. (i) Includes 46,493 shares of Class A common stock issuable upon the exercise of options which are exercisable within 60 days. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. WARRANTS In connection with the incurrence of subordinated debt to finance the acquisition of Winston in May 1997, Heafner issued to The 1818 Mezzanine Fund, L. P. (the "1818 Fund") warrants (the "Warrants") to purchase shares of Heafner's common stock. Joseph P. Donlan, a member of Heafner's board of directors, is a Senior Manager of Brown Brothers Harriman & Co., the 1818 Fund's general partner. Mr. Donlan and Robert R. Gould, a Partner of Brown Brothers Harriman & Co., are co-managers of the 1818 Fund, and in that capacity they exercise voting and investment power over the 1818 Fund's shares. The Warrants are exercisable for 1,034,000 shares of Class A common stock. The Warrants may be exercised, in whole or in part, at any time prior to the earliest of: - May 7, 2007, - the date of an initial public offering of Class A common stock yielding gross proceeds of at least $25.0 million or representing at least 20% of the Class A common stock on a fully-diluted basis, or - Heafner's merger or consolidation with or into another entity or the sale of all or substantially all of Heafner's assets. The number of shares issuable upon the exercise of the Warrants is subject to adjustment from time to time to reflect stock dividends, splits, combinations and reclassifications. In addition, the Warrants provide for upward adjustment of the number of issuable shares if Heafner issues Class A common stock at a price per share that is less than its current fair market value. Fair market value is determined by reference to closing prices of the Class A common stock on a national exchange or, if the Class A common stock is not publicly traded, in good faith by Heafner's board of directors or a nationally recognized investment banking firm, if requested by the holders of 33% of the Class A common stock on a fully-diluted basis. Heafner has no right to call for the redemption of the Warrants. Heafner and the 1818 Fund are also parties to a note and warrant purchase agreement and a registration rights agreement, each dated as of May 7, 1997, which contain provisions restricting the transferability of the Warrants, including a right of first offer in favor of Heafner, and grant registration rights with respect to shares of Class A common stock issuable upon exercise of the Warrants. 51 54 PREFERRED STOCK In connection with entering into the Kelly-Springfield Supply Agreement, Kelly-Springfield purchased from Heafner 7,000 newly issued shares of Heafner's Series A Cumulative Redeemable Preferred Stock, par value $.01 (the "Series A preferred stock"), and 4,500 newly issued shares of Heafner's Series B Cumulative Redeemable Preferred Stock, par value $.01 (the "Series B preferred stock"), for an aggregate purchase price of $11.5 million. Kelly-Springfield is the sole holder of each series of preferred stock. Each series of the preferred stock has a stated value and liquidation preference equal to $1,000 per share, except the liquidation preference of the Series B preferred stock is reduced from time to time based upon purchases by Heafner of certain types of tires from Kelly-Springfield. Kelly-Springfield is entitled to receive monthly dividends on the liquidation preference of the Series A preferred stock at a rate of 4% per year, which may be increased if Heafner's annual tire purchases from Kelly- Springfield fall below certain levels. Heafner is not required to pay dividends on the Series B preferred stock unless its annual tire purchases from Kelly-Springfield fall below certain levels. Subject to the limitations summarized below, beginning in December 2002 and ending in June 2007, Heafner is required to redeem 700 shares of Series A preferred stock each year on a semi-annual basis at 100% of the liquidation preference of such shares plus all accrued and unpaid dividends. Subject to the same limitations, Heafner is required to redeem all of the outstanding shares of Series B preferred stock in June 2007 at the same redemption price. Unless restricted by the limitations summarized below, Heafner is also required to redeem all the preferred stock if the Kelly-Springfield Supply Agreement is terminated or, at the request of Kelly-Springfield, if a change of control of Heafner occurs and Kelly-Springfield requests a termination of the Supply Agreement. Each series of preferred stock also is redeemable at any time at Heafner's option. So long as any amounts are outstanding under Heafner's existing credit facility or subordinated notes, or any amending or replacing agreement for that debt, or any commitments to lend exist under such debt, Heafner is prohibited from: - making any payment in respect of any mandatory or optional redemption of either series of preferred stock, or - declaring, making or paying any dividend or distribution in respect of either series of preferred stock, if any default or event of default under any such debt, or any event which upon notice or lapse of time, or both, would constitute an event of default, has occurred or is continuing or would result from that event and has not been cured or waived in accordance with such debt. SHARE REPURCHASES In February 1997, Heafner offered to repurchase shares of common stock from members of the Gaither family not actively involved in the operation of Heafner at a price equal to $.8058 per share, or $2,644 per share without giving effect to a 3,281-for-1 stock split that occurred on May 7, 1997. Pursuant to the offer, Heafner repurchased, and subsequently canceled and retired, 3,359,744 shares, 1,024 shares without giving effect to the stock split, of common stock from the Gaither family members for an aggregate purchase price of $2.7 million. In 1986, Heafner repurchased from Carolyn H. Williams, and subsequently canceled and retired, all of her shares of Heafner's common stock in exchange for a promissory note in the original principal amount of $1.4 million. Carolyn H. Williams is the sister of Ann H. Gaither, the former Chairperson of Heafner. The note is payable through January 2006 in annual installments of $124,600, including interest at a rate per year of 7.5%. The outstanding principal amount of the note at December 31, 1999 was approximately $660,000. CHARLESBANK PURCHASE On May 24, 1999, Charlesbank purchased all of the shares of Class A common stock of Heafner held by the members of the Gaither family and substantially all of the shares of Class B common stock of Heafner held by the former stockholders of ITCO for an aggregate purchase price of approximately $44.7 million. Following the Charlesbank purchase, Charlesbank became beneficial owner of a majority of the combined 52 55 voting power of Heafner on a fully-diluted basis. Heafner agreed to pay certain fees and expenses of the selling stockholders and Charlesbank in connection with the Charlesbank purchase which totaled approximately $0.9 million. In addition, Heafner incurred additional fees and expenses in connection with the Charlesbank purchase and related transactions, including payments in connection with the consent solicitation, which, together with the stockholder and Charlesbank expenses, totaled approximately $1.7 million. Effective upon the closing of the Charlesbank purchase, the following designees of Charlesbank were appointed to Heafner's board of directors: Kim G. Davis, Tim R. Palmer, Mark A. Rosen and Jon M. Biotti. In addition, Ann H. Gaither, V. Edward Easterling, Jr., Victoria B. Jackson and William M. Wilcox, Jr. resigned from Heafner's board of directors. Simultaneously, William H. Gaither resigned as President and Chief Executive Officer of Heafner and became its Chairman, and Donald C. Roof, formerly Senior Vice President, Chief Financial Officer and Treasurer, became President and Chief Executive Officer and was appointed to Heafner's board of directors. In connection with the Charlesbank purchase, Heafner also revised its existing employee stock option and bonus plans, and issued and sold 150,000 newly-issued restricted shares of Class A common stock to certain of its executives. MONITORING FEE Heafner expects to pay an advisory and monitoring fee not to exceed $200,000 annually to Charlesbank Capital Partners, LLC. None has been paid through December 31, 1999. RELATED PARTY LEASES AND LOANS Heafner leases corporate office space in Lincolnton, North Carolina from Ann H. Gaither, the former Chairperson of Heafner, and her sister, Carolyn H. Williams, for an annual rent equal to approximately $87,000. Heafner leases its Winston-Salem, North Carolina distribution center from Ann H. Gaither for an annual rent equal to approximately $55,000. In connection with this property in Winston-Salem, Ann H. Gaither has a note owing to Heafner with a principal balance of approximately $135,000 payable in monthly installments of principal and interest of $3,500 accruing interest at 9% per year with the final due date of October 1, 2003. Heafner leases the data processing and human resources buildings adjacent to its corporate headquarters in Lincolnton, North Carolina from Evangeline Heafner, Ann H. Gaither's mother, for an annual rent equal to approximately $37,000. The expiration dates of these leases are September 30, 2003, August 1, 2003 and December 30, 2002, respectively. Heafner believes that these leases are on terms no less favorable to it than could have been obtained from an independent third party. 53 56 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents filed as part of this Report: 1. The following items, including consolidated financial statements of the Company, are set forth at Item 8 of this report: - Report of Independent Public Accountants - Consolidated Balance Sheets as of December 31, 1999 and 1998 - Consolidated Statement of Operations for the years ended December 31, 1999, 1998, and 1997 - Consolidated Statement of Stockholders' Equity for the years ended December 31, 1999, 1998, and 1997 - Consolidated Statement of Cash Flows for the years ended December 31, 1999, 1998, and 1997 - Notes to Consolidated Financial Statements 2. Financial Statement Schedules Report of Independent Public Accountants (set forth on following page) SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
ADDITIONS ----------------------- CHARGED CHARGED BALANCE TO COSTS TO OTHER BALANCE JANUARY 1, AND EXPENSES ACCOUNTS DEDUCTIONS DECEMBER 31, ---------- ------------ -------- ---------- ------------ 1999 Allowance for doubtful accounts...... 2,220 3,184 280(1) (3,299)(4) 2,385 Restructuring reserve................ 1,187 -- -- (687) 500 1998 Allowance for doubtful accounts...... 400 1,627 1,701(2) (1,508)(4) 2,220 Restructuring reserve................ -- 1,409 -- (222) 1,187 1997 Allowance for doubtful accounts...... 200 479 175(3) (454)(4) 400 Restructuring reserve................ -- -- -- -- --
- --------------- (1) Includes amounts for California Tire as of the January 12, 1999 acquisition date. (2) Includes amounts for ITCO and CPW as of the May 20, 1998 acquisition date. (3) Includes amounts for Winston as of the May 7, 1997 acquisition date. (4) Accounts written off during the year, net of recoveries. Schedules not included herein are omitted because they are not applicable or the required information appears in the financial statements or notes thereto. 54 57 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Heafner Tire Group, Inc. We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements of Heafner Tire Group, Inc. included in this Form 10-K, and have issued our report thereon dated March 20, 2000. Our audits were made for the purpose of forming an opinion on those financial statements taken as whole. The schedule listed on Item 14 of this Form 10-K is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Charlotte, North Carolina March 20, 2000. 55 58 3. Exhibits: (a) Exhibits:
3.1 Certificate of Incorporation of Heafner Tire Group, Inc. (the "Company")P 3.2 By-laws of the Company* 3.3 Articles of Incorporation of Oliver & Winston, Inc.* (see amendment) 3.4 By-laws of Oliver & Winston, Inc.* 3.5 Articles of Incorporation of The Speed Merchant, Inc.* 3.6 By-laws of The Speed Merchant, Inc.* 3.7 Articles of Incorporation of Phoenix Racing, Inc.* 3.8 By-laws of Phoenix Racing, Inc.* 3.9 Articles of Incorporation of California Tire Company++ 3.10 By-laws of California Tire Company++ 3.11 Certificate of Amendment of Articles of Incorporation of Winston Tire CompanyP 4.1 Indenture, dated as of December 1, 1998, among the Company, First Union National Bank, as Trustee (the "Trustee"), and Oliver & Winston, Inc., ITCO Logistics Corporation, ITCO Holding Company, Inc., ITCO Tire Company, ITCO Tire Company of Georgia, The Speed Merchant, Inc., and Phoenix Racing, Inc. (the "Series D Indenture)+ 4.2 Form of Series C and Series D Note (attached as Exhibit A to the Series D Indenture)+ 4.3 Supplemental Indenture to the Series D Indenture, dated as of February 22, 1999, among the Company, the Trustee, Oliver & Winston, Inc., The Speed Merchant, Inc., Phoenix Racing, Inc. and California Tire Company++ 4.4 Indenture, dated as of May 15, 1998, among the Company, the Trustee, and Oliver & Winston, Inc., ITCO Logistics Corporation, ITCO Holding Company, Inc., ITCO Tire Company, ITCO Tire Company of Georgia, The Speed Merchant, Inc., and Phoenix Racing, Inc. (the "Series B Indenture")* 4.5 Form of Series B Global Note (attached as Exhibit A to the Series B Indenture)* 4.6 Supplemental Indenture to the Series B Indenture, dated as of February 22, 1999, among the Company, the Trustee, Oliver & Winston, Inc., The Speed Merchant, Inc., Phoenix Racing, Inc. and California Tire Company++ 4.7 Registration Rights Agreement, dated as of December 1, 1998, among the Company, its subsidiaries and BancBoston Robertson Stephens Inc. and Credit Suisse First Boston Corporation++ 4.8 Second Supplemental Indenture to the Series B Indenture, dated as of May 14, 1999, among the Company, the subsidiary guarantors party thereto and First Union National Bank, as Trustee# 4.9 Second Supplemental Indenture to the Series C Indenture, dated as of May 14, 1999, among the Company, the subsidiary guarantors party thereto and First Union National Bank, as Trustee# 5.1 Opinion of Howard, Smith & Levin LLP as to the Legality of the New Notes++ 10.1 Second Amended and Restated Loan and Security Agreement, dated as of March 6, 2000, among the Company, Winston Tire Company, The Speed Merchant, Inc. and California Tire Company as Borrowers, and Fleet Capital Corporation, as Administrative Agent (the "Administrative Agent"), Bank of America, N.A., as Syndication Agent (the "Syndication Agent"), FleetBoston Robertson Stephens Inc., as Arranger (the "Arranger") and the financial institutions party from time to time party thereto, as LendersP 10.2 Letter, dated March 6, 2000, from the Company to the Administrative AgentP 10.3 Amended and Restated Registration Rights Agreement, dated as of May 21, 1999, between and among the Company, The 1818 Mezzanine Fund, L.P., and Charlesbank Equity Fund IV, Limited Partnership#
56 59 10.4 Warrantholder Agreement, dated as of May 21, 1999, between the Company, The 1818 Mezzanine Fund, L.P. and Charlesbank Equity Fund IV, Limited Partnership# 10.5 Amended and Restated Warrant No. 2 exercisable for 1,034,000 shares of Class A Common Stock in the name of The 1818 Mezzanine Fund, L.P.# 10.6 Securities Purchase Agreement, dated as of May 7, 1997, between The J. H. Heafner Company, Inc. and The Kelly-Springfield Tire and Rubber Company* 10.7 Amendment to Securities Purchase Agreement, dated as of May 21, 1999, between and among the Company and The Kelly-Springfield Tire Company, a division of The Goodyear Tire and Rubber Company# 10.8 Termination and Release Agreement, dated as of May 22, 1999, among the Company and the Class B Stockholders party thereto# 10.9 Stock Purchase Agreement, dated as of March 11, 1998, among the Company, Arthur C. Soares and Ray C. Barney* 10.10 Escrow Agreement, dated as of May 20, 1998, among the Company, Arthur C. Barney, Ray C. Barney and First Union National Bank, as escrow agent (the "CPW Escrow Agreement")* 10.11 Letter of Credit, dated as of May 20, 1998, issued to Frist Union National Bank, as CPW Escrow Agent* 10.12 Stock Purchase Agreement, dated as of April 9, 1997, among the Company and the shareholders of Oliver & Winston, Inc.* 10.13 1998 Michelin North America, Inc. Distributor Agreement, dated January 1, 1998, by and between Michelin North America, Inc. and the Company** 10.14 Letter Agreements, dated as of November 24 and 25, 1998, respectively, by and between Michelin North America and the Company ++ 10.15 The J.H. Heafner Company Amended and Restated 1997 Stock Option Plan # 10.16 Heafner Tire Group 1999 Stock Option PlanP 10.17 Stock Option Agreement, dated as of May 24, 1999, between the Company and each of Donald C. Roof, J. Michael Gaither, Daniel K. Brown, Richard P. Johnson and P. Douglas Roberts# 10.18 Stock Option Agreement, dated as of August 16, 1999, between the Company and David H. TaylorP 10.19 Stock Option Agreement, dated as of December 10, 1999, between the Company and Ray C. BarneyP 10.20 The J.H. Heafner Company 1997 Restricted Stock Plan* 10.21 Securities Purchase and Stockholders Agreement, dated as of May 28, 1997, among the Company and various management stockholders* 10.22 Securities Purchase and Stockholders' Agreement, dated as of May 24, 1999, between the Company and each of Donald C. Roof, J. Michael Gaither, Daniel K. Brown, Richard P. Johnson, and P. Douglas Roberts# 10.23 Securities Purchase and Stockholders' Agreement, dated as of August 16, 1999, between the Company and David H. TaylorP 10.24 Employment and Severance Agreements between the Company and Thomas J. Bonburg** 10.25 Employment Agreement, dated as of May 20, 1998, between the Company and Arthur C. Soares* 10.26 Employment Agreement, dated as of May 20, 1998, between The Speed Merchant, Inc. and Ray C. Barney* 10.27 Letter Agreement, dated as of May 20, 1999, by and between the Company and William H. Gaither# 10.28 Executive Severance Agreements, dated as of May 24, 1999, between the Company and each of Donald C. Roof, J. Michael Gaither, Daniel K. Brown, Richard P. Johnson, P. Douglas Roberts and J. Lewis McKnight, Jr.#
57 60 10.29 Executive Severance Agreement, dated August 16, 1999, between the Company and DAVID H. TAYLORP 10.30 Executive Severance Agreement, dated November 1, 1999, between the Company and Ray C. BarneyP 10.31 Stock Purchase Agreement, dated as of April 21, 1999, among the Company, Charlesbank Equity Fund IV, Limited Partnership and the stockholders party thereto# 11.1 Statement re: Computation of Per Share EarningsP 12.1 Statement re: Computation of RatiosP 21.1 Chart of Subsidiaries of the CompanyP 25.1 Statement of Eligibility of Trustee on Form T-1 related to the Notes# 27.1 Financial Data SchedulesP 27.2 Financial Data SchedulesP 99.1 Form of Letter of Transmittal++ 99.2 Form of Notice of Guaranteed Delivery++ 99.3 Form of Exchange Agent Agreement#
- --------------- * Incorporated by reference to Heafner's Registration Statement on Form S-4 filed with the SEC on August 18, 1998. ** Incorporated by reference to Amendment No. 1 to Heafner's Registration Statement on Form S-4 filed with the SEC on October 2, 1998. *** Incorporated by reference to Amendment No. 2 to Heafner's Registration Statement on Form S-4 filed with the SEC on October 14, 1998. herewith. All other exhibits were filed with the Registration Statement dated August 18, 1998 or Amendment No. 1 to the Registration Statement dated October 2, 1998. + Incorporated by reference to Heafner's Form 8-K filed on December 15, 1998. ++ Incorporated by reference to Heafner's Form 8-K filed on December 15, 1998 +++ Incorporated by reference to Heafner's Form 10-Q filed on March 31, 1999. # Incorporated by reference to Heafner's Registration Statement Form S-4 filed with the SEC on June 9, 1999 P Filed herewith (b) Reports on Form 8-K No report on Form 8-K was filed during the quarter ended December 31, 1999. 58 61 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 30, 2000. HEAFNER TIRE GROUP, INC. By: /s/ DONALD C. ROOF ------------------------------------ Name: Donald C. Roof Title: President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated on March 30, 2000.
SIGNATURE TITLE DATE --------- ----- ---- /s/ DONALD C. ROOF Director, President and Chief March 30, 2000 - --------------------------------------------- Executive Officer Donald C. Roof /s/ DAVID H. TAYLOR Senior Vice President, Chief March 30, 2000 - --------------------------------------------- Financial Officer and Treasurer David H. Taylor /s/ J. LEWIS MCKNIGHT, JR. Chief Accounting Officer March 30, 2000 - --------------------------------------------- J. Lewis McKnight, Jr. /s/ WILLIAM H. GAITHER Chairman of the Board March 30, 2000 - --------------------------------------------- William H. Gaither /s/ JOSEPH P. DONLAN Director March 30, 2000 - --------------------------------------------- Joseph P. Donlan /s/ JON M. BIOTTI Director March 30, 2000 - --------------------------------------------- Jon M. Biotti /s/ KIM G. DAVIS Director March 30, 2000 - --------------------------------------------- Kim G. Davis /s/ TIM R. PALMER Director March 30, 2000 - --------------------------------------------- Tim R. Palmer /s/ MARK A. ROSEN Director March 30, 2000 - --------------------------------------------- Mark A. Rosen
59 EX-3.1 2 CERTIFICATE OF INCORPORATION OF HEAFNER TIRE GROUP 1 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF HEAFNER TIRE GROUP, INC. I, the undersigned, for the purposes of incorporating and organizing a corporation under the General Corporation Law of the State of Delaware (as the same may be amended, supplemented or repealed from time to time, the "Act"), do hereby certify as follows: ARTICLE 1 CORPORATE NAME. The name of the Corporation is Heafner Tire Group, Inc. ARTICLE 2 REGISTERED AGENT. The address, including street, number, city, and county, of the registered office of the Corporation in the State of Delaware is 1013 Centre Road in the City of Wilmington, County of New Castle, and the name of the registered agent of the Corporation in the State of Wilmington at such address is Corporation Service Company. ARTICLE 3 PURPOSE. The purpose of the Corporation is to conduct any lawful business, to promote any lawful purpose, and to engage in any lawful act or activity for which a corporation may be organized under the Act. ARTICLE 4 CAPITAL STOCK. Section 4.1. Shares Authorized. The total number of shares of capital stock which the Corporation shall have authority to issue is (i) 30,000,000 shares of Common Stock, par value of $.01 per share (the "Common Stock"), and (ii) 11,500 shares of Preferred Stock with a par value of $.01 per share (the "Preferred Stock"). Section 4.2. Common Stock. The Common Stock shall have such rights, powers and privileges as provided in these Articles, in any amendment to these Articles and under applicable law. Of the 30,000,000 shares of Common Stock authorized for issuance by the Corporation, 10,000,000 shall initially be designated Class A Common Stock (the "Class A Common Stock") 2 and 20,000,000 shall initially be designated Class B Common Stock (the "Class B Common Stock"). Section 4.3. Preferred Stock. The Preferred Stock shall have such voting powers, designations, preferences, such other relative, participating, optional and other special rights, and such qualifications, limitations and restrictions as provided in these Articles and in any amendment to these Articles. Of the 11,500 shares of Preferred Stock authorized for issuance by the Corporation, 7,000 shares shall initially be designated Series A Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock") and 4,500 shares shall initially be designated Series B Cumulative Redeemable Preferred Stock (the "Series B Preferred Stock" and, together with the Series A Preferred Stock, the "Kelly Preferred Stock"). The stated value of the Series A Preferred Stock (the "Series A Liquidation Preference") shall be $1,000.00 per share. The stated value of the Series B Preferred Stock (the "Series B Liquidation Preference") shall initially be $1,000.00 per share and shall be adjusted from time to time as provided in Section 6.3. Section 4.4. Rank of Capital Stock. With respect to dividend rights and other rights upon liquidation, dissolution or winding up of the Corporation, (i) the Series A Preferred Stock and the Series B Preferred Stock shall rank on a parity with each other and senior to the Common Stock and (ii) the Class A Common Stock and the Class B Common Stock shall rank on a parity with each other. Other classes or series of capital stock may, subject to the provisions of these Articles and applicable law, be authorized by the Board of Directors that rank (as to payment of dividends or distribution of assets upon liquidation, dissolution or winding up) senior to ("Senior Stock"), on a parity with ("Parity Stock") or junior to ("Junior Stock") other classes or series of capital stock. Section 4.5. No Preemptive Rights. No holder of shares of capital stock of the Corporation shall have preemptive rights to acquire unissued shares of capital stock of the Corporation under these Articles. ARTICLE 5 COMMON STOCK. Section 5.1. Voting Rights. (a) Each outstanding share of Class A Common Stock shall be entitled to vote on each matter on which the stockholders of the Corporation shall be entitled to vote, and each holder of Class A Common Stock shall be entitled to twenty votes for each share of such stock held by such holder. (b) Each outstanding share of Class B Common Stock shall be entitled to vote on each matter on which the stockholders of the Corporation shall be entitled to vote, and each holder of Class B Common Stock shall be entitled to one vote for each share of such stock held by such holder. c) Except as otherwise provided by the Act, the holders of Class A Common Stock and the holders of Class B Common Stock shall vote together as a single class on all matters on which the stockholders of the Corporation shall be entitled to vote. 2 3 Section 5.2. Dividends and Distributions. The holders of shares of Class A Common Stock and the holders of Class B Common Stock shall be entitled to receive dividends or other distributions, which must be identical for each of the Class A Common Stock and the Class B Common Stock, out of the assets of the Corporation legally available therefor when, as and if declared by the Board of Directors. Section 5.3. Liquidation, Dissolution or Winding Up. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, holders of Common Stock shall be entitled to share ratably in the net assets of the Corporation remaining after payment or provision for payment of the debts and liabilities of the Corporation and all amounts payable to holders of Senior Stock. Section 5.4. Automatic Conversion of Class B Stock. Each share of Class B Common Stock shall automatically convert into one share of Class A Common Stock without the requirement of any further action on the part of the Corporation or its stockholders upon the earliest to occur of (i) an initial public offering of the Class A Common Stock in connection with a registration of the Class A Common Stock under the Securities Act of 1933, as amended, (ii) the occurrence of any condition or event which results in the acceleration of the maturity of the indebtedness evidenced by the Debt Documents (as defined below in Section 6.6), and (iii) an order for relief under Title 11 of the United States Code is entered against the Company. Section 5.6. Other Rights. Except as otherwise required by the Act or as otherwise provided in these Articles, each share of Class A Common Stock and each share of Class B Common Stock shall have identical powers, rights and privileges. ARTICLE 6 KELLY PREFERRED STOCK. The Kelly Preferred Stock shall have the following voting powers, preferences and other rights, qualifications, limitations and restrictions: Section 6.1. Series A Dividends and Distributions. (a) Holders of shares of Series A Preferred Stock, in preference to the holders of shares of Common Stock and any shares of other capital stock of the Corporation other than shares of Parity Stock or Senior Stock with respect to the Series A Preferred Stock, shall be entitled to receive, when, as and if declared by the Board of Directors, out of the assets of the Corporation legally available therefor, cumulative cash dividends (the "4% Series A Dividends") on the Series A Liquidation Preference of such shares at an annual rate of 4.0%; provided that, if as of December 31, 1997 (i) the Corporation and its subsidiaries are not ordering all of their respective requirements of "Winston" brand tires from The Kelly-Springfield Tire Company, a division of The Goodyear Tire and Rubber Company (together with its affiliates, "Kelly-Springfield"), and (ii) Kelly-Springfield is otherwise ready, willing and able to supply the Corporation and its subsidiaries with such "Winston" brand tires in accordance with the terms set forth in the Supply Agreement (as defined below in Section 6.5(c)), then, beginning immediately thereafter and continuing until such time as the earlier of (1) the Corporation and its 3 4 affiliates are ordering all of such "Winston" brand tires from Kelly-Springfield and (2) the Kelly Preferred Stock has been redeemed in full, the annual rate of the 4% Series A Dividends shall be at the greater of (x) 4% and (y) 120% of the Prime Rate (as defined below in Section 6.1(b)) (the "Adjusted Series A Dividend Rate"). The 4% Series A Dividends shall be calculated on the basis of a 360-day year consisting of twelve 30-day months, and shall accrue and be payable, in immediately available funds, due on the last Business Day of each calendar month (each a "4% Dividend Monthly Payment Date"). Payment of 4% Series A Dividends on shares of Series A Preferred Stock shall commence on the first 4% Dividend Monthly Payment Date following the date of original issue of such shares (the "Series A Issue Date"). The first payment of 4% Series A Dividends on such shares shall be in an amount equal to the product of (i) the quotient obtained by dividing (1) the product of the Series A Liquidation Preference of such shares and 4.0% by (2) 12 and (ii) the quotient obtained by dividing (x) the number of days from and including the Series A Issue Date up to and excluding the initial 4% Dividend Monthly Payment Date by (y) 30. If holders of shares of Series A Preferred Stock are entitled to receive 4% Series A Dividends on a date other than a 4% Dividend Monthly Payment Date (a "4% Dividend Special Payment Date"), such payment shall be in an amount equal to the product of (i) the quotient obtained by dividing (1) the product of the Series A Liquidation Preference of such shares and 4.0% or the Adjusted Series A Dividend Rate, as applicable, by (2) 12 and (ii) the quotient obtained by dividing (x) the number of days from and including the date of such immediately preceding 4% Dividend Monthly Payment Date up to and excluding the 4% Dividend Special Payment Date by (y) 30. All other payments of 4% Series A Dividends shall accrue from and including the immediately preceding 4% Dividend Monthly Payment Date or 4% Dividend Special Payment Date, as applicable, to but excluding the following 4% Dividend Monthly Payment Date or 4% Dividend Special Payment Date, as applicable. "Business Day" means any day other than a Saturday, Sunday or other day on which banks in Atlanta, Georgia are authorized to close. (b) In addition to the 4% Series A Dividends, holders of Series A Preferred Stock, in preference to the holders of shares of Common Stock and any shares of other capital stock of the Corporation other than shares of Parity Stock or Senior Stock with respect to the Series A Preferred Stock, shall be entitled to receive, when, as and if declared by the Board of Directors, out of the assets of the Corporation legally available therefor, cumulative cash dividends (the "Series A Additional Dividends" and, together with the 4% Series A Dividends, the "Series A Dividends") in an amount equal to the product of the Series A Liquidation Preference of such shares and the Applicable Rate (as defined below). The Series A Additional Dividends shall accrue and be payable in immediately available funds on the last Business Day of January of each year (each an "Additional Dividend Payment Date"), with the first such Series A Additional Dividend to accrue and be payable on the last Business Day of January 1999; provided that, if in any calendar year immediately preceding an Additional Dividend Payment Date a 4% Series A Dividend accrues and becomes payable at the Adjusted Series A Dividend Rate, the amount of the Series A Additional Dividend that accrues and becomes payable on such Additional Dividend Payment Date shall be reduced by an amount equal to the excess, if any, of (x) the aggregate amount of the 4% Series A Dividends that accrued and became payable in such calendar year over (y) the aggregate amount of such Series A Dividends that would have accrued and become payable in such calendar year if the Adjusted Series A Dividend Rate had not applied in such calendar year. The "Applicable Rate" for determining the amount of the Series A Additional Dividend for each Additional Dividend 4 5 Payment Date shall be the percentage rate set forth opposite such date (and corresponding to the applicable number of Units Purchased (as defined below)) set forth below: - -------------------------------------------------------------------------------- Additional Dividend Payment Date Units Purchased Applicable Rate - -------------------------------------------------------------------------------- January 1999 Less than 1,000,000 Standard Rate 1,000,000-1,099,999 4.0 1,100,000-1,199,999 3.0 1,200,000-1,299,999 2.0 1,300,000-1,399,999 1.0 1,400,000 or more 0.0 - -------------------------------------------------------------------------------- January 2000 Less than 1,100,000 Standard Rate 1,100,000-1,199,999 4.0 1,200,000-1,299,999 3.0 1,300,000-1,399,999 2.0 1,400,000-1,499,999 1.0 1,500,000 or more 0.0 - -------------------------------------------------------------------------------- January 2001 Less than 1,144,000 Standard Rate 1,144,001-1,247,999 4.0 1,248,000-1,351,999 3.0 1,352,000-1,455,999 2.0 1,456,000-1,559,999 1.0 1,560,000 or more 0.0 - -------------------------------------------------------------------------------- January 2002 Less than 1,189,760 Standard Rate 1,189,761-1,297,919 4.0 1,297,920-1,406,079 3.0 1,406,080-1,514,239 2.0 1,514,240-1,622,399 1.0 1,622,400 or more 0.0 5 6 - -------------------------------------------------------------------------------- Additional Dividend Payment Date Units Purchased Applicable Rate - -------------------------------------------------------------------------------- January 2003 Less than 1,237,350 Standard Rate 1,237,351-1,349,836 4.0 1,349,837-1,462,322 3.0 1,462,323-1,574,809 2.0 1,574,810-1,687,295 1.0 1,687,296 or more 0.0 - -------------------------------------------------------------------------------- January 2004 Less than 1,286,844 Standard Rate 1,286,845-1,403,829 4.0 1,403,830-1,520,815 3.0 1,520,816-1,637,801 2.0 1,637,802-1,754,787 1.0 1,754,788 or more 0.0 - -------------------------------------------------------------------------------- January 2005 Less than 1,338,318 Standard Rate 1,338,319-1,459,982 4.0 1,459,983-1,581,648 3.0 1,581,649-1,703,313 2.0 1,703,314-1,824,978 1.0 1,824,979 or more 0.0 - -------------------------------------------------------------------------------- January 2006 Less than 1,391,851 Standard Rate 1,391,852-1,518,381 4.0 1,518,382-1,644,914 3.0 1,644,915-1,771,446 2.0 1,771,447-1,897,977 1.0 1,897,978 or more 0.0 - -------------------------------------------------------------------------------- January 2007 Less than 1,447,525 Standard Rate 1,447,526-1,579,116 4.0 1,579,117-1,710,711 3.0 1,710,712-1,842,304 2.0 1,842,305-1,973,896 1.0 1,973,897 or more 0.0 - -------------------------------------------------------------------------------- 6 7 Additional Dividend Payment Date Units Purchased Applicable Rate - -------------------------------------------------------------------------------- January 2008 Less than 1,505,426 Standard Rate 1,505,427-1,642,281 4.0 1,642,282-1,779,139 3.0 1,779,140-1,915,996 2.0 1,915,997-2,052,852 1.0 2,052,853 or more 0.0 - -------------------------------------------------------------------------------- provided that, in no event shall the Applicable Rate be higher than the Standard Rate. "Standard Rate" means the excess, if any, of (x) the Prime Rate over (y) 4%. "Prime Rate" means the rate of interest publicly announced from time to time by BankBoston, N.A., at its head office at 100 Federal Street, Boston, Massachusetts as its "base" rate as in effect on the Business Day immediately preceding the applicable dividend payment date. "Units Purchased" means, for any Additional Dividend Payment Date, the net number of tires (other than "Monarch" brand tires) purchased by the Corporation and its subsidiaries from Kelly-Springfield during the calendar year immediately preceding such Additional Dividend Payment Date, which number of tires shall not include an amount equal to the sum of (x) 250,000 and (y) an amount equal to the number of premium tires purchased by the Corporation and its affiliates from Kelly-Springfield in 1996. (c) If, as of the close of business on any 4% Dividend Monthly Payment Date, there is a 4% Series A Dividend Arrearage (as hereinafter defined), an additional dividend (the "4% Series A Makewhole Dividend") shall accrue on each share of the Series A Preferred Stock for the period from and including such 4% Dividend Monthly Payment Date to the earlier of (x) the date on which such 4% Series A Dividend Arrearage is paid in full and (y) the next succeeding 4% Dividend Monthly Payment Date, in an amount equal to the product of (i) the Prime Rate (calculated for such period in accordance with Section 6.1(a)) and (ii) the amount of such 4% Series A Dividend Arrearage as of such 4% Dividend Monthly Payment Date. "4% Series A Dividend Arrearage" means, with respect to each share of Series A Preferred Stock, as of any 4% Dividend Monthly Payment Date, the excess, if any, of (i) all 4% Series A Dividends accrued to (but excluding) such 4% Dividend Monthly Payment Date on such share over (ii) all 4% Series A Dividends actually paid with respect to such share on or before the close of business on such 4% Dividend Monthly Payment Date. (d) If, as of the close of business on any Additional Dividend Payment Date, there is a Series A Additional Dividend Arrearage (as hereinafter defined), an additional dividend (the "Additional Series A Makewhole Dividend") shall accrue on each share of the Series A Preferred Stock for the period from and including such Additional Dividend Payment Date to the earlier of (x) the date on which such Additional Series A Dividend Arrearage is paid in full and (y) the next succeeding Additional Dividend Payment Date, in an amount equal to the product of (i) the 7 8 Prime Rate and (ii) the amount of such Additional Series A Dividend Arrearage as of such Additional Dividend Payment Date. "Additional Series A Dividend Arrearage" means, with respect to each share of Series A Preferred Stock, as of any Additional Dividend Payment Date, the excess, if any, of (i) all Series A Additional Dividends accrued to (but excluding) such Additional Dividend Payment Date on such share over (ii) all Series A Additional Dividends actually paid with respect to such share on or before the close of business on such Additional Dividend Payment Date. (e) The 4% Series A Dividends shall accrue, and shall be cumulative from the Series A Issue Date of the underlying shares, whether or not declared by the Board of Directors. The Series A Additional Dividends shall accrue, and shall be cumulative from the first day on which such dividends are due, whether or not declared by the Board of Directors. The 4% Series A Makewhole Dividend and the Additional Series A Makewhole Dividend, if any, shall accrue, and shall be cumulative from the date on which a 4% Series A Dividend Arrearage or Series A Additional Dividend Arrearage arises, whether or not declared by the Board of Directors. If the Corporation makes a dividend payment on shares of Series A Preferred Stock in an amount less than the total amount of accrued and payable dividends on the underlying shares at such time, then the dividends paid shall be allocated ratably on a share-by-share basis among all shares of Series A Preferred Stock then outstanding. The Board of Directors may fix a record date that is no more than sixty days and no less than ten days prior to any date fixed for payment of a dividend declared on shares of Series A Preferred Stock to determine the holders of shares of Series A Preferred Stock entitled to receive such payment. Accumulated but unpaid dividends for any past dividend periods or payment dates may be declared and paid at any time (without reference to any regular payment date) to holders of record on a record date fixed by the Board of Directors that is no more than sixty days and no less than ten days preceding the date fixed for payment of such dividends. (f) The holders of shares of Series A Preferred Stock shall not be entitled to receive, and the Corporation shall not declare or pay thereon, any dividends or other distributions except as provided herein. No interest or sum of money in lieu of interest shall be payable in respect of any dividend payment or payments on the shares of Series A Preferred Stock which may be in arrears. Section 6.2. Series B Dividends and Distributions. (a) If during any calendar year beginning with 1998 the Corporation and its affiliates do not purchase from Kelly-Springfield tires with an aggregate purchase price in an amount equal to or greater than (i) for 1998, $60,000,000, (ii) for 1999, $80,000,000, and (iii) for each calendar year thereafter, an amount averaging at least 104% of the aggregate purchase price for tires purchased from Kelly-Springfield in the prior calendar year, holders of shares of Series B Preferred Stock, in preference to the holders of shares of Common Stock and any shares of other capital stock of the Corporation other than shares of Parity Stock or Senior Stock with respect to the Series B Preferred Stock, shall be entitled to receive, when, as and if declared by the Board of Directors, out the assets of the Corporation legally available therefor, cumulative cash dividends (the "Series B Dividends") on the Series B Liquidation Preference of such shares at the Prime Rate. The Series B Dividends shall accrue and be payable in immediately available funds on the last 8 9 Business Day of the month of January following each such calendar year during which the applicable aggregate purchase price threshold is not equaled or exceeded (each a "Series B Dividend Payment Date"). (b) If, as of the close of business on any Series B Dividend Payment Date, there is a Series B Dividend Arrearage (as hereinafter defined), an additional dividend (the "Series B Makewhole Dividend") shall accrue on each share of the Series B Preferred Stock for the period from and including such Series B Dividend Payment Date to the earlier of (x) the date on which such Series B Dividend Arrearage is paid in full and (y) the next succeeding Series B Dividend Payment Date, in an amount equal to the product of (i) the Prime Rate and (ii) the amount of such Series B Dividend Arrearage as of such Series B Dividend Payment Date. "Series B Dividend Arrearage" means, with respect to each share of Series B Preferred Stock, as of any Series B Dividend Payment Date, the excess, if any, of (i) all Series B Dividends accrued to (but excluding) such Series B Dividend Payment Date on such share over (ii) all Series B Dividends actually paid with respect to such share on or before the close of business on such Series B Dividend Payment Date. (c) Series B Dividends shall accrue, and shall be cumulative from the first day on which such dividends are due, whether or not declared by the Board of Directors. Series B Makewhole Dividends, if any, shall accrue, and shall be cumulative from the date on which a Series B Dividend Arrearage arises. If the Corporation makes a dividend payment on the shares of Series B Preferred Stock in an amount less than the total amount of accrued and payable dividends on the underlying shares at such time, then the dividends paid shall be allocated ratably on a share-by-share basis among all shares of Series B Preferred Stock then outstanding. The Board of Directors may fix a record date that is no more than sixty days and no less than ten days prior to any date fixed for payment of a dividend declared on shares of Series B Preferred Stock to determine the holders of shares of Series B Preferred Stock entitled to receive such payment. Accumulated but unpaid dividends for any past dividend periods or payment dates may be declared and paid at any time (without reference to any regular payment date) to holders of record on a record date fixed by the Board of Directors that is no more than sixty days and no less than ten days preceding the date fixed for payment of such dividends. (d) The holders of shares of Series B Preferred Stock shall not be entitled to receive, and the Corporation shall not declare or pay, any dividends or other distributions except as provided herein. No interest or sum of money in lieu of interest shall be payable in respect of any dividend payment or payments on the shares of Series B Preferred Stock which may be in arrears. Section 6.3. Adjustment of Series B Liquidation Preference. After the date of original issue of the shares of Series B Preferred Stock (the "Series B Issue Date"), the Series B Liquidation Preference for the outstanding shares of Series B Preferred Stock on any date (a "Series B Valuation Date") shall be an amount per share equal to the excess, if any, of (i) $1,000 over (ii) the quotient obtained by dividing (x) the aggregate Tire Purchase Credit (as defined below) as of such Series B Valuation Date by (y) the total number of shares of Series B Preferred Stock outstanding as of such Series B Valuation Date. The "Tire Purchase Credit" as of any Series B Valuation Date shall be an amount equal to (x) $1.00 per unit of "Broad Line" tires and 9 10 (y) $2.00 per unit of "HV&Z Performance" tires, in each case purchased by the Corporation and its affiliates from and including the Series B Issue Date through such Series B Valuation Date; provided that, for purposes of calculating the amount of the Tire Purchase Credit, purchases of "Value Line" and "OPP" tires shall not be counted. Section 6.4. Voting Rights. (a) Ownership of shares of Kelly Preferred Stock shall entitle the holders to no voting rights except as provided in this Section 6.4 and under applicable law. (b) So long as any shares of either Series A Preferred Stock or Series B Preferred Stock shall be outstanding, the Corporation shall not, without the affirmative vote or written consent of the holders of a majority of the aggregate number of shares of Series A Preferred Stock or Series B Preferred Stock then outstanding, as applicable, each considered as a separate series, (i) alter or change the powers, preferences or rights given to the Series A Preferred Stock or Series B Preferred Stock, as applicable, by these Articles or (ii) amend these Articles to increase the authorized amount of Series A Preferred Stock or Series B Preferred Stock or to authorize or create any Senior Stock or Parity Stock with respect to the Series A Preferred Stock or Series B Preferred Stock. The amendment of these Articles to authorize or create, or to increase the authorized amount of, any Junior Stock shall not be deemed to alter or change the powers, preferences or rights given to the Series A Preferred Stock or the Series B Preferred Stock by these Articles. Notwithstanding the foregoing provisions, the affirmative vote or consent of the holders of the Series A Preferred Stock or the Series B Preferred Stock, as applicable, shall not be required for any alteration or change on which the holders would otherwise be entitled to vote if, at or prior to the time that any such alteration or change takes effect, due provision is made for the redemption of all such shares of Series A Preferred Stock or Series B Preferred Stock at the time outstanding. (c) So long as Kelly-Springfield holds (of record and beneficially) all of the outstanding shares of Kelly Preferred Stock, if on any date (1) any condition or event shall occur which results in the acceleration of the maturity of the indebtedness evidenced by the Debt Documents or (2) without the requisite vote or consent of the holders of Series A Preferred Stock or Series B Preferred Stock, as applicable, the Corporation adversely alters or changes the powers, preferences or rights given to such series by these Articles, then the number of directors constituting the Board of Directors shall, without further action, be increased by the Specified Number (as defined below) and the holders of shares of Kelly Preferred Stock shall have, in addition to the other voting rights set forth in these Articles, the exclusive right, voting separately as a single class, to elect such Specified Number of directors of the Corporation to fill such newly created directorships, by written consent as provided herein, or at a special meeting of such holders called as provided herein. Any such additional directors shall continue as directors (subject to reelection or removal as provided in Section 6.4(d)(ii)) and the holders of Kelly Preferred Stock shall have such additional voting rights until such time as (A) Kelly-Springfield no longer holds (of record and beneficially) all of the outstanding shares of Kelly Preferred Stock, (B) in the case of any event described in clause (1) above, such acceleration of the indebtedness evidenced by the Debt Documents shall have been rescinded or such indebtedness 10 11 shall have been repaid in full, (C) in the case of clause (2) above, such adverse alteration or change of the powers, preferences or rights given to the Series A Preferred Stock or the Series B Preferred Stock, as applicable, shall have been rescinded or (D) all of the outstanding shares of Kelly Preferred Stock shall have been redeemed pursuant to Section 6.5, whichever is earlier, at which time such additional directors shall cease to be directors and such additional voting rights of the holders of Kelly Preferred Stock shall terminate subject to revesting in the event of each and every subsequent event of the character indicated above. "Specified Number" means a number of directors equal to the number required so that the holders of Kelly Preferred Stock will have the right to elect, voting separately as a single class, a majority of the Board of Directors at any time. (d) (i) The right of holders of shares of Kelly Preferred Stock to take any action as provided in Section 6.4(c) may be exercised at any annual meeting of stockholders or at a special meeting of holders of shares of Kelly Preferred Stock held for such purpose as hereinafter provided or at any adjournment thereof, or by the written consent, delivered to the Secretary of the Corporation, of the holders of the minimum number of shares required to take such action, which shall be a majority of the outstanding shares of Kelly Preferred Stock unless otherwise required by law. So long as such right to vote continues (and unless such right has been exercised by written consent of the minimum number of shares required to take such action), the President of the Company may call, and upon the written request of holders of record of at least 10% of the outstanding shares of Kelly Preferred Stock, addressed to the Secretary of the Company at the principal office of the Company, shall call, a special meeting of the holders of shares entitled to vote as provided herein. Such meeting shall be held within 30 days after delivery of such request to the Secretary, at the place and upon the notice provided by law and in the by-laws of the Company for the holding of meetings of stockholders. (ii) At each meeting of stockholders at which the holders of shares of Kelly Preferred Stock shall have the right, voting separately as a single class, to elect the directors of the Corporation as provided in Section 6.4(c), the presence in person or by proxy of the holders of record of a majority of the total number of shares of Kelly Preferred Stock then outstanding and entitled to vote on the matter shall be necessary and sufficient to constitute a quorum. At any such meeting or at any adjournment thereof: (A) the absence of a quorum of the holders of shares of Kelly Preferred Stock shall not prevent the election of directors other than those to be elected by the holders of shares of Kelly Preferred Stock, and the absence of a quorum of the holders of shares of any other class or series of capital stock shall not prevent the election of directors to be elected by the holders of shares of Kelly Preferred Stock; and (B) in the absence of a quorum of the holders of shares of Kelly Preferred Stock, a majority of the holders of such shares present in person or by proxy shall have the power to adjourn the meeting as to the actions to be taken by the holders 11 12 of shares of Kelly Preferred Stock from time to time and place to place without notice other than announcement at the meeting until a quorum shall be present. For taking of any action as provided in Section 6.4(c) by the holders of shares of Kelly Preferred Stock, each such holder shall have one vote for each share of such stock standing in his name on the transfer books of the Corporation as of any record date fixed for such purpose or, if no such date be fixed, at the close of business on the Business Day next preceding the day on which notice is given, or if notice is waived, at the close of business on the Business Day next preceding the day on which the meeting is held or, if action is taken by written consent, at the close of business on the Business Day next preceding the day on which such consent is entered into; provided that shares of Kelly Preferred Stock owned by the Corporation or any Affiliate of the Corporation shall not be deemed to be outstanding for purposes of taking any action as provided in Section 6.4(c). Each director elected by the holders of shares of Kelly Preferred Stock as provided in Section 6.4(c) shall, unless his or her term shall expire earlier in accordance with the provisions hereof, hold office until the annual meeting of stockholders next succeeding his or her election or until his or her successor, if any, is elected and qualified. If any director so elected by the holders of Kelly Preferred Stock shall cease to serve as a director before his or her term shall expire (except by reason of the termination of the voting rights accorded to the holders of Kelly Preferred Stock with respect to the Specified Number of directors in accordance with Section 6.4(c)), the holders of the Kelly Preferred Stock then outstanding and entitled to vote for such director may, by written consent as provided herein, or at a special meeting of such holders called as provided herein, elect a successor to hold office for the unexpired term of the director whose place shall be vacant. Any director elected by the holders of shares of Kelly Preferred Stock voting separately as a single class may be removed from office with or without cause by the vote or written consent of the holders of at least a majority of the then outstanding shares of Kelly Preferred Stock, at the time of removal. Section 6.5. Redemption. (a) Subject to the restrictions contained in Section 6.6, beginning on the last Business Day of December 2002, and on the last Business Day of each June and December thereafter ending on the last Business Day of June 2007 (each a "Series A Fixed Redemption Date"), the Corporation shall redeem, out of the assets of the Corporation legally available therefor, a number of outstanding shares of Series A Preferred Stock equal to the lesser of (x) 700 and (y) the total number of shares of Series A Preferred Stock outstanding on such Series A Fixed Redemption Date at a price per share equal to the sum of (1) 100% of the Series A Liquidation Preference and (2) an amount per share equal to all accrued and unpaid Series A Dividends, 4% Series A Makewhole Dividends and Additional Series A Makewhole Dividends on such shares, whether or not declared or payable, to such Series A Fixed Redemption Date, in immediately available funds. If less than all of the outstanding shares of Series A Preferred Stock are to be 12 13 redeemed pursuant to this Section 6.5(a), shares shall be redeemed from all holders of outstanding Series A Preferred Stock on the date the redemption notice specified in Section 6.5(g) is mailed, pro rata in proportion (to the extent practicable) to the number of shares of Series A Preferred Stock held by each such holder. No fractions of shares shall be redeemed pursuant to this Section 6.5(a). (b) Subject to the restrictions contained in Section 6.6, on the last business day of June 2007 (the "Series B Fixed Redemption Date"), the Corporation shall redeem, out of the assets of the Corporation legally available therefor, all of the outstanding shares of Series B Preferred Stock at a price per share equal to the sum of (1) 100% of the Series B Liquidation Preference and (2) an amount per share equal to all accrued and unpaid Series B Dividends and Series B Makewhole Dividends on such shares, whether or not declared or payable, to the Series B Fixed Redemption Date, in immediately available funds. (c) Subject to the restrictions contained in Section 6.6, no later than 30 Business Days after the termination of the Supply Agreement (the "Supply Agreement") to be entered into by and between the Corporation and Kelly-Springfield in connection with Kelly-Springfield's purchase of the Kelly Preferred Stock (the "Kelly Mandatory Redemption Date"), the Corporation shall redeem, out of the assets of the Corporation legally available therefor, all of the shares of Kelly Preferred Stock outstanding on the Kelly Mandatory Redemption Date at a price per share equal to the sum of (1) the product of (x) 100% of the Series A Liquidation Preference or the Series B Liquidation Preference, as applicable, and (y) the Applicable Premium then in effect as provided in paragraph (f) below and (2) an amount per share equal to all accrued and unpaid Series A Dividends, 4% Series A Makewhole Dividends and Additional Series A Makewhole Dividends or Series B Dividends and Series B Makewhole Dividends, as applicable, whether or not declared or payable, to the Kelly Mandatory Redemption Date, in immediately available funds. (d) Subject to the restrictions contained in Section 6.6, if, at any time after the Series A Issue Date a Change of Control (as defined below) occurs, the Corporation shall, within 10 Business Days after such occurrence, send notice of such occurrence to the holders of Kelly Preferred Stock. If, within 10 Business Days of such notice, (i) the holders of all (but not less than all) of the outstanding shares of Kelly Preferred Stock send notice to the Corporation specifying that such holders thereby request that the Corporation redeem all of the outstanding shares of Kelly Preferred Stock held by each such holder and (ii) Kelly-Springfield agrees in writing to the termination of the Supply Agreement, the Corporation shall redeem, out of the assets of the Corporation legally available therefor, all such shares within 30 Business Days of the Corporation's receipt of all such requests (the "Change of Control Redemption Date") at a price per share equal to the sum of (1) the product of (x) 100% of the Series A Liquidation Preference or the Series B Liquidation Preference, as applicable, and (y) the Applicable Premium then in effect as provided in paragraph (f) below and (2) an amount per share equal to all accrued and unpaid Series A Dividends, 4% Series A Makewhole Dividends and Additional Series A Makewhole Dividends or Series B Dividends and Series B Makewhole Dividends, as applicable, whether or not declared or payable, to the Change of Control Redemption Date, in immediately available funds. 13 14 "Change of Control" means such time as (i) any person or "group" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act") other than the Principal Shareholders (as defined below), Family Members (as defined below) or Kelly-Springfield is or becomes the beneficial owner, directly or indirectly, of outstanding shares of capital stock of the Corporation, entitling such person or persons to exercise 50% or more of the total votes entitled to be cast at a regular or special meeting, or by action by written consent, of stockholders of he Corporation (the term "beneficial owner" shall be determined in accordance with Rule 13d-3, promulgated by the Securities and Exchange Commission under the Exchange Act), (ii) a majority of the Board of Directors shall consist of persons other than Continuing Directors (the term "Continuing Director" shall mean any member of the Board of Directors on the Series A Issue Date, any member of the Board of Directors elected by Kelly-Springfield pursuant to Section 6.4(c) of these Articles and any other member of the Board of Directors who shall be recommended or elected to succeed or become a Continuing Director by a majority of Continuing Directors who are then members of the Board of Directors), (iii) the stockholders of the Corporation shall have approved a recapitalization, reorganization, merger, consolidation or similar transaction, in each case, with respect to which all or substantially all the persons who were the respective beneficial owners of the outstanding shares of capital stock of the Corporation immediately prior to such recapitalization, reorganization, merger, consolidation or similar transaction will beneficially own, directly or indirectly, less than 50% of the combined voting power of the then outstanding shares of capital stock of the Corporation resulting from such recapitalization, reorganization, merger consolidation or similar transaction; or (iv) the stockholders of the Corporation shall have approved the sale or other disposition of all or substantially all the assets of the Corporation in one transaction or in a series of related transactions to a person not owning or controlling, or any entity not owned or controlled by the holders of, directly or indirectly, 50% or more of the combined voting power of the outstanding shares of capital stock of the Corporation immediately prior to such disposition. "Family Member" means (i) a member of a Principal Shareholder's family, which shall include her or his ancestors, spouse, siblings, descendants or spouses (or surviving spouse) of descendants, or (ii) a trust, corporation, partnership or other entity, all of the beneficial interests in which shall be held by a Principal Shareholder or one or more persons described in clause (I); provided, that during the period any such trust, corporation, partnership or other entity holds any right, title or interest in any Common Stock, no Person other than such Principal Shareholder or one or more Family Members of such Principal Shareholder of the type listed in clause (i) may be or become beneficiaries, stockholders or limited or general partners or owners thereof. "Principal Shareholders" means Ann Heafner Gaither, William H. Gaither, Susan Gaither Jones and Thomas R. Jones. (e) Subject to the restrictions contained in Section 6.6, at any time after the Series A Issue Date, the Corporation may, in its sole discretion, redeem all (but not less than all) of the outstanding shares of Kelly Preferred Stock, out of the assets of the Corporation legally available therefor, at a price per share equal to the sum of (1) the product of (x) 100% of the Series A Liquidation Preference or the Series B Liquidation Preference, as applicable, and (y) the Applicable Premium then in effect as provided in paragraph (f) below and (2) an amount per share equal to all accrued and unpaid Series A Dividends, 4% Series A Makewhole Dividends 14 15 and Additional Series A Makewhole Dividends or Series B Dividends and Series B Makewhole Dividends, as applicable, whether or not declared or payable, to the Optional Redemption Date (as defined below), in immediately available funds. "Optional Redemption Date" means, with respect to a redemption pursuant to this Section 6.5(e), the date specified for such redemption in the notice to the holders of the Kelly Preferred Stock required under Section 6.5(g). (f) The "Applicable Premium" for each of the following periods shall be the number set forth opposite such period below: - ------------------------------------------------------------------------------ Period Applicable Premium - ------------------------------------------------------------------------------ Series A Issue Date through first anniversary 1.22 - ------------------------------------------------------------------------------ After first anniversary through second anniversary 1.20 - ------------------------------------------------------------------------------ After second anniversary through third anniversary 1.18 - ------------------------------------------------------------------------------ After third anniversary through fourth anniversary 1.15 - ------------------------------------------------------------------------------ After fourth anniversary through fifth anniversary 1.10 - ------------------------------------------------------------------------------ After fifth anniversary 1.00 - ------------------------------------------------------------------------------ (g) Notice of any redemption of shares of Kelly Preferred Stock pursuant to this Section 6.5 shall be mailed at least 10, but not more than 30, days prior to the date fixed for redemption to each holder of shares of Kelly Preferred Stock to be redeemed, at such holder's address as it appears on the transfer books of the Corporation. Such notice shall include instructions for the surrender of the Kelly Preferred Stock to be redeemed and the receipt of payment therefor. In order to facilitate the redemption of shares of Kelly Preferred Stock pursuant to this Section 6.5, the Board of Directors may fix a record date for the determination of shares of Kelly Preferred Stock to be redeemed, or may cause the transfer books of the Corporation for the Kelly Preferred Stock to be closed, not more than 30 days or less than 10 days prior to the date fixed for such redemption. (h) Notice of redemption having been given as aforesaid, upon the date fixed for redemption in respect of shares of Kelly Preferred Stock to be redeemed pursuant to this Section 6.5, notwithstanding that any certificates for such shares shall not have been surrendered for cancellation, from and after the date of redemption designated in the notice of redemption, (i) the shares of Kelly Preferred Stock represented thereby shall no longer be deemed outstanding, (ii) the rights to receive dividends thereon shall cease to accrue, and (iii) all rights of the holders of shares of Kelly Preferred Stock to be redeemed shall cease and terminate, excepting only the right to receive the applicable redemption price. 15 16 Section 6.6. Limitations on Mandatory Redemption and Dividends. Notwithstanding anything to the contrary in these Articles, so long as any amounts are outstanding under any Debt Documents (as defined below) or any commitments to lend under the Debt Documents have not been terminated, the Corporation shall not make payment in respect of any redemption permitted or otherwise required by Section 6.5, or declare, make or pay any dividend or distribution in respect of any shares of Kelly Preferred Stock if any Event of Default (as defined in the Debt Documents) or default under any of the Debt Documents or any event which, upon notice or lapse of time, or both, would constitute an Event of Default has occurred and is continuing or would result therefrom and has not been cured or waived in writing by the requisite vote of the holders of the indebtedness represented by the Debt Documents. "Debt Documents" means the Loan and Security Agreement, dated as of the Series A Issue Date between the Corporation, Oliver & Winston, Inc., the financial institutions party thereto and BankBoston, N.A., as agent, and the Senior Subordinated Note and Warrant Purchase Agreement, dated the Series A Issue Date, by and among the Corporation and The 1818 Mezzanine Fund, L.P., and the notes, mortgages, security documents, guaranties and other agreements entered into in connection therewith (each as amended, modified, supplemented and/or restated from time to time in accordance with its terms, including any replacement agreement therefor and any refinancing of the debt incurred thereunder, which refinancing may result in a greater principal amount outstanding in connection therewith). Section 6.7. Reacquired Shares. Any shares of Kelly Preferred Stock exchanged, redeemed, purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares of Kelly Preferred Stock shall upon their cancellation become authorized but unissued shares of preferred stock, par value $.01 per share, of the Corporation and, upon the filing of an appropriate charter amendment with the Secretary of State of the State of Delaware, may be reissued as part of another series of preferred stock, par value $.01 per share, of the Corporation subject to the conditions or restrictions on issuance set forth herein, but in any event may not be reissued as shares of Kelly Preferred Stock or other Parity Stock unless all of the shares of Kelly Preferred Stock shall have already been redeemed. Section 6.8. Liquidation, Dissolution or Winding Up. (a) If the Corporation shall commence a voluntary case under the United States bankruptcy laws or any applicable bankruptcy, insolvency or similar law of any other country, or consent to the entry of an order for relief in an involuntary case under any such law or to the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due, or if a decree or order for relief in respect of the Corporation shall be entered by a court having jurisdiction in the premises in an involuntary case under the United States bankruptcy laws or any applicable bankruptcy, insolvency or similar law of any other country, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and on account of any such event the Corporation shall liquidate, dissolve or wind up, or if the Corporation shall otherwise liquidate, dissolve or wind up, no distribution shall be made (i) to the holders of shares 16 17 of Junior Stock with respect to the Kelly Preferred Stock unless, prior thereto, the holders of shares of Kelly Preferred Stock shall have received an amount equal to the Series A Liquidation Preference or the Series B Liquidation Preference, as applicable, plus all accrued and unpaid dividends, whether or not declared or currently payable, to the date of distribution, with respect to each outstanding share, or (ii) to the holders of shares of Parity Stock with respect to the Kelly Preferred Stock, except distributions made ratably on the Kelly Preferred Stock and all other Parity Stock in proportion to the total amounts to which the holders of all shares of Kelly Preferred Stock and other Parity Stock are entitled upon such liquidation, dissolution or winding up. (b) Neither the consolidation or merger of the Corporation with or into any other person or entity nor the sale, lease, exchange (for cash, shares of stock, securities or other consideration) or other distribution to another person or entity of all or substantially all the assets, property or business of the Corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation for purposes of this Section 6.8. Section 6.9. Exercise of Rights. (a) The rights of holders of shares of Kelly Preferred Stock to take any action as provided in Article 6 hereof may be exercised at any annual meeting of stockholders or by the written consent, delivered to the Secretary of the Corporation, of the holders of the minimum number of shares required to take such action, which shall be a majority of the outstanding shares of Series A Preferred Stock or Series B Preferred Stock, as applicable, unless otherwise required by law. (b) For taking of any action as provided in this Article 6 by the holders of shares of Kelly Preferred Stock, each such holder shall have one vote for each share of such stock standing in its name on the transfer books of the Corporation as of any record date fixed for such purpose or, if no such date be fixed, at the close of business on the Business Day next preceding the day on which notice is given, or if notice is waived, at the close of business on the Business Day next preceding the day on which the meeting is held. ARTICLE 7 CORPORATE EXISTENCE. The Corporation is to have perpetual existence. ARTICLE 8 CORPORATE GOVERNANCE. For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation, and regulation of the powers of the Corporation and of its directors and of its stockholders or any class thereof, as the case may be, it is further provided: Section 8.1. Management. The management of the business and the conduct of the affairs of the Corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed by, or in the manner provided in, the By- 17 18 laws. The election of directors need not be by written ballot except and to the extent provided in the By-laws of the Corporation. Section 8.2. Amendment of Articles. From time to time any of the provisions of these Articles may be amended, altered or repealed, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws, and all rights at any time conferred upon the stockholders of the Corporation by these Articles are granted subject to the provisions of this Section 8.2. Section 8.3. Amendment of By-laws. The Board of Directors shall, subject to Section 109 of the Act, have the power to adopt, amend, or repeal the By-laws of the Corporation. Section 8.4. Indemnification of Directors. To the fullest extent permitted by the Act, no director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. No amendment, modification or repeal of this Section 8.4 shall adversely affect any right or protection of a director that exists at the time of such amendment, modification or repeal. Section 8.5. Indemnification of Authorized Persons. The Corporation shall, to the fullest extent permitted by the Act, indemnify any and all persons whom it shall have power to indemnify thereunder from and against any and all of the expenses, liabilities, or other matters referred to in or covered by the Act and may advance funds to such persons in respect of such expenses, liabilities or other matters. The indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any By-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent, and shall inure to the benefit of the heirs, executors, and administrators of such a person. The name and the mailing address of the incorporator are: Edgar B. Fisher, III NationsBank Corporate Center 100 North Tryon Street, Floor 47 Charlotte, North Carolina 28202-4003 I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the purpose of forming a corporation pursuant to the General Corporation Law of the State Delaware, do make this certificate, hereby declaring and certifying that this is my act and deed and the facts herein stated are true, and accordingly have hereunto set my hand this 28th day of December, 1998. /s/ Edgar B. Fisher, III ----------------------------------- Edgar B. Fisher, III, Incorporator 18 EX-3.11 3 CERTIFICATE OF AMENDMENT / WINSTON TIRE GROUP 1 EXHIBIT 3.11 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION The undersigned hereby execute and certify this Certificate of Amendment for the purpose of amending its Articles of Incorporation under the California Corporations Code: 1. They are the president and the secretary, respectively of Oliver & Winston, Inc., a California corporation. 2. Article I of the Articles of Incorporation of this corporation is amended to read as follows: The name of this corporation is Winston Tire Company 3. The foregoing amendment of Articles of Incorporation has been duly approved by the board of directors. 4. The foregoing amendment of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902, California Corporations Code. The total number of outstanding shares of the corporation is 181,942. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50%. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. DATE: 10/7/99 /s/ Donald C. Roof ------------------------ Donald C. Roof, President /s/ J. Michael Gaither ------------------------ J. Michael Gaither, Secretary EX-10.1 4 SECOND AMENDED LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.1 [EXECUTION COPY] ================================================================================ $200,000,000 SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT Dated as of March 6, 2000 Between HEAFNER TIRE GROUP, INC. WINSTON TIRE COMPANY THE SPEED MERCHANT, INC. CALIFORNIA TIRE COMPANY (the Borrowers) and THE FINANCIAL INSTITUTIONS PARTY HERETO FROM TIME TO TIME (the Lenders) and FLEET CAPITAL CORPORATION (the Administrative Agent) and BANK OF AMERICA, N.A. (the Syndication Agent) and FIRST UNION NATIONAL BANK (the Documentation Agent) FLEETBOSTON ROBERTSON STEPHENS INC. (the Arranger) ================================================================================ 2 TABLE OF CONTENTS
Page ARTICLE 1 DEFINITIONS...........................................................1 SECTION 1.1 Definitions.....................................................1 SECTION 1.2 General Interpretive Rules.....................................30 SECTION 1.3 Exhibits and Schedules.........................................32 ARTICLE 2 COMMITMENTS..........................................................33 SECTION 2.1 Loans..........................................................33 SECTION 2.2 Manner of Borrowing............................................33 SECTION 2.3 Repayment......................................................35 SECTION 2.4 Notes..........................................................36 SECTION 2.5 Extension of Commitments.......................................36 ARTICLE 2A SWINGLINE FACILITY...................................................37 SECTION 2A.1 Swingline Loans................................................37 SECTION 2A.2 Making Swingline Loans.........................................37 SECTION 2A.3 Repayment of Swingline Loans...................................37 SECTION 2A.4 Prepayment.....................................................37 SECTION 2A.5 Swingline Note.................................................38 SECTION 2A.6 Extension of Commitments.......................................38 ARTICLE 3 LETTER OF CREDIT FACILITY............................................39 SECTION 3.1 Agreement to Issue.............................................39 SECTION 3.2 Amounts........................................................39 SECTION 3.3 Conditions.....................................................39 SECTION 3.4 Issuance of Letter of Credit Guarantees........................40 SECTION 3.5 Duties of FCC..................................................40 SECTION 3.6 Payment of Reimbursement Obligations...........................41 SECTION 3.7 Participations.................................................41 SECTION 3.8 Indemnification, Exoneration...................................43 SECTION 3.9 Supporting Letter of Credit; Cash Collateral Account...........44 ARTICLE 4 GENERAL LOAN PROVISIONS..............................................46 SECTION 4.1 Interest.......................................................46 SECTION 4.2 Certain Fees...................................................47 SECTION 4.3 Manner of Payment..............................................49 SECTION 4.4 General........................................................49 SECTION 4.5 Loan Accounts; Statements of Account...........................49 SECTION 4.6 Reduction of Commitments; Termination of Agreement.............50 SECTION 4.7 Making of Loans................................................51 SECTION 4.8 Settlement Among Lenders.......................................52 SECTION 4.9 Mandatory Prepayments..........................................55 SECTION 4.10 Payments Not at End of Interest Period; Failure to Borrow......55 SECTION 4.11 Notice of Conversion or Continuation...........................56 SECTION 4.12 Conversion or Continuation.....................................56
2 3 SECTION 4.13 Duration of Interest Periods; Maximum Number of Eurodollar Rate Loans; Minimum Increments................................56 SECTION 4.14 Changed Circumstances..........................................57 SECTION 4.15 Cash Collateral Account; Investment Accounts...................58 SECTION 4.16 Allocation of Payments from Borrowers..........................59 SECTION 4.17 Borrowers' Representative......................................60 SECTION 4.18 Joint and Several Liability....................................60 SECTION 4.19 Obligations Absolute...........................................61 SECTION 4.20 Waiver of Suretyship Defenses..................................61 ARTICLE 5 CONDITIONS PRECEDENT.................................................63 SECTION 5.1 Conditions Precedent to Effectiveness of Agreement.............63 SECTION 5.2 All Loans; Letters of Credit...................................65 SECTION 5.3 Conditions as Covenants........................................66 ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF BORROWERS..........................67 SECTION 6.1 Representations and Warranties.................................67 SECTION 6.2 Survival of Representations and Warranties, Etc................74 ARTICLE 7 SECURITY INTEREST....................................................75 SECTION 7.1 Security Interest..............................................75 SECTION 7.2 Continued Priority of Security Interest........................76 ARTICLE 8 COLLATERAL COVENANTS.................................................78 SECTION 8.1 Collection of Receivables......................................78 SECTION 8.2 Verification and Notification..................................79 SECTION 8.3 Disputes, Returns and Adjustments..............................79 SECTION 8.4 Invoices.......................................................80 SECTION 8.5 Delivery of Instruments........................................80 SECTION 8.6 Sales of Inventory.............................................81 SECTION 8.7 Ownership and Defense of Title.................................81 SECTION 8.8 Insurance......................................................81 SECTION 8.9 Location of Offices and Collateral.............................82 SECTION 8.10 Records Relating to Collateral.................................82 SECTION 8.11 Inspection.....................................................83 SECTION 8.12 Information and Reports........................................83 SECTION 8.13 Power of Attorney..............................................84 SECTION 8.14 Assignment of Claims Act.......................................84 ARTICLE 9 AFFIRMATIVE COVENANTS................................................85 SECTION 9.1 Preservation of Corporate Existence and Similar Matters........85 SECTION 9.2 Compliance with Applicable Law.................................85 SECTION 9.3 Maintenance of Property........................................85 SECTION 9.4 Conduct of Business............................................85 SECTION 9.5 Insurance......................................................86 SECTION 9.6 Payment of Taxes and Claims....................................86 SECTION 9.7 Accounting Methods and Financial Records.......................86
3 4 SECTION 9.8 Use of Proceeds................................................86 SECTION 9.9 Hazardous Waste and Substances; Environmental Requirements.....87 SECTION 9.10 Additional Subsidiaries........................................87 SECTION 9.11 Compliance with Senior Note Indenture..........................87 SECTION 9.12 Agency Account Agreements......................................87 ARTICLE 10 INFORMATION..........................................................88 SECTION 10.1 Financial Statements...........................................88 SECTION 10.2 Accountants' Certificate.......................................89 SECTION 10.3 Officer's Certificate..........................................89 SECTION 10.4 Copies of Other Reports........................................89 SECTION 10.5 Notice of Litigation and Other Matters.........................90 SECTION 10.6 ERISA..........................................................90 ARTICLE 11 NEGATIVE COVENANTS...................................................92 SECTION 11.1 Financial Covenant.............................................92 SECTION 11.2 Debt...........................................................92 SECTION 11.3 Guarantees.....................................................93 SECTION 11.4 Acquisitions...................................................93 SECTION 11.5 Capital Expenditures...........................................95 SECTION 11.6 Restricted Distributions and Payments, Etc.....................95 SECTION 11.7 Merger, Consolidation and Sale of Assets.......................95 SECTION 11.8 Transactions with Affiliates...................................95 SECTION 11.9 Liens..........................................................95 SECTION 11.10 Sales and Leasebacks...........................................95 SECTION 11.11 Amendments of Other Agreements.................................95 SECTION 11.12 Commingling....................................................96 ARTICLE 12 DEFAULT..............................................................97 SECTION 12.1 Events of Default..............................................97 SECTION 12.2 Remedies......................................................100 SECTION 12.3 Application of Proceeds.......................................102 SECTION 12.4 Power of Attorney.............................................102 SECTION 12.5 Miscellaneous Provisions Concerning Remedies..................103 SECTION 12.6 Trademark License.............................................104 ARTICLE 13 ASSIGNMENTS.........................................................105 SECTION 13.1 Successors and Assigns; Participations........................105 SECTION 13.2 Representation of Lenders.....................................107 ARTICLE 14 AGENT...............................................................108 SECTION 14.1 Appointment of Agent..........................................108 SECTION 14.2 Delegation of Duties..........................................108 SECTION 14.3 Exculpatory Provisions........................................108 SECTION 14.4 Reliance by Agent.............................................109 SECTION 14.5 Notice of Default.............................................109 SECTION 14.6 Non-Reliance on Agent and Other Lenders.......................109
4 5 SECTION 14.7 Indemnification...............................................110 SECTION 14.8 Agent in Its Individual Capacity..............................111 SECTION 14.9 Successor Collateral Agent....................................112 SECTION 14.10 Notices from Agent to Lenders.................................113 SECTION 14.11 Declaring Events of Default...................................113 SECTION 14.12 Syndication Agent and Documentation Agent.....................113 ARTICLE 15 MISCELLANEOUS.......................................................114 SECTION 15.1 Notices.......................................................114 SECTION 15.2 Expenses......................................................115 SECTION 15.3 Stamp and Other Taxes.........................................116 SECTION 15.4 Setoff........................................................116 SECTION 15.5 Consent to Advertising and Publicity..........................117 SECTION 15.6 Reversal of Payments..........................................117 SECTION 15.7 Injunctive Relief.............................................117 SECTION 15.8 Accounting Matters............................................117 SECTION 15.9 Amendments....................................................118 SECTION 15.10 Assignment....................................................119 SECTION 15.11 Performance of Borrowers' Duties..............................119 SECTION 15.12 Indemnification...............................................120 SECTION 15.13 All Powers Coupled with Interest..............................120 SECTION 15.14 Survival......................................................120 SECTION 15.15 Titles and Captions...........................................121 SECTION 15.16 Severability of Provisions....................................121 SECTION 15.17 Governing Law.................................................121 SECTION 15.18 Counterparts..................................................122 SECTION 15.19 Reproduction of Documents.....................................122 SECTION 15.20 Term of Agreement.............................................122 SECTION 15.21 Increased Capital.............................................122 SECTION 15.22 Pro-Rata Participation........................................123 SECTION 15.23 Net Payments..................................................124 SECTION 15.24 Effect on Effectiveness of this Agreement.....................126
5 6 ANNEX A COMMITMENTS ANNEX B PRICING MATRIX EXHIBIT A-1 FORM OF SECOND AMENDED AND RESTATED PROMISSORY NOTE EXHIBIT A-2 FORM OF SWINGLINE NOTE EXHIBIT B FORM OF BORROWING BASE CERTIFICATE EXHIBIT C FORM OF ASSIGNMENT AND ACCEPTANCE EXHIBIT D FORM OF COMPLIANCE CERTIFICATE EXHIBIT E FORM OF SUBSIDIARY GUARANTY EXHIBIT F FORM OF SUBSIDIARY SECURITY AGREEMENT Schedule 1.1A Permitted Investments Schedule 1.1B Permitted Liens Schedule 1.1C Clearing Banks Schedule 6.1(a) Jurisdictions in Which Borrowers are Qualified as Foreign Corporations Schedule 6.1(b) Capitalization Schedule 6.1(c) Subsidiaries; Ownership of Stock Schedule 6.1(e) Compliance with Laws Schedule 6.1(f) Business of Borrowers Schedule 6.1(g) Governmental Approvals Schedule 6.1(h) Title to Properties Schedule 6.1(i) Liens Schedule 6.1(j) Indebtedness and Guarantees Schedule 6.1(k) Litigation Schedule 6.1(l) Tax Matters Schedule 6.1(m) Burdensome Provisions Schedule 6.1(n) Undisclosed Material Obligations Schedule 6.1(p) ERISA Schedule 6.1(t) Location of Offices and Receivables Schedule 6.1(u) Location of Inventory and Equipment Schedule 6.1(v) Corporate and Fictitious Names Schedule 6.1(y) Employee Relations Schedule 6.1(aa) Trade Names Schedule 6.1(bb) Bank Accounts Schedule 6.1(dd) Real Property Schedule 11.8 Affiliate Transactions 6 7 SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is made as of March 6, 2000 by and between HEAFNER TIRE GROUP, INC., WINSTON TIRE COMPANY, THE SPEED MERCHANT, INC., CALIFORNIA TIRE COMPANY, the financial institutions party to this Agreement from time to time as the Lenders, FIRST UNION NATIONAL BANK, as documentation agent, BANK OF AMERICA, N.A., as syndication agent, and FLEET CAPITAL CORPORATION, as administrative agent for the Lenders. PRELIMINARY STATEMENT Heafner Tire Group, Inc., Winston Tire Company, The Speed Merchant, Inc., and Fleet Capital Corporation and First Union National Bank and, by assignment from Fleet Capital Corporation and First Union National Bank (the "Existing Lenders"), Bank of America, N.A., Mellon Bank, N.A. and PNC Bank, National Association (the "New Lenders"), are parties to an Amended and Restated Loan and Security Agreement dated as of May 20, 1998 (as amended to date, the "Existing Loan Agreement"). At the request of Heafner Tire Group, Inc., the parties to the Existing Loan Agreement have agreed to increase the amount available to be borrowed on a revolving credit basis, add California Tire Company as a Borrower, modify certain covenants and make other changes to the Existing Loan Agreement, and for the convenience of the parties, to effect such increase, additions, modifications and other changes by amending and restating the Existing Loan Agreement in its entirety as hereinafter set forth, upon and subject to all of the terms, conditions and provisions hereof. This amendment and restatement is not intended to be, and shall not be deemed or construed as, a repayment or novation of the Debt outstanding under the Existing Loan Agreement. Accordingly, in consideration of the Existing Loan Agreement, the financial accommodations outstanding thereunder, the mutual promises hereinafter set forth and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.1 Definitions. For the purposes of this Agreement: "ACH Transfer" means and refers to the transfer of funds within or between financial institutions using electronic credits and debits in accordance with banking procedures promulgated by the National Automated Clearing House Association or any related regional association. "Account Debtor" means a Person who is obligated on a Receivable. 8 "Acquire" or "Acquisition", as applied to any Business Unit or Investment, means the acquisition of such Business Unit or Investment by purchase, exchange, issuance of stock or other securities, or by merger, reorganization or any other method. "Acquired Debt" means Debt of a Person that becomes a Consolidated Subsidiary after the Effective Date or is otherwise Acquired by a Loan Party after the Effective Date and Debt secured by property included in a Business Unit Acquired by a Loan Party after the Effective Date, which Debt was outstanding immediately prior to such Acquisition but was not incurred or created in contemplation of such Acquisition. "Additional Reserves" means reserves other than the Letter of Credit Reserve, the Rent Reserve or the Dilution Reserve against the Borrowing Base established by the Administrative Agent from time to time in the exercise of its reasonable credit judgment. "Administrative Agent" means FCC and any successor agent appointed pursuant to SECTION 14.9 hereof. "Administrative Agent's Office" means the office of the Administrative Agent specified in or determined in accordance with the provisions of SECTION 15.1. "Affiliate" (and with corollary meaning, "Affiliated") means, with respect to a Person, (a) any partner, officer, shareholder (if holding more than ten percent (10%) of the outstanding shares of capital stock of such Person), member, director, manager or managing agent of such Person, (b) any spouse, parents, siblings, children or grandchildren of such Person, and (c) any other Person (other than a Subsidiary) that, (i) directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such given Person, (ii) directly or indirectly beneficially owns or holds ten percent (10%) or more of any class of voting stock or partnership or other voting interest of such Person or any Subsidiary of such Person, or (iii) ten percent (10%) or more of the voting stock or partnership or other voting interest of which is directly or indirectly beneficially owned or held by such Person or a Subsidiary of such Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities or partnership or other voting interest, by contract or otherwise. So long as it is not a holder, beneficially or of record, of issued and outstanding shares of common stock of Heafner or otherwise in control of Heafner, The 1818 Mezzanine Fund, L.P. will not be deemed to be an Affiliate of Heafner by reason of its holding the Warrant. "Agency Account" means an account of a Loan Party maintained by it with a Clearing Bank pursuant to an Agency Account Agreement. "Agency Account Agreement" means an agreement among a Loan Party, the Administrative Agent and a Clearing Bank, in form and substance satisfactory to the Administrative Agent, concerning the collection and transfer of payments which represent the proceeds of Receivables or of any other Collateral. "Agreement" means and includes this Second Amended and Restated Loan and Security Agreement, including all Schedules, Exhibits and other attachments hereto, and all 2 9 amendments, modifications and supplements hereto and thereto and restatements hereof and thereof. "Agreement Date" means the date as of which this Agreement is dated. "Applicable Law" means all applicable provisions of constitutions, statutes, rules, regulations and orders of all governmental bodies and of all orders and decrees of all courts and arbitrators, including, without limitation, Environmental Laws. "Applicable Margin" means (a) as to Base Rate Revolving Credit Loans, 0.25%, and (b) as to Eurodollar Rate Revolving Credit Loans, 1.75%, subject to quarterly adjustment as follows: From and after the delivery of the consolidated quarterly financial statements of Heafner and its Consolidated Subsidiaries for the Fiscal Quarter ending on or about June 30, 2000 and each Fiscal Quarter ending thereafter and the related officer's certificate in accordance with the respective provisions of SECTIONS 10.1(B) and 10.3, the foregoing percentages will be adjusted, PROVIDED that no Default or Event of Default has occurred and is continuing, effective the first day of the calendar month that begins at least 10 days after delivery of such financial statements for such Fiscal Quarter or any succeeding Fiscal Quarter, to the percentages set forth in ANNEX B that correspond to the Interest Coverage Ratio reflected in such financial statements and the related certificate. "Assignment and Acceptance" means an assignment and acceptance in the form attached hereto as EXHIBIT C assigning all or a portion of a Lender's interests, rights and obligations under this Agreement pursuant to SECTION 13.1. "Attributable Debt" in respect of a sale leaseback transaction means, as at the date of determination, the present value (discounted at the interest rate borne by the Senior Notes, compounded annually) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such sale leaseback transaction (including any period for which such lease has been extended). "Bank" means Fleet National Bank, a national banking association. "BankBoston" means BankBoston, N.A., a national banking association. "Bank of America" means Bank of America, N.A., a national banking association. "Base Rate" means at any time a fluctuating interest rate per annum equal to the greater of (i) the rate of interest announced or quoted from time to time by Bank as its prime rate for commercial loans, which rate might not be the lowest rate charged by Bank, and, if such prime rate for commercial loans is discontinued by Bank as a standard, a comparable reference rate designated by Bank as a substitute therefor shall be the Base Rate, and (ii) the Federal Funds Rate plus 1/2 of 1% per annum. "Base Rate Loan" means each Borrowing of Loans bearing interest determined with reference to the Base Rate on the same day and a specified principal amount of such Loans outstanding and any Non-Ratable Loan. 3 10 "Base Rate Revolving Credit Loan" means each Base Rate Loan outstanding under the Revolving Credit Facility. "Benefit Plan" means an "employee pension benefit plan" as defined in Section 3(3) of ERISA (other than a Multiemployer Plan) in respect of which a Borrower or any Related Company is, or within the immediately preceding six years was, an "employer" as defined in Section 3(5) of ERISA, including such plans as may be established after the Agreement Date. "Borrower" means each of Heafner, Winston, CPW and Cal Tire. "Borrowing" means Loans of the same Type hereunder made (or continued or converted) by the Lenders Ratably on the same date, and, in the case of Eurodollar Rate Loans, for the same Interest Period. "Borrowing Base" means at any time an amount equal to the lesser of: (a) the aggregate Commitments, MINUS the sum of (i) the Letter of Credit Reserve, PLUS (ii) the Rent Reserve, PLUS (iii) any Additional Reserves, and (b) an amount equal to (i) 85% (or such lesser percentage as the Administrative Agent may in its reasonable credit judgment determine from time to time) of the face value of Eligible Receivables due and owing at such time, PLUS (ii) 65% as to Inventory consisting of tires and 50% as to all other Inventory (or in either case, such lesser percentage as the Administrative Agent may in its reasonable credit judgment determine from time to time) of the lesser of cost determined on a FIFO (or first-in-first-out) accounting basis and fair market value of applicable Eligible Inventory, at such time, MINUS (iii) the sum of (A) the Letter of Credit Reserve, PLUS (B) the Rent Reserve, PLUS (C) the Dilution Reserve, PLUS (D) any Additional Reserves. "Borrowing Base Certificate" means a certificate in the form attached hereto as EXHIBIT B or in such other form as the Borrowers and the Administrative Agent may agree. 4 11 "Business Day" means any day other than a Saturday, Sunday or other day on which banks in Atlanta, Georgia, Boston, Massachusetts or Hartford, Connecticut are authorized to close and, when used with respect to Eurodollar Rate Loans, means any such day on which dealings in Dollar deposits are carried on in the London interbank market. "Business Unit" means assets constituting a business, whether all of the assets of any Person or the assets of a division or operating unit of any Person. "CPW" means The Speed Merchant, Inc., a California corporation, doing business as "The Speed Merchant" and as "Competition Parts Warehouse" and a Wholly Owned Subsidiary of Heafner. "Cal Tire" means California Tire Company, a California corporation and a Wholly Owned Subsidiary of Heafner. "Capital Expenditures" means, with respect to any Person, all expenditures made and liabilities incurred for the acquisition of assets (other than Inventory or assets that constitute a Business Unit) which are not, in accordance with GAAP, treated as expense items for such Person in the year made or incurred or as a prepaid expense applicable to a future year or years. "Capitalized Lease" means a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. "Capitalized Lease Obligation" means Indebtedness represented by obligations under a Capitalized Lease, and the amount of such Indebtedness shall be the capitalized amount of such obligations determined in accordance with GAAP. "Cash Collateral" means collateral consisting of cash or Cash Equivalents on which the Administrative Agent, for the benefit of itself as Administrative Agent and the Lenders, has a first priority Lien. "Cash Collateral Account" means a special interest-bearing deposit account consisting of cash maintained by the Administrative Agent in the name of Heafner but under the sole dominion and control of the Administrative Agent, for its benefit and for the benefit of the Lenders, established pursuant to the provisions of SECTION 4.15(A) for purposes set forth therein. "Cash Equivalents" means (a) marketable direct obligations issued or unconditionally guaranteed by the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof; (b) commercial paper maturing no more than one year from the date issued and, at the time of acquisition thereof, rated at least A-1 by S&P or at least P-1 by Moody's; (c) certificates of deposit or bankers' acceptances issued in Dollar denominations and maturing within one year from the date of issuance thereof issued by any commercial bank organized under the laws of the United States of America or any state thereof 5 12 or the District of Columbia having combined capital and surplus of not less than $100,000,000 and, unless issued by a Lender, not subject to set-off or offset rights in favor of such bank arising from any banking relationship with such bank; (d) units or other interests in funds invested solely in instruments described in CLAUSES (A), (B) and (C); and (e) repurchase agreements in form and substance and for amounts satisfactory to the Administrative Agent. "Clearing Bank" means each bank listed on SCHEDULE 1.1C - CLEARING BANKS and any other banking institution with which an Agency Account has been established pursuant to an Agency Account Agreement. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Collateral" means and includes all of each Loan Party's right, title and interest in and to each of the following, wherever located and whether now or hereafter existing or now owned or hereafter acquired or arising: (a) (i) all rights to the payment of money or other forms of consideration of any kind (whether classified under the UCC as accounts, contract rights, chattel paper, general intangibles or otherwise) including, but not limited to, accounts receivable, insurance proceeds, letters of credit and the right to receive payment thereunder, chattel paper, any rights under contracts not yet earned by performance and not evidenced by an instrument or chattel paper, notes, drafts, instruments, documents, acceptances and all other debts, obligations and liabilities in whatever form from any Person, but excluding tax refunds and insurance proceeds not arising out of the Collateral, (ii) all guarantees, security and Liens securing payment thereof, (iii) all goods, whether now owned or hereafter acquired, and whether sold, delivered, undelivered, in transit or returned, which may be represented by, or the sale or lease of which may have given rise to, any such right to payment or other debt, obligation or liability, and (iv) all proceeds of any of the foregoing (the foregoing, collectively, "Receivables"), (b) (i) all inventory, (ii) all goods intended for sale or lease or for display or demonstration, (iii) all work in process, (iv) all raw materials and other materials and supplies of every nature and description used or which might be used in connection with the manufacture, packing, shipping, advertising, selling, leasing or furnishing of goods or services or otherwise used or consumed in the conduct of business, and (v) all documents of title, including bills of lading and warehouse receipts, and other documents evidencing and general intangibles relating to any of the foregoing (the foregoing, collectively, "Inventory"), (c) any demand, time, savings, passbook, money market or like depository account, and all certificates of deposit, maintained with a bank, savings and loan association, credit union or like organization (other than an account evidenced by a certificate of deposit that is an instrument under the UCC) to which proceeds of Collateral are deposited (the foregoing, collectively, "Deposit Accounts"), 6 13 (d) all certificated and uncertificated securities, all security entitlements, all securities accounts, all commodity contracts and all commodity accounts (EXCLUDING, HOWEVER, the equity securities of any Subsidiary), to the extent acquired directly with proceeds of Collateral (the foregoing, collectively, "Investment Property"), (e) (i) any investment account maintained by or on behalf of a Loan Party with the Administrative Agent or any Lender or any Affiliate of the Administrative Agent or any Lender, (ii) any agreement governing such account, (iii) all cash proceeds and Investment Property now or hereafter held by the Administrative Agent or any Lender or any Affiliate of the Administrative Agent or any Lender on behalf of a Loan Party in connection with such investment account and (iv) all documents evidencing and general intangibles related to the foregoing (the foregoing, collectively, "Investment Accounts"), (f) all cash or other property deposited with the Administrative Agent or any Lender or any Affiliate of the Administrative Agent or any Lender or which the Administrative Agent, for its benefit and for the benefit of the Lenders, or any Lender or such Affiliate is entitled to retain or otherwise possess as collateral pursuant to the provisions of this Agreement or any of the Loan Documents or any agreement relating to any Letter of Credit, including, without limitation, amounts on deposit in the Cash Collateral Account, (g) all goods and other property, whether or not delivered, (i) the sale or lease of which gives or purports to give rise to any Receivable, including, but not limited to, all merchandise returned or rejected by or repossessed from customers, or (ii) securing any Receivable, including, without limitation, all rights as an unpaid vendor or lienor (including, without limitation, stoppage in transit, replevin and reclamation) with respect to such goods and other properties, (h) all mortgages, deeds to secure debt and deeds of trust on real or personal property, guarantees, leases, security agreements and other agreements and property which secure or relate to any Receivable or other Collateral or are acquired for the purpose of securing and enforcing any item thereof, (i) all files, correspondence, computer programs, tapes, disks and related data processing software which contain information identifying or pertaining to any of the Collateral or any Account Debtor or showing the amounts thereof or payments thereon or otherwise necessary or helpful in the realization thereon or the collection thereof, and (j) any and all products and cash and non-cash proceeds of the foregoing (including, but not limited to, any claims to any items referred to in this definition and any claims against third parties for loss of, damage to or destruction of any or all of the Collateral or for proceeds payable under or unearned premiums with respect to policies of insurance) in whatever form, including, but not limited to, cash, negotiable instruments and other instruments for the payment of money, chattel paper, security agreements and other documents. "Collateral Availability" means at any time the excess, if any, of the amount determined pursuant to CLAUSE (B) of the definition "Borrowing Base" over the aggregate principal amount of Revolving Credit Loans and Swingline Loans outstanding at such time. 7 14 "Commitment" means, as to each Lender, the amount set forth opposite such Lender's name on ANNEX A hereto or, from and after the date hereof, as set forth in the Register, representing such Lender's obligation, upon and subject to the terms and conditions of this Agreement (including the applicable provisions of SECTION 13.1), to make its Proportionate Share of Loans (including to repay Swingline Loans) and to purchase participations in Letter of Credit Guarantees. "Commitment Percentage" means, as to any Lender at the time of determination, the percentage obtained by dividing such Lender's Commitment at such time by the aggregate amount of the Commitments at such time. "Consolidated Subsidiary" means each Subsidiary of Heafner the financial results of which, at the time in question, are consolidated with those of Heafner in accordance with GAAP. "Contaminant" means any waste, pollutant, hazardous substance, toxic substance, hazardous waste, special waste, petroleum or petroleum-derived substance or waste, or any constituent of any such substance or waste. "Controlled Disbursement Account" means one or more accounts maintained by and in the name of the Borrowers (or any of them) with a Disbursing Bank for the purposes of disbursing Loan proceeds and amounts deposited thereto. "Current Assets" means, with respect to any Person, the aggregate amount of assets of such Person which should properly be classified as current assets in accordance with GAAP, after deducting adequate reserves in each case where a reserve is appropriate in accordance with GAAP. "Current Liabilities" means, with respect to any Person, the aggregate amount of all Liabilities of such Person which should properly be classified as current liabilities in accordance with GAAP. "Debt" means (a) Indebtedness for money borrowed, (b) Indebtedness, whether or not in any such case the same was for money borrowed, (i) represented by notes payable, drafts accepted and reimbursement obligations under letters of credit, including Reimbursement Obligations, and similar instruments that represent extensions of credit, (ii) constituting obligations evidenced by bonds, debentures, notes or similar instruments, 8 15 (iii) any amounts required to be included in the Purchase Price of any Acquisition pursuant to SECTION 11.4 and not paid in cash at the closing of such Acquisition, (iv) upon which interest charges are customarily paid or that was issued or assumed as full or partial payment for property (other than trade credit that is incurred in the ordinary course of business), (c) Capitalized Lease Obligations, and (d) Indebtedness that is such by virtue of CLAUSE (C) of the definition thereof, but only to the extent that the obligations Guaranteed are Debt. The KS Preferred is not Debt for purposes of this Agreement or the other Loan Documents. "Default" means any of the events specified in SECTION 12.1 which with the passage of time or giving of notice or both would constitute an Event of Default. "Default Margin" means 2.0%. "Deposit Account" has the meaning set forth in the definition "Collateral." "Dilution Reserve" means an amount equal to the EXCESS of (i) non-cash reductions to the Loan Parties' Receivables (on a combined basis) during a 12-month period prior to the date of determination as established by the Loan Parties' records or by a field examination conducted by the Administrative Agent's, the Syndication Agent's or the Documentation Agent's employees or representatives, expressed as a percentage of the Loan Parties' Receivables (on a combined basis) outstanding during the same period OVER (ii) 5%, MULTIPLIED by an amount equal to Eligible Receivables as of the date of determination. "Disbursing Bank" means any commercial bank with which a Controlled Disbursement Account is maintained after the Effective Date. "Dollar" and "$" means freely transferable United States dollars. "Documentation Agent" means FUNB. "EBIT" for any specified accounting period means Net Income of Heafner and its Consolidated Subsidiaries on a consolidated basis for such period before provision for net interest expense and income taxes PLUS up to $3,500,000 in non-recurring charges related to what is commonly referred to by the Borrowers as the "Riggs Settlement" deducted in computing Net Income for such specified period. "EBITDA" for any specified accounting period means EBIT for such period PLUS depreciation and amortization expense deducted in computing EBIT. "ERISA" means the Employee Retirement Income Security Act of 1974, as in effect from time to time. 9 16 "ERISA Event" means (a) a "Reportable Event" as defined in Section 4043(c) of ERISA, but excluding any such event as to which the provision for 30 days' notice to the PBGC is waived under applicable regulations, (b) the filing of a notice of intent to terminate a Benefit Plan subject to Title IV of ERISA under a distress termination under Section 4041(c) of ERISA or the treatment of an amendment to such a Benefit Plan as a termination under Section 4041(c) of ERISA, (c) the institution of proceedings by the PBGC to terminate a Benefit Plan subject to Title IV of ERISA or the appointment of a trustee to administer any such Benefit Plan or an event or condition that might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Benefit Plan subject to Section 4042, (d) the imposition of any liability under Title IV of ERISA other than for PBGC premiums due but not yet payable, (e) the filing of an application for a minimum funding waiver under Section 412 of the Code, (f) a withdrawal by a Borrower or any Related Company from a Benefit Plan subject to Section 4063 of ERISA during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA), (g) a Benefit Plan intending to qualify under Section 401(a) of the Code losing such qualified status (other than because of a Remediable Defect), (h) the failure to make a material required contribution to a Benefit Plan, (i) a Borrower or any Related Company being in "default" (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multiemployer Plan because of its complete or partial withdrawal (as described in Section 4203 or 4205 of ERISA) from such Multiemployer or Plan, or (j) the occurrence of a material non-exempt prohibited transaction within the meaning of Section 4975 of the Code or Section 406 of ERISA with respect to any Benefit Plan that is not cured within 60 days after a Borrower has knowledge thereof. "Effective Date" means the later of: (a) the Agreement Date, and (b) the first date on which all of the conditions set forth in ARTICLE 5 shall have been fulfilled. "Effective Interest Rate" means each rate of interest per annum on Revolving Credit Loans and Swingline Loans in effect from time to time pursuant to the provisions of SECTIONS 4.1(A) and (C). "Eligible Assignee" means (i) a commercial bank organized under the laws of the United States, or any State thereof, having total assets in excess of $10,000,000,000; (ii) any commercial finance or asset based lending company organized under the laws of the United States, or any State thereof, that is an Affiliate of a commercial bank having total assets in excess of $10,000,000,000; and (iii) any Lender listed on the signature page of this Agreement; PROVIDED that the representation contained in SECTION 13.2 hereof shall be applicable with respect to any such Person. "Eligible Inventory" means items of Inventory of a Loan Party held for sale in the ordinary course of the business of such Loan Party (but not including packaging or shipping materials or maintenance supplies) that meet all of the following requirements: (a) such Inventory is owned by a Loan Party, is subject to the Security Interest, which is perfected as to such Inventory, and is not subject to a Vendor Lien or any other Lien whatsoever other than a 10 17 Permitted Lien (that is not a Vendor Lien); (b) such Inventory consists of raw materials or finished goods and does not consist of work-in-process, supplies or consigned goods; (c) such Inventory is in good condition and meets all standards applicable to such goods, their use or sale imposed by any governmental agency, or department or division thereof, having regulatory authority over such matters; (d) such Inventory is currently either usable or saleable, at prices approximating at least the cost thereof, in the normal course of the applicable Loan Party's business; (e) such Inventory is not obsolete or returned or repossessed or used goods taken in trade; (f) such Inventory is located within the United States at one of the Permitted Inventory Locations; (g) such Inventory is in the possession and control of a Loan Party and not any third party and if located in a warehouse or other facility leased by a Loan Party, the lessor has delivered to the Administrative Agent a waiver and consent in form and substance satisfactory to the Administrative Agent or such facility is reflected in the Rent Reserve; and (h) such Inventory is not determined by the Administrative Agent, in the exercise of its reasonable credit judgment, to be ineligible for any reason. "Eligible Receivable" means the unpaid portion of a Receivable payable in Dollars to a Loan Party net of any returns, discounts, credits, or other allowances or deductions agreed to by a Loan Party and net of any amounts owed by a Loan Party to the Account Debtor on such Receivable, which Receivable meets all of the following requirements: (a) such Receivable is owned by a Loan Party and represents a complete bona fide transaction which requires no further act under any circumstances on the part of any Loan Party to make such Receivable payable by the Account Debtor; (b) such Receivable is not past due more than 60 days after its due date, which due date shall not be later than 90 days after the invoice date; (c) such Receivable does not arise out of any transaction with any Subsidiary, Affiliate, creditor, lessor or supplier of a Loan Party; (d) such Receivable is not owing by an Account Debtor more than 15% of whose then-existing accounts owing to the Loan Parties do not meet the requirements set forth in CLAUSE (B) above; (e) if the Account Debtor with respect thereto is located outside of the United States of America, Canada or Puerto Rico, the goods which gave rise to such Receivable were shipped after receipt by the applicable Loan Party from the Account Debtor of an irrevocable letter of credit that has been confirmed by a financial institution acceptable to the Administrative Agent and is in form and substance acceptable to the Administrative Agent, payable in the full face amount of the face value of the Receivable in Dollars at a place of payment located within the United States and has been duly assigned to the Administrative Agent, except that up to $1,000,000 of such Receivables outstanding at any time that are otherwise Eligible Receivables, may be included in Eligible Receivables without such letter of credit support; (f) the Account Debtor with respect to such Receivable is not located in a state which imposes conditions on the enforceability of Receivables with which the applicable Loan Party has not complied; (g) such Receivable is not subject to the Assignment of Claims Act of 1940, as amended from time to time, or any applicable law now or hereafter existing similar in effect thereto, as determined in the sole discretion of the Administrative Agent, or to any provision prohibiting its assignment or requiring notice of or consent to such assignment; (h) the Loan Party that is the obligee thereof is not in breach of any express or implied representation or warranty with respect to the goods the sale of which gave rise to such Receivable; (i) the Account Debtor with respect to such Receivable is not insolvent or the subject of any bankruptcy or insolvency proceedings of any kind or of any other proceeding or action, threatened or pending, which might, in the Administrative Agent's judgment, have a materially adverse effect on such Account Debtor; (j) the goods the sale of which gave rise to such Receivable were shipped or 11 18 delivered to the Account Debtor on an absolute sale basis and not on a bill and hold sale basis, a consignment sale basis, a guaranteed sale basis, a sale or return basis or on the basis of any other similar understanding, and such goods have not been returned or rejected; (k) such Receivable is not owing by an Account Debtor or a group of affiliated Account Debtors whose then-existing accounts owing to the Loan Parties exceed in face amount 20% of the Loan Parties' total Eligible Receivables; (l) such Receivable is evidenced by an invoice or other documentation in form acceptable to the Administrative Agent containing only terms normally offered by the applicable Loan Party, and dated no later than the date of shipment; (m) such Receivable is a valid, legally enforceable obligation of the Account Debtor with respect thereto and is not subject to any present, or contingent (and no facts exist which are the basis for any future), offset, deduction or counterclaim, dispute or other defense on the part of such Account Debtor; (n) such Receivable is not evidenced by chattel paper or an instrument of any kind; (o) other than mechanical services performed by Winston or CPW, such Receivable does not arise from the performance of services, including services under or related to any warranty obligation of a Loan Party or out of service charges by a Loan Party or other fees for the time value of money; (p) such Receivable is subject to the Security Interest, which is perfected as to such Receivable, and is subject to no other Lien whatsoever other than a Permitted Lien and the goods giving rise to such Receivable were not, at the time of the sale thereof, subject to any Lien other than a Permitted Lien (that is not a Vendor Lien); and (q) such Receivable is not determined by the Administrative Agent, in the exercise of its reasonable credit judgment, to be ineligible for any reason. "Environmental Laws" means all federal, state, local and foreign laws now or hereafter in effect relating to pollution or protection of the environment, including laws relating to emissions, discharges, Releases or threatened Releases of pollutants, Contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment (including, without limitation, ambient air, surface water, ground water, or land), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, removal, transport, or handling of pollutants, Contaminants, chemicals, or industrial, toxic or hazardous substances or wastes, and any and all regulations, notices or demand letters issued, entered, promulgated or approved thereunder; such laws and regulations include but are not limited to the Resource Conservation and Recovery Act, 42 U.S.C. ss. 6901 et seq., as amended; the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. ss. 9601 et seq., as amended; the Toxic Substances Control Act, 15 U.S.C. ss. 2601 et seq., as amended; the Clean Air Act, 46 U.S.C. ss. 7401 et seq., as amended; and state and federal lien and environmental cleanup programs. "Environmental Lien" means a Lien in favor of any governmental entity for (a) any liability under Environmental Laws or (b) damages arising from, or costs incurred by such governmental entity in response to, a Release or threatened Release of Contaminant into the environment. "Eurodollar Rate" means, with respect to any Eurodollar Rate Loan for the Interest Period applicable thereto, a simple per annum interest rate determined pursuant to the following formula: 12 19 Eurodollar Rate = Interbank Offered Rate --------------------------------- 1 - Eurodollar Reserve Percentage The Eurodollar Rate shall be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Percentage. "Eurodollar Rate Loan" means any Loan (or Loans made (or converted or continued) by the Lenders Ratably on the same date for the same Interest Period), bearing interest determined with reference to the Eurodollar Rate. "Eurodollar Rate Revolving Credit Loan" means each Eurodollar Rate Loan outstanding under the Revolving Credit Facility. "Eurodollar Reserve Percentage" means that percentage (expressed as a decimal) which is in effect from time to time under Regulation D of the Board of Governors of the Federal Reserve System, as such regulation may be amended from time to time, or any successor regulation, as the maximum reserve requirement (including, without limitation, any basic, supplemental, emergency, special, or marginal reserves) applicable with respect to Eurocurrency liabilities as that term is defined in Regulation D (or against any other category of liabilities that includes deposits by reference to which the interest rate of Eurodollar Rate Loans is determined), whether or not any Lender has any Eurocurrency liabilities subject to such reserve requirement at that time. Eurodollar Rate Loans shall be deemed to constitute Eurocurrency liabilities and as such shall be deemed subject to reserve requirements without benefits of credits for proration, exceptions or offsets that may be available from time to time to any Lender. "Event of Default" means any of the events specified in SECTION 12.1, PROVIDED that any requirement for notice or lapse of time or any other condition has been satisfied. "Existing Loan Agreement" has the meaning specified in the Preliminary Statement. "Existing Lender" has the meaning specified in the Preliminary Statement. "FCC" means Fleet Capital Corporation, a Rhode Island corporation. "FUNB" means First Union National Bank, a national banking association. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve system arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by Bank from three federal funds brokers of recognized standing selected by Bank. "Financed Capex" means Capital Expenditures funded with the proceeds of Debt (excluding Loans) or represented by Capitalized Lease Obligations. 13 20 "Financial Officer" means the chief financial officer, Treasurer or Controller of Heafner. "Financing Statements" means any and all Uniform Commercial Code financing statements, in form and substance satisfactory to the Administrative Agent, executed and delivered by a Loan Party to the Administrative Agent or assigned to the Administrative Agent by BankBoston, naming the Administrative Agent, for the benefit of the Lenders, as secured party or assignee and the applicable Loan Party as debtor, in connection with this Agreement. "Fiscal Month" means each of the 12 consecutive four- or five-week periods beginning on the first day of the Fiscal Year, in the pattern 4,4,5 within a Fiscal Quarter (or 4,5,5 in the fourth Fiscal Quarter of any 53-week Fiscal Year). "Fiscal Quarter" means each of the four consecutive periods of 13 weeks (or 14 weeks in the fourth Fiscal Quarter of any 53-week Fiscal Year), beginning on the first day of the Fiscal Year. "Fiscal Year" means the period of 52 or 53 consecutive weeks beginning on the Sunday after the Saturday nearest December 31 in one calendar year and ending on the Saturday nearest December 31 of the following calendar year and when followed or preceded by the designation of a calendar year, means such period ending on the Saturday nearest December 31 of such designated calendar year. "Foreign Lender" means any Lender organized under the laws of a jurisdiction outside of the United States. "GAAP" means generally accepted accounting principles consistently applied and maintained throughout the period indicated and, when used with reference to a Borrower or any Subsidiary, consistent with the prior financial practice of Heafner, as reflected on the financial statements referred to in SECTION 6.1(N); PROVIDED, HOWEVER, that, in the event that changes shall be mandated by the Financial Accounting Standards Board or any similar accounting authority of comparable standing, or shall be recommended by Heafner's independent public accountants, such changes shall be included in GAAP as applicable to Heafner and its Consolidated Subsidiaries only from and after such date as the Borrowers, the Required Lenders and the Administrative Agent shall have amended this Agreement to the extent necessary to reflect any such changes in the financial covenants set forth in ARTICLE 11. "Governmental Approvals" means all authorizations, consents, approvals, licenses and exemptions of, registrations and filings with, and reports to, all governmental bodies, whether federal, state, local or foreign national or provincial and all agencies thereof. "Guaranty", "Guaranteed" or to "Guarantee" as applied to any obligation of another Person shall mean and include (a) a guaranty (other than by endorsement of negotiable instruments for collection in the ordinary course of business), directly or indirectly, in any manner, of any part or all of such obligation of such other Person, and 14 21 (b) an agreement, direct or indirect, contingent or otherwise, and whether or not constituting a guaranty, the practical effect of which is to assure the payment or performance (or payment of damages in the event of nonperformance) of any part or all of such obligation of such other Person whether by (i) the purchase of securities or obligations, (ii) the purchase, sale or lease (as lessee or lessor) of property or the purchase or sale of services primarily for the purpose of enabling the obligor with respect to such obligation to make any payment or performance (or payment of damages in the event of nonperformance) of or on account of any part or all of such obligation, or to assure the owner of such obligation against loss, (iii) the supplying of funds to or in any other manner investing in the obligor with respect to such obligation, (iv) repayment of amounts drawn down by beneficiaries of letters of credit, or (v) the supplying of funds to or investing in a Person on account of all or any part of such Person's obligation under a Guaranty of any obligation or indemnifying or holding harmless, in any way, such Person against any part or all of such obligation. "Heafner" means Heafner Tire Group, Inc., a Delaware corporation, successor by merger to The J.H. Heafner Company, Inc., a North Carolina corporation. "Indebtedness" of any Person means, without duplication, all Liabilities of such Person, and to the extent not otherwise included in Liabilities, the following: (a) all obligations for money borrowed or for the deferred purchase price of property or services or in respect of drafts accepted or similar instruments or reimbursement obligations under letters of credit, (b) all obligations (including, during the noncancellable term of any lease in the nature of a title retention agreement, all future payment obligations under such lease discounted to their present value in accordance with GAAP) secured by any Lien to which any property or asset owned or held by such Person is subject, whether or not the obligation secured thereby shall have been assumed by such Person, (c) all obligations of other Persons which such Person has Guaranteed, including, but not limited to, all obligations of such Person consisting of recourse liability with respect to accounts receivable sold or otherwise disposed of by such Person, (d) all obligations of such Person in respect of Interest Rate Protection Agreements, and 15 22 (e) in the case of the Borrowers (without duplication) all obligations under the Loans and the Reimbursement Obligations. "Initial Notice of Borrowing" means the Notice of Borrowing given by the Borrowers with respect to the Loans to be made on the Effective Date which shall also specify the method of disbursement. "Interbank Offered Rate" for an Interest Period means the rate per annum (rounded upwards, if necessary to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. If for any reason such rate is not available, the term "Interbank Offered Rate" shall mean, for any Eurodollar Rate Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on the Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; PROVIDED, HOWEVER, that if more than one rate is specified on the Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates. "Interest Coverage Ratio" means for any specified measurement period, the ratio of (i) EBITDA for such period to (ii) consolidated interest expense of Heafner and its Consolidated Subsidiaries for such period. "Interest Payment Date" means the first day of each calendar month commencing April 1, 2000. "Interest Period" means with respect to each Eurodollar Rate Loan, the period commencing on the date of the making or continuation of or conversion to such Eurodollar Rate Loan and ending one, two, three, six or, if available in the Administrative Agent's reasonable judgment to all Lenders, twelve months thereafter, as the Borrowers may elect in the applicable Notice of Borrowing or Notice of Conversion or Continuation; PROVIDED, that: (i) any Interest Period that would otherwise end on a day that is not a Business Day shall, subject to the provisions of CLAUSE (III) below, be extended to the next succeeding Business Day unless such Business Day falls in the next calendar month, in which case such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to CLAUSE (III) below, end on the last Business Day of a calendar month; (iii) any Interest Period that would otherwise end after the Termination Date shall end on the Termination Date; and 16 23 (iv) notwithstanding CLAUSE (III) above, no Interest Period shall have a duration of less than one month and if any applicable Interest Period would be for a shorter period, such Interest Period shall not be available hereunder. "Interest Rate Protection Agreement" shall mean an interest rate swap, cap or collar agreement or similar arrangement between any Person and a financial institution providing for the transfer or mitigation of interest risks either generally or under specific contingencies. "Inventory" has the meaning set forth in the definition "Collateral." "Investment" means, with respect to any Person: (a) the acquisition or ownership by such Person of any share of capital stock, evidence of Indebtedness or other security issued by any other Person, (b) any loan, advance or extension of credit to, or contribution to the capital of, any other Person, excluding advances to employees in the ordinary course of business for business expenses, (c) any Guaranty of the obligations of any other Person, (d) any other investment (other than the Acquisition of a Business Unit) in any other Person, and (e) any commitment or option to make any of the investments listed in CLAUSES (A) through (D) above if, in the case of an option, the consideration therefor exceeds $100. "Investment Account" has the meaning set forth in the definition "Collateral." "Investment Property" has the meaning set forth in the definition "Collateral." "IRS" means the Internal Revenue Service. "Issuing Bank" means BankBoston as to Letters of Credit outstanding on the Effective Date and Bank as to Letters of Credit issued on and after the Effective Date. "KS Preferred" means up to 7,000 shares of Series A Cumulative Redeemable Preferred Stock and up to 4,500 shares of Series B Cumulative Redeemable Preferred Stock of Heafner issued by Heafner and sold to The Kelly-Springfield Tire Company, a division of The Goodyear Tire and Rubber Company, pursuant to the KS Preferred Stock Purchase Agreement. "KS Preferred Stock Purchase Agreement" means the Securities Purchase Agreement dated May 7, 1997 between Heafner and The Kelly-Springfield Tire Company, a division of The Goodyear Tire and Rubber Company, as amended and in effect on the Effective Date and modified after the Effective Date in accordance with the terms of this Agreement. 17 24 "Lender" means at any time any financial institution party to this agreement at such time, including any such Person becoming a party hereto pursuant to the provisions of ARTICLE 13. "Letter of Credit" means each documentary or standby letter of credit (i) issued by BankBoston for the account of a Borrower under the Existing Loan Agreement and outstanding on the Effective Date or (ii) issued by the Issuing Bank for the account of a Borrower or any Subsidiary and Guaranteed by FCC pursuant to ARTICLE 3. "Letter of Credit Amount" means, at any time with respect to any Letter of Credit Guarantee, the aggregate maximum amount at any time available for drawing under the Guaranteed Letter of Credit at such time (assuming all conditions to drawing are satisfied). "Letter of Credit Availability" means, as of the date of determination, the aggregate face amount of Letter of Credit Obligations available to be incurred hereunder at the time of determination in accordance with SECTION 3.2, which shall be an amount equal to the lesser of (i) the Letter of Credit Guarantee Facility MINUS the Letter of Credit Obligations and (ii) the Loan Availability, on such date. "Letter of Credit Guarantee" means any Guarantee pursuant to which FCC or any of its Affiliates Guarantees to an Issuing Bank, the payment or performance by a Loan Party of its Reimbursement Obligations under any Letter of Credit, including by FCC's (or such Affiliate's) joining in the Reimbursement Agreement for such Letter of Credit as a co-applicant or otherwise as acceptable to the Issuing Bank. "Letter of Credit Guarantee Facility" means a subfacility of the Revolving Credit Facility providing for the issuance of Letters of Credit and Letter of Credit Guarantees as described in Article 3 in an aggregate amount of Letter of Credit Obligations at any one time outstanding not to exceed $10,000,000. "Letter of Credit Obligations" means, at any time, the sum of (a) the Reimbursement Obligations at such time, PLUS (b) the aggregate Letter of Credit Amount of Letter of Credit Guarantees outstanding at such time, PLUS (c) the aggregate Letter of Credit Amount of Letter of Credit Guarantees the issuance of which has at such time been authorized by the Administrative Agent and FCC pursuant to SECTION 3.4(B) but that have not yet been issued, in each case as determined by the Administrative Agent. "Letter of Credit Reserve" means, at any time, the aggregate Letter of Credit Obligations at such time, other than Letter of Credit Obligations that are fully secured by Cash Collateral. "Liabilities" of any Person means all items (except for items of capital stock, including specifically as to Heafner the KS Preferred, additional paid-in capital or retained earnings, or of general contingency or deferred tax reserves) which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as at the date as of which Liabilities are to be determined. "Lien" as applied to the property of any Person means: 18 25 (a) any mortgage, deed to secure debt, deed of trust, lien, pledge, charge, lease constituting a Capitalized Lease Obligation, conditional sale or other title retention agreement, or other security interest, security title or encumbrance of any kind in respect of any property of such Person, or upon the income or profits therefrom, (b) any arrangement, express or implied, under which any property of such Person is transferred, sequestered or otherwise identified for the purpose of subjecting the same to the payment of Indebtedness or performance of any other obligation in priority to the payment of the general, unsecured creditors of such Person, (c) any Indebtedness which is unpaid more than 30 days after the same shall have become due and payable and which if unpaid might by law (including, but not limited to, bankruptcy and insolvency laws), or otherwise, be given any priority whatsoever over the claims of general unsecured creditors of such Person, except to the extent being disputed or contested by such Person by appropriate proceedings and in respect of which any reserve required by GAAP has been appropriately established and maintained, (d) the filing of, or any agreement to give, any financing statement under the UCC or its equivalent in any jurisdiction (excluding informational financing statements relating to property leased by a Borrower or any Subsidiary), and (e) in the case of Real Estate, reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances. "Loan" means any Revolving Credit Loan or Swingline Loan, as well as all such loans collectively, as the context requires. "Loan Account" and "Loan Accounts" have the meanings specified in SECTION 4.5. "Loan Availability" means, as of the date of determination, the aggregate principal amount of Revolving Credit Loans available to be borrowed by the Borrowers hereunder at the time in accordance with SECTION 2.1, which shall be an amount equal to the remainder derived by subtracting the aggregate principal amount of Revolving Credit Loans and Swingline Loans outstanding on such date from the Borrowing Base on such date. "Loan Documents" means collectively this Agreement, the Notes, the Security Documents and each other instrument, agreement or document executed by a Loan Party or any Affiliate or Subsidiary of a Loan Party in connection with this Agreement whether prior to, on or after the Effective Date and each other instrument, agreement or document referred to herein or contemplated hereby. "Loan Party" means any Borrower or Subsidiary Guarantor. "Lockbox" means each U. S. Post Office Box specified in a Lockbox Agreement. "Lockbox Agreement" means each agreement between a Borrower and a Clearing Bank concerning the establishment of a Lockbox for the collection of Receivables. 19 26 "Margin Stock" means margin stock as defined in Section 221.1(h) of Regulation U. "Materially Adverse Effect" means any act, omission, situation, circumstance, event or undertaking which would, singly or in any combination with one or more other acts, omissions, situations, circumstances, events or undertakings, have, or reasonably be expected to have, a materially adverse effect upon (a) the business, assets, properties, liabilities, condition (financial or otherwise), results of operations or business prospects of Heafner and its Consolidated Subsidiaries taken as a whole, (b) the value of the whole or any material part of the Collateral, (c) the Security Interest or the priority of the Security Interest, (d) the ability of Heafner and its Consolidated Subsidiaries taken as a whole to perform any material obligation under this Agreement or any other Loan Document, or (e) other than solely and directly by reason of any release given or other action taken by the Administrative Agent or any Lender, the legality, validity, binding effect, enforceability or admissibility into evidence of any Loan Document or the ability of the Administrative Agent or the Lenders to enforce in any material respect any rights or remedies under or in connection with any Loan Document. "Minimum Commitment" means $10,000,000. "Moody's" means Moody's Investors Service, Inc. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA to which a Borrower or a Related Company is required to contribute or has contributed within the immediately preceding six years. "Net Amount" means, with respect to any Investments made by any Person, the gross amount of all such Investments MINUS the aggregate amount of all cash received and the fair value, at the time of receipt by such Person, of all property received as payments of principal or premiums, returns of capital, liquidating dividends or distributions, proceeds of sale or other dispositions with respect to such Investments. "Net Income" or "Net Loss" means, as applied to any Person for any accounting period, the net income or net loss, as the case may be, of such Person for the period in question after giving effect to deduction of or provision for all operating expenses, all taxes and reserves (including reserves for deferred taxes) and all other proper deductions, all determined in accordance with GAAP, PROVIDED that there shall be excluded: (a) the net income or net loss of any Person accrued prior to the date it becomes a Subsidiary of, or is merged into or consolidated with, the Person whose Net Income is being determined or a Subsidiary of such Person, (b) the net income or net loss of any Person in which the Person whose Net Income is being determined or any Subsidiary of such Person has an ownership interest, except, in the case of net income, to the extent that any such income has actually been received by such Person or such Subsidiary in the form of cash dividends or similar distributions, (c) any restoration of any contingency reserve, except to the extent that provision for such reserve was made out of income during such period, 20 27 (d) any net gains or losses on the sale or other disposition, not in the ordinary course of business, of Investments, Business Units and other capital assets, provided that there shall also be excluded any related charges for taxes thereon, (e) any net gain arising from the collection of the proceeds of any insurance policy, (f) any write-up of any asset, and (g) any other extraordinary item. "Net Outstandings" of any Lender means, at any time, the sum of (a) all amounts paid by such Lender (other than pursuant to SECTION 14.7) to the Administrative Agent in respect of Revolving Credit Loans made by such Lender, MINUS (b) all amounts received by the Administrative Agent and paid by the Administrative Agent to such Lender for application, pursuant to this Agreement, to reduction of the outstanding principal balance of the outstanding Revolving Credit Loans of such Lender. "Net Worth" means, with respect to any Person, such Person's total shareholder's equity (including specifically as to Heafner the KS Preferred, the Warrant and including any other capital stock, warrants, additional paid-in capital and retained earnings, after deducting treasury stock) which would appear as such on a balance sheet of such Person prepared in accordance with GAAP. "New Lender" has the meaning specified in the Preliminary Statement. "Non-Ratable Loan" means a Base Rate Loan made by FCC in accordance with the provisions of SECTION 4.8(B). "Note" means any of the Revolving Credit Notes and the Swingline Note and "Notes" means more than one such Note. "Notice of Borrowing" means a written notice (including by electronic mail), or telephonic notice followed by a confirming same-day written notice, requesting a Borrowing of, respectively, (i) Base Rate Revolving Credit Loans or Eurodollar Rate Revolving Credit Loans or (ii) a Swingline Loan which is given by telex or facsimile transmission in accordance with the applicable provisions of SECTION 2.2 or SECTION 2A.2, as the case may be, and which specifies (i) the amount of the requested Borrowing, (ii) the date of the requested Borrowing, and (iii) if the requested Borrowing is of Eurodollar Rate Loans, the duration of the applicable Interest Period. "Notice of Conversion or Continuation" has the meaning specified in SECTION 4.13. "Overadvance" means at any time the amount by which the aggregate outstanding principal amount of Loans exceeds the Borrowing Base. "Overadvance Condition" means and is deemed to exist any time the aggregate outstanding principal amount of Loans exceeds the Borrowing Base. 21 28 "Overadvance Loan" means a Base Rate Loan made at a time an Overadvance Condition exists or which results in an Overadvance Condition. "PBGC" means the Pension Benefit Guaranty Corporation and any successor agency. "Permitted Inventory Locations" means each location listed on SCHEDULE 6.1(U) and from time to time each other location within the continental United States which Heafner has notified the Administrative Agent is a location at which Inventory of a Loan Party is maintained together with such evidence as the Administrative Agent may reasonably require that the Inventory at such location is subject to the Security Interest and to no other Lien other than Permitted Liens. "Permitted Investments" means (a) Investments of Heafner and its Consolidated Subsidiaries in: (i) cash and Cash Equivalents in an aggregate amount not greater than $5,000,000, (ii) sales of inventory on credit in the ordinary course of business, (iii) shares of capital stock, evidence of Debt or other security acquired in consideration for or as evidence of past-due or restructured Receivables in an aggregate face amount of such Receivables as to Heafner and its Subsidiaries at any time not to exceed $2,500,000, (iv) any Loan Party, and (v) those items described on SCHEDULE 1.1A - PERMITTED INVESTMENTS; and (b) Investments of any Loan Party in any Subsidiary that is not a Loan Party to the extent in existence on the Effective Date, as such Investments may increase by reason of the profitable operations of such Subsidiary. "Permitted Liens" means: (a) Liens securing taxes, assessments and other governmental charges or levies (excluding any Lien imposed pursuant to any of the provisions of ERISA) or the claims of materialmen, mechanics, carriers, warehousemen or landlords for labor, materials, supplies or rentals incurred in the ordinary course of business, but (i) in all cases only if payment shall not at the time be required to be made in accordance with SECTION 9.6, and (ii) in the case of warehousemen or landlords, only if such liens are junior to the Security Interest in any of the Collateral or the relevant premises are reflected in the Rent Reserve, (b) Liens consisting of deposits or pledges made in the ordinary course of business in connection with, or to secure payment of, obligations under workers' compensation, unemployment insurance or similar legislation or under payment or performance bonds, 22 29 (c) Liens constituting encumbrances in the nature of zoning restrictions, easements, and rights or restrictions of record on the use of real property, which do not materially detract from the value of such property or impair the use thereof in the business of the applicable Borrower, (d) Liens shown on SCHEDULE 1.1B - PERMITTED LIENS, (e) Vendor Liens, (f) Liens of the Administrative Agent, for the benefit of the Lenders, arising under this Agreement and the other Loan Documents, (g) Liens on Margin Stock, (h) Liens in existence immediately prior to the Effective Date that are satisfied in full and released on the Effective Date or promptly thereafter by application of the proceeds of the Loans or cash on hand, (i) the Lien of FUNB as Trustee under the Senior Note Indenture pursuant to Section 7.07 thereof on certain property in its possession as security for payment of fees and other amounts owing to it in its capacity as such Trustee, and (j) additional Liens in accordance with the provisions of SECTION 11.9. "Person" means an individual, corporation, limited liability company, partnership, association, trust or unincorporated organization, or a government or any agency or political subdivision thereof. "Projections" means the forecasted (a) balance sheets, (b) income statements and (c) cash flow statements of the Borrowers for each Fiscal Year, prepared annually by the Borrowers on a consolidated monthly basis, together with appropriate supporting details (including stand-alone forecasts for each Borrower) and a statement of underlying assumptions. "Proportionate Share" or "Ratable Share" or "Ratable" (and with corollary meaning, "Ratably") means, as to a Lender, such Lender's share of an amount in Dollars or of other property at the time of determination equal to (i) the Commitment Percentage of such Lender, or (ii) if the Commitments are terminated, the percentage obtained by dividing the principal amount of the Loans then owing to such Lender by the total principal amount of all Loans then owing to all Lenders, or (iii) if no Loans are outstanding, the percentage obtained by dividing such Lender's participation in the total Letter of Credit Obligations then outstanding by the total Letter of Credit Obligations then outstanding. "Proprietary Rights" means as to any Person, such Person's rights, title and interest in and to intellectual property and all other rights (including rights as a licensee thereof) under any patents, trademarks, trade names, tradestyles, copyrights and all extensions, renewals, reissues, divisions, continuations, and continuations-in-part of any of the foregoing, and all rights to sue for past, present and future infringement of any of the foregoing. 23 30 "Purchase Money Lien" means any Lien securing Debt created to finance the payment of all or any part of the purchase price (not in excess of the fair market value thereof) of any tangible personal property (other than Inventory) and incurred at the time of or within 10 days prior to or after the acquisition of such tangible asset, but only if such Lien shall at all times be confined solely to the property (other than Inventory) the purchase price of which was financed through the incurrence of such Debt. "Purchase Price" has the meaning specified in SECTION 11.4. "Real Estate" means all real property now or hereafter owned or leased by Heafner or any Subsidiary, including, without limitation, all fees, leaseholds and future interests. "Receivables" has the meaning set forth in the definition "Collateral." "Register" has the meaning specified in SECTION 13.1(D). "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System (or any successor). "Reimbursement Agreement" means, with respect to a Letter of Credit, such form of application therefor and form of reimbursement agreement therefor (whether in a single document or several documents) as the Issuing Bank may employ in the ordinary course of business for its own account, in such form as may be acceptable to FCC in its reasonable judgment and with such modifications thereto as may be agreed upon by the Issuing Bank, FCC and the Borrowers, PROVIDED that such application and agreement and any modifications thereto are not inconsistent with the terms of this Agreement. "Reimbursement Obligations" means the unsatisfied reimbursement or repayment obligations of the Borrowers to FCC pursuant to SECTION 3.6 or (but without duplication) to an Issuing Bank pursuant to a Reimbursement Agreement with respect to amounts that have been drawn under Letters of Credit Guaranteed by FCC. "Related Company" means any (i) corporation which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as Heafner; (ii) partnership or other trade or business (whether or not incorporated) under common control (within the meaning of Section 414(c) of the Code) with Heafner; or (iii) member of the same affiliated service group (within the meaning of Section 414(m) of the Code) as Heafner, any corporation described in CLAUSE (I) above or any partnership, trade or business described in CLAUSE (II) above. "Release" means release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment or into or out of any property, including the movement of Contaminants through or in the air, soil, surface water or groundwater. "Remediable Defect" means an operational defect or violation that could disqualify a Benefit Plan intended to qualify under Section 401(a) (and, if applicable, Section 401(k)) of the Code and that can be remedied under the IRS's Closing Agreement Program, 24 31 Voluntary Compliance Resolution Program, or Administrative Policy Regarding Self-Correction, without in any case a payment to any governmental authority with respect to such Benefit Plan and any other Benefit Plan of more than $100,000 in any calendar year. "Remedial Action" means actions required to (i) clean up, remove, treat or in any other way address Contaminants in the indoor or outdoor environment; (ii) prevent the Release or threat of Release or minimize the further Release of Contaminants so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment; or (iii) perform pre-remedial studies and investigations and post-remedial monitoring and care. "Rent Reserve" means an amount approximately equal to the aggregate monthly rental payable by the Borrowers on all leased Real Estate in respect of which landlord's or warehouseman's waivers, in form and substance acceptable to the Administrative Agent, are not in effect or such greater amount as the Administrative Agent may, in its reasonable credit judgment, determine to be appropriate after notice to the Borrowers. "Required Lenders" means, at any time, any combination of two or more Lenders whose Commitment Percentages at such time aggregate in excess of 50%. "Restricted Distribution" by any Person means (a) its retirement, redemption, purchase, or other acquisition or retirement for value of any capital stock or other equity securities (except equity securities acquired on the conversion or exercise thereof into other equity securities of such Person) or partnership interests issued by such Person, (b) the declaration or payment of any dividend or distribution in cash or property on or with respect to any such securities (other than dividends payable solely in shares of its capital stock) or partnership interests, EXCLUDING, HOWEVER, any such dividend, distribution or payment to a Loan Party by any of its Subsidiaries, (c) any Investment (other than a Permitted Investment) by such Person in, the holder of any of such securities or partnership interests, and (d) any other payment by such Person in respect of such securities or partnership interests. "Restricted Payment" means (a) any redemption or prepayment or other retirement, prior to the stated maturity thereof or prior to the due date of any regularly scheduled installment or amortization payment with respect thereto, of any Debt (other than the Loans) or of any Indebtedness that is junior and subordinate to the Secured Obligations, (b) any payment on or with respect to any Subordinated Debt other than in accordance with the subordination provisions thereof, (c) the payment by any Person of the principal amount of or interest on any Indebtedness (other than trade accounts payable and employee compensation in the ordinary course of business, consistent with past practices) owing to an Affiliate of such Person or to any Affiliate of any such Affiliate and (d) the payment of any management, consulting or similar fee by any Person to any Affiliate of such Person. "Revolving Credit Facility" means the credit facility providing for Revolving Credit Loans based upon the Borrowing Base and described in SECTION 2.1 up to an aggregate principal amount at any one time outstanding not to exceed $200,000,000 or such lesser or greater amount as shall be agreed upon from time to time in writing by the Administrative Agent, the Syndication Agent, the Documentation Agent, the Lenders and the Borrowers. 25 32 "Revolving Credit Loans" means (i) the Loans under and as defined in the Existing Loan Agreement outstanding on the Effective Date and (ii) the Loans made to the Borrowers pursuant to SECTION 2.1., including any Non-Ratable Loan. "Revolving Credit Note" means each Second Amended and Restated Promissory Note made by the Borrowers payable to the order of a Lender evidencing the joint and several obligation of the Borrowers to pay the aggregate unpaid principal amount of the Loans made to them by such Lender under the Revolving Credit Facility (and any promissory note or notes that may be issued from time to time in substitution, renewal, extension, replacement or exchange therefor whether payable to such Lender or to a different Lender in connection with a Person becoming a Lender after the Effective Date or otherwise) substantially in the form of EXHIBIT A-1 hereto, with all blanks properly completed, either as originally executed or as the same may from time to time be supplemented, modified, amended, renewed, extended or refinanced. "S&P" means Standard & Poor's Ratings Service, a division of The McGraw-Hill Companies. "Schedule of Inventory" means a schedule delivered by the Borrowers to the Administrative Agent pursuant to the provisions of SECTION 8.12(B). "Schedule of Receivables" means a schedule delivered by the Borrowers to the Administrative Agent pursuant to the provisions of SECTION 8.12(A). "Secured Obligations" means, in each case whether now in existence or hereafter arising, (a) the principal of and interest on the Loans, (b) the Reimbursement Obligations and all other obligations of the Borrowers to FCC, any Lender or any Affiliate of a Lender arising in connection with the issuance of Letter of Credit Guarantees, (c) all obligations of the Borrowers to any Lender or any Affiliate of a Lender (i) under any Interest Rate Protection Agreement, and (ii) under, arising out of or related to any ACH Transfer arrangement, and (d) all indebtedness, liabilities, obligations, covenants and duties of the Borrowers or any Subsidiary to the Administrative Agent or to the Lenders or to any Affiliate of the Administrative Agent or any Lender of every kind, nature and description arising under or in respect of this Agreement, the Notes or any of the other Loan Documents, whether direct or indirect, absolute or contingent, due or not due, contractual or tortious, liquidated or unliquidated, and whether or not evidenced by any note, and whether or not for the payment of money, including without limitation, fees required to be paid pursuant to ARTICLE 4 and expenses required to be paid or reimbursed pursuant to SECTION 15.2. "Security Documents" means the Financing Statements, any Subsidiary Security Agreements and each other writing executed and delivered by a Loan Party or any other Person 26 33 securing the Secured Obligations or assuring rights of the Administrative Agent or the Lenders in respect of the Collateral. "Security Interest" means the Liens of the Administrative Agent, for the benefit of itself as the Administrative Agent and the Lenders and Affiliates of the Lenders, on and in the Collateral effected hereby or by any of the Security Documents or pursuant to the terms hereof or thereof. "Senior Note Indenture" means collectively (i) the Indenture, dated as of May 15, 1998, as amended and supplemented by the Supplemental Indenture, dated as of February 22, 1999, and the Second Supplemental Indenture, dated as of May 14, 1999, each between Heafner and First Union National Bank, Trustee, and (ii) the Indenture, dated as of December 1, 1998, as amended and supplemented by the Supplemental Indenture, dated as of February 22, 1999, and the Second Supplemental Indenture, dated as of May 14, 1999, each between Heafner and First Union National Bank, Trustee. "Senior Notes" means Heafner's 10% Senior Notes due 2008 in the original principal amount of $150,000,000, issued pursuant to the Senior Note Indenture, including any "Exchange Securities" and "Private Exchange Securities" issued (and as defined) thereunder. "Settlement Date" means each Business Day after the Effective Date selected by the Administrative Agent in its sole discretion subject to and in accordance with the provisions of SECTION 4.8(B)(I) as of which a Settlement Report is delivered by the Administrative Agent and on which settlement is to be made among the Lenders in accordance with the provisions of SECTION 4.8. "Settlement Report" means each report substantially in the form employed by the Administrative Agent from time to time or as the Administrative Agent and the Lenders may otherwise agree, prepared by the Administrative Agent and delivered to each Lender and setting forth, among other things, as of the Settlement Date indicated thereon and as of the next preceding Settlement Date, the aggregate principal balance of all Revolving Credit Loans outstanding, each Lender's Proportionate Share thereof, each Lender's Net Outstandings and all payments of principal and interest in respect of Revolving Credit Loans and of fees received by the Administrative Agent from the Borrowers during the period beginning on such next preceding Settlement Date and ending on such Settlement Date. "Subordinated Debt" means any Debt of Heafner or any Subsidiary that is subordinated to the Secured Obligations on terms and conditions acceptable to the Required Lenders in their sole discretion. "Subsidiary" (a) when used to determine the relationship of a Person to another Person, means a Person of which an aggregate of 50% or more of the stock of any class or classes or 50% or more of other ownership interests is owned of record or beneficially by such other Person, or by one or more Subsidiaries of such other Person, or by such other Person and one or more Subsidiaries of such Person, (i) if the holders of such stock, or other ownership interests, (A) are ordinarily, in the absence of contingencies, entitled to vote for the election of a 27 34 majority of the directors (or other individuals performing similar functions) of such Person, even though the right so to vote has been suspended by the happening of such a contingency, or (B) are entitled, as such holders, to vote for the election of a majority of the directors (or individuals performing similar functions) of such Person, whether or not the right so to vote exists by reason of the happening of a contingency, or (ii) in the case of such other ownership interests, if such ownership interests constitute a majority voting interest and (b) when used without other designation of ownership, means a Subsidiary of Heafner. "Subsidiary Guarantor" means any Subsidiary of Heafner that is not a Borrower and that has, at the Administrative Agent's request or with its consent, executed and delivered a Subsidiary Guaranty and a Subsidiary Security Agreement. "Subsidiary Guaranty" means a Guaranty of the Secured Obligations substantially in the form of EXHIBIT F attached hereto or as otherwise acceptable to the Administrative Agent and Heafner. "Subsidiary Security Agreement" means one or more agreements substantially in the form of EXHIBIT F attached hereto or otherwise in form and substance satisfactory to the Administrative Agent in its reasonable judgment, sufficient to create in favor of the Administrative Agent a security interest in all of the Receivables, Inventory and proceeds thereof of any Subsidiary Guarantor. "Swingline Facility" means an amount equal to $5,000,000. "Swingline Lender" means FCC. "Swingline Loan" means each advance by the Swingline Lender to the Borrowers pursuant to SECTION 2A.1. "Swingline Loan Request" has the meaning set forth in SECTION 2A.2. "Swingline Note" means the Swingline Note made by the Borrowers payable to the order of the Swingline Lender evidencing the joint and several obligation of the Borrowers to pay the aggregate unpaid principal amount of the Swingline Loans made to them by the Swingline Lender under the Swingline Facility (and any promissory note that may be issued from time to time in substitution, renewal, extension, replacement or exchange therefor) substantially in the form of EXHIBIT A-2 hereto, with all blanks properly completed, either as originally executed or as the same may from time to time be supplemented, modified, amended, renewed, extended or refinanced. "Syndication Agent" means Bank of America. 28 35 "Termination Date" means March 6, 2005, such earlier date as all Secured Obligations shall have been irrevocably paid in full and the Commitments shall have been terminated, or such later date to which the same may be extended pursuant to the provisions of SECTION 2.5. "Type" when used in respect of any Loan or Borrowing, shall refer to the rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. "UCC" means the Uniform Commercial Code as in effect from time to time in the applicable jurisdiction. "Unfunded Vested Accrued Benefits" means at any time, with respect to any Benefit Plan that is a pension plan within the meaning of Section 3(2) of ERISA, the amount (if any) by which (a) the present value of all vested nonforfeitable benefits under such Benefit Plan exceeds (b) the fair market value of all such Benefit Plan assets allocable to such benefits, as determined using the valuation date and such reasonable actuarial assumptions and methods as are specified in the Schedule B (Actuarial Information) to the most recent Annual Report (Form 5500) filed with respect to such Benefit Plan. "Unused Commitments" has the meaning specified in SECTION 4.2(B). "Vendor Lien" means any Lien affecting tire Inventory of a Loan Party for the benefit of the vendor of such Inventory, as security for the payment or repayment of amounts (including trade accounts and vendor loans permitted pursuant to SECTION 11.2(F)) owing by such Loan Party to such vendor; provided, that if and to the extent that any such Lien purports to affect any property of a Loan Party other than such tire Inventory (including, without being limited to, proceeds including accounts), such Lien as it affects such other property is subordinated to the Security Interest in a manner satisfactory to the Administrative Agent. "Warrant" means the Amended and Restated Warrant No. 2 to purchase common stock of Heafner issued to The 1818 Mezzanine Fund II, L.P., as amended and in effect on the Effective Date and as thereafter amended in accordance with the provisions of this Agreement. "Wholly Owned Subsidiary" when used to determine the relationship of a Subsidiary to a Person means a Subsidiary all of the issued and outstanding shares (other than directors' qualifying shares) of the capital stock of which shall at the time be owned by such Person or one or more of such Person's Wholly Owned Subsidiaries or by such Person and one or more of such Person's Wholly Owned Subsidiaries. "Winston" means Winston Tire Company, a California corporation and a Wholly Owned Subsidiary of Heafner. "Year 2000 Compliant" as to any Person means that all software, embedded microchips and other processing capabilities utilized by, and material to the business operations or financial condition of, such Person are able to interpret and manipulate data on and involving all calendar dates correctly and without causing any abnormal ending scenario, including in relation to dates in and after the calendar year 2000. 29 36 SECTION 1.2 General Interpretive Rules. (a) All terms of an accounting nature not specifically defined herein shall have the meanings ascribed thereto by GAAP. (b) The terms accounts, chattel paper, contract rights, documents, equipment, instruments, general intangibles, inventory and proceeds, as and when used in this Agreement or the Security Documents (without being capitalized), shall have the meanings given those terms in the UCC. (c) Unless otherwise specified, the words "hereof," "herein," "hereunder" and words of similar import, when used in this Agreement, refer to this Agreement as a whole and not to any particular provision, section or subsection of this Agreement. (d) Wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, the feminine and the neuter. Words denoting individuals include corporations and vice versa. (e) References to any legislation or statute or code, or to any provisions of any legislation or statute or code, shall include any modification or reenactment of, or any legislative, statutory or code provision substituted for, such legislation, statute or code or provision thereof. (f) References to any document or agreement (including this Agreement) shall include references to such document or agreement as amended, novated, supplemented, modified or replaced from time to time, so long as and to the extent that such amendment, novation, supplement, modification or replacement is not prohibited by the terms of this Agreement or is consented to, if such consent is required, in accordance with the applicable provisions of this Agreement. (g) Except where specifically restricted in a Loan Document, references to any Person include its successors and substitutes and assigns permitted or not prohibited under such Loan Document. (h) References to the time of day are to the time of day in the city in which the Administrative Agent's Office is located. (i) The terms "payment", "prepayment", "distribution" and similar terms used in the definitions of "Restricted Distribution" and "Restricted Payment" and in SECTION 11.6, shall include payment by means of the transfer of funds or of property and, in the event of a transfer of property, the payment shall be deemed to be in an amount equal to the greater of the fair market value and the book value of the property at the time of the transfer. (j) Titles of Articles and Sections in this Agreement are for convenience only, do not constitute part of this Agreement and neither limit nor amplify the provisions of this Agreement, and all references in this Agreement to Articles, Sections, subsections, paragraphs, clauses, subclauses, Schedules or Exhibits shall refer to the corresponding Article, Section, subsection, paragraph, clause or subclause of, or Schedule or Exhibit attached to, this Agreement, 30 37 unless specific reference is made to the articles, sections or other subdivisions or divisions of, or to schedules or exhibits to, another document or instrument. (k) Whenever from the context it appears appropriate, the term "Loan", including such terms as used as part of a defined term including the term "Loan", shall mean and include a Loan made by all Lenders to the Borrowers as well as a Lender's Proportionate Share of any Loan. (l) Whenever the phrase "to the knowledge of the Borrower" or words of similar import relating to the knowledge of the Borrowers (or any of them) are used herein, such phrase shall mean and refer to the actual knowledge of the President or chief financial officer of such Borrower. (m) Unless otherwise specified herein, any Lien created or purported to be created hereby or by or pursuant to any Loan Documents in favor of the Administrative Agent and each payment made to the Administrative Agent, is and shall be deemed to have been created in favor of the Administrative Agent, for its benefit as the Administrative Agent and for the Ratable benefit of the Lenders, or made to and received by the Administrative Agent for the Ratable benefit of the Lenders, as the case may be. (n) Whenever in this Agreement or any other Loan Document the word "stock" or "capital stock" or other similar word or phrase is used in connection with a Loan Party or any Subsidiary of a Loan Party referring to equity ownership interests in such Loan Party or such Subsidiary, such word or phrase shall also be deemed to include a reference to member interests, each reference to "corporation" with reference to a Loan Party or any Subsidiary of a Loan Party shall also be deemed to include a reference to limited liability companies and each reference to "certificate of incorporation" or "articles of incorporation" or "bylaws" with reference to a Loan Party or any Subsidiary of a Loan Party shall also be deemed to include a reference to "certificate of formation" and "operating agreement" or other constituent documents of a limited liability company. SECTION 1.3 Exhibits and Schedules. All Exhibits and Schedules attached hereto are by reference made a part hereof. 31 38 ARTICLE 2 REVOLVING CREDIT FACILITY SECTION 2.1 Revolving Credit Loans. Upon the terms and subject to the conditions of, and in reliance upon the representations and warranties made under, this Agreement, each Lender agrees, severally, but not jointly, to make Revolving Credit Loans to the Borrowers from time to time from the Effective Date to but not including the Termination Date, as requested or deemed requested by the Borrowers in accordance with the terms of SECTION 2.2, in amounts equal to such Lender's Proportionate Share of each Revolving Credit Loan requested or deemed requested hereunder up to an aggregate amount at any one time outstanding equal to such Lender's Proportionate Share of the Borrowing Base; PROVIDED, HOWEVER, that no Borrowing shall exceed the Loan Availability at the time and the aggregate principal amount of all outstanding Loans (after giving effect to the Revolving Credit Loans requested or deemed requested) shall not exceed the Borrowing Base. It is expressly understood and agreed that the Lenders may and at present intend to use the Borrowing Base as a maximum ceiling on Loans made to the Borrowers; PROVIDED, HOWEVER, that it is agreed that should the aggregate outstanding amount of such Loans exceed the ceiling so determined or any other limitation set forth in this Agreement, such Loans shall nevertheless constitute Secured Obligations and, as such, shall be entitled to all benefits thereof and security therefor. The principal amount of any Revolving Credit Loan which is repaid may be reborrowed by the Borrowers, subject to the terms and conditions of this Agreement, in accordance with the terms of this Section 2.1. The Administrative Agent's and each Lender's books and records reflecting the date and the amount of each Revolving Credit Loan and each repayment of principal thereof shall constitute prima facie evidence of the accuracy of the information contained therein, subject to the provisions of SECTION 4.5. SECTION 2.2 Manner of Borrowing. Borrowings shall be made as follows: (a) Requests for Borrowing. (i) Base Rate Revolving Credit Loans. A request for the Borrowing of Base Rate Revolving Credit Loans shall be made, or shall be deemed to be made, in the following manner: (A) with respect to any Loans to be made on the Effective Date, which shall be Base Rate Loans, the Borrowers' representative shall give the Administrative Agent the Initial Notice of Borrowing at least two Business Days prior to the proposed date of the Borrowing, and, with respect to each subsequent Borrowing, the Borrowers may request a Base Rate Revolving Credit Loan by giving the Administrative Agent a Notice of Borrowing, before noon on the proposed date of the Borrowing, PROVIDED that if such notice is received after noon on the proposed date of Borrowing, the proposed Borrowing may be postponed by the Administrative Agent to the next Business Day; 32 39 (B) whenever a check or other item is presented to a Disbursing Bank for payment against a Controlled Disbursement Account in an amount greater than the then available balance in such account, such Disbursing Bank shall, and is hereby irrevocably authorized by the Borrowers to, give the Administrative Agent notice thereof, which notice shall be deemed to be a request for a Base Rate Revolving Credit Loan on the date of such notice in an amount equal to the excess of such check or other item over such available balance, and such request shall be irrevocable; (C) unless payment is otherwise made by the Borrowers, the becoming due of any amount required to be paid under this Agreement or any of the Notes as interest shall be deemed to be a request for a Base Rate Revolving Credit Loan on the due date in the amount required to pay such interest, and such request shall be irrevocable; (D) unless payment is otherwise made by the Borrowers, a becoming due of any other Secured Obligation shall be deemed to be a request for a Base Rate Revolving Credit Loan on the due date in the amount then so due, and such request shall be irrevocable; and (E) the receipt by the Administrative Agent of notification from FCC to the effect that a payment has been made under a Letter of Credit or Letter of Credit Guarantee and that the Borrowers have failed to reimburse FCC therefor in accordance with the terms of ARTICLE 3, shall be deemed to be a request for a Base Rate Revolving Credit Loan on the date such notification is received in the amount of such payment which is so unreimbursed. (ii) Eurodollar Rate Revolving Credit Loans. At any time after the Effective Date, and so long as no Default or Event of Default has occurred and is continuing, the Borrowers may request a Eurodollar Rate Revolving Credit Loan by giving the Administrative Agent a Notice of Borrowing (which notice shall be irrevocable) not later than 11:30 a.m. on the date three Business Days before the day on which the requested Eurodollar Rate Revolving Credit Loan is to be made. The Borrowers may direct the Administrative Agent to apply the proceeds of a Eurodollar Rate Revolving Credit Loan to Secured Obligations as described in SECTIONS 2.2(A)(I)(B), (C), (D) and (E) and the Administrative Agent shall comply with such direction to the extent that proceeds of a Borrowing of Eurodollar Rate Revolving Credit Loans are available to be so applied and in such case, no duplicative Borrowing of Base Rate Revolving Credit Loans will be deemed to have been requested. (iii) Notification of Lenders. In the case of each Eurodollar Rate Revolving Credit Loan and, unless the Administrative Agent has elected to make a Swingline Loan to the Borrowers pursuant to SECTION 2A.2, in the case of each Base Rate Loan, the Administrative Agent shall promptly notify the Lenders of any Notice of Borrowing given or deemed given pursuant to this SECTION 2.2(A) by 33 40 12:00 noon on the proposed Borrowing date (in the case of Base Rate Loans) or by 3:00 p.m. three Business Days before the proposed Borrowing date (in the case of Eurodollar Rate Loans). If the Administrative Agent does so notify the Lenders, then not later than 1:30 p.m. on the proposed Borrowing date, each Lender will make available to the Administrative Agent, for the account of the Borrowers, at the Administrative Agent's Office in funds immediately available to the Administrative Agent, such Lender's Proportionate Share of the Base Rate Loan or Eurodollar Rate Loan, as the case may be. (b) Disbursement of Loans. The Borrowers hereby irrevocably authorize the Administrative Agent to disburse the proceeds of each Borrowing requested, or deemed to be requested, pursuant to SECTION 2.2(A) as follows: (i) the proceeds of each Borrowing requested under SECTIONS 2.2(A)(I)(A) (other than the Borrowing of any Loans made on the Effective Date) or (B) or 2.2(A)(II) shall be disbursed by the Administrative Agent in Dollars in immediately available funds by wire transfer to a Controlled Disbursement Account or, in the absence of a Controlled Disbursement Account, by wire transfer to such other account as may be agreed upon by the Borrowers and the Administrative Agent from time to time, and the proceeds of the Loans to be made on the Effective Date under SECTION 2.2(A)(I)(A) shall be disbursed in accordance with the Initial Notice of Borrowing, (ii) the proceeds of each Borrowing deemed requested under SECTION 2.2(A)(I)(C) or (D) shall be disbursed by the Administrative Agent by way of direct payment of the relevant Secured Obligation, and (iii) the proceeds of each Borrowing deemed requested under SECTION 2.2(A)(I)(E) shall be disbursed by the Administrative Agent directly to FCC on behalf of the Borrowers for application to the Reimbursement Obligations. SECTION 2.3 Repayment. The Revolving Credit Loans will be repaid as follows: (a) The outstanding principal amount of all Revolving Credit Loans is due and payable, and shall be repaid by the Borrowers, as their joint and several obligation, in full, not later than the Termination Date and the outstanding principal amount of any Revolving Credit Loan may be repaid by the Borrowers at any time and from time to time prior to the Termination Date; (b) If at any time the aggregate outstanding unpaid principal amount of the Revolving Credit Loans exceeds the Borrowing Base in effect at such time, but subject to the provisions of SECTION 4.7(D), the Borrowers shall repay the Revolving Credit Loans in an amount sufficient to reduce the aggregate unpaid principal amount of the Revolving Credit Loans by an amount equal to such excess, together with accrued and unpaid interest on the amount so repaid to the date of repayment; and 34 41 (c) The Borrowers hereby instruct the Administrative Agent to repay the Revolving Credit Loans outstanding on any day in an amount equal to the amount received by the Administrative Agent on such day pursuant to SECTION 8.1(C); PROVIDED that payments received in excess of outstanding Revolving Credit Loans or payments received (when no Default or Event of Default exists) on account of Eurodollar Rate Revolving Credit Loans which would otherwise result in prepayment of such Eurodollar Rate Revolving Credit Loans prior to the end of the Interest Period applicable thereto may, upon the instruction of the Borrowers to the Administrative Agent not later than 1:00 p.m. on any Business Day, be applied to the Cash Collateral Account or any Investment Account. Repayments pursuant to SECTION 2.3(B) or (C) shall be applied first to the Base Rate Revolving Credit Loans and then to Eurodollar Rate Revolving Credit Loans. SECTION 2.4 Notes. Each Lender's Revolving Credit Loans and the joint and several obligation of the Borrowers to repay such Revolving Credit Loans shall also be evidenced by a Revolving Credit Note payable to the order of such Lender. Each such Note shall be dated the Effective Date (or later "effective date" under any Assignment and Acceptance) and be duly and validly executed and delivered by the Borrowers. SECTION 2.5 Extension of Commitments. Upon the request of the Borrowers, all, but not less than all, of the Lenders may, in their sole discretion, effective as of any anniversary of the Effective Date, agree to extend the Commitments for a period such that the Termination Date would fall on a date that is up to but not in excess of five years after such anniversary date. Any such extension may be effected solely by the delivery to the Borrowers of a written notice to that effect by the Lenders, not less than 30 days prior to such anniversary date. 35 42 ARTICLE 2A SWINGLINE FACILITY SECTION 2A.1 Swingline Loans. Upon the terms and subject to the conditions of, and in reliance upon the representations and warranties made under, this Agreement, the Swingline Lender shall make Swingline Loans to the Borrowers from time to time, from and after the Effective Date until the Termination Date, as requested or deemed requested by the Borrowers in accordance with the terms of SECTION 2A.2, up to an aggregate principal amount of Swingline Loans at any time outstanding not to exceed the lesser of (i) the Swingline Facility and (ii) the Borrowing Base MINUS the aggregate principal amount of outstanding Revolving Credit Loans. The Swingline Loans will be deemed to be usage of the Revolving Credit Facility for the purpose of calculating availability pursuant to SECTION 2.1, but will not reduce the Swingline Lender's obligation to lend its Proportionate Share of the remaining unused Revolving Credit Facility. The principal amount of any Swingline Loan which is repaid may be reborrowed by the Borrowers, subject to the terms and conditions of this Agreement, in accordance with the terms of this SECTION 2A.1. SECTION 2A.2 Making Swingline Loans. Requests for Swingline Loans, which shall be Base Rate Loans and shall not be entitled to be converted into Eurodollar Loans, shall be made not later than 1:00 p.m. on the Business Day of the proposed Swingline Loan by delivery by telex, telegraph, telecopy or telephone of a request therefor by Heafner to the Administrative Agent and the Swingline Lender and shall be deemed to be made on each Settlement Date. Each such notice (a "Swingline Loan Request") shall specify (i) the proposed borrowing date and (ii) the amount of Swingline Loan requested (which, in the case of deemed Settlement Date requests shall be, respectively, the Settlement Date and the excess, if any, of the Swingline Facility over the outstanding principal amount of Swingline Loans on the Settlement Date). Not later than 3:00 p.m. on the date specified for any Swingline Loan, the Swingline Lender shall make available such Swingline Loan in immediately available funds to the Administrative Agent. After the Administrative Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in ARTICLE 5, the Administrative Agent will, and the Borrowers hereby irrevocably authorize the Administrative Agent to, disburse the proceeds of each Swingline Loan by making such funds available to the Borrowers by wire transfer to such account of a Borrower as Heafner and the Administrative Agent may agree from time to time. SECTION 2A.3 Repayment of Swingline Loans. The outstanding principal amount of all Swingline Loans is due and payable, and shall be repaid by the Borrowers, as their joint and several obligation, in full, not later than the Termination Date, together with accrued and unpaid interest thereon to such date. SECTION 2A.4 Prepayment. If at any time the aggregate unpaid principal amount of Swingline Loans outstanding to the Borrowers from the Swingline Lender exceeds the amount set forth in the first sentence of SECTION 2A.1, the Borrowers shall pay to the Administrative Agent for the account of the Swingline Lender on demand by the Administrative Agent, an amount equal to such excess, together with accrued and unpaid interest on the principal amount prepaid to the date of prepayment. For the avoidance of doubt, notwithstanding the foregoing, no 36 43 such prepayment shall be required if the Borrowers shall have made an appropriate prepayment in accordance with the provisions of SECTION 2.3(B). SECTION 2A.5 Swingline Note. The Swingline Loans made by the Swingline Lender and the obligation of the Borrowers to repay such Loans shall be evidenced by, and be repayable in accordance with the terms of, a single Swingline Note, made by the Borrowers payable to the order of the Swingline Lender. The Swingline Note shall be dated the Effective Date and be duly and validly executed and delivered by the Borrowers. SECTION 2A.6 Settlement with Other Lenders. All payments of principal, interest and any other amount with respect to such Swingline Loan shall be payable to and received by the Administrative Agent for the account of the Swingline Lender. Upon demand by the Swingline Lender, with notice thereof to the Administrative Agent, and notwithstanding the occurrence and continuation at the time of such demand of any Default or Event of Default, each Lender shall make a Base Rate Revolving Credit Loan in the amount of its Commitment Percentage of the outstanding Swingline Loans for the account of the Borrowers or purchase a participation of such amount in each outstanding Swingline Loan, the proceeds of which shall be paid over to the Swingline Lender and applied to the repayment of such Swingline Loans. Any payments received by the Administrative Agent prior to such repayment by the Lenders which in accordance with the terms of this Agreement are to be applied to the reduction of the outstanding principal balance of Swingline Loans shall be paid over to the Swingline Lender and so applied. 37 44 ARTICLE 3 LETTER OF CREDIT GUARANTEES SECTION 3.1 Agreement to Issue. Upon the terms and subject to the conditions of, and in reliance upon the representations and warranties made under, this Agreement, FCC agrees to issue or cause the issuance of, including by issuance of Letter of Credit Guarantees, for the account of any Borrower or Subsidiary one or more Letters of Credit in accordance with this ARTICLE 3, from time to time during the period commencing on the Effective Date and ending on the Termination Date. SECTION 3.2 Amounts. FCC shall not have any obligation to issue or cause the issuance of any Letter of Credit at any time: (a) if, after giving effect to the issuance of the requested Letter of Credit, (i) the aggregate Letter of Credit Obligations of the Borrowers would exceed the Letter of Credit Guarantee Facility then in effect or (ii) the aggregate principal amount of Loans outstanding would exceed the Borrowing Base (after reduction for the Letter of Credit Reserve in respect of such Letter of Credit) or (iii) if no Loans are outstanding, the aggregate Letter of Credit Obligations would exceed the Borrowing Base; or (b) which has a term longer than one calendar year or an expiration date after the last Business Day that is more than 30 days prior to the Termination Date. SECTION 3.3 Conditions. The obligation of FCC to issue any Letter of Credit Guarantee is subject to the satisfaction of (a) the applicable conditions precedent contained in ARTICLE 5 and (b) the following additional conditions precedent in a manner satisfactory to the Administrative Agent and FCC: (i) the Borrowers shall have delivered to FCC and the Administrative Agent at such times and in such manner as FCC or the Administrative Agent may prescribe, a Reimbursement Agreement and such other documents as may be required pursuant to the terms thereof, and the form of the proposed Letter of Credit, all of which shall be satisfactory in form and substance, as completed, to the Issuing Bank, FCC and the Administrative Agent; and (ii) as of the date of issuance, no law, rule or regulation, or order of any court, arbitrator or governmental authority having jurisdiction or authority over FCC shall purport by its terms to enjoin or restrain FCC or commercial financing entities, generally, from issuing guarantees, including guarantees of letter of credit obligations, of the type and in the amount of the proposed Letter of Credit Guarantee or the proposed Letter of Credit Guarantee specifically. SECTION 3.4 Issuance of Letter of Credit Guarantees. (a) Request for Issuance. A Borrower shall give the Issuing Bank, FCC and the Administrative Agent written notice of such Borrower's request for the issuance of a Letter of Credit no later than six Business Days prior to the proposed date of issuance. Such notice shall 38 45 be irrevocable and shall be accompanied by a completed form of letter of credit application in a form acceptable to the Issuing Bank specifying at least the name of the Subsidiary (if other than such Borrower) which will appear as the account party on the face of such Letter of Credit, the original face amount of the Letter of Credit requested, the effective date (which date shall be a Business Day) of issuance of such requested Letter of Credit, whether the Letter of Credit may be drawn in a single or in multiple draws, the date on which such requested Letter of Credit is to expire (which date shall be a Business Day earlier than the 30th day prior to the Termination Date), the purpose for which the Letter of Credit is to be issued and the beneficiary of the Letter of Credit. The Borrower shall attach to such notice the form of the Letter of Credit that the Borrower requests be issued. (b) Responsibilities of the Administrative Agent; Issuance. The Administrative Agent shall determine, as of the Business Day immediately preceding the requested effective date of issuance of a Letter of Credit set forth in the notice from the Borrowers pursuant to SECTION 3.4(A), the amount of Letter of Credit Availability. If (i) the form of requested Letter of Credit delivered by the Borrowers to the Administrative Agent is acceptable to FCC and the Administrative Agent in their sole, reasonable discretion, (ii) the amount of the Letter of Credit Guarantee necessary to procure the issuance by the Issuing Bank of such Letter of Credit is less than or equal to the Letter of Credit Availability and (iii) the Administrative Agent has received a certificate from the Borrowers stating that the applicable conditions set forth in ARTICLE 5 have been satisfied, then FCC will join in the application for such Letter of Credit or otherwise cause the Issuing Bank to issue the requested Letter of Credit. (c) Notice of Issuance. Promptly after the issuance of any Letter of Credit supported by a Letter of Credit Guarantee, FCC or the Issuing Bank shall give the Administrative Agent written or facsimile notice, or telephonic notice confirmed promptly thereafter in writing, of the issuance of such Letter of Credit, and the Administrative Agent shall give each Lender a periodic written report, not less frequently than monthly, of each such Letter of Credit outstanding as of the date thereof, the amount available to be drawn thereunder and the expiration date thereof. (d) No Extension or Amendment. FCC shall not cause any Letter of Credit to be extended or amended unless the requirements of this SECTION 3.4 are met as though a new Letter of Credit were being requested and issued. SECTION 3.5 Duties of FCC. The rights and obligations of the Issuing Bank in connection with any Letter of Credit shall be governed by the Reimbursement Agreement for such Letter of Credit and in no event shall the Administrative Agent or any Lender have any liability or obligation to any Loan Party or its Subsidiaries for any failure or refusal or delay by the Issuing Bank to issue, or error in issuing, any Letter of Credit. Any action taken or omitted to be taken by FCC under or in connection with any Letter of Credit Guarantee, if taken or omitted in the absence of gross negligence or willful misconduct, shall not result in any liability of FCC to any Lender or relieve any Lender of its obligations hereunder to FCC. In determining whether to pay under any Letter of Credit Guarantee, FCC shall have no obligation to confirm that the Issuing Bank acted properly in honoring any drawing under the related Letter of Credit and shall be entitled to rely on the Issuing Bank's demand for payment as sufficient evidence of the Issuing Bank's entitlement thereto. 39 46 SECTION 3.6 Payment of Reimbursement Obligations. (a) Payment to Issuing Bank, FCC. Notwithstanding any provisions to the contrary in any Reimbursement Agreement, the Borrowers agree, jointly and severally, for the benefit of FCC and the other Lenders, to reimburse the Issuing Bank for any drawings (whether partial or full) under each Letter of Credit on demand and agree to pay to the Issuing Bank the amount of all other Reimbursement Obligations and other amounts payable to the Issuing Bank under or in connection with such Letter of Credit in accordance with the Reimbursement Agreement. If FCC shall pay any amount under any Letter of Credit Guarantee, the Borrowers shall, jointly and severally, unless the Borrowers shall have already paid the amount in respect of which payment was made under such Letter of Credit Guarantee to the Issuing Bank in accordance with a Reimbursement Agreement, pay to FCC on the first Business Day following such payment, an amount equal to the amount of the payment made by FCC under such Letter of Credit Guarantee, together with interest on such amount for the period from FCC's payment under the applicable Letter of Credit Guarantee, until repayment in full of such amount, at the interest rate then applicable to Base Rate Revolving Credit Loans. So long as FCC remains unpaid, it shall be subrogated to all rights and remedies of (i) the Issuing Bank under the related Reimbursement Agreement and (ii) any beneficiary of such Letter of Credit whose claims against the account party on such Letter of Credit have been satisfied with proceeds of drawing under such Letter of Credit. (b) Recovery or Avoidance of Payments. In the event any payment by or on behalf of the Borrowers with respect to any Letter of Credit (or any Reimbursement Obligation relating thereto) or any Letter of Credit Guarantee received by FCC, the Issuing Bank or by the Administrative Agent and distributed by the Administrative Agent to the Lenders on account of their respective participations therein, is thereafter set aside, avoided or recovered from FCC, the Issuing Bank or the Administrative Agent in connection with any receivership, liquidation or bankruptcy proceeding, the Lenders shall, upon demand by the Administrative Agent, pay to the Administrative Agent, for the account of the Administrative Agent, FCC or the Issuing Bank, as the case may be, their respective Proportionate Shares of such amount set aside, avoided or recovered together with interest at the rate required to be paid by the Administrative Agent, FCC or the Issuing Bank upon the amount required to be repaid by it. SECTION 3.7 Participations. (a) Purchase of Participations. Immediately upon the Effective Date as to Letters of Credit outstanding on the Effective Date and immediately upon issuance by the Issuing Bank of any other Letter of Credit, each Lender shall be deemed to have irrevocably and unconditionally purchased and received without recourse or warranty, an undivided interest and participation in the Letter of Credit Obligations thereunder, equal to such Lender's Proportionate Share thereof (including, without limitation, all obligations of the Borrowers with respect thereto, other than amounts owing to FCC or for the account of the Issuing Bank under SECTION 4.2(E), and any security therefor or guaranty pertaining thereto). (b) Sharing of Letter of Credit Payments. In the event that FCC makes a payment under any Letter of Credit Guarantee and shall not have been repaid such amount pursuant to SECTION 3.6, then the Borrowers shall be deemed to have requested a Base Rate 40 47 Revolving Credit Loan in the amount of such payment and, notwithstanding the occurrence or continuance of a Default or Event of Default at the time of such payment, each Lender shall be absolutely obligated to make its Proportionate Share of such Loan available to the Administrative Agent for disbursement as provided by SECTION 2.2(B) or to purchase a participation in the payment made by FCC under any such Letter of Credit Guarantee. (c) Sharing of Reimbursement Obligation Payments. Whenever FCC receives a payment from or on behalf of the Borrowers or the Issuing Bank on account of a Reimbursement Obligation as to which the Administrative Agent has previously received for the account of FCC payment from a Lender pursuant to this SECTION 3.7, FCC shall promptly pay to the Administrative Agent, for the benefit of such Lender, such Lender's Proportionate Share of the amount of such payment from the Borrowers or the Issuing Bank in Dollars. Each such payment shall be made by FCC on the Business Day on which FCC receives immediately available funds from the Borrowers or the Issuing Bank pursuant to the immediately preceding sentence, if received prior to 11:00 a.m. on such Business Day, and otherwise on the next succeeding Business Day. (d) Documentation. Upon the request of any Lender, the Administrative Agent shall furnish to such Lender copies of any Letter of Credit, Reimbursement Agreement, Letter of Credit Guarantee or application for any Letter of Credit and such other documentation as to Letters of Credit as may reasonably be requested by such Lender. (e) Obligations Irrevocable. The obligations of each Lender to make payments to the Administrative Agent with respect to any Letter of Credit or Letter of Credit Guarantee in respect thereof and its participation therein pursuant to the provisions of this SECTION 3.7 or otherwise and the obligations of the Borrowers to make payments to FCC, the Issuing Bank or to the Administrative Agent, for the account of Lenders, shall be irrevocable, shall not be subject to any qualification or exception whatsoever and shall be made in accordance with the terms and conditions of this Agreement (assuming, in the case of the obligations of the Lenders to make such payments, that the Letter of Credit has been issued in accordance with SECTION 3.4), including, without limitation, any of the following circumstances: (i) Any lack of validity or enforceability of this Agreement or any of the other Loan Documents; (ii) The existence of any claim, set-off, defense or other right which the Borrowers (or any of them) may have at any time against a beneficiary named in a Letter of Credit or any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), any Lender, FCC, the Issuing Bank or any other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transactions between the Borrowers or any other Person and the beneficiary named in any Letter of Credit); (iii) Any draft, certificate or any other document presented under the Letter of Credit upon which payment has been made in good faith and according to 41 48 its terms proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) The surrender or impairment of any Collateral or any other security for the Secured Obligations or the performance or observance of any of the terms of any of the Loan Documents; (v) The occurrence of any Default or Event of Default; or (vi) FCC's, the Issuing Bank's or the Administrative Agent's failure to deliver the notice provided for in SECTION 3.4(C). SECTION 3.8 Indemnification, Exoneration. (a) Indemnification. In addition to amounts payable as elsewhere provided in this ARTICLE 3, the Borrowers, jointly and severally, agree to protect, indemnify, pay and save harmless the Lenders, FCC, the Issuing Bank and the Administrative Agent from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees) which any Lender, FCC, the Issuing Bank or the Administrative Agent may incur or be subject to as a consequence, directly or indirectly, of (i) the issuance of any Letter of Credit, other than as a result of its gross negligence or willful misconduct, as determined by a court of competent jurisdiction, or (ii) the failure of the Issuing Bank to honor a drawing under any Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto governmental authority (all such acts or omissions being hereinafter referred to collectively as "Government Acts"). (b) Assumption of Risk by the Borrowers. As among the Borrowers, the Lenders, FCC, the Issuing Bank and the Administrative Agent, the Borrowers assume all risks of the acts and omissions of, or misuse of any of the Letters of Credit by, the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, subject to the provisions of the applications for the issuance of Letters of Credit, the Lenders, FCC, the Issuing Bank and the Administrative Agent shall not be responsible for: (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any Person in connection with the application for and issuance of and presentation of drafts with respect to any of the Letters of Credit, even if it should prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; 42 49 (iii) the failure of the beneficiary of any Letter of Credit to comply duly with conditions required in order to draw upon such Letter of Credit; (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) errors in interpretation of technical terms; (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Letter of Credit or of the proceeds thereof; (vii) the misapplication by the beneficiary of any Letter of Credit of the proceeds of any drawing under such Letter of Credit; or (viii) any consequences arising from causes beyond the control of the Lenders, FCC, the Issuing Bank or the Administrative Agent, including, without limitation, any Government Acts. None of the foregoing shall affect, impair or prevent the vesting of any of the Administrative Agent's rights or powers under this SECTION 3.8. (c) Exoneration. In furtherance and extension, and not in limitation, of the specific provisions set forth above, any action taken or omitted by the Administrative Agent, FCC, the Issuing Bank or any Lender under or in connection with any of the Letters of Credit or any related certificates, if taken or omitted in good faith, shall not result in any liability of any Lender, FCC, the Issuing Bank or the Administrative Agent to the Borrowers or relieve any Borrower of any of its obligations hereunder to any such Person. SECTION 3.9 Supporting Letter of Credit; Cash Collateral Account. Upon the occurrence of an Event of Default or, if, notwithstanding the provisions of SECTION 3.2(B), any Letter of Credit is outstanding on the Termination Date, then on or prior to the Termination Date, the Borrowers shall, as their joint and several obligation, promptly on demand by the Administrative Agent, deposit with the Administrative Agent, for the ratable benefit of the Lenders, with respect to each Letter of Credit then outstanding, as the Administrative Agent shall specify, either (a) a standby letter of credit (a "Supporting Letter of Credit") in form and substance satisfactory to the Administrative Agent, issued by an issuer satisfactory to the Administrative Agent in its sole and absolute judgment in an amount equal to 105% of the greatest amount for which such Letter of Credit may be drawn, under which Supporting Letter of Credit the Administrative Agent shall be entitled to draw amounts necessary to reimburse the Lenders for payments made by the Lenders under the related Letter of Credit Guarantee or under any reimbursement or guaranty agreement with respect thereto, or (b) Cash Collateral in an amount necessary to reimburse the Administrative Agent and the Lenders for payments made by the Administrative Agent and the Lenders under the related Letter of Credit Guarantee or under any reimbursement or guaranty agreement with respect thereto. Such Supporting Letter of Credit or Cash Collateral shall be held by the Administrative Agent for the benefit of the Lenders, as security for, and to provide for the payment of, the Reimbursement Obligations. In addition, the 43 50 Administrative Agent may at any time after such Event of Default or the Termination Date apply any or all of such Cash Collateral to the payment of any or all of the Secured Obligations then due and payable. The Cash Collateral shall be deposited in the Cash Collateral Account or an Investment Account and shall be administered in accordance with the provisions of SECTION 4.15. 44 51 ARTICLE 4 GENERAL LOAN PROVISIONS SECTION 4.1 Interest. (a)(i) Base Rate Revolving Credit Loans. Subject to the provisions of SECTION 4.1(C), the Borrowers will pay interest on the unpaid principal amount of each Base Rate Revolving Credit Loan, for each day from the day such Loan is made (or is converted to a Base Rate Loan) until such Loan is paid (whether at maturity, by reason of acceleration, or otherwise) or is converted to a Loan of a different Type, at a rate per annum equal to the sum of (i) the Applicable Margin and (ii) the Base Rate, payable monthly in arrears as it accrues on each Interest Payment Date. (ii) Eurodollar Rate Revolving Credit Loans. Subject to the provisions of SECTION 4.1(C), the Borrowers will pay interest on the unpaid principal amount of each Eurodollar Rate Revolving Credit Loan for the applicable Interest Period at a rate per annum equal to the sum of (i) the Applicable Margin and (ii) the Eurodollar Rate, payable on the last day of such Interest Period and, if such Interest Period is longer than three months, at three-month intervals during such Interest Period. (iii) Swingline Loans. Subject to the provisions of SECTION 4.1(C), the Borrowers will pay interest on the unpaid principal amount of each Swingline Loan for each day from the day such Loan is made until such Loan is paid (whether at maturity, by reason of acceleration or otherwise) at a rate per annum equal to the sum of (i) the Applicable Margin and (ii) the Base Rate, payable monthly in arrears as it accrues on each Interest Payment Date. (b) Other Secured Obligations. The Borrowers will, to the extent permitted by Applicable Law, pay interest on the unpaid principal amount of any Secured Obligation that is due and payable other than the Loans in accordance with SECTIONS 4.1(A) or (C), as applicable, as if such Secured Obligation were a Base Rate Loan. (c) Default Rate. If a payment default pursuant to SECTION 12.1(A) shall occur and be continuing or there shall occur and be continuing, uncured and unwaived for 30 days, any other Event of Default, at the election of the Required Lenders, the unpaid principal amount of the Loans and other Secured Obligations shall no longer bear interest in accordance with the terms of SUBSECTION 4.1(A) OR (B), as applicable, but shall bear interest for each day from the date of such payment default or the 30th day after such other Event of Default until such payment default or other Event of Default shall have been cured or waived at a rate per annum equal to the sum of (i) the Default Margin and (ii) the rate otherwise applicable to such Loan, payable on demand. The interest rate provided for in the preceding sentence shall, to the extent permitted by Applicable Law, apply to and accrue on the amount of any judgment entered with respect to any Secured Obligation and shall continue to accrue at such rate during any proceeding described in SECTION 12.1(G) or (H). (d) Calculation of Interest. The interest rates provided for in SECTIONS 4.1(A), (B) and (C) shall be computed on the basis of a year of 360 days and the actual number of days 45 52 elapsed. Each interest rate determined with reference to the Base Rate shall be adjusted automatically as of the opening of business on the effective date of each change in the Base Rate. (e) Maximum Rate. It is not intended by the Lenders, and nothing contained in this Agreement or the Notes shall be deemed, to establish or require the payment of a rate of interest in excess of the maximum rate permitted by Applicable Law (the "Maximum Rate"). If, in any month, the Effective Interest Rate, absent such limitation, would have exceeded the Maximum Rate, then the Effective Interest Rate for that month shall be the Maximum Rate, and, if in future months, the Effective Interest Rate would otherwise be less than the Maximum Rate, then the Effective Interest Rate shall remain at the Maximum Rate until such time as the amount of interest paid hereunder equals the amount of interest which would have been paid if the same had not been limited by the Maximum Rate. In the event that, upon payment in full of the Secured Obligations, the total amount of interest paid or accrued under the terms of this Agreement is less than the total amount of interest which would have been paid or accrued if the Effective Interest Rate (without regard to any limitation hereunder) had at all times been in effect, then the Borrowers shall, to the extent permitted by Applicable Law, pay to the Lenders an amount equal to the excess, if any, of (i) the lesser of (A) the amount of interest which would have been charged if the Maximum Rate had, at all times, been in effect and (B) the amount of interest which would have accrued had the Effective Interest Rate (without reference to any limitation hereunder), at all times, been in effect and (ii) the amount of interest actually paid or accrued under this Agreement. In the event the Lenders receive, collect or apply as interest any sum in excess of the Maximum Rate, such excess amount shall be applied to the reduction of the principal balance of the Secured Obligations, and if no such principal is then outstanding, such excess or part thereof remaining, shall be paid to the Borrowers. For the purposes of computing the Maximum Rate, to the extent permitted by applicable law, all interest and charges, discounts, amounts, premiums or fees deemed to constitute interest under applicable law, shall be amortized, prorated, allocated and spread in substantially equal parts throughout the full term of this Agreement. The provisions of this SECTION 4.1(E) shall be deemed to be incorporated into every Loan Document (whether or not any provision of this SECTION 4.1(E) is specifically referred to therein). SECTION 4.2 Certain Fees. (a) Administrative Agent Fee. For administration and other services performed by the Administrative Agent in connection with its continuing administration of this Agreement, the Borrowers, jointly and severally, shall pay to the Administrative Agent, for its own account, and not for the account of the Lenders, an annual fee in accordance with the provisions of a separate letter agreement between the Borrowers and the Administrative Agent. (b) Unused Commitment Fee. In connection with and as consideration for the holding available for the use of the Borrowers hereunder the full amount of the Commitments, the Borrowers, jointly and severally, will pay a fee to the Administrative Agent, for the Ratable benefit of the Lenders, for each day from the Effective Date until the Termination Date, in an amount equal to 0.375% per annum of the Unused Commitments for such day, SUBJECT, HOWEVER to quarterly adjustment in accordance with the pricing matrix attached hereto as ANNEX B, on the dates specified for adjustments to the Applicable Margin. "Unused Commitments" means an amount equal to the aggregate Commitments, LESS the aggregate 46 53 outstanding principal amount of Loans, other than any Swingline Loan, LESS the total amount of Letter of Credit Obligations, in each case on the date of determination. Such fee shall be payable monthly in arrears on each Interest Payment Date and on the date of any permanent reduction in the aggregate Commitments. (c) Arrangement Fee. As compensation for structuring and arranging the credit facilities available hereunder, on the Effective Date the Borrowers, jointly and severally, shall pay to FleetBoston Robertson Stephens Inc. ("FRSI"), for its own account, an arrangement fee in accordance with the provisions of a separate letter agreement between the Borrowers and FRSI. (d) Closing Fee. As compensation for structuring and approving the credit facilities available hereunder, on the Effective Date the Borrowers, jointly and severally, shall pay to the Administrative Agent for the Ratable benefit of the Lenders a closing fee at the rate of 0.25% of each such Lender's Commitment. (e) Letter of Credit Fees. The Borrowers, jointly and severally, agree to pay to the Administrative Agent through its Treasury and International Services Group: (i) for the Ratable benefit of the Lenders, Letter of Credit fees on each Letter of Credit or Letter of Credit Guarantee equal to the Applicable Margin per annum (or, in the case of commercial or documentary Letters of Credit or related Letter of Credit Guarantees, such Applicable Margin minus 0.50%) applicable to Eurodollar Rate Loans on the date of issuance of such Letter of Credit, payable quarterly in arrears on the first day of each January, April, July and October on the average daily Letter of Credit Amount of such Letters of Credit outstanding during the preceding Fiscal Quarter; (ii) for the account of the Issuing Bank, the standard fees and charges of the Issuing Bank for issuing, administering, amending, renewing, paying and canceling and otherwise administering letters of credit, as and when assessed as to any Letters of Credit; and (iii) for the account of FCC, an additional fronting fee at a rate of 0.125% per annum of the Letter of Credit Amount of each Letter of Credit, payable quarterly in arrears on the first day of each January, April, July and October, on the average daily Letter of Credit Amounts of all Letters of Credit from time to time outstanding from the Issuing Bank during the preceding Fiscal Quarter. (f) General. All fees provided for in this SECTION 4.2 and otherwise in this Agreement or any other Loan Document, shall be fully earned when due and payable and, except as otherwise set forth herein or required by applicable law, shall not be subject to refund or rebate. All such fees are for compensation for services and are not, and shall not be deemed to be, interest or a charge for the use of money. Fees payable pursuant to the foregoing subsections (b) and (e) shall be calculated based on a year of 360 days and the actual number of days elapsed. 47 54 SECTION 4.3 Manner of Payment. (a) Except as otherwise expressly provided in SECTION 8.1(C), each payment (including prepayments) by the Borrowers on account of the principal of or interest on the Loans or of any other amounts payable to the Administrative Agent or the Lenders under this Agreement or any Note or other Loan Document shall be made not later than 12:00 noon on the date specified for payment under this Agreement to the Administrative Agent, at the Administrative Agent's Office, in Dollars, in immediately available funds and shall be made without any setoff, counterclaim or deduction whatsoever. Any payment received after such time but before 2:00 p.m. on such day shall be deemed a payment on such date for the purposes of SECTION 12.1, but for all other purposes shall be deemed to have been made on the next succeeding Business Day. (b) The Borrowers hereby irrevocably authorize each Lender and each Affiliate of such Lender and each participant herein to charge any account of a Borrower maintained with such Lender or such Affiliate or participant with such amounts as may be necessary from time to time to pay any Secured Obligations (whether or not owed to such Lender, Affiliate or participant) which are not paid when due. SECTION 4.4 General. If any payment under this Agreement or any Note shall be specified to be made on a day which is not a Business Day, it shall be made on the next succeeding day which is a Business Day and such extension of time shall in such case be included in computing interest, if any, in connection with such payment. SECTION 4.5 Loan Accounts; Statements of Account. (a) Each Lender shall open and maintain on its books a loan account in Heafner's name (each, a "Loan Account" and collectively, the "Loan Accounts"). Each such Loan Account shall show as debits thereto each Loan made under this Agreement by such Lender to the Borrowers and as credits thereto all payments received by such Lender and applied to principal of such Loans, so that the balance of the Loan Account at all times reflects the principal amount due such Lender from the Borrowers. (b) The Administrative Agent shall maintain on its books a control account for the Borrowers in which shall be recorded (i) the amount of each disbursement made hereunder, (ii) the amount of any principal or interest due or to become due from the Borrowers hereunder, and (iii) the amount of any sum received by the Administrative Agent hereunder from or on behalf of the Borrowers and each Lender's share therein. (c) The entries made in the accounts pursuant to SUBSECTIONS (A) and (B) shall be prima facie evidence, in the absence of manifest error, of the existence and amounts of the obligations of the Borrowers therein recorded and in case of discrepancy between such accounts, in the absence of manifest error, the accounts maintained pursuant to SUBSECTION (B) shall be controlling. (d) The Administrative Agent will account separately to the Borrowers monthly with a statement of Loans, charges and payments made to and by the Borrowers pursuant to this Agreement, and such accounts rendered by the Administrative Agent shall be 48 55 deemed final, binding and conclusive, save for manifest error, unless the Administrative Agent is notified by the Borrowers in writing to the contrary within 30 days of the date the account to the Borrowers was so rendered. Such notice by the Borrowers shall be deemed an objection to only those items specifically objected to therein. Failure of the Administrative Agent to render such account shall in no way affect the rights of the Administrative Agent or of the Lenders hereunder. SECTION 4.6 Reduction of Commitments; Termination of Agreement. (a) Reduction of Commitments. (i) The Borrowers shall have the right, at any time and from time to time, upon at least seven days' prior irrevocable, written notice to the Administrative Agent, to reduce permanently and Ratably in part the Commitments; PROVIDED, HOWEVER, that any such partial reduction shall be in an amount equal to $5,000,000 or any larger integral, multiple of $1,000,000 and shall not reduce the aggregate Commitments below an amount equal to the sum of the Letter of Credit Reserve PLUS the Rent Reserve PLUS any Additional Reserves. As of the date of reduction set forth in such notice, the Commitments shall be permanently reduced to the amount stated in the Borrowers' notice (and each Lender's Commitment shall be reduced Ratably) for all purposes herein, and the Borrowers shall pay the amount necessary to reduce the amount of the outstanding Loans to any amount that does not exceed the Borrowing Base (as reduced), together with accrued interest on any amounts so prepaid and an early termination fee in an amount equal to (A) 1% of the amount of such reduction if effected prior to the first anniversary of the Effective Date or (B) 1/2 of 1% of the amount of such reduction if effected on or after the first anniversary of the Effective Date but prior to the second anniversary of the Effective Date. (ii) The aggregate Commitments shall be automatically reduced to zero on the Termination Date. (iii) The aggregate Commitments shall be reduced as provided in SECTION 4.9. (iv) The Commitments or any portion thereof terminated or reduced pursuant to this SECTION 4.6 may not be reinstated. (b) Termination of Agreement. The Borrowers shall have the right, at any time, to terminate this Agreement upon not less than 10 Business Days' prior written notice, which notice shall specify the effective date of such termination. Upon receipt of such notice, the Administrative Agent shall promptly notify each Lender thereof. On the date specified in such notice, such termination shall be effected, PROVIDED, that the Borrowers shall, on or prior to such date, pay to the Administrative Agent, for its account and the account of the Lenders, in same day funds, an amount equal to all Secured Obligations (other than with respect to Letter of Credit Obligations) outstanding on such date, including, without limitation, all (i) accrued interest thereon, (ii) all accrued fees provided for hereunder, (iii) any amounts payable to the Administrative Agent or the Lenders pursuant to SECTIONS 4.10, 4.15, 15.2, 15.3, 15.14 and 15.23, and, in addition thereto, shall deliver to the Administrative Agent, in respect of each 49 56 outstanding Letter of Credit, either a Supporting Letter of Credit or Cash Collateral as provided in SECTION 3.9, and (iv) if such termination occurs prior to the first anniversary of the Effective Date, an early termination fee in an amount equal to 1% of the amount of the Commitments so terminated or if such termination occurs on or after the first anniversary of the Effective Date but prior to the second anniversary of the Effective Date, an early termination fee in an amount equal to 1/2 of 1% of the amount of the Commitments so terminated, PROVIDED, that such fee shall be payable only if contemporaneously with such termination and repayment, the Borrowers (or any of them) issue additional Debt in a private placement, a public offering, or to one or more institutional lenders, PROVIDED FURTHER, that if Loan Availability has been reduced by 10% or more during the six-month period preceding such termination as a result of the Administrative Agent's having, without the agreement of Heafner, reduced any advance rate specified in the definition "Borrowing Base" or declared in the exercise of its reasonable credit judgment any otherwise Eligible Inventory or Eligible Receivables to be ineligible, then such early termination fee will not be payable notwithstanding that any such other Debt is incurred. Additionally, the Borrowers shall provide the Administrative Agent and the Lenders with indemnification in form and substance satisfactory to the Administrative Agent in its reasonable judgment with respect to such customary matters as the Administrative Agent and the Lenders shall reasonably require. Following a notice of termination as provided for in this SECTION 4.6(B) and upon payment in full of the amounts specified in this SECTION 4.6(B), and execution and delivery of any required indemnification, this Agreement shall be terminated and the Administrative Agent, the Lenders and the Borrowers shall have no further obligations to any other party hereto, except for the obligations to the Administrative Agent and the Lenders pursuant to SECTION 15.12 hereof, which shall survive any termination of this Agreement. SECTION 4.7 Making of Loans. (a) Nature of Obligations of Lenders to Make Loans. The obligations of the Lenders under this Agreement to make the Loans are several and are not joint or joint and several. (b) Assumption by Administrative Agent. Subject to the provisions of SECTION 4.8 and notwithstanding the occurrence or continuance of a Default or Event of Default or other failure of any condition to the making of Loans hereunder subsequent to the Loans to be made on the Effective Date, unless the Administrative Agent shall have received notice from a Lender prior to a proposed Borrowing date that such Lender will not make available to the Administrative Agent such Lender's Proportionate Share of the Loan to be borrowed on such date, the Administrative Agent may assume that such Lender will make such Proportionate Share available to the Administrative Agent in accordance with SECTION 2.2(A), and the Administrative Agent may, in reliance upon such assumption, make available to the Borrowers on such date a corresponding amount. If and to the extent a Lender shall not make its Proportionate Share of any Loan available to the Administrative Agent, and the Administrative Agent has made a corresponding amount available to the Borrowers, such Lender, on the one hand, and the Borrowers, jointly and severally on the other hand, severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount (the "Make-Whole Amount"), together with interest thereon for each day from the date such amount is made available to the Borrowers until the date such amount is repaid to the Administrative Agent at (i) the Federal Funds Rate if repaid by the Lender or (ii) the Effective Interest Rate or, if lower, subject to SECTION 4.1(F), the 50 57 Maximum Rate, if repaid by the Borrowers. If such Lender shall repay to the Administrative Agent such corresponding amount, the amount so repaid shall constitute such Lender's Proportionate Share of the Loan made on such Borrowing date for purposes of this Agreement. The Administrative Agent shall not be required to make any Loan as to which it shall have received notice by a Lender of such Lender's intention not to make its Ratable Share of such Loan available to the Administrative Agent. The failure of any Lender to make its Proportionate Share of any Loan available shall not (without regard to whether the Borrowers shall have returned the amount thereof to the Administrative Agent in accordance with this SECTION 4.7) relieve it or any other Lender of its obligation, if any, hereunder to make its Proportionate Share of the Loan available on such Borrowing date, but no Lender shall be responsible for the failure of any other Lender to make its Proportionate Share of a Loan available on the Borrowing date. (c) Delegation of Authority to Administrative Agent. Without limiting the generality of SECTION 14.1, each Lender expressly authorizes the Administrative Agent to determine on behalf of such Lender (i) any reduction or increase of advance rates applicable to the Borrowing Base, so long as such advance rates do not at any time exceed the rates set forth in the Borrowing Base definition as in effect on the Agreement Date, (ii) the creation or elimination of Additional Reserves and (iii) whether or not Inventory or Receivables shall be deemed to constitute Eligible Inventory or Eligible Receivables. Any withdrawal of authorization under this SECTION 4.7(C) shall not affect the validity of any Loans made prior to the effectiveness thereof. (d) Overadvances. Notwithstanding anything to the contrary contained elsewhere in this SECTION 4.7 or this Agreement or the other Loan Documents and whether or not a Default or Event of Default exists at the time, the Administrative Agent may in its discretion require all Lenders to honor requests or deemed requests by the Borrowers for Loans at a time that an Overadvance Condition exists or which would result in an Overadvance Condition and each Lender shall be obligated to continue to make its Proportionate Share of any such Overadvance Loan up to a maximum amount outstanding equal to its Commitment, so long as such Overadvance is not known by the Administrative Agent to exceed $3,000,000 or to exist for more than five consecutive Business Days or more than 10 days in any Fiscal Year. SECTION 4.8 Settlement Among Lenders. (a) Revolving Credit Loans. It is agreed that each Lender's Net Outstandings are intended by the Lenders to be equal at all times to such Lender's Ratable Share of the aggregate principal amount of all Revolving Credit Loans outstanding. Notwithstanding such agreement, the several and not joint obligation of each Lender to make its Ratable Share of Loans in accordance with the terms of this Agreement and each Lender's right to receive its Ratable Share of principal payments on Revolving Credit Loans, the Lenders agree that, in order to facilitate the administration of this Agreement and the Loan Documents, settlement among them may take place on a periodic basis in accordance with the provisions of this SECTION 4.8. (b) Settlement Procedures. To the extent and in the manner hereinafter provided in this SECTION 4.8, settlement among the Lenders as to Base Rate Revolving Credit Loans may occur periodically on Settlement Dates determined from time to time by the Administrative Agent, which may occur before or after the occurrence or during the continuance 51 58 of a Default or Event of Default and whether or not all of the conditions set forth in SECTION 5.2 have been met. On each Settlement Date payments shall be made by or to FCC and the other Lenders in the manner provided in this SECTION 4.8 in accordance with the Settlement Report delivered by the Administrative Agent pursuant to the provisions of this SECTION 4.8 in respect of such Settlement Date, so that as of each Settlement Date, and after giving effect to the transactions to take place on such Settlement Date, each Lender's Net Outstandings shall equal such Lender's Ratable Share of the Revolving Credit Loans. (i) Selection of Settlement Dates. If the Administrative Agent elects, in its discretion, but subject to the consent of FCC, to settle accounts among the Lenders with respect to principal amounts of Base Rate Revolving Credit Loans less frequently than each Business Day, then the Administrative Agent shall designate periodic Settlement Dates which may occur on any Business Day after the Effective Date; PROVIDED, that (A) the Administrative Agent shall designate as a Settlement Date any Business Day which is an Interest Payment Date, (B) a Settlement Date shall occur not less often than every five Business Days, and (C) settlements with respect to each Eurodollar Rate Revolving Credit Loan shall take place on the Borrowing date for such Loan, on the last day of the Interest Period applicable thereto and on any other date during such Interest Period on which interest is payable thereon. The Administrative Agent shall designate a Settlement Date by delivering to each Lender a Settlement Report not later than 12:00 noon on the proposed Settlement Date, which Settlement Report shall be with respect to the period beginning on the next preceding Settlement Date and ending on such designated Settlement Date. (ii) Non-Ratable Loans and Payments. Between Settlement Dates, the Administrative Agent shall request and FCC may (but shall not be obligated to) advance to the Borrowers out of FCC's own funds, the entire principal amount of any Base Rate Loan requested or deemed requested pursuant to SECTION 2.2(A) (any such Base Rate Loan being referred to as a "Non-Ratable Loan"). The making of each Non-Ratable Loan by FCC shall be deemed to be a purchase by FCC of a 100% participation in each other Lender's Proportionate Share of such Non-Ratable Loan. All payments of principal, interest and any other amount with respect to such Non-Ratable Loan shall be payable to and received by the Administrative Agent for the account of FCC. Upon demand by FCC, with notice thereof to the Administrative Agent, each other Lender shall pay to FCC, as the repurchase of such participation, an amount equal to 100% of such Lender's Proportionate Share of the principal amount of such Non-Ratable Loan. Notwithstanding the provisions of SECTION 4.16, any payments received by the Administrative Agent between Settlement Dates which in accordance with the terms of this Agreement are to be applied to the reduction of the outstanding principal balance of the Revolving Credit Loans, shall be paid over to and retained by FCC for such application, and such payment to and retention by FCC shall be deemed, to the extent of each other Lender's Proportionate Share of such payment, to be a purchase by each such other Lender of a participation in the Revolving Credit Loans (including the repurchase of participations in Non-Ratable Loans) held by FCC. Upon demand by another Lender, with notice thereof to the Administrative Agent, FCC shall pay to the 52 59 Administrative Agent, for the account of such other Lender, as a repurchase of such participation, an amount equal to such other Lender's Proportionate Share of any such amounts (after application thereof to the repurchase of any participations of FCC in such other Lender's Proportionate Share of any Non-Ratable Loans) paid only to FCC by the Administrative Agent. (iii) Settlement. On each Settlement Date each Lender shall transfer to the Agent and the Agent shall transfer to each Lender such amounts as are necessary to insure that, after giving effect to all such transfers, each Lender's Net Outstandings are equal to such Lender's Proportionate Share of the aggregate principal amount of all Revolving Credit Loans then outstanding. (iv) Return of Payments. If any amounts received by FCC in respect of the Secured Obligations are later required to be returned or repaid by FCC to the Borrowers or any other obligor or their respective representatives or successors in interest, whether by court order, settlement or otherwise, in excess of the FCC's Proportionate Share of all such amounts required to be returned by all Lenders, each other Lender shall, upon demand by FCC with notice to the Administrative Agent, pay to the Administrative Agent for the account of FCC, an amount equal to the excess of such Lender's Proportionate Share of all such amounts required to be returned by all Lenders over the amount, if any, returned directly by such Lender. (v) Payments to Administrative Agent, Lenders. (A) Payment by any Lender to the Administrative Agent pursuant to this SECTION 4.8 shall be made not later than 1:00 p.m. on the Business Day such payment is due, PROVIDED that if such payment is due on demand by another Lender, such demand is made on the paying Lender not later than 10:00 a.m. on such Business Day. Payment by the Administrative Agent to any Lender shall be made by wire transfer, promptly following the Administrative Agent's receipt of funds for the account of such Lender and in the type of funds received by the Administrative Agent, PROVIDED that if the Administrative Agent receives such funds (A) at or prior to 1:00 p.m., the Administrative Agent shall pay such funds to such Lender by 2:00 p.m. on such Business Day or (B) after 1:00 p.m., the Administrative Agent shall pay such funds to such Lender prior to 2:00 p.m. on the following Business Day. If a demand for payment is made after the applicable time set forth above, the payment due shall be made by 2:00 p.m. on the first Business Day following the date of such demand. (B) If a Lender shall, at any time, fail to make any payment to the Administrative Agent required hereunder, the Administrative Agent may, but shall not be required to, retain payments that would otherwise be made to such Lender hereunder and apply such payments to such Lender's defaulted obligations hereunder, at such time, and in such order, as the Administrative Agent may elect in its sole discretion. 53 60 (C) With respect to the payment of any funds under this SECTION 4.8(B), whether from the Administrative Agent to a Lender or from a Lender to the Administrative Agent, the party failing to make full payment when due pursuant to the terms hereof shall, upon demand by the other party, pay such amount together with interest on such amount at the Federal Funds Rate. (c) Settlement of Other Secured Obligations. All other amounts received by the Administrative Agent on account of, or applied by the Administrative Agent to the payment of, any Secured Obligation owed to the Lenders (including, without limitation, fees payable to the Lenders pursuant to SECTIONS 4.2(B) and (E) and proceeds from the sale of, or other realization upon, all or any part of the Collateral following an Event of Default) that are received by the Administrative Agent at or prior to 1:00 p.m. on a Business Day will be paid by the Administrative Agent to each Lender on the same Business Day, and any such amounts that are received by the Administrative Agent after 1:00 p.m. will be paid by the Administrative Agent to each Lender on the following Business Day. Unless otherwise stated herein, the Administrative Agent shall distribute to each Lender such Lender's Proportionate Share of fees payable to the Lenders pursuant to SECTIONS 4.2(B) and (E) and shall distribute to each Lender such Lender's Proportionate Share (or if different, such Lender's share based upon the amount of the Secured Obligations then owing to each Lender) of the proceeds from the sale of, or other realization upon, all or any part of the Collateral following an Event of Default. SECTION 4.9 Mandatory Prepayments. The Borrowers shall permanently reduce the Commitments (Ratably) by an amount equal to any amount that would otherwise constitute "Net Available Cash" as defined in the Senior Note Indenture and be required by the terms thereof to be applied to the prepayment of the Senior Notes. To the extent necessary to comply with the provisions of SECTION 2.3(B) after giving effect to such reduction, the Borrowers shall also prepay the Loans. Any such prepayment pursuant to this SECTION 4.9 shall be applied first to Base Rate Loans to the extent thereof and then to Eurodollar Rate Loans. If any payments are received which result in prepayment of Eurodollar Rate Loans prior to the end of the applicable Interest Period, the Borrowers shall also pay any amounts due pursuant to SECTION 4.10. SECTION 4.10 Payments Not at End of Interest Period; Failure to Borrow. If for any reason any payment of principal with respect to any Eurodollar Rate Loan is made on any day prior to the last day of the Interest Period applicable to such Eurodollar Rate Loan or, after having given a Notice of Borrowing with respect to any Eurodollar Rate Loan or a Notice of Conversion or Continuation with respect to any Loan to be continued as or converted into a Eurodollar Rate Loan, such Loan is not made or is not continued as or converted into a Eurodollar Rate Loan due to the Borrowers' failure to borrow or to fulfill the applicable conditions set forth in ARTICLE 5, the Borrowers shall pay to each Lender, an amount equal to such Lender's costs and expenses incurred as a result of such failure, including in connection with obtaining deposits to fund its Ratable Share of such new (or continued or converted) Loan and redeploying such deposits. The Borrowers shall pay such amount upon presentation by the Administrative Agent of a statement setting forth the amount and the applicable Lender's calculation thereof in reasonable detail, which statement shall be deemed true and correct absent manifest error. 54 61 SECTION 4.11 Notice of Conversion or Continuation. Whenever the Borrowers desire, subject to the provisions of SECTIONS 4.12 and 4.13, to convert an outstanding Loan into a Loan or Loans of a different Type or to continue all or a portion of an outstanding Eurodollar Rate Loan for a subsequent Interest Period, the Borrowers shall notify the Administrative Agent in writing (which notice shall be irrevocable) by telecopy or electronic mail not later than 11:30 a.m. on the date two Business Days before the day on which such proposed conversion or continuation is to be effective (and such effective date of any continuation shall be the last day of the Interest Period for the Eurodollar Rate Loan). Each such notice (a "Notice of Conversion or Continuation") shall (i) identify the Loan to be converted or continued, the aggregate outstanding principal balance thereof and, if a Eurodollar Rate Loan, the last day of the Interest Period applicable to such Loan, (ii) specify the effective date of such conversion or continuation, (iii) specify the principal amount of such Loan to be converted or continued and, if converted, the Type or Types into which the same is to be converted, and (iv) the Interest Period to be applicable to the Eurodollar Rate Loan as converted or continued, and shall be immediately followed by a written confirmation thereof by the Borrowers in a form acceptable to the Administrative Agent, PROVIDED that if such written confirmation differs in any respect from the action taken by the Lenders, the records of the Administrative Agent shall control absent manifest error. SECTION 4.12 Conversion or Continuation. Provided that no Event of Default shall have occurred and be continuing (but subject to the provisions of SECTIONS 4.11 and 4.13), the Borrowers may request that all or any part of any outstanding Loan be converted into a Loan or Loans of a different Type or be continued as a Loan or Loans of the same Type, in the same aggregate principal amount, on any Business Day (which, in the case of continuation of a Eurodollar Rate Loan, shall be the last day of the Interest Period applicable to such Loan), upon notice (which notice shall be irrevocable) given in accordance with SECTION 4.11. SECTION 4.13 Duration of Interest Periods; Maximum Number of Eurodollar Rate Loans; Minimum Increments. (a) Subject to the provisions of the definition "Interest Period," the duration of each Interest Period applicable to a Eurodollar Rate Loan shall be as specified in the applicable Notice of Borrowing or Notice of Conversion or Continuation. The Borrowers may elect a subsequent Interest Period to be applicable to any Eurodollar Rate Loan by giving a Notice of Conversion or Continuation with respect to such Loan in accordance with SECTION 4.11. (b) If the Administrative Agent does not receive a notice of election in accordance with SECTION 4.11 with respect to the continuation of Eurodollar Rate Loan within the applicable time limits specified in said SECTION 4.11, or if, when such notice must be given, an Event of Default exists or such Type of Loan is not available, the Borrowers shall be deemed to have elected to convert such Eurodollar Rate Loan in whole into a Base Rate Loan on the last day of the Interest Period therefor. (c) Notwithstanding the foregoing, the Borrowers may not select an Interest Period that would end, but for the provisions of the definition "Interest Period," after the Termination Date. 55 62 (d) In no event shall there be more than six Eurodollar Rate Loans outstanding hereunder at any time. For the purpose of this SUBSECTION (D), each Loan having a distinct Interest Period shall be deemed to be a separate Loan hereunder. (e) Each Eurodollar Rate Loan shall be in a minimum amount of $1,000,000 or an integral multiple of $250,000 in excess thereof. SECTION 4.14 Changed Circumstances. (a) If the introduction of or any change in or in the interpretation of (in each case, after the date hereof) any law or regulation makes it unlawful, or any Governmental Authority asserts, after the date hereof, that it is unlawful, for any Lender to perform its obligations hereunder to make Eurodollar Rate Loans or to fund or maintain Eurodollar Rate Loans hereunder, such Lender shall notify the Administrative Agent of such event and the Administrative Agent shall notify the Borrowers of such event, and the right of the Borrowers to select Eurodollar Rate Loans for any subsequent Interest Period or in connection with any subsequent conversion of any Loan shall be suspended until the Administrative Agent shall notify the Borrowers that the circumstances causing such suspension no longer exist, and the Borrowers shall forthwith prepay in full all Eurodollar Rate Loans then outstanding and shall pay all interest accrued thereon through the date of such prepayment or conversion, unless the Borrowers, within three Business Days after such notice from the Administrative Agent, request the conversion of all Eurodollar Rate Loans then outstanding into Base Rate Loans; PROVIDED, that if the date of such repayment or proposed conversion is not the last day of the Interest Period applicable to such Eurodollar Rate Loans, the Borrowers shall also pay any amount due pursuant to SECTION 4.10. (b) If the Administrative Agent shall, at least one Business Day before the date of any requested Borrowing or the effective date of any conversion or continuation of an existing Loan to be made or continued as or converted into a Eurodollar Rate Loan (each such requested Borrowing made and Loan to be converted or continued, a "Pending Loan"), notify the Borrowers that the Eurodollar Rate will not adequately reflect the cost to the Lenders of making or funding such Pending Loan as a Eurodollar Rate Loan or that the Interbank Offered Rate is not determinable from any interest rate reporting service of recognized standing, then the right of the Borrowers to select Eurodollar Rate Loan for such Pending Loan, any subsequent Loan or in connection with any subsequent conversion or continuation of any Loan shall be suspended until the Administrative Agent shall notify the Borrowers that the circumstances causing such suspension no longer exist, and each Pending Loan and each such subsequent Loan requested to be made, continued or converted shall be made or continued as or converted into a Base Rate Loan. SECTION 4.15 Cash Collateral Account; Investment Accounts. (a) Cash Collateral Account. The Borrowers shall establish a Cash Collateral Account in which to deposit Collateral consisting of cash or Cash Equivalents from time to time (i) representing payments received pursuant to SECTION 2.3(C) in excess of then outstanding Loans or on account of Eurodollar Rate Loans which would 56 63 otherwise result in repayment of such Loans prior to the end of the Interest Period applicable thereto, (ii) with respect to Letter of Credit Obligations (x) at the request of the Administrative Agent upon the occurrence of an Event of Default, or (y) for the purposes set forth in SECTION 4.6 in the event of termination of this Agreement, or (iii) for any other purpose as may be agreed between the Administrative Agent and the Borrowers to provide security for the Secured Obligations. On the last day of the applicable Interest Period as to any amounts deposited to the Cash Collateral Account pursuant to CLAUSE (I) above or if a drawing under a Letter of Credit occurs with respect to any amounts deposited to the Cash Collateral Account pursuant to CLAUSE (II) above, the Borrowers hereby authorize the Administrative Agent to use the monies deposited in the Cash Collateral Account to make payment to the payee with respect to such Loan or drawing. The Cash Collateral Account shall be in the name of the Administrative Agent and the Administrative Agent shall have sole dominion and control over, and sole access to, the Cash Collateral Account. Neither any Borrower nor any Person claiming on behalf of or through any Borrower shall have any right to withdraw any of the funds held in the Cash Collateral Account. The Borrowers agree that they will not at any time (x) sell or otherwise dispose of any interest in the Cash Collateral Account or any funds held therein or (y) create or permit to exist any Lien upon or with respect to the Cash Collateral Account or any funds held therein, except as provided in or contemplated by this Agreement. The Administrative Agent shall exercise reasonable care in the custody and preservation of any funds held in the Cash Collateral Account and shall be deemed to have exercised such care if such funds are accorded treatment substantially equivalent to that which the Administrative Agent accords other funds deposited with the Administrative Agent, it being understood that the Administrative Agent shall not have any responsibility for taking any necessary steps to preserve rights against any parties with respect to any funds held in the Cash Collateral Account. Subject to the right of the Administrative Agent to withdraw funds from the Cash Collateral Account as provided herein, the Administrative Agent will, so long as no Default or Event of Default shall have occurred and be continuing, from time to time invest funds on deposit in the Cash Collateral Account, reinvest proceeds of any such investments which may mature or be sold, and invest interest or other income received from any such investments, in each case, in Cash Equivalents, as the Borrowers may direct prior to the occurrence of a Default or Event of Default and as the Administrative Agent may select after the occurrence and during the continuance of a Default or Event of Default. Such proceeds, interest and income which are not so invested or reinvested in Cash Equivalents shall be deposited and held by the Administrative Agent in the Cash Collateral Account. The Administrative Agent makes no representation or warranty as to, and shall not be responsible for, the rate of return, if any, earned in any Cash Collateral. Any earnings on Cash Collateral shall be held as additional Cash Collateral on the terms set forth in this SECTION 4.15. (b) Investment Accounts. The Borrowers may from time to time establish one or more Investment Accounts with the Administrative Agent, any Lender or any Affiliate of a Lender, for the purpose of investing in Cash Equivalents any Cash Collateral representing payments received pursuant to SECTION 2.3(C) in excess of then outstanding Loans or on account of Eurodollar Rate Loans which would otherwise result in repayment of such Loans prior to the 57 64 end of the Interest Period applicable thereto. The Borrowers hereby acknowledge and agree that each such Investment Account shall constitute Collateral hereunder and shall be maintained with the Administrative Agent, a Lender or Affiliate of a Lender as security for the Secured Obligations. Notwithstanding the foregoing, until such time as the Administrative Agent shall otherwise instruct the Lender or the Affiliate of a Lender maintaining such account, the Borrowers shall be entitled to direct the investment of the funds deposited therein. The Borrowers agree that they will not at any time (x) sell or otherwise dispose of any interest in any Investment Account or any funds held therein other than by application thereof to any Secured Obligation, or (y) create or permit to exist any Lien upon or with respect to any Investment Account or any funds held therein, except as provided in or contemplated by this Agreement. The Borrowers agree that at any time, and from time to time, at the expense of the Borrowers, the Borrowers will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Administrative Agent or any Lender may request, in order to perfect and protect any security interest in any Investment Account granted or purported to be granted hereby or to enable the Borrowers, for their respective benefit and the benefit of the Lenders, to exercise and enforce its rights and remedies hereunder with respect to such Investment Account. SECTION 4.16 Allocation of Payments from Borrowers. All monies to be applied to the Secured Obligations, whether such monies represent voluntary payments by the Borrowers or are received pursuant to demand for payment or realized from any disposition of Collateral, shall be allocated among the Administrative Agent and such of the Lenders and other holders of the Secured Obligations as are entitled thereto (and, with respect to monies allocated to the Lenders, on a Ratable basis unless otherwise provided in this SECTION 4.16): (i) first, to the Swingline Lender (or to any Lender to the extent such Lender has previously repaid such Loan) to pay principal and accrued interest on any portion of any Swingline Loan; (ii) second, to the Administrative Agent to pay the amount of expenses that have not been reimbursed to the Administrative Agent by the Borrowers or the Lenders, together with interest accrued thereon; (iii) third, to the Administrative Agent to pay any indemnified amount that has not been paid to the Administrative Agent by the Borrowers or the Lenders, together with interest accrued thereon; (iv) fourth, to the Administrative Agent to pay any fees due and payable to the Administrative Agent under this Agreement; (v) fifth, to the Lenders for any indemnified amount that they have paid to the Administrative Agent and for any expenses that they have reimbursed to the Administrative Agent; (vi) sixth, to the Lenders to pay any fees due and payable to the Lenders under this Agreement; (vii) seventh, in payment of the unpaid principal and accrued interest in respect of the Loans and any other Secured Obligations then outstanding and held by any Lender to be shared among the Lenders on a Ratable basis, or on such other basis as may be agreed upon in writing by all of the Lenders (which agreement or agreements may be entered into without notice to or the consent or approval of the Borrowers); and (vii) eight, to the holders of the other Secured Obligations who are not Lenders on a pro rata basis. The allocations set forth in this SECTION 4.16 are solely to determine the rights and priorities of the Administrative Agent and the Lenders as among themselves and may be changed by the Administrative Agent and the Lenders without notice to or the consent or approval of the Borrowers or any other Person. Whenever allocation is made pursuant to this SECTION 4.16 to the holder of Secured Obligations in which another Lender acquires a participation, the monies received by such holder shall be shared as between such holder and such participants on a Ratable basis. 58 65 SECTION 4.17 Borrowers' Representative. Heafner shall act under this Agreement as the representative of all Borrowers, and each other Borrower hereby appoints Heafner as its representative, hereunder, for all purposes, including, without being limited to, requesting borrowings and receiving account statements and other notices and communications to the Borrowers (or any of them) from the Administrative Agent or any Lender. The Administrative Agent and the Lenders may rely, and shall be fully protected in relying, on any request for borrowing, disbursement instruction, report, information or any other notice or communication made or given by Heafner, whether in its own name, on behalf of any other Borrower or on behalf of "the Borrowers," and neither the Administrative Agent nor any Lender shall have any obligation to make any inquiry or request any confirmation from or on behalf of any other Borrower as to the binding effect on it of any such request, instruction, report, information, notice or communication, nor shall the joint and several character of the Borrowers' liability for the Secured Obligations be affected. The Administrative Agent and each Lender intend to maintain a single Loan Account in the name of "Heafner Tire Group, Inc." hereunder and each Borrower expressly agrees to such arrangement and confirms that such arrangement shall have no effect on the joint and several character of its liability for the Secured Obligations. SECTION 4.18 Joint and Several Liability. (a) Joint and Several Liability. The Secured Obligations shall constitute one joint and several direct and general obligation of all of the Borrowers. Notwithstanding anything to the contrary contained herein, each of the Borrowers shall be jointly and severally, with each other Borrower, directly and unconditionally liable to the Administrative Agent and the Lenders for all Secured Obligations and shall have the obligations of co-maker with respect to the Loans, the Notes, and the Secured Obligations, it being agreed that the advances to each Borrower inure to the benefit of all Borrowers, and that the Administrative Agent and the Lenders are relying on the joint and several liability of the Borrowers as co-makers in extending the Loans hereunder. Each Borrower hereby unconditionally and irrevocably agrees that upon default in the payment when due (whether at stated maturity, by acceleration or otherwise) of any principal of, or interest on, any Loan or other Secured Obligation payable to the Administrative Agent or any Lender, it will forthwith pay the same, without notice or demand. (b) No Modification or Release of Obligations. No payment or payments made by any of the Borrowers or any other Person or received or collected by the Administrative Agent or any Lender from any of the Borrowers or any other Person by virtue of any action or proceeding or any set-off or appropriation or application at any time or from time to time in reduction of or in payment of the Secured Obligations shall be deemed (except to the extent Secured Obligations are satisfied) to modify, release or otherwise affect the liability of each Borrower under this Agreement, which shall remain liable for the Secured Obligations until the Secured Obligations are paid in full and the Commitments are terminated. SECTION 4.19 Obligations Absolute. Each Borrower agrees that the Secured Obligations will be paid strictly in accordance with the terms of the Loan Documents, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of the Administrative Agent or any Lender with respect thereto. All Secured Obligations shall be conclusively presumed to have been created in reliance hereon. The liabilities under this Agreement shall be absolute and unconditional irrespective of: 59 66 (a) any lack of validity or enforceability of any Loan Documents or any other agreement or instrument relating thereto; (b) any change in the time, manner or place of payments of, or in any other term of, all or any part of the Secured Obligations, or any other amendment or waiver thereof or any consent to departure therefrom, including, but not limited to, any increase in the Secured Obligations resulting from the extension of additional credit to any Borrower or otherwise; (c) any taking, exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any guaranty for all or any of the Secured Obligations; (d) any change, restructuring or termination of the corporate structure or existence of any Borrower; or (e) any other circumstance which might otherwise constitute a defense available to, or a discharge of, any Borrower or a guarantor. This Agreement shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Secured Obligations is rescinded or must otherwise be returned by the Administrative Agent or any Lender upon the insolvency, bankruptcy or reorganization of any Borrower or otherwise, all as though such payment had not been made. SECTION 4.20 Waiver of Suretyship Defenses. Each Borrower agrees that the joint and several liability of the Borrowers provided for in SECTION 4.18 shall not be impaired or affected by any modification, supplement, extension or amendment or any contract or agreement to which the other Borrowers may hereafter agree (other than an agreement signed by the Administrative Agent and the Lenders specifically releasing such liability), nor by any delay, extension of time, renewal, compromise or other indulgence granted by the Administrative Agent or any Lender with respect to any of the Secured Obligations, nor by any other agreements or arrangements whatever with the other Borrowers or with anyone else, each Borrower hereby waiving all notice of such delay, extension, release, substitution, renewal, compromise or other indulgence, and hereby consenting to be bound thereby as fully and effectually as if it had expressly agreed thereto in advance. The liability of each Borrower is direct and unconditional as to all of the Secured Obligations, and may be enforced without requiring the Administrative Agent or any Lender first to resort to any other right, remedy or security. Each Borrower hereby expressly waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Secured Obligations, the Notes, this Agreement or any other Loan Document (other than notices expressly required in this Agreement or by any of the Loan Documents) and any requirement that the Administrative Agent or any Lender protect, secure, perfect or insure any Lien or any property subject thereto or exhaust any right or take any action against any Borrower or any other Person or any collateral, including any rights any Borrower may otherwise have under the New York General Obligations Law. 60 67 ARTICLE 5 CONDITIONS PRECEDENT SECTION 5.1 Conditions Precedent to Effectiveness of Agreement. Notwithstanding any other provision of this Agreement, this Agreement shall not become effective nor shall the Lenders have any obligation to make any Loans on the Effective Date unless and until the following conditions precedent are satisfied: (a) Documents. The Administrative Agent shall have received on or before the Effective Date the following, each in form and substance satisfactory to the Administrative Agent, its special counsel and the Lenders and (except for the Notes) in sufficient copies for each Lender: (1) Agreement. This Agreement, duly executed and delivered by the Borrowers and the other Lenders; (2) Notes. The Notes, each dated the Effective Date and duly executed and delivered by the Borrowers; (3) Articles, Bylaws and Resolutions. A certificate, dated the Effective Date, of the Secretary or an Assistant Secretary of each Loan Party, as to and having attached thereto copies of the articles of incorporation and by-laws and shareholder agreements of such Loan Party as in effect on the Effective Date and all corporate action, including shareholder approval, if necessary, taken by such Loan Party and/or its shareholders to authorize the execution, delivery and performance of this Agreement and the other Loan Documents to which such Loan Party is a party and, in the case of each Borrower, the Borrowings under this Agreement; (4) Incumbency Certificates. A certificate, dated the Effective Date, of the Secretary or an Assistant Secretary of each Loan Party, as to the incumbency and specimen signatures of each of the officers of such Loan Party who is authorized to execute and deliver this Agreement or any other Loan Document on behalf of such Loan Party or any document, certificate or instrument to be delivered in connection with this Agreement or the other Loan Documents to which such Loan Party is a party and, in the case of each Borrower, to request Borrowings under this Agreement; (5) Good Standing Certificates. A certificate as of a recent date evidencing the good standing of each Loan Party in the jurisdiction of its incorporation and in each other jurisdiction in which it is qualified as a foreign corporation to transact business; (6) Financing Statements. The Financing Statements to be delivered by the Loan Parties duly executed and delivered by the Loan Parties, and evidence satisfactory to the Administrative Agent that the Financing Statements have been filed in each jurisdiction where such filing may be necessary or appropriate to 61 68 perfect the Security Interest or, at the Administrative Agent's discretion, in appropriate form for such filing; (7) Landlord's Waiver. Landlord's waiver and consent agreements duly executed on behalf of each landlord of real property on which any Collateral is located, except to the extent that the Rent Reserve appropriately reflects the absence of such a waiver; (8) Schedules of Inventory and Receivables. A Schedule of Inventory and a Schedule of Receivables, each prepared as of a recent date; (9) Insurance Coverage. Certificates or binders of insurance relating to each of the policies of insurance covering any of the Collateral together with loss payable clauses which comply with the terms of SECTION 8.8(B); (10) Borrowing Base Certificate. A Borrowing Base Certificate prepared as of January 29, 2000 duly executed and delivered by the Financial Officer demonstrating Loan Availability of not less than $35,000,000, after giving effect to the Loans to be made on the Effective Date and any transactions contemplated by this Agreement to occur on or before the Effective Date; (11) Notice of Borrowing. The Initial Notice of Borrowing dated the Effective Date from the Borrowers to the Administrative Agent requesting the Loans to be made on the Effective Date and specifying the method of disbursement; (12) Financial Statements. Copies of all the financial statements referred to in SECTION 6.1(N) and meeting the requirements thereof; (13) Officer's Certificate. A certificate of the President or a Vice President of Heafner stating that, to the best of his knowledge and based on an examination sufficient to enable him to make an informed statement, (a) all of the representations and warranties made or deemed to be made under this Agreement are true and correct as of the Effective Date, both with and without giving effect to the Loans to be made on the Effective Date and the application of the proceeds thereof, and (b) as of the Effective Date, no Default or Event of Default exists; (14) Factual Certificate. A certification from an appropriate officer of each Borrower as to such factual matters as shall be required by the Administrative Agent; (15) Other Loan Documents. Copies of each of the other Loan Documents dated the Effective Date, duly executed by the parties thereto with evidence satisfactory to the Administrative Agent and its counsel of the due authorization, binding effect and enforceability of each such Loan Document on each such party and such other documents and instruments as the Administrative Agent may reasonably request; 62 69 (16) Legal Opinions. An opinion dated the Effective Date of each of Covington & Burling, counsel for the Borrowers, and of such local counsel as the Administrative Agent shall deem necessary or desirable, opining as to such matters in connection with this Agreement as the Administrative Agent or its counsel may reasonably request; (17) Fees. The Administrative Agent shall have received from the Borrowers all of the fees payable on the Effective Date referred to herein; and (18) Priority. The Administrative Agent shall have received satisfactory evidence that the Administrative Agent (for the benefit of Lenders) has a valid and perfected first priority security interest as of such date in all of the Collateral, subject only to Permitted Liens. (b) Litigation. The Administrative Agent shall have received evidence satisfactory to it that no action, proceeding, investigation, regulation or legislation, shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain or prohibit, or to obtain substantial damages in respect of, or which is related to or arises out of, this Agreement, or the consummation of the transactions contemplated hereby, or which may otherwise have a Materially Adverse Effect. (c) No Material Adverse Change. There shall not have occurred any event or series of events or circumstances or group of circumstances which individually or in the aggregate, in the sole judgment of the Administrative Agent, would have a Materially Adverse Effect. (d) Receipt of Funds. The Administrative Agent shall have received and disbursed such amounts from and to each Existing Lender and New Lender (and each such Lender shall be deemed to have purchased from or sold to each other such Lender such interest in such Lender's Revolving Credit Loans outstanding immediately prior to the Effective Date) as would result in each such Lender's having Revolving Credit Loans outstanding on the Effective Date equal to its Proportionate Share (based upon the Commitments set forth on ANNEX A hereto) of the outstanding principal amount of such Revolving Credit Loans. SECTION 5.2 All Loans; Letters of Credit. The obligation of the Lenders to make (but not to continue or convert any outstanding Loan, which shall be subject to the provisions of SECTION 4.12) any Loan hereunder, including any Loans to be made on the Effective Date and all subsequent Loans, and of FCC to cause the issuance of any Letter of Credit are further subject to the following: (a) at such time, both with and without giving effect to the Loans to be made at such time and the application of the proceeds thereof or the Letter of Credit Guarantee to be issued, (1) no Default or Event of Default shall exist nor (2) shall any event have occurred or condition exist that could reasonably be expected to have a Materially Adverse Effect, and (b) the corporate actions of the Loan Parties referred to in SECTION 5.1(A)(3) shall remain in full force and effect and the incumbency of officers shall be as stated in the 63 70 certificates of incumbency delivered pursuant to SECTION 5.1(A)(4) or as subsequently modified and reflected in a certificate of incumbency delivered to the Administrative Agent. Each request or deemed request for any Borrowing or other advance or submission of any request for any Letter of Credit hereunder shall be deemed to be a certification by the Borrowers to the Administrative Agent and the Lenders as to the matters set forth in SECTION 5.2(A) and (B) and the Administrative Agent and the Lenders may, without waiving either condition, consider the conditions specified in SECTIONS 5.2(A) and (B) fulfilled and a representation by the Borrowers to such effect made, if no written notice to the contrary is received by the Administrative Agent prior to the making of the Loan then to be made or the issuance of the Letter of Credit so requested. SECTION 5.3 Conditions as Covenants. In the event that the Lenders permit this Agreement to become effective and make any Loans on the Effective Date or permit FCC to issue a Letter of Credit Guarantee prior to the satisfaction of all conditions precedent set forth in SECTION 5.1, and such conditions are not waived in writing by the Administrative Agent, the Borrowers shall nevertheless cause such condition or conditions to be satisfied within 30 days after the making of such Loans or the issuance of such Letter of Credit Guarantee. 64 71 ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF BORROWERS SECTION 6.1 Representations and Warranties. The Borrowers represent and warrant to the Administrative Agent and to the Lenders as follows: (a) Organization; Power; Qualification. Each Borrower and each of its Subsidiaries is a corporation, duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, having the power and authority to own its properties and to carry on its business as now being and hereafter proposed to be conducted and is duly qualified and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification or authorization. The jurisdictions in which each of the Borrowers and each of their respective Subsidiaries is qualified to do business as a foreign corporation are listed on SCHEDULE 6.1(A). (b) Capitalization; Shareholder Agreements. The outstanding capital stock of the Borrowers has been duly and validly issued and is fully paid and nonassessable, and the number and owners of such shares of capital stock of the Borrowers are set forth on SCHEDULE 6.1(B). Except as set forth on SCHEDULE 6.1(B), the issuance and sale of the Borrowers' capital stock have been registered or qualified under applicable federal and state securities laws or are exempt therefrom and there are no shareholders agreements, options, subscription agreements or other agreements or understandings to which any Borrower is a party in effect with respect to the capital stock of a Borrower, including, without limitation, agreements providing for special voting requirements or arrangements for approval of corporate actions or other matters relating to corporate governance or restrictions on share transfer or providing for the issuance of any securities convertible into shares of the capital stock of any Borrower, any warrants or other rights to acquire any shares or securities convertible into such shares, or any agreement that obligates a Borrower, either by its terms or at the election of any other Person, to repurchase such shares under any circumstances. (c) Subsidiaries. SCHEDULE 6.1(C) correctly sets forth the name of each Subsidiary of any Borrower, its jurisdiction of incorporation, the name of its immediate parent or parents, and the percentage of its issued and outstanding securities owned by the Borrowers or any other Subsidiary of any Borrower. Except as set forth on SCHEDULE 6.1(C), (i) no Subsidiary has issued any securities convertible into shares of such Subsidiary's capital stock or any options, warrants or other rights to acquire any shares or securities convertible into such shares, (ii) the outstanding stock and securities of each Subsidiary are owned by a Borrower or a Wholly Owned Subsidiary of a Borrower, or by a Borrower and one or more of its Wholly Owned Subsidiaries, free and clear of all Liens, warrants, options and rights of others of any kind whatsoever, and (iii) no Borrower has any Subsidiaries. 65 72 The outstanding capital stock of each Subsidiary has been duly and validly issued and is fully paid and nonassessable by the issuer, and the number and owners of the shares of such capital stock are set forth on SCHEDULE 6.1(C). (d) Authorization of Agreement, Notes, Loan Documents and Borrowing. Each Loan Party has the right and power, and has taken all necessary action to authorize it, to execute, deliver and perform this Agreement and each of the Loan Documents to which it is a party in accordance with their respective terms. This Agreement and each of the Loan Documents have been duly executed and delivered by the duly authorized officers of each Loan Party and each is, or when executed and delivered in accordance with this Agreement will be, a legal, valid and binding obligation of each such Loan Party, enforceable in accordance with its terms. (e) Compliance of Agreement, Notes, Loan Documents and Borrowing with Laws, Etc. Except as set forth on SCHEDULE 6.1(E), the execution, delivery and performance of this Agreement and each of the Loan Documents in accordance with their respective terms and the borrowings hereunder do not and will not, by the passage of time, the giving of notice or otherwise, (i) require any Governmental Approval or violate any Applicable Law relating to a Borrower or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute a default under the articles or certificate of incorporation, by-laws or any shareholders' agreement of a Borrower or any of its Subsidiaries, (iii) conflict with, result in a breach of or constitute a default under any material provisions of any indenture, agreement or other instrument to which a Borrower or any of its Subsidiaries is a party or by which a Borrower, any of its Subsidiaries or any of any Borrower's or such Subsidiaries' property may be bound or any Governmental Approval relating to a Borrower or any of its Subsidiaries, or (iv) result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by any Loan Party other than the Security Interest. (f) Business. Each Borrower and each Subsidiary is engaged in the business described on SCHEDULE 6.1(F). (g) Compliance with Law; Governmental Approvals. Except as set forth in SCHEDULE 6.1(G), each Borrower and each of its Subsidiaries (i) has all Governmental Approvals, including permits relating to federal, state and local Environmental Laws, ordinances and regulations, required by any Applicable Law for it to conduct its business, each of which is in full force and effect, is final and not subject to review on appeal and is not the subject of any pending or, to the knowledge of any Borrower, threatened attack by direct or collateral proceeding, and 66 73 (ii) is in compliance with each Governmental Approval applicable to it and in compliance with all other Applicable Laws relating to it, including, without being limited to, all Environmental Laws and all occupational health and safety laws applicable to any Borrower, any of its Subsidiaries or their respective properties, except for instances of noncompliance which would not, singly or in the aggregate, cause a Default or Event of Default or have a Materially Adverse Effect and in respect of which appropriate reserves have been established. (h) Title to Properties. Except as set forth in SCHEDULE 6.1(H), each Borrower and each of the Subsidiaries has valid and legal title to or leasehold interest in all personal property, Real Estate and other assets used in its business, including, but not limited to, those reflected on the most recent balance sheet of the Borrowers delivered pursuant to SECTION 6.1(N). (i) Liens. Except as set forth in SCHEDULE 6.1(I), none of the properties and assets of any Borrower or any Subsidiary is subject to any Lien, except Permitted Liens. Other than the Financing Statements, no financing statement under the UCC of any State or other instrument evidencing a Lien which names a Borrower or any Subsidiary as debtor has been filed (and has not been terminated) in any State or other jurisdiction, and neither any Borrower nor any Subsidiary has signed any such financing statement or other instrument (which financing statement or other instrument has not been terminated) or any security agreement (which security agreement has not been terminated) authorizing any secured party thereunder to file any such financing statement or instrument, except to perfect those Liens listed on SCHEDULE 6.1(I). (j) Indebtedness and Guarantees. SCHEDULE 6.1(J) is a complete and correct listing of all (i) Debt and (ii) Guarantees of each Borrower and each of its Subsidiaries. Each Borrower and each of its Subsidiaries has performed and is in compliance in all material respects with all of the terms of such Debt and Guarantees and all instruments and agreements relating thereto, and no default or event of default, or event or condition which with notice or lapse of time, or both, would constitute such a default or event of default, exists with respect to any such Debt or Guaranty. (k) Litigation. Except as set forth on SCHEDULE 6.1(K), as of the Effective Date there are no actions, suits or proceedings pending (nor, to the knowledge of any Borrower, are there any actions, suits or proceedings threatened, or any reasonable basis therefor) against or in any other way relating to or affecting a Borrower or its Subsidiaries or any of their respective properties in any court or before any arbitrator of any kind or before or by any governmental body, EXCEPT actions, suits or proceedings of the character normally incident to the kind of business conducted by the Borrowers and their Subsidiaries which, if adversely determined, would not singly or in the aggregate have a Materially Adverse Effect, and there are no strikes or walkouts in progress, pending or contemplated relating to any labor contracts to which a Borrower or any of its Subsidiaries is a party, relating to any labor contracts being negotiated, or otherwise. (l) Tax Returns and Payments. Except as set forth on SCHEDULE 6.1(L), all United States federal, state and local as well as foreign national, provincial and local and other tax returns of each Borrower and each of its Subsidiaries required by Applicable Law to be filed 67 74 have been duly filed, and all United States federal, state and local and foreign national, provincial and local and other taxes, assessments and other governmental charges or levies upon a Borrower or any of its Subsidiaries or their respective property, income, profits and assets which are due and payable have been paid, except any such nonpayment which is at the time permitted under SECTION 9.6. The charges, accruals and reserves on the books of the Borrowers and each Subsidiary as of the Effective Date in respect of United States federal, state and local and foreign national, provincial and local taxes for all fiscal years and portions thereof since January 1, 1994 are in the judgment of the Borrowers adequate, and the Borrowers know of no reason to anticipate any additional assessments for any of such years which, singly or in the aggregate, might have a Materially Adverse Effect. (m) Burdensome Provisions. Except as set forth on SCHEDULE 6.1(M), neither Borrower nor any Subsidiary is a party to any indenture, agreement, lease or other instrument, or subject to any charter or corporate restriction, Governmental Approval or Applicable Law compliance with the terms of which is reasonably likely to have a Materially Adverse Effect. (n) Financial Statements. (i) The Borrowers have furnished to the Administrative Agent and the Lenders copies of Heafner's (A) consolidating and audited consolidated balance sheets as at December 31, 1998 and the related consolidating and audited consolidated statements of income, cash flow and shareholders equity for the Fiscal Year then ended and (B) unaudited consolidating and consolidated balance sheets as at November 30, 1999 and the related consolidating and consolidated statements of income, cash flow and shareholders equity for the eleven-month period then ended, which financial statements present fairly and in all material respects in accordance with GAAP the financial positions of Heafner and its Consolidated Subsidiaries as at their respective dates, and the results of operations of Heafner and its Consolidated Subsidiaries for the periods then ended (except, in the case of the interim statements, for the omission of notes and subject to normal year-end audit adjustments). (ii) Except as set forth on SCHEDULE 6.1(N) or as disclosed or reflected in the financial statements described in CLAUSE (I) above, Heafner and its Subsidiaries, taken as a whole, have no material liabilities, contingent or otherwise. (o) Adverse Change. Since the date of the latest financial statements referred to in SECTION 6.1(N)(I), (i) no material adverse change has occurred in the business, assets, liabilities, financial condition, results of operations or business prospects of Heafner, the other Borrowers and their respective Subsidiaries taken as a whole, and (ii) no event has occurred or failed to occur which has had, or may have, singly or in the aggregate, a Materially Adverse Effect. (p) ERISA. Neither any Borrower nor any Related Company maintains or contributes to any Benefit Plan other than those listed on SCHEDULE 6.1(P). Except as set forth on 68 75 SCHEDULE 6.1(P), and subject to correction of possible Remediable Defects, each Benefit Plan is in substantial compliance with ERISA and the Code, including but not limited to those provisions thereof relating to reporting and disclosure, and neither any Borrower nor any Related Company has received any notice asserting that a Benefit Plan is not in compliance with ERISA. No material liability to the PBGC or to a Multiemployer Plan has been, or is expected to be, incurred by any Borrower or any Related Company. Except as set forth on SCHEDULE 6.1(P), and subject to correction of possible Remediable Defects, each Benefit Plan intended to qualify under Section 401(a) of the Code so qualifies and any related trust is exempt from federal income tax under Section 501(a) of the Code. A favorable determination letter from the IRS has been issued or applied for with respect to each such plan and trust and nothing that is not a Remediable Defect has occurred since the date of such determination letter that would adversely affect such qualification or tax-exempt status. No Benefit Plan subject to the minimum funding standards of the Code has failed to meet such standards. Neither the Borrower or any Related Company has transferred any pension plan liability in a transaction that could be subject to Sections 4069 or 4212(c) of ERISA. Except as set forth on SCHEDULE 6.1(P), neither any Borrower nor any Related Company has any liability, actual or contingent, with respect to any Benefit Plan other than to make payments to the Benefit Plan in accordance with its terms, and there are no pending or threatened claims against a Benefit Plan. No non-exempt prohibited transaction with the meaning of Section 4975 of the Code or Section 406 of ERISA has occurred with respect to a Benefit Plan. Except under plans listed on SCHEDULE 6.1(P), no employee or former employee of any Borrower or any Related Company is or may become entitled to any benefit under a Benefit Plan that is a "welfare plan" within the meaning of Section 3(1) of ERISA following such employee's termination of employment. Except as set forth on SCHEDULE 6.1(P), each such welfare plan that is a group health plan has been operated in compliance with the provision of Section 4980B of the Code and Sections 601-609 of ERISA and any applicable provisions of state law that are similar. (q) Absence of Defaults. No Borrower nor any Subsidiary is in default under its articles or certificate of incorporation or by-laws and no event has occurred, which has not been remedied, cured or waived, (i) which constitutes a Default or an Event of Default, or (ii) which constitutes, or which with the passage of time or giving of notice, or both, would constitute, a default or event of default by a Borrower or any of its Subsidiaries under any material agreement (other than this Agreement) or judgment, decree or order to which such Borrower or any of its Subsidiaries is a party or by which such Borrower, any of its Subsidiaries or any of such Borrower's or any of its Subsidiaries' properties may be bound or which would require a Borrower or any Subsidiary to make any payment under any thereof prior to the scheduled maturity date therefor, except, in the case only of any such agreement, for alleged defaults which are being contested in good faith by appropriate proceedings and with respect to which reserves in respect of a Borrower's or such Subsidiary's reasonably anticipated liability have been established on the appropriate books. 69 76 (r) Accuracy and Completeness of Information. (i) As of the Effective Date, no fact is known to the Borrowers which has had, or is reasonably likely in the future to have (so far as the Borrowers can reasonably foresee), a Materially Adverse Effect which has not been set forth in the financial statements or disclosure delivered to the Administrative Agent and the Lenders prior to the Effective Date. No document furnished or written statement made to the Administrative Agent or any Lender by the Borrowers (or any of them) prior to the Agreement Date, in connection with the negotiation, preparation or execution of this Agreement or any of the Loan Documents contained, except to the extent corrected or superseded prior to the Agreement Date, any untrue statement of a fact material to the creditworthiness of a Borrower or omitted to state a material fact necessary in order to make the statements contained therein not misleading. (ii) The Borrowers have no reason to believe that any document furnished or written statement made to the Administrative Agent or any Lender prior to the Agreement Date by any Person other than the Borrowers in connection with the negotiation, preparation or execution of this Agreement or any of the Loan Documents contained any incorrect statement of a material fact or omitted to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, that has not been corrected or superseded prior to the Effective Date. (s) Solvency. In each case after giving effect to the Debt represented by the Loans outstanding and to be incurred and the transactions contemplated by this Agreement, each Borrower and each of its Subsidiaries is solvent, having assets of a fair salable value which exceeds the amount required to pay its debts as they become absolute and matured (including contingent, subordinated, unmatured and unliquidated liabilities), and each Borrower and each of its Subsidiaries is able to and anticipates that it will be able to meet its debts as they mature and has adequate capital to conduct the business in which it is or proposes to be engaged. (t) Receivables. (i) Status. (1) Each Receivable reflected in the computations included in any Borrowing Base Certificate meets the criteria enumerated in CLAUSES (A) through (P) of the definition "Eligible Receivables," except as disclosed in such Borrowing Base Certificate or as disclosed in a timely manner in a subsequent Borrowing Base Certificate or otherwise in writing to the Administrative Agent. (2) No Borrower has any knowledge of any fact or circumstance not disclosed to the Administrative Agent in a Borrowing Base Certificate or otherwise in writing which would impair the validity or collectibility of any Receivable 70 77 of $250,000 or more or of Receivables which (regardless of the individual amount thereof) aggregate $500,000 or more. (ii) Chief Executive Office. The chief executive office of each Borrower and the books and records relating to the Receivables are located on the Effective Date at the address or addresses set forth on SCHEDULE 6.1(T). (u) Inventory. (i) Schedule of Inventory. All Inventory included in any Schedule of Inventory or Borrowing Base Certificate delivered to the Administrative Agent on or prior to the Effective Date meets the criteria enumerated in CLAUSES (A) through (G) of the definition "Eligible Inventory," except as disclosed in such Schedule of Inventory or Borrowing Base Certificate. (ii) Condition. All Inventory is in good condition, meets all standards imposed by any governmental agency, or department or division thereof, having regulatory authority over such goods, their use or sale, and is currently either usable or salable in the normal course of the applicable Borrower's business, except to the extent reserved against in the financial statements referred to in SECTION 6.1(N) or a Borrowing Base Certificate delivered pursuant to SECTION 5.1. (iii) Location. All Inventory is located at a Permitted Inventory Location or is in transit to a Permitted Inventory Location. (v) Corporate and Fictitious Names. Except as otherwise disclosed on SCHEDULE 6.1(V), during the five-year period preceding the Agreement Date, neither any Borrower nor any predecessor thereof has been known as or used any corporate or fictitious name other than the corporate name of such Borrower on the Effective Date. (w) Federal Reserve Regulations. Neither any Borrower nor any of its Subsidiaries is engaged, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" (as each of the quoted terms is defined or used in Regulation U of the Board of Governors of the Federal Reserve System). (x) Investment Company Act. No Borrower is an "investment company" or a company "controlled" by an "investment company" (as each of the quoted terms is defined or used in the Investment Company Act of 1940, as amended). (y) Employee Relations. The Borrowers and each Subsidiary have stable work forces in place and none of them is, except as set forth on SCHEDULE 6.1(Y), party to any collective bargaining agreement nor has any labor union been recognized as the representative of a Borrower's or any of its Subsidiaries' employees, and the Borrowers know of no pending, threatened or contemplated strikes, work stoppage or other labor disputes involving a Borrower's or any Subsidiary's employees. 71 78 (z) Proprietary Rights. Each Borrower owns or has the right to use all Proprietary Rights necessary or desirable in the conduct of its business as conducted on the Agreement Date and as expected on the Agreement Date to be conducted in the future. To the best of the Borrowers' knowledge, none of such Proprietary Rights infringes on or conflicts with any other Person's property, and no other Person's property infringes on or conflicts with the Proprietary Rights. (aa) Trade Names. All trade names or styles under which any Loan Party sells Inventory or creates Receivables, or to which instruments in payment of Receivables are made payable, all as of the Effective Date, are listed on SCHEDULE 6.1(AA). (bb) Bank Accounts. Attached hereto as SCHEDULE 6.1(BB) is a complete and correct list of all checking accounts, depository accounts, special deposit accounts and other accounts maintained by any Borrower or Subsidiary with any commercial bank or savings bank as of the Effective Date and each such account (except any account indicated by an asterisk (*)) is either (i) subject to an Agency Account Agreement or (ii) subject to directions from the account holder to the institution maintaining such account, in form and substance approved by the Administrative Agent, to transfer all collected funds therein daily to the Administrative Agent. (cc) Equipment. All machinery, equipment, fixtures and other tangible property (other than Inventory) of each Borrower and their respective Subsidiaries, other than obsolete equipment no longer used or useful in the business of the Borrowers and their Subsidiaries, is in good order and repair, ordinary wear and tear excepted. (dd) Real Property. No Borrower nor any Subsidiary owns any Real Estate nor leases any Real Estate other than that described on SCHEDULE 6.1(DD) and other than Real Estate acquired or leased after the Effective Date. (ee) Year 2000 Compliant. Each Borrower and each Subsidiary is Year 2000 Compliant. SECTION 6.2 Survival of Representations and Warranties, Etc. All representations and warranties set forth in this ARTICLE 6 and all statements contained in any certificate, financial statement, or other instrument, delivered by or on behalf of the Borrowers pursuant to or in connection with this Agreement or any of the Loan Documents (including, but not limited to, any such representation, warranty or statement made in or in connection with any amendment thereto) shall constitute representations and warranties made under this Agreement. All representations and warranties made under this Agreement shall be made or deemed to be made at and as of the Agreement Date and at and as of the Effective Date, except that representations and warranties which, by their terms are applicable only to one such date shall be deemed to be made only at and as of such date. All representations and warranties made or deemed to be made under this Agreement shall survive and not be waived by the execution and delivery of this Agreement, any investigation made by or on behalf of the Administrative Agent or any Lender or any borrowing hereunder. 72 79 ARTICLE 7 SECURITY INTEREST SECTION 7.1 Security Interest. (a) Heafner, Winston and CPW hereby confirm the mortgage, pledge and assignment to the Administrative Agent under the Existing Loan Agreement of the Collateral and the creation in favor of the Administrative Agent of a continuing security interest in the Collateral, all as security for the Secured Obligations, and each Borrower hereby mortgages, pledges and assigns all of the Collateral to the Administrative Agent, for the benefit of itself as Administrative Agent, the Lenders and Affiliates of the Lenders, and grants to the Administrative Agent, for the benefit of itself as Administrative Agent, the Lenders and Affiliates of the Lenders, a continuing security interest in, and a continuing Lien upon, all of the Collateral as security for the payment, observance and performance of the Secured Obligations. (b) As additional security for all of the Secured Obligations, the Borrowers grant to the Administrative Agent, for the benefit of itself as Administrative Agent, the Lenders and Affiliates of the Lenders, a security interest in, and assigns to the Administrative Agent, for the benefit of itself as Administrative Agent and the Lenders and Affiliates of the Lenders, all of the Borrowers' right, title and interest in and to, any deposits or other sums at any time credited by or due from each Lender and each Affiliate of a Lender to a Borrower, or credited by or due from any participant of any Lender to a Borrower, with the same rights therein as if the deposits or other sums were credited by or due from such Lender. Each Borrower hereby authorizes each Lender and each Affiliate of such Lender and each participant to pay or deliver to the Administrative Agent, for the account of the Lenders, without any necessity on the Administrative Agent's or any Lender's part to resort to other security or sources of reimbursement for the Secured Obligations, at any time during the continuation of any Event of Default or in the event that the Administrative Agent, on behalf of the Lenders, should make demand for payment hereunder in accordance with the terms hereof, then and without further notice to any Borrower (such notice being expressly waived), any of the aforesaid deposits (general or special, time or demand, provisional or final) or other sums for application to any Secured Obligation, irrespective of whether any demand has been made or whether such Secured Obligation is mature, and the rights given the Administrative Agent, the Lenders, their Affiliates and participants hereunder are cumulative with such Person's other rights and remedies, including other rights of set-off. The Administrative Agent will promptly notify the Borrowers of its receipt of any such funds for application to the Secured Obligations, but failure to do so will not affect the validity or enforceability thereof. The Administrative Agent may give notice of the above grant of a security interest in and assignment of the aforesaid deposits and other sums, and authorization, to, and make any suitable arrangements with, any Lender, any such Affiliate of any Lender or participant for effectuation thereof, and each Borrower hereby irrevocably appoints the Administrative Agent as its attorney to collect any and all such deposits or other sums to the extent any such payment is not made to the Administrative Agent or any Lender by such Lender, Affiliate or participant. 73 80 SECTION 7.2 Continued Priority of Security Interest. (a) The Security Interest granted by the Borrowers shall at all times be valid, perfected and enforceable against each Borrower and all third parties in accordance with the terms of this Agreement, as security for the Secured Obligations, and the Collateral shall not at any time be subject to any Liens that are prior to, on a parity with or junior to the Security Interest, other than Permitted Liens. (b) The Borrowers shall, at their sole cost and expense, take all action that may be necessary or desirable, or that the Administrative Agent may reasonably request, so as at all times to maintain the validity, perfection, enforceability and rank of the Security Interest in the Collateral in conformity with the requirements of SECTION 7.2(A), or to enable the Administrative Agent and the Lenders to exercise or enforce their rights hereunder, including, but not limited to: (i) paying all taxes, assessments and other claims lawfully levied or assessed on any of the Collateral, except to the extent that such taxes, assessments and other claims constitute Permitted Liens, (ii) obtaining, after the Agreement Date, landlords', mortgagees', bailees', warehousemen's or processors' releases, subordinations or waivers (except as to premises reflected in the Rent Reserve), and using all reasonable efforts to obtain mechanics' releases, subordinations or waivers, (iii) delivering to the Administrative Agent, for the benefit of the Lenders, endorsed or accompanied by such instruments of assignment as the Administrative Agent may specify, and stamping or marking, in such manner as the Administrative Agent may specify, any and all chattel paper, instruments, letters and advices of guaranty and documents evidencing or forming a part of the Collateral, and (iv) executing and delivering financing statements, pledges, designations, hypothecations, notices and assignments in each case in form and substance satisfactory to the Administrative Agent relating to the creation, validity, perfection, maintenance or continuation of the Security Interest under the UCC or other Applicable Law. (c) The Administrative Agent is hereby authorized to file one or more financing or continuation statements or amendments thereto without the signature of or in the name of a Borrower for any purpose described in SECTION 7.2(B). The Administrative Agent will give the Borrowers notice of the filing of any such statements or amendments, which notice shall specify the locations where such statements or amendments were filed. A carbon, photographic, xerographic or other reproduction of this Agreement or of any of the Security Documents or of any financing statement filed in connection with this Agreement is sufficient as a financing statement. 74 81 (d) Each Borrower shall mark its books and records as directed by the Administrative Agent and as may be necessary or appropriate to evidence, protect and perfect the Security Interest and shall cause its financial statements to reflect the Security Interest. 75 82 ARTICLE 8 COLLATERAL COVENANTS Each Borrower covenants and agrees that until the Commitments have been terminated and all the Secured Obligations have been paid in full, unless the Lenders shall otherwise consent in the manner provided in SECTION 15.9: SECTION 8.1 Collection of Receivables. (a) The Borrowers will and will cause each other Loan Party to cause all monies, checks, notes, drafts and other payments relating to or constituting proceeds of trade accounts receivable, other Receivables and other Collateral to be deposited in (i) an Agency Account in accordance with the procedures set out in the corresponding Agency Account Agreement or (ii) an account subject to instructions from the account holder, in form and substance satisfactory to the Administrative Agent, requiring the transfer of collected balances in such account to the Administrative Agent not less often than each Business Day. In particular, each Borrower will and will cause each other Loan Party to advise each Account Debtor that makes payment to such Borrower or other Loan Party by wire transfer, ACH Transfer or similar means to make payment directly to an Agency Account or, if the applicable Borrower or other Loan Party is not party to an Agency Account Agreement, then to an account subject to such instructions. (b) If average Loan Availability is less than $20,000,000 for any period of 10 Business Days or is at any time less than $15,000,000, without limiting the ability of the Administrative Agent and the Lenders to exercise other rights and remedies hereunder, the Required Lenders may require that any or all of the Loan Parties establish Lockboxes to which monies, checks, notes, drafts and other payments relating to or constituting proceeds of Collateral shall be sent and if such requirement is imposed, each Borrower will and will cause each other Loan Party to: (i) advise each Account Debtor on trade accounts receivable that does not make payments directly to an Agency Account to address all remittances with respect to amounts payable on account thereof to a specified Lockbox, and (ii) stamp all invoices relating to trade accounts receivable with a legend satisfactory to the Administrative Agent indicating that payment is to be made to such Borrower or other Loan Party via a specified Lockbox. (c) The Borrowers and the Administrative Agent shall cause all collected balances in each Agency Account and the Borrowers shall, and shall cause each other Loan Party to, cause all collected balances in each other bank account subject to transfer instructions approved by the Administrative Agent, to be transmitted daily by wire transfer, ACH Transfer, depository transfer check or other means in accordance with the procedures set forth in the corresponding Agency Account Agreement or such instructions, to the Administrative Agent at the Administrative Agent's Office: 76 83 (i) for application, on account of the Secured Obligations, as provided in SECTIONS 2.3(C), 4.16, 12.2, and 12.3, such credits to be entered as of the Business Day they are received if they are received prior to 1:30 p.m. and to be conditioned upon final payment in cash or solvent credits of the items giving rise to them (PROVIDED that a collection fee shall be payable by the Borrowers with respect to any such credit received in other than immediately available funds, equal to one day's interest, at the rate applicable to Base Rate Loans, on such amount), and (ii) with respect to the balance, so long as no Default or Event of Default has occurred and is continuing, for transfer by wire transfer, ACH Transfer or depository transfer check to a Controlled Disbursement Account. (d) Any monies, checks, notes, drafts or other payments referred to in SUBSECTION (A) or (B) of this SECTION 8.1 which, notwithstanding the terms of such subsection, are received by or on behalf of the applicable Borrower will be held in trust for the Administrative Agent and will be delivered to the Administrative Agent or a Clearing Bank or a bank with which an account subject to satisfactory transfer instructions is maintained, as promptly as possible, in the exact form received, together with any necessary endorsements for application by the Administrative Agent directly to the Secured Obligations or, as applicable, for deposit in the Agency Account maintained with such Clearing Bank and processing in accordance with the terms of the corresponding Agency Account Agreement or for deposit in such account and processing and transfer in accordance with such instructions. SECTION 8.2 Verification and Notification. The Administrative Agent shall have the right at any time and from time to time, (a) in the name of the Administrative Agent, the Lenders or in the name of a Borrower, to verify the validity, amount or any other matter relating to any Receivables by mail, telephone, telegraph or otherwise, (b) to review, audit and make extracts from all records and files related to any of the Receivables, and (c) if a Default or Event of Default has occurred and is continuing, to notify the Account Debtors or obligors under any Receivables of the assignment of such Receivables to the Administrative Agent, for the benefit of the Lenders, and to direct such Account Debtor or obligors to make payment of all amounts due or to become due thereunder directly to the Administrative Agent, for the account of the Lenders, and, upon such notification and at the expense of the Borrowers, to enforce collection of any such Receivables and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as the applicable Borrower might have done. SECTION 8.3 Disputes, Returns and Adjustments. (a) In the event any amounts due and owing under any Receivable for an amount in excess of $250,000 are in dispute between the Account Debtor and the applicable Borrower, the Borrowers shall provide the Administrative Agent with prompt written notice thereof. 77 84 (b) The Borrowers shall notify the Administrative Agent promptly of all returns and credits in excess of $250,000 in respect of any Receivable, which notice shall specify the Receivable affected. (c) The Borrowers may, in the ordinary course of business unless a Default or an Event of Default has occurred and is continuing, grant any extension of time for payment of any Receivable or compromise, compound or settle the same for less than the full amount thereof, or release wholly or partly any Person liable for the payment thereof, or allow any credit or discount whatsoever therein; PROVIDED that (i) no such action results in the reduction of more than $250,000 in the amount payable with respect to any Receivable or of more than $1,000,000 with respect to all Receivables in any Fiscal Year (in each case, excluding the allowance of credits or discounts generally available to Account Debtors in the ordinary course of the applicable Borrower's business), and (ii) the Administrative Agent is promptly notified of the amount of such adjustments and the Receivable(s) affected thereby (by reflecting such reduction in an appropriate Borrowing Base Certificate or Schedule of Receivables). SECTION 8.4 Invoices. (a) No Borrower will issue invoices other than in its own name or in a trade name of which the Administrative Agent has received prior written notice, accompanied by such evidence as the Administrative Agent may reasonably require that all actions required pursuant to ARTICLE 7 with respect to Receivables or other Collateral created or held in such name have been taken. (b) The Borrowers will not use any invoices other than invoices in the forms delivered to the Administrative Agent prior to the Agreement Date without giving the Administrative Agent prior notice of the intended use of a different form of invoice together with a copy of such different form and such evidence as the Administrative Agent may reasonably require that any actions required pursuant to ARTICLE 7 with respect to any (i) name, (ii) address or (iii) remittance instructions appearing on such invoice have been taken. (c) Upon the request of the Administrative Agent, the Borrowers shall deliver to the Administrative Agent, at the Borrowers' expense, copies of customers' invoices or the equivalent, original shipping and delivery receipts or other proof of delivery, customers' statements, customer address lists, the original copy of all documents, including, without limitation, repayment histories and present status reports, relating to Receivables and such other documents and information relating to the Receivables as the Administrative Agent shall specify. SECTION 8.5 Delivery of Instruments. In the event any Receivable is at any time evidenced by a promissory note, trade acceptance or any other instrument for the payment of money, the Borrowers will, promptly upon request by the Administrative Agent, deliver such instrument to the Administrative Agent, appropriately endorsed to the Administrative Agent, for the benefit of the Lenders. SECTION 8.6 Sales of Inventory. All sales of Inventory will be made in compliance in all material respects with all requirements of Applicable Law. 78 85 SECTION 8.7 Ownership and Defense of Title. (a) Except for Permitted Liens, the Borrowers shall be or shall cause another Loan Party to be at all times the sole owners or lessees of each and every item of Collateral and shall not create nor permit any other Loan Party to create any lien on, or sell, lease, exchange, assign, transfer, pledge, hypothecate, grant a security interest or security title in or otherwise dispose of, any of the Collateral or any interest therein, except for sales of Inventory in the ordinary course of business, for cash or on open account or on terms of payment ordinarily extended to its customers, and except for dispositions that are otherwise expressly permitted under this Agreement or any Subsidiary Security Agreement. (b) Each Borrower shall defend and cause each other Loan Party to defend its title or leasehold interest in and to, and the Security Interest in, the Collateral against the claims and demands of all Persons. SECTION 8.8 Insurance. (a) The Borrowers shall at all times maintain and cause the other Loan Parties to maintain insurance on the Collateral and their other property against loss or damage by fire, theft (excluding theft by employees), burglary, pilferage, loss in transit and such other hazards as the Administrative Agent shall reasonably specify, in amounts not to exceed those obtainable at commercially reasonable rates and under policies issued by insurers acceptable to the Administrative Agent in the exercise of its reasonable judgment. All premiums on such insurance shall be paid by the Borrowers and copies of the policies delivered to the Administrative Agent. The Borrowers will not use or permit the Inventory or its other property to be used in violation in any material respect of Applicable Law or in any manner which might render inapplicable any insurance coverage. (b) All insurance policies required under SECTION 8.8(A) relating to Collateral shall name the Administrative Agent as an additional insured and shall contain loss payable clauses in the form submitted to the Borrowers by the Administrative Agent, or otherwise in form and substance satisfactory to the Required Lenders, naming the Administrative Agent, as loss payee, as its interests may appear, and providing that (i) all proceeds thereunder shall be payable to the Administrative Agent, (ii) no such insurance shall be affected by any act or neglect of the insurer or owner of the property described in such policy, and (iii) such policy and loss payable clauses may be canceled, amended or terminated only upon at least 10 days' prior written notice given to the Administrative Agent. (c) Any proceeds of insurance referred to in this SECTION 8.8 which are paid to the Administrative Agent shall be, at the option of the Required Lenders in their sole discretion, either (i) applied to replace the damaged or destroyed property, or (ii) applied to the payment or prepayment of the Secured Obligations, PROVIDED that in the event that the proceeds from any single casualty do not exceed $250,000, then, upon the Borrowers' written request to the 79 86 Administrative Agent, provided that no Default or Event of Default shall have occurred and be continuing, such proceeds shall be disbursed by the Administrative Agent to the Borrowers pursuant to such procedures as the Administrative Agent shall reasonably establish for application to the replacement of the damaged or destroyed property. SECTION 8.9 Location of Offices and Collateral. (a) No Borrower will change the location of its chief executive office or the place where it keeps its books and records relating to the Collateral from the address set forth for it on SCHEDULE 6.1(T) or change its name, its identity or corporate structure from that in effect on the Effective Date, or use any trade name not listed on SCHEDULE 6.1(AA), without giving the Administrative Agent 30 days' prior written notice thereof accompanied by such evidence as the Administrative Agent may reasonably require that all actions required to be taken pursuant to ARTICLE 7 have been taken. (b) All Inventory, other than Inventory in transit to any such location, will at all times be kept by the applicable Borrower at one or more Permitted Inventory Locations and shall not, without the prior written consent of the Administrative Agent, be kept elsewhere (except as a result of sales of Inventory permitted under SECTION 8.7(A)). (c) If any Inventory is in the possession or control of any of a Borrower's agents or processors, the Borrowers shall notify such agents or processors of the Security Interest (and shall promptly provide copies of any such notice to the Administrative Agent and the Lenders) and, upon the occurrence of an Event of Default, shall instruct them (and cause them to acknowledge such instruction) to hold all such Inventory for the account of the account of the Lenders, subject to the instructions of the Administrative Agent. SECTION 8.10 Records Relating to Collateral. (a) The Borrowers will and will cause their Subsidiaries to at all times (i) keep complete and accurate records of Inventory on a basis consistent with past practices of Heafner so as to permit comparison of Inventory records relating to different time periods, itemizing and describing the kind, type and quantity of Inventory and the applicable Borrower's or Subsidiary's cost thereof and a current price list for such Inventory, and (ii) keep complete and accurate records of all other Collateral. (b) The Borrowers will prepare a physical listing of all Inventory, wherever located, at least annually. SECTION 8.11 Inspection. The Administrative Agent and each Lender (by any of their officers, employees or agents) shall have the right, to the extent that the exercise of such right shall be within the control of a Borrower, at any time or times to (a) visit the properties of the Borrowers and the Subsidiaries, inspect the Collateral and the other assets of the Borrowers and the Subsidiaries and inspect and make 80 87 extracts from the books and records of the Borrowers and the Subsidiaries, including but not limited to management letters prepared by independent accountants, all during customary business hours at such premises; (b) discuss the Borrowers' and the Subsidiaries' business, assets, liabilities, financial condition, results of operations and business prospects, insofar as the same are reasonably related to the rights of the Administrative Agent or the Lenders hereunder or under any of the Loan Documents, with the Borrowers' and the Subsidiaries' (i) principal officers, (ii) independent accountants, and (iii) any other Person (except that any such discussion with any third parties shall be conducted only in accordance with the Administrative Agent's or such Lender's standard operating procedures relating to the maintenance of the confidentiality of confidential information of borrowers); and (c) verify the amount, quantity, value and condition of, or any other matter relating to, any of the Collateral and in this connection to review, audit and make extracts from all records and files related to any of the Collateral. The Borrowers will deliver to the Administrative Agent, upon the Administrative Agent's request, any instrument necessary for it to obtain records from any service bureau maintaining records on behalf of the Borrowers or any Subsidiary. SECTION 8.12 Information and Reports. (a) Schedule of Receivables. The Borrowers shall deliver to the Administrative Agent on or before the Effective Date and not later than the 20th day of each calendar month thereafter a Schedule of Receivables which (i) shall be as of the last Business Day of the immediately preceding Fiscal Month, (ii) shall be reconciled to the Borrowing Base Certificate as of such last Business Day, and (iii) shall set forth a detailed aged trial balance of all of the Borrowers' then existing Receivables, specifying the names, addresses and balance due for each Account Debtor obligated on a Receivable so listed. (b) Schedule of Inventory. The Borrowers shall deliver to the Administrative Agent on or before the Effective Date and not later than the 20th day of each calendar month thereafter a Schedule of Inventory as of the last Business Day of the immediately preceding Fiscal Month of the Borrowers, itemizing and describing the kind, type and quantity of Inventory, the applicable Borrower's cost thereof and the location thereof. (c) Borrowing Base Certificate. The Borrowers shall deliver to the Administrative Agent on the 20th day of each calendar month, subject to the provisions of SECTION 8.12(E), a Borrowing Base Certificate prepared as of the last Business Day of the preceding Fiscal Month. 81 88 (d) Notice of Diminution of Value. The Borrowers shall give prompt notice to the Administrative Agent of any matter or event which has resulted in, or may result in, the diminution in excess of $500,000 in the value of any of its Collateral, except for any such diminution in the value of any Receivables or Inventory in the ordinary course of business which has been appropriately reserved against, as reflected in financial statements previously delivered to the Administrative Agent and the Lenders pursuant to ARTICLE 10. (e) Additional Information. The Administrative Agent may in its reasonable discretion from time to time request that the Borrowers deliver the schedules and certificates described in SECTIONS 8.12(A), (B), (C) and (D) more or less often and on different schedules than specified in such Sections and the Borrowers will comply with such requests. The Borrowers will also furnish to the Administrative Agent and each Lender such other information with respect to the Collateral as the Administrative Agent or any Lender may from time to time reasonably request. SECTION 8.13 Power of Attorney. Each Borrower hereby appoints the Administrative Agent as its attorney, with power (a) to endorse the name of such Borrower on any checks, notes, acceptances, money orders, drafts or other forms of payment or security that may come into the Administrative Agent's or any Lender's possession, and (b) if a Default or Event of Default exists, to sign the name of such Borrower on any invoice or bill of lading relating to any Receivable, Inventory or other Collateral, on any drafts against customers related to letters of credit, on schedules and assignments of Receivables furnished to the Administrative Agent or any Lender by such Borrower, on notices of assignment, financing statements and other public records relating to the perfection or priority of the Security Interest, verifications of account and notices to or from customers. SECTION 8.14 Assignment of Claims Act. Upon the request of the Administrative Agent, the Borrowers shall execute any documents or instruments and shall take such steps or actions reasonably required by the Administrative Agent so that all monies due or to become due under any contract with the United States of America, the District of Columbia or any state, county, municipality or other domestic or foreign governmental entity, or any department, agency or instrumentality thereof, will be assigned to the Administrative Agent, for the benefit of itself and the Lenders, and notice given thereof in accordance with the requirements of the Assignment of Claims Act of 1940, as amended, or any other laws, rules or regulations relating to the assignment of any such contract and monies due to or to become due. ARTICLE 9 AFFIRMATIVE COVENANTS The Borrowers covenant and agree that the Borrowers will, as their joint and several obligation, duly and punctually pay the principal of, and interest on, and all other amounts payable with respect to, the Loans and all other Secured Obligations in accordance with the terms of the Loan Documents and that until the Commitments have been terminated and all the Secured Obligations have been paid in full, unless the Lenders shall otherwise consent in the 82 89 manner provided for in SECTION 15.9, each of the Borrowers will, and will cause each of the Subsidiaries to: SECTION 9.1 Preservation of Corporate Existence and Similar Matters. Preserve and maintain its corporate existence, rights, franchises, licenses and privileges in the jurisdiction of its incorporation and qualify and remain qualified as a foreign corporation and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification or authorization (except where any failure so to qualify could not reasonably be expected to have a Materially Adverse Effect). SECTION 9.2 Compliance with Applicable Law. Comply in all material respects with all Applicable Law relating to the Borrowers or such Subsidiary except to the extent being contested in good faith by appropriate proceedings and for which reserves in respect of a Borrower's or such Subsidiary's reasonably anticipated liability have been established in accordance with GAAP. SECTION 9.3 Maintenance of Property. In addition to, and not in derogation of, the requirements of SECTION 8.7 and of the Security Documents, (a) protect and preserve all properties material to its business, including copyrights, patents, trade names and trademarks, and maintain in good repair, working order and condition in all material respects, with reasonable allowance for wear and tear, all tangible properties, and (b) from time to time make or cause to be made all needed and appropriate repairs, renewals, replacements and additions to such properties necessary for the conduct of its business, so that the business carried on in connection therewith in the ordinary course and in a manner consistent with past practices of Heafner. SECTION 9.4 Conduct of Business. At all times conduct its business in accordance with sound business practices and engage only in the business(es) described in SCHEDULE 6.1(F). SECTION 9.5 Insurance. Maintain, in addition to the coverage required by SECTION 8.8 and the Security Documents, insurance with responsible insurance companies against such risks and in such amounts as is customarily maintained by similar businesses or as may be required by Applicable Law, and from time to time deliver to the Administrative Agent or any Lender upon its request a detailed list of the insurance then in effect, stating the names of the insurance companies, the amounts and rates of the insurance, the dates of the expiration thereof and the properties and risks covered thereby. SECTION 9.6 Payment of Taxes and Claims. Pay or discharge when due (a) all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or upon any properties belonging to it, except that real property ad valorem taxes shall be deemed to have been so paid or discharged if the same are paid before they become delinquent, and 83 90 (b) all lawful claims of materialmen, mechanics, carriers, warehousemen and landlords for labor, materials, supplies and rentals which, if unpaid, might become a Lien on any properties of any Borrower; except that this SECTION 9.6 shall not require the payment or discharge of any such tax, assessment, charge, levy or claim which is being contested in good faith by appropriate proceedings and for which reserves in respect of reasonably anticipated liability have been established in accordance with GAAP. SECTION 9.7 Accounting Methods and Financial Records. Maintain a system of accounting, and keep such books, records and accounts (which shall be true and complete), as may be required or as may be necessary to permit the preparation of financial statements in accordance with GAAP and notify the Administrative Agent promptly, and in any event within five days after any such account is opened, of the existence, location, number and title of any bank account of a Loan Party not listed on SCHEDULE 6.1(BB). SECTION 9.8 Use of Proceeds. (a) Use the proceeds of the Loans only for working capital and general business purposes, including, without being limited to, payment of interest on the Senior Notes and dividends on the KS Preferred in accordance with the provisions of this Agreement, and (b) not use any part of such proceeds to purchase or, to carry or reduce or retire or refinance any credit incurred to purchase or carry, any Margin Stock or, in any event, for any purpose which would involve a violation of Regulation U or of Regulation T or X of the Board of Governors of the Federal Reserve System, or for any purpose prohibited by law or by the terms and conditions of this Agreement. SECTION 9.9 Hazardous Waste and Substances; Environmental Requirements. In addition to, and not in derogation of, the requirements of SECTION 9.2 and of the Security Documents, comply in all material respects with all Environmental Laws and all Applicable Laws relating to occupational health and safety (except for instances of noncompliance that are being contested in good faith by appropriate proceedings if reserves in respect of any Borrower's or such Subsidiary's reasonably anticipated liability therefor have been appropriately established), promptly notify the Administrative Agent of its receipt of any notice of a violation of any such Environmental Laws or other such Applicable Laws and indemnify and hold harmless the Administrative Agent and the Lenders from all loss, cost, damage, liability, claim and expense incurred by or imposed upon the Administrative Agent or any Lender on account of a Borrower's failure to perform its obligations under this SECTION 9.9. SECTION 9.10 Additional Subsidiaries. Cause each Person that becomes a domestic Subsidiary of Heafner after the Effective Date, promptly upon request by the Administrative Agent, to execute and deliver a Subsidiary Guaranty and a Subsidiary Security Agreement or, if requested by the Administrative Agent, enter into and cause any such new Subsidiary or any existing Subsidiary Guarantor to enter into an amendment to this Agreement or such other documents as may reasonably be determined by the Administrative Agent to be necessary or desirable to add such Subsidiary as an additional "Borrower" hereunder, in each 84 91 case together with such allonges to the Notes, restated promissory notes, Financing Statements, legal opinions and other certificates, instruments and documents as the Administrative Agent may reasonably request. SECTION 9.11 Compliance with Senior Note Indenture. Comply with the terms and provisions of the Senior Note Indenture and the Senior Notes and cause each Guarantor of Heafner's obligations under the Senior Notes to comply with the terms of the Guaranty applicable to it. SECTION 9.12 Agency Account Agreements. To the extent not received by the Administrative Agent on or prior to the Effective Date, deliver to the Administrative Agent as soon as possible, but in any event not later than April 15, 2000, such Agency Account Agreements duly executed by the applicable Clearing Bank and Loan Party and confirmations of effective directions to pay the Administrative Agent affecting each account of a Loan Party to which Collateral proceeds are deposited, each in form and substance satisfactory to the Administrative Agent, as may be required by the Administrative Agent 85 92 ARTICLE 10 INFORMATION Until the Commitments have been terminated and all the Secured Obligations have been paid in full, unless the Lenders shall otherwise consent in the manner set forth in SECTION 15.9, the Borrowers will furnish to the Administrative Agent and to each Lender at its offices then designated for notices pursuant to SECTION 15.1, the statements, reports, certificates, and other information provided for in this ARTICLE 10. All written information, reports, statements and other papers and data furnished to the Administrative Agent or any Lender by or at the request of the Borrowers, whether pursuant to this ARTICLE 10 or any other provision of this Agreement or of any other Loan Document, shall be, at the time the same is so furnished, complete and correct in all material respects to the extent necessary to give the Administrative Agent and the Lenders true and accurate knowledge of the subject matter. Specifically, the Borrowers will so furnish: SECTION 10.1 Financial Statements. (a) Audited Year-End Statements. As soon as available, but in any event within 90 days after the end of each Fiscal Year, copies of the consolidated and consolidating balance sheets of Heafner and its Consolidated Subsidiaries as at the end of such Fiscal Year and the related consolidated and consolidating statements of income, shareholders' equity and cash flows of Heafner and its Consolidated Subsidiaries for such Fiscal Year, in each case setting forth in comparative form the figures for the previous Fiscal Year, and, as to such consolidated financial statements, reported on, without qualification, by Arthur Andersen LLP or other independent certified public accountants of nationally recognized standing; (b) Monthly Financial Statements. As soon as available after the end of each Fiscal Month, but in any event within 30 days after the end of each Fiscal Month (or 45 days after the end of any such Fiscal Month that is the last Fiscal Month of a Fiscal Quarter), copies of the unaudited consolidated and consolidating balance sheets of Heafner and its Consolidated Subsidiaries as at the end of such Fiscal Month and the related unaudited consolidated and consolidating statements of income and cash flows for Heafner and its Consolidated Subsidiaries for such Fiscal Month and for the portion of the Fiscal Year through such Fiscal Month, certified by a Financial Officer as presenting fairly the financial condition and results of operations of the Borrowers (subject to normal year-end audit adjustments) for the applicable period(s); all such financial statements to be complete and correct in all material respects and prepared in accordance with GAAP (except, with respect to interim financial statements, for the omission of notes and for the effect of normal year-end audit adjustments) applied consistently throughout the periods reflected therein; and (c) Projections. As soon as available, but in any event not later than 30 days after the first day of each Fiscal Year beginning after the Effective Date, Projections for such Fiscal Year in such format and detail as the Administrative Agent may reasonably specify. 86 93 SECTION 10.2 Accountants' Certificate. Together with the financial statements referred to in SECTION 10.1(A), a certificate of such accountants addressed to the Administrative Agent (a) stating that in making the examination necessary for the certification of such financial statements, nothing has come to their attention to lead them to believe that any Default or Event of Default exists and, in particular, they have no knowledge of any Default or Event of Default or, if such is not the case, specifying such Default or Event of Default and its nature, and (b) having attached the calculations, prepared by the Borrowers and reviewed by such accountants, required to establish whether or not the Borrowers are in compliance with the covenants contained in SECTIONS 11.1, 11.2, 11.4 and 11.5 as at the date of such financial statements. SECTION 10.3 Officer's Certificate. At the time that the Borrowers furnish the financial statements pursuant to SECTION 10.1(B) for the last Fiscal Month in a Fiscal Quarter, a certificate of the President of Heafner or of a Financial Officer in substantially the form attached hereto as EXHIBIT D, (a) setting forth as at the end of such Fiscal Quarter or Fiscal Year, as the case may be, the calculations required to establish whether or not the Borrowers were in compliance with the requirements of SECTIONS 11.1, 11.2, 11.4 and 11.5 as at the end of each respective period, and (b) stating that, based on a reasonably diligent examination, no Default or Event of Default exists, or, if such is not the case, specifying such Default or Event of Default and its nature, when it occurred, whether it is continuing and the steps being taken by the Borrowers with respect to such Default or Event of Default. SECTION 10.4 Copies of Other Reports. (a) Promptly upon receipt thereof, copies of all reports, if any, submitted to the Borrowers or the Board of Directors of Heafner by the Borrowers' independent public accountants, including, without limitation, any management report. (b) As soon as practicable, copies of all financial statements and reports that Heafner sends to its shareholders generally in their capacity as such and of all registration statements and all regular or periodic reports which any Borrower shall file with the Securities and Exchange Commission or any successor commission. (c) From time to time and as soon as reasonably practicable following each request, such data, certificates, reports, statements, opinions of counsel, documents or further information regarding the business, assets, liabilities, financial condition, results of operations or business prospects of a Borrower or any Subsidiary as the Administrative Agent or any Lender may reasonably request and that a Borrower has or (except in the case of legal opinions relating to the perfection or priority of the Security Interest) without unreasonable expense can obtain; PROVIDED, HOWEVER, that the Lenders shall, to the extent reasonably practicable, coordinate 87 94 examinations of the Borrowers' records by their respective internal examiners. The rights of the Administrative Agent and the Lenders under this SECTION 10.4 are in addition to and not in derogation of their rights under any other provision of this Agreement or of any other Loan Document. (d) If requested by the Administrative Agent or any Lender, statements in conformity with the requirements of Federal Reserve Form G-3 or U-1 referred to in Regulation U. SECTION 10.5 Notice of Litigation and Other Matters. Prompt notice of: (a) the commencement, to the extent a Borrower is aware of the same, of all proceedings and investigations by or before any governmental or nongovernmental body and all actions and proceedings in any court or before any arbitrator against or in any other way relating to or affecting any Borrower, any of its Subsidiaries or any of a Borrower's or any of its Subsidiaries' properties, assets or businesses, which is reasonably likely to, singly or together with other pending proceedings or investigations, result in the occurrence of a Default or an Event of Default, or have a Materially Adverse Effect, (b) any amendment of the articles of incorporation or by-laws of a Borrower or any of its Subsidiaries, (c) any change in the business, assets, liabilities, financial condition, results of operations or business prospects of a Borrower or any of its Subsidiaries which has had or is reasonably likely to have, singly or in the aggregate, a Materially Adverse Effect and any change in the executive officers of a Borrower, (d) the discovery or determination by any Loan Party that any computer application (including any computer application of any key supplier, vendor or customer) that is material to the business or operations of any Borrower is not Year 2000 Compliant, except to the extent that such failure could not reasonably be expected to have a Materially Adverse Effect, (e) the receipt of any notice from or giving of any notice to the trustee under the Senior Note Indenture, together with a copy of such notice, and (f) any Default or Event of Default or any event which constitutes or which with the passage of time or giving of notice or both would constitute a default or event of default by a Borrower or any of its Subsidiaries under any material agreement (other than this Agreement) to which such Borrower or any of its Subsidiaries is a party or by which any Borrower, any of its Subsidiaries or any Borrower's or any Subsidiary's properties may be bound. SECTION 10.6 ERISA. As soon as possible and in any event within 30 days after a Borrower knows, or has reason to know, that: (a) any ERISA Event with respect to a Benefit Plan has occurred or will occur, or 88 95 (b) the aggregate present value of the Unfunded Vested Accrued Benefits under all Benefit Plans is equal to an amount in excess of $0, or (c) a Borrower or any Subsidiary is in "default" (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multiemployer Benefit Plan required by reason of a Borrower's or such Subsidiary's complete or partial withdrawal (as described in Section 4203 or 4205 of ERISA) from such Multiemployer Plan, to the Administrative Agent a certificate of the President of Heafner or a Financial Officer setting forth the details of such event and the action which is proposed to be taken with respect thereto, together with any notice or filing which may be required by the PBGC or other agency of the United States government with respect to such event. 89 96 ARTICLE 11 NEGATIVE COVENANTS Until the Commitments have been terminated and all the Secured Obligations have been paid in full, unless the Lenders shall otherwise consent in the manner set forth in SECTION 15.9, the Borrowers will not directly or indirectly and, in the case of SECTIONS 11.2 through 11.12, will not permit any Subsidiaries to: SECTION 11.1 Financial Covenants. (a) Permit Net Worth of Heafner and its Consolidated Subsidiaries on a consolidated basis at any time on or after the Effective Date to be less than $21,000,000; provided, that for purposes of this SECTION 11.1(A), the Net Worth of Heafner and its Consolidated Subsidiaries shall exclude any and all amounts recorded as an expense from time to time after December 31, 1999 to reflect amortization of goodwill. (b) Permit Collateral Availability at any time after the Effective Date to be less than $15,000,000. (c) Permit the Interest Coverage Ratio as of the last day of any Fiscal Quarter ending on or after the Effective Date, calculated for the period of four consecutive Fiscal Quarters then ended, to be less than 1.25 to 1. SECTION 11.2 Debt. Create, assume, or otherwise become or remain obligated in respect of, or permit or suffer to exist or to be created, assumed or incurred or to be outstanding any Debt, except that this SECTION 11.2 shall not apply to: (a) Debt of the Loan Parties represented by the Loan Documents, (b) Subordinated Debt, (c) Debt of the Loan Parties represented by the Senior Notes, (d) Debt reflected on SCHEDULE 6.1(J) and refinancings thereof that do not result in an increase in the principal amount of any such Debt outstanding on the date of refinancing or in any other Person becoming obligated thereon, but excluding any such scheduled Debt that is to be paid in full on the Effective Date, (e) Acquired Debt permitted in accordance with SECTION 11.4 and Attributable Debt permitted in accordance with SECTION 11.10, (f) vendor loans, advances and similar financings in an aggregate principal amount outstanding at any time not to exceed $20,000,000, and (g) other Debt in an aggregate principal amount outstanding at any time not to exceed $15,000,000. 90 97 SECTION 11.3 Guarantees. Become or remain liable with respect to any Guaranty of any obligation of any other Persons, except as listed on SCHEDULE 6.1(J) or pursuant to a Guaranty by a Borrower or any Subsidiary of the obligations of a Loan Party (including specifically the Subsidiaries' Guarantees of Heafner's obligations in respect of the Senior Notes). SECTION 11.4 Acquisitions. (a) Acquire, after the Agreement Date, any Business Unit or Investment or, after the Agreement Date, maintain any Investment other than Permitted Investments, EXCEPT that this SECTION 11.4 shall not apply to Acquisitions by Heafner or another Loan Party after the Effective Date of (A) Investments in the capital stock of any other Person organized under the laws of the United States of America or any state thereof which thereupon becomes a Wholly Owned Subsidiary or (B) Business Units located in the United States, provided, that: (i) the aggregate Purchase Price of all such Acquisitions does not exceed $75,000,000 during the term of this Agreement, (ii) Heafner or the applicable Loan Party has made available to the Administrative Agent, not later than 10 Business Days prior to the proposed date of such Acquisition, the results of any investigation of the target performed by or on behalf of such Loan Party and copies of the Acquisition documents and historical financial statements of the target for at least the three previous years, (iii) the Administrative Agent shall have received evidence satisfactory to it of the Loan Parties' continued compliance with the provisions of this Agreement and the other Loan Documents, including, without being limited to, the provisions of SECTIONS 9.4, 9.11 and 11.1, on a pro forma basis after giving effect to such Acquisition, (iv) to the extent financed with Debt other than Acquired Debt or Loans, such Debt shall be payable to the seller and shall be subordinated to the prior payment of the Secured Obligations on terms and conditions satisfactory to the Administrative Agent and the Required Lenders, (v) the Administrative Agent shall have received evidence satisfactory to it demonstrating on a pro forma basis that Net Income of the target, before provision for interest expense, taxes, depreciation and amortization for the period of 12 consecutive calendar months ended nearest the date of determination, is at least equal to the sum of interest expense and scheduled principal payments on any Debt incurred in connection with payment of the Purchase Price (including Loans and Acquired Debt), and (vi) as requested by the Administrative Agent, any new Subsidiary shall have executed and delivered the Subsidiary Guaranty and a Subsidiary Security Agreement, or all Loan Parties, as appropriate, and such new Subsidiary shall have executed and delivered an amendment to this Agreement sufficient to cause such new Subsidiary to become a "Borrower" hereunder, and in either case shall have delivered or caused to be delivered as to such Subsidiary the items referred to in SECTIONS 5.1(A)(3), (4), (5), (6), and (8) and an opinion of counsel for such Subsidiary as to such matters in connection with the transactions contemplated by the Subsidiary Guaranty and Subsidiary Security 91 98 Agreement or such amendment to this Agreement as the Administrative Agent may reasonably request; PROVIDED, HOWEVER, that Heafner or the applicable Loan Party shall not be required to furnish the information described in SECTION 11.4(A)(II) or (A)(V) except with respect to any Acquisition the aggregate Purchase Price of which, when added to the aggregate Purchase Price of all Acquisitions made on or after the Effective Date and prior to the date of determination as to which such information has not been provided, exceeds $10,000,000. "Purchase Price" means an amount equal to the total consideration paid for such Acquisition, including all cash payments (whether classified as purchase price, noncompete payments, consulting payments, "earn out" or otherwise and without regard to whether such amount is paid in whole or in part at the closing of the Acquisition or over time thereafter, but excluding any finance charges attributable to deferred payments and excluding any salary or other employment compensation paid to a seller for the purpose of retaining such seller's services as an active employee of a Borrower or a Subsidiary), the principal amount of all Acquired Debt and of any Subordinated Debt owing to the seller, and the value (as determined by the board of directors of Heafner, including pursuant to the applicable purchase agreement between the relevant Borrower and the seller, in the case of any property, the fair value of which is not readily ascertainable) of all other property, other than capital stock of Heafner, transferred by Heafner to the seller. (b) Notwithstanding any provision of this Agreement to the contrary, in connection with any merger (or other distribution of the assets) of a Subsidiary that is not a Loan Party with and into (or to) a Loan Party, or any Acquisition of a Business Unit, whether by purchase of stock, merger, or purchase of assets and whether in a single transaction or series of related transactions, by a Borrower, where the value of the assets of such Subsidiary or the Purchase Price of such Acquisition, as the case may be: (i) is less than $10,000,000, Heafner shall have the right to determine whether the Inventory and Receivables so acquired are included in the Borrowing Base, subject to the provision of the definitions "Borrowing Base," "Eligible Inventory" and Eligible Receivables" and any other provisions of this Agreement and the other Loan Documents applicable to the computation and reporting of the Borrowing Base, and if Heafner elects so to include such acquired Inventory and Receivables, then any Subsidiary that owns any such acquired Inventory or Receivables shall execute and deliver to the Administrative Agent the agreements, certificates, instruments and other documents referred to in SECTION 11.4(A)(VI) or (ii) is $10,000,000 or more, the Required Lenders shall have the right to determine whether any Inventory or Receivables so acquired are included in the Borrowing Base (subject to the other applicable provisions of this Agreement). SECTION 11.5 Capital Expenditures. Make or incur any Capital Expenditures (excluding Financed Capex and expenditures pursuant to SECTION 11.4) in the aggregate in excess of $12,000,000 for any Fiscal Year, PROVIDED that any amount of such allowance not used in a Fiscal Year may be carried forward, but only to the succeeding Fiscal Year. 92 99 SECTION 11.6 Restricted Distributions and Payments, Etc. Declare or make any Restricted Distribution or Restricted Payment in any Fiscal Year which, when added to all other Restricted Distributions and Restricted Payments made in the same Fiscal Year of Heafner, would exceed $2,000,000; PROVIDED, that Restricted Payments shall not include any non-compete, bonus or "earn-out" payments payable (i) to the former stockholders of CPW pursuant to agreements in effect on the Effective Date or (ii) in connection with an Acquisition by Heafner or any other Loan Party after the Effective Date that is permitted under SECTION 11.4(A). SECTION 11.7 Merger, Consolidation and Sale of Assets. Merge or consolidate with any other Person or sell, lease or transfer or otherwise dispose of all or a substantial portion of its assets to any Person other than sales of Inventory in the ordinary course of business, EXCEPT that any Loan Party may merge with and into another Loan Party (provided that Heafner shall be the surviving corporation of any merger to which it is a party) and, subject to the provisions of SECTION 11.4(B), any Subsidiary may merge into a Loan Party with such Loan Party as the surviving corporation. SECTION 11.8 Transactions with Affiliates. Except as described on SCHEDULE 11.8, effect any transaction with any Affiliate on a basis less favorable to a Loan Party than would be the case if such transaction had been effected with a Person not an Affiliate. SECTION 11.9 Liens. Create, assume or permit or suffer to exist or to be created or assumed any Lien on any of the Collateral or its other assets, other than Liens listed in CLAUSES (A) through (I) of the definition "Permitted Liens" and (a) Liens securing Acquired Debt, which Liens affect solely capital or fixed assets (and not Receivables or Inventory or proceeds thereof) of the Business Unit Acquired, existing on the date of the related Acquisition and not created in contemplation thereof, and (b) Purchase Money Liens (including Capitalized Lease Obligations) securing Debt otherwise permitted pursuant to SECTION 11.2. SECTION 11.10 Sales and Leasebacks. Enter into any arrangement with any Person providing for a Loan Party's leasing from such Person any real or personal property which has been or is to be sold or transferred, directly or indirectly, by a Loan Party to such Person, if the associated Attributable Debt, when added to all other outstanding Attributable Debt, would exceed $15,000,000. SECTION 11.11 Amendments of Other Agreements. Amend the interest rate or principal amount or schedule of payments of principal and interest with respect to any Debt (other than the Secured Obligations) or any dividend rate or redemption schedule, applicable to any preferred stock of a Borrower, other than to reduce the interest or dividend rate or to extend any such schedule of payments or redemption schedule, or amend or cause or permit to be amended in any material respect or in any respect that may be adverse to the interests of the Administrative Agent or the Lenders, (i) the KS Preferred Stock Purchase Agreement, (ii) the Senior Note Indenture, or (iii) the articles or certificate of incorporation of any Loan Party. SECTION 11.12 Commingling. Commingle or permit the commingling of Collateral or proceeds of Collateral with other property of or under the control of any of Heafner or any of its Subsidiaries that is not Collateral or proceeds thereof. 93 100 ARTICLE 12 DEFAULT SECTION 12.1 Events of Default. Each of the following shall constitute an Event of Default, whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment or order of any court or any order, rule or regulation of any governmental or nongovernmental body: (a) Default in Payment. The Borrowers shall default in any payment of principal of or interest on any Loan or any Note when and as due (whether at maturity, by reason of acceleration or otherwise). (b) Other Payment Default. The Borrowers shall default in the payment, as and when due, of principal of or interest on, any other Secured Obligation, and such default shall continue for a period of 10 days after written notice thereof has been given to the Borrowers by the Administrative Agent. (c) Misrepresentation. Any representation or warranty made or deemed to be made by the Borrowers under this Agreement or any Loan Document, or any amendment hereto or thereto, shall at any time prove to have been incorrect or misleading in any material respect when made. (d) Default in Performance. The Borrowers shall default in the performance or observance of any term, covenant, condition or agreement to be performed by the Borrowers, contained in (i) ARTICLES 8 (other than SECTIONS 8.3 and 8.4(A)) or 11, or SECTIONS 9.1 (insofar as it requires the preservation of the corporate existence of the Borrowers), 9.8, 10.1, 10.2 OR 10.3, and the Administrative Agent shall have delivered to the Borrowers written notice of such default, or (ii) this Agreement (other than as specifically provided for otherwise in this SECTION 12.1) and such default shall continue for a period of 30 days after written notice thereof has been given to the Borrowers by the Administrative Agent. (e) Debt Cross-Default. (i) A Borrower or any Subsidiary shall fail to pay when due and payable (and within any applicable cure or grace period) the principal of or interest on any Debt (other than the Loans) in an amount in excess of $5,000,000, or (ii) the maturity of any such Debt outstanding in a principal amount greater than $5,000,000 shall have (A) been accelerated in accordance with the provisions of any indenture, contract or instrument providing for the creation of or concerning such Indebtedness, or (B) been required to be prepaid prior to the stated maturity thereof, including, without being limited to, upon a "Change of Control" as defined in the Senior Note Indenture, or 94 101 (iii) any event shall have occurred and be continuing which would permit any holder or holders of such Debt outstanding in an amount in excess of $5,000,000, any trustee or agent acting on behalf of such holder or holders or any other Person so to accelerate such maturity, and the Borrowers shall have failed to cure such default prior to the expiration of any applicable cure or grace period. (f) Other Cross-Defaults; Mandatory Redemption. A Borrower or any Subsidiary shall default in the payment when due, or in the performance or observance, of any obligation or condition of any agreement, contract or lease (other than this Agreement, the Security Documents or any such agreement, contract or lease relating to Debt), if the existence of any such defaults, singly or in the aggregate, could reasonably be expected to have a Materially Adverse Effect, PROVIDED, that for the purposes of this provision, where such a default could result only in a monetary loss, a Materially Adverse Effect shall not be deemed to have occurred unless the aggregate of such losses would exceed $5,000,000, or any event shall occur or circumstances exist that would result in or permit the holder thereof to require the redemption of the KS Preferred. (g) Voluntary Bankruptcy Proceeding. A Borrower or any Subsidiary shall (i) commence a voluntary case under the federal bankruptcy laws (as now or hereafter in effect), (ii) file a petition seeking to take advantage of any other laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding up or composition for adjustment of debts, (iii) consent to or fail to contest in a timely and appropriate manner any petition filed against it in an involuntary case under such bankruptcy laws or other laws, (iv) apply for or consent to, or fail to contest in a timely and appropriate manner, the appointment of, or the taking of possession by, a receiver, custodian, trustee, or liquidator of itself or of a substantial part of its property, domestic or foreign, (v) admit in writing its inability to pay its debts as they become due, (vi) make a general assignment for the benefit of creditors, or (vii) take any corporate action for the purpose of authorizing any of the foregoing. (h) Involuntary Bankruptcy Proceeding. A case or other proceeding shall be commenced against a Borrower or any Subsidiary in any court of competent jurisdiction seeking (i) relief under the federal bankruptcy laws (as now or hereafter in effect) or under any other laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding up or adjustment of debts, 95 102 (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of a Borrower, any Subsidiary or of all or any substantial part of the assets, domestic or foreign, of a Borrower or any Subsidiary, and such case or proceeding shall continue undismissed or unstayed for a period of 60 consecutive calendar days, or an order granting the relief requested in such case or proceeding against such Borrower or Subsidiary (including, but not limited to, an order for relief under such federal bankruptcy laws) shall be entered. (i) Loan Documents. Any "Event of Default" under any Loan Document (other than this Agreement) shall occur or a Borrower shall default in the performance or observance of any material term, covenant, condition or agreement contained in, or the payment of any other sum covenanted to be paid by the Borrowers under, any Loan Document (other than this Agreement) that does not expressly provide for "Events of Default," or any provision thereof (in each case, after giving effect to any applicable grace or cure period), other than any nonmaterial provision rendered unenforceable by operation of law, shall cease to be valid and binding. (j) Failure of Agreements. A Loan Party shall challenge the validity and binding effect of any provision of any Loan Document after delivery thereof hereunder or shall state in writing its intention to make such a challenge, or any Security Document, after delivery thereof hereunder, shall for any reason (except to the extent permitted by the terms thereof) cease to create a valid and perfected first priority Lien (except for Permitted Liens) on, or security interest in, any of the Collateral purported to be covered thereby. (k) Judgment. A final, unappealable judgment or order for the payment of money in an amount that exceeds the uncontested insurance available therefor by $2,500,000 or more shall be entered against a Borrower by any court and such judgment or order shall continue undischarged or unstayed for 30 days. (l) Attachment. A warrant or writ of attachment or execution or similar process which exceeds $2,500,000 in value shall be issued against any property of a Borrower and such warrant or process shall continue undischarged or unstayed for 30 days. (m) ERISA. In addition to the breach of any other representation and warranty, any ERISA Event with respect to a Benefit Plan shall occur. (n) Qualified Audits. The independent certified public accountants retained by Heafner shall refuse to deliver an opinion in accordance with SECTION 10.1(A) with respect to the annual consolidated financial statements of Heafner and its Consolidated Subsidiaries. (o) Change of Control. Heafner shall cease to own, directly or indirectly, 100% of the issued and outstanding stock of each other Loan Party or a "Change of Control" for purposes of the Senior Note Indenture, the Class B Stock or the Warrant shall occur. 96 103 SECTION 12.2 Remedies. (a) Automatic Acceleration and Termination of Facilities. Upon the occurrence of an Event of Default specified in SECTION 12.1(G) or (H), (i) the principal of and the interest on the Loans and any Note at the time outstanding, and all other amounts owed to the Administrative Agent or the Lenders under this Agreement or any of the other Loan Documents and all other Secured Obligations, shall thereupon become due and payable without presentment, demand, protest, or other notice of any kind, all of which are expressly waived, anything in this Agreement or any of the Loan Documents to the contrary notwithstanding, and (ii) the Commitments and the right of the Borrowers to request Borrowings under this Agreement shall immediately terminate. (b) Other Remedies. If any Event of Default shall have occurred, and during the continuance of any Event of Default, the Administrative Agent may, and at the direction of the Required Lenders in their sole and absolute discretion shall, do any of the following: (i) declare the principal of and interest on the Loans and any Note at the time outstanding, and all other amounts owed to the Administrative Agent or the Lenders under this Agreement or any of the other Loan Documents and all other Secured Obligations, to be forthwith due and payable, whereupon the same shall immediately become due and payable without presentment, demand, protest or other notice of any kind, all of which are expressly waived, anything in this Agreement or the Loan Documents to the contrary notwithstanding; (ii) terminate the Commitments and any other right of the Borrowers to request borrowings hereunder; (iii) notify, or request the Borrowers to notify, in writing or otherwise, any Account Debtor or obligor with respect to any one or more of the Receivables to make payment to the Administrative Agent, for the benefit of the Lenders, or any agent or designee of the Administrative Agent, at such address as may be specified by the Administrative Agent and if, notwithstanding the giving of any notice, any Account Debtor or other such obligor shall make payments to the Borrowers, the Borrowers shall hold all such payments received in trust for the Administrative Agent, for the account of the Lenders, without commingling the same with other funds or property of, or held by, the Borrowers, and shall deliver the same to the Administrative Agent or any such agent or designee of the Administrative Agent immediately upon receipt by the Borrowers in the identical form received, together with any necessary endorsements; (iv) settle or adjust disputes and claims directly with Account Debtors and other obligors on Receivables for amounts and on terms which the Administrative Agent considers advisable and in all such cases only the net amounts received by the Administrative Agent, for the account of the Lenders, in payment of such amounts, after deductions of costs and attorneys' fees, shall constitute Collateral and the Borrowers shall have no further right to make any such settlements or adjustments or to accept any returns of merchandise; 97 104 (v) enter upon any premises in which Inventory may be located and, without resistance or interference by the Borrowers, take physical possession of any or all thereof and maintain such possession on such premises or move the same or any part thereof to such other place or places as the Administrative Agent shall choose, without being liable to the Borrowers on account of any loss, damage or depreciation that may occur as a result thereof, so long as the Administrative Agent shall act reasonably and in good faith; (vi) require the Borrowers to and the Borrowers shall, without charge to the Administrative Agent or any Lender, assemble the Inventory and maintain or deliver it into the possession of the Administrative Agent or any agent or representative of the Administrative Agent at such place or places as the Administrative Agent may designate and as are reasonably convenient to both the Administrative Agent and the applicable Borrower; (vii) at the expense of the Borrowers, cause any of the Inventory to be placed in a public or field warehouse, and the Administrative Agent shall not be liable to the Borrowers on account of any loss, damage or depreciation that may occur as a result thereof, so long as the Administrative Agent shall act reasonably and in good faith; (viii) without notice, demand or other process, and without payment of any rent or any other charge, enter any of the Borrowers' premises and, without breach of the peace, until the Administrative Agent, on behalf of the Lenders, completes the enforcement of its rights in the Collateral, take possession of such premises or place custodians in exclusive control thereof, remain on such premises and use the same and any of the Borrowers' equipment, for the purpose of (A) completing any work in process, preparing any Inventory for disposition and disposing thereof, and (B) collecting any Receivable, and the Administrative Agent for the benefit of the Lenders is hereby granted a license or sublicense and all other rights as may be necessary, appropriate or desirable to use the Proprietary Rights in connection with the foregoing, and the rights of the Borrowers under all licenses, sublicenses and franchise agreements shall inure to the Administrative Agent for the benefit of the Lenders (PROVIDED, HOWEVER, that any use of any federally registered trademarks as to any goods shall be subject to the control as to the quality of such goods of the owner of such trademarks and the goodwill of the business symbolized thereby); (ix) exercise any and all of its rights under any and all of the Security Documents; (x) apply any Collateral consisting of cash to the payment of the Secured Obligations in any order in which the Administrative Agent, on behalf of the Lenders, may elect or use such cash in connection with the exercise of any of its other rights hereunder or under any of the Security Documents; 98 105 (xi) establish or cause to be established one or more Lockboxes or other arrangement for the deposit of proceeds of Receivables, and, in such case, the Borrowers shall cause to be forwarded to the Administrative Agent at the Administrative Agent's Office, on a daily basis, copies of all checks and other items of payment and deposit slips related thereto deposited in such Lockboxes, together with collection reports in form and substance satisfactory to the Administrative Agent; and (xii) exercise all of the rights and remedies of a secured party under the UCC and under any other Applicable Law, including, without limitation, the right, without notice except as specified below and with or without taking possession thereof, to sell the Collateral or any part thereof in one or more parcels at public or private sale, at any location chosen by the Administrative Agent, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as the Administrative Agent may deem commercially reasonable. Each Borrower agrees that, to the extent notice of sale shall be required by law, at least 10 days' notice to the Borrowers of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification, but notice given in any other reasonable manner or at any other reasonable time shall constitute reasonable notification. The Administrative Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Administrative Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. SECTION 12.3 Application of Proceeds. All proceeds from each sale of, or other realization upon, all or any part of the Collateral following an Event of Default shall be applied or paid over in accordance with the provisions of SECTION 4.16. THE BORROWERS SHALL REMAIN LIABLE AND WILL PAY, ON DEMAND, ANY DEFICIENCY REMAINING IN RESPECT OF THE SECURED OBLIGATIONS, TOGETHER WITH INTEREST THEREON AT A RATE PER ANNUM EQUAL TO THE HIGHEST RATE THEN PAYABLE HEREUNDER ON SUCH SECURED OBLIGATIONS, WHICH INTEREST SHALL CONSTITUTE PART OF THE SECURED OBLIGATIONS. SECTION 12.4 Power of Attorney. In addition to the authorizations granted to the Administrative Agent under SECTION 9.13 or under any other provision of this Agreement or of any other Loan Document, during the continuance of an Event of Default, each Borrower hereby irrevocably designates, makes, constitutes and appoints the Administrative Agent (and all Persons designated by the Administrative Agent from time to time) as the Borrower's true and lawful attorney, and agent in fact, and the Administrative Agent, or any agent of the Administrative Agent, may, without notice to the Borrowers, and at such time or times as the Administrative Agent or any such agent in its sole discretion may determine, in the name of a Borrower, the Administrative Agent or the Lenders, (a) demand payment of the Receivables, (b) enforce payment of the Receivables by legal proceedings or otherwise, 99 106 (c) exercise all of any Borrower's rights and remedies with respect to the collection of Receivables, (d) settle, adjust, compromise, extend or renew any or all of the Receivables, (e) settle, adjust or compromise any legal proceedings brought to collect the Receivables, (f) discharge and release the Receivables or any of them, (g) prepare, file and sign the name of a Borrower on any proof of claim in bankruptcy or any similar document against any Account Debtor, (h) prepare, file and sign the name of a Borrower on any notice of Lien, assignment or satisfaction of Lien, or similar document in connection with any of the Collateral, (i) endorse the name of a Borrower upon any chattel paper, document, instrument, notice, freight bill, bill of lading or similar document or agreement relating to the Receivables, the Inventory or any other Collateral, (j) use the stationery of the Borrowers and sign the names of the Borrowers to verifications of the Receivables and on any notice to the Account Debtors, (k) open the Borrowers' mail, (l) notify the post office authorities to change the address for delivery of the Borrowers' mail to an address designated by the Administrative Agent, and (m) use the information recorded on or contained in any data processing equipment and computer hardware and software relating to the Receivables, Inventory or other Collateral to which any Borrower has access. SECTION 12.5 Miscellaneous Provisions Concerning Remedies. (a) Rights Cumulative. The rights and remedies of the Administrative Agent and the Lenders under this Agreement, the Notes and each of the Loan Documents shall be cumulative and not exclusive of any rights or remedies which it or they would otherwise have. In exercising such rights and remedies the Administrative Agent and the Lenders may be selective and no failure or delay by the Administrative Agent or any Lender in exercising any right shall operate as a waiver of it, nor shall any single or partial exercise of any power or right preclude its other or further exercise or the exercise of any other power or right. (b) Waiver of Marshalling. Each Borrower hereby waives any right to require any marshalling of assets and any similar right. (c) Limitation of Liability. Nothing contained in this ARTICLE 12 or elsewhere in this Agreement or in any of the Loan Documents shall be construed as requiring or obligating the Administrative Agent, any Lender or any agent or designee of the Administrative Agent or 100 107 any Lender to make any demand, or to make any inquiry as to the nature or sufficiency of any payment received by it, or to present or file any claim or notice or take any action, with respect to any Receivable or any other Collateral or the monies due or to become due thereunder or in connection therewith, or to take any steps necessary to preserve any rights against prior parties, and the Administrative Agent, the Lenders and their agents or designees shall have no liability to the Borrowers for actions taken pursuant to this ARTICLE 12, any other provision of this Agreement or any of the Loan Documents so long as the Administrative Agent or such Lender shall act in good faith and in a commercially reasonable manner. (d) Appointment of Receiver. In any action under this ARTICLE 12, the Administrative Agent shall be entitled during the continuance of an Event of Default, to the fullest extent permitted by Applicable Law, to the appointment of a receiver, without notice of any kind whatsoever, to take possession of all or any portion of the Collateral and to exercise such power as the court shall confer upon such receiver. SECTION 12.6 Trademark License. Each Borrower hereby grants to the Administrative Agent for its benefit as Administrative Agent and for the benefit of the Lenders, the nonexclusive right and license to use its trademarks for the purposes set forth in SECTION 12.2(B)(VIII) and for the purpose of enabling the Administrative Agent to realize on the Collateral and to permit any purchaser of any portion of the Collateral through a foreclosure sale or any other exercise of the Administrative Agent's rights and remedies under this Agreement and the other Security Documents to use, sell or otherwise dispose of the Collateral bearing any such trademark. Such right and license is granted free of charge, without the requirement that any monetary payment whatsoever be made to the Borrowers or any other Person by the Lenders or the Administrative Agent or any purchaser or purchasers of the Collateral. The Borrowers hereby represent, warrant, covenant and agree that they presently have, and shall continue to have, the right, without the approval or consent of others, to grant the license set forth in this SECTION 12.6. 101 108 ARTICLE 13 ASSIGNMENTS SECTION 13.1 Successors and Assigns; Participations. (a) This Agreement shall be binding upon and inure to the benefit of the Borrowers, the Lenders, the Administrative Agent, all future holders of the Notes, and their respective successors and assigns, except that the Borrowers may not assign or transfer any of their rights or obligations under this Agreement without the prior written consent of each Lender. (b) Each Lender may with the consent of the Administrative Agent and, so long as no Default or Event of Default has occurred and is continuing, Heafner (which consent shall not be unreasonably withheld) assign to one or more Eligible Assignees all or a portion of its interests, rights and obligations under this Agreement (including, without limitation, all or a portion of the Loans at the time owing to it and the Notes held by it) (PROVIDED that no consent shall be required with respect to any assignment to an Eligible Assignee as part of the assigning Lender's transfer of all or substantially all of its assets of a similar type in connection with any acquisition or divestiture or otherwise); PROVIDED, HOWEVER, that (i) each such assignment shall be of a constant, and not a varying, percentage of all the assigning Lender's rights and obligations under this Agreement, (ii) the amount of the Commitment of the assigning Lender that is subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall in no event be less than the Minimum Commitment (or the assigning Lender's entire remaining Commitment, if less) (except that a Lender may assign less than the Minimum Commitment to its Affiliate), (iii) in the case of a partial assignment, the amount of the Commitment that is retained by the assigning Lender (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall in no event be less than the Minimum Commitment, (iv) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register an Assignment and Acceptance, together with any Note or Notes subject to such assignment and an assignment fee in the amount of $2,500, (v) such assignment shall not, without the consent of the Borrowers, require the Borrowers to file a registration statement with the Securities and Exchange Commission or apply to or qualify the Loans or the Notes under the blue sky laws of any state, and (vi) the representation contained in SECTION 13.2 hereof shall be true with respect to any such proposed assignee. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder, and (B) the Lender assignor thereunder shall, to the extent provided in such assignment, be released from its obligations under this Agreement. (c) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim, such Lender assignor makes no representation or warranty and assumes no responsibility with 102 109 respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such Lender assignor makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrowers or the performance or observance by the Borrowers of any of their obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in SECTION 6.1(N) and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Administrative Agent, such Lender assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the other Loan Documents as are delegated to the Administrative Agent by the terms hereof and thereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) The Administrative Agent shall maintain a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders and the Commitment and Proportionate Share of, and principal amount of the Loans and owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrowers, the Administrative Agent and the Lenders may treat each person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrowers or any Lender at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an Eligible Assignee together with any Note or Notes and evidence satisfactory to the Administrative Agent of the Borrowers' consent thereto (if applicable), subject to such assignment, the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in the form of EXHIBIT C, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register, (iii) give prompt notice thereof to the Lenders and the Borrowers, and (vi) promptly deliver a copy of such Acceptance and Assignment to the Borrowers. Within five Business Days after receipt of notice, the Borrowers shall execute and deliver to the Administrative Agent in exchange for the surrendered Note or Notes a new Note or Notes to the order of such Eligible Assignee in amounts equal to the Commitment assumed by such Eligible Assignee pursuant to such Assignment and Acceptance and a new Note or Notes to the order of the assigning Lender in an amount equal to the Commitment retained by it hereunder. Such new Note or Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note or Notes, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in 103 110 substantially the form of the assigned Notes. Each surrendered Note or Notes shall be canceled and returned to the Borrowers. (f) Each Lender may sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment hereunder and the Loans owing to it and the Notes held by it); PROVIDED, HOWEVER, that (i) each such participation (other than to a Lender's own Affiliate) shall be in an amount not less than the Minimum Commitment, (ii) such Lender's obligations under this Agreement (including, without limitation, its Commitment hereunder) shall remain unchanged, (iii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iv) such Lender shall remain the holder of the Notes held by it for all purposes of this Agreement, (v) the Borrowers, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement; PROVIDED, that such Lender may agree with any participant that such Lender will not, without such participant's consent, agree to or approve any waivers or amendments which would reduce the principal of or the interest rate on any Loans, extend the term or increase the amount of the commitments of such participant, reduce the amount of any fees to which such participant is entitled, extend any scheduled payment date for principal or release Collateral securing the Loans (other than Collateral disposed of pursuant to SECTION 8.7 hereof or otherwise in accordance with the terms of this Agreement or the Security Documents), and (vi) any such disposition shall not, without the consent of the Borrowers, require any Borrower to file a registration statement with the Securities and Exchange Commission to apply to qualify the Loans or the Notes under the blue sky law of any state. The Lender selling a participation to any bank or other entity that is not an Affiliate of such Lender shall give prompt notice thereof to the Administrative Agent, the other Lenders and the Borrowers. (g) Any Lender may, in connection with any assignment, proposed assignment, participation or proposed participation pursuant to this SECTION 13.1, disclose to the assignee, participant, proposed assignee or proposed participant, any information relating to the Borrowers furnished to such Lender by or on behalf of the Borrowers, PROVIDED that, prior to any such disclosure, each such assignee, proposed assignee, participant or proposed participant shall agree with the Borrowers or such Lender (which in the case of an agreement with only such Lender, the Borrowers shall be recognized as third party beneficiaries thereof) to preserve the confidentiality of any confidential information relating to the Borrowers received from such Lender. SECTION 13.2 Representation of Lenders. Each Lender hereby represents that it will make each Loan hereunder as a commercial loan for its own account in the ordinary course of its business; PROVIDED, HOWEVER, that subject to SECTION 13.1 hereof, the disposition of the Notes or other evidence of the Secured Obligations held by any Lender shall at all times be within its exclusive control. 104 111 ARTICLE 14 AGENT SECTION 14.1 Appointment of Administrative Agent. Each Lender hereby irrevocably designates and appoints (1) FCC as the Administrative Agent of such Lender and (2) Bank of America as the Syndication Agent and FUNB as the Documentation Agent under this Agreement and the other Loan Documents, and each Lender irrevocably authorizes the Administrative Agent, as the Administrative Agent for such Lender, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent by the terms of this Agreement and such other Loan Documents, including, without limitation, to make determinations as to the eligibility of Inventory and Receivables, to establish Additional Reserves and to adjust the advance ratios contained in the definition of "Borrowing Base" (so long as such advance ratios, as adjusted, do not exceed those set forth in the definition of "Borrowing Base" as of the Agreement Date), together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement or the other Loan Documents, the Administrative Agent shall not have any duties or responsibilities except those expressly set forth herein and therein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or the other Loan Documents or otherwise exist against the Administrative Agent. SECTION 14.2 Delegation of Duties. The Administrative Agent may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. The Administrative Agent hereby appoints, authorizes and directs each Lender to act as collateral sub-agent for the Administrative Agent for the purposes of perfecting security interests and Liens in Collateral held by such Lender. SECTION 14.3 Exculpatory Provisions. Neither the Administrative Agent nor any of its trustees, officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be (i) liable to any Lender (or any Lender's participants) for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or the other Loan Documents (except for its or such Person's, as the case may be, own gross negligence or willful misconduct), or (ii) responsible in any manner to any Lender (or any Lender's participants) for any recitals, statements, representations or warranties made by the Borrowers or any of its Subsidiaries, any Affiliate thereof or any other Person or any officer thereof contained in this Agreement or the other Loan Documents or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Agreement or the other Loan Documents or for the existence, value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or the other Loan Documents or any Collateral or the Security Interest or other Lien or other interest therein or for any failure of the Borrowers, or any Subsidiary of the Borrower or any Affiliate of the Borrowers to perform its obligations hereunder or thereunder. The Administrative Agent shall 105 112 not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement, or to inspect the properties, books or records of the Borrowers. SECTION 14.4 Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any Note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrowers), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless such Note shall have been transferred in accordance with SECTION 13.1. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement and the other Loan Documents unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate and shall be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the Notes in accordance with a request of the Required Lenders (or all Lenders if such action or inaction would have the effect of amending or waiving a breach of any provision of this Agreement that only all the Lenders may amend or waive in accordance with the provisions of SECTION 15.9(B)), and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Notes. SECTION 14.5 Notice of Default. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent has received notice from a Lender or the Borrowers referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Administrative Agent receives such a notice, the Administrative Agent shall promptly give notice thereof to the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be directed by the Required Lenders; PROVIDED that unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) continue making Loans to the Borrowers on behalf of the Lenders in reliance on the provisions of SECTION 4.7 and take such other action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable and in the best interests of the Lenders. SECTION 14.6 Non-Reliance on Administrative Agent and Other Lenders. Each Lender expressly acknowledges that none of the Administrative Agent, the Syndication Agent nor the Documentation Agent nor any of their respective officers, directors, counsel, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Administrative Agent, the Syndication Agent or the Documentation Agent hereafter taken, including any review of the affairs of the Borrowers, any Subsidiary or any Affiliate of the Borrowers, shall be deemed to constitute any representation or warranty by the Administrative Agent, the Syndication Agent or the Documentation Agent to any Lender. Each Lender represents to the Administrative Agent, the Syndication Agent and the Documentation 106 113 Agent that it has, independently and without reliance upon the Administrative Agent, the Syndication Agent or the Documentation Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial (and other) condition and creditworthiness of the Borrowers and the Subsidiaries, and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Administrative Agent or any Co-Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial (and other) condition and creditworthiness of the Borrowers and the Subsidiaries. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent hereunder or under the other Loan Documents none of the Administrative Agent, the Syndication Agent nor the Documentation Agent shall have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, financial (and other) condition or creditworthiness of the Borrowers or the Subsidiaries or the Affiliates of the Borrowers which may come into the possession of the Administrative Agent, the Syndication Agent or the Documentation Agent or any of their respective officers, directors, employees, agents, attorneys-in-fact or Affiliates. SECTION 14.7 Indemnification. (a) The Lenders agree to indemnify the Administrative Agent in its capacity as such (to the extent not reimbursed by the Borrowers and without limiting the obligation of the Borrowers or any other Person to do so), Ratably according to their respective Commitment Percentages, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, attorneys' fees, costs, expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Notes) be imposed on, incurred by or asserted against the Administrative Agent in any way relating to or arising out of this Agreement or the other Loan Documents, or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Administrative Agent under or in connection with any of the foregoing; PROVIDED that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, attorneys' fees, costs, expenses or disbursements resulting from the Administrative Agent's gross negligence or willful misconduct or resulting solely from transactions or occurrences that occur at a time after such Lender has assigned all of its interests, rights and obligations under this Agreement pursuant to SECTION 13.1 or, in the case of a Lender to which an assignment is made hereunder pursuant to SECTION 13.1, at a time before such assignment. The agreements in this SECTION 14.7 shall survive the payment of the Notes, the Secured Obligations and all other amounts payable hereunder and the termination of this Agreement. (b) Without limiting the generality of the foregoing provisions of this SECTION 14.7, if the Administrative Agent should be sued by any receiver, trustee in bankruptcy, debtor-in-possession or other Person on account of any alleged preference or fraudulent transfer received or alleged to have been received from the Borrowers, any Subsidiary or any other 107 114 Person as the result of any transaction under the Loan Documents, then any monies paid by the Administrative Agent in settlement or satisfaction of such suit, together with all costs and expenses (including attorneys' fees and expenses) incurred by Administrative Agent in the defense of same, shall be promptly reimbursed to the Administrative Agent by the Lenders to the extent of each Lender's Proportionate Share. (c) Further, without limiting the generality of the foregoing provisions of this SECTION 14.7, if at any time (whether prior to or after the Termination Date) any action or proceeding shall be brought against the Administrative Agent by the Borrowers, any Subsidiary, or by any other Person claiming by, through or under the Borrowers or any Subsidiary, to recover damages for any action taken or omitted by the Administrative Agent under any of the Loan Documents or in the performance of any rights, powers or remedies of the Administrative Agent against the Borrowers, any Account Debtor, any Subsidiary, the Collateral or with respect to any Loans, or to obtain any other relief of any kind on account of any transaction between the Administrative Agent and the Borrowers, any Subsidiary or any other Person under or in relation to any of the Loan Documents, the Lenders agree to indemnify and hold the Administrative Agent harmless with respect thereto and to pay to Administrative Agent their respective Proportionate Shares of such amount as the Administrative Agent shall be required to pay by reason of a judgment, decree or other order entered in such action or proceeding or by reason of any compromise or settlement agreed to by the Administrative Agent, including all interest and costs assessed against the Administrative Agent in defending or compromising such action, together with attorneys' fees and other legal expenses paid or incurred by the Administrative Agent in connection therewith; PROVIDED, HOWEVER, that no Lender shall be liable to the Administrative Agent for any of the foregoing to the extent that they arise from the willful misconduct or gross negligence of the Administrative Agent. In the Administrative Agent's discretion, the Administrative Agent may also reserve for or satisfy any such judgment, decree or order from proceeds of Collateral prior to any distributions therefrom to or for the account of Lenders. SECTION 14.8 Administrative Agent in Its Individual Capacity. The institution at the time acting as the Administrative Agent and its Affiliates may make loans to, issue or cause to be issued letters of credit to or for the account of, accept deposits from and generally engage in any kind of business with the Borrowers, any Subsidiary or any Affiliate of the Borrowers as if it were not the Administrative Agent hereunder. With respect to its Commitment, the Loans made or renewed by it and any Note issued to it and any Letter of Credit or Letter of Credit Guarantee issued by it, such institution shall have and may exercise the same rights and powers under this Agreement and the other Loan Documents and shall be subject to the same obligations and liabilities as and to the extent set forth herein and in the other Loan Documents for any other Lender. The terms "Lenders" and "Required Lenders" or any other term shall, unless the context clearly otherwise indicates, include such institution in its individual capacity as a Lender or one of the Required Lenders. SECTION 14.9 Successor Collateral Administrative Agent. (a) The Administrative Agent may resign as Administrative Agent upon 30 days' notice to the Lenders and the Borrowers or may be removed by the Lenders (other than the Lender who is also the Administrative Agent), or, if there are more than two other Lenders by the 108 115 Lenders whose Commitment Percentages equal at least 51% of the total Commitment Percentage of all other Lenders; PROVIDED, HOWEVER that such resignation shall not take effect until a successor agent has been appointed. If the Administrative Agent shall resign as Administrative Agent under this Agreement or be removed, then the Required Lenders shall appoint from among the Lenders a successor agent for the Lenders and, so long as no Event of Default has occurred and is continuing, subject to approval by Heafner (which approval shall not be unreasonably withheld), whereupon such successor agent shall succeed to the rights, powers and duties of the Administrative Agent, and the term "Administrative Agent" shall mean such successor agent effective upon its appointment, and the former Administrative Agent's rights, powers and duties as Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Agreement or any holders of the Notes. If the Required Lenders have failed to appoint a successor Administrative Agent within 30 days of the resignation notice given by the Administrative Agent as provided above, then the Administrative Agent shall be entitled to appoint a successor agent from among the Lenders, subject, so long as no Event of Default has occurred and is continuing, to approval by Heafner (which approval shall not be unreasonably withheld). After any retiring Administrative Agent's resignation hereunder as Administrative Agent or the removal of any Administrative Agent, the provisions of SECTION 14.7 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. (b) It is intended that there shall be no violation of any Applicable Law denying or restricting the right of financial institutions to transact business as agent in any jurisdiction. It is recognized that, in case of litigation under any of the Loan Documents, or in case the Administrative Agent deems that by reason of present or future laws of any jurisdiction the Administrative Agent might be prohibited from or restricted in exercising any of the powers, rights or remedies granted to the Administrative Agent or the Lenders hereunder or under any of the Loan Documents or from holding title to or a Lien upon any Collateral or from taking any other action which may be necessary or desirable hereunder or under any of the Loan Documents, the Administrative Agent may appoint an additional individual or institution as a separate collateral agent or co-collateral agent which is not so prohibited from or restricted in taking any of such actions or exercising any of such powers, rights or remedies. If the Administrative Agent shall appoint an additional individual or institution as a separate collateral agent or co-collateral agent as provided above, each and every remedy, power, right, claim, demand or cause of action intended by any of the Loan Documents to be exercised by or vested in or conveyed to the Administrative Agent with respect thereto shall be exercisable by and vested in such separate collateral agent or co-collateral agent, but only to the extent necessary to enable such separate collateral agent or co-collateral agent to exercise such powers, rights and remedies, and every covenant and obligation necessary to the exercise thereof by such separate collateral agent or co-collateral agent shall run to and be enforceable by either of them. Should any instrument from the Lenders be required by the separate collateral agent or co-collateral agent so appointed by Administrative Agent in order more fully and certainly to vest in and confirm to him or it such rights, powers, duties and obligations, including without limitation indemnification of such collateral agent or co-collateral agent, any and all of such instruments shall, on request, be executed, acknowledged and delivered by the Lenders. In case any separate collateral agent or co-collateral agent, or a successor to either, shall die, become incapable of acting, resign or be removed, all the estates, properties, rights, powers, duties and obligations of such separate collateral agent or co-collateral agent, so far as permitted by Applicable Law, shall 109 116 vest in and be exercised by the Administrative Agent until the appointment of a new collateral agent or successor to such separate collateral agent or co-collateral agent. SECTION 14.10 Notices from Administrative Agent to Lenders. The Administrative Agent shall promptly, upon receipt thereof, forward to each Lender copies of any updated Schedules and of any written notices, reports or other information supplied to it by the Borrowers or any Subsidiary (but which such Person is not required to supply directly to the Lenders). Except to the extent expressly provided in this Agreement or in the other Loan Documents, the Administrative Agent shall not be obligated to deliver or disclose to any Lender any of the Administrative Agent's internal reports, analysis or investigation or any records or other information in its possession relating to the Borrowers or any of the Subsidiaries or the Affiliates of the Borrowers. SECTION 14.11 Declaring Events of Default. Upon the occurrence of a Default, the Administrative Agent may, and at the direction of the Required Lenders shall, give such notice or take such other action as may be required hereunder to declare an Event of Default. SECTION 14.12 Syndication Agent and Documentation Agent. For avoidance of doubt, it is expressly acknowledged and agreed by the Administrative Agent and each Lender for the benefit of each of the Syndication Agent and the Documentation Agent that, other than any rights or obligations explicitly reserved to or imposed upon the Syndication Agent and the Documentation Agent under this Agreement, neither the Syndication Agent nor the Documentation Agent, in such capacity, has any rights or obligations hereunder nor shall the Syndication Agent or the Documentation Agent, in such capacity, be responsible or accountable to any other party hereto for any action or failure to act hereunder, other than in connection with such explicitly reserved rights or such obligations and then only for claims, damages, losses (other than consequential losses) and other liabilities arising out of such Person's own gross negligence or willful misconduct. 110 117 ARTICLE 15 MISCELLANEOUS SECTION 15.1 Notices. (a) Method of Communication. Except as specifically provided in this Agreement or in any of the Loan Documents, all notices and the communications hereunder and thereunder shall be in writing or by telephone subsequently confirmed in writing. Notices in writing shall be delivered personally or sent by certified or registered mail, postage pre-paid, or by overnight courier, telex or facsimile transmission and shall be deemed received in the case of personal delivery, when delivered, in the case of mailing, when receipted for, in the case of overnight delivery, on the next Business Day after delivery to the courier, and in the case of telex and facsimile transmission, upon transmittal, provided that in the case of notices to the Administrative Agent, notice shall be deemed to have been given only when such notice is actually received by the Administrative Agent. A telephonic notice to the Administrative Agent, as understood by the Administrative Agent, will be deemed to be the controlling and proper notice in the event of a discrepancy with or failure to receive a confirming written notice. (b) Addresses for Notices. Notices to any party shall be sent to it at the following addresses, or any other address of which all the other parties are notified in writing by such first party: If to the Borrowers: Heafner Tire Group, Inc. 2105 Water Ridge Parkway Suite 500 Charlotte, North Carolina 28217 Attn: David H. Taylor Facsimile No.: (704) 423-8987 with a copy to: J. Michael Gaither, Esq. Heafner Tire Group, Inc. 2105 Water Ridge Parkway Suite 500 Charlotte, North Carolina 28217 Facsimile No.: (704) 423-8987 If to the Administrative Agent: Fleet Capital Corporation 300 Galleria Parkway Suite 800 Atlanta, Georgia 30339 Attn: Stephen Y. McGehee Facsimile No.: (770) 859-2483 If to a Lender: At the address of such Lender set forth on the signature pages hereof. 111 118 (c) Administrative Agent's Office. The Administrative Agent hereby designates its office located at 300 Galleria Parkway, Suite 800, Atlanta, Georgia 30339, or any subsequent office which shall have been specified for such purpose by written notice to the Borrowers, as the office to which payments due are to be made. SECTION 15.2 Expenses. The Borrowers agree, jointly and severally, to pay or reimburse on demand all costs and expenses reasonably (other than pursuant to subsection (b) below as to which such requirement shall not apply) incurred (a) by or on behalf of the Administrative Agent, including, without limitation, the reasonable fees and disbursements of counsel, in connection with (i) the negotiation, preparation, execution, delivery, administration, enforcement and termination of this Agreement and each of the other Loan Documents, whenever the same shall be executed and delivered, including, without limitation (A) reasonable out-of-pocket costs and expenses incurred in connection with the administration and interpretation of this Agreement and the other Loan Documents; (B) reasonable costs and expenses of appraisals of the Collateral; (C) the costs and expenses of lien searches; and (D) taxes, fees and other charges for filing the Financing Statements and continuations and the costs and expenses of taking other actions to perfect, protect, and continue the Security Interests; (ii) the preparation, execution and delivery of any waiver, amendment, supplement or consent by the Administrative Agent and the Lenders relating to this Agreement or any of the Loan Documents; (iii) sums paid or incurred to pay any amount or take any action required of the Borrowers under the Loan Documents that the Borrowers fail to pay or take; (iv) costs of inspections and verifications of the Collateral, including, without limitation, standard per diem fees charged by the Administrative Agent or the Lenders, travel, lodging, and meals for inspections of the Collateral and the Borrowers' operations and books and records by the Administrative Agent's and/or the Lenders' agents up to two times per year and whenever an Event of Default exists; (v) costs and expenses of forwarding loan proceeds, collecting checks and other items of payment, and establishing and maintaining each Controlled Disbursement Account, Agency Account and Lockbox; and (vi) costs and expenses of preserving and protecting the Collateral; and 112 119 (b) by or on behalf of the Administrative Agent or any Lender in connection with (i) consulting, after the occurrence of a Default, with one or more Persons, including appraisers, accountants and lawyers, concerning the value of any Collateral for the Secured Obligations or related to the nature, scope or value of any right or remedy of the Administrative Agent or any Lender hereunder or under any of the Loan Documents, including any review of factual matters in connection therewith, which expenses shall include the fees and disbursements of such Persons; and (ii) costs and expenses paid or incurred to obtain payment of the Secured Obligations, enforce the Security Interests, sell or otherwise realize upon the Collateral, and otherwise enforce the provisions of the Loan Documents, or to prosecute or defend any claim in any way arising out of, related to or connected with, this Agreement or any of the Loan Documents, which expenses shall include the reasonable fees and disbursements of counsel and of experts and other consultants retained by the Administrative Agent or any Lender. The foregoing shall not be construed to limit any other provisions of the Loan Documents regarding costs and expenses to be paid by the Borrowers. The Borrowers hereby authorize the Administrative Agent and the Lenders to debit the Borrowers' Loan Accounts (by increasing the principal amount of the Loans) in the amount of any such costs and expenses owed by the Borrowers when due. SECTION 15.3 Stamp and Other Taxes. The Borrowers will pay any and all stamp, registration, recordation and similar taxes, fees or charges and shall indemnify the Administrative Agent and the Lenders against any and all liabilities with respect to or resulting from any delay in the payment or omission to pay any such taxes, fees or charges, which may be payable or determined to be payable in connection with the execution, delivery, performance or enforcement of this Agreement and any of the Loan Documents or the perfection of any rights or security interest thereunder, including, without limitation, the Security Interest. SECTION 15.4 Setoff. In addition to any rights now or hereafter granted under Applicable Law and not by way of limitation of any such rights, during the continuance of any Event of Default, each Lender, any participant with such Lender in the Loans and each Affiliate of each Lender are hereby authorized by the Borrowers at any time or from time to time, without notice to the Borrowers or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, including, but not limited to, indebtedness evidenced by certificates of deposit, whether matured or unmatured) and any other indebtedness at any time held or owing by any Lender or any Affiliate of any Lender or any participant to or for the credit or the account of the Borrowers against and on account of the Secured Obligations irrespective or whether or not (a) the Administrative Agent or such Lender shall have made any demand under this Agreement or any of the Loan Documents, or 113 120 (b) the Administrative Agent or such Lender shall have declared any or all of the Secured Obligations to be due and payable as permitted by SECTION 12.2 and although such Secured Obligations shall be contingent or unmatured. SECTION 15.5 Consent to Advertising and Publicity. With the prior written consent of the Borrowers, which consent shall not be unreasonably withheld, the Administrative Agent, on behalf of the Lenders, may issue and disseminate to the public information describing the credit accommodation entered into pursuant to this Agreement, including the name and address of the Borrowers, the amount, interest rate, maturity, collateral for and a general description of the credit facilities provided hereunder and of the Borrowers' business. SECTION 15.6 Reversal of Payments. The Administrative Agent and each Lender shall have the continuing and exclusive right to apply, reverse and re-apply any and all payments to any portion of the Secured Obligations in a manner consistent with the terms of this Agreement. To the extent the Borrowers make a payment or payments to the Administrative Agent, for the account of the Lenders, or any Lender receives any payment or proceeds of the Collateral for the Borrowers' benefit, which payment(s) or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then, to the extent of such payment or proceeds received, the Secured Obligations or part thereof intended to be satisfied shall be revived and continued in full force and effect, as if such payment or proceeds had not been received by the Administrative Agent or such Lender. SECTION 15.7 Injunctive Relief. The Borrowers recognize that, in the event the Borrowers fail to perform, observe or discharge any of their obligations or liabilities under this Agreement, any remedy at law may prove to be inadequate relief to the Administrative Agent and the Lenders; therefore, the Borrowers agree that if any Event of Default shall have occurred and be continuing, the Administrative Agent and the Lenders, if the Administrative Agent or any Lender so requests, shall be entitled to temporary and permanent injunctive relief without the necessity of proving actual damages. SECTION 15.8 Accounting Matters. All financial and accounting calculations, measurements and computations made for any purpose relating to this Agreement, including, without limitation, all computations utilized by the Borrowers to determine whether they are in compliance with any covenant contained herein, shall, unless this Agreement otherwise provides or unless Required Lenders shall otherwise consent in writing, be performed in accordance with GAAP. SECTION 15.9 Amendments. (a) Except as set forth in SUBSECTION (B) below, any term, covenant, agreement or condition of this Agreement or any of the other Loan Documents may be amended or waived, and any departure therefrom may be consented to by the Required Lenders, if, but only if, such amendment, waiver or consent is in writing signed by the Required Lenders and, in the case of an amendment (other than an amendment described in SECTION 15.9(D)), by the 114 121 Borrowers, PROVIDED that no such amendment, unless consented to by the Administrative Agent, shall alter or affect the rights or responsibilities of the Administrative Agent, and in any such event, the failure to observe, perform or discharge any such term, covenant, agreement or condition (whether such amendment is executed or such waiver or consent is given before or after such failure) shall not be construed as a breach of such term, covenant, agreement or condition or as a Default or an Event of Default. Unless otherwise specified in such waiver or consent, a waiver or consent given hereunder shall be effective only in the specific instance and for the specific purpose for which given. In the event that any such waiver or amendment is requested by the Borrowers, the Administrative Agent and the Lenders may require and charge a fee in connection therewith and consideration thereof in such amount as shall be determined by the Administrative Agent and the Required Lenders in their discretion. (b) Without the prior unanimous written consent of the Lenders, (i) no amendment, consent or waiver shall (A) affect the amount or extend the time of any Lender's obligation to make Loans or (B) extend the originally scheduled time or times of payment of the principal of any Loan or (C) alter the time or times of payment of interest on any Loan or of any fees payable for the account of the Lenders or (D) alter the amount of the principal of any Loan or the rate of interest thereon (except with respect to application of the Default Margin under SECTION 5.1(D)) or (E) alter the amount of any commitment fee or other fee payable hereunder for the account of the Lenders or (F) permit any subordination of the principal of or interest on any Loan or (G) permit the subordination of the Security Interests in any Collateral, (ii) no Collateral having an aggregate value greater than $250,000 shall be released by the Administrative Agent in any 12-month period other than as specifically permitted in this Agreement or the Security Documents nor shall any Collateral be released at a time when the Administrative Agent is entitled to exercise remedies hereunder upon default, nor shall any Borrower or material Guarantor be released from its liability for the Secured Obligations, (iii) except to the extent expressly provided in SECTIONS 4.7 and 14.1, no amendment shall be made to the definition of any of the following terms, "Applicable Margin", "Borrowing Base" (except as otherwise expressly contemplated hereunder) and the defined terms used in such definition, "Eligible Assignee", "Proportionate Share", "Ratable", "Ratable Share", "Commitment Percentage", "Secured Obligations", or "Commitment", (iv) none of the provisions of this SECTION 15.9, the definitions "Lenders" or "Required Lenders", or the provisions of ARTICLE 12 shall be amended, (v) neither the Administrative Agent nor any Lender shall consent to any amendment to or waiver of the amortization, deferral or subordination provisions of any instrument or agreement evidencing or relating to obligations (whether or not Debt) of the Borrowers that are expressly subordinate to any of the Secured 115 122 Obligations if such amendment or waiver would be adverse to the Lenders in their capacities as Lenders hereunder; (vi) no amendment shall be made to any provision in ARTICLE 14, and (vii) no extension of the Termination Date shall be effected; PROVIDED, HOWEVER, that anything herein to the contrary notwithstanding, the Required Lenders shall have the right to waive any Default or Event of Default and the consequences hereunder of such Default or Event of Default provided only that such Default or Event of Default does not arise under SECTION 12.1(G) OR (H) or out of a breach of or failure to perform or observe any term, covenant or condition of this Agreement or any other Loan Document (other than the provisions of ARTICLE 12 of this Agreement) the amendment of which requires the unanimous consent of the Lenders. The Required Lenders shall have the right, with respect to any Default or Event of Default that may be waived by them, to enter into an agreement with the Borrowers providing for the forbearance from the exercise of any remedies provided hereunder or under the other Loan Documents without thereby waiving any such Default or Event of Default. (c) The making of Loans hereunder by the Lenders during the existence of a Default or Event of Default shall not be deemed to constitute a waiver of such Default or Event of Default. (d) Notwithstanding any provision of this Agreement or the other Loan Documents to the contrary, no consent, written or otherwise, of the Borrowers shall be necessary or required in connection with any amendment to ARTICLE 14 or SECTION 4.8, and any amendment to such provisions may be effected solely by and among the Administrative Agent and the Lenders, PROVIDED that no such amendment shall impose any obligation on the Borrowers or limit or reduce any right granted hereunder or thereunder to the Borrowers. SECTION 15.10 Assignment. All the provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrowers may not assign or transfer any of their rights under this Agreement. SECTION 15.11 Performance of Borrowers' Duties. (a) The Borrowers' obligations under this Agreement and each of the Loan Documents shall be performed by the Borrowers at their sole cost and expense. (b) If the Borrowers shall fail to do any act or thing which they have covenanted to do under this Agreement or any of the Loan Documents, the Administrative Agent, on behalf of the Lenders, may (but shall not be obligated to) do the same or cause it to be done either in the name of the Administrative Agent or the Lenders or in the name and on behalf of the Borrowers, and each Borrower hereby irrevocably authorizes the Administrative Agent so to act. SECTION 15.12 Indemnification. The Borrowers agree to reimburse the Administrative Agent and the Lenders for all costs and expenses, including reasonable counsel 116 123 fees and disbursements, incurred, and to indemnify and hold harmless the Administrative Agent and the Lenders from and against all losses suffered by, the Administrative Agent or any Lender in connection with (a) the exercise by the Administrative Agent or any Lender of any right or remedy granted to it under this Agreement or any of the Loan Documents, (b) any claim, and the prosecution or defense thereof, arising out of or in any way connected with this Agreement or any of the Loan Documents, and (c) the collection or enforcement of the Secured Obligations or any of them, other than such costs, expenses and liabilities arising out of the Administrative Agent's or any Lender's gross negligence or willful misconduct. SECTION 15.13 All Powers Coupled with Interest. All powers of attorney and other authorizations granted to the Administrative Agent and the Lenders and any Persons designated by the Administrative Agent or the Lenders pursuant to any provisions of this Agreement or any of the Loan Documents shall be deemed coupled with an interest and shall be irrevocable so long as any of the Secured Obligations remain unpaid or unsatisfied. SECTION 15.14 Survival. Notwithstanding any termination of this Agreement, (a) until all Secured Obligations have been irrevocably paid in full or otherwise satisfied, the Administrative Agent, for the benefit of the Lenders, shall retain its Security Interest and shall retain all rights under this Agreement and each of the Security Documents with respect to such Collateral as fully as though this Agreement had not been terminated, (b) the indemnities to which the Administrative Agent and the Lenders are entitled under the provisions of this ARTICLE 15 and any other provision of this Agreement and the Loan Documents shall continue in full force and effect and shall protect the Administrative Agent and the Lenders against events arising after such termination as well as before, and (c) in connection with the termination of this Agreement and the release and termination of the Security Interests, the Administrative Agent, on behalf of itself as agent and the Lenders, may require such assurances and indemnities as it shall reasonably deem necessary or appropriate to protect the Administrative Agent and the Lenders against loss on account of such release and termination, including, without limitation, with respect to credits previously applied to the Secured Obligations that may subsequently be reversed or revoked. SECTION 15.15 Titles and Captions. Titles and captions of Articles, Sections and subsections in this Agreement are for convenience only, and neither limit nor amplify the provisions of this Agreement. SECTION 15.16 Severability of Provisions. Any provision of this Agreement or any Loan Document which is prohibited or unenforceable in any jurisdiction shall, 117 124 as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remainder of such provision or the remaining provisions hereof or thereof or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 15.17 Governing Law; Waiver of Jury Trial. (a) This Agreement and the Notes shall be governed by and construed in accordance with the laws of the State of New York. (b) Each Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court for the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State court or, to the extent permitted by law, in such federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Administrative Agent, any Issuing Bank, FCC as issuer of any Letter of Credit Guarantee or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against any Borrower or its properties in the courts of any jurisdiction. (c) Each Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Loan Documents in any court referred to in PARAGRAPH (B) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in SECTION 15.1. Nothing in this Agreement will affect the right of any party to this Agreement to service of process in any other manner permitted by law. (e) Each Borrower, the Administrative Agent and each Lender hereby knowingly, intentionally and voluntarily waive trial by jury in any action or proceeding of any kind or nature in any court in which an action may be commenced by or against a Borrower, the Administrative Agent or such Lender arising out of this Agreement, the Collateral or any assignment thereof or by reason of any other cause or dispute whatsoever between the Borrowers and the Administrative Agent or any Lender of any kind or nature. SECTION 15.18 Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and shall be binding upon all parties, their 118 125 successors and assigns, and all of which taken together shall constitute one and the same agreement. SECTION 15.19 Reproduction of Documents. This Agreement, each of the Loan Documents and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by the Administrative Agent or any Lender, and (c) financial statements, certificates and other information previously or hereafter furnished to the Administrative Agent or any Lender, may be reproduced by the Administrative Agent or such Lender by any photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and such Person may destroy any original document so produced. Each party hereto stipulates that, to the extent permitted by Applicable Law, any such reproduction shall be as admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original shall be in existence and whether or not such reproduction was made by the Administrative Agent or such Lender in the regular course of business), and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. SECTION 15.20 Term of Agreement. This Agreement shall remain in effect from the Agreement Date through the Termination Date and thereafter until all Secured Obligations shall have been irrevocably paid and satisfied in full. No termination of this Agreement shall affect the rights and obligations of the parties hereto arising prior to such termination. SECTION 15.21 Increased Capital. If any Lender shall have determined that the adoption of any applicable law, rule, regulation, guideline, directive or request (whether or not having force of law) regarding capital requirements for banks or bank holding companies, or any change therein or in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, in each case after the Agreement Date, or compliance by such Lender with any of the foregoing, imposes or increases a requirement by such Lender to allocate capital resources to such Lender's Commitment to make Loans hereunder which has or would have the effect of reducing the return on such Lender's capital to a level below that which such Lender could have achieved (taking into consideration such Lender's then existing policies with respect to capital adequacy and assuming full utilization of such Lender's capital) but for such adoption, change or compliance by any amount deemed by such Lender to be material: (i) such Lender shall promptly after its determination of such occurrence give notice thereof to the Borrower; and (ii) the Borrowers shall pay to such Lender as an additional fee from time to time on demand such amount as such Lender certifies to be the amount that will compensate it for such reduction. A certificate of such Lender claiming compensation under this SECTION 15.21 shall be conclusive in the absence of manifest error. Such certificate shall set forth the nature of the occurrence giving rise to such compensation, the additional amount or amounts to be paid to it hereunder and the method by which such amounts were determined. In determining such amount, such Lender may use any reasonable averaging and attribution methods. 119 126 SECTION 15.22 Pro-Rata Participation. (a) Each Lender agrees that if, as a result of the exercise of a right of setoff, banker's lien or counterclaim or other similar right or the receipt of a secured claim it receives any payment in respect of the Secured Obligations, it shall promptly notify the Administrative Agent thereof (and the Administrative Agent shall promptly notify the other Lenders). If, as a result of such payment, such Lender receives a greater percentage of the Secured Obligations owed to it under this Agreement than the percentage received by any other Lender, such Lender shall purchase a participation (which it shall be deemed to have purchased simultaneously upon the receipt of such payment) in the Secured Obligations then held by such other Lenders so that all such recoveries of principal and interest with respect to all Secured Obligations owed to each Lender shall be pro rata on the basis of its respective amount of the Secured Obligations owed to all Lenders, PROVIDED that if all or part of such proportionately greater payment received by such purchasing Lender is thereafter recovered by or on behalf of the Borrower from such Lender, such purchase shall be rescinded and the purchase price paid for such participation shall be returned to such Lender to the extent of such recovery, together with interest thereon at the rate, if any, required to be paid on the amount recovered from such purchasing Lender. (b) Each Lender which receives such a secured claim shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders entitled under this SECTION 15.22 to share in the benefits of any recovery on such secured claim. (c) Each Lender shall include in any arrangement or agreement it enters into with any participant in such Lender's interests hereunder, an undertaking by such participant substantially similar to the foregoing SUBSECTIONS (A) and (B). (d) The Borrowers expressly consent to the foregoing arrangements and agree that any holder of a participation in any Secured Obligation so purchased or otherwise acquired of which such Borrower has received notice may exercise any and all rights of banker's lien, set-off or counterclaim with respect to any and all monies owing by such Borrower to such holder as fully as if such holder were a holder of such Secured Obligation in the amount of the participation held by such holder. SECTION 15.23 Net Payments. (a) No Reduction for Taxes. All payments by the Borrowers hereunder to or for the benefit of any Lender or the Administrative Agent shall be made without setoff, counterclaim or other defense. Except as required by law or as provided in SECTION 15.23(B), all such payments will be made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments, or other charges of whatever nature now or hereafter imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein with respect to such payments (excluding any tax imposed on or measured by the net income or profits of such Lender or the Administrative Agent, as the case may be, pursuant to the laws of the jurisdiction in which it is organized or in which its principal offices or the office from which the Loans are administered may be located or to which payments on the Loans are otherwise deemed connected for tax purposes) together with all interest, 120 127 penalties or similar liabilities with respect thereto (collectively, "Covered Taxes"). Except as provided in SECTION 15.23(B), if the Borrowers shall be required by law to deduct or withhold any Covered Taxes from any sum payable hereunder to any Lender or the Administrative Agent, (A) the sum payable shall be increased as may be necessary so that after making all required deductions or withholdings of Covered Taxes (including deductions or withholdings of Covered Taxes applicable to additional sums payable under this SECTION 15.23(A)) such Lender or the Administrative Agent, as the case may be, receives an amount equal to the sum it would have received had such deductions or withholdings not been made, (B) the Borrowers shall make such deductions or withholdings, and (C) the Borrowers shall pay the full amount so deducted or withheld to the relevant taxing authority or other authority in accordance with Applicable Law. The Borrowers shall furnish to the Administrative Agent within 45 days after the date on which the payment of any Covered Taxes is due certified copies of tax receipts evidencing such payment by the Borrowers. Except as provided in SECTION 15.23(B), the Borrowers agree to indemnify and hold harmless the Lenders and the Administrative Agent and reimburse each of them, as the case may be, for the amount of any Covered Taxes that are levied against or imposed on the Lenders or the Administrative Agent and that are paid by the Lenders or the Administrative Agent, as the case may be. (b) Foreign Lenders. (i) Each Foreign Lender shall deliver to the Administrative Agent and the Borrowers (A) two valid, duly completed copies of IRS Form 1001 or 4224 or applicable successor form, as the case may be, and any other required form, certifying in each case that such Foreign Lender is entitled to receive payments under this Agreement or the Note(s) payable to it without deduction or withholding of any United States federal income taxes and (B) a valid, duly completed IRS Form W-8 or W-9 or applicable successor form, as the case may be, to establish an exemption from United States backup withholding tax. Each such Foreign Lender shall also deliver to the Administrative Agent and the Borrowers two further copies of said Form 1001 or 4224 and W-8 or W-9, or applicable successor forms, or other manner of required certification, as the case may be, on or before the date that any such form expires or becomes obsolete or otherwise is required to be resubmitted as a condition to obtaining an exemption from a required withholding of United States federal income tax or after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrowers and the Administrative Agent, and such extensions or renewals thereof as may reasonably be requested by the Borrowers and the Administrative Agent. (ii) If the forms provided by a Foreign Lender under SECTION 15.23(B)(I) at the time such Foreign Lender first becomes a party to this Agreement indicate that such Foreign Lender is subject to a rate of United States withholding tax in excess of zero, then withholding tax at such rate shall be considered excluded from Covered Taxes unless and until such Foreign Lender provides the appropriate forms certifying that a lesser rate of withholding applies, whereupon withholding tax at such lesser rate only shall be excluded from Covered Taxes for period governed by such forms. (iii) For any period with respect to which a Foreign Lender has failed to provide the Borrowers with the appropriate forms described in Section 15.23(B)(I), such Foreign Lender shall not be entitled to indemnification under SECTION 15.23(A) with respect to Covered Taxes imposed by the United States by reason of such failure. 121 128 (c) Affected Lenders. If the Borrowers are obligated to pay to any Lender any amount under this SECTION 15.23, the Borrowers may, if no Default or Event of Default then exists, replace such Lender with another lender acceptable to the Administrative Agent, and such Lender hereby agrees to be so replaced subject to the following: (i) The obligations of the Borrowers hereunder to the Lender to be replaced (including such increased or additional costs incurred from the date of notice to the Borrowers of such increase or additional costs through the date such Lender is replaced hereunder) shall be paid in full to such Lender concurrently with such replacement; (ii) The replacement Lender shall be a bank or other financial institution that is not subject to such increased costs which caused the Borrowers' election to replace any Lender hereunder, and each such replacement Lender shall execute and deliver to the Administrative Agent such documentation satisfactory to the Administrative Agent pursuant to which such replacement Lender is to become a party hereto, conforming to the provisions of SECTION 13.1 hereof, with a Commitment equal to that of the Lender being replaced and shall make Revolving Credit Loans in the aggregate principal amount equal to the aggregate outstanding principal amount of the Revolving Credit Loans of the Lender being replaced; (iii) Upon such execution of such documents referred to in CLAUSE (II) and repayment of the amounts referred to in CLAUSE (I), the replacement Lender shall be a "Lender" with a Commitment as specified hereinabove and the Lender being replaced shall cease to be a "Lender" hereunder, except with respect to indemnification provisions under this Agreement, which shall survive as to such replaced Lender; (iv) The Administrative Agent shall reasonably cooperate in effectuating the replacement of any Lender under this SECTION 15.23, but at no time shall the Administrative Agent be obligated to initiate any such replacement; (v) Any Lender replaced under this SECTION 15.23 shall be replaced at the Borrowers' sole cost and expense and at no cost or expense to the Administrative Agent or any of the Lenders; and (vi) If the Borrowers propose to replace any Lender pursuant to this SECTION 15.23 because the Lender seeks reimbursement hereunder, then the Borrowers must also replace any other Lender who seeks similar levels of reimbursement (as a percentage of such Lender's Commitment) under such Sections. SECTION 15.24 Effect on Effectiveness of this Agreement. From and after the Effective Date, all references in this Agreement or in any other Loan Document (whether delivered pursuant to this Agreement or pursuant to the Existing Loan Agreement) to this Agreement or the "Loan Agreement," and the words "herein," "hereof" and words of like import referring to the Existing Loan Agreement, shall mean and be references to the Existing Loan Agreement as amended and restated in its entirety by this Agreement and all references in this Agreement, in any other Loan Documents (whether delivered pursuant to this Agreement or 122 129 pursuant to the Existing Loan Agreement) or in any Note to a "Revolving Credit Note" and the words "hereof," "herein" and words of like import referring to any such Note, shall mean and be references to the Second Amended and Restated Promissory Notes in the form attached to this Agreement as EXHIBIT A-1, appropriately completed and duly executed and delivered by the Borrowers. 123 130 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers in several counterparts all as of the day and year first written above. BORROWERS: HEAFNER TIRE GROUP, INC. [CORPORATE SEAL] Attest: By: -------------------------------------- Donald C. Roof President and Chief Executive Officer - ------------------------------ J. Michael Gaither Secretary WINSTON TIRE COMPANY [CORPORATE SEAL] Attest: By: -------------------------------------- Donald C. Roof President and Chief Executive Officer - ------------------------------ J. Michael Gaither Secretary By: -------------------------------------- David H. Taylor Chief Financial Officer CALIFORNIA TIRE COMPANY [CORPORATE SEAL] Attest: By: -------------------------------------- Donald C. Roof President and Chief Executive Officer - ------------------------------ J. Michael Gaither Secretary By: -------------------------------------- David H. Taylor Chief Financial Officer 131 THE SPEED MERCHANT, INC. [CORPORATE SEAL] Attest: By: -------------------------------------- Donald C. Roof President and Chief Executive Officer - ------------------------------ [Assistant] Secretary By: -------------------------------------- David H. Taylor Chief Financial Officer 132 FLEET CAPITAL CORPORATION, as Administrative Agent and as a Lender By:_______________________________________ Name:________________________________ Title:_______________________________ Address: Fleet Capital Corporation 300 Galleria Parkway Suite 800 Atlanta, Georgia 30339 Attn: Stephen Y. McGehee Facsimile No.: (770) 859-2483 BANK OF AMERICA, N.A., as Syndication Agent and as a Lender By:_______________________________________ Name:________________________________ Title:_______________________________ Address: ------------------------------ ------------------------------ ------------------------------ Attn:_________________________ Facsimile No.:________________ FIRST UNION NATIONAL BANK, as Documentation Agent and as a Lender By: --------------------------------------- John T. Trainor Director Address: First Union National Bank 301 South College Street, DC-5 Charlotte, North Carolina 28288 Attn: Facsimile No.: (704) 374-2703 133 MELLON BANK, N.A., as a Lender By:_______________________________________ Roger Attix Vice President Address: ------------------------------ ------------------------------ ------------------------------ Attn:_________________________ ______________________________ Facsimile No.:________________ PNC BANK, NATIONAL ASSOCIATION, as a Lender By:_______________________________________ Kurt Putkonen Vice President Address: ------------------------------ ------------------------------ ------------------------------ Attn:_________________________ Facsimile No.:________________ 134 ANNEX A COMMITMENTS - ----------------------------------------------------------------------------- LENDER COMMITMENT (IN $) - ----------------------------------------------------------------------------- Fleet Capital Corporation 65,000,000 - ----------------------------------------------------------------------------- First Union National Bank 45,000,000 - ----------------------------------------------------------------------------- Bank of America, N.A. 45,000,000 - ----------------------------------------------------------------------------- Mellon Bank, N.A. 22,500,000 - ----------------------------------------------------------------------------- PNC Bank, National Association 22,500,000 - ----------------------------------------------------------------------------- TOTAL 200,000,000 - ----------------------------------------------------------------------------- 135 ANNEX B PRICING MATRIX - -------------------------------------------------------------------------------- LEVEL INTEREST COVERAGE EURODOLLAR RATE BASE RATE UNUSED COMMITMENT RATIO LOANS LOANS FEE - -------------------------------------------------------------------------------- Level I < 1.50:1 2.00% 0.50% 0.50% - - -------------------------------------------------------------------------------- > 1.50:1 and Level II < 2.00:1 1.75% 0.25% 0.375% - - -------------------------------------------------------------------------------- > 2.00:1 and Level III < 2.50:1 1.50% 0.00% 0.375% - - -------------------------------------------------------------------------------- Level IV > 2.50:1 1.25% 0.00% 0.25% - -------------------------------------------------------------------------------- EX-10.2 5 LETTER DATED 3/6/2000 TO ADMINISTRATIVE AGENT 1 EXHIBIT 10.2 FLEET CAPITAL CORPORATION Atlanta, Georgia March 6, 2000 Heafner Tire Group, Inc., for itself and as the representative of the Borrowers under the Loan Agreement referred to below Charlotte, North Carolina Second Amended and Restated Loan and Security Agreement dated as of March 6, 2000 Ladies and Gentlemen: We refer to the captioned agreement (the "Loan Agreement"; terms defined therein and not otherwise defined herein being used herein as therein defined) to which Heafner Tire Group, Inc., certain of its Subsidiaries and the undersigned, as Administrative Agent, are parties. This letter will memorialize our agreement as to certain unsatisfied conditions to the effectiveness of the Loan Agreement. Section 5.1(a)(18) of the Loan Agreement provides that as a condition to the effectiveness of the Loan Agreement, the Administrative Agent shall have received evidence satisfactory to it of a valid and perfected first priority lien (subject only to Permitted Liens) in all Collateral. As to each of Heafner, Winston, CPW, and Cal Tire there remain of record certain financing statements and, in the case of CPW and Winston, agreements are or may be in effect, creating or evidencing a perfected security interest in favor of third parties that do not constitute "Permitted Liens." The Administrative Agent and the Lenders have nevertheless permitted the Loan Agreement to become effective as of the date hereof, in consideration of the Borrowers' promise to cause the releases (or, as specified, lien subordinations) detailed on Exhibit A hereto to become effective within the time periods (if any) specified thereon. Kindly evidence your agreement with the foregoing, your undertaking to cause the actions detailed on Exhibit A to be completed within any time periods specified therein and your further agreement that the Borrowers' failure to complete said actions shall constitute an Event of Default, immediately and without any requirement of notice or further opportunity to cure, by signing the attached duplicate of this letter and returning it to the undersigned. Very truly yours, FLEET CAPITAL CORPORATION, as Administrative Agent By ___________________________ Acknowledged and agreed this 6th day of March 2000. HEAFNER TIRE GROUP, INC., for itself and as the representative of the Borrowers under the Loan Agreement By _____________________________ 2 EXHIBIT A As to Heafner: Record amendments related to UCC financing statements naming Bridgestone/Firestone as secured party that correctly reflect the contractual limitation of the Liens of such party on property of Heafner to Liens on tire Inventory bearing its brand (no deadline). As to Winston: (1) Record UCC termination statements evidencing release of all Pacific Crest Liens (no deadline), (2) within 30 days after the date of this letter, record amendments or partial releases related to UCC financing statements naming Pirelli Armstrong Tire Company and Yokohama Tire Corporation as secured party that correctly reflect the contractual limitation of the Liens of these companies on property of Winston to Liens on tire Inventory bearing their respective brands and (3) within 45 days after the date of this letter, cause FFCA Acquisition Corporation to release or to subordinate to the prior Liens of the Administrative Agent thereon, its Lien on Winston Inventory (which is located at Winston premises the acquisition of which was financed in whole or in part by FFCA) and record the related UCC financing statement amendment or partial release. As to CPW: Within 30 days (as to Pirelli) and 14 days (as to Michelin), respectively, after the date of this letter; as to Pirelli, record amendments or partial releases related to UCC financing statements naming Pirelli Armstrong Tire Company as secured party that correctly reflect the contractual limitation of the Liens of these companies on property of CPW to Liens on tire Inventory bearing its brand and, as to Michelin, record termination statements evidencing the release of all Michelin Liens. As to Cal Tire: Record amendments related to UCC financing statements naming Bridgestone/Firestone as secured party that correctly reflect the contractual limitation of the Liens of such party on property of Cal Tire to Liens on tire Inventory bearing its brand (no deadline). EX-10.16 6 HEAFNER TIRE GROUP 1999 STOCK OPTION PLAN 1 EXHIBIT 10.16 HEAFNER TIRE GROUP, INC. 1999 STOCK OPTION PLAN 1. Purpose. The purpose of the 1999 Stock Option Plan (the "Plan") of Heafner Tire Group, Inc., a Delaware corporation (the "Company"), is to attract and retain employees (including officers), directors and independent contractors of the Company, or any Subsidiary or Affiliate which now exists or hereafter is organized or acquired, and to furnish additional incentives to such persons to enhance the value of the Company over the long term by encouraging them to acquire a proprietary interest in the Company. 2. Definitions. For purposes of the Plan, the following terms shall be defined as set forth below: (a) "Affiliate" means any entity if, at the time of granting of an Option, (i) the Company, directly, owns at least 20% of the combined voting power of all classes of stock of such entity or at least 20% of the ownership interests in such entity or (ii) such entity, directly or indirectly, owns at least 20% of the combined voting power of all classes of stock of the Company. (b) "Beneficiary" means the person, persons, trust or trusts which have been designated by an Optionee in his or her most recent written beneficiary designation filed with the Company to receive the Optionee's rights under the Plan upon the Optionee's death, or, if there is no such designation or no such designated person survives the Optionee, then the person, persons, trust or trusts entitled by will or applicable law to receive such rights or, if no such person has such right then the Optionee's executor or administrator. (c) "Board" means the Board of Directors of the Company. (d) "Change in Control" means the first to occur of any of the following: (i) the sale (including by merger, consolidation or sale of stock of subsidiaries or any other method) of all or substantially all of the assets of the Company and its consolidated subsidiaries (taken as a whole) to any person or entity not directly or indirectly controlled by the holders of at least 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company (excluding shares owned by employees of the Company as of the date of determination), (ii) at any time prior to the consummation of an initial public offering of Stock of the Company or other common stock of the Company having the voting power to elect directors, a transaction (except pursuant to such initial public offering) resulting in the Principal Shareholders owning, collectively, less than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company (excluding shares owned by employees of the Company as of the date of determination), (iii) at any time after the consummation of an initial public offering of Stock of the Company or other common stock of the Company having the voting power to elect directors, the acquisition (except pursuant to such initial public offering) by any person or entity (other than the Principal Shareholders) not directly or indirectly controlled by the Company's stockholders of more than 30% of the Combined Voting Power of the then outstanding shares of capital stock of the Company (excluding shares owned by employees of the Company as of the date of 2 determination), (iv) individuals serving as directors of the Company on the Effective Date and who were nominated or selected to serve as directors by one or more Principal Shareholders (together with any new directors whose election was approved by a vote of (A) such individuals or directors whose election was previously so approved or (B) Principal Shareholders holding a majority of the aggregate voting power of the capital stock of the Company held by all Principal Shareholders) cease for any reason to constitute a majority of the Board of the Company, (v) the adoption of a plan relating to the liquidation or dissolution of the Company in connection with an equity investment or sale or a business combination transaction or (vi) any other event or transaction that the Board of the Company deems to be a Change in Control. (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (f) "Combined Voting Power" with respect to capital stock of the Company means the number of votes such stock is normally entitled (without regard to the occurrence of any contingency) to vote in an election of directors of the Company. (g) "Committee" means the committee, consisting of at least two members of the Board, established by the Board to administer the Plan. (h) "Company" means Heafner Tire Group, Inc., a corporation organized under the laws of the State of Delaware, or any successor corporation. (i) "Effective Date" is defined in Section 8(i). (j) "Fair Market Value" means, with respect to Stock or other property, the fair market value of such Stock or other property determined by such methods or procedures as shall be established from time to time by the Board acting in its sole discretion and in good faith. (k) "ISO" means any Option intended to be and designated as an incentive stock option within the meaning of Section 422 of the Code. (l) "NQSO" means any Option not designated as an ISO. (m) "Option" means a right, granted to an Optionee under Section 6(b) of the Plan, to purchase shares of Stock, subject to the terms and conditions of this Plan. An Option may be either an ISO or an NQSO, provided that ISOs may be granted only to employees of the Company or a Subsidiary. (n) "Optionee" means a person who, as an employee, director or independent contractor of the Company, a Subsidiary or an Affiliate, has been granted an Option. (o) "Plan" means Heafner Tire Group, Inc. 1999 Stock Option Plan, as amended from time to time. (p) "Principal Shareholders" means (i) Charlesbank Equity Fund IV, Limited Partnership and the investors in such fund, (ii) Charlesbank Equity Fund IV G.P. Limited Partnership, (iii) Charlesbank Capital Partners, LLC (and any other fund managed by Charlesbank 2 3 Capital Partners, LLC), (iv) any investor (other than The 1818 Mezzanine Fund, L.P.) whose investment in the Company is approved by the representative of management on the board of the Company, (v) any new investors in the Company designated as Principal Shareholders by Charlesbank Capital Partners, LLC within one year of the initial investment by Charlesbank Equity Fund IV, Limited Partnership, and (vi) any corporation, partnership, limited liability company or other entity a majority of the capital stock or other ownership interests of which are directly or indirectly owned by any of the foregoing. (q) "Stock" means the Class A Common Stock, par value $.01 per share, of the Company. (r) "Stock Option Agreement" means any written agreement, contract, or other instrument or document evidencing an Option. (s) "Subsidiary" means any corporation in which the Company, directly or indirectly, owns stock possessing 50% or more of the total combined voting power of all classes of stock of such corporation. (t) "Ten Percent Shareholder" means a person or persons who own, directly or indirectly, more than 10% of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries. 3. Administration. The Plan shall be administered by the Committee which shall consist of a committee of not less than two persons appointed by the Board. The Committee shall have full power to construe and interpret the Plan, to establish rules for its administration and to grant Options. The Committee may establish rules setting forth terms and conditions for a specified group of Options. The Committee may act by a majority of a quorum (a quorum being a majority of the members of such Committee) present at a called meeting or by unanimous written consent of all of its members. All actions taken and decisions made by the Board or the Committee pursuant to the Plan shall be binding and conclusive on all persons interested in the Plan. 4. Eligibility. Options may be granted in the discretion of the Committee to employees (including officers), directors and independent contractors of the Company and its present or future Subsidiaries and Affiliates. In determining the persons to whom Options shall be granted and the type of Options granted (including the number of shares to be covered by such Options), the Committee shall take into account such factors as the Committee shall deem relevant in connection with accomplishing the purposes of the Plan. 5. Stock Subject to the Plan. The maximum number of shares of Stock reserved for the grant of Options under the Plan shall be 1,103,550 shares of Stock, subject to adjustment as provided herein. Such shares may, in whole or in part, be authorized but unissued shares or shares that shall have been or may be reacquired by the Company in private transactions or otherwise. The number of shares of Stock 3 4 available for issuance under the Plan shall be reduced by the number of shares of Stock subject to outstanding Options. If any shares subject to an Option are forfeited, canceled, exchanged or surrendered or if an Option otherwise terminates or expires without a distribution of shares to the Optionee, the shares of Stock with respect to such Option shall, to the extent of any such forfeiture, cancellation, exchange, surrender, termination or expiration, again be available for Options under the Plan. In no event shall any Optionee acquire, pursuant to any awards of Options under this Plan, more than 80% of the aggregate number of shares of Stock reserved for awards under the Plan. In the event of any change in corporate capitalization (including, but not limited to, a change in the number of shares of Stock outstanding), such as a stock split or a corporate transaction, such as any merger, consolidation, separation, including a spin-off, or other distribution of stock or property of the Company, any reorganization (whether or not such reorganization comes within the definition of such term in Section 368 of the Code) or any partial or complete liquidation of the Company, the Committee or Board may make such substitution or adjustments in the aggregate number and kind of shares reserved for issuance under the Plan and the maximum limitation upon Options to be granted to any Optionee, in the number, kind and option price of shares subject to outstanding Options and/or such other equitable substitution or adjustments as it may determine to be appropriate in its sole discretion; provided, however, that the number of shares subject to any Option shall always be a whole number. In the event of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation, the Board shall be authorized to cause the Company to issue or assume stock options, whether or not in transaction to which Section 424(a) of the Code applies, by means of substitution of new stock options for previously issued stock options or an assumption of previously issued stock options. In such event, the aggregate number of shares of the Stock available for issuance under this Section 5 will be increased to reflect such substitution or assumption. 6. Specific Terms of Options. (a) General. Options may be granted at the discretion of the Committee. The term of each Option shall be for such period as may be determined by the Committee. The Committee may make rules relating to Options, and may impose on any Option or the exercise thereof, at the date of grant or thereafter, such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine. (b) Options. The Committee is authorized to grant Options to Optionees on the following terms and conditions: (i) Type of Option. The Stock Option Agreement evidencing the grant of an Option under the Plan shall designate the Option as an ISO (in the event its terms, and the individual to whom it is granted, satisfy the requirements for ISOs under the Code), or an NQSO. (ii) Exercise Price. The exercise price per share of Stock purchasable under an Option shall be determined by the Committee; provided that, in the case of an ISO, (i) such exercise price shall be not less than the Fair Market Value of a share of Stock on the date of grant of such Option or such other exercise price as may be required by the Code, and (ii) if the Optionee is a Ten Percent Shareholder, 4 5 such exercise price shall not be less than 110% of the Fair Market Value of a share of Stock on the date of grant of such Option, in no event shall the exercise price for the purchase of shares of Stock be less than par value and the term of the Option shall be no more than five years. Options shall be exercised by (i) giving written notice thereof to the Company, and (ii) paying the exercise price. In addition to any other method of payment which may be acceptable to the Committee, if permitted by the Committee in its sole discretion at the time of exercise, payment may be effected, either in whole or in part, by the surrender to the Company of outstanding Stock. Any Stock so surrendered shall be valued at the Fair Market Value on the date on which such shares are surrendered. (iii) Term and Exercisability of Options. The date on which the Committee adopts a resolution expressly granting an Option shall be considered the day on which such Option is granted. Options shall be exercisable over the exercise period (which shall not exceed ten years from the date of grant), at such times and upon such conditions as the Committee may determine, as reflected in the Stock Option Agreement. As a condition to exercising any Option, the Optionee shall exercise and deliver to the Company an agreement in substantially the form of Exhibit A hereto or in such other form as the Company may reasonably require. (iv) Termination of Employment, etc. An Option may not be exercised unless the Optionee is then in the employ or a director of, or then maintains an independent contractor relationship with, the Company or any Subsidiary or Affiliate (or a company or a parent or subsidiary company of such company issuing or assuming the Option in a transaction to which Section 424(a) of the Code applies), and unless the Optionee has continuously maintained any of such relationships since the date of grant of the Option; provided that, the Stock Option Agreement may contain provisions extending the exercisability of Options, in the event of specified terminations, to a date not later than the expiration date of such Option. The Committee may establish a period during which the Beneficiaries of an Optionee who died while an employee, director or independent contractor of the Company or any Subsidiary or Affiliate or during any extended period referred to in the immediately preceding proviso may exercise those Options which were exercisable on the date of the Optionee's death; provided that no Option shall be exercisable after its expiration date. (v) Transferability. Except as otherwise provided in this Section 6(b)(v), Options are not transferable other than as designated by the Optionee, in his or her most recently filed Beneficiary designation filed with the Company, or if there is no such designation or no such designated person survives the Optionee, as designated by the Optionee by will or by the laws of descent and distribution, and during the Optionee's life, may be exercised only by the Optionee. However, an Optionee, with the approval of the Committee, may transfer Options for no consideration to or for the benefit of the Optionee's Immediate Family or to a partnership or limited liability company for one or more members of the Optionee's Immediate Family, subject to such limits as the Committee may establish, and the transferee shall remain subject to all the terms and conditions applicable to Options prior to such transfer. The foregoing right to transfer Options shall apply to the right to consent 5 6 to amendments to the Stock Option Agreement and, in the discretion of the Committee, shall also apply to the right to transfer ancillary rights associated with Options. The term "Immediate Family" shall mean the Optionee's spouse, parents, children, stepchildren, adoptive relationships, sisters, brothers, nieces, nephews and grandchildren (and, for this purpose, shall also include the Optionee). (vi) Other Provisions. Options may be subject to such other conditions as the Committee may prescribe in its discretion. 7. Change in Control Provisions. Upon a Change in Control, the treatment of each Option issued under the Plan shall be as set forth in the applicable Stock Option Agreement. Nothing contained herein shall prevent the substitution of a new option by the Company after a Change in Control. 8. General Provisions. (a) Fair Market Value of Common Stock. In determining the Fair Market Value of the Stock for purposes of the Plan, the Board may rely on a valuation report by an investment banking or valuation firm selected by the Board. In the event the Stock becomes listed on any national stock exchange or quoted on the national market quotations system, the Fair Market Value of the Stock shall, as of any day, be the closing price for the immediately preceding trading day. (b) Compliance with Legal and Exchange Requirements. The Plan, the granting and exercising of Options thereunder, and the other obligations of the Company under the Plan and any Stock Option Agreement, shall be subject to all applicable federal and state laws, rules and regulations, and to such approvals by any regulatory or governmental agency as may be required. The Company, in its discretion, may postpone the issuance or delivery of Stock under any Option until completion of such stock exchange listing or registration or qualification of such Stock or other required action under any state, federal or foreign law, rule or regulation as the Company may consider appropriate, and may require any Optionee to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of Stock in compliance with applicable laws, rules and regulations. (c) No Right to Continued Employment, etc. Nothing in the Plan or in any Option granted or Stock Option Agreement entered into pursuant to the Plan shall confer upon any Optionee the right to continue in the employ of, or to continue as a director of or an independent contractor to, the Company, any Subsidiary or any Affiliate, as the case may be, or to be entitled to any remuneration or benefits not set forth in the Plan or such Stock Option Agreement or to interfere with or limit in any way the right of the Company or any such Subsidiary or Affiliate to terminate such Optionee's employment, directorship or independent contractor relationship. (d) Taxes. The Company or any Subsidiary or Affiliate is authorized to withhold from any Option granted, any payment relating to an Option under the Plan (including from a distribution of Stock), or any other payment to an Optionee, amounts of withholding and other taxes due in connection with any transaction involving an Option, and to take such other action as the Committee may deem advisable to enable the Company and an Optionee to satisfy 6 7 obligations for the payment of withholding taxes and other tax obligations relating to any Option. This authority shall include authority to withhold or receive Stock or other property and to make cash payments in respect thereof in satisfaction of an Optionee's tax obligations. (e) Amendment and Termination of the Plan. The Board may at any time and from time to time alter, amend, suspend, or terminate the Plan in whole or in part. Notwithstanding the foregoing, no amendment shall affect adversely any of the rights of any Optionee, without such Optionee's consent, under any Option theretofore granted under the Plan. (f) No Rights to Options; No Stockholder Rights. No person shall have any claim to be granted any Option under the Plan, and there is no obligation for uniformity of treatment of Optionees. Except as provided specifically herein, an Optionee or a transferee of an Option shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a stock certificate to such Optionee for such shares. (g) Unfunded Status of Options. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. Nothing contained in the Plan or any Option shall give any such Optionee any rights that are greater than those of a general creditor of the Company. (h) Governing Law. The Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of North Carolina without giving effect to the conflict of laws principles thereof. (i) Effective Date; Plan Termination. (i) The Plan shall take effect upon its adoption by the Board (the "Effective Date"), but the Plan (and any grants of Options made prior to the stockholder approval mentioned herein), shall be subject to the approval of the holder(s) of a majority of the issued and outstanding shares of voting securities of the Company entitled to vote, which approval must occur within twelve months of the date the Plan is adopted by the Board. In the absence of such approval, such Options shall be null and void. (ii) The Board may terminate the Plan at any time with respect to any shares of Stock that are not subject to Options. Unless terminated earlier by the Board, the Plan shall terminate ten years after the Effective Date and no Options shall be granted under the Plan after such date. Termination of the Plan under this Section 8(h) will not affect the rights and obligations of any Optionee with respect to Options granted prior to termination. 7 EX-10.18 7 STOCK OPTION AGREEMENT / DAVID H. TAYLOR 1 EXHIBIT 10.18 HEAFNER TIRE GROUP, INC. STOCK OPTION AGREEMENT Number of shares subject to option: [75,000] This Agreement (the "Agreement") made this 16TH day of August, 1999, between Heafner Tire Group, Inc., a Delaware corporation (the "Company"), and David H. Taylor (the "Optionee"). W I T N E S S E T H: 1. Grant of Option. Pursuant to the provisions of Heafner Tire Group, Inc. 1999 Stock Option Plan (the "Plan"), the Company hereby grants to the Optionee, subject to the terms and conditions of the Plan and subject further to the terms and conditions herein set forth, the right and option (the "Option") to purchase from the Company all or any part of an aggregate of [75,000] shares of the Class A Common Stock, par value $0.01 per share, of the Company (the "Common Stock" or the "Shares") at a purchase price of $9.00 per Share (the "Exercise Price"), such Option to be exercised as hereinafter provided. 2. Terms and Conditions. It is understood and agreed that the Option evidenced hereby is subject to the following terms and conditions: (a) Expiration Date. The Option shall expire on the tenth anniversary of the date hereof (the "Expiration Date"). (b) Type of Option. This Option is eligible to be an incentive stock option (an "Incentive Stock Option") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"); provided that to the extent this Option does not qualify as an Incentive Stock Option under the Code, it shall constitute a nonqualified stock option. (c) Exercise of Option. (i) The shares subject to this Option shall be divided into three separate pools, "Tier 1 Options," "Tier 2 Options" and "Tier 3 Options," and the Options in each pool shall vest and be exercisable according to the terms and conditions applicable to such pool as set forth below. For purposes of this Agreement, "Option" shall mean, collectively, the Tier 1 Options, the Tier 2 Options and the Tier 3 Options granted pursuant to this Agreement. (A) Tier 1 Options. The Company hereby grants to the Optionee [25,000] Tier 1 Options. Subject to the other terms of this Agreement regarding the exercisability of this 2 Option, the Tier 1 Options will vest and be exercisable in accordance with the following schedule: Options Exercisable with respect to On or After Cumulative Number of Shares ----------- ----------------------------------- May 24, 2000 25,000 x 25% May 24, 2001 25,000 x 50% May 24, 2002 25,000 x 75% May 24, 2003 25,000 x 100% Notwithstanding the foregoing, all of the Tier 1 Options shall become fully vested and exercisable immediately upon the earlier to occur of the following: (x) any or all of the Tier 3 Options becoming fully vested and exercisable, provided that if only 50% of the Tier 3 Options have vested and become exercisable, then only 50% of the then unvested Tier 1 Options shall vest and become exercisable, and the remaining 50% of the unvested Tier 1 Options shall vest and become exercisable immediately upon the vesting and exercisability of the remaining 50% of the Tier 3 Options, and (y) the termination of Optionee's employment (1) by the Company without Cause (as defined below) or by the Optionee for Good Reason (as defined below) at any time after a Change in Control or (2) by the Company or the Optionee for any reason other than a Specified Cause Event (as defined below) more than six months after a Change in Control. "Change in Control" means the first to occur of any of the following: (i) the sale (including by merger, consolidation or sale of stock of subsidiaries or any other method) of all or substantially all of the assets of the Company and its consolidated subsidiaries (taken as a whole) to any person or entity not directly or indirectly controlled by the holders of at least 50% of the Combined Voting Power (as defined in the Plan) of the then outstanding shares of capital stock of the Company (excluding shares owned by employees of the Company as of the date of determination), (ii) at any time prior to the consummation of an initial public offering of Common Stock of the Company or other common stock of the Company having the voting power to elect directors, a transaction (except pursuant to such initial public offering) resulting in the Principal Shareholders (as defined in the Plan) owning, collectively, less than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company (excluding shares owned by employees of the Company as of the date of determination), (iii) at any time after the consummation of an initial public offering of Common Stock of the Company or other common stock of the Company having the voting power to elect directors, the acquisition (except pursuant to such initial public offering) by any person or entity (other than the Principal Shareholders) not directly or indirectly controlled by the Company's stockholders of more than 30% of the Combined Voting Power of the then outstanding shares of capital stock of the Company (excluding shares owned by employees of the Company as of the date of determination), (iv) individuals serving as directors of the Company on the Effective Date (as defined in the Plan) and who were nominated or 2 3 selected to serve as directors by one or more Principal Shareholders (together with any new directors whose election was approved by a vote of (A) such individuals or directors whose election was previously so approved or (B) Principal Shareholders holding a majority of the aggregate voting power of the capital stock of the Company held by all Principal Shareholders) cease for any reason to constitute a majority of the Board of Directors of the Company (the "Board"), (v) the adoption of a plan relating to the liquidation or dissolution of the Company in connection with an equity investment or sale or a business combination transaction or (vi) any other event or transaction that the Board deems to be a Change in Control. "Specified Cause Event" means (1) a proven or admitted act of fraud, misappropriation or embezzlement by the Optionee that is detrimental to the Company or (2) the Optionee's conviction of or plea of guilty or nolo contendere to a felony that is related to the Company or the performance of the Optionee's services for the Company. (B) Tier 2 Options. The Company hereby grants to the Optionee [ ] Tier 2 Options. Subject to the other terms of this Agreement regarding the exercisability of this Option, the Tier 2 Options will vest and be exercisable annually as of December 31 of each fiscal year of the Company with respect to a cumulative number of shares in an amount equal to the product of (i) a fraction, the denominator of which is 278,658,000 (the "Aggregate EBITDA Target") and the numerator of which is the aggregate EBITDA of the Company for all fiscal years following the date hereof, beginning with the 1999 fiscal year, multiplied by (ii) the total number of shares subject to Tier 2 Options, provided that the maximum cumulative number of shares subject to Tier 2 Options that shall be vested in any fiscal year shall not exceed the product of (1) the Applicable Percentage for such fiscal year multiplied by (2) the total number of shares subject to Tier 2 Options. This calculation shall be made with respect to each fiscal year, beginning with the 1999 fiscal year, based on the Company's audited financial statements for such year. Notwithstanding the foregoing, (x) if the Optionee's employment with the Company shall terminate because of death, disability, termination by the Company without Cause (as defined below) or termination by the Optionee for Good Reason (as defined below), the aggregate cumulative number of shares subject to Tier 2 Options that shall be vested as of the termination date shall not be subject to any limitations imposed by the Applicable Percentage and shall be equal to the product of (1) a fraction, the denominator of which is the Aggregate EBITDA Target and the numerator of which is the aggregate EBITDA of the Company for all fiscal years following the date hereof, beginning with the 1999 fiscal year, multiplied by (2) the total number of shares subject to Tier 2 Options, and (y) all of the Tier 2 Options shall become fully vested and exercisable immediately upon the earlier to occur of the following: (1) any or all of the Tier 3 Options becoming fully vested and exercisable, provided that if only 50% of the Tier 3 Options have vested and become exercisable, then only 50% of the then unvested Tier 2 Options shall vest and become exercisable, and the remaining 50% of the unvested Tier 2 Options shall vest and become exercisable immediately upon the vesting and exercisability of the remaining 50% of the Tier 3 Options, and (2) the seventh anniversary of the date hereof. 3 4 "Applicable Percentage" means with respect to (i) fiscal year 1999, 20%, (2) fiscal year 2000, 40%, (3) fiscal year 2001, 60%, (4) fiscal year 2002, 80%, and (5) fiscal year 2003, 100%, provided, however, that the Applicable Percentage shall be 100% if following any fiscal year prior to the fifth anniversary hereof, the aggregate EBITDA of the Company for the fiscal years following the date hereof equals or exceeds the Aggregate EBITDA Target. "EBITDA" means earnings before interest, taxes, depreciation, and amortization as reflected in the Company's audited financial statements. Adjustments for unusual items will be made in the reasonable discretion of the Board, after consultation with the Chief Executive Officer of the Company. (C) Tier 3 Options. The Company hereby grants to the Optionee [ ] Tier 3 Options. Subject to the other terms of this Agreement regarding the exercisability of this Option, the Tier 3 Options will vest and be exercisable (except as provided below) only upon the first to occur of (x) a Change in Control that satisfies the CIC Return Hurdle and (y) an Actual Sale or Deemed Sale following a Qualified Public Offering that satisfies the QPO Return Hurdle as hereinafter described. If on any date beginning six months after a Qualified Public Offering the QPO Return Hurdle has been satisfied based on a Deemed Sale at Fair Market Value as of such date, 50% of the Tier 3 Options will vest and be immediately exercisable, and if on any date beginning 24 months after a Qualified Public Offering the QPO Return Hurdle has been satisfied based on a Deemed Sale at Fair Market Value as of such date, the additional 50% of the Tier 3 Options will vest and be immediately exercisable, except that, if at any time after a Qualified Public Offering the QPO Return Hurdle is satisfied based on an Actual Sale, 100% of the Tier 3 Options will vest and be immediately exercisable. Notwithstanding the foregoing, the Tier 3 Options shall become fully vested and exercisable upon the seventh anniversary of the date hereof. "Actual Sale" means a sale following a Qualified Public Offering by Charlesbank Equity Fund IV, Limited Partnership of its shares in the Company in consideration for cash or freely tradable securities or a combination thereof. "Charlesbank Investment" means the total amount of capital expended to acquire Common Stock or warrants to acquire Common Stock of the Company or capital contributed to the Company (including capital provided in the form of an extension of credit or an advance of funds) by Charlesbank Equity Fund IV, Limited Partnership, commencing on the date of the original investment by Charlesbank Equity Fund IV, Limited Partnership. "CIC Return Hurdle" means (i) if the Change in Control occurs within 18 months of the original investment by Charlesbank Equity Fund IV, Limited Partnership, a Return on Investment of 2.0x, and (ii) if the Change in Control occurs more than 18 months after the original investment by Charlesbank Equity Fund IV, Limited Partnership a Return on Investment of 3.0x and a 30% IRR. 4 5 "Deemed Sale", as of any date, means the deemed sale following a Qualified Public Offering by Charlesbank Equity Fund IV, Limited Partnership of its shares in the Company at the Fair Market Value in effect on such date. "Fair Market Value", as of any date, means (i) with respect to any freely tradeable security, the closing market price for such security on the day immediately preceding such date as determined from the principal trading market for such security on such date, (ii) with respect to any publicly traded security of the Company, the average of the closing market prices of such security for the 30 consecutive trading days immediately prior to such date to be determined from the principal trading market for such security during such period, and (iii) with respect to any other property, such value determined as of such date by such methods or procedures as established in the good faith discretion of the Board. "IRR" means an internal rate of return to Charlesbank Equity Fund IV, Limited Partnership on the Charlesbank Investment as calculated by the use of an HP12c financial calculator, taking into account the timing and amount (based on the Fair Market Value thereof) of all contributions to capital and investments in the Company and the timing and amount (based on the Fair Market Value thereof) of all dividends, interest payments or other distributions or payments (whether in cash or other property), from the Company or any other person or entity in respect of the Charlesbank Investment, through the date of determination, and subject to adjustment in the good faith discretion of the Board in the event of any merger, acquisition, consolidation, sale of assets, recapitalization, contribution of capital to, or redemption of stock of, the Company, or any other event that the Board deems relevant to the calculation of such return. "QPO Return Hurdle" means (i) if the Actual Sale or Deemed Sale occurs within 18 months of the original investment by Charlesbank Equity Fund IV, Limited Partnership, a Return on Investment of 2.0x and (ii) if the Actual Sale or Deemed Sale occurs more than 18 months after the original investment by Charlesbank Equity Fund IV, Limited Partnership, a Return on Investment of 3.0x and a 30% IRR. "Qualified Public Offering" means a public offering of the Company's Class A Common Stock or other common stock of the Company with a minimum offering size of $50,000,000. "Return on Investment" means (i) in the case of a Change in Control, the quotient of (A) the total amount of cash and freely tradable securities and based on the Fair Market Value thereof received by Charlesbank Equity Fund IV, Limited Partnership upon such Change in Control, together with all dividends, interest payments and other distributions or payments (whether in cash or other property and based on the Fair Market Value thereof) received from the Company or any other person or entity in respect of the Charlesbank Investment prior to such Change in Control, divided by (B) the Charlesbank 5 6 Investment, and (ii) in the case of an Actual Sale or Deemed Sale following a Qualified Public Offering, the quotient of (A) the total amount of cash and freely tradeable securities (based on the Fair Market Value thereof) received in such Actual Sale, or the aggregate Fair Market Value of all shares in the Company owned at the time of such Deemed Sale, by Charlesbank Equity Fund IV, Limited Partnership, together with all dividends, interest payments and other distributions or payments (whether in cash or other property and based on the Fair Market Value thereof) received from the Company or any other person or entity in respect of the Charlesbank Investment prior to such Actual Sale or Deemed Sale, as the case may be, divided by (B) the Charlesbank Investment. (ii) Options exercised in any one year shall be deducted from the number of Options exercisable in any future year. Once vested, this Option shall be exercisable at the following times prior to the expiration date: (A) if the Optionee is employed by the Company at the time of exercise, at any time by giving the Company 45 days' advance written notice or (B) if the Optionee is not employed by the Company at the time of exercise but has the right to exercise after termination in accordance with Section 2(d) of this Agreement, by giving the Company written notice at any time during the period specified in Section 2(d) of this Agreement, in which case the Option shall be deemed exercised as of the end of the calendar month in which the Company received notice of exercise of the Option. In either case, the notice of exercise shall specify the number of Shares as to which the Option is being exercised. (iii) Upon receipt of written notice of exercise by the Company, the Company shall, upon full payment in cash to the Company of the Exercise Price of the Shares as to which the Option shall be exercised and upon receipt of a duly executed shareholders agreement (in the form attached hereto as Exhibit A or in such other form as the Company may reasonably require), issue to the Optionee the Shares subject to the Option. Any issuance of Shares to an Optionee pursuant to the preceding sentence shall be made by the Company within 90 days after the date of exercise. For purposes of this Agreement, the fair market value of Shares shall be determined by such methods or procedures as shall be established from time to time by the Board acting in its sole discretion and in good faith. In making such determinations, the Board may rely on a valuation report by an investment banking or valuation firm selected by the Board. The Committee established by the Board to administer the Plan (the "Committee") may, in its sole discretion, permit the Optionee to pay the Exercise Price in previously acquired Shares rather than in cash. (d) Exercise Upon Death or Termination of Employment. (i) If the Optionee dies while an employee of the Company, the Optionee's Designee may exercise the Option, to the extent it was vested on the date of termination, by giving the Company written notice of such exercise within 12 months after the date of Optionee's death, but in no event later than the Expiration Date. An Optionee's "Designee" means the person designated by the Optionee in his or her most recently filed beneficiary designation filed with the Company to receive the Optionee's rights under the Plan upon the 6 7 Optionee's death, or if there is no such designation or no such designated person survives the Optionee, by the person or persons to whom the Optionee's rights pass by will or applicable law, or if no such person has such right, by his executors or administrators. (ii) If the Company shall terminate Optionee's employment with the Company because of disability, the Optionee may exercise the Option to the extent it was vested on the date of termination, by giving the Company written notice of such exercise within 12 months after the date of termination of employment, but in no event later than the Expiration Date. (iii) If the Optionee terminates his employment with the Company other than for Good Reason, the Optionee may exercise the Option to the extent it was vested on the date of termination, by giving the Company written notice of such exercise within 90 days after the date of termination of employment, but in no event later then the Expiration Date. For purposes of this Agreement, "Good Reason" has the meaning set forth in the executive severance or employment agreement, if any, then in effect between the Company and the Optionee or, in the absence of such agreement shall mean, if the basis for such Good Reason is not cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason, but in no event less than 15 days), the failure of the Company to pay any undisputed amount due to the Optionee in connection with his employment by the Company. (iv) If the Optionee's employment shall terminate for any reason other than death, disability or Cause (as hereinafter defined), or if the Optionee shall terminate his employment with the Company for Good Reason, the Optionee may exercise the Option to the extent it was vested on the date of termination or, otherwise would have vested in the 12 months thereafter, in either event according to the applicable vesting schedule in Section 2(c)(i), by giving the Company written notice of such exercise within 18 months after the date of termination of employment, but in no event later than the Expiration Date. Notwithstanding the foregoing, the Optionee shall forfeit his right to exercise any Options that would have vested within the 12 months after termination, if the Optionee violates the terms regarding non-competition set forth in the Optionee's executive severance or employment agreement. (v) If the Optionee's employment shall terminate for Cause, all right to exercise the Option shall terminate at the date of such termination of employment. For purposes of this Agreement, "Cause" has the meaning set forth in the executive severance or employment agreement, if any, then in effect between the Company and the Optionee or, in the absence of such agreement, shall mean (i) the Optionee's conviction of, or plea of guilty or nolo contendere to, a felony, (ii) the Optionee's gross negligence in the performance of his duties and obligations to the Company, which is not corrected within 15 business days after written notice, (iii) the Optionee's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of his duties and obligations to the Company to the material detriment of the Company, which is not corrected within 15 business days after written notice, or (iv) the Optionee's other material breach of his obligations under this Agreement, which is not corrected 7 8 within a reasonable period of time (determined in light of the cure appropriate to such material breach, but in no event less than 15 business days) after written notice. (vi) In the event of termination of employment, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purpose of Section 422 of the Code, such stock option shall thereafter be treated as a nonqualified stock option. (e) Transferability. Except as otherwise provided in this Section, the Option is not transferable other than as designated by the Optionee in his or her most recently filed Beneficiary designation filed with the Company, or if there is no such designation or no such designated person survives the Optionee, as designated by the Optionee, by will or by the laws of descent and distribution, and during the Optionee's life, may be exercised only by the Optionee. However, an Optionee, with the approval of the Committee, may transfer the Option for no consideration to or for the benefit of the Optionee's Immediate Family or to a partnership or limited liability company for one or more members of the Optionee's Immediate Family, subject to such limits as the Committee may establish, and the transferee shall remain subject to all the terms and conditions applicable to Options prior to such transfer. The foregoing right to transfer the Option shall apply to the right to consent to amendments to this Agreement and, in the discretion of the Committee, shall also apply to the right to transfer ancillary rights associated with the Option. The term "Immediate Family" shall mean the Optionee's spouse, parents, children, stepchildren, adoptive relationships, sisters, brothers, nieces, nephews and grandchildren (and, for this purpose, shall also include the Optionee). (f) Adjustments. In the event of any change in corporate capitalization (including, but not limited to, a change in the number of shares of Common Stock outstanding), such as a stock split or a corporate transaction, such as any merger, consolidation, separation, including a spin-off, or other distribution of stock or property of the Company, any reorganization (whether or not such reorganization comes within the definition of such term in Section 368 of the Code) or any partial or complete liquidation of the Company, the Committee or Board may make such substitution or adjustments in the number, kind and option price of shares subject to the Option and/or such other equitable substitution or adjustments as it may determine to be appropriate in its sole discretion; provided, however, that the number of shares subject to the Option shall always be a whole number. In the event of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation, the Board shall be authorized to cause the Company to issue or assume stock options, whether or not in transaction to which Section 424(a) of the Code applies, by means of substitution of new stock options for previously issued stock options or an assumption of previously issued stock options. (g) No Rights as Stockholder. The Optionee shall have no rights as a stockholder with respect to any Shares subject to the Option prior to the date of issuance to the Optionee of a certificate or certificates for such Shares. (h) Optionee Acknowledgement. The Optionee acknowledges that: 8 9 (i) the future value of the Company is highly speculative; (ii) the Optionee is not relying on the value of this Option as current compensation; (iii) the Company has no obligation to the Optionee to sell the Company or to sell Shares publicly (which may have the effect of reducing the value of the Company); (iv) upon exercise of this Option, unless the Shares issuable upon exercise of the Options have been registered under applicable securities laws, there will be substantial restrictions on the transferability of the Shares; and (v) the past performance or experience of the Company, the Company's officers, directors, agents, or employees, will not in any way indicate or predict the results of the ownership of Shares or of the Company's activities. (i) No Right to Continued Employment. The Option shall not confer upon the Optionee any right with respect to continuance of employment by the Company, nor shall it interfere in any way with the right of the Optionee's employer to terminate the Optionee's employment at any time. (j) Compliance With Law and Regulations. The Option herein granted and the obligation of the Company to sell and deliver shares hereunder, shall be subject to all applicable Federal and State laws, rules and regulations and to such approvals by any government or regulatory agency as may be required. The Company shall not be required to issue or deliver any certificates for Shares prior to (i) the listing of such Shares on any stock exchange or national market quotations system on which the Shares may then be listed and (ii) the completion of any registration or qualification of such Shares under any Federal or State law, or any rule or regulation of any government body which the Company shall, in its sole discretion, determine to be necessary or advisable. Moreover, the Option herein granted may not be exercised if its exercise, or the receipt of Shares pursuant hereto, would be contrary to applicable law. 9 10 3. Optionee Bound by Plan. The Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. 4. Notices. All notices or any other communications hereunder shall be in writing and delivered personally or by registered or certified mail or overnight courier, addressed, if to the Company, to Heafner Tire Group, Inc., 2105 Water Ridge Parkway, Suite 500, Charlotte, North Carolina 28217; Attention: Chairman, and if to the Optionee, at the address set forth below, subject to the right of either party to designate at any time hereafter in writing some other address. 5. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina without regard to conflicts of laws principles. 6. No Assignment. Except as provided in Section 2(e), neither this Agreement nor any of the rights or obligations of the Optionee hereunder may be transferred or assigned by the Optionee. 7. Benefits. This Agreement shall be binding upon and inure to the benefit of the parties hereto. This Agreement is for the sole benefit of the parties hereto and not for the benefit of any other party. 8. Severability. If any provision of this Agreement shall be determined to be illegal and unenforceable by any court of law, the remaining provisions shall be severable and enforceable in accordance with their terms. 9. Amendments. No modification, amendment or waiver of any provision of this Agreement, other than as required under Section 2(f), shall be effective unless it is in writing and signed by the parties hereto. 10. Counterparts. This Agreement has been executed in two counterparts each of which shall constitute one and the same instrument. 10 11 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its Chairman, Chief Executive Officer, Chief Operating Officer, President or a Vice President and Optionee has executed this Agreement, both as of the day and year first above written. 11 12 HEAFNER TIRE GROUP, INC. By:/s/ ??????????????????? -------------------------- Name: Title: /s/ David H. Taylor - ------------------------------- David H. Taylor Address: 5500 Hardison Road Charlotte NC 12 EX-10.19 8 STOCK OPTION AGREEMENT / RAY C. BARNEY 1 EXHIBIT 10.19 HEAFNER TIRE GROUP, INC. STOCK OPTION AGREEMENT Number of shares subject to option: 10,000 This Agreement (the "Agreement") made this 10th day of December, 1999, between Heafner Tire Group, Inc., a Delaware corporation (the "Company"), and Ray C. Barney (the "Optionee"). W I T N E S S E T H: 1. Grant of Option. Pursuant to the provisions of the Heafner Tire Group, Inc. 1999 Stock Option Plan (the "Plan"), the Company hereby grants to the Optionee, subject to the terms and conditions of the Plan and subject further to the terms and conditions herein set forth, the right and option (the "Option") to purchase from the Company all or any part of an aggregate of 10,000 shares of the common stock, par value $0.01 per share, of the Company (the "Common Stock" or the "Shares") at a purchase price of $9.00 per Share (the "Exercise Price"), such Option to be exercised as hereinafter provided. 2. Terms and Conditions. It is understood and agreed that the Option evidenced hereby is subject to the following terms and conditions: (a) Expiration Date. The Option shall expire on the tenth anniversary of the date hereof (the "Expiration Date"). (b) Type of Option. This option is eligible to be an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). (c) Exercise of Option. (i) Subject to the other terms of this Agreement regarding the exercisability of this Option, this Option may be exercised in accordance with the following vesting schedule: Options Exercisable with respect to On or After Cumulative Number of Shares ----------- ----------------------------------- November 25, 2000 10,000 x 25% November 25, 2001 10,000 x 25% November 25, 2002 10,000 x 25% November 25, 2003 10,000 x 25% 2 Options exercised in any one year shall be deducted from the number of Options exercisable in any future year. Once vested, this Option shall be exercisable at the following times prior to the expiration date: (A) if the Optionee is employed by the Company at the time of exercise, at any time by giving the Company 45 days' advance written notice or (B) if the Optionee is not employed by the Company at the time of exercise but has the right to exercise after termination in accordance with paragraph 2(d) of this Agreement, by giving the Company written notice at any time during the period specified in paragraph 2(d) of this Agreement, in which case the Option shall be deemed exercised as of the end of the calendar month in which the Company received notice of exercise of the Option. In either case, the notice of exercise shall specify the number of Shares as to which the Option is being exercised. (ii) Upon receipt of written notice of exercise by the Company, the Company shall, upon full payment in cash to the Company of the Exercise Price of the Shares as to which the Option shall be exercised, issue to the Optionee the Shares subject to the Option. Any issuance of Shares to an Optionee pursuant to the preceding sentence shall be made by the Company within 90 days after the date of exercise. For purposes of this Agreement, the fair market value of Shares shall be determined by such methods or procedures as shall be established from time to time by the Board of Directors of the Company (the "Board") acting in its sole discretion and in good faith. In making such determinations, the Board may rely on a valuation report by an investment banking or valuation firm selected by the Board. The Committee established by the Board to administer the Plan (the "Committee") may, in its sole discretion, permit the Optionee to pay the Exercise Price in previously acquired Shares rather than in cash. (d) Exercise Upon Death or Termination of Employment. (i) If the Optionee dies while an employee of the Company, the Optionee's Designee may exercise the Option, to the extent it was vested on the date of termination or otherwise would have vested in the 12 months thereafter in accordance with the vesting schedule in Section 2(c) hereof, by giving the Company written notice of such exercise within 180 days after the date of Optionee's death, but in no event later than the Expiration Date. An Optionee's "Designee" means the person designated by the Optionee in his or her most recently filed beneficiary designation filed with the Company to receive the Optionee's rights under the Plan upon the Optionee's death, or if there is no such designation or no such designated person survives the Optionee, by the person or persons to whom the Optionee's rights pass by will or applicable law, or if no such person has such right, by his executors or administrators. (ii) If the Optionee's employment with the Company shall terminate because of permanent disability, the Optionee may exercise the Option to the extent it was vested on the date of termination or otherwise would have vested in the 12 months thereafter, in either event according to the vesting schedule in Section 2(c), by giving the Company written notice of such exercise within 180 days after the date of termination of employment, but in no event later than the Expiration Date. (iii) If the Optionee's employment shall terminate for any reason other than death or permanent disability as aforesaid or for Cause (as hereinafter defined), the Optionee may exercise the Option to the extent it was vested on the date of termination or otherwise would have vested in the 12 months thereafter, in either event according to the vesting schedule in Section 2(c), 2 3 by giving the Company written notice of such exercise within 180 days after the date of termination of employment, but in no event later than the Expiration Date. (iv) If the Optionee's employment shall terminate for Cause, all right to exercise the Option shall terminate at the date of such termination of employment except that the Optionee may exercise the Option to the extent vested as of the date of such termination by giving the Company written notice thereof within 30 days after such termination. For purposes of this Agreement, "Cause" shall mean (i) the Employee's conviction of, or plea of guilty or nolo contendere to, a felony, (ii) the Employee's gross negligence in the performance of his duties and obligations to the Company, which is not corrected within 15 business days after written notice, (iii) the Employee's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of his duties and obligations to the Company to the material detriment of the Company, which is not corrected within 15 business days after written notice, or (iv) the Employee's other material breach of his obligations under this Agreement, which is not corrected within a reasonable period of time (determined in light of the cure appropriate to such material breach, but in no event less than 15 business days) after written notice. (e) Nontransferability. This Option shall not be transferable other than by will or by the laws of descent and distribution. During the lifetime of the Optionee, this Option shall be exercisable only by such Optionee. (f) Forfeiture of Option Gain. If at any time within 12 months after the later of (i) termination of employment or (ii) the date on which the Optionee exercises any portion of this Option, the Optionee violates the terms of the covenants regarding confidential information, soliciting customer accounts, non-competition or hiring of employees, currently set forth in Sections 2 and 3 of the Employment Agreement between the Company and the Optionee dated the date hereof (the "Employment Agreement"), (A) then any income realized by the Optionee upon the exercise of this Option or upon the sale of Shares acquired by exercise of this Option at any time, whether before or after the date of termination of employment, shall promptly be paid by the Optionee to the Company and (B) any unexercised Options shall be canceled. The Company shall have the right to set off against any amount payable by the Company to the Optionee, including, without limitation, salary, benefits or other amounts, any amounts owed by the Optionee to the Company under this subparagraph (f). The Committee may waive the requirements of this subparagraph (f) if it determines in its sole discretion that such action is in the best interests of the Company. (g) Adjustments. In the event that the Committee shall determine, in its sole discretion, that any dividend or other distribution (whether in the form of cash, Common Stock, or other property), recapitalization, stock split, reverse split, any reorganization, merger, consolidation, spin-off, combination, repurchase, share exchange, license arrangement, strategic alliance or other corporate transaction or event, affects the Shares such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of the Optionee under the Plan, then the Committee shall make such equitable changes or adjustments as it deems necessary or appropriate to any or all of (i) the number and kind of Shares which may thereafter be issued in connection with Options, (ii) the number and kind of Shares issued or issuable in respect of outstanding Options, and (iii) the Exercise Price relating to any Option; provided that, with respect 3 4 to incentive stock options, such adjustment shall be made in accordance with Section 424(h) of the Code. (h) No Rights as Stockholder. The Optionee shall have no rights as a stockholder with respect to any Shares subject to the Option prior to the date of issuance to the Optionee of a certificate or certificates for such Shares. (i) Optionee Acknowledgement. The Optionee acknowledges that: (i) the future value of the Company is highly speculative; (ii) the Optionee is not relying on the value of this Option as current compensation; (iii) the Company has no obligation to the Optionee to sell the Company or to sell Shares publicly (which may have the effect of reducing the value of the Company); (iv) upon exercise of this Option, unless the Shares issuable upon exercise of the Options have been registered under applicable securities laws, there will be substantial restrictions on the transferability of the Shares; and (v) the past performance or experience of the Company, the Company's officers, directors, agents, or employees, will not in any way indicate or predict the results of the ownership of Shares or of the Company's activities. (j) No Right to Continued Employment. The Option shall not confer upon the Optionee any right with respect to continuance of employment by the Company, nor shall it interfere in any way with the right of the Optionee's employer to terminate the Optionee's employment at any time. (k) Compliance With Law and Regulations. The Option herein granted and the obligation of the Company to sell and deliver shares hereunder, shall be subject to all applicable Federal and State laws, rules and regulations and to such approvals by any government or regulatory agency as may be required. The Company shall not be required to issue or deliver any certificates for Shares prior to (i) the listing of such Shares on any stock exchange or national market quotations system on which the Shares may then be listed and (ii) the completion of any registration or qualification of such Shares under any Federal or State law, or any rule or regulation of any government body which the Company shall, in its sole discretion, determine to be necessary or advisable. Moreover, the Option herein granted may not be exercised if its exercise, or the receipt of Shares pursuant hereto, would be contrary to applicable law. (l) Condition Precedent. In consideration for and as a condition precedent to being eligible to participate in the Plan, the Optionee shall have executed and delivered to the Company the Employment Agreement. 4 5 3. Optionee Bound by Plan. The Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. 4. Notices. All notices or any other communications hereunder shall be in writing and delivered personally or by registered or certified mail or overnight courier, addressed, if to the Company, to Heafner Tire Group, Inc., 2105 Water Ridge Parkway, Suite 500, Charlotte, NC 28217; Attention: Chairman, and if to the Optionee, at the address set forth below, subject to the right of either party to designate at any time hereafter in writing some other address. 5. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina without regard to conflicts of laws principles. 6. No Assignment. Neither this Agreement nor any of the rights or obligations of the Optionee hereunder may be transferred or assigned by the Optionee. 7. Benefits. This Agreement shall be binding upon and inure to the benefit of the parties hereto. This Agreement is for the sole benefit of the parties hereto and not for the benefit of any other party. 8. Severability. If any provision of this Agreement shall be determined to be illegal and unenforceable by any court of law, the remaining provisions shall be severable and enforceable in accordance with their terms. 9. Amendments. No modification, amendment or waiver of any provision of this Agreement, other than as required under Section 2(g), shall be effective unless it is in writing and signed by the parties hereto. 10. Counterparts. This Agreement has been executed in two counterparts each of which shall constitute one and the same instrument. 5 6 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its Chairman, Chief Executive Officer, Chief Operating Officer, President or a Vice President and Optionee has executed this Agreement, both as of the day and year first above written. HEAFNER TIRE GROUP, INC. By: /s/ Donald C. Roof -------------------------------------------- Name: Donald C. Roof Title: President and Chief Executive Officer /s/ Ray C. Barney - ------------------------------- Ray C. Barney Address: 216 Fieldcrest Court Danville, CA 94506 6 EX-10.23 9 SECURITIES PURCHASE AND STOCKHOLDERS' AGREEMENT 1 EXHIBIT 10.23 SECURITIES PURCHASE AND STOCKHOLDERS' AGREEMENT, dated as of August 16, 1999, among HEAFNER TIRE GROUP, INC., a Delaware corporation (the "Company"), and David H. Taylor (the "Purchaser"). Introduction The Company desires to issue and sell to the Purchaser, and the Purchaser desires to purchase from the Company, that number of shares (the "Purchased Shares") of the Company's Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), set forth in Exhibit A attached hereto. In addition to the terms of the issuance, sale and purchase of the Purchased Shares, the Company and the Purchaser desire to set forth herein certain matters regarding the ownership of shares of Class A Common Stock by the Purchaser (the shares of Class A Common Stock now or hereafter acquired by the Purchaser are referred to herein as the "Shares"). For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE I Purchase and Sale SECTION 1.1. Purchase and Sale of Common Stock. The Company hereby issues and sells to the Purchaser, and the Purchaser hereby acquires from the Company, on the date hereof, that number of Purchased Shares set forth on Exhibit A hereto for a purchase price of $9.00 per Share (the "Purchase Price"), in cash, payable by wire transfer of immediately available funds to an account heretofore designated to the Purchaser by the Company, by certified bank check or money order payable to the Company. The Purchased Shares shall have the respective rights and preferences of other shares of Class A Common Stock as set forth in the Company's Certificate of Incorporation in Delaware, a copy of which is attached to this Agreement as Exhibit B. SECTION 1.2. Delivery of Certificates. The Company is hereby issuing and selling to the Purchaser the Purchaser's Purchased Shares by delivering to the Purchaser a duly executed certificate or certificates representing the Purchased Shares registered in the name of the Purchaser, with appropriate issue stamps, if any, affixed at the expense of the Company, free and clear of all security interests, liens, pledges, charges, options, rights of first refusal, mortgages, indentures, security agreements or other claims, encumbrances, agreements, arrangements or commitments of any kind or character, whether written or oral and whether or not relating in any way to credit or the borrowing of money ("Claims"), and the Purchaser is hereby purchasing the Shares for the Purchase Price applicable thereto. 2 ARTICLE II Representations and Warranties of the Company The Company represents and warrants to the Purchaser as follows: SECTION 2.1. Organization Standing and Power. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. SECTION 2.2. Authority; Binding Agreements. The Company has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by the Company and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of the Company. This Agreement has been duly executed and delivered by the Company and constitutes the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. SECTION 2.3. Conflicts; Consents. The execution and delivery by the Company of this Agreement and the consummation of the transactions contemplated hereby and compliance by the Company with any of the provisions hereof do not and will not (i) conflict with or result in a breach of the articles of incorporation, by-laws or other constitutive documents of the Company, (ii) conflict with or result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the provisions of any note, bond, lease, mortgage, indenture, or any license, franchise, permit, agreement or other instrument or obligation to which the Company is a party, or by which the Company or any of the Company's properties or assets may be bound or affected, except for such conflicts, breaches or defaults as to which requisite waivers or consents have been obtained, (iii) violate any law, statute, rule or regulation or order, writ, injunction or decree applicable to the Company or any of the Company's properties or assets or (iv) result in the creation or imposition of any Claim upon any of the Company's properties or assets. No consent or approval by, or notification of or filing with, any person is required in connection with the execution, delivery and performance by the Company of this Agreement and the consummation of the transactions contemplated hereby. ARTICLE III Representations and Warranties of the Purchaser The Purchaser represents and warrants to the Company as follows: SECTION 3.1. Capacity; Binding Agreements. The Purchaser has all requisite capacity to enter into this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Purchaser, and constitutes the valid 2 3 and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms. SECTION 3.2. Conflicts; Consents. The execution and delivery by the Purchaser of this Agreement, the consummation of the transactions contemplated hereby and compliance by the Purchaser with any of the provisions hereof do not and will not (i) conflict with or result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the provisions of any note, bond, lease, mortgage, indenture, or any license, franchise, permit, agreement or other instrument or obligation to which the Purchaser is a party, or by which the Purchaser or any of the Purchaser's properties or assets may be bound or affected, except for such conflicts, breaches or defaults as to which requisite waivers or consents have been obtained, (ii) violate any law, statute, rule or regulation or order, writ, injunction or decree applicable to the Purchaser or any of the Purchaser's properties or assets or (iii) result in the creation or imposition of any Claim upon any of the Purchaser's properties or assets. SECTION 3.3. Purchase for Own Account. (a) The Purchased Shares to be acquired by the Purchaser pursuant to this Agreement are being acquired for his own account and the Purchaser has no intention of distributing or reselling such securities or any part thereof in any transaction that would be in violation of the securities laws of the United States of America, or any state thereof. If the Purchaser should in the future decide to dispose of any of the Purchased Shares, the Purchaser understands and agrees that he may do so only in compliance with this Agreement and with the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities laws, as then in effect, and that stop-transfer instructions to that effect, where applicable, will be in effect with respect to such securities. If the Purchaser should decide to dispose of any Shares, the Purchaser, if requested by the Company, will have the obligation in connection with such disposition, at the Purchaser's expense, of delivering an opinion of counsel of recognized standing in securities law in connection with such disposition to the effect that the proposed disposition of the Shares will not be in violation of the Securities Act or any applicable state securities laws and, assuming such opinion is required and is otherwise appropriate in form and substance under the circumstances, the Company will accept, and will recommend to any applicable transfer agent or trustee for such securities that it accept, such opinion. (b) The Purchaser agrees to the imprinting of a legend on certificates representing all of the Shares to the following effect: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED, QUALIFIED, APPROVED OR DISAPPROVED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS AND NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER FEDERAL OR STATE REGULATORY AUTHORITY HAS PASSED ON OR ENDORSED THE MERITS OF THESE SECURITIES. THE TRANSFER OF ANY 3 4 SECURITIES REPRESENTED BY THIS CERTIFICATE IS FURTHER LIMITED BY THE PROVISIONS OF THE SECURITIES PURCHASE AND STOCKHOLDERS' AGREEMENT AMONG HEAFNER TIRE GROUP, INC. AND THE MANAGEMENT STOCKHOLDERS IDENTIFIED THEREIN, A COPY OF WHICH IS ON FILE AT THE EXECUTIVE OFFICE OF THE COMPANY." SECTION 3.4. Nature of Purchaser. The Purchaser acknowledges that the offer and sale of the Purchased Shares is intended to be exempt from registration under the Securities Act. The Purchaser is (i) a director, president, vice president in charge of a principal business unit, division or function or other officer of the Company who performs a policy making function for the Company, (ii) an individual with a net worth, or joint net worth with the Purchaser's spouse, at the date hereof in excess of $1,000,000, (iii) an individual with an income in excess of $200,000 in each of the two most recent years or joint income with the Purchaser's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year or (iv) an individual who has appointed a "purchaser representative" as described in Section 5.6 to act as the Purchaser's representative to assist the Purchaser in evaluating the purchase of the Purchased Shares. The Purchaser has such knowledge and experience in financial and business matters so that he is capable of evaluating the relative merits and risks of purchasing the Purchased Shares. The Purchaser has adequate means of providing for his current economic needs and possible personal contingencies, has no need for liquidity in his investment in the Company and is able financially to bear the risks of such investment. SECTION 3.5. Information. All documents, records and books pertaining to the investment in the Purchased Shares and requested by the Purchaser or his purchaser representative, if any, have been made available or delivered to the Purchaser. The Purchaser has been given full access to all material information concerning the condition, business, operations, proposed operations and prospects of Purchaser, including (i) the Annual Report on Form 10-K most recently filed with the SEC by the Company, (ii) all Quarterly Reports on Form 10-Q filed with the SEC by the Company since the date of such Annual Report and (iii) all Reports on Form 8-K filed with the SEC by the Company since the date of such Annual Report (receipt of copies of each of which is hereby acknowledged by the Purchaser). The Purchaser has had an opportunity to discuss the Company's business, management and financial affairs with the Company's management and to ask questions of and receive answers from the Company concerning such matters. All such questions, if any, have been answered to the full satisfaction of the Purchaser and his purchaser representative, if any, and the Purchaser has received all information about the Company which the Purchaser or his purchaser representative, if any, desires, including information which the Purchaser or purchaser representative deems necessary to verify the accuracy of information the Company has furnished to the Purchaser. 4 5 ARTICLE IV Transferability of Shares SECTION 4.1. Stock Transfer Restrictions. The Purchaser shall not sell, assign, pledge, give away or otherwise transfer (a "Transfer") any Shares except in accordance with the procedures set forth in this Agreement. Any attempted Transfer of Shares not permitted by this Agreement shall be null and void, and the Company shall not in any way give effect to any such Transfer. Any proposed Transfer of Shares shall be null and void, and the Company shall not in any way give effect to any such Transfer, unless the transferee of such Shares who is not, immediately prior to such Transfer, the Purchaser shall agree in writing to be bound by and comply with the provisions of this Agreement SECTION 4.2. Termination of Employment. (a) Termination by Company for Cause or by Purchaser without Good Reason. If the Company shall terminate the Purchaser's employment for "Cause" or the Purchaser shall terminate his employment with the Company other than for "Good Reason" (as such terms are defined below), the Company shall have the right, commencing on the date of such termination and continuing until the first anniversary thereof, to purchase all of the Purchaser's Shares at the Repurchase Price (as defined below) applicable thereto; provided that if and to the extent that, prior to such first anniversary, the Company is prohibited under the terms of any loan agreement, indenture, note or other agreement from making such repurchase, in whole or in part, the Company shall have the right to purchase such Shares until the expiration of 45 days after such first anniversary. In the event the Company does not exercise its right to purchase such Shares, or is unable to purchase such Shares, and so long as the Principal Shareholders then own more than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company, then the Company shall so notify the Principal Shareholders in writing no later than the first anniversary of the date of the termination triggering the right to purchase, and for a period of 60 days following the first anniversary of such termination the Principal Shareholders (through their agent Charlesbank Capital Partners, LLC) shall have all the rights conferred on the Company pursuant to this Section 4.2(a). For purposes of this Section 4.2, "Company" shall include any subsidiary of the Company with respect to the Purchaser employed directly by such subsidiary. For purposes of this Agreement, "Cause", with respect to the Purchaser, has the meaning set forth in the executive severance or employment agreement, if any, then in effect between the Company and the Purchaser or, in the absence of such an agreement, shall mean (i) the Purchaser's conviction of, or plea of guilty or nolo contendere to a felony, (ii) the Purchaser's gross negligence in the performance of his employment services to the Company, which is not corrected within 15 business days after written notice, (iii) the Purchaser's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of such services to the material detriment of the Company, which is not corrected within 15 business days after written notice, or (iv) the Purchaser's other material breach of his obligations as an employee or officer of the Company which is not corrected within a reasonable period of time (determined in light of the cure 5 6 appropriate to such material breach, but in no event less than 15 business days) after written notice. "Combined Voting Power" with respect to capital stock of the Company means the number of votes such stock is normally entitled (without regard to the occurrence of any contingency) to vote in an election of the directors of the Company. "EBITDA" means earnings before interest, taxes, depreciation, and amortization as reflected in the Company's financial statements for the four full fiscal quarters immediately preceding the date on which such termination shall have occurred. Adjustments for unusual items will be made in the reasonable discretion of the Board of Directors of the Company, after consultation with the Chief Executive Officer of the Company. "Good Reason", with respect to the Purchaser, has the meaning set forth in the executive severance or employment agreement, if any, then in effect between the Company and the Purchaser or, in the absence of such an agreement, shall mean any of the following, unless the basis for such Good Reason is cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason, but in no event less than 15 business days) after the Company receives written notice specifying the basis of such Good Reason: (i) the failure of the Company to pay any undisputed amount due to the Purchaser in connection with his employment by the Company or a substantial diminution in benefits provided pursuant to such employment other than a reduction in benefits or salary applicable to all of the Company's bonus eligible employees, (ii) a substantial diminution in the status, position and responsibilities of the Purchaser that is not instituted to all employees of the Company or (iii) the Company requiring the Purchaser to be based at any office or location that requires a relocation or commute greater than 50 miles from the office or location to which the Purchaser is currently assigned; provided, however, that Good Reason shall not be deemed to exist due to the travel requirements consistent with the performance of the Purchaser's employment services. "Principal Shareholders" means (i) Charlesbank Equity Fund IV, Limited Partnership and the investors in such fund, (ii) Charlesbank Equity Fund IV G.P. Limited Partnership, (iii) Charlesbank Capital Partners, LLC (and any other fund managed by Charlesbank Capital Partners, LLC), (iv) any investor (other than The 1818 Mezzanine Fund, L.P.) whose investment in the Company is approved by the representative of management on the board of the Company, (v) any new investors in the Company designated as Principal Shareholders by Charlesbank Capital Partners, LLC within one year of the initial investment by Charlesbank Equity Fund IV, Limited Partnership, and (vi) any corporation, partnership, limited liability company or other entity a majority of the capital stock or other ownership interests of which are directly or indirectly owned by any of the foregoing. "Repurchase Price" means, with respect to each Share owned by the Purchaser, (a) in the event of any termination, excluding a termination described in clause (b) below, the greater of (i) the Purchase Price applicable thereto, and (ii) the quotient obtained by dividing the Net Equity Value by the total number of shares of Common Stock outstanding on the date of termination of the Purchaser's employment (on a fully diluted basis, after assuming the issuance 6 7 of shares of Common Stock pursuant to the exercise of in-the-money options granted under the Option Plans and in-the-money Warrants), (b) in the event of a termination (i) by the Company for Cause or (ii) within 24 months of the date hereof, by the Purchaser other than for Good Reason, the Purchase Price applicable thereto, and (c) notwithstanding the terms of clauses (a) and (b) above, in the event of a termination by the Company for a Specified Cause Event or in the event that following termination for any reason the Purchaser violates the confidentiality or non-compete provisions of any executive severance, employment or non-competition agreement with the Company, the lesser of (i) the Purchase Price applicable thereto and (ii) the quotient obtained by dividing the Net Equity Value by the total number of shares of Common Stock outstanding on the date of termination of the Purchaser's employment (on a fully diluted basis, after assuming the issuance of shares of Common Stock pursuant to the exercise of in-the-money options granted under the Option Plans and in-the-money Warrants). "Net Equity Value" means the sum of (x) 6 times the Company's EBITDA plus (y) the aggregate exercise price of all in-the-money options granted under the Option Plans and all in-the-money Warrants, less (z) the aggregate amount of principal of and interest on (in the case of debt) and liquidation value of (in the case of capital stock) all debt for borrowed money and Preferred Stock (or any replacements therefor) owed or outstanding as of the date of such termination. "Specified Cause Event" means (1) a proven or admitted act of fraud, misappropriation or embezzlement by the Purchaser that is detrimental to the Company or (2) the Purchaser's conviction of or plea of guilty or nolo contendere to a felony that is related to the Company or the performance of the Purchaser's services for the Company. (b) Termination by Company other than for Cause or by Purchaser with Good Reason. If the Company shall terminate the Purchaser's employment other than for Cause or the Purchaser shall terminate his employment with the Company for Good Reason, the Purchaser shall have the right, commencing on the date of such termination and continuing until the first anniversary thereof, to require the Company to purchase all of the Purchaser's Shares at the Repurchase Price applicable thereto; provided that if and to the extent that, prior to such first anniversary, the Company is prohibited under the terms of any loan agreement, indenture, note or other agreement from purchasing such Shares to the extent so required by the Purchaser, the Company shall not be obligated to make such purchase until it is no longer prohibited from doing so, in which case payment shall be made promptly after the removal of such prohibition. In the event the option is not exercised, the Company shall have the right, commencing on the first anniversary and continuing until the second anniversary thereof, to purchase all of the Purchaser's Shares at the Repurchase Price applicable thereto. In the event the Company does not exercise its right to purchase such Shares, or is unable to purchase such Shares, and so long as the Principal Shareholders then own more than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company, then the Company shall so notify the Principal Shareholders in writing no later than the second anniversary of the date of termination triggering the right to purchase, and for a period of 60 days following the second anniversary of such termination the Principal Shareholders (through their agent Charlesbank Capital Partners, LLC) shall have all the rights conferred on the Company pursuant to this Section 4.2(b). 7 8 (c) Termination or Repurchase upon Death. If the Purchaser's employment with the Company shall terminate due to the Purchaser's death, or, if within one year after any other termination of employment with the Company, the Purchaser shall die, the Company shall have the right to purchase, and the Purchaser's descendants shall have the right to require the Company to purchase, all of the Purchaser's Shares at the Repurchase Price applicable thereto, commencing on the date of death of the Purchaser and continuing until the first anniversary thereof; provided that if and to the extent that, prior to such first anniversary, the Company is prohibited under the terms of any loan agreement, indenture, note, or other agreement from purchasing such Shares to the extent so required by the Purchaser's descendants, the Company shall not be obligated to make such purchase until it is no longer prohibited from doing so, in which case payment shall be made promptly after the removal of such prohibition. In the event the Company does not exercise its right to purchase such Shares, or is unable to purchase such Shares, and so long as the Principal Shareholders then own more than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company, then the Company shall so notify the Principal Shareholders in writing no later than the first anniversary of the date of the death triggering the right to purchase, and for a period of 60 days following the first anniversary of the date of death the Principal Shareholders (through their agent Charlesbank Capital Partners, LLC) shall have all the rights conferred on the Company pursuant to this Section 4.2(c). (d) Delivery of Payment. The Company or the Principal Shareholders or the Purchaser, as the case may be, shall notify the other of such party's exercise of its rights under this Section 4.2 by giving written notice of such exercise at least 10 and not more than 30 days before the date established by such electing party for such purchase or sale, as the case may be. On the date so designated, the Company or the Principal Shareholders shall deliver the appropriate Repurchase Price to the Purchaser by certified check or money order and the Purchaser shall deliver the certificates evidencing the Shares being purchased, duly endorsed for transfer as the Company or the Principal Shareholders may direct, and free and clear of any Claim. If any Shares evidenced by a certificate so surrendered are not being purchased pursuant to the terms hereof, the Company shall promptly issue to the Purchaser a replacement certificate evidencing the Shares not so purchased. SECTION 4.3. Transfers Among Management or to Descendants. The Purchaser may, so long as any right has not been exercised with respect to such Shares pursuant to Section 4.2, Transfer any Shares to another management employee of the Company or one of its subsidiaries who has acquired or does acquire shares of Common Stock pursuant to a purchase agreement containing transfer and other restrictions substantially similar to, and no less favorable to the Company than, those contained herein or pursuant to an exercise of any option under the Option Plans (a "Management Employee"). The Purchaser may Transfer all or any portion of the Purchaser's Shares to the Purchaser's spouse or descendants or a trust for the benefit of the Purchaser or his or her spouse or descendants or to a partnership or corporation controlled by the Purchaser or his or her spouse or descendants. Such Transfers shall be effective only if the transferee agrees to be bound by the terms of this Agreement. 8 9 SECTION 4.4. Right of First Offer. With respect to any Shares that the Purchaser wishes to Transfer, other than pursuant to Section 4.3 hereof, the following provisions shall apply. (a) If the Purchaser desires to Transfer any such Shares, the Purchaser shall deliver to the Company, the Principal Shareholders, and the Management Employees a written notice, which shall be irrevocable for a period of 60 days after delivery, offering all of such Shares to the Company, and so long as the Principal Shareholders then own more than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company, the Principal Shareholders, and the Management Employees at the purchase price and on the terms specified in the written notice. The Company shall have the first right and option, for a period of 30 days after delivery of such written notice, to purchase all (but not part) of such Shares at the purchase price and on the terms specified in the notice. Such acceptance shall be made by delivering a written notice to the Purchaser within such 30-day period. (b) If the Company fails to accept such offer, then upon the earlier of the expiration of such 30-day period or upon the receipt of a written rejection of such offer from the Company, the Principal Shareholders shall have the second right and option, until 15 days after the expiration of the 30-day period, to purchase all (but not part) of such Shares offered at the purchase price and on the terms specified in the notice. Such acceptance shall be made by delivering a written notice to the Purchaser within the 15-day period. (c) If the Principal Shareholders fail to accept such offer, then upon the earlier of the expiration of such 15-day period or upon the receipt of a written rejection of such offer from the Principal Shareholders, the Management Employees (as a group) shall have the third right and option, until 15 days after the expiration of the 15-day period, to purchase on a pro rata basis with all Management Employees so electing all (but not part) of such Shares offered at the purchase price and on the terms specified in the notice. Such acceptance shall be made by delivering a written notice to the Purchaser within the second 15-day period. (d) If the Company, Principal Shareholders, and the Management Employees do not elect to purchase the Shares so offered, then the Purchaser may Transfer all (but not part) of such Shares at a price not less than the price, and on terms not more favorable to the transferee of such Shares than the terms, stated in the original written notice of intention to sell, at any time within 15 days after the expiration of the period in which the Management Employees could elect to purchase such Shares. If such Shares are not sold by the Purchaser during such 15-day period, the right of the Purchaser to sell such Shares shall expire and the rights and obligations set forth in this Section 4.4 shall be reinstated with respect to such Shares. (e) The rights of the Principal Shareholders under this Section 4.4 shall terminate if at the time of the proposed Transfer the Principal Shareholders do not own more than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company. SECTION 4.5. Lock-up Agreements. If the Company proposes to register under the Securities Act any of its Common Stock for sale to the public, the Purchaser shall enter into such agreement (a "Lock-up Agreement") as may be requested by the underwriters of such 9 10 registered offering, pursuant to which Lock-up Agreement the Purchaser shall refrain from selling any Shares during the period of distribution of Common Stock by such underwriters and for a period of up to 180 days following the effective date of such registration. SECTION 4.6. Take-Along. If Charlesbank Capital Partners, LLC agrees to transfer all of the shares of Common Stock which it owns and which are owned by funds that it manages to any person or entity other than an affiliate of the Principal Shareholders, and so long as the Principal Shareholders then own more than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Company, then Charlesbank Capital Partners, LLC shall have the right to require the Purchaser to sell his Shares to such person or entity upon the same terms and subject to the same conditions as the Principal Shareholders have agreed to sell their shares. The Principal Shareholders shall provide a written notice of such sale not less than 30 days prior to the closing of such sale. ARTICLE V Miscellaneous SECTION 5.1. Option Shares; Dividends; Reclassifications. If, subsequent to the date hereof, any shares of Common Stock are issued to the Purchaser pursuant to the exercise of any option (including options granted under the Option Plans), warrant or other security convertible into or exercisable for shares of Common Stock, or any shares or other securities are issued with respect to, or in exchange for, any of the Shares by reason of any reincorporation, stock dividend, stock split, consolidation of shares, reclassification or consolidation involving the Company, such shares of Common Stock and such other shares or securities shall be deemed to be Shares for all purposes of this Agreement. SECTION 5.2. Survival of Provisions; Termination. (a) All of the representations, warranties and covenants made herein and each of the provisions of this Agreement shall, except as otherwise expressly set forth herein, survive the execution and delivery of this Agreement, any investigation by or on behalf of the Purchaser, the acceptance of the Purchased Shares and payment therefor or the termination of this Agreement. (b) This Agreement shall terminate upon the earliest to occur of the (i) issuance by the Company or sale by the shareholders of the Company to the public on a Form S-1 under the Securities Act of shares of Common Stock representing at least 40% of the Common Stock outstanding after such issuance or sale, (ii) tenth anniversary of the date of this Agreement and (iii) written consent of the Purchaser, the Management Employees and the Company. Upon such a termination, all rights and obligations under this Agreement shall terminate, except the Purchaser's obligations under Section 4.5 with respect to a Lock-up Agreement entered into in connection with a public offering referred to in the foregoing clause (i), if applicable. SECTION 5.3. Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier, courier services or personal delivery 10 11 to the following addresses, or to such other addresses as shall be designated from time to time by a party in accordance with this Section 5.3: (a) if to the Company: Heafner Tire Group, Inc. 2105 Water Ridge Parkway Suite 500 Charlotte, North Carolina 28217 Attention: J. Michael Gaither Telecopier No.: (704) 423-9469 with a copy to: Howard, Smith & Levin LLP 1330 Avenue of the Americas New York, New York 10019 Attention: Scott F. Smith, Esq. Telecopier No.: (212) 841-1010 (b) if to the Purchaser: David H. Taylor 5500 hardison Road Charlotte, NC 28226 (c) if to the Principal Shareholders: Charlesbank Capital Partners, LLC 600 Atlantic Avenue Boston, Massachusetts 02210-2203 Attention: Mark A. Rosen and Tami E. Nason Telecopier: (617) 619-5402 with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP 919 Third Avenue New York, NY 10022 Facsimile: (212) 735-2000 Attention: David J. Friedman All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; one business day after delivery to a courier, if delivered by 11 12 commercial overnight courier service; five business days after being deposited in the mail, postage prepaid, if mailed; and when receipt is acknowledged, if telecopied. SECTION 5.4. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties hereto. The provisions of Article IV also shall inure to the benefit of and be enforceable by the Management Employees and the Principal Shareholders. The Purchaser may assign its rights hereunder only in conjunction with, and to a transferee of, a Transfer permitted pursuant to the terms of Article IV, and any such assignee shall be deemed to be the "Purchaser" for purposes of this Agreement. The Company may not assign any of its rights or obligations hereunder without the consent of Purchaser; provided that any successor by merger or consolidation of the Company or similar transaction shall be bound by and benefit from the terms hereof as if named as the Company hereunder. SECTION 5.5. Amendment and Waiver. No failure or delay on the part of the Company or the Purchaser in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. No waiver of or consent to any departure by the Company or the Purchaser from any provision of this Agreement shall be effective unless signed in writing by the party entitled to the benefit thereof; provided that notice of any such waiver shall be given to each party hereto as set forth herein. Except as otherwise provided herein, no amendment, modification or termination of any provision of this Agreement shall be effective unless signed in writing by or on behalf of the Company and the Purchaser and with respect to any amendment, modification or termination of the rights or obligations of the Principal Shareholders under Article IV, the Principal Shareholders (through their agent Charlesbank Capital Partners, LLC); provided that the provisions of Section 5.2(b) and of this sentence shall not be amended or waived without the written consent of the Purchaser and the Company. Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure by the Company or the Purchaser from the terms of any provision of this Agreement, shall be effective only in the specific instance and for the specific purpose for which made or given. Except where notice is specifically required by this Agreement, no notice to or demand on the Company or the Purchaser in any case shall entitle the Company or the Purchaser to any other or further notice or demand in similar or other circumstances. SECTION 5.6. Purchaser Representative. If the Purchaser has been represented by a purchaser representative in connection with his investment in the Shares, in evaluating the Purchaser's investment in the Shares the Purchaser has been advised by the Purchaser representative as to the merits and risks of the investment in general and the suitability of the investment for the Purchaser in particular, and the purchaser representative has disclosed in writing any material relationship, actual or contemplated, between the purchaser representative and any entity connected to the transactions contemplated hereby, or affiliate of any such entity, and any compensation received or to be received as a result of such relationship. 12 13 SECTION 5.7. Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. SECTION 5.8. Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. SECTION 5.9. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. SECTION 5.10. Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof. SECTION 5.11. Entire Agreement. This Agreement, together with the exhibits hereto and the terms of the Common Stock, is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein or therein. This Agreement, together with the exhibits hereto and the Common Stock, supersede all prior agreements and understandings among the parties with respect to such subject matter hereof. SECTION 5.12. Expenses. Each party to this Agreement shall each bear its or his own costs incurred in connection with the negotiation, execution and delivery and enforcement of this Agreement, including the fees and expenses of lawyers, financial advisors and accountants. SECTION 5.13. Certain Definitions and Rules of Interpretation. Except as otherwise expressly provided in this Agreement, the following rules of interpretation apply to this Agreement: (i) the singular includes the plural and the plural includes the singular; (ii) "or" and "any" are not exclusive and "include" and "including" are not limiting; (iii) a reference to any agreement or other contract includes permitted supplements and amendments; (iv) a reference to a law includes any amendment or modification to such law and any rules or regulations issued thereunder; (v) a reference to a person includes its permitted successors and assigns; (vi) a reference to GAAP or generally accepted accounting principles refers to United States generally accepted accounting principles; and (vii) a reference in this Agreement to an Article, Section or Exhibit is to the Article, Section or Exhibit of this Agreement. 13 14 IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase and Stockholders' Agreement to be executed and delivered as of the date first above written. HEAFNER TIRE GROUP, INC. By:/s/ J. Michael Gaither -------------------------------------------- J. Michael Gaither Executive Vice President and General Counsel /s/ David H. Taylor -------------------------------------------- David H. Taylor 15 Exhibit A to Securities Purchase and Stockholders' Agreement Shareholder Number of Purchased Shares Cash - ----------- -------------------------- ---- David H. Taylor 25,000 $225,000 EX-10.29 10 EXECUTIVE SEVERANCE AGREEMENT / DAVID H. TAYLOR 1 EXHIBIT 10.29 Execution Copy EXECUTIVE SEVERANCE AGREEMENT, dated as of August 16, 1999 (the "Agreement"), between Heafner Tire Group, Inc., a Delaware corporation (the "Employer"), and David H. Taylor (the "Employee"). The Employer desires to retain the Employee to supply services to the Employer, and the Employee desires to provide such services to the Employer, on the terms and subject to the conditions set forth in this Agreement. In consideration of (i) the Employee's agreement to supply services under this Agreement and (ii) the mutual agreements set forth below, the sufficiency of which is hereby acknowledged, the Employer and the Employee agree as follows: SECTION 1. Employment Relationship. (a) Employment by Employer. The Employer hereby employs the Employee, and the Employee hereby agrees to be employed by the Employer, as Senior Vice-President and Chief Financial Officer of the Employer, and the Employee will devote all of his business time, attention, knowledge and skills and use his best efforts during the Employment Period to perform services and duties consistent with his title and position (the "Services") for the Employer in accordance with directions given to the Employee from time to time by the Board of Directors of the Employer. (b) Employment Period. The period commencing on the date of this Agreement and ending on the date on which this Agreement is terminated is referred to herein as the "Employment Period." During the Employment Period, the Employee will be an at-will employee of the Employer. The Employment Period shall be freely terminable for any reason by either party at any time. SECTION 2. Compensation and Benefits. During the Employment Period: (a) Base Compensation. The Employer shall pay to the Employee a base salary of $225,000 per annum (the "Base Salary"), payable in accordance with the Employer's payroll practices. The Base Salary shall be increased (but not decreased) subject to additional discretionary increases (but not decreases) as determined periodically by the Board of Directors. (b) Additional Compensation. As additional compensation for the Services, the Employer shall pay to the Employee the following amount: (x) with respect to calendar year 1999, an annual bonus payment at the "Minimum," "Plan" or "Maximum" percentage payment levels, as the case may be, in accordance with the terms of the Employer's 1999 Executive Bonus Plan and (y) with respect to subsequent calendar years, other annual incentive compensation as the Board of Directors of the Employer determines in its sole discretion to pay the Employee, payable in all cases on or around March 1 of the following year. The Employee will be entitled 2 to participate in the 1999 Executive Bonus Plan as a Level I Employee. The Employee acknowledges that the Employer may terminate or modify its Executive Bonus Plan or other incentive plans (excluding the 1999 Executive Bonus Plan as in effect and applied to the Employee on the date hereof) at any time, although no termination or amendment affecting the Employee will be made effective unless it is consistently applied to other employees participating in such plans. In the event of any conflict or inconsistency between the terms of the 1999 Executive Bonus Plan and the terms of Section 2(b) or 3 of this Agreement, the terms of Sections 2(b) and 3 of this Agreement shall control. (c) Restricted Stock and Stock Options. The Employee has purchased shares of Class A Common Stock of the Employer pursuant to the Securities Purchase and Stockholders Agreement, dated as of the date hereof, between the Employer and the Employee (the "1999 Purchase Agreement"), and has been granted options to acquire shares of Class A Common Stock of the Employer, pursuant to the Stock Option Agreement, dated as of the date hereof, between the Employer and the Employee (the "1999 Stock Option Agreement"). The stock options granted to the Employee under the 1999 Stock Option Agreement were granted pursuant to the Employer's 1999 Stock Option Plan and are subject to vesting in accordance with the terms of the 1999 Stock Option Agreement. The Purchase Agreements and the Stock Option Agreements are referred to in this Agreement as the "Other Agreements." The Employee shall be entitled to participate in current or future equity incentive plans adopted by the Employer on terms substantially similar to those offered to members of the Employer's Executive Committee or other division Presidents of the Employer. Such grants may be awarded from time to time in the sole discretion of the Employer's Board of Directors. Except as otherwise provided in the 1999 Stock Option Agreement and in this Agreement with respect to payments under the Executive Bonus Plan and except as hereafter mutually agreed by the Employer and the Employee, in the event of a Change in Control (as defined below), to the extent not fully vested at such time, the Employee shall become fully vested in all awards heretofore or hereafter granted to him under all incentive compensation, deferred compensation, stock option, stock appreciation rights, restricted stock, phantom stock or other similar plans maintained by the Employer. (d) Benefit Plans. During the Employment Period, the Employee shall be entitled to receive benefits from the Employer consistent with those currently in effect for the Employer's senior executives (including deferred compensation plans, and company automobile and financial planning perquisites), as those benefits are revised from time to time by the Board of Directors of the Employer. Nothing contained herein is intended to require the Employer to maintain any existing benefits or create any new benefits. The Employee will be entitled to participate in the Employer's deferred compensation program as a Level 2 Employee and to receive benefits thereunder in accordance with the terms and conditions of such program. If the Employment Period is terminated by the Employer or the Employee as set forth in Section 3(e)(ii) below, the Employee and relevant family members shall be entitled to continue to participate in the Employer's welfare benefit plans at the Employer's expense for a period of two years after the termination date. If the Employment Period is terminated by the Employer or the Employee as set forth in Section 3(e)(iii) below, the Employee and relevant family members shall be entitled to continue to participate in the Employer's welfare benefit plans at the -2- 3 Employer's expense for a period of three years after the termination date. For purposes of this Section 2(d), the Employees' relevant family members shall be those members of the Employee's immediate family covered by the applicable welfare benefit plan immediately prior to the termination date. (e) Vacation and Holidays. The Employee shall be entitled to a minimum of four weeks' vacation each year and paid holidays in accordance with the Employer's policy. (f) No Mitigation. The Employee shall not be required to mitigate the amount of any payments under this Agreement (whether by seeking new employment or in any other manner), nor shall any such payment be reduced by any earnings that the Employee may receive from any other source. SECTION 3. Termination. (a) Death or Disability. If the Employee dies during the Employment Period, the Employment Period shall terminate as of the date of the Employee's death. If the Employee becomes unable to perform the Services for 90 consecutive days due to a physical or mental disability, (i) the Employer may elect to terminate the Employment Period at any time thereafter, and (ii) the Employment Period shall terminate as of the date of such election. All disabilities shall be certified by a physician acceptable to both the Employer and the Employee, or, if the Employer and the Employee cannot agree upon a physician within 15 days, by a physician selected by physicians designated by each of the Employer and the Employee. The Employee's failure to submit to any physical examination by such physician after such physician has given reasonable notice of the time and place of such examination shall be conclusive evidence of the Employee's inability to perform his duties hereunder. (b) Cause. The Employer, at its option, may terminate the Employment Period and all of the obligations of the Employer under this Agreement for Cause. The Employer shall have "Cause" to terminate the Employee's employment hereunder in the event of (i) the Employee's conviction of or plea of guilty or nolo contendere to a felony, (ii) the Employee's gross negligence in the performance of the Services, which is not corrected within 15 business days after written notice, (iii) the Employee's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of the Services, which is not corrected within 15 business days after written notice, or (iv) the Employee's material breach of any of his obligations under Sections 5 and 6, which is not corrected within a reasonable period of time (determined in light of the cure, if any, appropriate to such material breach, but in no event less than 15 business days) after written notice. If the Employee is charged with a felony, then during the period while such charge or related indictment remains outstanding and until finally determined, the Employer shall have the right to suspend the Employee without compensation. (c) Without Cause. The Employer, at its option, may terminate the Employment Period without Cause at any time. (d) Termination by Employee for Good Reason. The Employee may terminate this Agreement upon 60 days' prior written notice to the Employer for Good Reason (as defined -3- 4 below) if the basis for such Good Reason is not cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason, but in no event less than 15 business days) after the Employer receives written notice specifying the basis of such Good Reason. "Good Reason" shall mean (i) the failure of the Employer to pay any undisputed amount due under this Agreement or a reduction in Base Salary or benefits provided under this Agreement (other than immaterial reductions in benefits or a reduction in benefits or salary applicable to all of the Employer's bonus eligible employees) or a termination of, or reduction in the percentage level of, the "plan" or "target" bonus opportunity applicable to the Employee from the "Plan" percentage level under the 1999 Executive Bonus Plan in effect on the date hereof (the "Effective Date Plan Percentage"), (ii) a substantial diminution in the status, position and responsibilities of the Employee or (iii) the Employer requiring the Employee to be based at any office or location that requires a relocation or commute greater than 50 miles from the office or location to which the Employee is currently assigned, provided, however, that Good Reason shall not be deemed to exist due to the travel requirements consistent with the performance of the Employee's services hereunder. (e) Payments in the Event of Termination. (i) Basic Termination Payment. Upon the termination of the Employment Period at any time for any reason, the Employer shall pay to the Employee or his estate the Base Salary earned to the date of termination, and if such termination occurs after December 31st of any year for which a bonus is payable pursuant to Section 2(b) but before such bonus has been paid, the Employer shall pay to the Employee or his estate the bonus due for the preceding year. (ii) Additional Involuntary Termination Payment. Upon the termination of the Employment Period at any time by the Employer without Cause or by the Employee for Good Reason, the Employer shall pay to the Employee within five business days of such termination a lump-sum amount (in addition to the amount payable under the first sentence of Section 3(e)(i)) equal to (x) the sum of the Employee's annual Base Salary at the annual rate in effect on the date of termination and the Severance Bonus Amount, multiplied by (y) two. Notwithstanding the foregoing, the Employee shall be entitled to no payment under this Section 3(e)(ii) if he is entitled to receive a payment under Section 3(e)(iii). "Severance Bonus Amount" means an amount equal to the Employee's Base Salary at the annual rate in effect on the date of termination multiplied by a percentage, which is the greater of (1) the Effective Date Plan Percentage and (2) the "plan" or "target" bonus percentage then applicable under any executive bonus plan or other incentive compensation program for purposes of determining the Employee's annual bonus for the year of termination. (iii) Additional Change in Control Payment. Upon the termination of the Employment Period (x) by the Employer without Cause upon or prior to a Change in Control, provided that the Employee reasonably demonstrates that such termination occurred at the request of a third party participating in, or otherwise in anticipation of or in connection with, such Change in Control, or (y) by the Employee with Good Reason or by the Employer for any reason other than for Cause within one year after a Change in Control, then the Employer shall pay to the Employee within five business days of such termination a lump-sum amount (in addition to the amount payable under the first sentence of Section 3(e)(i)) equal to the sum of (A) -4- 5 the higher of (1) the Employee's annual Base Salary at the date of such termination or (2) the Employee's annual Base Salary at the time of the Change in Control, in each case multiplied by three and (B) the Severance Bonus Amount multiplied by three. If the Employment Period is terminated by the Employee for any reason other than with Good Reason on or after the first anniversary of a Change in Control but no later than the 30th day after such first anniversary, the Employee shall be entitled to 50% of the payments specified in this Section 3(e)(iii). If the Employment Period is terminated by the Employee with Good Reason at any time on or after the first anniversary of a Change in Control, the Employee shall be entitled to the payment specified in Section 3(e)(ii). (iv) Change in Control Defined. "Change in Control" means the first to occur of any of the following: (A) the sale (including by merger, consolidation or sale of stock of subsidiaries or any other method) of all or substantially all of the assets of the Employer and its consolidated subsidiaries (taken as a whole) to any person or entity not directly or indirectly controlled by the holders of at least 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer (excluding shares owned by employees of the Employer as of the date of determination) (B) at any time prior to the consummation of an initial public offering of Class A Common Stock of the Employer or other common stock of the Employer having the voting power to elect directors, a transaction (except pursuant to such initial public offering) resulting in the Principal Shareholders owning, collectively, less than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer (excluding shares owned by employees of the Employer as of the date of determination), (C) at any time after the consummation of an initial public offering of Class A Common Stock of the Employer or other common stock of the Employer having the voting power to elect directors, the acquisition (except pursuant to such initial public offering) by any person or entity (other than the Principal Shareholders) not directly or indirectly controlled by the Employer's stockholders of more than 30% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer (excluding shares owned by employees of the Employer as of the date of determination), (D) individuals serving as directors of the Employer on the date hereof and who were nominated or selected to serve as directors by one or more Principal Shareholders (together with any new directors whose election was approved by a vote of (x) such individuals or directors whose election was previously so approved or (y) Principal Shareholders holding a majority of the aggregate voting power of the capital stock of the Employer held by all Principal Shareholders) cease for any reason to constitute a majority of the Board of Directors of the Employer, (E) the adoption of a plan relating to the liquidation or dissolution of the Employer in connection with an equity investment or sale or a business combination transaction or (F) any other event or transaction that the Board of Directors of the Employer deems to be a Change in Control. "Combined Voting Power" with respect to capital stock of the Employer means the number of votes such stock is normally entitled (without regard to the occurrence of any contingency) to vote in an election of directors of the Employer. "Principal Shareholders" means (i) Charlesbank Equity Fund IV, Limited Partnership and the investors in such fund, (ii) Charlesbank Equity Fund IV G.P. Limited Partnership, (iii) Charlesbank Capital Partners, LLC (and any other fund managed by Charlesbank Capital Partners, LLC), (iv) any investor (other than The 1818 Mezzanine Fund, L.P.) whose investment in the Employer is approved by the representative of management on the board of the Employer, (v) any new investors in the -5- 6 Company designated as Principal Shareholders by Charlesbank Capital Partners, LLC within one year of the initial investment by Charlesbank Equity Fund IV, Limited Partnership, and (vi) any corporation, partnership, limited liability company or other entity a majority of the capital stock or other ownership interests of which are directly or indirectly owned by any of the foregoing. (v) Other Provisions Applicable to Payments. Any amounts due under this Section 3 and not paid when due shall bear interest (compounded annually) for the period from and including the date payable to but excluding the date paid at a rate per annum equal to the sum of (x) four percent and (y) the rate publicly announced by BankBoston, N.A. as its "prime rate." (f) Termination of Obligations. In the event of termination of the Employment Period in accordance with this Section 3, all obligations of the Employer and the Employee under this Agreement shall terminate, except for any amounts payable by the Employer as specifically set forth in Section 3(e); provided, however, that notwithstanding anything to the contrary contained in this Agreement, the provisions of Section 5 and Section 6 shall survive such termination in accordance with their respective terms and the relevant provisions of Section 7 shall survive such termination indefinitely. In the event of termination of the Employment Period in accordance with this Section 3, the Employee agrees to cooperate with the Employer in order to ensure an orderly transfer of the Employee's duties and responsibilities. SECTION 4. Parachute Excise Tax Gross-Up (a) If, as a result of any payment or benefit provided under this Agreement or under any other plan, arrangement or other agreement with the Employer or any entity affiliated with the Employer, either alone or together with such other payments and benefits which the Employee receives or is then entitled to received from the Employer, the Employee becomes subject to the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), (together with any interest and penalties thereon an "Excise Tax"), the Employer shall pay the Employee an amount (the "Gross-Up Payment") sufficient to place the Employee in the same after-tax financial position that he would have been in if he had not incurred any tax liability under Section 4999 of the Code. For purposes of determining whether the Employee is subject to an Excise Tax and the amount of any Gross-Up Payment, (i) any payments or benefits received by the Employee (whether pursuant to the terms hereof or pursuant to any plan, arrangement or other agreement with the Employer or any entity affiliated with the Employer) which payments ("Contingent Payments") are deemed to be contingent on a change described in Section 280G(b)(2)(A)(i) of the Code shall be taken into account and (ii) the Employee shall be deemed to pay federal, state and local taxes at the highest marginal applicable rates of such taxes for the calendar year in which the Gross-Up Payment is to be made, net of the maximum deduction from federal income taxes which could be obtained from deduction of any state and local taxes deemed paid by the Employee. (b) The determination of whether the Employee is subject to Excise Tax and the amounts of such Excise Tax and Gross-Up Payment, as well as other calculations hereunder, shall be made at the expense of the Employer by Arthur Andersen, which shall provide the -6- 7 Employee with prompt written notice (the "Employer Notice") setting forth their determinations and calculations. Within 30 days following the receipt by the Employee of the Employer Notice, the Employee may notify the Employer in writing (the "Employee Notice") if the Employee disagrees with such determinations or calculations, setting forth the reasons for any such disagreement. If the Employer and the Employee do not resolve such disagreement within 10 business days following receipt by the Employer of the Employee Notice, such dispute will be resolved in accordance with Section 7(f). The Employer shall pay all reasonable expense incurred by either party in connection with the determinations, calculations, disagreements or resolutions pursuant to this paragraph, including, but not limited to, reasonable legal, consulting or other similar fees. (c) The Employee shall notify the Employer in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Employer of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Employee is informed in writing of such claim and shall apprise the Employer of the nature of such claim and the date of which such claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30 day period following the date on which the Employee gives such notice to the Employer (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Employer notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (i) give the Employer any information reasonably requested by the Employer relating to such claim; (ii) take such action in connection with contesting such claim as the Employer shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Employer and reasonably satisfactory to the Employee; (iii) cooperate with the Employer in good faith in order to effectively contest such claim; and (iv) permit the Employer to participate in any proceedings relating to such claim; provided, however, that the Employer shall bear and pay directly all costs and expenses (including, but not limited to, additional interest and penalties and related legal, consulting or other similar fees) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. (d) The Employer shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and -7- 8 may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Employer shall determine; provided, however, that if the Employer directs the Employee to pay such claim and sue for a refund, the Employer shall advance the amount of such payment to the Employee on an interest-free basis, and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or other tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that if the Employee is required to extend the statute of limitations to enable the Employer to contest such claim, the Employee may limit this extension solely to such contested amount. The Employer's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. In addition, no position may be taken nor any final resolution be agreed to by the Employer without the Employee's consent if such position or resolution could reasonably be expected to adversely affect the Employee (including any other tax position of the Employee unrelated to the matters covered hereby). (e) As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Employer hereunder, it is possible that Gross-Up Payments which will not have been made by the Employer should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Employer exhausts its remedies and the Employee thereafter is required to pay to the Internal Revenue Service an additional amount in respect of any Excise Tax, the Employer (in the same fashion as set forth in Section 4(b) shall determine the amount of the Underpayment that has occurred and any such Underpayment shall promptly be paid by the Employer to or for the benefit of the Employee. (f) If, after the receipt by Employee of an amount advanced by the Employer in connection with the contest of an Excise Tax claim, the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall promptly pay to the Employer the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Employer in connection with an Excise Tax claim, a determination is made that Employee shall not be entitled to any refund with respect to such claim and the Employer does not notify the Employee in writing of its intent to contest the denial of such refund prior to the expiration of 30 days after receiving notice of such determination, such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall be offset, to the extent thereof, by the amount of the Gross-Up Payment. SECTION 5. Confidentiality; Non-Disclosure. (a) (i) Non-Disclosure Obligation. Except as provided in this Section 5(a), the Employee shall not disclose any Confidential Information of the Employer or any of its -8- 9 affiliates or subsidiaries to any person, firm, corporation, association or other entity (other than the Employer, its subsidiaries, officers or employees, attorneys, accountants, bank lenders, agents, advisors or representatives thereof) for any reason or purpose whatsoever (other than in the normal course of business on a need-to-know basis after the Employer has received assurances that the confidential or proprietary information shall be kept confidential), nor shall the Employee make use of any such confidential or proprietary information for his own purposes or for the benefit of any person, firm, corporation or other entity, except the Employer. As used in this Section, the term "Confidential Information" means all information which is or becomes known to the Employee and relates to matters such as trade secrets, research and development activities, new or prospective lines of business (including analysis and market research relating to potential expansion of the Business), books and records, financial data, customer lists, marketing techniques, financing, credit policies, vendor lists, suppliers, purchasers, potential business combinations, distribution channels, services, procedures, pricing information and private processes as they may exist from time to time; provided that the term Confidential Information shall not include information that is or becomes generally available to the public (other than as a result of a disclosure in violation of this Agreement by the Employee or by a person who received such information from the Employee in violation of this Agreement). (ii) Compulsory Disclosures. If the Employee is requested or (in the opinion of his counsel) required by law or judicial order to disclose any Confidential Information, the Employee shall provide the Employer with prompt notice of any such request or requirement so that the Employer may seek an appropriate protective order or waiver of the Employee's compliance with the provisions of this Section 5(a). The Employee will not oppose any reasonable action by, and will cooperate with, the Employer to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the Confidential Information. If, failing the entry of a protective order or the receipt of a waiver hereunder, the Employee is, in the opinion of his counsel, compelled by law to disclose a portion of the Confidential Information, the Employee may disclose to the relevant tribunal without liability hereunder only that portion of the Confidential Information which counsel advises the Employee he is legally required to disclose, and each of the parties hereto agrees to exercise such party's best efforts to obtain assurance that confidential treatment will be accorded such Confidential Information. During the Employment Period, and for matters arising from events or circumstances occurring during the Employment Period, the Employer will provide for the defense of matters arising under this provision. (b) Assignment of Inventions. The Employee agrees that he will promptly and fully disclose to the Employer all inventions, ideas, software, trade secrets or know-how (whether patentable or copyrightable or not) made or conceived by the Employee (either solely or jointly with others) during the Employment Period and for a period of six months thereafter, all tangible work product derived therefrom (collectively, the "Ideas"). The Employee agrees that all such Ideas shall be and remain the sole and exclusive property of the Employer. On the request of the Employer, the Employee shall, during and after the term of this Agreement, without charge to the Employer but at the expense of the Employer, assist the Employer in any reasonable way to vest in the Employer, title to all such Ideas, and to obtain any related patents, -9- 10 trademarks or copyrights in all countries throughout the world. In this regard, the parties shall execute and deliver any and all documents that the Employer may reasonably request. SECTION 6. Non-Competition; Non-Solicitation. The Employee acknowledges and recognizes his possession of Confidential Information and acknowledges the highly competitive nature of the business of the Employer and its affiliates and subsidiaries and accordingly agrees that, in consideration of the premises contained herein, he will not, during the Employment Period and for one year after the date of termination of the Employment Period, for any reason whatsoever, either individually or as an officer, director, stockholder, member, partner, agent, consultant or principal of another business firm, (x) directly or indirectly engage in North America, or any country in which the Employer or any of its affiliates or subsidiaries actively engages in business during the Employment Period, in any competitive business, (y) assist others in engaging in any competitive business in the manner described in clause (x), or (z) induce any employee of the Employer or any of its affiliates or subsidiaries to terminate such person's employment with the Employer or such affiliate or subsidiary or hire any employee of the Employer or any of its affiliates or subsidiaries to work with any businesses affiliated with the Employee. The Employee's ownership of not more than 1% of the outstanding capital stock of any public corporation shall not in itself be deemed to be engaging in any competitive business for purposes of this Section 6. SECTION 7. General Provisions. (a) Enforceability. It is the desire and intent of the parties hereto that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, although the Employee and the Employer consider the restrictions contained in this Agreement to be reasonable for the purpose of preserving the Employer's goodwill and proprietary rights, if any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. It is expressly understood and agreed that although the Employer and the Employee consider the restrictions contained in Section 6 to be reasonable, if a final determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is unenforceable against the Employee, the provisions of this Agreement shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. (b) Remedies. The parties acknowledge that the Employer's damages at law would be an inadequate remedy for the breach by the Employee of any provision of Section 5 or Section 6, and agree in the event of such breach that the Employer may obtain temporary and permanent injunctive relief restraining the Employee from such breach, and, to the extent permissible under the applicable statutes and rules of procedure, a temporary injunction may be granted immediately upon the commencement of any such suit. Nothing contained herein shall be construed as prohibiting the Employer from pursuing any other remedies available at law or -10- 11 equity for such breach or threatened breach of Section 5 or Section 6 or for any breach or threatened breach of any other provision of this Agreement. (c) Withholding. The Employer shall withhold such amounts from any compensation or other benefits payable to the Employee under this Agreement on account of payroll and other taxes as may be required by applicable law or regulation of any governmental authority. (d) Employer's Successors. The Employer shall require any successor or successors (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Employer's business and/or assets, by an agreement in substance and form satisfactory to the Employee, to assume this Agreement and to agree expressly to perform this Agreement in the same manner and to the same extent as the Employer would be required to perform it in the absence of a succession. The Employer's failure to obtain such agreement prior to the effectiveness of a succession shall be a breach of this Agreement and shall entitle the Employee to all of the compensation and benefits to which he would have been entitled hereunder if the Employer had involuntarily terminated his employment without Cause immediately after such succession become effective. For all purposes under this Agreement, the term "Employer" shall include any successor or successors to the Employer's business and/or assets which executes and delivers the assumption agreement described in the subsection or which becomes bound by this Agreement by operation of law. (e) Employee's Successors. This Agreement and all rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributee, devisees and legatees. (f) Indemnity. The Employer hereby agrees to indemnify and hold the Employee harmless consistent with the Employer's policy against any and all liabilities, expenses (including attorneys' fees and costs), claims, judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any proceeding arising out of the Employee's employment with the Employer (whether civil, criminal, administrative or investigative, other than proceedings by or in the right of the Employer), if with respect to the actions at issue in the proceeding the Employee acted in good faith and in a manner Employee reasonably believed to be in, or not opposed to, the best interests of the Employer, and (with respect to any criminal action) Employee had no reason to believe Employee's conduct was unlawful. Said indemnification arrangement shall (i) survive the termination of this Agreement, (ii) apply to any and all qualifying acts of the Employee which have taken place during any period in which he was employed by the Employer, irrespective of the date of this Agreement or the term hereof, including, but not limited to, any and all qualifying acts as an officer and/or director of any affiliate while the Employee is employed by the Employer and (iii) be subject to any limitations imposed from time to time under applicable law. (g) Dispute Resolution; Attorney's Fees. The Employer and the Employee agree that any dispute arising as to the parties' rights and obligations hereunder shall be resolved by binding arbitration before an arbitrator to be determined by mutually agreeable means. In -11- 12 such event, each of the Employer and the Employee shall have the right to full discovery. The Employer shall bear all costs of the arbitrator in any such proceeding, and if the arbitration is definitively decided in the Employee's favor, the Employee shall have the right, in addition to any other relief granted by such arbitrator, to recover reasonable attorneys' fees; provided, however, that the Employer shall have the right, in any dispute other than a dispute relating to the occurrence of a Change in Control or the payment of an amount under Section 3(e)(iii), in addition to any other relief granted by such arbitrator, to recover reasonable attorneys' fees in the event that a claim brought by the Employee is definitively decided in the Employer's favor (with the amount of such fees being limited to those expended defending the claim or claims decided in favor of the Employer). Any judgment by such arbitrator may be entered into any court with jurisdiction over the dispute. (h) Acknowledgment. The Employee acknowledges that he has been advised by the Employer to seek the advice of independent counsel prior to reaching agreement with the Employer on any of the terms of this Agreement. The parties agree that no rule of construction shall apply to this Agreement which construes ambiguous language in favor of or against any party by reason of that party's role in drafting the Agreement. (i) Amendments and Waivers. No modification, amendment or waiver, of any provision of, or consent required by, this Agreement, nor any consent to any departure herefrom, shall be effective unless it is in writing and signed by the parties hereto. Such modification, amendment, waiver or consent shall be effective only in the specific instance and for the purpose for which given. (i) Notices. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, sent by overnight courier, or sent by facsimile (with confirmation of receipt), addressed as follows: If to the Employer: Heafner Tire Group, Inc. 2105 Water Ridge Parkway, Suite 500 Charlotte, North Carolina 28217 Attention: President Facsimile: (704) 423-8987 -12- 13 with a copy to: Howard, Smith & Levin LLP 1330 Avenue of the Americas New York, New York 10019 Attention: Scott F. Smith Facsimile: (212) 841-1010 and: Charlesbank Capital Partners, LLC 600 Atlantic Avenue Boston, Massachusetts 02210-2203 Attention: Mark A. Rosen and Tami E. Nason Facsimile: (617) 619-5402 with a copy to: Skadden, Arps, Slate Meagher & Flom LLP 919 Third Avenue New York, NY 10022 Facsimile: (212) 735-2000 Attention: David J. Friedman If to the Employee: David H. Taylor 5500 Hardison Road Charlotte, NC 28226 or at such other address as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. If such notice or communication is mailed, such communication shall be deemed to have been given on the fifth business day following the date on which such communication is posted. (j) Descriptive Headings; Certain Interpretations. Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. Except as otherwise expressly provided in this Agreement: (i) any reference in this Agreement to any agreement, document or instrument includes all permitted supplements and amendments; (ii) a reference to a law includes any amendment or modification to such law and any rules or regulations issued thereunder; (iii) the words "include," "included" and "including" are not limiting; and (iv) a reference to a person or entity includes its permitted successors and assigns. -13- 14 (k) Counterparts; Entire Agreement. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute one agreement. This Agreement and the Other Agreements contain the entire agreement among the parties with respect to the transactions contemplated by this Agreement and the Other Agreements and supersede all other or prior written or oral agreements or understandings among the parties with respect to the Employee's employment by the Employer. The Existing Employment Agreement is expressly superseded and hereby amended and restated in its entirety by this Agreement. (L) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NORTH CAROLINA. (M) CONSENT TO JURISDICTION. EACH OF THE EMPLOYER AND THE EMPLOYEE HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NORTH CAROLINA SITTING IN MECKLENBURG COUNTY AND ALL STATE COURTS OF THE STATE OF NORTH CAROLINA SITTING IN MECKLENBURG COUNTY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND THE EMPLOYEE AGREES NOT TO COMMENCE ANY LEGAL PROCEEDING RELATING THERETO EXCEPT IN SUCH COURTS. EACH OF THE EMPLOYER AND THE EMPLOYEE IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH HE MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH COURTS AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH COURTS HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH OF THE PARTIES HERETO HEREBY CONSENTS TO SERVICE OF PROCESS BY NOTICE IN THE MANNER SPECIFIED IN SECTION 7(I) AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE TO SERVICE OF PROCESS IN SUCH MANNER. -14- 15 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. HEAFNER TIRE GOURP, INC. By: /s/ J. Michael Gaither ----------------------------------------- J. Michael Gaither Executive Vice President, General Counsel and Secretary /s/ David H. Taylor ---------------------------------- David H. Taylor EX-10.30 11 EXECUTIVE SEVERANCE AGREEMENT / RAY C. BARNEY 1 EXHIBIT 10.30 EXECUTIVE SEVERANCE AGREEMENT, dated as of November 1, 1999 (the "Agreement"), between Heafner Tire Group, Inc., a Delaware corporation (the "Employer"), and Ray C. Barney (the "Employee"). The Speed Merchant, Inc., a California corporation d/b/a the Speed Merchant and Competition Parts Warehouse and a subsidiary of the Employer (the "Speed Merchant"), and the Employee desire to have this Agreement supersede any prior or existing agreements or understandings between them including, without limitation, the Amended and Restated Employment Agreement dated May 20, 1998 between the Speed Merchant and Employee; the Executive Severance Agreement dated September 16, 1999 between the Employer and Employee; the Stock Option Agreement between Employer and Employee dated September 16, 1999; and the Securities Purchase and Stockholders Agreement between Employer and Employee dated September 16, 1999, provided , however, this Agreement does not supersede the Settlement Agreement and Release dated September 16, 1999 between Employer and Employee In consideration of (i) the Employee's agreement to supply services under this Agreement and (ii) the mutual agreements set forth below, the sufficiency of which is hereby acknowledged, the Employer and the Employee agree as follows: SECTION 1. Employment Relationship. (a) Employment by Employer. The Employer hereby employs the Employee, and the Employee hereby agrees to be employed by the Employer, as President of the CPW Division of the Employer, and the Employee will devote all of his business time, attention, knowledge and skills and use his best efforts during the Employment Period to perform services and duties consistent with his title and position (the "Services") for the Employer in accordance with directions given to the Employee from time to time by the Board of Directors of the Employer. (b) Employment Period. The period commencing on the date of this Agreement and ending on the date on which this Agreement is terminated is referred to herein as the "Employment Period." During the Employment Period, the Employee will be an at-will employee of the Employer. The Employment Period shall be freely terminable for any reason by either party at any time. SECTION 2. Compensation and Benefits. During the Employment Period: (a) Base Compensation. The Employer shall pay to the Employee a base salary of $230,000 per annum (the "Base Salary"), payable in accordance with the Employer's payroll practices. The Base Salary shall be increased (but not decreased) subject to additional discretionary increases (but not decreases) as determined periodically by the Board of Directors. 2 (b) Additional Compensation. As additional compensation for the Services, the Employer shall pay to the Employee an amount equal to (A) with respect to calendar year 1999 , the amount owed to Employee under that certain bonus plan in effect for CPW which is 1.5% of net income for CPW payable within 45 days after the end of each fiscal quarter for the period, (B) with respect to the period from January 1, 2000 through December 31, 2001, the greater of (x) an annual fixed bonus payment (the "Fixed Bonus") equal to 30% of the Employee's Base Salary for such year, and (y) an annual bonus payment at the "Minimum", "Plan" or "Maximum" percentage payment levels, as the case may be, in accordance with the terms and conditions of the Employer's then existing Executive Bonus Plan or such other annual incentive compensation as the Board of Directors of the Employer determines in its sole discretion to pay the Employee and (C) with respect to calendar year 2002 and thereafter, an annual bonus payment at the "Minimum", "Plan" or "Maximum" percentage payment levels, as the case may be, in accordance with the terms and conditions of the Employer's then existing Executive Bonus Plan or such other annual incentive compensation as the Board of Directors of the Employer determines in its sole discretion to pay the Employee, payable in all cases on or around March 1 of the following year. The Employee will be entitled to participate in any Executive Bonus Plan as a Level 1 Employee. The Employee acknowledges that the Employer may terminate or modify its Executive Bonus Plan and other incentive plans (excluding the Fixed Bonus payable hereunder) at any time, although no termination or amendment affecting the Employee will be made effective unless it is consistently applied to other employees participating in such plans. In the event of any conflict or inconsistency between the terms of the any Executive Bonus Plan and the terms of Section 2(b) or 3 of this Agreement, the terms of Sections 2(b) and 3 of this Agreement shall control. (c) Stock Options. The Employee has been granted options to acquire shares of Class A Common Stock of the Employer, pursuant to the Stock Option Agreement, dated as of the date hereof, between the Employer and the Employee (the "1999 Stock Option Agreement"). The stock options granted to the Employee under the 1999 Stock Option Agreement are granted pursuant to the Employer's 1999 Stock Option Plan and are subject to vesting in accordance with the terms of the 1999 Stock Option Agreement Except as otherwise provided in the 1999 Stock Option Agreement and in this Agreement with respect to payments under the Executive Bonus Plan and except as hereafter mutually agreed by the Employer and the Employee, in the event of a Change in Control (as defined below), to the extent not fully vested at such time, the Employee shall become fully vested in all awards heretofore or hereafter granted to him under all incentive compensation, deferred compensation, stock option, stock appreciation rights, restricted stock, phantom stock or other similar plans maintained by the Employer. (d) Benefit Plans. During the Employment Period, the Employee shall be entitled to receive benefits from the Employer consistent with those currently in effect for the Employer's senior executives (including deferred compensation plans, and company automobile and financial planning perquisites), as those benefits are revised from time to time by the Board of Directors of the Employer. Nothing contained herein is intended to require the Employer to maintain any existing benefits or create any new benefits. The Employee will be entitled to participate in the Employer's deferred compensation program at the level of $5500 contribution per year and to receive benefits thereunder in accordance with the terms and conditions of such program. If the Employment Period is terminated by the Employer or the Employee as set forth -2- 3 in Section 3(e)(ii) below, the Employee and relevant family members shall be entitled to continue to participate in the Employer's welfare benefit plans at the Employer's expense for a period of 18 months after the termination date. If the Employment Period is terminated by the Employer or the Employee as set forth in Section 3(e)(iii) below, the Employee and relevant family members shall be entitled to continue to participate in the Employer's welfare benefit plans at the Employer's expense for a period of three years after the termination date. For purposes of this Section 2(d), the Employees' relevant family members shall be those members of the Employee's immediate family covered by the applicable welfare benefit plan immediately prior to the termination date. (e) Vacation and Holidays. The Employee shall be entitled to a minimum of four weeks' vacation each year and paid holidays in accordance with the Employer's policy. (f) No Mitigation. The Employee shall not be required to mitigate the amount of any payments under this Agreement (whether by seeking new employment or in any other manner), nor shall any such payment be reduced by any earnings that the Employee may receive from any other source. SECTION 3. Termination. (a) Death or Disability. If the Employee dies during the Employment Period, the Employment Period shall terminate as of the date of the Employee's death. If the Employee becomes unable to perform the Services for 90 consecutive days due to a physical or mental disability, (i) the Employer may elect to terminate the Employment Period at any time thereafter, and (ii) the Employment Period shall terminate as of the date of such election. All disabilities shall be certified by a physician acceptable to both the Employer and the Employee, or, if the Employer and the Employee cannot agree upon a physician within 15 days, by a physician selected by physicians designated by each of the Employer and the Employee. The Employee's failure to submit to any physical examination by such physician after such physician has given reasonable notice of the time and place of such examination shall be conclusive evidence of the Employee's inability to perform his duties hereunder. (b) Cause. The Employer, at its option, may terminate the Employment Period and all of the obligations of the Employer under this Agreement for Cause. The Employer shall have "Cause" to terminate the Employee's employment hereunder after May 20, 2001in the event of (i) the Employee's conviction of or plea of guilty or nolo contendere to a felony, (ii) the Employee's gross negligence in the performance of the Services, which is not corrected within 15 business days after written notice, (iii) the Employee's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of the Services, which is not corrected within 15 business days after written notice, or (iv) the Employee's material breach of any of his obligations under Section 5, which is not corrected within a reasonable period of time (determined in light of the cure, if any, appropriate to such material breach, but in no event less than 15 business days) after written notice. If the Employee is charged with a felony, then during the period while such charge or related indictment remains outstanding and until finally determined, the Employer shall have the right to suspend the Employee without compensation. The employer shall have "Cause" to terminate the Employee's employment hereunder on or before May 20. 2001, in the event of (i) a proven or admitted act of fraud, misappropriation or embezzlement by the Executive that is -3- 4 detrimental to the Employer or (ii) the Employee's conviction of or plea of guilty or nolo contendere to a felony. If the Employee is charged with a felony, then during the period while such charge or related indictment remains outstanding and until finally determined, the Employer shall have the right to suspend the Employee without compensation. (c) Without Cause. The Employer, at its option, may terminate the Employment Period without Cause at any time. (d) Termination by Employee for Good Reason. The Employee may terminate this Agreement upon 60 days' prior written notice to the Employer for Good Reason (as defined below) if the basis for such Good Reason is not cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason, but in no event less than 15 business days) after the Employer receives written notice specifying the basis of such Good Reason. "Good Reason" shall mean (i) the failure of the Employer to pay any undisputed amount due under this Agreement or a reduction in Base Salary, Fixed Bonus or benefits provided under this Agreement (other than immaterial reductions in benefits or a reduction in benefits or salary applicable to all of the Employer's bonus eligible employees) or a termination of, or reduction in the percentage level of, the "plan" or "target" bonus opportunity applicable to Employee from the "Plan" percentage level applicable to a Level 1 Employee under the 1999 Executive Bonus Plan in effect on the date hereof (the "Effective Date Plan Percentage"), (ii) a substantial diminution in the status, position and responsibilities of the Employee or (iii) the Employer requiring the Employee to be based at any office or location that requires a relocation or commute greater than 50 miles from the office or location to which the Employee is currently assigned, provided, however, that Good Reason shall not be deemed to exist due to the travel requirements consistent with the performance of the Employee's services hereunder. (e) Payments in the Event of Termination. (i) Basic Termination Payment. Upon the termination of the Employment Period at any time for any reason, the Employer shall pay to the Employee or his estate the Base Salary earned to the date of termination, and if such termination occurs after December 31st of any year for which a bonus is payable pursuant to Section 2(b) but before such bonus has been paid, the Employer shall pay to the Employee or his estate the bonus due for the preceding year. Upon the termination of the Employment Period after May 31, 2000 and during calendar year 2000, or during calendar year 2001 for any reason other than the reasons set forth in Section 3(e)(ii) or 3(e)(iii) below, the Employer shall pay to the Employee within five business days after such termination, a lump-sum amount equal to the Fixed Bonus earned to the date of termination. Any Fixed Bonus payable under this Section 3(e)(i) shall be prorated if payable for periods of less than one year and shall be payable regardless of whether the Employee is still in the employ of the Employer on the date such bonuses are otherwise declared or payable. (ii) Additional Involuntary Termination Payment. Upon the termination of the Employment Period at any time by the Employer without Cause or by the Employee for Good Reason, the Employer shall pay to the Employee within five business days of such termination a lump-sum amount (in addition to the amount payable under the first sentence of Section 3(e)(i)) equal to (x) the sum of the Employee's annual Base Salary at the annual rate in effect on the date of termination and the Severance Bonus Amount, multiplied by (y) 1.5. -4- 5 Notwithstanding the foregoing, the Employee shall be entitled to no payment under this Section 3(e)(ii) if he is entitled to receive a payment under Section 3(e)(iii). "Severance Bonus Amount" means an amount equal to the Employee's Base Salary at the annual rate in effect on the date of termination multiplied by a percentage, which is the greater of (1) the Effective Date Plan Percentage and (2) the "plan" or "target" bonus percentage then applicable under any executive bonus plan or other incentive compensation program and (3) the "fixed" bonus, if still in effect for purposes of determining the Employee's annual bonus for the year of termination. (iii) Additional Change in Control Payment. Upon the termination of the Employment Period (x) by the Employer without Cause upon or prior to a Change in Control, provided that the Employee reasonably demonstrates that such termination occurred at the request of a third party participating in, or otherwise in anticipation of or in connection with, such Change in Control, or (y) by the Employee with Good Reason or by the Employer for any reason other than for Cause within one year after a Change in Control, then the Employer shall pay to the Employee within five business days of such termination a lump-sum amount (in addition to the amount payable under the first sentence of Section 3(e)(i)) equal to the sum of (A) the higher of (1) the Employee's annual Base Salary at the date of such termination or (2) the Employee's annual Base Salary at the time of the Change in Control, in each case multiplied by three, and (B) the Severance Bonus Amount multiplied by three. If the Employment Period is terminated by the Employee for any reason other than with Good Reason on or after the first anniversary of a Change in Control but no later than the 30th day after such first anniversary, the Employee shall be entitled to the greater of (x) 50% of the payments specified in this Section 3(e)(iii), or (y) the payments of Base Salary and bonus under the CPW bonus plan that Employee would have received if he had remained employed through May 31, 2001. If the Employment Period is terminated by the Employee with Good Reason at any time on or after the first anniversary of a Change in Control, the Employee shall be entitled to the payment specified in Section 3(e)(ii). (iv) Change in Control Defined. "Change in Control" means the first to occur of any of the following: (A) the sale (including by merger, consolidation or sale of stock of subsidiaries or any other method) of all or substantially all of the assets of the Employer and its consolidated subsidiaries (taken as a whole) to any person or entity not directly or indirectly controlled by the holders of at least 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer (excluding shares owned by employees of the Employer as of the date of determination) (B) at any time prior to the consummation of an initial public offering of Class A Common Stock of the Employer or other common stock of the Employer having the voting power to elect directors, a transaction (except pursuant to such initial public offering) resulting in the Principal Shareholders owning, collectively, less than 50% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer (excluding shares owned by employees of the Employer as of the date of determination), (C) at any time after the consummation of an initial public offering of Class A Common Stock of the Employer or other common stock of the Employer having the voting power to elect directors, the acquisition (except pursuant to such initial public offering) by any person or entity (other than the Principal Shareholders) not directly or indirectly controlled by the Employer's stockholders of more than 30% of the Combined Voting Power of the then outstanding shares of capital stock of the Employer (excluding shares owned by employees of the Employer as of the date of determination), (D) individuals serving as directors of the Employer on the date hereof and who -5- 6 were nominated or selected to serve as directors by one or more Principal Shareholders (together with any new directors whose election was approved by a vote of (x) such individuals or directors whose election was previously so approved or (y) Principal Shareholders holding a majority of the aggregate voting power of the capital stock of the Employer held by all Principal Shareholders) cease for any reason to constitute a majority of the Board of Directors of the Employer, (E) the adoption of a plan relating to the liquidation or dissolution of the Employer in connection with an equity investment or sale or a business combination transaction or (F) any other event or transaction that the Board of Directors of the Employer deems to be a Change in Control. "Combined Voting Power" with respect to capital stock of the Employer means the number of votes such stock is normally entitled (without regard to the occurrence of any contingency) to vote in an election of directors of the Employer. "Principal Shareholders" means (i) Charlesbank Equity Fund IV, Limited Partnership and the investors in such fund, (ii) Charlesbank Equity Fund IV G.P. Limited Partnership, (iii) Charlesbank Capital Partners, LLC (and any other fund managed by Charlesbank Capital Partners, LLC), (iv) any investor (other than The 1818 Mezzanine Fund, L.P.) whose investment in the Employer is approved by the representative of management on the board of the Employer, (v) any new investors in the Company designated as Principal Shareholders by Charlesbank Capital Partners, LLC within one year of the initial investment by Charlesbank Equity Fund IV, Limited Partnership, and (vi) any corporation, partnership, limited liability company or other entity a majority of the capital stock or other ownership interests of which are directly or indirectly owned by any of the foregoing. (v) Other Provisions Applicable to Payments. Any amounts due under this Section 3 and not paid when due shall bear interest (compounded annually) for the period from and including the date payable to but excluding the date paid at a rate per annum equal to the sum of (x) four percent and (y) the rate publicly announced by BankBoston, N.A. as its "prime rate." (f) Termination of Obligations. In the event of termination of the Employment Period in accordance with this Section 3, all obligations of the Employer and the Employee under this Agreement shall terminate, except for any amounts payable by the Employer as specifically set forth in Section 3(e); provided, however, that notwithstanding anything to the contrary contained in this Agreement, the provisions of Section 5 shall survive such termination in accordance with their respective terms and the relevant provisions of Section 6 shall survive such termination indefinitely. In the event of termination of the Employment Period in accordance with this Section 3, the Employee agrees to cooperate with the Employer in order to ensure an orderly transfer of the Employee's duties and responsibilities. SECTION 4. Parachute Excise Tax Gross-Up (a) If, as a result of any payment or benefit provided under this Agreement or under any other plan, arrangement or other agreement with the Employer or any entity affiliated with the Employer, either alone or together with such other payments and benefits which the Employee receives or is then entitled to received from the Employer, the Employee becomes subject to the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), (together with any interest and penalties thereon an "Excise Tax"), the Employer shall pay the Employee an amount (the "Gross-Up Payment") sufficient to place the -6- 7 Employee in the same after-tax financial position that he would have been in if he had not incurred any tax liability under Section 4999 of the Code. For purposes of determining whether the Employee is subject to an Excise Tax and the amount of any Gross-Up Payment, (i) any payments or benefits received by the Employee (whether pursuant to the terms hereof or pursuant to any plan, arrangement or other agreement with the Employer or any entity affiliated with the Employer) which payments ("Contingent Payments") are deemed to be contingent on a change described in Section 280G(b)(2)(A)(i) of the Code shall be taken into account and (ii) the Employee shall be deemed to pay federal, state and local taxes at the highest marginal applicable rates of such taxes for the calendar year in which the Gross-Up Payment is to be made, net of the maximum deduction from federal income taxes which could be obtained from deduction of any state and local taxes deemed paid by the Employee. (b) The determination of whether the Employee is subject to Excise Tax and the amounts of such Excise Tax and Gross-Up Payment, as well as other calculations hereunder, shall be made at the expense of the Employer by Arthur Andersen, which shall provide the Employee with prompt written notice (the "Employer Notice") setting forth their determinations and calculations. Within 30 days following the receipt by the Employee of the Employer Notice, the Employee may notify the Employer in writing (the "Employee Notice") if the Employee disagrees with such determinations or calculations, setting forth the reasons for any such disagreement. If the Employer and the Employee do not resolve such disagreement within 10 business days following receipt by the Employer of the Employee Notice, such dispute will be resolved in accordance with Section 6(f). The Employer shall pay all reasonable expense incurred by either party in connection with the determinations, calculations, disagreements or resolutions pursuant to this paragraph, including, but not limited to, reasonable legal, consulting or other similar fees. (c) The Employee shall notify the Employer in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Employer of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Employee is informed in writing of such claim and shall apprise the Employer of the nature of such claim and the date of which such claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30 day period following the date on which the Employee gives such notice to the Employer (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Employer notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (i) give the Employer any information reasonably requested by the Employer relating to such claim; (ii) take such action in connection with contesting such claim as the Employer shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Employer and reasonably satisfactory to the Employee; -7- 8 (iii) cooperate with the Employer in good faith in order to effectively contest such claim; and (iv) permit the Employer to participate in any proceedings relating to such claim; provided, however, that the Employer shall bear and pay directly all costs and expenses (including, but not limited to, additional interest and penalties and related legal, consulting or other similar fees) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. (d) The Employer shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Employer shall determine; provided, however, that if the Employer directs the Employee to pay such claim and sue for a refund, the Employer shall advance the amount of such payment to the Employee on an interest-free basis, and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or other tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that if the Employee is required to extend the statute of limitations to enable the Employer to contest such claim, the Employee may limit this extension solely to such contested amount. The Employer's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. In addition, no position may be taken nor any final resolution be agreed to by the Employer without the Employee's consent if such position or resolution could reasonably be expected to adversely affect the Employee (including any other tax position of the Employee unrelated to the matters covered hereby). (e) As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Employer hereunder, it is possible that Gross-Up Payments which will not have been made by the Employer should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Employer exhausts its remedies and the Employee thereafter is required to pay to the Internal Revenue Service an additional amount in respect of any Excise Tax, the Employer (in the same fashion as set forth in Section 4(b) shall determine the amount of the Underpayment that has occurred and any such Underpayment shall promptly be paid by the Employer to or for the benefit of the Employee. -8- 9 (f) If, after the receipt by Employee of an amount advanced by the Employer in connection with the contest of an Excise Tax claim, the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall promptly pay to the Employer the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Employer in connection with an Excise Tax claim, a determination is made that Employee shall not be entitled to any refund with respect to such claim and the Employer does not notify the Employee in writing of its intent to contest the denial of such refund prior to the expiration of 30 days after receiving notice of such determination, such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall be offset, to the extent thereof, by the amount of the Gross-Up Payment. SECTION 5. Confidential Information; Non-Competition. (a) Stock Purchase Agreement. The Employee acknowledges and agrees that pursuant to Section 3.6 of that certain Stock Purchase Agreement (herein "Stock Purchase Agreement"), dated March 11, 1998, among Employee and others, Employee agreed to certain Confidentiality and Non-Competition provisions which are hereby ratified and affirmed by Employee and Employer, and nothing in this Agreement shall affect the validity of such provisions. (b) Incorporation by Reference. Without in any way limiting the terms and conditions of the Stock Purchase Agreement referred to in subsection (a) above, the Employer and the Employee hereby agree that the terms and conditions of Section 6 of the Existing Employment Agreement shall be incorporated by reference herein in their entirety, except that references to the "Company" in such Section (other than Section 6(f)) shall be deemed to be references to the Employer hereunder. SECTION 6. General Provisions. (a) Enforceability. It is the desire and intent of the parties hereto that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, although the Employee and the Employer consider the restrictions contained in this Agreement to be reasonable for the purpose of preserving the Employer's goodwill and proprietary rights, if any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. It is expressly understood and agreed that although the Employer and the Employee consider the restrictions contained in Section 5 to be reasonable, if a final determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is unenforceable against the Employee, the provisions of this Agreement shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. -9- 10 (b) Remedies. The parties acknowledge that the Employer's damages at law would be an inadequate remedy for the breach by the Employee of any provision of Section 5, and agree in the event of such breach that the Employer may obtain temporary and permanent injunctive relief restraining the Employee from such breach, and, to the extent permissible under the applicable statutes and rules of procedure, a temporary injunction may be granted immediately upon the commencement of any such suit. Nothing contained herein shall be construed as prohibiting the Employer from pursuing any other remedies available at law or equity for such breach or threatened breach of Section 5 or for any breach or threatened breach of any other provision of this Agreement. (c) Withholding. The Employer shall withhold such amounts from any compensation or other benefits payable to the Employee under this Agreement on account of payroll and other taxes as may be required by applicable law or regulation of any governmental authority. (d) Employer's Successors. The Employer shall require any successor or successors (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Employer's business and/or assets, by an agreement in substance and form satisfactory to the Employee, to assume this Agreement and to agree expressly to perform this Agreement in the same manner and to the same extent as the Employer would be required to perform it in the absence of a succession. The Employer's failure to obtain such agreement prior to the effectiveness of a succession shall be a breach of this Agreement and shall entitle the Employee to all of the compensation and benefits to which he would have been entitled hereunder if the Employer had involuntarily terminated his employment without Cause immediately after such succession become effective. For all purposes under this Agreement, the term "Employer" shall include any successor or successors to the Employer's business and/or assets which executes and delivers the assumption agreement described in the subsection or which becomes bound by this Agreement by operation of law. (e) Employee's Successors. This Agreement and all rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributee, devisees and legatees. (f) Indemnity. The Employer hereby agrees to indemnify and hold the Employee harmless consistent with the Employer's policy against any and all liabilities, expenses (including attorneys' fees and costs), claims, judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any proceeding arising out of the Employee's employment with the Employer (whether civil, criminal, administrative or investigative, other than proceedings by or in the right of the Employer), if with respect to the actions at issue in the proceeding the Employee acted in good faith and in a manner Employee reasonably believed to be in, or not opposed to, the best interests of the Employer, and (with respect to any criminal action) Employee had no reason to believe Employee's conduct was unlawful. Said indemnification arrangement shall (i) survive the termination of this Agreement, (ii) apply to any and all qualifying acts of the Employee which have taken place during any period in which he was employed by the Employer, irrespective of the date of this Agreement or the term hereof, including, but not limited to, any and all qualifying acts as an officer and/or director of any affiliate while the Employee is -10- 11 employed by the Employer and (iii) be subject to any limitations imposed from time to time under applicable law. (g) Dispute Resolution; Attorney's Fees. The Employer and the Employee agree that any dispute arising as to the parties' rights and obligations hereunder shall be resolved by binding arbitration before an arbitrator to be determined by mutually agreeable means. In such event, each of the Employer and the Employee shall have the right to full discovery. The Employer shall bear all costs of the arbitrator in any such proceeding, and if the arbitration is definitively decided in the Employee's favor, the Employee shall have the right, in addition to any other relief granted by such arbitrator, to recover reasonable attorneys' fees; provided, however, that the Employer shall have the right, in any dispute other than a dispute relating to the occurrence of a Change in Control or the payment of an amount under Section 3(e)(iii), in addition to any other relief granted by such arbitrator, to recover reasonable attorneys' fees in the event that a claim brought by the Employee is definitively decided in the Employer's favor (with the amount of such fees being limited to those expended defending the claim or claims decided in favor of the Employer). Any judgment by such arbitrator may be entered into any court with jurisdiction over the dispute. (h) Acknowledgment. The Employee acknowledges that he has been advised by the Employer to seek the advice of independent counsel prior to reaching agreement with the Employer on any of the terms of this Agreement. The parties agree that no rule of construction shall apply to this Agreement which construes ambiguous language in favor of or against any party by reason of that party's role in drafting the Agreement. (i) Amendments and Waivers. No modification, amendment or waiver, of any provision of, or consent required by, this Agreement, nor any consent to any departure herefrom, shall be effective unless it is in writing and signed by the parties hereto. Such modification, amendment, waiver or consent shall be effective only in the specific instance and for the purpose for which given. (i) Notices. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, sent by overnight courier, or sent by facsimile (with confirmation of receipt), addressed as follows: If to the Employer: Heafner Tire Group, Inc. 2105 Water Ridge Parkway, Suite 500 Charlotte, North Carolina 28217 Attention: President Facsimile: (704) 423-8987 -11- 12 with a copy to: Covington & Burling 1330 Avenue of the Americas New York, New York 10019 Attention: Scott F. Smith Facsimile: (212) 841-1010 and: Charlesbank Capital Partners, LLC 600 Atlantic Avenue Boston, Massachusetts 02210-2203 Attention: Mark A. Rosen and Tami E. Nason Facsimile: (617) 619-5402 with a copy to: Skadden, Arps, Slate Meagher & Flom LLP 919 Third Avenue New York, NY 10022 Facsimile: (212) 735-2000 Attention: David J. Friedman If to the Employee: Ray C. Barney 216 Fieldcrest Court Danville, CA 94506 or at such other address as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. If such notice or communication is mailed, such communication shall be deemed to have been given on the fifth business day following the date on which such communication is posted. (j) Descriptive Headings; Certain Interpretations. Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. Except as otherwise expressly provided in this Agreement: (i) any reference in this Agreement to any agreement, document or instrument includes all permitted supplements and amendments; (ii) a reference to a law includes any amendment or modification to such law and any rules or regulations issued thereunder; (iii) the words "include," "included" and "including" are not limiting; and (iv) a reference to a person or entity includes its permitted successors and assigns. -12- 13 (k) Counterparts; Entire Agreement. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute one agreement. This Agreement and the 1999 Stock Option Agreement contain the entire agreement among the parties with respect to the transactions contemplated by this Agreement and the 1999 Stock Option Agreement and supersede all other or prior written or oral agreements or understandings among the parties with respect to the Employee's employment by the Employer. Speed Merchant, the Employer and the Employee hereby agree that the Existing Employment Agreement is expressly terminated and superseded in its entirety by this Agreement (excluding Section 6 thereof which is incorporated herein by reference as set forth in Section 5 hereof). (L) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OFCALIFORNIA. (M) CONSENT TO JURISDICTION. EACH OF THE PARTIES TO THIS AGREEMENT AGREES TO BE BOUND BY THE PROVISIONS SET FORTH IN EXHIBIT A TO THIS AGREEMENT. EACH OF EMPLOYEE AND EMPLOYER HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT IN SAN JOSE OR THE SUPERIOR COURT OF THE STATE OF CALIFORNIA, COUNTY OF SANTA CLARA FOR THE PURPOSES OF ALL LEGAL PROCEEDINGS WHICH ARSIE OUR OF OR RELATE TO THIS AGREMENT, AND EACH OF EMPLOYEE AND EMPLOYER AGREES NOT TO COMMENCE AND LEGAL PROVEEDING RELATED THERETO EXCEPT IN SUCH COURT. EACH OF EMPLOYEE AND EMPLOYER IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, AND OBJECTION WHICH IT MAY NOW OF HEREAFTER HAVE TO THE LAYING OF VENUE IN ANY SUCH COURT HAS BENN BROUGHT IN AN INCONVENIENT FORUM. (Signature page follows) -13- 14 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. HEAFNER TIRE GROUP, INC. By: /s/ Donald C. Roof ------------------------------------- Donald C. Roof President and Chief Executive Officer /s/ Ray C. Barney ----------------------------------------- Ray C. Barney For purposes of Section 6(k) only: THE SPEED MERCHANT, INC. By: /s/ Donald C. Roof -------------------------------------- Name: Donald C. Roof Title: Chairman EX-11.1 12 COMPUTATION OF PER SHARE EARNINGS 1 Heafner Tire Group, Inc. Exhibit 11.1 Computation of Earnings Per Share (Unaudited)
YEAR ENDED DECEMBER 31, -------------------------------------------- 1999 1998 1997 ----------- ----------- --------- Average shares outstanding during the period 5,203,896 6,062,322 4,736,501 Incremental shares under stock options and warrants computed under the treasury stock method using the average market price of issuer's stock during the period -- -- -- ----------- ----------- --------- Total shares for diluted EPS 5,203,896 6,062,322 4,736,501 =========== =========== ========= Income applicable to common shareholders: Loss from operations before extraordinary charge -- (2,508,000) -- =========== Net income (loss) $(6,588,000) $(4,724,000) $ (14,000) =========== =========== ========= (Loss) income per basic common share: Loss from operations before extraordinary charge -- (0.41) -- Net income (loss) $ (1.27) $ (0.78) $ (0.00) =========== =========== ========= Income (loss) per diluted share: Loss from operations before extraordinary charge -- (0.41) -- Net income (loss) $ (1.27) $ (0.78) $ (0.00) =========== =========== =========
EX-12.1 13 COMPUTATION OF RATIOS 1 Page 1 Exhibit 12.1 HEAFNER TIRE GROUP, INC. Statement Regarding: Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends (AMOUNTS IN THOUSANDS, EXCEPT RATIO AMOUNTS)
Twelve months Twelve months Twelve months Ended Ended Ended December 31, December 31, December 31, 1999 1998 1997 (unaudited) (unaudited) (unaudited) ----------- ----------- ----------- Consolidated pretax income (loss) from continuing operations (6,936) (2,219) (254) Interest 22,053 13,460 4,842 Interest portion of rent expense 9,545 6,474 2,985 ------ ------ ------ EARNINGS 24,662 17,715 7,573 ====== ====== ====== Interest 22,053 13,460 4,842 Interest portion of rent expense 9,545 6,474 2,985 ------ ------ ------ FIXED CHARGES 31,598 19,934 7,827 ====== ====== ====== RATIO OF EARNINGS TO FIXED CHARGES -- -- -- ====== ====== ======
EX-21.1 14 CHART OF SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 HEAFNER TIRE GROUP, INC. Corporate Structure Chart Heafner Tire Group, Inc. | | ___________________________________________________________ | | | Winston Tire Company The Speed Merchant, Inc. California Tire Company | | Phoenix Racing, Inc. EX-27.1 15 1999 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HEAFNER TIRE GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 6,497 0 117,117 2,385 148,865 283,501 64,852 17,228 459,246 193,840 158,362 11,094 0 53 10,468 459,246 1,016,589 1,016,589 764,386 1,003,719 (2,247) 0 22,053 (6,936) (348) (6,588) 0 0 0 (6,588) (1.27) (1.27)
EX-27.2 16 RESTATED 1998 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HEAFNER TIRE GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. CERTAIN 1998 AMOUNTS HAVE BEEN RECLASSIFIED TO CONFORM WITH THE 1999 PRESENTATION. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 6,648 0 111,691 2,220 133,221 262,659 55,652 12,850 430,821 206,097 160,400 11,353 0 51 18,073 430,821 716,485 716,485 530,618 706,000 (756) 0 13,460 (2,219) 289 (2,508) 0 (2,216) 0 (4,724) (0.78) (0.78)
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