-----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, V/xa3NbXe80IN0r+Qs+i0RV88ZDj5p3sb0IH28a2nxuFYh6ghRJkeo6WI0YaGBTF uqTVHSaRwNNTwbHg0vNd8w== 0000950144-01-004948.txt : 20010410 0000950144-01-004948.hdr.sgml : 20010410 ACCESSION NUMBER: 0000950144-01-004948 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 20001230 FILED AS OF DATE: 20010409 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: 1598255 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 g67750e10-k405.txt 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 30, 2000 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 30, 2001: 5,271,917 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
PAGE ---- PART I ITEM 1. Description of Business..................................... 1 ITEM 2. Description of Properties................................... 5 ITEM 3. Legal Proceedings........................................... 5 ITEM 4. Submission of Matters to a Vote of Security Holders......... 5 PART II ITEM 5. Market for Registrant's Common Stock and Related Security Holder Matters.............................................. 6 ITEM 6. Selected Financial Data..................................... 6 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 7 ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk... 9 ITEM 8. Financial Statements and Supplementary Data................. 10 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 37 PART III ITEM 10. Directors and Executive Officers of the Registrant.......... 37 ITEM 11. Executive Compensation...................................... 40 ITEM 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 46 ITEM 13. Certain Relationships and Related Transactions.............. 47 ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 49 Signatures.................................................. 54
3 PART I ITEM 1. DESCRIPTION OF BUSINESS. GENERAL DEVELOPMENT OF BUSINESS Heafner Tire Group, Inc. (formerly The J.H. Heafner Company, Inc.) (together with its subsidiaries, "Heafner" or "the Company"), is one of the largest independent suppliers of tires to the replacement tire market in the United States. Heafner operates 73 distribution centers servicing all or parts of 35 states. Through this distribution network, the Company supplied over 15 million tires in 2000 and currently serves an average of 30,000 customers each month. 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. Founded in 1935, Heafner has grown over the past four years both by consistent growth in revenues which exceeded the industry average, and acquisitions. Heafner acquired Winston Tire Company (formerly Oliver & Winston) ("Winston") in 1997, Speed Merchant, d/b/a Competition Parts Warehouse ("CPW") in 1998 and merged with ITCO Logistics Corporation in 1998. Heafner acquired California Tire Company in 1999 and in 2000, the Company acquired certain assets of Tire Centers, LLC, the outstanding common stock of T.O. Haas Tire Company and the distribution operations of Merchant's, Inc., known as American Tire Distributors. In May 1999, the majority owners of Heafner's Class A and Class B common stock sold their shares to Charlesbank Equity Fund IV, a Massachusetts general partnership. 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. Effective January 26, 2001, the Company's Board of Directors authorized the exit from retail operations and determined that it was in the Company's best interest to concentrate solely on wholesale distribution, which it considers to be its core business. In that regard, the Company is pursuing the sale of the operations of Winston, its retail segment, and anticipates that the disposition will be completed by the summer of 2001. Accordingly, this segment has been reflected as a discontinued operation in the accompanying consolidated financial statements. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion. INDUSTRY OVERVIEW Purchasers in the United States spent approximately $20.9 billion on new replacement tires in 2000. Of that amount, passenger tires accounted for approximately 57.9% of sales, light truck tires accounted for approximately 16.3%, truck tires accounted for approximately 21.5% and farm, specialty and other types of tires accounted for approximately 4.3%. 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 237.0 million tires in 2000. Heafner believes that increases in both the number and average age of cars as well as passenger miles driven in the United States have contributed to this growth. 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 59.5% of retail sales of domestic replacement passenger tires in 2000. 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 1 4 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 and marketed by the major tire manufacturers; and private-label brands, which are brands made by tire manufacturers and are marketed by independent tire wholesale distributors and or retailers. In 2000, flag brands constituted approximately 57% of the United States passenger and light truck replacement tire markets, house brands made up approximately 19% of those markets and private-label brands constituted approximately 24% of those markets. PRODUCTS The Company 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, which includes the B.F. Goodrich and Uniroyal brands as well as, private-label products such as Regal tires, Winston tires and Pacer custom wheels; and house brand products such as Monarch tires, manufactured by Goodyear. 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), 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, the Company supplies automotive parts and accessories. Sales of tires accounted for approximately 82.0% of sales from continuing operations in 2000, 84.3% in 1999 and 83.9% in 1998. The remainder of the Company's sales includes wheels, service equipment and other automotive parts. SUPPLIERS Heafner purchases its products from all major tire manufacturers and other suppliers. In 2000, the Company's continuing operations purchased in excess of 16.0 million tires. Heafner's purchases of passenger and light truck tires represented approximately 6.4% of the total U.S. replacement passenger and light truck tire market. Approximately 85.0% of Heafner's total tire purchases, in units, in 2000 were supplied by Michelin, Goodyear and Bridgestone/Firestone. Of the total 2000 U.S. new replacement passenger tire market, Michelin flag brands (including the B.F. Goodrich and Uniroyal brands) accounted for 15.5%, Bridgestone/Firestone flag brands accounted for 13.5% and the leader, Goodyear/Dunlop brand, accounted for 17.5%. Of the total 2000 U.S. replacement light truck tire market, Michelin (including the B.F. Goodrich and Uniroyal brands) accounted for 17.0%, Bridgestone/ Firestone accounted for 12.5% and Goodyear/Dunlop accounted for 14.5%. 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, the Company 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 2 5 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 the Company's Series A preferred stock and Series B preferred stock, as discussed below under "Certain Relationships and Related Transactions -- Preferred Stock." CUSTOMERS The Company 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 programs for its larger customers. In 2000, the Company's continuing operations served an average of more than 30,000 customers each month. Heafner's largest customer accounted for less than 2% and its top 25 customers accounted for less than 7% of net sales from continuing operations in 2000. COMPETITION The industry in which the Company operates is highly competitive, and many of Heafner's competitors have resources significantly greater than Heafner. 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. The Company 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 the Company markets its products are trademarks of the Company. Those private brand names are considered to be important to Heafner's business because they develop brand identification and foster customer loyalty. All of Heafner's trademarks are of perpetual duration as long as they are periodically renewed. The Company currently intends to maintain all of them in force. The principal 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 The Company's 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. 3 6 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 operations. Inventory levels fluctuate throughout the year with anticipated seasonal sales volume. Inventories are financed through vendor credit terms and borrowings under the Company's credit facility. The amount of borrowings under the credit facility fluctuates throughout the year. On December 30, 2000, $130.0 million of borrowing was outstanding and an additional $20.1 million was available under the credit facility. Both the maintenance of substantial inventories and the practice of seasonal borrowing are common to the wholesale tire distribution industry. ENVIRONMENTAL MATTERS The Company'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 automotive service operations of the discontinued retail segment, 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. The Company 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 the Company's business or earnings. EMPLOYEES As of December 30, 2000, the Company's continuing operations employed approximately 2,600 people, excluding 1,550 employees of the Company's discontinued operations. None of Heafner's employees are represented by a union. The Company believes its employee relations are satisfactory. 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, and its expectations and estimates about its future financial performance, including its financial position, cash flows from continuing operations, cash proceeds from the sale of discontinued 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 4 7 actual results to differ materially from the Company'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. The Company 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. The Company's principal properties are geographically situated to meet sales and operating requirements. All of Heafner's properties are considered to be adequate to meet current operating requirements. Distribution Centers. As of December 30, 2000, Heafner had a total of 73 warehouse distribution centers located in 18 states, aggregating approximately 4.7 million square feet. Of these centers, 11 are owned and the remainder are leased. Corporate and Executive Offices. In addition to its principal executive offices located in Charlotte, North Carolina, Heafner's continuing operations currently have corporate offices in five other locations, each responsible for various geographic areas. The corporate offices in Hayward, California will be consolidated into the San Jose, California corporate office as of the first quarter 2001. All of Heafner's corporate and executive offices are leased.
LOCATION USE - -------- ----------------- Charlotte, North Carolina............................. Executive offices Lincolnton, North Carolina............................ Corporate offices San Jose, California.................................. Corporate offices Hayward, California................................... Corporate offices Lincoln, Nebraska..................................... Corporate offices Haymarket, Virginia................................... Corporate offices
ITEM 3. LEGAL PROCEEDINGS. Winston was named as a defendant in a class action lawsuit filed on December 20, 2000 in Orange County Superior Court by plaintiff's Theodore Collins and Mark Orlando on behalf of themselves and all other Winston store managers similarly situated. The lawsuit alleges that Winston violated certain California wage regulations and unfair business practices statutes. The plaintiff's seek various damages including overtime compensation due and owing, prejudgment interest, certain penalties and attorneys' fees and costs. The Company believes that Winston's operation, including its wage practices fully comply with applicable California and federal legal requirements and that the plaintiffs' claims are without merit. Heafner is vigorously defending the matter. The Company is also involved in various other lawsuits, including alleged class action 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. 5 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS. Not applicable. ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth selected historical consolidated financial data of the Company for the periods indicated as restated for the presentation of Winston, its retail segment, as a discontinued operation. The selected historical financial data as of and for the years ended December 31, 1996 through 1999 and December 30, 2000 are derived from the consolidated financial statements of Heafner as of and for those years. The consolidated financial statements of Heafner as of December 31, 1999 and December 30, 2000 and for each of the three years in the period ended December 30, 2000 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 the Company and the related notes, included as Item 8, in this report.
1996 1997(a) 1998(b) 1999(c) 2000(e) -------- -------- -------- -------- ---------- IN THOUSANDS STATEMENTS OF OPERATIONS DATA: Net sales(d)............................... $190,535 $210,781 $593,879 $908,049 $1,087,260 Gross profit............................... 31,655 35,146 102,311 159,178 199,956 Operating income........................... 1,995 2,413 10,044 21,526 27,186 Income (loss) from continuing operations... 1,051 (1,706) (2,685) (1,249) (1,555) Income (loss) from discontinued operations............................... -- 1,692 177 (5,339) (39,938) Loss on disposal of discontinued operations............................... -- -- -- -- (1,200) Net income (loss) before extraordinary charge................................... 1,051 (14) (2,508) (6,588) (42,693) Extraordinary charge....................... -- -- (2,216) -- -- Net income (loss).......................... 1,051 (14) (4,724) (6,588) (42,693) BALANCE SHEET DATA: Working capital for continuing operations............................... $ 16,913 $ 14,560 $ 47,327 $ 82,592 $ 91,778 Total assets............................... 55,474 118,292 388,654 416,171 497,120 Total debt................................. 21,003 62,712 184,199 235,353 292,433 Total redeemable preferred stock........... -- 11,500 11,353 11,094 11,035 OTHER DATA: EBITDA from continuing operations(f)....... $ 3,847 $ 5,016 $ 19,182 $ 35,418 $ 42,722 Depreciation and amortization for continuing operations.................... 1,331 2,114 7,671 12,735 14,322 Capital expenditures....................... 7,865 4,908 8,697 11,218 14,724
- --------------- (a) In May 1997, Heafner acquired Winston. The transaction was accounted for using the purchase method of accounting. Winston has been treated as a discontinued operation in the accompanying selected financial data. (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. This transaction was accounted for using the purchase method of accounting. (d) Net sales include approximately $60.6 million, $55.9 million and $27.4 million of inter-segment sales from CPW to Winston for 2000, 1999 and 1998, respectively. (e) In April 2000, the Company purchased certain assets of Tire Centers, LLC, in May 2000 the Company acquired T.O. Haas and in July 2000 purchased the net assets of ATD. Each transaction was accounted for using the purchase method of accounting. 6 9 (f) EBITDA represents net income before discontinued operations and extraordinary item plus income taxes, depreciation and amortization and interest expense. Interest expense for the years ended December 31, 2000, 1999 and 1998 includes $1.2 million, $0.9 million and $0.7 million, respectively, related to amortization of deferred financing charges. EBITDA for the year ended December 30, 2000 excludes the effect of special charges of $0.3 million. 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. 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. 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. YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999 Consolidated net sales from continuing operations increased $179.2 million, or 19.7%, to $1.1 billion in 2000 from $908.0 million in 1999. Of this increase, the operations acquired from Haas and ATD accounted for $118.6 million, or a 13.1% increase over 1999. The precise effect on sales of the TCI assets acquired cannot be determined due to the merger of these operations into various of the Company's existing operations. Other net sales growth was $60.6 million, or 6.7% increase over 1999. Sales growth in 2000 was aided during the second half of the year (primarily in the third quarter) by a very strong consumer market for replacement tires caused by the heightened consumer awareness of tire safety issues arising from the publicity surrounding the recall of certain Firestone brands. In addition, sales growth was driven by the entry into new markets, either through acquisition or expansion, combined with the effects of the Company's marketing programs. Gross profit increased $40.8 million to $200.0 million in 2000 compared to $159.2 million in 1999, and gross profit as a percentage of sales increased to 18.4% in 2000 compared to 17.5% in 1999. These increases are the result of the Company's efforts to enhance margin through improved mix, purchasing efficiencies, and marketing program management. Selling, general, and administrative expenses were $172.8 million in 2000, representing 15.9% of sales in 2000, compared to $137.7 million and 15.2% of sales in 1999. The primary areas of increase in selling, general, and administrative expenses in 2000 are warehouse occupancy, consisting primarily of rents and utilities, delivery expense, consisting primarily of vehicle lease costs and fuel and amortization of goodwill resulting from acquisitions. Interest expense increased $4.4 million to $26.4 million in 2000 compared to $22.0 million in 1999 primarily due to higher borrowing levels on the revolving credit facility arising from the acquired operations in 2000. Income taxes in 2000 totaled $3.2 million, which is higher than would be expected based on statutory income tax rates primarily due to non-deductible goodwill amortization. Loss from discontinued operations totaled $39.9 million (net of income tax benefits of $23.2 million) in 2000 and includes the write-off of goodwill and other intangibles totaling $31.8 million in 2000, and other adjustments. In addition, the Company has recorded an estimated loss on the disposal of discontinued operations of $1.2 million, net of income tax benefits of $0.8 million. This estimated loss includes estimated operating losses from the measurement date, January 26, 2001, to the estimated date of disposal. 7 10 EBITDA from continuing operations increased $7.3 million to $42.7 million in 2000 compared to $35.4 million in 1999. This increase in EBITDA is due to higher sales combined with improved margins. This was partially offset by increased selling, general and administrative expenses. YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998 Consolidated net sales from continuing operations were $908.0 million for 1999, an increase of $314.2 million, or 52.9%, compared to sales of $593.9 million in 1998. This increase in 1999 sales can be partially attributed to twelve months sales for CPW and ITCO, compared to seven months in 1998, and sales from the acquisition of Cal Tire in January 1999. Gross profit increased $56.9 million to $159.2 million in 1999 compared to $102.3 million in 1998 and increased as a percentage of sales from 17.2% in 1998 to 17.5% in 1999. The overall increase in gross profit is primarily attributable to a full years' results from CPW, ITCO and Cal Tire when compared to the prior year. Selling, general, and administrative expenses increased by $45.4 million in 1999 representing 15.2% of sales compared to 15.5% in 1998. The decrease in expenses as a percentage of sales is due to cost savings as a result of the consolidation of operations between Heafner and ITCO, which was completed in 1999. Interest expense increased by $8.6 million to $22.0 million primarily due to higher average borrowings arising from acquisitions. Income tax expense in 1999 was $2.9 million compared to $0.1 million in 1998. The difference between the statutory tax rate and the effective tax rate is primarily due to non-deductible goodwill amortization. EBITDA from continuing operations increased $16.2 million to $35.4 million in 1999 compared to $19.2 million in 1998. This increase in EBITDA is due to significantly higher sales levels resulting from acquisitions and growth combined with improved gross profit margins and cost reductions during 1999. EBITDA from continuing operations as a percentage of sales increased to 3.9% in 1999 compared to 3.2% in 1998. LIQUIDITY AND CAPITAL RESOURCES At December 30, 2000 the combined net indebtedness (net of cash) of the Company was $289.1 million compared to $228.9 million at December 31, 1999. Total commitments by the lenders under the Company's revolving credit facility were $200.0 million at December 30, 2000, of which $130.0 million was outstanding and $20.1 million was available for additional borrowings. Heafner's principal sources of cash during 2000 came from operations, and borrowings under revolving credit facilities. Cash generated from continuing operations was $40.6 million for the year ended December 30, 2000. Net working capital (exclusive of net assets of discontinued operations) at December 30, 2000 totaled $91.8 million, compared to $82.6 million at December 31, 1999, an increase of $9.5 million. Such increase is due primarily to higher levels of business activity in the fourth quarter of 2000 as compared to 1999. The effects of higher receivables and inventories are partially offset by higher levels of accounts payable. Net cash used to fund discontinued operations totaled $14.8 million, and $2.1 million during 2000 and 1999, respectively. In 2000, Heafner required approximately $21.4 million of financing in connection with the T.O. Haas acquisition, $39.1 million of financing in connection with the ATD acquisition, and $6.2 million of financing in connection with the TCI acquisition. Heafner obtained the necessary funds by borrowing under the revolving credit facility. Capital expenditures during the years 2000, 1999 and 1998 were $14.7 million, $11.2 million and $8.7 million respectively. Capital expenditures in 2000 include $7.9 million in the discontinued retail segment for information system installation and stabilization efforts, retail store expansions and upgrades, and new store locations. Capital expenditures for continuing operations were primarily for distribution warehouse expansions and racking. The Company has expanded during 2000 to 73 distribution centers with approximately 4.7 million square feet of warehouse space. 8 11 Loans under the Company's credit facility bore interest in 2000 at a floating rate based upon federal funds or Eurodollar rates plus an applicable margin. At December 30, 2000, borrowings under the credit facility were at a weighted average interest rate of 9.3%. Loans under the credit facility are guaranteed by all subsidiaries of Heafner and collateralized by liens on inventory and accounts receivable. Effective March 30, 2001, the Company and its lenders amended the revolving credit facility ("Revolver") to, among other things, reduce the aggregate amount of the Revolver from $200 million to $180 million, amend the financial covenants contained therein, change the rate at which borrowings thereunder bear interest, and require the Company to comply with additional reporting requirements. Borrowings under the Revolver will, following these amendments, bear interest at (i) the Base Rate, as defined, plus the applicable margin or (ii) the Eurodollar Rate, as defined, plus the applicable margin. The applicable margins were increased resulting in an applicable margin of 2.0% for Base Rate loans (0.5% at December 30, 2000) and an applicable margin of 3.25% (2.25% at December 30, 2000) for Eurodollar Rate loans. The applicable margins are subject to performance-based step-downs resulting in margins ranging from 0.5% to 2.0% for Base Rate loans and 1.75% to 3.25% for Eurodollar Rate loans, respectively. The Revolver, as amended, requires the Company to meet certain financial requirements, including minimum EBITDA for both continuing and discontinued operations, fixed charge coverage and tangible capital funds, all as defined, and minimum loan availability and certain covenants which, among other things, restrict the ability of the Company to incur additional indebtedness; enter into guarantees; make loans and investments; 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 inventories and accounts receivable. At the same time the Revolver was amended, the banks waived the effects of a failure to meet the minimum net worth and interest coverage covenants, as defined in the credit agreement, as of December 30, 2000. As of March 30, 2001, the Company's financial measures were in excess of the minimums required, as amended, and management expects that such amounts will remain above the minimums for the foreseeable future. Following these events, management believes that its cash flow and anticipated availability under the revolving credit facility, as amended, will be adequate to meet its requirements. On April 2, 2001, the Company issued 1,333,334 shares of Series C Preferred Stock in exchange for $12.0 million in cash contributed by certain of its principal stockholders. Heafner anticipates that its principal use of cash going forward will be able 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company's results of operations are exposed to changes in interest rates primarily with respect to borrowings under its credit facility, where interest rates are tied to the prime rate or LIBOR. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. An increase of 1% in such interest rate percentages would increase the annual interest expense by $1.3 million, based on borrowings at December 30, 2000. 9 12 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.................... 11 Consolidated Balance Sheets as of December 30, 2000 and December 31, 1999......................................... 12 Consolidated Statements of Operations for the years ended December 30, 2000 and December 31, 1999 and 1998.......... 13 Consolidated Statements of Stockholders' Investment for the years ended December 30, 2000 and December 31, 1999 and 1998...................................................... 14 Consolidated Statements of Cash Flows for the years ended December 30, 2000 and December 31, 1999 and 1998.......... 15 Notes to Consolidated Financial Statements.................. 16
10 13 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To 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 30, 2000 and December 31, 1999, and the related consolidated statements of operations, stockholders' investment and cash flows for each of the three years in the period ended December 30, 2000. 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 auditing standards generally accepted in the United States. 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 30, 2000 and December 31, 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 30, 2000, in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Charlotte, North Carolina April 4, 2001 11 14 HEAFNER TIRE GROUP, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 30, DECEMBER 31, 2000 1999 ------------ ------------ ASSETS Current assets: Cash and cash equivalents................................. $ 3,327 $ 6,497 Accounts receivable, net of allowances of $1,877 and $2,057 in 2000 and 1999, respectively.................. 101,828 86,311 Inventories............................................... 179,825 130,131 Other current assets...................................... 23,517 13,324 Net assets of discontinued operations..................... 17,866 58,289 -------- -------- Total current assets.............................. 326,363 294,552 -------- -------- Property and equipment: Land...................................................... 3,436 3,593 Buildings and leasehold improvements...................... 19,506 19,066 Machinery and equipment................................... 13,489 9,474 Furniture and fixtures.................................... 5,686 3,725 Vehicles and other........................................ 3,758 2,356 -------- -------- Total property and equipment...................... 45,875 38,214 Less -- Accumulated depreciation.......................... (13,371) (10,142) -------- -------- Property and equipment, net....................... 32,504 28,072 -------- -------- Goodwill, net............................................... 101,070 76,360 Other intangible assets, net................................ 8,191 5,242 Deferred income taxes....................................... 19,149 2,726 Other assets................................................ 9,843 9,219 -------- -------- $497,120 $416,171 ======== ======== LIABILITIES AND STOCKHOLDERS' INVESTMENT Current liabilities: Accounts payable.......................................... $186,256 $134,172 Accrued expenses.......................................... 28,992 17,134 Current maturities of long-term debt...................... 1,471 2,365 -------- -------- Total current liabilities......................... 216,719 153,671 -------- -------- Revolving credit facility................................... 130,020 74,688 Long-term debt.............................................. 160,942 158,300 Other liabilities........................................... 9,393 6,760 Redeemable preferred stock series A -- 4% cumulative, 7,000 shares authorized, issued and outstanding................. 7,000 7,000 Redeemable preferred stock series B -- variable rate cumulative, 4,500 shares authorized, issued and outstanding............................................... 4,035 4,094 Commitments and contingencies............................... Stockholders' investment: Class A common stock, par value $.01 per share; 10,000,000 shares authorized; 5,286,917 shares issued and outstanding............................................ 53 53 Class B common stock, par value $.01 per share; 20,000,000 shares authorized; no shares issued and outstanding.... -- -- Additional paid-in capital................................ 23,981 23,981 Warrants.................................................. 1,137 1,137 Notes receivable from sale of stock....................... (1,046) (1,092) Retained deficit.......................................... (55,114) (12,421) -------- -------- Total stockholders' investment.................... (30,989) 11,658 -------- -------- $497,120 $416,171 ======== ========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. 12 15 HEAFNER TIRE GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
FOR THE FISCAL YEAR ENDED -------------------------------------------- DECEMBER 30, DECEMBER 31, DECEMBER 31, 2000 1999 1998 ------------ ------------ ------------ Net sales............................................. $1,087,260 $908,049 $593,879 Cost of goods sold.................................... 887,304 748,871 491,568 ---------- -------- -------- Gross profit........................................ 199,956 159,178 102,311 Selling, general and administrative expenses.......... 172,770 137,652 92,267 ---------- -------- -------- Operating income.................................... 27,186 21,526 10,044 Other income (expense): Interest expense.................................... (26,447) (22,000) (13,408) Other income, net................................... 918 2,106 791 ---------- -------- -------- Income (loss) from continuing operations before income taxes............................................... 1,657 1,632 (2,573) Provision for income taxes.......................... 3,212 2,881 112 ---------- -------- -------- Loss from continuing operations....................... (1,555) (1,249) (2,685) ---------- -------- -------- Discontinued operations: Income (loss) from discontinued operations, net of income tax provision (benefit) of ($23,154), ($3,229) and $177................................ (39,938) (5,339) 177 Loss on disposal of discontinued operations, net of income tax benefit of $800....................... (1,200) -- -- ---------- -------- -------- Net loss before extraordinary charge.................. (42,693) (6,588) (2,508) Extraordinary charge from early extinguishment of debt, net of income tax benefit of $1,478........... -- -- (2,216) ---------- -------- -------- Net loss.............................................. $ (42,693) $ (6,588) $ (4,724) ========== ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. 13 16 HEAFNER TIRE GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT (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 WARRANTS OF STOCK (DEFICIT) TOTAL --------- ------ ---------- ------ ---------- -------- ---------- --------- -------- 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) Amendment of warrant agreement.............. -- -- -- -- -- 1,137 -- -- 1,137 --------- ---- ---------- ---- ------- ------ ------- -------- -------- Balance, December 31, 1999..................... 5,286,917 53 -- -- 23,981 1,137 (1,092) (12,421) 11,658 Net loss................. -- -- -- -- -- -- -- (42,693) (42,693) Forgiveness of note receivable............. -- -- -- -- -- -- 46 -- 46 --------- ---- ---------- ---- ------- ------ ------- -------- -------- Balance, December 30, 2000..................... 5,286,917 $ 53 -- $ -- $23,981 $1,137 $(1,046) $(55,114) $(30,989) ========= ==== ========== ==== ======= ====== ======= ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. 14 17 HEAFNER TIRE GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE FISCAL YEAR ENDED ------------------------------------------ DECEMBER 30, DECEMBER 31, DECEMBER 31, 2000 1999 1998 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $(42,693) $(6,588) $(4,724) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Loss (income) from discontinued operations.............. 39,938 5,339 (177) Loss on disposal of discontinued operations............. 1,200 -- -- Depreciation and amortization of goodwill and other intangibles........................................... 14,322 11,786 6,938 Amortization of other assets............................ 1,156 949 733 Extraordinary charge.................................... -- -- 3,694 Deferred taxes.......................................... 2,582 2,881 (2,194) Other................................................... (169) (592) 117 Change in assets and liabilities: Accounts receivable, net................................ 440 (1,326) (20,767) Inventories............................................. (22,550) (13,152) (7,913) Other current assets.................................... (9,070) (832) (5) Accounts payable and accrued expenses................... 54,507 (20,284) 16,021 Other................................................... 912 220 (1,119) -------- ------- ------- Net cash provided by (used in) continuing operating activities....................................... 40,575 (21,599) (9,396) -------- ------- ------- Net cash used in discontinued operations........... (14,786) (2,133) (288) -------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Mergers and acquisitions, net of cash acquired............ (70,149) (12,091) (53,199) Purchase of property and equipment........................ (14,724) (11,218) (8,697) Proceeds from sale of property and equipment.............. 2,718 786 3,826 Other..................................................... -- 1,835 -- -------- ------- ------- Net cash used in investing activities.............. (82,155) (20,688) (58,070) -------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt.................. 105 -- 150,000 Net proceeds from (repayments of) revolving credit facility................................................ 55,332 52,763 (38,071) Principal payments on long-term debt...................... (2,241) (5,506) (32,714) Cash paid for stock repurchase............................ -- (31) (3) Cash paid for financing costs............................. -- (1,915) (8,030) Cash paid for costs associated with change in control..... -- (1,697) -- Proceeds from issuance of common stock.................... -- 575 -- Other..................................................... -- 80 718 -------- ------- ------- Net cash provided by financing activities.......... 53,196 44,269 71,900 -------- ------- ------- Net increase (decrease) in cash and cash equivalents........ (3,170) (151) 4,146 Cash and cash equivalents, beginning of year................ 6,497 6,648 2,502 -------- ------- ------- Cash and cash equivalents, end of year...................... $ 3,327 $ 6,497 $ 6,648 ======== ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash payments for interest................................ $ 24,233 $21,574 $10,495 ======== ======= ======= Cash payments for taxes................................... $ 502 $ 1,334 $ 1,963 ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS: In 1998, in connection with the ITCO merger (See Note 2), the Company issued 1,400,667 shares of Class B Common Stock at a fair value of approximately $15.0 million. The accompanying notes to consolidated financial statements are an integral part of these statements. 15 18 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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. The Company is an independent distributor of tires, custom wheels, automotive service equipment and related products to the replacement market. Heafner's customer base is comprised primarily of independent tire dealers with other customers representing national retail chains, service stations and other automotive dealer and repair facilities. The Company operates as one business with 73 distribution centers serving all or parts of 35 states located in the Southeastern and Mid-Atlantic regions, portions of the Midwest and the West Coast of the United States. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Heafner Tire Group, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. FISCAL YEAR During 2000, the Company changed its fiscal year end from a calendar year to the Saturday closest to December 31. CASH AND CASH EQUIVALENTS The Company includes cash, demand deposits and highly liquid investments with initial maturities of less than three months in cash and cash equivalents in its consolidated financial statements. REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK The Company recognizes revenue upon shipment from its distribution centers/warehouses to the customer. 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 Carrying value approximates fair value as it relates to cash and cash equivalents, accounts receivable and accounts payable due to the short-term maturity of those instruments. The fair value of the Company's 16 19 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) revolving credit facility approximates its carrying value and the fair value of the Company's debt is 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. The Company performs periodic assessments to determine the existence of obsolete, slow-moving and non-saleable inventories and records necessary provisions to reduce such inventories to net realizable value. Terms with a majority of the Company's tire vendors allow return of tire products, within limitations, specified in their supply agreements. 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 and 5) 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 was $7.6 million and $7.8 million at December 30, 2000 and December 31, 1999, 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 applicable to continuing operations was $6.8 million, $5.2 million and $2.9 million in 2000, 1999 and 1998, respectively. Accumulated amortization for continuing operations at December 30, 2000 and December 31, 1999 was $15.0 million and $8.2 million, respectively. The carrying amount of goodwill is reviewed periodically based on the non-discounted cash flows and pretax income of the acquired entity over the remaining amortization period. During 2000, based upon such review, which considered the significant increase in losses during fiscal 2000 and 1999 and management's outlook for the business of Winston Tire Company ("Winston"), the Company wrote off approximately $31.8 million of goodwill and other intangibles related to this acquisition. The charge has been included in the loss from discontinued operations in the accompanying consolidated statement of operations. At December 30, 2000, the Company believes the remaining net goodwill of $101.1 million is fully recoverable. Other intangible assets, which represent noncompete agreements, stayput agreements and other intangibles, are being amortized on a straight-line basis over periods ranging from two to six years. Amortization of other intangibles applicable to continuing operations was $2.3 million, $2.9 million and $1.6 million in 2000, 17 20 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1999 and 1998, respectively. Accumulated amortization for continuing operations at December 30, 2000 and December 31, 1999 was $6.7 million and $4.4 million, respectively. CONCENTRATION OF SUPPLIERS The Company currently purchases approximately 85% of their tire products from three tire suppliers. The Company does not have long term supply agreements with these vendors for its purchases of the vendor's branded products. The operating results of the Company could be adversely affected if the Company was unable to purchase tires from these three suppliers. The Company has a good relationship with these suppliers and does not anticipate a shortage in the supply of tires from these vendors. SHIPPING AND HANDLING COSTS Shipping and handling costs are classified as selling, general and administrative expenses in the accompanying consolidated statements of operations. INCOME TAXES The Company accounts for its income taxes under 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. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138, will be effective for the Company's fiscal year 2001. The statement established 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. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company will adopt SFAS No. 133, as amended, beginning the first quarter of fiscal 2001. In management's opinion, the impact of adoption of this statement on the Company's financial position and results of operations will not be significant. STOCK OPTIONS As permitted by SFAS No. 123, "Accounting For Stock Based Compensation," 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. Accordingly, no compensation expense has been recorded in the consolidated statements of operations as the exercise price of all stock options represented fair value of the underlying common stock at the date of grant. SFAS No. 123 established 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. 18 21 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 1999 and 1998 amounts have been reclassified to conform with the 2000 presentation. 2. ACQUISITIONS: During fiscal 2000, 1999 and 1998, the Company acquired the entities described below, which were accounted for by the purchase method of accounting, reflecting a preliminary purchase price allocation for the fiscal 2000 acquisitions. Accordingly, results of operations for the acquired businesses have been included in consolidated statements of operations from the acquisition dates. On July 21, 2000, the Company purchased the net assets of American Tire Distributors ("ATD"), the wholesale operations of Merchants, Inc. The total purchase price, subject to adjustment, was approximately $39.8 million, of which approximately $1.9 million was held in escrow, and was funded primarily through the Company's revolving credit facility. Subsequent to year-end, the purchase price adjustment was settled and the escrow funds were distributed with no significant impact on the net purchase price. On May 25, 2000, the Company purchased all of the outstanding common stock of T.O. Haas Holding Co. ("Haas"), a tire wholesaler and distributor, located in Lincoln, Nebraska, as well as all of the outstanding common stock of Haas Investment Company ("Haas Investment"). In connection with the acquisition, the Company sold certain parcels of real estate, including substantially all of the assets of Haas Investment, and leased them back in a transaction which closed on August 8, 2000. The net purchase price of the Haas acquisition, giving effect to the real estate transaction and subject to adjustment as provided in the agreement, was approximately $28.4 million (including $1.6 million of assumed debt), of which approximately $1.5 million was held back at closing pending adjustment as provided in the agreement and $5.5 million which is payable in the form of noncompete and stay-put payments over a period of 6 years. The cash portion of the purchase price was funded through the Company's revolving credit facility. Subsequent to year-end, the purchase price adjustment was settled and the applicable hold back was paid with no significant impact on the net purchase price. On April 28, 2000, the Company purchased certain assets of Tire Centers, LLC ("TCI"), a wholly owned subsidiary of Michelin North America, Inc. The total purchase price was approximately $4.1 million, which was funded through the company's revolving credit facility. 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 acquisition was primarily funded through the company's revolving credit facility. 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 was funded primarily through proceeds from issuance of Senior Notes (see Note 5). 19 22 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 30, 2000, all contingency payments have been made for a total of $2.3 million. This amount has been recorded as additional purchase price and is being amortized over the remaining amortization period for goodwill. The acquisition was funded primarily through proceeds from issuance of Senior Notes. In connection with the CPW and ITCO acquisitions in fiscal 1998, the Company recorded a $1.5 million liability for estimated costs related to employee severance and a $3.7 million liability related to facilities closing expense and other related exit costs. The severance costs were primarily related to management and administrative personnel at the corporate locations in San Jose, California and Wilson, North Carolina. The facilities closing expense primarily relates to the closing of acquired distribution centers due to existing distribution centers being located in close proximity to the acquired distribution facilities. During the year ended December 31, 1999, the Company revised its estimate of these reserves, reducing goodwill by $1.3 million. The Company has charged approximately $0.8 million, $1.7 million and $0.6 million against these reserves for the fiscal years 2000, 1999 and 1998, respectively. The Company has completed substantially all facility closings and employee severance related to these reserves. The remaining liability of $0.8 million is primarily related to lease obligations, which will expire in 2005. The following pro forma summary information presents information for the fiscal years 2000 and 1999 as if the Haas acquisition occurred as of January 1, 1999 (in thousands).
YEAR ENDED ---------------------------- DECEMBER 30, DECEMBER 31, 2000 1999 ------------ ------------ Net sales.................................................. $1,128,045 $1,011,425 Loss from continuing operations............................ (3,360) (2,646) Net loss................................................... (44,498) (7,985)
The following pro forma summary information presents information for the fiscal years 1998 and 1997, as if the ITCO merger and the CPW acquisition occurred as of January 1, 1997 (in thousands).
YEAR ENDED ---------------------------- DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ Net sales.................................................. $801,394 $729,942 Loss from continuing operations............................ (5,252) (3,419) Net loss................................................... (7,291) (5,111)
The pro forma information is provided for informational purposes only and is not necessarily indicative of the actual results that would have occurred had the Haas acquisition taken place on January 1, 1999 or the ITCO merger and the CPW acquisition had taken place on January 1, 1997, nor is it indicative of future results of the combined companies. The impact of the ATD, TCI, and California Tire acquisitions was not material to the Company's results of operations and consequently, pro forma information is not presented. 20 23 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. INCOME TAXES: The following summarizes the components of the Company's continuing operations' income tax provision (benefit) for fiscal years 2000, 1999 and 1998 (in thousands):
YEAR ENDED -------------------------------------------- DECEMBER 30, DECEMBER 31, DECEMBER 31, 2000 1999 1998 ------------ ------------ ------------ Federal -- Current provision........................... $ -- $ -- $ 1,961 Deferred provision (benefit)................ 2,482 2,233 (1,865) ------ ------ ------- 2,482 2,233 96 State -- Current provision........................... 630 -- 345 Deferred provision (benefit)................ 100 648 (329) ------ ------ ------- 730 648 16 ------ ------ ------- Total provision..................... $3,212 $2,881 $ 112 ====== ====== =======
Actual income tax expense differs from the amount computed by applying the statutory federal income tax rate of 34% as a result of the following (in thousands):
YEAR ENDED ------------------------------------------ DECEMBER 30, DECEMBER 31, DECEMBER 31, 2000 1999 1998 ------------ ------------ ------------ Income tax provision (benefit) computed at the federal statutory rate.......................... $ 563 $ 554 $(875) Amortization of nondeductible goodwill............ 2,035 1,655 956 State income taxes, net of federal income tax benefit......................................... 474 421 11 Other............................................. 140 251 20 ------ ------ ----- Income tax provision.............................. $3,212 $2,881 $ 112 ====== ====== =====
21 24 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 carry-forwards. The tax effects of the significant temporary differences which comprise deferred tax assets and liabilities at December 30, 2000 and December 31, 1999, are as follows (in thousands):
2000 1999 ------- ------- Deferred tax assets -- Accrued expenses and liabilities.......................... $ 9,703 $ 6,833 Employee benefits......................................... 2,460 2,066 Inventory cost capitalization............................. 2,219 1,570 Net operating loss carry-forwards......................... 8,201 995 Amortization and write-off of intangibles................. 13,464 1,583 AMT tax credit............................................ 14 217 Other..................................................... 413 526 ------- ------- Gross deferred tax assets............................ 36,474 13,790 ------- ------- Deferred tax liabilities -- Software development costs................................ $ (897) $ (351) Depreciation.............................................. (483) (319) Other..................................................... (515) (1,041) ------- ------- Gross deferred tax liabilities....................... (1,895) (1,711) ------- ------- Net deferred tax assets........................... $34,579 $12,079 ======= =======
The above amounts have been classified in the consolidated balance sheets as follows (in thousands):
DECEMBER 30, DECEMBER 31, 2000 1999 ------------ ------------ Deferred tax assets -- Current, included in other current assets................. $15,430 $ 9,353 Noncurrent................................................ 19,149 2,726 ------- ------- $34,579 $12,079 ======= =======
Management has evaluated the Company's deferred tax assets and has concluded that the realizability of the deferred tax assets is "more likely than not". Accordingly, no valuation allowance has been provided at December 30, 2000 or December 31, 1999. This evaluation considered the historical and expected profitability of the Company's continuing operations combined with the initiated sale of the Company's retail segment (Note 9), which segment has generated the Company's losses in 2000 and 1999. The Company expects that the operations of its continuing business will be sufficient to utilize the Company's net deferred tax assets at December 30, 2000. These factors along with the timing of the reversal of its temporary differences and the expiration date of its net operating loss carryovers were also considered in reaching this conclusion. The Company's ability to generate future taxable income is dependent on numerous factors including general economic conditions, the state of the replacement tire market and other factors beyond management's control. Therefore, there can be no assurance that the Company will meet its expectation of future taxable income. At December 30, 2000, the Company had net operating loss carry-forwards ("NOLs") for Federal income tax purposes of $20.8 million. These carry-forwards expire in 2019 and 2020. Future sales of common stock by the Company or its principal stockholders, or changes in the composition of its principal stockholders, could constitute a "change in control" that would result in annual limitations on the Company's use of its NOLs and unused tax credits. Management cannot predict whether 22 25 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) such a "change in control" will occur. If such a "change in control" were to occur, the resulting annual limitations on the use of NOLs and tax credits would depend on the value of the equity of the Company and the amount of "built-in gain" or "built-in loss" in the Company's assets at the time of the "change in control", which cannot be known at this time. 4. REVOLVING CREDIT FACILITY: Effective March 30, 2001, the Company amended its existing loan and security agreement. The amended agreement provides for a senior secured revolving credit facility (the "Revolver") which provides for borrowings in the aggregate principal amount of up to the lesser of $180.0 million or the Borrowing Base, as defined in the agreement, based on 85% of eligible accounts receivable, the lesser of 65% of eligible tire inventory or $100 million and the lesser of 50% of all other eligible inventory or $40 million (of which up to $10 million may be utilized in the form of letters of credit). Average borrowings under the existing loan and security agreement were approximately $89.4 million in 2000 and $60.5 million in 1999. At December 30, 2000, the maximum loan amount available under the existing credit facility was $150.1 million of which $130.0 million was outstanding. The Revolver term expires in March 2005, and is extendable by the Company and the banks for an additional five years. Borrowings under the Revolver will, following these amendments, bear interest at (i) the Base Rate, as defined, plus the applicable margin or (ii) the Eurodollar Rate, as defined, plus the applicable margin. The applicable margins were increased resulting in an applicable margin of 2.0% for Base Rate loans (0.5% at December 30, 2000), and an applicable margin of 3.25% (2.25% at December 30, 2000) for Eurodollar Rate loans. The applicable margins are subject to performance-based step-downs resulting in margins ranging from 0.5% to 2.0% for Base Rate loans and 1.75% to 3.25% for Eurodollar Rate loans, respectively. At December 30, 2000 and December 31, 1999, borrowings outstanding under the existing loan and security agreement were at a weighted average interest rates of 9.3% and 8.2%, respectively. The Revolver, as amended, requires the Company to meet certain financial requirements, including minimum EBITDA for both continuing and discontinued operations, fixed charge coverage and tangible capital funds, all as defined, and minimum loan availability and certain covenants which, among other things, restrict the ability of the Company to incur additional indebtedness; enter into guarantees; make loans and investments; 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 inventories and accounts receivable. At the same time the Revolver was amended, the banks waived the effects of a failure to meet the minimum net worth and interest coverage covenants, as defined in the credit agreement, as of December 30, 2000. As of March 30, 2001, the Company's financial measures were in excess of the minimums required, as amended, and management expects that such amounts will remain above the minimums for the foreseeable future. 23 26 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. LONG-TERM DEBT: Long-term debt consists of the following (in thousands):
DECEMBER 30, DECEMBER 31, 2000 1999 ------------ ------------ Series D Senior Notes....................................... $150,000 $150,000 Other....................................................... 12,413 10,665 -------- -------- 162,413 160,665 Less -- Current maturities.................................. (1,471) (2,365) -------- -------- $160,942 $158,300 ======== ========
Aggregate maturities of long-term debt at December 30, 2000, are as follows (in thousands): 2001........................................................ $ 1,471 2002........................................................ 3,827 2003........................................................ 3,745 2004........................................................ 412 2005........................................................ 384 Thereafter.................................................. 152,574 -------- $162,413 ========
SENIOR NOTES The Series D Senior Notes ("Senior Notes") have an annual coupon of 10% and are 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 can redeem up to 35% of the original principal amount of the Senior Notes at 110% of par with one or more public equity offerings. The Senior Notes are due May 2008 and interest is payable semiannually on May 15 and November 15 of each year commencing November 15, 1999. The 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; 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 Senior Notes, at December 30, 2000, approximated fair value. The fair value of the Series D Notes is based upon quoted market price and approximates $42.0 million. 6. EXTRAORDINARY CHARGE: The Company recorded an extraordinary charge in 1998 related to the early extinguishment of certain senior subordinated 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. 7. EMPLOYEE BENEFITS: 401(k) PLANS The Company maintains a qualified profit-sharing and 401(k) plan for eligible employees. There are separate benefit formulas for employees of various divisions within the Company. All accounts are funded based on employee contributions to the plans, with the limits of such contributions determined by the Board of Directors. Depending on the division, the plan either matches 50% of the participant's contributions up to 6% 24 27 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of their compensation or matches 50% of the first 2% of participant contributions and 6% of the remaining contribution up to a total of 6% of their compensation. The 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 applicable to continuing operations during the years ended December 30, 2000 and December 31, 1999 and 1998, was $0.9 million, $0.7 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 authorizes the issuance of up to 527,500 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, which includes a 1998 amendment that increased the amount of shares by 262,500. All options expire 10 years from the date of grant. In connection with the Charlesbank purchase, which constituted a change in control under the 1997 Plan, all outstanding options became fully vested. Through December 30, 2000, 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 1,143,550 shares of voting common stock under terms and conditions to be set by the Company's Board of Directors, which includes a 2000 amendment that increased the amount by 40,000 shares. 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. The options are divided into three tiers that vest over varying periods of time or upon the occurrence of certain events. All options expire 10 years from the date of grant. Under the 1999 Plan, 113,335 options are vested; however, no options were exercised as of December 30, 2000. Stock option activity under the plans is as follows:
WEIGHTED AVERAGE NUMBER EXERCISE OF SHARES PRICE --------- -------- Outstanding at December 31, 1997............................ 256,000 $1.10 Granted................................................... 283,400 7.48 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 Granted................................................... 273,100 9.00 Forfeited................................................. (14,000) 7.48 --------- ----- Outstanding at December 30, 2000 (553,535 exercisable)...... 1,359,100 $7.67 ========= =====
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 (in thousands):
YEAR ENDED ------------------------------------------ DECEMBER 30, DECEMBER 31, DECEMBER 31, 2000 1999 1998 ------------ ------------ ------------ Net loss.......................................... $(42,693) $(6,588) $(4,724) ======== ======= ======= Pro forma net loss................................ (43,511) (7,375) (4,813) ======== ======= =======
25 28 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The weighted average fair value of options granted during 2000, 1999 and 1998 estimated on the date of grant using the Black-Scholes option pricing model was $4.11, $3.89 and $2.80, respectively. The fair value of options granted in 2000, 1999 and 1998 were determined using the following assumptions: a risk-free interest rate of 6.10%, 5.65% and 4.69%, respectively, no dividend yield, expected life of 10 years which equals the lives of the grants, and no expected volatility. The following is summary information about the Company's stock options outstanding at December 30, 2000:
WEIGHTED WEIGHTED WEIGHTED OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE EXERCISE DECEMBER 30, REMAINING EXERCISE DECEMBER 30, EXERCISE PRICE 2000 TERM (YEARS) PRICE 2000 PRICE -------- -------------- ------------ -------- -------------- -------- $1.10 179,500 6.42 $1.10 179,500 $1.10 7.48 260,700 7.73 7.48 260,700 7.48 9.00 918,900 8.71 9.00 113,335 9.00 --------- ---- ----- ------- ----- 1,359,100 8.22 $7.67 553,535 $5.72 ========= ==== ===== ======= =====
DEFERRED COMPENSATION PLAN The Company has 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 the Company. 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. The plan provides that an employee who becomes 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 the Company, 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 the Company's Board of Directors. The contributions made by the Company on behalf of its employees were not significant in 2000 and 1999. 8. COMMITMENTS AND CONTINGENCIES: LEASES The Company leases land, buildings, equipment and vehicles under various operating leases which expire between 2001 and 2010. Future minimum lease commitments for continuing operations at December 30, 2000 are as follows (in thousands): 2001........................................................ $ 23,892 2002........................................................ 21,780 2003........................................................ 18,981 2004........................................................ 15,983 2005........................................................ 12,462 Thereafter.................................................. 23,496 -------- $116,594 ========
Rent expense under these operating leases was $20.8 million in 2000, $14.2 million in 1999 and $10.2 million in 1998. Obligations under capital leases are not significant. 26 29 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PURCHASE COMMITMENTS In May 1997, the Company entered into a purchase agreement with a supplier (the "Tire Supply Agreement" -- see Note 11) which expires May 2007. Under the terms of the agreement, the Company has agreed to purchase all requirements of its "Winston" brand tires at a negotiated price specified in the agreement. LEGAL PROCEEDINGS In the fourth quarter of 2000, Winston was named as a defendant in a class action lawsuit alleging that Winston violated certain California wage regulations and unfair business practices statutes. The Company believes that Winston's operations, including its wage practices, fully comply with applicable California and federal legal requirements and that the plaintiffs' claims are without merit. The Company is vigorously defending the matter. The Company is also involved in various other proceedings incidental to the ordinary course of its business. The Company believes, based on consultation with legal counsel, that none of these other proceedings will have a material adverse effect on its financial condition or results of operations. 9. DISCONTINUED OPERATIONS: Effective January 26, 2001, the Company's Board of Directors authorized the exit of retail operations and determined that it was in the Company's best interest to solely concentrate on wholesale distribution, which it considers to be its core business. In that regard, the Company is actively pursuing the sale of the operations of Winston, its retail segment, and anticipates that the disposition will be completed by the summer of 2001. Accordingly, this segment has been reflected as a discontinued operation in the accompanying consolidated financial statements and previously reported financial results for all periods have been restated to reflect this treatment. In connection with the decision to discontinue Winston, the Company has recorded an estimated loss of $1.2 million, net of income tax benefits of $0.8 million. This loss reflects management's estimate of sale proceeds, net of associated transaction costs, and includes the estimated operating losses from the measurement date, January 26, 2001, to the estimated date of disposal. The timing of the Winston sale and the proceeds to be realized are dependent on numerous factors, some of which are beyond management's control. Therefore, management's estimates may be revised and reported in future periods. Net sales of discontinued operations in fiscal 2000, 1999 and 1998 were approximately $178.0 million, $164.0 million and $149.8 million, respectively. Net sales from continuing operations in 2000, 1999 and 1998 include approximately $60.6 million, $55.9 million and $27.4 million of intersegment sales to Winston that have not been eliminated in the accompanying statements of operations. The net assets of the discontinued operations primarily consist of property and equipment, inventory, payables and other normal operating assets and liabilities. In connection with the lease obligations of discontinued operations, the Company has net future minimum lease commitments of $14.5 million in 2001, $12.7 million in 2002, $11.4 million in 2003, $9.4 million in 2004, $8.0 million in 2005 and $41.7 million, thereafter. The Company also has capital lease obligations totaling $2.3 million. 10. WARRANTS: In May 1997, in connection with the issuance of senior subordinated debt ("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 in part, but 27 30 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) in no event later than the date of an initial public offering or a sale transaction. The Company recorded the warrants at fair value, which resulted in a discount on the Subordinated Debt in the same amount. In 1999, in conjunction with Charlesbank's purchase of the Company, the terms of the warrants were amended to eliminate a provision which may have required the Company to repurchase the warrants for cash. As a result of this amendment, the warrants were reclassified and presented as a component of stockholders' investment. 11. 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 early termination of the Tire Supply Agreement (see Note 8), 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 Revolver, 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, 2000, 1999 and 1998, 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 Note 8). 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 2000, 1999 and 1998 based on the Company's purchases, the stated value of the Series B Preferred Stock was reduced by $0.1 million, $0.3 million and $0.1 million, respectively. 12. COMMON STOCK: CHANGE OF CONTROL On May 24, 1999, Charlesbank 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 28 31 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) common stock for a purchase price of approximately $44.7 million. During 1999, approximately $1.7 million in fees related to this transaction were charged to retained earnings. The Company's financial statements have not been adjusted to reflect the acquisition cost basis of Charlesbank due to the existence of the $150.0 million of publicly held Senior Notes. CLASS A AND CLASS B COMMON STOCK On May 12, 1998, the Company's Board of Directors amended the Company's Articles of Incorporation to create two classes of common stock. At December 30, 2000, 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"). In August 1999, the Company offered all holders of Class B common stock the opportunity to exchange their shares for a like number of shares of Class A common stock. In response to this offer, 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 the Company the opportunity to acquire restricted shares of Class A common stock. The Company'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 30, 2000, directors and executives of the Company 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 note 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. 13. SUBSEQUENT EVENTS: On March 30, 2001, the Company amended its articles of incorporation to authorize 15,000,000 shares of a single class of $0.01 par value common stock and 1,344,834 shares of $0.01 par value preferred stock. On April 2, 2001 the Company issued 1,333,334 shares of Series C Preferred Stock for $9.00 per share in exchange for $12.0 million in cash contributed by certain of its principal stockholders. Shares of Series C Preferred Stock accrue dividends at an annual rate of 12% and are redeemable beginning May 16, 2009 at the initial price plus any cumulative unpaid dividends as of the redemption date. However, as long as any shares of Series A Preferred Stock or Series B Preferred Stock remain outstanding, no dividends may be paid, nor redemption occur. In addition, shares of Series C Preferred Stock are convertible into common stock at a conversion price of $9.00 per common share. The Company and its lenders amended the loan and security agreement ("the Revolver") effective March 30, 2001 (See Note 4). 29 32 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. SUBSIDIARY GUARANTOR FINANCIAL INFORMATION: The Senior 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 condensed consolidating financial information for the Company is as follows (in thousands): CONDENSED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 30, 2000 AND DECEMBER 31, 1999, ARE AS FOLLOWS:
AS OF DECEMBER 30, 2000 --------------------------------------------------- PARENT SUBSIDIARY COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED -------- ---------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents........................ $ 3,518 $ (191) $ -- $ 3,327 Accounts receivable, net......................... 74,682 27,146 -- 101,828 Inventories...................................... 109,841 69,984 -- 179,825 Other current assets............................. 14,481 9,036 -- 23,517 Inter-company receivables........................ 197,848 -- (197,848) -- Net assets of discontinued operations............ -- 17,866 -- 17,866 -------- -------- --------- -------- Total current assets..................... 400,370 123,841 (197,848) 326,363 -------- -------- --------- -------- Property and equipment, net........................ 21,555 10,949 -- 32,504 Goodwill and other intangible assets, net.......... 54,523 54,738 -- 109,261 Investment in subsidiaries......................... 73,985 -- (73,985) -- Other assets....................................... 26,563 2,429 -- 28,992 -------- -------- --------- -------- $576,996 $191,957 $(271,833) $497,120 ======== ======== ========= ======== LIABILITIES AND STOCKHOLDERS' INVESTMENT Current liabilities: Accounts payable................................. $127,062 $ 59,194 $ -- $186,256 Accrued expenses................................. 25,019 3,973 -- 28,992 Current maturities of long-term debt............. 289 1,182 -- 1,471 Inter-company payables........................... 148,980 48,868 (197,848) -- -------- -------- --------- -------- Total current liabilities................ 301,350 113,217 (197,848) 216,719 -------- -------- --------- -------- Revolving credit facility.......................... 130,020 -- -- 130,020 Long-term debt..................................... 156,871 4,071 -- 160,942 Other liabilities.................................. 8,709 684 -- 9,393 Redeemable preferred stock series A -- 4% cumulative, 7,000 shares authorized, issued and outstanding...................................... 7,000 -- -- 7,000 Redeemable preferred stock series B -- variable rate cumulative, 4,500 shares authorized, issued and outstanding.................................. 4,035 -- -- 4,035 Stockholders' investment: Inter-company investment......................... -- 124,343 (124,343) -- Class A common stock, par value $.01 par: 10,000,000 shares authorized; 5,286,917 shares issued and outstanding...................... 53 -- -- 53 Additional paid-in capital....................... 23,981 -- -- 23,981 Warrants......................................... 1,137 -- -- 1,137 Notes receivable from sale of stock.............. (1,046) -- -- (1,046) Retained deficit................................. (55,114) (50,358) 50,358 (55,114) -------- -------- --------- -------- Total stockholders' investment........... (30,989) 73,985 (73,985) (30,989) -------- -------- --------- -------- $576,996 $191,957 $(271,833) $497,120 ======== ======== ========= ========
30 33 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, 1999 --------------------------------------------------- PARENT SUBSIDIARY COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED -------- ---------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents........................ $ 3,820 $ 2,677 $ -- $ 6,497 Accounts receivable, net......................... 67,697 18,614 -- 86,311 Inventories...................................... 84,695 45,436 -- 130,131 Other current assets............................. 7,160 6,164 -- 13,324 Inter-company receivables........................ 191,974 -- (191,974) -- Net assets of discontinued operations............ -- 58,289 -- 58,289 -------- -------- --------- -------- Total current assets..................... 355,346 131,180 (191,974) 294,552 -------- -------- --------- -------- Property and equipment, net........................ 21,267 6,805 -- 28,072 Goodwill and other intangible assets, net.......... 39,533 42,069 -- 81,602 Investment in subsidiaries......................... 88,392 -- (88,392) -- Other assets....................................... 10,348 1,597 -- 11,945 -------- -------- --------- -------- $514,886 $181,651 $(280,366) $416,171 ======== ======== ========= ======== LIABILITIES AND STOCKHOLDERS' INVESTMENT Current liabilities: Accounts payable................................. $ 99,330 $ 34,842 $ -- $134,172 Accrued expenses................................. 15,263 1,871 -- 17,134 Current maturities of long-term debt............. 2,014 351 -- 2,365 Inter-company payables........................... 138,723 53,251 (191,974) -- -------- -------- --------- -------- Total current liabilities................ 255,330 90,315 (191,974) 153,671 -------- -------- --------- -------- Revolving credit facility.......................... 74,688 -- -- 74,688 Long-term debt..................................... 155,406 2,894 -- 158,300 Other liabilities.................................. 6,710 50 -- 6,760 Redeemable preferred stock series A - 4% cumulative, 7,000 shares authorized, issued and outstanding...................................... 7,000 -- -- 7,000 Redeemable preferred stock series B - variable rate cumulative, 4,500 shares authorized, issued and outstanding...................................... 4,094 -- -- 4,094 Stockholders' investment: Inter-company investment......................... -- 95,873 (95,873) -- Class A common stock, par value $.01 par: 10,000,000 shares authorized; 5,286,917 shares issued and outstanding........................ 53 -- -- 53 Additional paid-in capital....................... 23,981 -- -- 23,981 Warrants......................................... 1,137 -- -- 1,137 Notes receivable from sale of stock.............. (1,092) -- -- (1,092) Retained deficit................................. (12,421) (7,481) 7,481 (12,421) -------- -------- --------- -------- Total stockholders' investment........... 11,658 88,392 (88,392) 11,658 -------- -------- --------- -------- $514,886 $181,651 $(280,366) $416,171 ======== ======== ========= ========
31 34 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FISCAL YEARS ENDED DECEMBER 30, 2000, DECEMBER 31, 1999 AND DECEMBER 31, 1998 ARE AS FOLLOWS:
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2000 --------------------------------------------------- PARENT SUBSIDIARY COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED -------- ---------- ------------ ------------ Net sales.......................................... $742,754 $344,506 $ -- $1,087,260 Cost of goods sold................................. 603,394 283,910 -- 887,304 -------- -------- ------- ---------- Gross profit..................................... 139,360 60,596 -- 199,956 Selling, general and administrative expenses....... 110,708 62,062 -- 172,770 -------- -------- ------- ---------- Operating income (loss).......................... 28,652 (1,466) -- 27,186 -------- -------- ------- ---------- Other income (expense): Interest expense................................. (26,011) (436) -- (26,447) Other income..................................... 677 241 -- 918 Equity in loss of subsidiaries................... (43,483) -- 43,483 -- -------- -------- ------- ---------- Income (loss) from continuing operations before income taxes..................................... (40,165) (1,661) 43,483 1,657 Provision for income taxes......................... 2,528 684 -- 3,212 -------- -------- ------- ---------- Loss from continuing operations.................... (42,693) (2,345) 43,483 (1,555) Discontinued operations: Loss from discontinued operations................ -- (39,938) -- (39,938) Loss on disposal of discontinued operations...... -- (1,200) -- (1,200) -------- -------- ------- ---------- Net loss........................................... $(42,693) $(43,483) $43,483 $ (42,693) ======== ======== ======= ==========
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 --------------------------------------------------- PARENT SUBSIDIARY COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED -------- ---------- ------------ ------------ Net sales.......................................... $662,542 $245,507 $ -- $ 908,049 Cost of goods sold................................. 549,173 199,698 -- 748,871 -------- -------- ------- ---------- Gross profit..................................... 113,369 45,809 -- 159,178 Selling, general and administrative expenses....... 96,949 40,703 -- 137,652 -------- -------- ------- ---------- Operating income................................. 16,420 5,106 -- 21,526 -------- -------- ------- ---------- Other income (expense): Interest expense................................. (21,672) (328) -- (22,000) Other income..................................... 2,100 6 -- 2,106 Equity in loss of subsidiaries................... (3,314) -- 3,314 -- -------- -------- ------- ---------- Income (loss) from continuing operations before income taxes..................................... (6,466) 4,784 3,314 1,632 Provision for income taxes......................... 122 2,759 -- 2,881 -------- -------- ------- ---------- Income (loss) from continuing operations........... (6,588) 2,025 3,314 (1,249) Loss from discontinued operations.................. -- (5,339) -- (5,339) -------- -------- ------- ---------- Net loss........................................... $ (6,588) $ (3,314) $ 3,314 $ (6,588) ======== ======== ======= ==========
32 35 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 --------------------------------------------------- PARENT SUBSIDIARY COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED -------- ---------- ------------ ------------ Net sales.......................................... $478,120 $115,759 $ -- $593,879 Cost of goods sold................................. 399,957 91,611 -- 491,568 -------- -------- ------- -------- Gross profit..................................... 78,163 24,148 -- 102,311 Selling, general and administrative expenses....... 70,251 22,016 -- 92,267 -------- -------- ------- -------- Operating income................................. 7,912 2,132 -- 10,044 -------- -------- ------- -------- Other income (expense): Interest expense................................. (13,191) (217) -- (13,408) Other income..................................... 720 71 -- 791 Equity in income of subsidiaries................. 1,458 -- (1,458) -- -------- -------- ------- -------- Income (loss) from continuing operations before income taxes..................................... (3,101) 1,986 (1,458) (2,573) Provision (benefit) for income taxes............... (593) 705 -- 112 -------- -------- ------- -------- Income (loss) from continuing operations........... (2,508) 1,281 (1,458) (2,685) Income from discontinued operations................ -- 177 -- 177 -------- -------- ------- -------- Net income (loss) before extraordinary charge...... (2,508) 1,458 (1,458) (2,508) Extraordinary charge............................... (2,216) -- -- (2,216) -------- -------- ------- -------- Net income (loss).................................. $ (4,724) $ 1,458 $(1,458) $ (4,724) ======== ======== ======= ========
33 36 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED DECEMBER 30, 2000, DECEMBER 31, 1999 AND DECEMBER 31, 1998 ARE AS FOLLOWS:
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2000 --------------------------------------------------- PARENT SUBSIDIARY COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED -------- ---------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).................................. $(42,693) $(43,483) $ 43,483 $(42,693) Adjustments to reconcile net income to net cash provided by operating activities: Net loss from discontinued operations............ -- 39,938 -- 39,938 Loss on disposal of discontinued operations...... -- 1,200 -- 1,200 Depreciation and amortization of goodwill, other intangibles and other assets.................. 7,965 7,513 -- 15,478 Deferred taxes................................... 2,032 550 -- 2,582 Other............................................ (190) 21 -- (169) Equity in loss of subsidiaries................... 43,483 -- (43,483) -- Changes in operating assets and liabilities: Accounts receivable, net......................... 529 (89) -- 440 Inventories...................................... (16,421) (6,129) -- (22,550) Other current assets............................. (6,404) (2,666) -- (9,070) Accounts payable and accrued expense............. 45,663 8,844 -- 54,507 Other............................................ 1,331 (419) -- 912 -------- -------- -------- -------- Net cash provided by continuing operations............................. 35,295 5,280 -- 40,575 -------- -------- -------- -------- Net cash used in discontinued operations............................. -- (14,786) -- (14,786) -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired............... (69,449) (700) -- (70,149) Purchase of property and equipment............... (3,849) (10,875) -- (14,724) Proceeds from sale of property and equipment..... 2,170 548 -- 2,718 Intercompany..................................... (19,541) 19,541 -- -- -------- -------- -------- -------- Net cash provided by (used in) investing activities............................. (90,669) 8,514 -- (82,155) -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt......... -- 105 -- 105 Principal payments on long-term debt............. (260) (1,981) -- (2,241) Net proceeds from revolving credit facility...... 55,332 -- -- 55,332 -------- -------- -------- -------- Net cash provided by (used in) financing activities............................. 55,072 (1,876) -- 53,196 -------- -------- -------- -------- Net decrease in cash and cash equivalents.......... (302) (2,868) -- (3,170) Cash and cash equivalents, beginning of year....... 3,820 2,677 -- 6,497 -------- -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR............. $ 3,518 $ (191) $ -- $ 3,327 ======== ======== ======== ========
34 37 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 ---------------------------------------------------- PARENT SUBSIDIARY COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED -------- ----------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss........................................... $ (6,588) $ (3,314) $ 3,314 $ (6,588) Adjustments to reconcile net income to net cash provided by operating activities: Net loss from discontinued operations............ -- 5,339 -- 5,339 Depreciation and amortization of goodwill, other intangibles and other assets.................. 6,557 6,178 -- 12,735 (Gain) loss on property and equipment disposals..................................... (398) 6 -- (392) Deferred taxes................................... 122 2,759 -- 2,881 Other............................................ (200) -- -- (200) Equity in loss of subsidiaries................... 3,314 -- (3,314) -- Changes in operating assets and liabilities: Accounts receivable, net......................... 4,926 (6,252) -- (1,326) Inventories...................................... (4,949) (8,203) -- (13,152) Other current assets............................. 451 (1,283) -- (832) Accounts payable and accrued expense............. (14,400) (5,884) -- (20,284) Other............................................ 183 37 -- 220 -------- -------- ------- -------- Net cash used in continuing operating activities............................. (10,982) (10,617) -- (21,599) -------- -------- ------- -------- Net cash used in discontinued operations............................. -- (2,133) -- (2,133) -------- -------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Mergers and acquisitions, net of cash acquired... (11,216) (875) -- (12,091) Purchase of property and equipment............... (3,541) (7,677) -- (11,218) Proceeds from sale of property and equipment..... 768 18 -- 786 Intercompany..................................... (26,074) 26,074 -- -- Other............................................ 1,785 50 -- 1,835 -------- -------- ------- -------- Net cash provided by (used in) investing activities............................. (38,278) 17,590 -- (20,688) -------- -------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt......... (1,393) (4,113) -- (5,506) Net proceeds from revolving credit facility...... 52,763 -- -- 52,763 Cash received for stock purchase................. 575 -- -- 575 Cash paid for stock repurchase................... (31) -- -- (31) Cash paid for costs associated with change in control....................................... (1,697) -- -- (1,697) Cash paid for financing costs.................... (1,915) -- -- (1,915) Other............................................ 80 -- -- 80 -------- -------- ------- -------- Net cash provided by (used in) financing activities............................. 48,382 (4,113) -- 44,269 -------- -------- ------- -------- Net increase (decrease) in cash and cash equivalents...................................... (878) 727 -- (151) Cash and cash equivalents, beginning of year....... 4,698 1,950 -- 6,648 -------- -------- ------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR............. $ 3,820 $ 2,677 $ -- $ 6,497 ======== ======== ======= ========
35 38 HEAFNER TIRE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 ---------------------------------------------------- PARENT SUBSIDIARY COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED -------- ----------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (loss).................................. $ (4,724) $ 1,458 $(1,458) $ (4,724) Adjustments to reconcile net income to net cash provided by operating activities, net of mergers and acquisitions -- Net income from discontinued operations.......... -- (177) -- (177) Extraordinary charge............................. 3,694 -- -- 3,694 Depreciation and amortization of goodwill, other intangibles and other assets.................. 4,402 3,269 -- 7,671 Reduction of preferred stock stated value........ (147) -- -- (147) Loss on disposal of property and equipment....... 264 -- -- 264 Deferred taxes................................... (1,864) (330) -- (2,194) Equity in income of subsidiaries................. (1,458) -- 1,458 -- Changes in operating assets and liabilities: Accounts receivable, net......................... (15,758) (5,009) -- (20,767) Inventories...................................... (1,096) (6,817) -- (7,913) Other current assets............................. (454) 449 -- (5) Accounts payable and accrued expenses............ 10,470 5,551 -- 16,021 Other............................................ (740) (379) -- (1,119) -------- ------- ------- -------- Net cash used in continuing operating activities............................. (7,411) (1,985) -- (9,396) -------- ------- ------- -------- Net cash used in discontinued operations............................. -- (288) -- (288) -------- ------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Mergers and acquisitions, net of cash acquired... (53,722) 523 -- (53,199) Purchase of property and equipment............... (1,810) (6,887) -- (8,697) Proceeds from sale of property and equipment..... 3,737 89 -- 3,826 Intercompany..................................... (12,009) 12,009 -- -- -------- ------- ------- -------- Net cash provided by (used in) investing activities............................. (63,804) 5,734 -- (58,070) -------- ------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of long-term debt..... 150,000 -- -- 150,000 Principal payments of long-term debt............. (31,128) (1,586) -- (32,714) Net repayments of revolving credit facility...... (36,278) (1,793) -- (38,071) Cash paid for stock repurchase................... (3) -- -- (3) Cash paid for financing activities............... (8,030) -- -- (8,030) Other............................................ (8) 726 -- 718 -------- ------- ------- -------- Net cash provided by (used in) financing activities............................. 74,553 (2,653) -- 71,900 -------- ------- ------- -------- Net increase in cash and cash equivalents.......... 3,338 808 -- 4,146 Cash and cash equivalents, beginning of year....... 1,360 1,142 -- 2,502 -------- ------- ------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR............. $ 4,698 $ 1,950 $ -- $ 6,648 ======== ======= ======= ========
36 39 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..................... 45 Chairman Richard P. Johnson..................... 53 President, Chief Executive Officer and Director William E. Berry....................... 45 Executive Vice President -- Finance and Administration J. Michael Gaither..................... 48 Executive Vice President, General Counsel and Treasurer Daniel K. Brown........................ 47 President, Winston Tire Company and Senior Vice President -- Procurement Phillip E. Marrett..................... 50 Senior Vice President -- Sales and Marketing J. David Phillips...................... 54 Senior Vice President -- Human Resources Ray C. Barney.......................... 46 President, Heafner Tire Group -- Western Division Randall Haas........................... 50 President, Heafner Tire Group -- Central Division James Matthews......................... 57 President, Heafner Tire Group -- Northern Division Joseph P. Donlan....................... 54 Director Kim G. Davis........................... 47 Director Tim R. Palmer.......................... 43 Director Jon M. Biotti.......................... 32 Director Todd Krasnow........................... 43 Director Lenny Pippin........................... 53 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. Richard P. Johnson -- President, Chief Executive Officer and Director. Mr. Johnson became President and Chief Executive Officer in January 2001 and prior to that time, served as President of Heafner's Southeast Division. He 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 37 40 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. William E. Berry -- Executive Vice President -- Finance and Administration. Mr. Berry joined Heafner in May 1998 as a result of the merger with Itco Tire Company and served as Senior Vice President of Finance for the Southeast Division. Prior to that, he joined Itco Tire Company as Controller in 1984 and served as its Senior Vice President of Finance until 1996. From 1996 to the merger with Heafner, he served as Itco's Executive Vice President in charge of business development and sales and marketing. Prior to that, Mr. Berry held a variety of financial management positions for a subsidiary of the Dr. Pepper Company and also spent three years in a public accounting firm. He holds a B.S. in Business Administration from Virginia Tech. J. Michael Gaither -- Executive Vice President, General Counsel and Treasurer. 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. Daniel K. Brown -- President, Winston Tire and Senior Vice President -- Procurement. 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. from Western Carolina University. Phillip E. Marrett -- Senior Vice President -- Sales and Marketing. Mr. Marrett joined Heafner Tire Group in 1998 as Regional Vice President in the Southeast Division. Prior to joining Heafner, Mr. Marrett worked for ITCO Tire (1997-1998) and Dunlop Tire (1976-1996). J. David Phillips -- Senior Vice President -- Human Resources. Mr. Phillips joined Heafner Tire Group in November 1999. Prior to that he held various human resources positions with Celanese Corporation (1977 to 1984) and Hoechst Celanese Corporation (1988 to 1999), a diversified commodity and specialty chemicals manufacturer. Mr. Phillips also served as a Vice President of Human Resources for a division of Sara Lee Corporation (1984 to 1987) and as an Investment Broker for Edward Jones Inc. (1987 to 1988). He earned a B.S. from Pennsylvania State University. Ray C. Barney -- President, Heafner Tire Group -- Western Division. 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. Randall M. Haas -- President, Heafner Tire Group -- Central Division. Mr. Haas joined T.O. Haas Tire Co in 1968 and held several management positions prior to becoming president in 1975, a position he held until T.O. Haas became a part of Heafner in May 2000. Mr. Haas also served as president of its parent company T.O. Haas Holding Co., Inc. from 1983 until 2000. Mr. Haas received his bachelor's degree from the University of Nebraska in 1973. James L. Matthews -- President, Heafner Tire Group -- Northern Division. Mr. Matthews joined Heafner Tire Group as President of the Northern Division in July 2000. Mr. Matthews has over 30 years experience in the tire industry having served in a variety of management positions with both ITCO and Merchant's including President and COO of Merchant's Inc. from 1985-2000. Mr. Matthews received his bachelor's degree in accounting from Barton College in 1972. 38 41 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, and 1818 Mezzanine Fund II, L.P. 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., Wise Foods, Inc. and Fiber Composites, LLC. 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 several private companies. 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. 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. from Harvard University. Todd Krasnow -- Director. Mr. Krasnow is the cofounder and CEO of ZOOTS, The Cleaner Cleaner. Prior to ZOOTS, he was Executive Vice President of Sales and Marketing for Staples. He joined Staples as part of its original management team in 1986, before it opened its first office superstore in the country. During his 12 years with Staples, Mr. Krasnow helped launch the company's California operations, ran the company's international joint ventures and started the company's catalog operation. Mr. Krasnow serves on several local non-profit boards. He graduated from Cornell University, and from Harvard Business School in 1983. M. Lenny Pippin -- Director. Mr. Pippin is President and Chief Executive Officer of Schwan's Sales Enterprises, Inc. He earned his bachelor's degree from Florida Atlantic University in Boca Raton, Florida and currently is a member of the Board of Directors of Schwan's Sales Enterprises, Inc. He also serves on a number of non-profit organizations in a similar capacity, including the Florida Chamber of Commerce, Tampa Bay United Way, Tampa Bay Museum of Science and Industry, Lowery Park Zoo, Children's Home of Tampa and the Florida Council of 100, an organization of the state's largest business interests. 39 42 ITEM 11. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE The following table contains information concerning the compensation for services in all capacities to Heafner for the fiscal years 2000, 1999 and 1998 of the following "Named Executive Officers," who are those persons who (a) served during the fiscal year ended December 30, 2000 as the Chief Executive Officer of Heafner and, (b) were, at December 30, 2000, the other four most highly compensated executive officers of Heafner who earned more than $100,000 in salary and bonus in 2000.
LONG-TERM COMPENSATION ANNUAL COMPENSATION ------------ --------------------------------- SECURITIES FISCAL OTHER ANNUAL UNDERLYING ALL OTHER YEAR SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION NAME AND PRINCIPAL POSITION ENDED ($) ($) ($)(a) (#)(b) ($) - --------------------------- -------- ------- ------- ------------ ------------ ------------ Richard P. Johnson(c)....... 12/30/00 275,000 161,975 -- 30,000 -- President, Chief Executive 12/31/99 280,166 121,780 15,500 75,000 -- Officer; Former President, 12/31/98 125,004(d) 42,512 -- 25,000 37,131(e) Heafner-ITCO Donald C. Roof(c)........... 12/30/00 400,000 -- -- 50,000 -- Former President, 12/31/99 334,588 135,372 50,500 200,000 -- Chief Executive Officer 12/31/98 231,840 122,688 25,500 15,000 -- J. Michael Gaither.......... 12/30/00 246,000 36,900 -- 25,000 -- Executive Vice President, 12/31/99 236,885 71,882 41,153 75,000 -- General Counsel and 12/31/98 213,924 113,174 15,500 15,000 -- Secretary Daniel K. Brown............. 12/30/00 230,000 34,500 -- 25,000 -- President, Winston Tire and 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 -- Procurement Ray C. Barney............... 12/30/00 250,000 69,000 -- -- -- President, CPW 12/31/99 229,992 34,897 15,500 -- -- 12/31/98 31,944 -- -- 3,000 --
- --------------- (a) This column includes amounts for perquisites and other personal benefits including the annual contribution for deferred compensation plan in cases where such aggregate amounts exceed the reporting threshold of $50,000 or 10% of total annual salary and bonus. (b) This column includes stock options granted in 1998, 1999 and 2000 under Heafner's stock option plans, which is discussed below under "-- Stock Option Plans." All options granted in 1998, 57,335 of the options granted in 1999 and 11,478 of the options granted in 2000 vested as of December 30, 2000. The remaining options vest as described in "-- Stock Option Plans," below. (c) Effective January 2001, Mr. Johnson succeeded Mr. Roof as President and Chief Executive Officer and Mr. Roof left the Company's employ. (d) 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 $250,000. (e) Consists of taxable amounts reported in connection with reimbursement of relocation costs. 40 43 OPTION/SAR GRANTS IN 2000 No stock appreciation rights were granted during 2000. The following table contains information concerning the grant of stock options to each of the Named Executive Officers during 2000:
INDIVIDUAL GRANTS -------------------------------------------------- POTENTIAL REALIZABLE PERCENT OF VALUE AT ASSUMED NUMBER OF TOTAL OPTIONS ANNUAL RATES OF STOCK SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION FOR UNDERLYING EMPLOYEES OR BASE OPTION TERM(b) OPTIONS IN FISCAL PRICE EXPIRATION ----------------------- NAME GRANTED(a) YEAR ($/SH) DATE 5%($) 10%($) - ---- ---------- ------------- -------- ---------- ---------- ---------- Richard P. Johnson................ 30,000 11.0% $9.00 6/06/10 $169,802 $430,310 Donald C. Roof.................... 50,000 18.3 9.00 6/06/10 283,003 717,184 J. Michael Gaither................ 25,000 9.2 9.00 6/06/10 141,501 358,592 Daniel K. Brown................... 25,000 9.2 9.00 6/06/10 141,501 358,592 William E. Berry.................. 2,500 0.9 9.00 6/06/10 14,150 35,859 J. David Phillips................. 2,500 0.9 9.00 6/06/10 14,150 35,859 Phillip E. Marrett................ 2,500 0.9 9.00 6/06/10 14,150 35,859 Ray C. Barney..................... -- -- -- -- -- --
- --------------- (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, 11,478 of the options granted to each of the Named Executive Officers in 2000 vested as of December 30, 2000. 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 30, 2000. STOCK OPTION PLANS The Company 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 the Company. 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 in the stock option plans. As of December 30, 2000, the maximum aggregate number of shares which may be issued under the stock option plans is 1,593,250 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 41 44 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 would have vested 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. 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 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 30, 2000, directors and executives of the Company owned a total of 280,000 restricted shares of Class A common stock. 42 45 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. The Company 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 fair market value. The repurchase price for shares of stock subject to the restricted stock agreement in the case where a stockholder is terminated for certain specified cause events or violates his or her confidentiality or non-compete obligations is either 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. 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 30, 2000, directors who were not employees of the Company, nominees of The 1818 Mezzanine Fund, or Charlesbank Capital were paid a fee of $2,500 for each board meeting attended. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 2000, Tim Palmer, Kim Davis and Lenny Pippin served on a compensation committee of Heafner's board of directors which reviewed and recommended executive compensation for the Named Executive 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 COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The compensation committee, at the direction of the board of directors of the Company, recommends the compensation of the Named Executive Officers and other executives of Heafner. In addition, the compensation committee administers Heafner's compensation and stock option plans. The key components of the compensation packages of the Company's executive officers are annual salary, bonuses dependent upon Heafner's performance, deferred compensation, and long-term, stock-based incen- 43 46 tives. 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 the Company'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 the Company to attract, retain, and motivate the executives and key managers necessary to accomplish its business objectives; and to reward exceptional performance. The compensation 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 paid on the basis of the Company's and/or the individual division's profitability results versus the pre-established targets. The compensation committee of the board recommends the performance-based targets for these bonuses and for each participant or group of participants in the divisions. The board of directors must approve these targets. The established targets have "threshold" (entry), "target" (plan), and "stretch" (upper) levels defined. No bonus is paid to any individual or division whose results fall below the established threshold targets. The individual whose performance results meet the anticipated plan results is paid at "target:" or 100% of the planned bonus. An individual whose results exceed the anticipated plan results can be paid at 200% of the "target" or greater if the results exceed the "stretch" or upper level of the plan. Performance above the upper levels will be prorated accordingly. 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 COMPENSATION COMMITTEE Kim G. Davis Tim R. Palmer Lenny Pippin INDEMNIFICATION OF OFFICERS AND DIRECTORS The Company'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. EMPLOYMENT AND SEVERANCE AGREEMENTS The Company has entered into executive severance agreements with each of Messrs. J. Michael Gaither, Brown, Johnson, and Barney, providing for annual base salaries of approximately $246,000, $230,000, $275,000, and $230,000 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, and Johnson 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 severance agreements may be terminated at any time by the Company 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 44 47 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. EXECUTIVE BONUS PLAN Bonuses are paid on the basis of the Company's and/or the individual division's profitability results versus the pre-established targets. The compensation committee of the board recommends the performance -- based targets for these bonuses and for each participant or group of participants in the divisions. The board of directors must approve these targets. The established targets have "threshold" (entry), "target" (plan), and "stretch" (upper) levels defined. No bonus is paid to any individual or division whose results fall below the established threshold targets. The individual whose performance results meet the anticipated plan results is paid at "target" or 100% of the planned bonus. An individual whose results exceed the anticipated plan results can be paid at 200% of the "target" or greater if the results exceed the "stretch" or upper level of the plan. Performance above the upper levels will be prorated accordingly. 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. The plan provides that an employee who becomes 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. 45 48 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 March 30, 2001 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) 94.1% The 1818 Mezzanine Fund, L.P................................ 1,034,000(d) 16.4 Jon M. Biotti............................................... --(e) Kim G. Davis................................................ 4,961,734(c) 94.1 Joseph P. Donlan............................................ 1,034,000(d) 16.4 William H. Gaither.......................................... 62,500(f) 1.2 Tim R. Palmer............................................... 4,961,734(c) 94.1 Mark A. Rosen............................................... 4,961,734(c) 94.1 Daniel K. Brown............................................. 109,956(g) 2.1 J. Michael Gaither.......................................... 109,956(g) 2.1 Richard P. Johnson.......................................... 98,132(h) 1.8 William E. Berry............................................ 23,698(i) 0.4 Phillip E. Marrett.......................................... 5,625(i) 0.1 Donald C. Roof.............................................. 189,095(j) 3.5 All directors and executive officers of Heafner as a group (16 persons).............................................. 6,594,696 99.0
- --------------- (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 30, 2001 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 March 30, 2001, 5,271,917 shares of Class A common were issued and outstanding. (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. 46 49 (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 59,956 shares of Class A common stock issuable upon the exercise of options which are exercisable within 60 days. (h) Includes 46,022 shares of Class A common stock issuable upon the exercise of options which are exercisable within 60 days. (i) Includes 5,625 shares of Class A common stock issuable upon the exercise of options which are exercisable within 60 days. (j) Includes 114,095 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. The Company and the 1818 Fund are also parties to a 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. 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 47 50 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, the Company 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 the Company'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. MONITORING FEE The Company 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 30, 2000. RELATED PARTY LEASES Heafner leases corporate office space in Lincolnton, North Carolina from Ann H. Gaither, the mother of the Chairman of Heafner, and her sister, Carolyn H. Williams, for an annual rent equal to approximately $87,000. The lease expires September 30, 2002. Through January 2001, the Company leased 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 had a note owing to Heafner with a principal balance of approximately $104,000 as of December 30, 2000. In January 2001, this building was sold and the balance on the note was repaid from the proceeds. In connection therewith, the Company was relieved of its lease obligation. The Company believes that these leases are on terms no less favorable to it than could have been obtained from an independent third party. 48 51 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 30, 2000 and December 31, 1999 - Consolidated Statement of Operations for the years ended December 30, 2000, December 31, 1999 and 1998 - Consolidated Statement of Stockholders' Equity for the years ended December 30, 2000, December 31, 1999 and 1998 - Consolidated Statement of Cash Flows for the years ended December 30, 2000, December 31, 1999 and 1998 - 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 30, 2000, DECEMBER 31, 1999 AND 1998 (IN THOUSANDS)
ADDITIONS ------------------------ CHARGED CHARGED BALANCE TO COSTS TO OTHER BALANCE JANUARY 1, AND EXPENSES ACCOUNTS DEDUCTIONS DECEMBER 31, ---------- ------------ --------- ---------- ------------ 2000 Allowance for doubtful accounts..... $2,057 $ 658 $ 396(1) $(1,234)(4) $1,877 Acquisition exit cost reserves...... 1,646 -- 459 (873) 1,232 1999 Allowance for doubtful accounts..... 2,020 2,785 280(2) (3,028)(4) 2,057 Acquisition exit cost reserves...... 4,738 -- (1,355) (1,737) 1,646 1998 Allowance for doubtful accounts..... 200 1,894 1,701(3) (1,775)(4) 2,020 Acquisition exit cost reserves...... -- -- 5,244(3) (506) 4,738
- --------------- (1) Includes amounts for Haas as of the May 25, 2000 acquisition date. (2) Includes amounts for California Tire as of the January 12, 1999 acquisition date. (3) Includes amounts for ITCO and CPW as of the May 20, 1998 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. 49 52 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To Heafner Tire Group, Inc. and Subsidiaries: We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of Heafner Tire Group, Inc. and subsidiaries included in this Form 10-K, and have issued our report thereon dated April 4, 2001. Our audits were made for the purpose of forming an opinion on those financial statements taken as whole. The schedule listed in Item 14(a) 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 states 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 April 4, 2001 50 53 3. Exhibits: (a) Exhibits: 3.1 Certificate of Incorporation of Heafner Tire Group, Inc. (the "Company")+/- 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 Company+/- 3.12 Articles of Incorporation of T.O. Haas Holding Co., Inc.**** 3.13 Amended By-laws of T.O. Haas Holding Co., Inc.**** 3.14 Articles of Incorporation of Haas Investment Company**** 3.15 By-laws of Haas Investment Company**** 3.16 Articles of Incorporation of T.O. Haas Tire Co., Inc.**** 3.17 By-laws of T.O. Haas Tire Co., Inc.**** 3.18 Restated Certificate of Incorporation of Heafner Tire Group, Inc.**** 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# 4.10 Share Purchase Agreement, dated as of April 2, 2001, among Heafner Tire Group, Inc., a Delaware corporation and the parties listed on Schedule I.**** 5.1 Opinion of Howard, Smith & Levin LLP as to the Legality of the New Notes++
51 54 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 Lenders+/- 10.2 Letter, dated March 6, 2000, from the Company to the Administrative Agent+/- 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# 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 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")* 10.10 Letter of Credit, dated as of May 20, 1998, issued to Frist Union National Bank, as CPW Escrow Agent* 10.11 Stock Purchase Agreement, dated as of April 9, 1997, among the Company and the shareholders of Oliver & Winston, Inc.* 10.12 1998 Michelin North America, Inc. Distributor Agreement, dated January 1, 1998, by and between Michelin North America, Inc. and the Company** 10.13 Letter Agreements, dated as of November 24 and 25, 1998, respectively, by and between Michelin North America and the Company ++ 10.14 The J.H. Heafner Company Amended and Restated 1997 Stock Option Plan # 10.15 Heafner Tire Group 1999 Stock Option Plan+/- 10.16 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# 10.17 Stock Option Agreement, dated as of August 16, 1999, between the Company and David H. Taylor+/- 10.18 Stock Option Agreement, dated as of December 10, 1999, between the Company and Ray C. Barney+/- 10.19 The J.H. Heafner Company 1997 Restricted Stock Plan* 10.20 Securities Purchase and Stockholders Agreement, dated as of May 28, 1997, among the Company and various management stockholders* 10.21 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# 10.22 Securities Purchase and Stockholders' Agreement, dated as of August 16, 1999, between the Company and David H. Taylor+/- 10.23 Letter Agreement, dated as of May 20, 1999, by and between the Company and William H. Gaither#
52 55 10.24 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# 10.25 Executive Severance Agreement, dated August 16, 1999, between the Company and David H. Taylor+/- 10.26 Executive Severance Agreement, dated November 1, 1999, between the Company and Ray C. Barney+/- 10.27 Stock Purchase Agreement, dated as of April 21, 1999, among the Company, Charlesbank Equity Fund IV, Limited Partnership and the stockholders party thereto# 10.28 Stock Purchase Agreement dated April 14, 2000, between Heafner Tire Group Inc., T.O. Haas Holding Co., Randall M. Haas and Ricky L. Haas+/-+/- 10.29 Stock Purchase Agreement dated May 25, 2000, between Heafner Tire Group Inc., Haas Investment Co., Randall M. Haas, Ricky L. Haas, and Mildred M. Haas+/-+/- 10.30 Stock Option Agreement dated as of June 6, 2000, between the Company and Donald C. Roof, Richard P. Johnson, J. Michael Gaither, Daniel K. Brown and David H. Taylor**** 10.31 Executive Severance Agreement dated May 25, 2000, between the Company and Randall M. Haas**** 10.32 Executive Severance Agreement dated July 24, 2000, between the Company and James Matthews**** 10.33 Amendment No. 4 and Waiver to Second Amended and Restated Loan and Security Agreement**** 11.1 Statement re: Computation of Per Share Earnings**** 12.1 Statement re: Computation of Ratios**** 21.1 Chart of Subsidiaries of the Company**** 25.1 Statement of Eligibility of Trustee on Form T-1 related to the Notes# 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. +/- Incorporated by reference to Heafner's 10-K, filed on March 30, 2000. +/-+/- Incorporated by reference to Heafner's 8-K, filed on November 14, 2000. **** Filed herewith. (b) Reports on Form 8-K Report on Form 8-K was filed on November 14, 2000 related to the acquisition of T.O. Haas Holding Co. Inc. and Haas Investment Company. 53 56 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 April 9, 2001. HEAFNER TIRE GROUP, INC. By: /s/ RICHARD P. JOHNSON ------------------------------------ Name: Richard P. Johnson 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 April 9, 2001.
SIGNATURE TITLE DATE --------- ----- ---- /s/ RICHARD P. JOHNSON Director, President and Chief Executive April 9, 2001 - --------------------------------------------- Officer Richard P. Johnson /s/ WILLIAM E. BERRY Executive Vice President -- Finance and April 9, 2001 - --------------------------------------------- Administration William E. Berry /s/ J. MICHAEL GAITHER Executive Vice President, General April 9, 2001 - --------------------------------------------- Counsel and Treasurer J. Michael Gaither /s/ WILLIAM H. GAITHER Chairman of the Board April 9, 2001 - --------------------------------------------- William H. Gaither /s/ JOSEPH P. DONLAN Director April 9, 2001 - --------------------------------------------- Joseph P. Donlan /s/ JON M. BIOTTI Director April 9, 2001 - --------------------------------------------- Jon M. Biotti /s/ KIM G. DAVIS Director April 9, 2001 - --------------------------------------------- Kim G. Davis /s/ TIM R. PALMER Director April 9, 2001 - --------------------------------------------- Tim R. Palmer /s/ LENNY PIPPIN Director April 9, 2001 - --------------------------------------------- Lenny Pippin /s/ TODD KRASNOW Director April 9, 2001 - --------------------------------------------- Todd Krasnow
54 EX-3.12 2 g67750ex3-12.txt ARTICLES OF INCORPORATION OF T.O. HAAS HOLDING CO. 1 EXHIBIT 3.12 ARTICLES OF INCORPORATION OF T.O. HAAS HOLDING CO., INC. ARTICLE I Name The name of the corporation is T.O. Haas Holding Co., Inc. ARTICLE II Term The corporation shall commence business when these Articles of Incorporation are filed with the Secretary of State of Nebraska, and its duration shall be perpetual. ARTICLE III Purposes The purposes for which the corporation is organized are to transact any or all lawful business for which corporations may be incorporated under the Nebraska Business Corporation Act, and to engage in any other business related or unrelated thereto which the Board of Directors shall deem to be for the best interests of the corporation. The corporation shall have all of the powers set forth in the Nebraska Business Corporation Act. ARTICLE IV Capital Stock The aggregate number of shares which the corporation shall have authority to issues is 10,000, having a par value of $1.00 per share, all of which shall be common stock. Shares shall be subject to such provisions restricting their transfer as the shareholders may from time to time agree upon in writing. ARTICLE V Registered Office and Agent The street address of the corporation's initial registered office is P.O. Box 81067, 690 West "O" Street, Lincoln, Nebraska 68501, and the name and address of its initial registered agent is Randall M. Haas. 2 -2- ARTICLE VI Incorporator The name and street address of the incorporator is William E. Olson, P.O. Box 81686, 1227 "J" Street, Lincoln, Nebraska 68501. /s/ William E. Olson -------------------------------------- Incorporator 3 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF T.O. HAAS HOLDING CO., INC. This Amended and Restated Articles of Incorporation of T.O. Haas Holding Co., Inc., was adopted by unanimous written consent of the holders of all of the outstanding shares of common stock of the corporation, constituting the only class of stock at the time of the adoption hereof. The original articles of incorporation were filed December 1, 1982, under the name T.O. Haas Holding Co., Inc. ARTICLE I NAME The name of the corporation is T.O. Haas Holding Co., Inc. ARTICLE II TERM The corporation commenced business when the original articles of incorporation were filed with the Secretary of State of Nebraska, and the duration of the corporation shall be perpetual. ARTICLE III PURPOSES AND POWERS The purpose for which the corporation is organized are to transact any or all lawful business for which corporations may be incorporated under the Nebraska Business Corporation Act, and to engage in any other business related or unrelated thereto which the Board of Directors shall deem to be for the best interests of the corporation. The corporation shall have all of the powers set forth in the Nebraska Business Corporation Act. -1- 4 ARTICLE IV CAPITAL STOCK 1. The corporation is authorized to issue five million (5,000,000) shares of common stock having a par value of one cent (1 cent) per share. Each share of the common stock of the corporation of the par value of $1.00 outstanding when this article becomes fully effective shall be, upon the filing of these Amended and Restated Articles of Incorporation with the Secretary of State of the State of Nebraska, reclassified and changed into one hundred (100) fully paid and nonassessable shares of common stock with par value of one cent (1 cent) each, and each holder of record of a certificate for one or more shares of common stock of the corporation as of the close of the business on the date this article becomes effective shall be entitled to receive as soon as practicable and without surrender of such certificate, a certificate or certificates representing the one hundred (100) shares of common stock for each one share of common stock represented by the certificate of such holder. The stated capital applicable to the one hundred two thousand (102,000) shares resulting from the reclassification and change of each such outstanding share shall, when this article becomes effective, be $1,020,00. 2. Each holder of the common stock of the corporation shall be entitled to one vote for each share of stock standing in the holder's name on the books of the corporation. At the election of directors, each holder of the common stock shall have as many votes as the number of shares of common stock owned by such holder multiplied by the number of directors to be elected by the holders of the common stock. These votes may be divided among the total number of directors to be elected by the holders of common stock, or distributed among any lesser number, in such proportion as the holder may desire. -2- 5 ARTICLE V OTHER AUTHORIZED SECURITIES Subject only to the provisions set forth in these Articles, and to the extent not prohibited by law, the Corporation may from time to time, as determined by the Board of Directors, issue warrants, rights (i.e., debentures, etc.) options and other securities giving the holders thereof the right to purchase shares of stock of any class upon such terms and conditions as the Board of Directors shall provide. ARTICLE VI DENIAL OF PREEMPTIVE RIGHTS No holders of shares of the corporation of any class shall be entitled as such, as a matter of right, to subscribe for, purchase, or receive any shares of the corporation of any class, or any securities convertible into, exchangeable for, or carrying a right or option to purchase its shares of any class, whether now or hereafter authorized and whether issued, sold, or offered for sale by the corporation for cash or other consideration or by way of dividend, split of shares, or otherwise. ARTICLE VII NUMBER AND CLASSIFICATION OF DIRECTORS The number of directors shall be determined by the By-laws. At such time as the number of directors shall equal or exceed nine (9), the directors shall be divided into three classes with each class to be as nearly equal in number as possible. Directors shall be elected and serve in accordance with Section 21-2037 of the Nebraska Business Corporation Act and the By-laws of the Corporation. ARTICLE VIII ORIGINAL ARTICLES OF INCORPORATION AND AMENDMENTS These Amended and Restated Articles of Incorporation supersede original articles of incorporation and all amendments thereto which have previously been filed with the Secretary of State of the State of Nebraska. -3- 6 ARTICLE IX REGISTERED AGENT The street address of the corporation's registered office is 640 West "O" Street, Lincoln, Nebraska 68501 and the name of its registered agent at such address is Randall M. Haas. The foregoing Amended and Restated Articles of Incorporation correctly set forth without change the corresponding provisions of the articles of incorporation and amendments thereto as amended in these Amended and Restated Articles of Incorporation. Dated: February 8, 1984 /s/ Randall Haas ------------------------------- President /s/ Rick Haas ------------------------------- Secretary -4- EX-3.13 3 g67750ex3-13.txt AMENDED BY-LAWS OF T.O. HAAS HOLDING CO. 1 EXHIBIT 3.13 BYLAWS OF T.O. HAAS HOLDING CO., INC. ARTICLE I MEETINGS OF STOCKHOLDERS 1. Annual Meeting. The annual meeting of the stockholders for the election of directors and the transaction of such other business as may come before the meeting shall be held each year on the 3rd Tuesday in May at 10:00 A.M. unless a different hour is specified in the notice or waiver of notice. 2. Special Meetings. A special meeting of the stockholders may be called at any time by the President or Vice President or by the holders of a majority of the shares of stock then issued and outstanding. 3. Place of Meetings. All meetings shall be held at the corporation's principal office, in Lincoln, Nebraska unless a different place is specified in the notice or waiver of notice. 4. Notice of Meetings. Written notice of the time and place shall be mailed to each stockholder at least five days before such meeting. Written notice of the time and place of a special meeting, and of the purpose for which the meeting is called, shall be mailed to each stockholder at least five days before any such meeting. No notice shall be required as to any stockholder who signs a written waiver of notice of the meeting. 5. Quorum. The presence at any regular or special meeting, in person or by proxy, of the holders of record of a majority of the shares of stock then issued and outstanding shall constitute a quorum for the transaction of business. If a quorum is not present, the stockholders who are present may adjourn the meeting until a quorum is present. At any adjourned meeting at which a quorum is present, any business may be transacted which could have been transacted at the meeting as originally called. 2 6. Voting. All matters shall be decided by a majority of the shares present and voting at any meeting, unless otherwise provided by statute or by the Articles of Incorporation. Corporate stockholders shall be represented by either its President or Vice President. ARTICLE II BOARD OF DIRECTORS 1. General Powers. The business of the corporation shall be managed by the Board of Directors and the officers, but all matters of policy shall be determined by the Board of Directors. 2. Number. There shall be at least 3 and not more than 9 directors. 3. Election. The first Board of Directors shall be appointed by the incorporator to serve until the first special or annual meeting of the stockholders and until their successors are elected and qualified. Thereafter, the stockholders shall elect directors to serve until the next annual meeting and until their successors are elected and qualified. Directors need not be stockholders. In the event more than 3 directors shall be elected, then, the terms of all non-shareholder directors shall be staggered. In such event, the term of any 3 directors shall not end in the same year, and each such director shall serve a minimum term of two years, provided, however, that at the time of the first election of such directors, an original term of one year may be set by vote of the shareholders for any such directors. Compensation of non-shareholder directors shall be determined by the Board of Directors. 4. Resignations and Vacancies. The stockholders or the Board of Directors may accept the resignation of a director before his term has expired. Vacancies in the Board of Directors shall be filled by the stockholders in accordance with the provisions of Article II, Section 3, or by the remaining directors. 3 6. Advisory Board. The Board of Directors may, at its discretion, appoint an Advisory Board to be composed of such individuals as the Board of Directors decides. The Advisory Board shall have no voting authority or power, shall be advisory only, and shall attend such Board of Directors meetings as requested by the President of the Corporation or the Chairman of the Board of Directors. ARTICLE III MEETINGS OF DIRECTORS 1. Annual Meeting. The annual meeting of the Board of Directors for the election of officers and transaction of such other business as may come before the meeting shall be held immediately following the adjournment of the annual meeting of stockholders and at the same location. 2. Special Meetings. Special meetings of the Board of Directors may be held at any time and place on call of the President or Vice-President or any director. Reasonable notice of the time and place thereof shall be given orally or in writing to the director, unless such notice is waived by him in writing. 3. Quorum. A majority of the directors shall constitute a quorum at any meeting and any action by the Board of Directors shall require the affirmative vote of a majority of those present. In the absence of a quorum, the director or directors present may adjourn the meeting from time to time until a quorum is present. ARTICLE IV OFFICERS 1. Officers. The corporation shall have a President, a Vice President, a Secretary and a Treasurer and such other officers as may be determined from time to time by the Board of Directors, and the same person may hold two or more of said offices, except that the President may not also hold the office of Vice President. 4 2. Election. Officers shall be elected annually and shall serve until their successors are elected and qualified. Officers need not be directors or stockholders. 3. Removal. The Board of Directors may, at a meeting called for that purpose, remove any officer. 4. Resignations and Vacancies. The Board of Directors may accept the resignation of an officer. A vacancy in any office may be filled by the Board of Directors. 5. Executive Committee. The Board of Directors may convene an Executive Committee to be composed of such officers or key employees of the Corporation or any of its subsidiaries as the Board deems advisable. The Executive Committee shall have the powers and duties delegated and prescribed to it by the Board of Directors. The Executive Committee shall meet regularly at such times and such places as it shall decide. ARTICLE V DUTIES AND SALARIES OF OFFICERS 1. President. The President shall be the chief executive officer of the corporation. He shall preside at all meetings of the stockholders and the directors; shall see that all orders and resolutions of the Board of Directors are carried into effect; and shall execute bonds, notes, deeds, mortgages, contracts and other instruments for the corporation. 2. Vice President. In the absence of the President, or in the event of his inability to act as such, the Vice President may perform the duties of the President. He shall assist the President and shall perform such duties as are assigned to him by the Board of Directors. 3. Secretary. The Secretary shall issue necessary notices of meetings, shall keep the minutes, shall have charge of the seal, and shall sign such instruments as require his signature, and shall perform all duties incident to his office or that are properly required of him by the Board of Directors. 5 4. Treasurer. The Treasurer shall see that the books of account are kept and are balanced each month, and that such financial statements or reports are prepared as the Board of Directors may require. 5. Salaries. The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors. ARTICLE VI CAPITAL STOCK 1. Certificates. Certificates of stock shall be issued to holders of fully paid stock in numerical order from the stock certificate book, and shall be signed by the President and by the Secretary and impressed with the corporate seal. A record of each certificate issued shall be kept on a stub thereof. 2. Transfer. Transfers of stock shall be made only upon the books of the company; and before a new certificate is issued, the old certificate must be surrendered for cancellation. 3. Restricted Sale on Assignment. The sale and transfer of stock in the corporation by the original stockholders may be restricted, and by acceptance of the original stock certificates, each stockholder may agree that his stock cannot be sold or transferred to any third party without first being offered for sale to the corporation at a price to be agreed upon by separate written agreement, or if none, by the corporation and stockholders annually. Each certificate of stock shall then contain the following or substantially similar language: "Transfer of this certificate and the stock represented thereby is restricted in accordance with the records of the corporation." ARTICLE VII DIVIDENDS The Board of Directors may, subject to the laws and statutes of Nebraska and the Articles of Incorporation, declare dividends on the capital stock of the corporation. 6 Dividends may be paid in cash, in property, or in shares of the capital stock of the corporation at par. ARTICLE VIII AMENDMENTS These Bylaws may be amended or repealed at any meeting of the Board of Directors. CERTIFICATE I hereby certify that the foregoing are the Bylaws duly approved and adopted at the first meeting of the Shareholders & Directors of the aforesaid corporation. DATED this 10th day of March, 1983. /s/ Randy Haas ------------------------------ Assistant Secretary 7 NBCI 104 CERTIFICATE OF BY-LAWS The undersigned Rickey L. Haas, Secretary of T.O. Haas Holding Co., Inc., hereby certifies that the foregoing By-Laws were adopted as the Corporate By-Laws of the corporation at its duly called meeting of the Board of Directors of said corporation on the ___ day of ___________, 19__, and have not be rescinded or amended to date other than as indicated and are presently in full force and effect. Certified as of March ___, 1984. - --------------------------------- --------------------------------- Attested To Corporate Secretary Randall M. Haas Rickey L. Haas (SEAL) 8 AMENDED BYLAWS OF T.O. HAAS HOLDING CO., INC. ARTICLE I MEETINGS OF STOCKHOLDERS 1. Annual Meeting. The annual meeting of the stockholders for the election of directors and the transaction of such other business as may come before the meeting shall be held each year on the second (3rd) Tuesday In May at 10:00 A.M. or at such other time designated by the Board of Directors. 2. Special Meetings. A special meeting of the stockholders may be called at any time by the President or Vice President or by the holders of not less than one tenth of the shares of stock entitled to vote at such meeting or by a majority of the Board of Directors. 3. Place of Meetings. All meetings shall be held at the corporation's principal office, 640 West "O" Street, Lincoln, Nebraska, unless a different place is specified in the notice or waiver of notice. 4. Notice of Meetings. Written or printed notice of the time and place of the annual meeting shall be mailed to each stockholder not less than ten (10) nor more than fifty (50) days before such meeting. Written notice of the time and place of a special meeting, and of the purpose for which the meeting is called, shall be mailed to each stockholder not less than ten (10) nor more than fifty (50) days before any such meeting. No notice shall be required as to any stockholder who signs a written waiver of notice of any meeting. 5. Quorum. The presence at any regular or special meeting, in person or by proxy, of the holders of record of a majority of the shares of stock then issued and -1- 9 outstanding shall constitute a quorum for the transaction of business. If a quorum is not present, the stockholders who are present may adjourn the meeting until a quorum is present. At any adjourned meeting at which a quorum is present, any business may be transacted which could have been transacted at the meeting as originally called. 6. Closing of Transfer Books or Fixing of Record Date. The Board of Directors of the corporation may close its stock transfer books for a period of not less than ten (10) nor more than fifty (50) days preceding the date of any meeting of shareholders, or the date for the payment of any dividend or for the allotment of rights, or the date when any exchange or reclassification of shares shall be effective; or, in lieu thereof, may fix in advance a date, not less than ten (10) nor more than fifty (50) days preceding the date of any meeting of shareholders, or the date for the payment of any dividend or for the allotment of rights, or the date when any exchange or reclassification of shares shall be effective, as the record date for the determination of shareholders entitled to notice of, or to vote at, such meeting, or shareholders entitled to receive payment of any such dividend or to receive any such allotment of rights, or to exercise rights in respect of any exchange or reclassification of shares; and the shareholders of record on such date of closing the transfer books, or on the record date so fixed, shall be the shareholders entitled to notice of and to vote at, such meeting, or to receive payment of such dividend or to receive such allotment of rights, or to exercise such rights in the event of an exchange or reclassification of shares, as the case may be. If the Board of Directors shall not have closed the transfer books or set a record date for the determination of its stockholders entitled to vote as hereinabove provided, the record date shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. -2- 10 7. Voting Lists. At least ten (10) days prior to any meeting of the stockholders, the officer or agent having charge of the transfer book for shares of the corporation shall make a complete list of the shareholders entitled to vote at such meeting, arranged in alphabetical order with the address of, and the number of shares held by, each shareholder, which list, for a period of ten days prior to such meeting, shall be kept on file at the registered office of the corporation and shall be subject to inspection by any shareholder at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subjected to the inspection of any shareholder during the whole time of the meeting. The original share ledger or transfer book or a duplicate thereof kept in this state, shall be prima facie evidence as to who are the shareholders entitled to examine such list or share ledger or transfer book or to vote at any meeting of shareholders. 8. Proxies. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact. Such proxy shall be filed with the Secretary of the corporation before, or at the time of the meeting. No proxy shall be valid if dated more than eleven (11) months prior to the date of the meeting, unless otherwise provided in the proxy. 9. Voting of Shares. Subject to the provisions of Section 11, each outstanding share of capital stock having voting rights shall be entitled to one vote upon each matter submitted to a vote at a meeting of shareholders. 10. Voting of Shares by Certain Holders. Shares standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent, or proxy as the by-laws of such corporation may prescribe, or, in the absence of such provisions, as the Board of Directors of such corporation may determine. -3- 11 (a) Shares standing in the name of a deceased person may be voted by his personal representative either in person or by proxy. Shares standing in the name of a guardian, conservator, or trustee may be voted by such fiduciary either in person or by proxy, but no such fiduciary shall be entitled to vote shares held by him without a transfer of such shares into his name. (b) Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his name if authority to do so is contained in an appropriate order of the court by which such receiver was appointed. (c) A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. 11. Cumulative Voting. In all elections for directors, every shareholder of capital stock having voting rights shall have the right to vote, in person or by proxy, the number of shares owned by him for as many persons as there are directors to be elected, or to accumulate said shares, and give one candidate as many votes as the number of directors multiplied by the number of his voting shares shall equal, or to distribute them on the same principle among as many candidates as he shall see fit. 12. Consent Actions. Any action required to be taken at a meeting of the shareholders of this corporation or any action which may be taken at a meeting of the shareholders may be taken without a meeting if consents in writing, setting forth the action so taken, shall be signed by all of the shareholders entitled to vote with respect to -4- 12 the subject matter thereof. Such consents shall have the same force and effect as a unanimous vote of the shareholders at a meeting duly held and may be stated as such in any certificate or document. The Secretary shall file the consents with the minutes of the meetings of shareholders. ARTICLE II BOARD OF DIRECTORS 1. General Powers. The business of the corporation shall be managed by the Board of Directors and the officers, but all matters of policy shall be determined by the Board of Directors. 2. Number. There shall be a minimum of five (5) and a maximum of twenty-five (25) directors as shall be determined from time to time by the Board of Directors or the shareholders, but in no event shall a decrease in the number have the effect of shortening the term of any incumbent director. 3. Election. Except as provided in Section 5 of this Article II, stockholders at each annual meeting shall elect directors to serve until the next annual meeting and until their successors are elected and qualified. Directors need not be stockholders. 4. Vacancies. In case of the death, resignation or disqualification of one or more of the directors, the surviving or remaining directors though less than a quorum, by majority vote, may fill such vacancy or vacancies until the successor or successors are elected. A director elected to fill a vacancy shall serve as such until the expiration of the term of the director whose place he has been elected to fill even though that term may extend beyond the next annual meeting of shareholders. 5. Classification. In the event that the number of directors equals or exceeds nine (9) at any time, the directors shall be divided into three classes with each -5- 13 class to be as nearly equal in number as possible, with the term of office of one class expiring each year. At the time that the directors me divided into classes, the members of each class shall be designated by the Board of Directors. At the first annual meeting of shareholders after a classification of the directors, directors of the first class shall be elected to hold office for a term expiring at the next succeeding annual meeting of the shareholders, directors of the second class shall be elected to hold office for a term expiring at the second succeeding annual meeting of shareholders and directors of the third class shall be elected to hold office for a term expiring at the third succeeding annual meeting of shareholders. At each annual meeting held thereafter while the directors are classified, directors shall be elected to hold office for a three (3) year term to succeed those whose terms expire at that meeting. When the number of directors is changed, any newly created directorship(s) or any decrease in directorship(s) shall be so apportioned among the classes as to make all classes as nearly equal in number as possible. Each director shall hold office for the term for which he is elected or until his successor shall have been elected and qualified. Directors may be, but need not be, shareholders. ARTICLE III MEETINGS OF DIRECTORS 1. Annual Meeting. The annual meeting of the Board of Directors for the election of officers and transaction of such other business as may come before the meeting shall be held immediately following the adjournment of the annual meeting of stockholders and at the same location. 2. Special Meetings. Special meetings of the Board of Directors may be held at any time and place on call of the President or Vice President or any director. Reasonable notice of the time and place thereof shall be given orally or in writing to each director, unless such notice is waived by him in writing. -6- 14 3. Quorum. A majority of the directors shall constitute a quorum at any meeting and any action by the Board of Directors shall require the affirmative vote of a majority of those present. In the absence of a quorum, the director or directors present may adjourn the meeting from time to time until a quorum is present. 4. Compensation. Directors as such shall not receive any stated salaries for their services, but by resolution of the Board of Directors a fixed sum and expenses of attendance, if any, may be allowed for attendance at each annual or special meeting of the Board of Directors; provided, that nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. 5. Removal. Directors may be removed as provided by law. 6. Consent Actions. Any action which is required to be or may be taken at a meeting of the directors may be taken without a meeting if consents in writing, setting forth the action so taken, are signed by all of the directors. The consents shall have the same force and effect as a unanimous vote of the directors at a meeting duly held, and may be stated as such in any certificate or document filed under this chapter. The secretary shall file the consents with the minutes of the meetings of the Board of Directors. ARTICLE IV COMMITTEES 1. Executive Committee. The Board of Directors by resolution adopted by a majority of the whole Board may establish from among its membership an Executive Committee consisting of two (2) or more directors who shall serve at the pleasure of the Board of Directors. The Executive Committee shall have and may exercise all power given to the Board of Directors by the Articles of Incorporation, the statutes and laws of -7- 15 the State of Nebraska, and these by-laws with respect to the usual and ordinary decisions in the conduct of the business in the interim between annual meetings of the Board of Directors. The Executive Committee shall report in detail to the full Board following each meeting of the Executive Committee, on actions authorized by the Executive Committee. The full Board shall have the right to amend, change, alter, or revoke any action approved by the Executive Committee, except no such change shall be made as to any action upon which a third party has relied. Vacancies in the Executive Committee shall be filled by the Board of Directors. The Executive Committee shall designate one of its members as Chairman and shall keep a record of its meetings and transactions. 2. Meetings of the Executive Committee. A majority of the Executive Committee shall constitute a quorum. The Executive Committee may determine its rules of procedure and the notice to be even of its meetings. 3. Other Committees. The Board of Directors by resolution may provide for such other standing or special committees of two (2) or more persons as it deems desirable and discontinue the same at its pleasure. Each such committee shall have such powers and perform such duties not inconsistent with law as may be assigned to it by the Board of Directors. ARTICLE V OFFICERS 1. Officers. The corporation shall have a President, a Vice President, Secretary and a Treasurer, one or more executive Vice Presidents and such other officers as the Board of Directors may from time to time deem appropriate. All officers and agents of the corporation, as between themselves and the corporation, shall have such authority and perform such duties in the management of the property and affairs of the corporation as may be provided in the by-laws, or, in the absence of such provision, as may be determined by resolution of the Board of Directors. -8- 16 2. Election and Term of Office. The officers of the corporation shall be elected annually by the Board of Directors at the annual meeting of the Board of Directors held after each annual meeting of shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as practicable. Vacancies may be filled or new offices created and filled at any meeting of the Board of Directors. Each officer shall hold office until his successor shall have been duly elected and shall have qualified or until his death or until such officer shall resign or shall have been removed in the manner hereinafter provided. Executive Vice Presidents and Assistant Secretaries may be appointed by the President subject to ratification by the Board of Directors at the next following annual or special meeting or by consent action. 3. Removal. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. 4. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the Board of Directors for the unexpired portion of the term. ARTICLE VI DUTIES AND SALARIES OF OFFICERS 1. President. The President shall be the Chief Executive Officer of the corporation. The President shall preside at all meetings of the stockholders and the directors; shall see that all orders and resolutions of the Board of Directors are carried into effect; and shall execute bonds, notes, deeds, mortgages; contracts and other instruments for the corporation. 2. Vice President. In the absence of the President, or in the event of his inability to act as such, the Vice President may perform the duties of the President. The -9- 17 vice president shall assist the President and shall perform such duties as are assigned to him by the Board of Directors. 3. Secretary. The Secretary shall issue necessary notices of meetings, shall keep the minutes, shall have charge of the seal, and shall sign such instruments as require his signature, and shall perform all duties incident to his office or that are properly required of him by the Board of Directors. 4. Treasurer. The Treasurer shall see that the books of account are kept and are balanced each month, and that such financial statements or reports are prepared as the Board of Directors may require. 5. Other Officers. The duties of all other officers shall be as determined by the Board of Directors or the President. 6. Compensation. The compensation of the officers shall be fixed from time to time by the Board of Directors except to the extent such responsibility is delegated to the President (who may in no event fix his own compensation) and no officer shall be prevented from receiving such compensation by reason of the fact that he is also a director of the corporation. 7. Proxy Votes. Unless otherwise ordered by the Board of Directors, the President or a Vice President duly authorized by the President shall have full power and authority on behalf of the company to attend and to vote at any meeting of the shareholders of any corporation in which this company may hold stock and may exercise on behalf of this corporation any and all of the rights and powers incident to the ownership of such stock at any such meeting, and shall have power and authority to execute and deliver proxies and consents on behalf of this corporation in connection with the exercise by this corporation of the rights and powers incident to the ownership of such stock. The Board of Directors from time to time may confer like powers upon any other person or persons. -10- 18 8. Duties of Officers May Be Delegated. In the absence or disability of any officer of the corporation, not otherwise provided for in Article V, or for any other reason that the Board of Directors may deem sufficient, the Board of Directors, by majority vote, may delegate, for as long a time as the Board of Directors shall deem necessary, all the powers and duties, or any of them, of such officers to any other officer or to any director or to any other person. ARTICLE VII CONTRACTS, LOANS, CHECKS AND DEPOSITS 1. Contracts. The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances. 2. Checks, Drafts, Etc. All checks, drafts or other order for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors. 3. Deposits. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositaries as the Board of Directors may select. ARTICLE VIII CERTIFICATES FOR SHARES AND THEIR TRANSFER 1. Certificates for Shares. Certificates representing shares of the corporation shall be in such form as may be determined by the Board of Directors. Each shareholder shall be entitled to have a certificate stating the number of shares owned by -11- 19 him in this corporation. All such certificates shall be signed by the President or a Vice President and the Secretary or an Assistant Secretary or by a facsimile of the signature of such officers. Every certificate authenticated by a facsimile of a signature must be countersigned by a transfer agent or transfer clerk, or by the facsimile signature of the trader agent or transfer clerk, and be registered by an incorporated bank or trust company, either domestic or foreign as registrar of transfers, before issuance. Even though an officer who signed, or whose facsimile signature has been written, printed or stamped on, a certificate for shares shall have ceased by death, resignation, or otherwise to be an officer of the Corporation before such certificate is delivered by the Corporation, such certificate shall be as valid as though signed by a duly elected, qualified, and authorized officer, if it be countersigned by a signature or facsimile signature of a transfer agent or transfer clerk and registered by an incorporated bank or trust company as registrar of transfers. All certificates for shares shall be consecutively numbered. The name of the person owning the shares represented thereby with the number of shares and date of issue shall be entered on the books of the corporation. All certificates surrendered to the corporation for transfer shall be cancelled, and no new certificates shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except that in case of a lost, destroyed, or mutilated certificate a new certificate may be issued therefor upon such terms and indemnity to the corporation as the Board of Directors may prescribe. 2. Transfers of Shares. Transfers of shares of the corporation shall be made only on the books of the corporation by the registered holder thereof or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the corporation, and on surrender for cancelation of the certificate for such shares. The person in whose name shares stand on the books of the corporation shall be -12- 20 deemed the owner thereof for all purposes as regards the corporation. Upon surrender to this corporation or the transfer agent of the corporation of a certificate for shares, duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to cancel the old certificate; issue a new certificate to the person entitled thereto, and record the transaction on its books. ARTICLE IX DIVIDENDS The Board of Directors from time to time may declare and the corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and its articles of incorporation. ARTICLE X CORPORATE SEAL The Board of Directors shall provide a corporate seal which shall be in the form of a circle and shall have inscribed thereon the name of the corporation and the words "Corporate Seal, Nebraska." ARTICLE XI WAIVER OF NOTICE Whenever any notice whatever is required to be given under the provisions of these by-laws or under the provisions of the articles of incorporation or under the provisions of the Nebraska Business Corporation Act, waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. -13- 21 ARTICLE XII INDEMNIFICATION OF OFFICERS AND DIRECTORS AGAINST LIABILITIES AND EXPENSES IN ACTIONS 1. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative, other than an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. 2. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of -14- 22 another corporation, partnership, joint venture, trust or other enterprise against expenses, including attorneys' fees, actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation. No indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation unless and only to the extent that the court in which the action or suit was brought determined upon application that, despite the adjudication of liability and in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. 3. To the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in sections 1 and 2 of this Article, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses, including attorneys' fees, actually and reasonably incurred by him in connection with the action, suit or proceeding. 4. Any indemnification under sections 1 and 2 of this Article unless ordered by a court, shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of the conduct set forth in this Article. The determination shall be made by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to the action, suit, or proceeding, or if such a quorum is not obtainable, or even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or by the shareholders. -15- 23 5. Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the corporation in advance of the final disposition of the action, suit, or proceeding as authorized by the Board of Directors in the specific case upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the corporation as authorized in this Article. 6. The indemnification provided by this Article shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his 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, and personal representatives of such a person. 7. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as an officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article. 8. Any indemnification of a director in accordance with this Article, including any payment or reimbursement of expenses, shall be reported in writing to the shareholders with the notice of the next shareholders' meeting or prior to such meeting. -16- 24 ARTICLE IV AMENDMENTS These by-laws may be altered, amended or repealed and new by-laws may be adopted by the Board of Directors or the Shareholders at a meeting thereof called for that purpose or by unanimous, written consent in lieu of such a meeting. ARTICLE XIV ARTICLE XV ACCOUNTING The accounting year to be adopted by the corporation shall be determined by resolution of the Board of Directors. ARTICLE XVI INSPECTION OF BOOKS The Board of Directors shall determine from time to time whether, and if allowed, when and under what conditions and regulations the accounts and books of the corporation, or any of them, shall be opened to the inspection of the shareholders, and the shareholders' rights in this respect are and shall be restricted and limited accordingly, but not contrary to law. /s/ ------------------------------ President /s/ ------------------------------ Secretary Date adopted: February 8, 1984 -17- 25 FIRST AMENDMENT TO THE AMENDED BYLAWS OF T.O. HAAS HOLDING CO., INC. This First Amendment to the Amended Bylaws of T.O. Haas Holding Co., Inc. was adopted at the Special Meeting of the Directors of the Corporation held on August 11, 1994. Article II, Section 2 is amended to read as follows: 2. Number. There shall be a minimum of three (3) and a maximum of twenty-five (25) directors as shall be determined from time to time by the Board of Directors or the shareholders, but in no event shall a decrease in the number have the effect of shortening the term of any incumbent director. Dated: August 11, 1994 /s/ William E. Olson ------------------------------------- William E. Olson, Assistant Secretary 26 SECOND AMENDMENT TO THE AMENDED BYLAWS OF T.O. HAAS HOLDING CO., INC. This Second Amendment to the Amended Bylaws of T.O. Haas Holding Co., Inc. was adopted at the Special Meeting of the Directors of the Corporation held on September 14, 1998. Article II, Section 2 of the Bylaws is amended to read as follows: 2. Number. There shall be a minimum of one (1) and a maximum of twenty-five (25) directors as shall be determined from time to time by the Board of Directors or the shareholders, but in no event shall a decrease in the number have the effect of shortening the term of any incumbent director. Dated: September 14, 1998 /s/ William E. Olson ---------------------------------------- William E. Olson, Assistant Secretary EX-3.14 4 g67750ex3-14.txt ARTICLES OF INCORPORATION OF HAAS INVESTMENT CO. 1 EXHIBIT 3.14 ARTICLES OF CORPORATION OF HAAS INVESTMENT COMPANY KNOW ALL MEN BY THESE PRESENTS: The undersigned, for the purpose of organizing a corporation, pursuant to the laws of the State of Nebraska, do hereby adopt the following Articles of Incorporation. I. The name of the corporation is Haas Investment Company. II. The period of the corporation's duration is perpetual. III. The purposes for which the corporation is organized are: To acquire, improve, rent and dispose of real estate and to do all other things proper and allowed for corporations to do and not forbidden by the laws of the State of Nebraska. IV. The corporation shall have and may exercise all powers and rights (1) conferred upon corporations by the Nebraska Business Corporation Act as amended from time to time, (2) not otherwise denied corporations by the laws of the State of Nebraska, and (3) necessary, suitable, proper, convenient, or expedient to the attainment of the purposes set forth in Article III. V. The aggregate number of shares which the corporation shall have authority to issue is 1,000 shares of common stock having a par value of $10.00 per share. VI. The stockholders shall adopt the By-Laws for the management of the corporation, which By-Laws may be amended as provided therein. VII. The street address of the initial registered office of the corporation is 640 West "O" Street, Lincoln, Nebraska 68528 2 and the registered agent at such address is Ricky Haas. VIII. The name and address of the incorporator is: Rick Haas 840 Lakeshore Drive Lincoln, Nebraska 68528 Dated this 7th day of May, 1979. /s/ Rick Haas ------------------------------ EX-3.15 5 g67750ex3-15.txt BY-LAWS OF HAAS INVESTMENT COMPANY 1 EXHIBIT 3.15 AMENDED AND RESTATED BYLAWS OF HAAS INVESTMENT COMPANY The Bylaws of Haas Investment Company have been amended and restated in their entirety by resolution of the Board of Directors of the corporation dated June 27, 1991, as follows: ARTICLE I MEETINGS OF STOCKHOLDERS 1. ANNUAL MEETING. The annual meeting of the stockholders for the election of directors and the transaction of such other business as may come before the meeting shall be held each year on the first Tuesday in May, at 10:00 o'clock A.M., unless a different hour is specified in the notice or waiver of notice. 2. SPECIAL MEETINGS. A special meeting of the stockholders may be called at any time by the President or Vice President or by the holders of a majority of the shares of stock then issued and outstanding. 3. PLACE OF MEETINGS. All meetings shall be held at the corporation's principal office in Lincoln, Nebraska, unless a different place is specified in the notice or waiver of notice. 4. NOTICE OF MEETINGS. Written notice of the time and place shall be mailed to each stockholder at least five days before such meeting. Written notice of the time and place of a special meeting, and of the purpose for which the meeting is called, shall be mailed to each stockholder at least five days before any such meeting. No notice shall be required as to any stockholder who signs a written waiver of notice of the meeting. 2 5. QUORUM. The presence at any regular or special meeting, in person or by proxy, of the holders of record of a majority of the shares of stock then issued and outstanding shall constitute a quorum for the transaction of business. If a quorum is not present, the stockholders who are present may adjourn the meeting until a quorum is present. At any adjourned meeting at which a quorum is present, any business may be transacted which could have been transacted at the meeting as originally called. 6. VOTING. All matters shall be decided by a majority of the shares present and voting at any meeting, unless otherwise provided by statute or by the Articles of Incorporation. Corporate stockholders shall be represented by either its President or Vice President. ARTICLE II BOARD OF DIRECTORS 1. GENERAL POWERS. The business of the corporation shall be managed by the Board of Directors and the officers, but all matters of policy shall be determined by the Board of Directors. 2. NUMBER. There shall be at least 3 director(s). 3. ELECTION. The first Board of Directors shall be appointed by the incorporator to serve until the first special or annual meeting of the stockholders and until their successors are elected and qualified. Thereafter, the stockholders shall elect directors to serve until the next annual meeting and until their 2 3 successors are elected and qualified. Directors need not be stockholders. 4. RESIGNATIONS AND VACANCIES. The stockholders or the Board of Directors may accept the resignation of a director before the director's term has expired. Vacancies in the Board of Directors shall be filled by the stockholders in accordance with the provisions of Article II, Section 3, or by the remaining directors. ARTICLE III MEETING OF DIRECTORS 1. ANNUAL MEETING. The annual meeting of the Board of Directors for the election of officers and transaction of such other business as may come before the meeting shall be held immediately following the adjournment of the annual meeting of stockholders and at the same location. 2. SPECIAL MEETINGS. Special meetings of the Board of Directors may be held at any time and place on call of the President or Vice-President or any director. Reasonable notice of the time and place thereof shall be given orally or in writing to the director, unless such notice is waived by the director in writing. 3. QUORUM. A majority of the directors shall constitute a quorum at any meeting and any action by the Board of Directors shall require the affirmative vote of a majority of those present. In the absence of a quorum, the director or directors 3 4 present may adjourn the meeting from time to time until a quorum is present. ARTICLE IV OFFICERS 1. OFFICERS. The corporation shall have a President, a Vice President, a Secretary and a Treasurer, and the same person may hold two or more of said offices, except that the President may not also hold the office of Vice President. 2. ELECTION. Officers shall be elected annually and shall serve until their successors are elected and qualified. Officers need not be directors or stockholders. 3. REMOVAL. The Board of Directors may, at a meeting called for that purpose remove any officer. 4. RESIGNATIONS AND VACANCIES. The Board of Directors may accept the resignation of an officer. A vacancy in any office may be filled by the Board of Directors. ARTICLE V DUTIES AND SALARIES OF OFFICERS 1. PRESIDENT. The President shall be the chief executive officer of the corporation. The President shall preside at all meetings of the stockholders and the directors; shall see that all orders and resolutions of the Board of Directors are carried into effect; and shall execute bonds, notes, deeds, mortgages, contracts and other instruments for the corporation. 2. VICE PRESIDENT. In the absence of the President, or in the event of his inability to act as such, the Vice President 4 5 may perform the duties of the President. The Vice President shall assist the President and shall perform such duties as are assigned by the Board of Directors. 3. SECRETARY. The Secretary shall issue necessary notices of meetings, shall keep the minutes, shall have charge of the seal, and shall sign such instruments as require the Secretary's signature, and shall perform all duties incident to the office or that are properly required by the Board of Directors. 4. TREASURER. The Treasurer shall see that the books of account are kept and are balanced each month, and that such financial statements or reports are prepared as the Board of Directors may require. 5. SALARIES. The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors. ARTICLE VI CAPITAL STOCK 1. CERTIFICATES. Certificates of stock shall be issued to holders of fully paid stock in numerical order from the stock certificate book, and shall be signed by the President and by the Secretary and impressed with the corporate seal. A record of each certificate issued shall be kept on a stub thereof. 2. TRANSFER. Transfers of stock shall be made upon the books of the company; and before a new certificate is issued, the old certificate must be surrendered for cancellation. 3. RESTRICTED SALE AND ASSIGNMENT. The sale and transfer of stock in the corporation by the original stockholders 5 6 may be restricted, and by acceptance of the original stock certificates, each stockholder may agree that the stockholder's stock cannot be sold or transferred to any third party without first being offered for sale to the corporation at a price to be agreed upon by separate written agreement, or if none, by the corporation and stockholders annually. Each certificate of stock shall then contain the following or substantially similar language: "Transfer of this certificate and the stock represented thereby is restricted in accordance with the records of the corporation." ARTICLE VII DIVIDENDS The Board of Directors may, subject to the laws and statutes of Nebraska and the Articles of Incorporation, declare dividends on the capital stock of the corporation. Dividends may be paid in cash, in property, or in shares of the capital stock of the corporation at part. ARTICLE VIII AMENDMENTS These Bylaws may be amended or repealed at any meeting of the Board of Directors. CERTIFICATE I hereby certify that the foregoing are the Bylaws duly approved and adopted at the first meeting of the shareholders of the aforesaid corporation. DATED this 27 day of June, 1991. /s/ Mildred Haas ----------------------------------- Secretary 6 EX-3.16 6 g67750ex3-16.txt ARTICLES OF INCORPORATION OF T.O. HAAS TIRE CO. 1 EXHIBIT 3.16 ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION OF T.O. HAAS TIRE CO., INC. The undersigned President and Assistant Secretary of T.O. Haas Tire Co., Inc., do hereby certify that: 1. The Articles of Incorporation of T.O. Haas Tire Co., Inc., have been amended by substituting the following in place of ARTICLE VII: ARTICLE VII CAPITAL STOCK The authorized capital stock of said corporation shall be: 1. 500 shares of common stock of the par value of $100.00 per share. 2. 50,000 shares of cumulative preferred stock of the par value of $10.00 per share. a. Cumulative dividends of 8% per share shall be paid on the preferred stock from legally available funds. Dividends to be paid on said preferred stock shall be payable before dividends are paid on any other class of stock, except that such stock shall have equal dividend preference with any other class of preferred stock authorized by these Articles as they now exist or are hereafter amended. b. Such preferred stock shall be redeemable in whole or in part by the company at the par value of $10.00 per share after issuance at any time. c. In the event that the corporation elects to redeem the preferred shares issued pursuant to this article, the corporation shall provide to the holders thereof, written notice of its intent to redeem said shares of preferred stock, and the proposed redemption date, which date shall be no earlier than 60 days following the date of the notice of redemption. 2 3. The voting rights of the holders of the stock of the corporation shall be as follows: a. Each holder of the common stock of the corporation shall be entitled to one vote for each share of stock standing in the holder's name on the books of the corporation. At the election of directors, each holder of the common stock shall have as many votes as the number of shares of common stock owned by such holder multiplied by the number of directors to be elected by the holders of the common stock. These votes may be divided among the total number of directors to be elected by the holders of common stock, or distributed among any lesser number, in such proportion as the holder may desire. b. The holders of each class of the preferred stock shall have no voting rights, except that they shall be entitled to vote with the holders of the common stock, voting together as one class, and an affirmative vote of two-thirds of the total shares shall be required to approve: (1) Any amendments to the articles of incorporation which affect the rights, dividends or preferences of the preferred stock; (2) The merger or consolidation of the corporation with another corporation; (3) The sale, lease, exchange, mortgage pledge or other disposition of all or substantially all of the corporation's property not in the ordinary course of business of the corporation; and (4) the voluntary dissolution of the corporation. 4. In the event of the voluntary or involuntary liquidation, dissolution, or other termination of the corporation, the holders of the shares of the preferred stock shall be entitled only to cash payment of the par value of their shares, plus all declared 3 and unpaid dividends up to the date fixed for distribution. Such payment shall be the only payment to which the preferred shareholders are entitled and such payment shall be made before any payment or distribution is made to the holders of the common stock of the corporation. 5. These amendments were adopted by unanimous written consent of the shareholders of all of the shares entitled to vote thereon and all of the directors dated June 24, 1983. 6. The stated capital of the Corporation has not been changed, except by the addition of the two classes of preferred stock as reflected herein. The stated capital is now: a. $50,000 of Common Stock b. $500,000 of Cumulative Preferred Stock Dated: June 24, 1983 /s/ Randy Haas ----------------------- President /s/ ----------------------- Assistant Secretary EX-3.17 7 g67750ex3-17.txt BY-LAWS OF T.O. HAAS TIRE CO. 1 EXHIBIT 3.17 BYLAWS OF T.O. HAAS TIRE CO., INC. Article I Meetings of Stockholders 1. Annual Meeting. The annual meeting of the stockholders for the election of directors and the transaction of such other business as may come before the meeting shall be held each year on the 3rd Tuesday in May at 10:00 A.M. unless a different hour is specified in the notice or waiver of notice. 2. Special Meetings. A special meeting of the stockholders may be called at any time by the President or Vice President or by the holders of a majority of the shares of stock then issued and outstanding. 3. Place of Meetings. All meetings shall be held at the corporation's principal office, in Lincoln, Nebraska unless a different place is specified in the notice or waiver of notice. 4. Notice of Meetings. Written notice of the time and place shall be mailed to each stockholder at least five days before such meeting. Written notice of the time and place of a special meeting, and of the purpose for which the meeting is called, shall be mailed to each stockholder at least five days before any such meeting. No notice shall be required as to any stockholder who signs a written waiver of notice of the meeting. 5. Quorum. The presence at any regular or special meeting, in person or by proxy, of the holders of record of a majority of the shares of stock then issued and outstanding shall constitute a quorum for the transaction of business. If a quorum is not present, the stockholders who are present may adjourn the meeting until a quorum is present. At any adjourned meeting at which a quorum is present, any business may be transacted which could have been transacted at the meeting as originally called. 2 6. Voting. All matters shall be decided by a majority of the shares present and voting at any meeting, unless otherwise provided by statute or by the Articles of Incorporation. Corporate stockholders shall be represented by either its President or Vice President. Article II Board of Directors 1. General Powers. The business of the corporation shall be managed by the Board of Directors and the officers, but all matters of policy shall be determined by the Board of Directors. 2. Number. There shall be at least 3 and not more than 9 directors. 3. Election. The first Board of Directors shall be appointed by the incorporator to serve until the first special or annual meeting of the stockholders and until their successors are elected and qualified. Thereafter, the stockholders shall elect directors to serve until the next annual meeting and until their successors are elected and qualified. Directors need not be stockholders. In the event more than 3 directors shall be elected, then, the terms of all non-shareholder directors shall be staggered. In such event, the term of any 3 directors shall not end in the same year, and each such director shall serve a minimum term of two years, provided, however, that at the time of the first election of such directors, an original term of one year may be set by vote of the shareholders for any such directors. Compensation of non-shareholder directors shall be determined by the Board of Directors. 4. Resignations and Vacancies. The stockholders or the Board of Directors may accept the resignation of a director before his term has expired. Vacancies in the Board of Directors shall be filled by the stockholders in accordance with the provisions of Article II, Section 3, or by the remaining directors. 3 5. Advisory Board. The Board of Directors may, at its discretion, appoint an Advisory Board to be composed of such individuals as the Board of Directors decides. The Advisory Board shall have no voting authority or power, shall be advisory only, and shall attend such Board of Directors meetings as requested by the President of the Corporation or the Chairman of the Board of Directors. Article III Meetings of Directors 1. Annual Meeting. The annual meeting of the Board of Directors for the election of officers and transaction of such other business as may come before the meeting shall be held immediately following the adjournment of the annual meeting of stockholders and at the same location. 2. Special Meetings. Special meetings of the Board of Directors may be held at any time and place on call of the President or Vice-President or any director. Reasonable notice of the time and place thereof shall be given orally or in writing to the director, unless such notice is waived by him in writing. 3. Quorum. A majority of the directors shall constitute a quorum at any meeting and any action by the Board of Directors shall require the affirmative vote of a majority of those present. In the absence of a quorum, the director or directors present may adjourn the meeting from time to time until a quorum is present. Article IV Officers 1. Officers. The corporation shall have a President, a Vice President, a Secretary and a Treasurer and such other officers as may be determined from time to time by the Board of Directors, and the same person may hold two or more of said offices, except that the President may not also hold the office of Vice President. 4 2. Election. Officers shall be elected annually and shall serve until their successors are elected and qualified. Officers need not be directors or stockholders. 3. Removal. The Board of Directors may, at a meeting called for that purpose, remove any officer. 4. Resignations and Vacancies. The Board of Directors may accept the resignation of an officer. A vacancy in any office may be filled by the Board of Directors. 5. Executive Committee. The Board of Directors may convene an Executive Committee to be composed of such officers or key employees of the Corporation or any of its affiliate or parent Corporations as the Board deems advisable. The Executive Committee shall have the powers and duties delegated and prescribed to it by the Board of Directors. The Executive Committee shall meet regularly at such times and such places as it shall decide. Article V Duties and Salaries of Officers 1. President. The President shall be the chief executive officer of the corporation. He shall preside at all meetings of the stockholders and the directors; shall see that all orders and resolutions of the Board of Directors are carried into effect; and shall execute bonds, notes, deeds, mortgages, contracts and other instruments for the corporation. 2. Vice President. In the absence of the President, or in the event of his inability to act as such, the Vice President may perform the duties of the President. He shall assist the President and shall perform such duties as are assigned to him by the Board of Directors. 3. Secretary. The Secretary shall issue necessary notices of meetings, shall keep the minutes, shall have charge of the seal, and shall sign such instruments as require his signature, and shall perform all duties incident to his office or that are properly required of him by the Board of Directors. 5 4. Treasurer. The Treasurer shall see that the books of account are kept and are balanced each month, and that such financial statements or reports are prepared as the Board of Directors may require. 5. Salaries. The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors. Article VI Capital Stock 1. Certificates. Certificates of stock shall be issued to holders of fully paid stock in numerical order from the stock certificate book, and shall be signed by the President and by the Secretary and impressed with the corporate seal. A record of each certificate issued shall be kept on a stub thereof. 2. Transfer. Transfers of stock shall be made only upon the books of the company; and before a new certificate is issued, the old certificate must be surrendered for cancellation. 3. Restricted Sale on Assignment. The sale and transfer of stock in the corporation by the original stockholders may be restricted, and by acceptance of the original stock certificates, each stockholder may agree that his stock cannot be sold or transferred to any third party without first being offered for sale to the corporation at a price to be agreed upon by separate written agreement, or if none, by the corporation and stockholders annually. Each certificate of stock shall then contain the following or substantially similar language: "Transfer of this certificate and the stock represented thereby is restricted in accordance with the records of the corporation." Article VII Dividends The Board of Directors may, subject to the laws and statutes of Nebraska and the Articles of Incorporation, declare dividends on the capital stock of the corporation. 6 Dividends may be paid in cash, in property, or in shares of the capital stock of the corporation at par. Article VIII Amendments These Bylaws may be amended or repealed at any meeting of the Board of Directors. CERTIFICATE I hereby certify that the foregoing are the Bylaws duly approved and adopted at the meeting of March 10, 1983 of the aforesaid corporation. DATED this 10th day of March, 1983. /s/ illegible ---------------------------- Assistant EX-3.18 8 g67750ex3-18.txt RESTATED CERTIFICATE OF INCORPORATION OF HEAFNER 1 EXHIBIT 3.18 RESTATED CERTIFICATE OF INCORPORATION OF HEAFNER TIRE GROUP, INC. Heafner Tire Group, Inc. (the "Corporation"), a corporation formed 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"), hereby certifies as follows: 1. The original Certificate of Incorporation of the Corporation was filed on December 29, 1998. 2. This Restated Certificate of Incorporation (hereinafter referred to as the "Articles") was duly adopted in accordance with provisions of Sections 242 and 245 of the Act by a resolution duly adopted at a meeting of the Board of Directors and by written consent of the Stockholders of the Corporation. 3. The Corporation's Certificate of Incorporation is amended and restated in its entirety 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 2711 Centerville Road, Suite 400, Wilmington, Delaware 19808, in the 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. 2 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) 15,000,000 shares of Common Stock, par value of $.01 per share (the "Common Stock"), and (ii) 1,344,834 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. 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 1,344,834 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"), 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") and 1,333,334 shares shall initially be designated Series C Preferred Stock (the "Series C 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. The stated value of the Series C Preferred Stock shall initially be $9.00 per share and shall be adjusted from time to time as provided in Section 6A.2. 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 Series C Preferred Stock and Common Stock and (ii) the Series C Preferred Stock shall rank junior to the Series A Preferred Stock and Series B Preferred Stock and senior to the Common Stock. 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. 2 3 ARTICLE 5 COMMON STOCK. Section 5.1. Voting Rights. Each outstanding share of 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 Common Stock shall be entitled to one vote for each share of Common Stock held by such holder. Section 5.2. Dividends and Distributions. The holders of shares of Common Stock shall be entitled to receive dividends or other distributions 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. 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 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 3 4 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 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: 4 5 - -------------------------------------------------------------------------------- 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 Fleet National Bank at its 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 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 7 8 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 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"). 8 9 (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 (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. 9 10 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 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 10 11 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 Corporation 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 Corporation at the principal office of the Corporation, 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 Corporation 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 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 11 12 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 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). 12 13 (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) Reserved. (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 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 13 14 - -------------------------------------------------------------------------------- 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. 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 14 15 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 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. 15 16 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 6A SERIES C PREFERRED STOCK. The Series C Preferred Stock shall have the following voting powers, preferences and other rights, qualifications, limitations and restrictions: Section 6A.1. Dividends and Distributions. (a) Cumulative 12% Dividends. Holders of shares of Series C 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 C Preferred Stock, shall be entitled to receive, out of the assets of the Corporation legally available therefor, cumulative cash dividends (the "Series C Dividends") on the Series C Liquidation Preference of such shares at an annual rate of 12.0% (compounded quarterly and calculated on the basis of a 365/366 day year and the actual number of days elapsed), accruing in equal quarterly installments on the last Business Day of each fiscal quarter of the Corporation, commencing on the last Business Day of the second fiscal quarter of the Corporation's 2001 fiscal year. Series C Dividends shall accrue and shall be cumulative from the first date Series C Preferred Stock shall have been issued by the Company (the "Series C Issue Date") whether or not declared by the Board of Directors. Subject in each case to Sections 4.4 and 6A.7, (i) accumulated but unpaid dividends for any past quarterly dividend periods may be declared and paid at any time, without reference to any regular quarterly dividend payment date, to holders of record on any date fixed by the Board of Directors in accordance with these Articles and applicable law and (ii) accumulated but unpaid dividends for any current quarterly dividend period may be declared and paid in cash by the Board of Directors (in which case such dividend payment shall not accrue and be cumulative), to holders of record on any date fixed by the Board of Directors in accordance with these Articles and applicable law. The "Series C Liquidation Preference" shall initially be $9.00 per share of Series C Preferred Stock, and shall be adjusted appropriately from time to time after the Series C Issue Date to reflect stock splits, combinations and reclassifications with respect to the Series C Preferred Stock. 16 17 (b) Participating Dividends. Subject to Sections 4.4 and 6A.7, in addition to the Series C Dividends, in the event that the Corporation shall declare a dividend or make any other distribution (including, without limitation, in cash, in capital stock (which shall include, without limitation, any options, warrants, convertible securities or other rights to acquire capital stock) of the Corporation, whether or not pursuant to a shareholder rights plan, "poison pill" or similar arrangement, or other property or assets) on or with respect to shares of Common Stock other than a dividend paid solely in Common Stock, then the Board of Directors shall declare, and the holder of each share of Series C Preferred Stock shall be entitled to receive in respect of each share of Series C Preferred Stock, a dividend or distribution in an amount equal to the amount of such dividend or distribution received by a holder of the number of shares of Common Stock for which such share of Series C Preferred Stock is convertible on the record date for such dividend or distribution. Any such amount shall be paid to the holders of shares of Series C Preferred Stock at the same time such dividend or distribution is made to holders of Common Stock. (c) Other Provisions. The holders of shares of Series C Preferred Stock shall not be entitled to receive any dividends or other distributions with respect to the Series C Preferred Stock except as provided in this Article 6A. 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 C Preferred Stock which may be in arrears. Section 6A.2. Conversion of Series C Preferred Stock. (a) Conversion Right. Any holder of Series C Preferred Stock shall have the right, at its option, at any time and from time to time, to convert, subject to the terms and provisions of this Section 6A.2, any or all of such holder's shares of Series C Preferred Stock into such number of fully paid and non-assessable shares of Common Stock as is equal, subject to Section 6A.2(g), to the product of the number of shares of Series C Preferred Stock being so converted multiplied by the quotient of (i) the Series C Liquidation Preference then in effect divided by (ii) the Series C Conversion Price (as defined below) then in effect. The "Series C Conversion Price" shall initially be $9.00, and is subject to adjustment as set forth in Section 6A.2(d). Such conversion right shall be exercised by the surrender of the shares to be converted to the Corporation at any time during usual business hours at its principal place of business, accompanied by a written notice in which the holder elects to convert such shares and specifies the name or names (with address) in which a certificate or certificates for shares of Common Stock are to be issued and (if so required by the Corporation) by a written instrument or instruments of transfer in form reasonably satisfactory to the Corporation duly executed by the holder or its duly authorized legal representative and transfer tax stamps or funds therefor, if required pursuant to Section 6A.2(j). All shares surrendered for conversion shall be delivered to the Corporation for cancellation and canceled by it and no shares of Series C Preferred Stock shall be issued in lieu thereof. (b) As promptly as practicable after the surrender of any shares of Series C Preferred Stock for conversion pursuant to Section 6A.2(a), the Corporation shall deliver to or upon the written order of the holder of the shares of Series C Preferred Stock so surrendered a certificate or certificates representing the number of fully paid and non-assessable shares of Common Stock into which such shares of Series C Preferred Stock may be or have been converted in accordance 17 18 with the provisions of this Section 6A.2. Subject to the following provisions of this paragraph and of Section 6A.2(d), such conversion shall be deemed to have been made immediately prior to the close of business on the date that such shares of Series C Preferred Stock shall have been surrendered in satisfactory form for conversion, and the person or persons entitled to receive the Common Stock deliverable upon conversion of such shares of Series C Preferred Stock shall be treated for all purposes as having become the record holder or holders of such Common Stock at such appropriate time, and such conversion shall be at the Series C Conversion Price in effect at such time; provided, however, that no surrender shall be effective to constitute the person or persons entitled to receive the Common Stock deliverable upon such conversion as the record holder or holders of such Common Stock while the share transfer books of the Corporation shall be closed (but not for any period in excess of five days), but such surrender shall be effective to constitute the person or persons entitled to receive such Common Stock as the record holder or holders thereof for all purposes immediately prior to the close of business on the next succeeding day on which such share transfer books are open, and such conversion shall be deemed to have been made at, and shall be made at the Series C Conversion Price in effect at, such time on such next succeeding day. In case of the redemption of any shares of Series C Preferred Stock pursuant to Section 6A.4, the right of the holders of such shares to convert such shares into Common Stock pursuant to this Section 6A.2 shall cease and terminate, as to the shares to be redeemed, at the close of business on the date fixed for redemption, unless the Corporation shall default in the payment of the applicable redemption price for the shares to be redeemed. If the last day for the exercise of the conversion right with respect to the Series C Preferred Stock shall not be a Business Day, then such conversion right may be exercised on the next succeeding Business Day. (c) To the extent permitted by law, when shares of Series C Preferred Stock are converted, all dividends accrued and unpaid (whether or not declared or currently payable) on the Series C Preferred Stock so converted to the date of conversion shall be immediately due and payable, at the option of the holder of shares of Series C Preferred Stock being converted, in cash (subject to Section 6A.7 and to the last sentence of this Section 6A.2(c)) or shares of Common Stock. If the holder of shares of Series C Preferred Stock elects to receive shares of Common Stock in lieu of the cash payment of the accrued and unpaid dividends, the holder of shares of Series C Preferred Stock shall be entitled to receive that number of shares of Common Stock which the amount of accrued and unpaid dividends would purchase at the Series C Liquidation Preference, and such shares of Common Stock must accompany the shares of Common Stock issued upon such conversion. If the holder of shares of Series C Preferred Stock elects to receive payment in cash of such accrued and unpaid dividends, such cash payment must accompany the shares of Common Stock issued upon such conversion unless the Board of Directors determines that such cash payment may not be made under the Other Documents (as defined in Section 6A.7), in which case such cash payment shall be made promptly after such time as the circumstances giving rise to such inability to make such cash payment shall, in the sole judgment of the Board of Directors, no longer exist; provided, however, that, at any time prior to such payment, such holder may elect to receive shares of Common Stock in lieu of such cash payment, and, upon such election, shall be entitled to receive that number of shares of Common Stock that the amount of such cash payment would purchase at the Series C Liquidation Preference on the date of such election. 18 19 (d) The Series C Conversion Price and the number of shares of Common Stock issuable upon conversion of the Series C Preferred Stock shall be subject to adjustment as provided in this Section 6A.2(d): (i) In case the Corporation shall at any time or from time to time (A) subdivide the outstanding shares of Common Stock into a larger number of shares, (B) combine the outstanding shares of Common Stock into a smaller number of shares or (C) issue any shares of its capital stock in a reclassification of the Common Stock, then, and in each such case, the number of shares of Common Stock issuable upon conversion of the Series C Preferred Stock in effect immediately prior to such event shall be adjusted (and any other appropriate actions shall be taken by the Corporation) so that the holder of any share of Series C Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock or other securities of the Corporation that such holder would have owned or would have been entitled to receive upon or by reason of any of the events described above, had such share of Series C Preferred Stock been converted immediately prior to the occurrence of such event. An adjustment made pursuant to this Section 6A.2(d)(i) shall become effective retroactively to the close of business on the day upon which the corporate action giving rise to such adjustment becomes effective. (ii) In case the Corporation shall at any time or from time to time issue or sell (other than in an Exempt Issuance (as defined in Section 6A.2(d)(iii) below)) shares of Common Stock (or securities convertible into or exchangeable for Common Stock, or any options, warrants or other rights to acquire shares of Common Stock), at a price per share less than the Series C Conversion Price then in effect at the record date referred to in the immediately following sentence (treating the price per share of any security convertible or exchangeable or exercisable into Common Stock as equal to (A) the sum of the price for such security convertible, exchangeable or exercisable into Common Stock plus any additional consideration payable (without regard to any anti-dilution adjustments) upon the conversion, exchange or exercise of such security into Common Stock divided by (B) the number of shares of Common Stock initially underlying such convertible, exchangeable or exercisable security), then, and in each such case, the Series C Conversion Price then in effect shall be adjusted by dividing the Series C Conversion Price in effect on the day immediately prior to such record date by a fraction (x) the numerator of which shall be the sum of the number of shares of Common Stock outstanding on such record date plus the number of additional shares of Common Stock issued or to be issued (or the maximum number into which such convertible or exchangeable securities initially may convert or exchange or for which such options, warrants or other rights initially may be exercised) and (y) the denominator of which shall be the sum of the number of shares of Common Stock outstanding on such record date plus the number of shares of Common Stock which the aggregate consideration for the total number of such additional shares of Common Stock so issued (or into which such convertible or exchangeable securities may convert or exchange or for which such options, warrants or other rights may be exercised plus the aggregate amount of any additional consideration initially payable upon conversion, exchange or exercise of such security) would purchase at the Series C Conversion Price in effect on such record date. Such adjustment shall be made whenever such shares, securities, options, warrants or other rights are issued, and shall become effective retroactively to a date immediately following the close of business on the record date for the determination of shareholders entitled to receive such shares, securities, options, warrants or other rights; provided, however, that the determination as to 19 20 whether an adjustment is required to be made pursuant to this Section 6A.2(d)(ii) shall only be made upon the issuance of such shares or such convertible or exchangeable securities, options, warrants or other rights and not upon the issuance of the security into which such convertible or exchangeable security converts or exchanges, or the security underlying such options, warrants or other rights; provided, further, that if any convertible or exchangeable securities, options, warrants or other rights (or any portions thereof) which shall have given rise to an adjustment pursuant to this Section 6A.2(d)(ii) shall have expired or terminated without the exercise thereof and/or if by reason of the terms of such convertible or exchangeable securities, options, warrants or other rights there shall have been an increase or increases, with the passage of time or otherwise, in the price payable upon the exercise or conversion thereof, then the Series C Conversion Price hereunder shall be readjusted (but to no greater extent than originally adjusted with respect to the related event) on the basis of (x) eliminating from the computation any additional shares of Common Stock corresponding to such convertible or exchangeable securities, options, warrants or other rights as shall have expired or terminated, (y) treating the additional shares of Common Stock, if any, actually issued or issuable pursuant to the previous exercise of such convertible or exchangeable securities, options, warrants or other rights as having been issued for the consideration actually received and receivable therefor and (z) treating any of such convertible or exchangeable securities, options, warrants or other rights which remain outstanding as being subject to exercise or conversion on the basis of such exercise or conversion price as shall be in effect at this time. (iii) Notwithstanding Section 6A.2(d)(ii), no adjustment to the Series C Conversion Price pursuant to Section 6A.2(d)(ii) or otherwise shall be made in respect of any sale or issuance by the Corporation of (A) shares of Common Stock (or options, warrants or other Common Stock purchase rights, and the Common Stock issued pursuant to such options, warrants or other equity incentive rights (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like)) issued or to be issued pursuant to the conversion, exchange or exercise of the Series C Preferred Stock or any other security, option, warrant, right or other convertible security outstanding or in effect on the Series C Issued Date, (B) shares of Common Stock (or options, warrants or other Common Stock purchase rights, and the Common Stock issued pursuant to such options, warrants or other equity incentive rights (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like)) issued or to be issued to employees, officers or directors of, or consultants or advisors to the Corporation or any subsidiary pursuant to any stock incentive or equity-based compensation, plan, program, arrangement or agreement of the Corporation or any of its subsidiaries in effect on the Series C Issue Date (as amended from time to time in accordance with its terms) or any other stock incentive or equity-based compensation plan, program, arrangement or agreement approved by the Board of Directors; (C) securities issued pursuant to a registration statement filed under the Securities Act of 1933; (D) securities issued pursuant to the acquisition of another entity by the Corporation by merger, purchase of assets or other form of reorganization; or (E) securities issued to landlords, equipment lessors, banks, financial institutions, manufacturers, vendors, suppliers or similar entities in transactions approved by the Board of Directors (each, an "Exempt Issuance"). (iv) In case the Corporation at any time or from time to time shall take any action affecting its Common Stock, other than an action described in any of Section 6A.2(d)(i) through Section 6A.2(d)(iii), inclusive, then, and in each such case, the Series C Conversion 20 21 Price shall be adjusted in such manner and at such time as the Board of Directors of the Corporation in its sole business judgment determines to be equitable in the circumstances. (v) Notwithstanding anything herein to the contrary, no adjustment under this Section 6A.2(d) need be made to the Series C Conversion Price unless such adjustment would require an increase or decrease of at least 1% of the Series C Conversion Price then in effect. Any lesser adjustment shall be carried forward and shall be made at the time of and together with the next subsequent adjustment, which, together with any adjustment or adjustments so carried forward, shall amount to an increase or decrease of at least 1% of such Series C Conversion Price. Any adjustment to the Series C Conversion Price carried forward and not theretofore made shall be made immediately prior to the conversion of any shares of Series C Preferred Stock pursuant hereto. (e) If the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, and shall thereafter and before the distribution to shareholders thereof legally abandon its plan to pay or deliver such dividend or distribution, then thereafter no adjustment in the Series C Conversion Price then in effect shall be required by reason of the taking of such record. (f) Upon any increase or decrease in the Series C Conversion Price, then, and in each such case, the Corporation shall deliver to each registered holder of Series C Preferred Stock a certificate, signed by a responsible officer of the Corporation, setting forth in reasonable detail the event requiring the adjustment and the method by which such adjustment was calculated and specifying the increased or decreased Series C Conversion Price then in effect following such adjustment. (g) No fractional shares or scrip representing fractional shares shall be issued upon the conversion of any shares of Series C Preferred Stock. If more than one share of Series C Preferred Stock shall be surrendered for conversion at one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate Series C Liquidation Preference of the shares of Preferred Stock so surrendered. If the conversion of any share or shares of Series C Preferred Stock results in a fraction, an amount equal to such fraction multiplied by the Current Market Price of the Common Stock on the Business Day preceding the day of conversion shall be paid to such holder in cash by the Corporation. (h) In case at any time or from time to time: (A) the Corporation shall declare a dividend (or any other distribution) on or with respect to its Common Stock; (B) the Corporation shall authorize the granting to the holders of its Common Stock of rights or warrants to subscribe for or purchase any shares of stock of any class or of any other rights or warrants; (C) there shall be any reclassification of the Common Stock, or any consolidation or merger to which the Corporation is a party and for which approval of any 21 22 shareholders of the Corporation is required, or any sale or other disposition of all or substantially all of the assets of the Corporation; or (D) there shall occur any voluntary or involuntary dissolution, liquidation or winding up of the Corporation; then the Corporation shall mail to each holder of shares of Series C Preferred Stock at such holder's address as it appears on the transfer books of the Corporation a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution or rights or warrants or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution or rights are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, conveyance, dissolution, liquidation or winding up is expected to become effective. Such notice also shall specify the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Stock for shares of stock or other securities or property or cash deliverable upon such reclassification, consolidation, merger, sale, conveyance, dissolution, liquidation or winding up. (i) The Corporation shall at all times reserve and keep available for issuance upon the conversion of the Series C Preferred Stock, such number of its authorized but unissued shares of Common Stock as will from time to time be sufficient to permit the conversion of all outstanding shares of Series C Preferred Stock, and shall take all action required to increase the authorized number of shares of Common Stock if at any time there shall be insufficient authorized but unissued shares of Common Stock to permit such reservation or to permit the conversion of all outstanding shares of Series C Preferred Stock. (j) The issuance or delivery of certificates for Common Stock upon the conversion of shares of Series C Preferred Stock shall be made without charge to the converting holder of shares of Series C Preferred Stock for such certificates or for any stamp or transfer tax in respect of the issuance or delivery of such certificates or the securities represented thereby, and such certificates shall be issued or delivered in the respective names of, or in such names as may be directed by, the holders of the shares of Series C Preferred Stock converted; provided, however, that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificate in a name other than that of the holder of the shares of Series C Preferred Stock converted, and the Corporation shall not be required to issue or deliver such certificate unless or until the person or persons requesting the issuance or delivery thereof shall have paid to the Corporation the amount of such tax or shall have established to the reasonable satisfaction of the Corporation that such tax has been paid. Section 6A.3. Voting Rights. Ownership of shares of Series C Preferred Stock shall entitle the holders to no voting rights except as provided in this Section 6A.3 and under applicable law. So long as any shares of the Series C Preferred Stock are outstanding, each outstanding share of Series C Preferred Stock shall entitle the holder thereof to vote, in person or by proxy, at a special or annual meeting of shareholders, on all matters voted on by holders of Common Stock voting together as a single class with other shares entitled to vote thereon (other than matters on which the holders of Series C Preferred Stock are entitled by law or these Articles to vote as a separate class). With respect to any such vote, each share of Series C 22 23 Preferred Stock shall entitle the holder thereof to cast that number of votes per share of Series C Preferred Stock as is equal to the number of votes that such holder would be entitled to cast had such holder converted his shares of Series C Preferred Stock into Common Stock on the record date for determining the shareholders of the Corporation eligible to vote on any such matters. So long as any shares of Series C Preferred Stock are 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 C Preferred Stock then outstanding, (i) alter or change the powers, preferences or rights given to the Series C Preferred Stock by these Articles or (ii) amend these Articles to increase the authorized amount of Series C 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 C Preferred Stock by these Articles. Notwithstanding the foregoing provisions, the affirmative vote or consent of the holders of the Series C 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 C Preferred Stock at the time outstanding. Section 6A.4. Redemption. (a) Requested Redemption. At any time on or after May 16, 2009, each holder of Series C Preferred Stock shall have the right, exercisable by written notice to the Corporation (the "Series C Requested Redemption Notice"), to request that the Corporation purchase all or any portion of the shares of Series C Preferred Stock held by such holder, and upon the exercise of such right, the Corporation shall be obligated to repurchase and redeem, out of assets of the Corporation legally available therefor, the shares designated for repurchase and redemption in the Series C Requested Redemption Notice by the requesting holders, at a price per share equal to (x) the Series C Liquidation Preference then in effect plus (y) the amount of all accrued and unpaid Series C Dividends on such share through and including the date of redemption, on the date set forth in the Series C Requested Redemption Notice (which date shall be no less than 10 Business Days after the date of such Series C Requested Redemption Notice). (b) Optional Redemption. Subject to the rights and preferences of any Senior Stock and subject to Sections 4.4 and 6A.7, at any time on or after the Series C Issue Date, the Corporation shall have the right, exercisable by written notice to all holders of Series C Preferred Stock (the "Series C Optional Redemption Notice"), to redeem all (but not less than all) of the outstanding shares of Series C Preferred Stock, out of the assets of the Corporation legally available therefor, at a price per share equal to (x) the Series C Liquidation Preference then in effect plus (y) the amount of all accrued and unpaid Series C Dividends on such share through and including the date of redemption, on the date set forth in the Series C Optional Redemption Notice (which date shall be no less than 10 Business Days after the date of such Series C Optional Redemption Notice). (c) Redemption Procedures. Each repurchase of shares of Series C Preferred Stock under this Section 6A.4 shall be deemed to have been effected on the date of redemption and repurchase by the Corporation pursuant to this Section 6A.4(c). On the date specified in each Series C Requested Redemption Notice or in a Series C Optional Redemption Notice, as 23 24 applicable, each holder of shares of Series C Preferred Stock to be redeemed shall deliver to the Corporation a certificate or certificates representing the shares of Series C Preferred Stock to be redeemed, duly endorsed and in proper form for transfer, against payment in full by wire transfer of immediately available funds in U.S. dollars to an account designated in writing by such holder of an amount per share equal to (x) the Series C Liquidation Preference then in effect plus (y) the amount of all accrued and unpaid Series C Dividends on such share through and including the date of redemption. (d) Funds Insufficient to Effect Redemptions. If, at any time, the Corporation shall be required to redeem any shares of the Series C Preferred Stock, and the Corporation shall not have assets or funds legally available for the redemption of all of the shares required to be redeemed, the Corporation shall redeem ratably from the holders of the Series C Preferred Stock such number of shares as it shall have funds legally available therefor and shall redeem the remainder of such shares on the earliest practicable date(s) as assets or funds become legally available therefor. Any shares of Series C Preferred Stock not so redeemed shall remain issued and outstanding for all purposes under this Article 6A until the date of actual redemption by the Corporation. Section 6A.5. Reacquired Shares. Any shares of Series C 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. Section 6A.6. Liquidation, Dissolution or Winding Up. 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 of Series C Preferred Stock unless, prior thereto, the holders of shares of all Senior Stock shall have received the total amounts to which such holders are entitled upon such Liquidation Event, (ii) to the holders of shares of Junior Stock with respect to the Series C Preferred Stock unless, prior thereto, the holders of shares of Series C Preferred Stock shall have received an amount per share equal to the greater of (A) the amount and type of proceeds that a holder of Series C Preferred Stock would have been entitled to receive if such holder had converted its shares of Series C Preferred Stock into Common Stock in accordance with Section 6A.2 immediately prior to such liquidation, dissolution or winding up or (B) the sum of (x) the Series C Liquidation Preference then in effect plus (y) the amount of all accrued and unpaid Series C Dividends on such share through and including the date of redemption or (iii) to the 24 25 holders of shares of Parity Stock with respect to the Series C Preferred Stock, except distributions made ratably on the Series C Preferred Stock and all other Parity Stock in proportion to the total amounts to which the holders of all shares of Series C 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 Article 6A. Section 6A.7. Limitations on Redemption and Dividends. Notwithstanding anything to the contrary in these Articles, for so long as any shares of Series A Preferred Stock or Series B Preferred Stock are outstanding, no dividend or redemption payments (it being understood that the accrual of Series C Dividends shall not constitute the declaration or making of dividend payments for purposes of this sentence) shall be declared or made by the Corporation in respect of the Series C Preferred Stock under this Article 6A or otherwise. Notwithstanding anything to the contrary in these Articles, from and after the date on which no shares of Series A Preferred Stock or Series B Preferred Stock are outstanding, no dividend or redemption payments (it being understood that the accrual of Series C Dividends shall not constitute the declaration or making of dividend payments for purposes of this sentence) shall be declared or made by the Corporation in respect of the Series C Preferred Stock under this Article 6A or otherwise unless due provision can be made for the full amount of any dividend or liquidation preference or redemption payment (if any) payable to which holders of any Senior Stock may be entitled under these Articles. In addition, notwithstanding anything to the contrary in these Articles, so long as any amounts are outstanding under any Other Documents (as defined below) or any commitments to lend under the Other Documents have not been terminated, the Corporation shall not make payment in respect of any redemption permitted or otherwise required by this Article 6A, or declare, make or pay any dividend or distribution in respect of any shares of Series C Preferred Stock, to the extent that the making or declaration of such payment would breach, conflict with, or result in any violation of or default or event of default (with or without notice or lapse of time or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to the loss of any benefit under, or result in the creation or imposition of any lien or encumbrance of any nature whatsoever upon any of the properties or assets of the Corporation or any of its subsidiaries under, or result in the Series C Preferred Stock constituting "Disqualified Stock" as defined under, any provision of the Other Documents. "Other Documents" means (i) the Amended and Restated Loan and Security Agreement, dated as of March 6, 2000, between and among the Corporation, Winston Tire Company, The Speed Merchant, Inc., and California Tire Company, as borrowers, the financial institutions party thereto and Fleet Capital Corporation, as Administrative Agent, (ii) the Indenture, dated as of May 15, 1998, between and among the Corporation, the Subsidiary Guarantors party thereto and First Union National Bank, as Trustee, (iii) the Indenture, dated as of December 1, 1998, between and among the Corporation, the Subsidiary Guarantors party thereto and First Union National Bank, as Trustee, (iv) all notes, mortgages, security documents, guaranties and other agreements, documents and instruments entered into in connection therewith, in each case, as extended, amended, modified, supplemented and/or restated from time to time in accordance with its terms, including any 25 26 replacement agreement for any thereof and any refinancing of the debt incurred under any thereof, which refinancing may result in a greater principal amount outstanding in connection therewith. Any determination made by the Board of Directors, in its sole judgment, that the making or declaration of any payment pursuant to this Article 6A would breach, conflict with, or result in any violation of or default or event of default (with or without notice or lapse of time or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to the loss of any benefit under, or result in the creation or imposition of any lien or encumbrance of any nature whatsoever upon any of the properties or assets of the Corporation or any of its subsidiaries under, or result in the Series C Preferred Stock constituting "Disqualified Stock" as defined under, any of the Other Documents, shall be conclusive and binding on the Corporation and all holders of Series C Preferred Stock. 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-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. 26 27 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. IN WITNESS WHEREOF, Heafner Tire Group, Inc. has caused this Restated Certificate of Incorporation to be executed by its duly authorized officer on April 2, 2001. HEAFNER TIRE GROUP, INC. By: /s/ Richard P. Johnson ----------------------------- Name: Richard P. Johnson Title: President & CEO 27 EX-4.10 9 g67750ex4-10.txt SHARE PURCHASE AGREEMENT 1 EXHIBIT 4.10 SHARE PURCHASE AGREEMENT, dated as of March 30, 2001, among Heafner Tire Group, Inc., a Delaware corporation (the "Company"), the parties listed on Schedule I attached hereto (the "Investors"). ------------------------------------------------------------------- INTRODUCTION The Investors desire to purchase from the Company, and the Company desires to issue and sell to the Investors, 1,333,334 shares of Series C Preferred Stock, par value $.01 per share (the "Series C Preferred Stock"), of the Company upon the terms and subject to the conditions set forth in this Agreement. Accordingly, the parties agree as follows: ARTICLE I AUTHORIZATION AND SALE OF THE SHARES Section 1.1. Authorization. The Company has authorized the issuance and sale of 1,333,334 shares (the "Shares") of its Series C Preferred Stock at a price of $9.00 per share on the terms and conditions set forth in this Agreement. The Series C Preferred Stock shall have the rights, preferences and privileges provided for in the Restated Certificate of Incorporation of the Company, which shall be in the form attached as Exhibit A hereto (the "Articles"). Section 1.2. Purchase and Sale of the Shares. Upon the terms and subject to the conditions of this Agreement, at the Closing (as defined below) the Company shall issue and sell to the Investors, and the Investors shall purchase from the Company, the Shares for an aggregate purchase price of $12,000,006 in cash (the "Purchase Price"), of which $10,500,003 shall be paid by Charlesbank Equity Fund IV, Limited Partnership on the Closing Date and the remainder shall be paid by the Investors (on a joint and several basis) within five Business Days after the Closing Date. Subject to the foregoing, the amount to be paid by and the number of such Shares to be issued to each Investor are as set forth in Schedule I. Except as expressly provided in this Agreement, each Investor's obligations under this Agreement (including without limitation to purchase the Shares to be purchased by such Investor) shall be several and not joint. Section 1.3. Closing. The closing (the "Closing") of each purchase and sale to the Investors of the Shares shall be held at the offices of Covington & Burling, 1330 Avenue of the Americas, New York, New York 10019, at 10:00 a.m. on or prior to April 3, 2001, or at such other time or on such other date as may be agreed to by the Investors and the Company. The date on which the first such issuance and purchase of Shares occurs is referred to in this Agreement as the "Closing Date." Section 1.4. Closing Deliveries. At the Closing of each Investor's purchase of Shares, (a) such Investor shall deliver to the Company, by wire transfer of immediately available 2 funds to an account designated in writing by the Company no less than two business days prior to such Closing, the applicable Purchase Price and an executed copy of this Agreement and (b) the Company shall issue and deliver to such Investor certificates representing the Shares being purchased, registered in the name of each Investor as applicable. The obligation of each Investor to purchase such Investor's Shares is contingent on the fulfillment of each of the conditions set forth in Article IV and the obligation of the Company to issue and sell the Shares is contingent on the fulfillment of each of the conditions set forth in Article V. ARTICLE II COMPANY REPRESENTATIONS AND WARRANTIES The Company represents and warrants to the Investors as follows: Section 2.1. Organization and Standing. Each of the Company and its Subsidiaries is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. Each of the Company and its Subsidiaries has all requisite power and authority necessary to enable it to own and operate its properties and assets and to conduct its business as presently conducted and proposed to be conducted. Each of the Company and its Subsidiaries is duly qualified to do business as a foreign corporation and is in good standing in any jurisdiction in which the failure to so qualify could reasonably be expected to have a Material Adverse Effect. "Material Adverse Effect" means any change in or effect on the Company or its business that is or could reasonably be expected to be materially adverse to the business, operations, properties, condition (financial or otherwise), results of operations, assets or liabilities of the Company and its Subsidiaries, taken as a whole. Section 2.2. Authority; Valid and Binding Agreements. The Company has all requisite corporate power and authority to execute and deliver this Agreement and the Articles and, upon the filing of the Articles with the Secretary of State of Delaware, to issue and sell the Shares hereunder and to consummate the other transactions contemplated hereby. The execution, delivery and performance by the Company of this Agreement and the Articles and all documents, certificates and instruments to be executed by the Company in connection therewith and, upon the filing of the Articles with the Secretary of State of Delaware, the authorization, issuance, sale and delivery of the Shares, have been duly authorized by all requisite corporate action on the part of the Company and its stockholders. This Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and general principles of equity. Section 2.3. Conflicts; Consents. The execution, delivery and performance by the Company of this Agreement and the Articles and the consummation of the transactions contemplated hereby and thereby and compliance with the terms hereof and thereof does not and will not breach, conflict with, or result in any violation of or default (with or without notice or lapse of time or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to the loss of any benefit under, or result in the creation or imposition of any Lien of any nature whatsoever upon any of the properties or assets of the Company or any of its -2- 3 Subsidiaries under, (i) any material agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or any of their respective properties or assets may be bound or affected, (ii) any provision of the constitutive or governing documents of the Company or any of its Subsidiaries or (iii) assuming that the representations of the Investors set forth in Article III are correct, any Legal Requirement applicable to the Company or any of its Subsidiaries or any of their respective properties or assets. Assuming that the representations of the Investors set forth in Article III are correct and except for the filing of the Articles, no consent, approval, order, license, permit or authorization of, or notification, registration, declaration or filing with, any Governmental Authority or any other Person is required to be obtained or made by or with respect to the Company or any of its Subsidiaries in connection with the execution, delivery and performance by the Company of this Agreement, the issuance and sale of the Shares, or the consummation of the transactions contemplated thereby except for consents, approvals, orders, licenses, permits, authorizations, notifications, registrations, declarations or filings which have been obtained or made or the failure to obtain or make which could not reasonably be expected to have a Material Adverse Effect. Section 2.4. Capital Stock. (a) After giving effect to the filing of the Articles with the Secretary of State of Delaware, the authorized capital stock of the Company will consist of 15,000,000 shares of Common Stock (as defined below) and 1,344,834 shares of Preferred Stock, $.01 par value (the "Preferred Stock"). On the date hereof, 5,271,917 shares of Common Stock, $.01 par value (the "Common Stock"), and 11,500 shares of Preferred Stock were issued and outstanding. Upon the filing of the Articles with the Secretary of State of Delaware, the Shares will have been duly authorized and, when issued in accordance with this Agreement, the Shares (i) will be validly issued, fully paid and non-assessable, (ii) will have the rights, preferences and privileges described in the Articles and (iii) will not have been issued in violation of, and will not be subject to, any preemptive or subscription rights and will not result in the antidilution provisions of any security of the Company becoming applicable. (b) The Shares, when issued and delivered in accordance with this Agreement, will be free and clear of any Liens and the Investors will have good title thereto. (c) Except as set forth on Schedule 2.4(c), there are no outstanding warrants, options, rights, other securities, agreements, subscriptions or other commitments, arrangements or undertakings pursuant to which the Company is or may become obligated to issue, deliver or sell, or cause to be issued, delivered or sold, any additional capital stock or other securities of the Company or to issue, grant, extend or enter into any such warrant, option, right, security, agreement, subscription or other commitment, arrangement or undertaking. Except as set forth on Schedule 2.4(c), there are no outstanding options, rights, other securities, agreements or other commitments, arrangements or undertakings pursuant to which the Company is or may become obligated to redeem, repurchase or otherwise acquire or retire any capital stock or other securities of the Company, or any securities of the type described in this Section 2.4(c), which are presently outstanding or may be issued in the future. Except as set forth on Schedule 2.4(c), there are no bonds, debentures, notes or other indebtedness or securities of the Company having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which stockholders of the Company may vote. -3- 4 (d) All issued and outstanding shares of capital stock or membership interests of the Company's Subsidiaries have been duly authorized, were validly issued, are fully paid and non-assessable and subject to no preemptive rights and are directly or indirectly owned beneficially and of record by the Company, free and clear of all Liens, and free of any other limitation or restriction (including any restriction on the right to vote, sell or otherwise dispose of such capital stock). (e) Assuming that the representations and warranties of the Investors set forth in Section 3.2 and 3.3 are true and correct, the offering, issuance and delivery of the Shares are exempt from the registration requirements of the Securities Act, and it is not necessary to make or obtain any filings, registrations, qualifications, notifications or consents or approvals of or with any Governmental Authority (including without limitation under the Securities Act, the Exchange Act, the Investment Company Act of 1940, as amended, or any state securities or "blue sky" laws) in connection therewith. Section 2.5. SEC Reports. The Company has previously furnished or made available to the Investors true and complete copies of all reports (the "SEC Reports") filed by the Company and its Subsidiaries with the Securities and Exchange Commission (the "SEC") through and including the date of this Agreement. Each of the balance sheets (including the related notes) included in the Company SEC Reports presents fairly, in all material respects, the consolidated financial position of the Person (consolidated with its Subsidiaries, as applicable) to which it relates as of the date thereof, and each of the other related statements (including the related notes) included in the Company SEC Reports presents fairly, in all material respects, the results of operations and changes in financial position of the Person (consolidated with its Subsidiaries, as applicable) to which it relates for the period or as of the date set forth therein, all in conformity with generally accepted accounting principles consistently applied during the periods involved, except as otherwise noted therein and subject, in the case of the unaudited interim financial statements, to normal year-end adjustments and any other adjustments described therein. Each Company SEC Report, as of its date (as amended through the date of this Agreement), complied in all material respects with the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the applicable rules and regulations thereunder. Section 2.6 Litigation. There are no suits, actions, claims, arbitrations or other legal, administrative or regulatory proceedings or investigations, whether at law or in equity, or before or by any Governmental Authority pending or, to the knowledge of the Company, threatened by or against or affecting the Company or any of its Subsidiaries or any of their respective properties or assets, in each case, which could reasonably be expected to have a Material Adverse Effect. Section 2.7. Compliance with Applicable Laws. The Company and its Subsidiaries and their respective properties, assets, operations and business are in compliance in all material respects with all applicable Legal Requirements, including without limitation laws and regulations relating to the environment, hazardous materials and occupational safety and health, except for such instances of noncompliance as could not individually or in the aggregate -4- 5 be reasonably expected to have a Material Adverse Effect. Each of the Company and its Subsidiaries has obtained and has in effect all material permits, licenses and other authorizations which are required with respect to the operation of its business and the ownership of its assets. Each of the Company and its Subsidiaries is in full compliance in all material respects with all terms and conditions of such permits, licenses and authorizations, no proceeding is pending or, to the knowledge of the Company, threatened, to revoke or limit any thereof. Section 2.8. Brokers. No agent, broker, investment banker, Person or firm acting on behalf of the Company or under the authority of the Company is or will be entitled to any broker's or finder's fee or any other commission or similar fee directly or indirectly from any of the parties hereto in connection with any of the transactions contemplated hereby. ARTICLE III REPRESENTATIONS AND WARRANTIES OF EACH INVESTOR Each of the Investors hereby represents and warrants to the Company, severally and not jointly, as follows: Section 3.1. Organization and Authority. Such Investor is a corporation or limited liability company or limited partnership duly organized, validly existing and in good standing, if applicable, under the laws of its jurisdiction of organization. Such Investor has all requisite power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery by such Investor of this Agreement and the consummation by such Investor of the transactions contemplated hereby has been duly authorized by all requisite corporate action on the part of such Investor. This Agreement constitutes the valid and binding obligation of such Investor, enforceable against such Investor in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of credits' rights generally and general principles of equity. Section 3.2. Securities Act. Such Investor is acquiring the Shares for investment only for its own account, not as a nominee or agent, and not with a view to any public distribution of all or any portion thereof. Section 3.3. Accredited Investor. Such Investor is an "accredited investor" as such term is defined in Rule 501(a) promulgated under the Securities Act. Section 3.4. Brokers. No agent, broker, investment banker, Person or firm acting on behalf of such Investor or under the authority of such Investor is or will be entitled to any broker's or finder's fee or any other commission or similar fee directly or indirectly from any of the parties hereto in connection with any of the transactions contemplated hereby. -5- 6 Section 3.5. Experience. Such Investor is experienced in evaluating and investing in companies such as the Company. Such Investor has substantial experience in investing in and evaluating private placement transactions of securities in companies similar to the Company and is capable of evaluating the risks and merits of its investment in the Company and has the capacity to protect its own interests. Section 3.6. Restricted Securities. Such Investor acknowledges that, because they have not been registered under the Securities Act or any state securities laws, the Shares it is purchasing must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available. Such Investor is familiar with the provisions of Rule 144 promulgated under the Securities Act and the resale limitation imposed thereby and by the Securities Act. Such Investor understands that no public market now exists for the Shares and that it is uncertain whether a public market will ever exist for the Shares. Section 3.7. No Conflicts. The execution and delivery of this Agreement by such Investor does not and will not violate any Legal Requirement or provision of any indenture, agreement or other instrument applicable to such Investor, except in each case for violations which could not reasonably be expected to have a material adverse effect on such Investor's ability to execute, deliver and perform this Agreement and consummate the transactions contemplated hereby. ARTICLE IV CONDITIONS OF THE INVESTORS' OBLIGATIONS The obligation of the Investors to purchase the Shares is subject to the satisfaction (or waiver by the Investors) as of the Closing Date of the following conditions: Section 4.1. Representations and Warranties; Covenants. The representations and warranties of the Company made in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date with the same effect as if made at and as of the Closing Date, except to the extent such representations and warranties expressly relate to an earlier time. The Company shall have performed each of the covenants and agreements of the Company contained in this Agreement required to be performed at or prior to the Closing Date. Section 4.2. Consents and Approvals. The Company shall have obtained or made all consents, approvals, orders, licenses, permits and authorizations of, and registrations, declarations and filings with, any Governmental Authority or any other Person (if any) required to be obtained or made by or with respect to the Company in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated thereby. Section 4.3. No Legal Bar. No action or proceeding by or before any Governmental Authority shall be pending or threatened challenging or seeking to restrain or prohibit the transactions contemplated by this Agreement. No Legal Requirement preventing the transactions contemplated by this Agreement shall be in effect. -6- 7 Section 4.4. Restated Certificate of Incorporation. The Articles shall have been approved by all requisite Board and stockholder action on the part of the Company, filed with and accepted by the Secretary of State of the State of Delaware and not further amended in any respect except as consented to by the Investors in writing. Section 4.5. Closing Documents. The Company shall have delivered to the Investors the following: (a) a certificate of an authorized officer of the Company, dated the Closing Date, to the effect that the conditions specified in Section 4.1 and 4.2 have been satisfied or waived; (b) a certificate of the Secretary or an Assistant Secretary of the Company, dated as of the Closing Date, certifying as to attached copies of the Articles, the By-laws of the Company and resolutions adopted by the Board of Directors of the Company and its stockholders authorizing the Articles, the execution and delivery by the Company of this Agreement and the consummation by the Company of the transactions contemplated thereby, including the issuance and sale of the Shares; (c) a copy of the Articles, as filed with the Secretary of State of the State of Delaware; (d) a certificate of the Secretary of State of the State of Delaware, dated a recent date, certifying that the Company is in good standing in the State of Delaware; and (e) such other certificates or documents as the Investors or their counsel may reasonably request relating to the transactions contemplated hereby. ARTICLE V CONDITIONS OF COMPANY'S OBLIGATIONS The obligation of the Company to issue and sell the Shares to the Investors is subject to the satisfaction (or waiver by the Company) as of the Closing Date of the following conditions: Section 5.1. Representations and Warranties. The representations and warranties of the Investors made in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date with the same effect as if made at and as of the Closing Date. Section 5.2. No Legal Bar. The Company shall have obtained all necessary authorizations, approvals, blue sky law permits and qualifications, or secured exemptions therefrom, required by, and made all necessary filings and registrations with, any Governmental Authority in connection with the offer and sale of the Shares and the consummation of the transactions contemplated by this Agreement. No action or proceeding by or before any -7- 8 Governmental Authority shall be pending or threatened challenging or seeking to restrain or prohibit the transactions contemplated by this Agreement. No Legal Requirement preventing the transactions contemplated by this Agreement shall be in effect. Section 5.3. Purchase by Each Investor. Each Investor shall have purchased the applicable number of Shares to be purchased by such Investor in accordance with the terms of this Agreement. ARTICLE VI COVENANTS The Company covenants and agrees that: Section 6.1. Use of Proceeds. The proceeds of the sale of the Shares shall be used for ongoing working capital needs, capital expenditures and general corporate purposes. Section 6.2. Preservation of Corporate Existence. The Company shall preserve and maintain, and cause its Subsidiaries (other than Winston Tire Company) to preserve and maintain, in full force and effect its corporate existence and good standing under the laws of its jurisdiction of incorporation and shall use its best efforts to preserve and maintain in full force and effect all material rights, privileges, qualifications, licenses and franchises necessary in the normal conduct of its business. Section 6.3. Public Announcements. The Company and the Investors shall consult with each other before issuing any press release or otherwise making any public statements with respect to the transactions contemplated hereby, and shall not issue any such press release or make any such public statement that uses the name of any Investor or any affiliate thereof without the prior written consent of each such Investor and affiliate whose name is proposed to be used. Section 6.4. Redemption of Series C Preferred Stock. (a) Redemption Right. Subject to the restrictions contained in Section 6.4(e), if, at any time after the Closing Date a Change of Control (as defined below) occurs, the Company shall, within 10 Business Days after such occurrence, send notice of such occurrence to the holders of the Series C Preferred Stock. If, within 10 Business Days of such notice, a holder of outstanding shares of Series C Preferred Stock sends notice to the Company specifying that such holder thereby requests that the Company redeem all of the outstanding shares of Series C Preferred Stock held by such holder, the Company shall redeem, out of the assets of the Company legally available therefor, all such shares within 30 Business Days of the Company's receipt of all such requests (the "Change of Control Redemption Date") at a price per share equal to (x) the Series C Liquidation Preference then in effect plus (y) the amount of all accrued and unpaid Series C Dividends on such share through and including the date of redemption. -8- 9 (b) Change of Control Defined. "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) or Kelly-Springfield (as defined in the Articles) is or becomes the beneficial owner, directly or indirectly, of outstanding shares of capital stock of the Company, 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 the Company (the term "beneficial owner" shall be determined in accordance with Rule 13d-3, promulgated by the Securities and Exchange Commission under the Exchange Act), provided, however, that a person or group shall not be deemed to be the "beneficial owner" of capital stock of the Company solely by reason of such person or group having entered into a stockholders or similar agreement with a Principal Shareholder, (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 immediately following the Closing Date, any member of the Board of Directors elected by Kelly-Springfield pursuant to Section 6.4(c) of the 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 Company 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 Company 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 Company resulting from such recapitalization, reorganization, merger consolidation or similar transaction; or (iv) the stockholders of the Company shall have approved the sale or other disposition of all or substantially all the assets of the Company 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 Company immediately prior to such disposition. "Principal Shareholders" means Charlesbank Equity Fund IV, Limited Partnership, Charlesbank Equity Fund IV GP, Limited Partnership, Charlesbank Capital Partners, LLC, any other funds managed by Charlesbank Capital Partners, LLC, any person that, as of the Closing Date, is a limited partner of Charlesbank Equity Fund IV, Limited Partnership, members of senior management of the Company that were employees of the Company as of the Closing Date, and any corporation, partnership, limited liability company or other entity a majority of the voting capital stock or partnership, membership or equity interests of which is owned by any of the foregoing. (c) Redemption Procedures. Each redemption of shares of Series C Preferred Stock under this Section 6.4 shall be deemed to have been effected on the applicable Change of Control Redemption Date. On the applicable Change of Control Redemption Date, each holder of shares of Series C Preferred Stock to be redeemed shall deliver to the Company a certificate or certificates representing the shares of Series C Preferred Stock to be redeemed, duly endorsed and in proper form for transfer, against payment in full by wire transfer of immediately available funds in U.S. dollars to an account designated in writing by such holder of an amount per share -9- 10 equal to (x) the Series C Liquidation Preference then in effect plus (y) the amount of all accrued and unpaid Series C Dividends on such share through and including the date of redemption. (d) Funds Insufficient to Effect Redemptions. If the Company shall not have assets or funds legally available for the redemption of all of the shares of Series C Preferred Stock required to be redeemed under this Section 6.4, the Company shall redeem ratably from the holders of the Series C Preferred Stock such number of shares as it shall have funds legally available therefor and shall redeem the remainder of such shares on the earliest practicable date(s) as assets or funds become legally available therefor. Any shares of Series C Preferred Stock not so redeemed shall remain issued and outstanding for all purposes until the date of actual redemption by the Company. (e) Limitations on Redemption. Notwithstanding any contrary provision of this Agreement, for so long as any shares of Series A Preferred Stock or Series B Preferred Stock are outstanding, the Company shall not be obligated to make any redemption payments under this Section 6.4 or otherwise in respect of the Series C Preferred Stock. Notwithstanding any contrary provision of this Agreement, from and after the date on which no shares of Series A Preferred Stock or Series B Preferred Stock are outstanding, the Company shall not be obligated to make any redemption payments under this Section 6.4 or otherwise in respect of the Series C Preferred Stock unless due provision can be made for the full amount of any dividend or liquidation preference or redemption payment (if any) payable to which holders of any Senior Stock may be entitled under the Articles. In addition, notwithstanding anything to the contrary in this Agreement, (i) so long as any amounts are outstanding under any Other Documents (as defined below) or any commitments to lend under the Other Documents have not been terminated, the Company shall not make payment in respect of any redemption permitted or otherwise required by this Section 6.4 to the extent that the making of such payment would breach, conflict with, or result in any violation of or default or event of default (with or without notice or lapse of time or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to the loss of any benefit under, or result in the creation or imposition of any lien or encumbrance of any nature whatsoever upon any of the properties or assets of the Company or any of its Subsidiaries under, or result in the Series C Preferred Stock constituting "Disqualified Stock" as defined under, any provision of the Other Documents; and (ii) so long as any amount is outstanding under the May Indenture and/or the December Indenture, the Company shall not make payment in respect of any redemption permitted or otherwise required by this Section 6.4 until after the Company has complied with the provisions of Sections 4.06 and 4.09 of the May Indenture and/or the December Indenture, as applicable, it being understood and agreed that if any event or series of events constituting a Change of Control hereunder shall not also constitute a "Change of Control" under the May Indenture and/or the December Indenture, as applicable, such event or series of events shall be deemed not to constitute a Change of Control hereunder and the Company shall not be obligated to make any redemption payments under this Section 6.4 or otherwise in respect of the Series C Preferred Stock in connection therewith. "Other Documents" means (i) the Amended and Restated Loan and Security Agreement, dated as of March 6, 2000, between and among the Company, Winston Tire Company, The Speed Merchant, Inc., and California Tire Company, as borrowers, the financial institutions party thereto (the "Lenders") and Fleet Capital Corporation, as -10- 11 Administrative Agent (the "Administrative Agent"), (ii) the Indenture, dated as of May 15, 1998, between and among the Company, the Subsidiary Guarantors party thereto and First Union National Bank, as Trustee (the "May Indenture"), (iii) the Indenture, dated as of December 1, 1998, between and among the Company, the Subsidiary Guarantors party thereto and First Union National Bank, as Trustee (the "December Indenture"), (iv) all notes, mortgages, security documents, guaranties and other agreements, documents and instruments entered into in connection therewith, in each case, as extended, amended, modified, supplemented and/or restated from time to time in accordance with its terms, including any replacement agreement for any thereof and any refinancing of the debt incurred under any thereof, which refinancing may result in a greater principal amount outstanding in connection therewith. Any determination made by the Board of Directors, in its sole judgment, that the making of any payment pursuant to this Section 6.4 would breach, conflict with, or result in any violation of or default or event of default (with or without notice or lapse of time or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to the loss of any benefit under, or result in the creation or imposition of any lien or encumbrance of any nature whatsoever upon any of the properties or assets of the Company or any of its subsidiaries under, or result in the Series C Preferred Stock constituting "Disqualified Stock" as defined under, any of the Other Documents, shall be conclusive and binding on the Company and all holders of Series C Preferred Stock. ARTICLE VII MISCELLANEOUS Section 7.1. Notices. Notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service or sent by facsimile (a) if to an Investor, to the address or facsimile number set forth opposite such Investor's name on Schedule I and (b) if to the Company, to: Heafner Tire Group, Inc. 2105 Water Ridge Parkway, Suite 500 Charlotte, NC 28217 Facsimile: (704) 423-8987 Attention: General Counsel or to such other address as any party hereto shall have communicated to the other parties hereto by notice in accordance with this provision. All notices and other communications given to any party in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by facsimile in each case delivered or sent (properly addressed) to such party as provided in this Section 7.1 or in accordance with the latest unrevised direction from such party given in accordance with this Section 7.1. -11- 12 Section 7.2. Survival of Agreement. All representations and warranties made by the Company in this Agreement and in the certificates or other documents prepared or delivered in connection with the Closing shall be considered to have been relied upon by the Investors and shall survive the execution and delivery of this Agreement or such certificate or other document, the Closing, the sale and purchase of the Shares and any disposition thereof, regardless of any investigation made by any Investor or on its behalf, for a period of two years from and after the Closing Date. Section 7.3. Assignment. This Agreement and the rights, interests and obligations hereunder shall not be assignable or transferable by either party without the prior written consent of the other party hereto; provided that any Investor may assign, in its sole discretion, any or all of its rights, interests and obligations under this Agreement to any of its Affiliates. Notwithstanding the foregoing, it is acknowledged and agreed that this Agreement and all of the rights (but none of the obligations) of the Company hereunder will be assigned by the Company to the Administrative Agent as security for the benefit of the Lenders. Each party to this Agreement expressly acknowledges and consents to such assignment and agrees that all of its representations, warranties and covenants hereunder shall be for the benefit of and may be enforced by the Administrative Agent for the benefit of the Lenders. This Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective successors and permitted assigns. Section 7.4. No Third-Party Beneficiaries. This Agreement is for the sole benefit of the parties hereto and their respective successors and permitted assigns and nothing expressed or implied in this Agreement shall give or be construed to give to any Person, other than the parties hereto and such successors and assigns, any legal or equitable rights hereunder, except that the Administrative Agent (for the benefit of the Lenders) is intended to be a third party beneficiary of this Agreement. Section 7.5. Expenses. The Company shall pay or reimburse the Investors for all reasonable costs and expenses incurred in connection with the negotiation, execution and delivery of this Agreement, including the reasonable fees and expenses of attorneys, financial advisors and accountants. Section 7.6. Waivers; Amendment. No failure or delay of the Investors or the Company in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Investors and the Company hereunder are cumulative and are not exclusive of any rights or remedies which the Investors or the Company would otherwise have. No waiver of any provision of this Agreement or consent to any departure by the Company therefrom shall in any event be effective unless the same shall be effected in a written agreement signed by the Company and the Investors. Any such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances. -12- 13 Section 7.7. Entire Agreement. This Agreement (including the Exhibits and Schedules hereto) constitutes the entire agreement between the parties relative to the subject matter hereof and thereof. Any previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement. Section 7.8. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH ANY OF THE TRANSACTION DOCUMENTS, THE SHARES OR THE CONVERSION SHARES. Section 7.9. Severability. In the event that 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 7.10. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one agreement, and shall become effective when one or more such counterparts have been signed by each of the parties and delivered to the other party. Section 7.11. Headings, Definitions. (a) 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, 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; and (vi) a reference in this Agreement to an Article, Section, Annex, Exhibit or Schedule is to the Article, Section, Annex, Exhibit or Schedule of this Agreement. (b) As used in this Agreement, the following terms shall have the meanings specified below: "Affiliate" means, when used with respect to a specified Person, a limited or general partner of such Person or another Person that directly, or indirectly through one or more intermediaries, controls or is controlled by or is under common control with the Person specified. "Business Day" shall have the meaning given in the Articles. "Control" (including, with its correlative meanings, "controlled by" and "under common control with") means possession, directly or indirectly, of power to direct or cause the -13- 14 direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise). "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. "Governmental Authority" means any government, court, administrative agency or commission or other governmental agency, authority or instrumentality, domestic or foreign, of competent jurisdiction. "Legal Requirement" means any constitution, act, statute, law, ordinance, treaty, rule, regulation or official interpretation of, or judgment, injunction, order, decision, decree, license, permit or authorization issued by, any Governmental Authority. "Lien" means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, charge, security interest, easement, covenant, right of way, restriction, equity or encumbrance of any nature whatsoever in or on such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. "Person" means any individual, firm, corporation, partnership, limited liability company, trust, joint venture, Governmental Authority or other entity, and shall include any successor (by merger or otherwise) of such entity. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations thereunder. "Senior Stock" shall have the meaning given in the Articles. "Series A Preferred Stock" shall have the meaning given in the Articles. "Series B Preferred Stock" shall have the meaning given in the Articles. "Series C Dividends" shall have the meaning given in the Articles. "Series C Liquidation Preference" shall have the meaning given in the Articles. "Subsidiary" of any Person means any firm, corporation, partnership, limited liability company, trust, joint venture or other entity more than 50% of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are (or in the case of a Person which does not have outstanding shares or securities, but more than 50% of whose ownership interest representing the right to make decisions for such other entity is) now or hereafter owned or controlled, directly or indirectly, by such Person, but such firm, corporation, partnership, limited liability company, trust, joint venture or other entity shall be deemed to be a Subsidiary only so long as such ownership or control exists. -14- 15 Section 7.13. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE CONFLICTS OF LAW PRINCIPLES OF SUCH STATE. Section 7.14. CONSENT TO JURISDICTION. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF NEW YORK STATE SITTING IN THE COUNTY OF NEW YORK OR ANY FEDERAL COURT OF THE UNITED STATES OF AMERICA SITTING IN THE SOUTHERN DISTRICT OF NEW YORK IN CONNECTION WITH ANY SUIT, ACTION OR PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, THE SHARES OR THE TRANSACTIONS CONTEMPLATED HEREBY. NONE OF THE PARTIES HERETO MAY MOVE TO (I) TRANSFER ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH NEW YORK COURT OR FEDERAL COURT TO ANOTHER JURISDICTION, (II) CONSOLIDATE ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH NEW YORK COURT OR FEDERAL COURT WITH A SUIT, ACTION OR PROCEEDING IN ANOTHER JURISDICTION OR (III) DISMISS ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH NEW YORK COURT OR FEDERAL COURT FOR THE PURPOSE OF BRINGING THE SAME IN ANOTHER JURISDICTION. THE COMPANY AGREES THAT A FINAL JUDGMENT IN ANY SUCH SUIT, ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTION BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. EACH OF THE PARTIES HERETO 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, THE SHARES OR THE TRANSACTIONS CONTEMPLATED HEREBY IN ANY NEW YORK COURT SITTING IN THE COUNTY OF NEW YORK OR ANY FEDERAL COURT SITTING IN THE SOUTHERN DISTRICT OF NEW YORK. EACH OF THE PARTIES HERETO HEREBY CONSENTS TO THE SERVICE OF PROCESS IN ANY SUCH SUIT, ACTION OR PROCEEDING BY NOTICE IN THE MANNER SPECIFIED IN SECTION 7.1. Section 7.15. Restrictive Legends. The certificates evidencing the Shares to the extent applicable will bear legends reading substantially as follows (unless and until such legend is no longer required) in addition to any other legends required by any other agreement or applicable Legal Requirement: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN COMPLIANCE WITH THAT ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR IN A TRANSACTION WHICH QUALIFIES AS AN EXEMPT TRANSACTION UNDER SUCH ACT AND THE RULES AND REGULATIONS THEREUNDER. THE COMPANY WILL FURNISH THE HOLDER OF THIS CERTIFICATE INFORMATION CONCERNING THE DESIGNATION, RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS APPLICABLE TO EACH CLASS OR SERIES OF SHARES, INCLUDING THE LIQUIDATION PREFERENCES AND THE VOTING AND CONVERSION RIGHTS OF THE SERIES C PREFERRED STOCK EVIDENCED HEREBY, UPON WRITTEN REQUEST AND WITHOUT CHARGE." -15- 16 Section 7.16. Certain Acknowledgments by The 1818 Mezzanine Fund. The 1818 Mezzanine Fund, L. P. (the "Fund") hereby acknowledges and agrees that (i) the execution and delivery of this Agreement by the Fund and the Fund's purchase of the Shares to be purchased by it hereunder constitute the exercise in full of any and all subscription rights, preemptive rights or similar rights of the Fund to acquire shares of Series C Preferred Stock, including without limitation pursuant to Section 4.1(a) of the Warrantholder Agreement, dated as of May 21, 1999 (the "Warrantholder Agreement"), between and among the Company, the Fund and Charlesbank Equity Fund IV, Limited Partnership, and (ii) the Fund has received sufficient notice of the transactions contemplated by this Agreement and waives any rights under the Warrantholder Agreement or otherwise to receive any other notice with respect thereto. The Fund acknowledges and agrees that the Shares purchased by it under this Agreement shall constitute "Capital Stock" (as defined in the Warrantholder Agreement) for all purposes under the Warrantholder Agreement. -16- 17 IN WITNESS WHEREOF, the parties have duly executed this Share Purchase Agreement as of the day and year first above written. HEAFNER TIRE GROUP, INC. By: /s/ Richard P. Johnson ----------------------------------------- Name: Richard P. Johnson Title: President & CEO CHARLESBANK EQUITY FUND IV, LIMITED PARTNERSHIP By: CHARLESBANK EQUITY FUND IV GP, LIMITED PARTNERSHIP, ITS GENERAL PARTNER By: CHARLESBANK CAPITAL PARTNERS, LLC, ITS GENERAL PARTNER By: /s/ Mark A. Rosen ----------------------------------------- Mark A. Rosen Managing Director By: /s/ Michael Thonis ----------------------------------------- Michael Thonis Managing Director THE 1818 MEZZANINE FUND, L. P. By: BROWN BROTHERS HARRIMAN & CO., ITS GENERAL PARTNER By: /s/ ???????????????????? ----------------------------------------- Name: Title: 18 SCHEDULE I Number of Shares of Amount of Investor Series A Preferred Stock Investment - -------- ------------------------ ---------- Charlesbank Equity Fund IV, Limited Address for notices: 1,166,667 $10,500,003 The 1818 Mezzanine Fund, L. P. 166,667 $1,500,003 and Charlesbank Equity Fund IV, Limited Partnership (jointly and severally) Address for notices: --------- ----------- Total 1,333,334 $12,000,006 19 EXHIBIT A FORM OF RESTATED CERTIFICATE OF INCORPORATION 20 SCHEDULE 2.4(c) CAPITAL STOCK 21 SCHEDULE 6.1 USE OF PROCEEDS EX-10.30 10 g67750ex10-30.txt STOCK OPTION AGREEMENT DATED 6/6/2000 1 EXHIBIT 10.30 HEAFNER TIRE GROUP, INC. STOCK OPTION AGREEMENT Number of shares subject to option: 50,000] This Agreement (the "Agreement") made this 6th day of June, 2000, between Heafner Tire Group, Inc., a Delaware corporation (the "Company"), and Donald C. Roof (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 [50,000] 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 [______] Tier 1 Options. Subject to the other terms of this Agreement regarding the 2 exercisability of this 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 ------------ ----------------------------------- June 6, 2000 0 x 25% June 6, 2001 0 x 50% June 6, 2002 0 x 75% June 6, 2003 0 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 3 serving as directors of the Company on the Effective Date (as defined in the Plan) 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 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 [20,000] 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 4 exercisability of the remaining 50% of the Tier 3 Options, and (2) the seventh anniversary of the date hereof. "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 [30,000] 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 5 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. "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 6 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 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 7 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 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 8 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 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 9 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: (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 10 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. 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. 11 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. 12 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:__________________________ Name: Title: - ------------------------------- Donald C. Roof Address: 6705 Seton House Lane Charlotte, NC 28277 13 HEAFNER TIRE GROUP, INC. STOCK OPTION AGREEMENT Number of shares subject to option: 30,000] This Agreement (the "Agreement") made this 6th day of June, 2000, between Heafner Tire Group, Inc., a Delaware corporation (the "Company"), and Richard P. Johnson (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 [30,000] 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. 14 (A) Tier 1 Options. The Company hereby grants to the Optionee [______] Tier 1 Options. Subject to the other terms of this Agreement regarding the exercisability of this 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 ------------ ----------------------------------- June 6, 2000 0 x 25% June 6, 2001 0 x 50% June 6, 2002 0 x 75% June 6, 2003 0 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 15 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 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 [15,000] 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 16 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. "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 [15,000] 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. 17 "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. "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 18 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 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. 19 (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 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 20 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 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 21 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: (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. 22 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. 23 10. Counterparts. This Agreement has been executed in two counterparts each of which shall constitute one and the same instrument. 24 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:____________________________ Name: Title: - ------------------------------- Richard P. Johnson Address: 18816 Balmore Pines Lane Cornelius, NC 28031 25 HEAFNER TIRE GROUP, INC. STOCK OPTION AGREEMENT Number of shares subject to option: 25,000] This Agreement (the "Agreement") made this 6th day of June, 2000, between Heafner Tire Group, Inc., a Delaware corporation (the "Company"), and J. Michael Gaither (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 [25,000] 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 [______] Tier 1 Options. Subject to the other terms of this Agreement regarding the 26 exercisability of this 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 ------------ ----------------------------------- June 6, 2000 0 x 25% June 6, 2001 0 x 50% June 6, 2002 0 x 75% June 6, 2003 0 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 27 serving as directors of the Company on the Effective Date (as defined in the Plan) 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 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 [10,000] 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 28 exercisability of the remaining 50% of the Tier 3 Options, and (2) the seventh anniversary of the date hereof. "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 [15,000] 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 29 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. "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 30 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 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 31 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 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 32 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 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. 33 (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: (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. 34 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. 35 10. Counterparts. This Agreement has been executed in two counterparts each of which shall constitute one and the same instrument. 36 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:______________________________ Name: Title: - ------------------------------- J. Michael Gaither Address: 8309 Merrimack Court Charlotte, NC 28210 37 HEAFNER TIRE GROUP, INC. STOCK OPTION AGREEMENT Number of shares subject to option: 25,000] This Agreement (the "Agreement") made this 6th day of June, 2000, between Heafner Tire Group, Inc., a Delaware corporation (the "Company"), and Daniel K. Brown (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 [25,000] 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. 38 (A) Tier 1 Options. The Company hereby grants to the Optionee [______] Tier 1 Options. Subject to the other terms of this Agreement regarding the exercisability of this 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 ------------ ----------------------------------- June 6, 2000 0 x 25% June 6, 2001 0 x 50% June 6, 2002 0 x 75% June 6, 2003 0 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 39 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 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 [10,000] 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 40 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. "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 [15,000] 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. 41 "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. "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 42 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 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. 43 (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 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 44 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 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 45 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: (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. 46 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. 47 10. Counterparts. This Agreement has been executed in two counterparts each of which shall constitute one and the same instrument. 48 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:____________________________ Name: Title: - ------------------------------- Daniel K. Brown Address: 17915 Jetton Road Cornelius, NC 28031 49 HEAFNER TIRE GROUP, INC. STOCK OPTION AGREEMENT Number of shares subject to option: 25,000] This Agreement (the "Agreement") made this 6th day of June, 2000, between Heafner Tire Group, Inc., a Delaware corporation (the "Company"), and David H. Taylor (the "Optionee"). WITNESSETH: 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 [25,000] 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. 50 (A) Tier 1 Options. The Company hereby grants to the Optionee [______] Tier 1 Options. Subject to the other terms of this Agreement regarding the exercisability of this 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 ------------ ----------------------------------- June 6, 2000 0 x 25% June 6, 2001 0 x 50% June 6, 2002 0 x 75% June 6, 2003 0 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 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 2 51 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 [10,000] 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. "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 3 52 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 [15,000] 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. "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. 4 53 "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 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 5 54 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 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 6 55 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 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 7 56 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: (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); 8 57 (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. 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. 9 58 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 59 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 CEO /s/ David H. Taylor - --------------------------------- David H. Taylor Address: 5500 Hardeson Road Charlotte, NC 28226 11 EX-10.31 11 g67750ex10-31.txt EXECUTIVE SEVERANCE AGREEMENT 5/25/00 / R. HAAS 1 EXHIBIT 10.31 EXECUTIVE SEVERANCE AGREEMENT, dated as of May 25, 2000 (the "Agreement"), between Heafner Tire Group, Inc., a Delaware corporation (the "Employer"), and Randall M. Haas (the "Employee"). The Employer desires to retain the Employee to supply services to the Employer in connection with Employer's business of marketing and distributing wholesale and retail tires and related products (the "Business"), 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 President of the T.O. Haas Division of the Employer (the "Division"), 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 $175,000 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 an amount equal to 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 2 modify its Executive Bonus Plan and other incentive plans 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) Retention Payments. In addition to the compensation set forth in Section 2(a) and (b) above, during the first three years of the Employment Period, the Employer shall pay to the Employee a bonus (the "Stay-Put Bonus"), subject to the provisions of Section 3(e)(ii), the Stay-Put Bonus for any year shall only be payable in the event the Employee is employed by the Employer as of December 31 of such year. The Stay-Put Bonus for the calendar year ending December 31, 2000 shall be equal to $287,250. The Stay-Put Bonus for the calendar year ending December 31, 2001 shall be equal to $670,250. The Stay-Put Bonus for the calendar year ending on December 31, 2002 shall be equal to $957,500. Subject to the provisions of Section 3(e)(ii) hereinbelow, the Stay-Put Bonus for each applicable year shall be payable on or before the anniversary date of the date hereof in the following year. (d) 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. (e) 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 contribution of $16,000 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 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 2 3 of the Employee's immediate family covered by the applicable welfare benefit plan immediately prior to the termination date. (f) 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. (g) 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 (this will be the date that coincides with the end of non compete period from the stock purchase agreement) 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 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. (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 3 4 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 2000 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) 1.5. Additionally, upon a termination of the Employment Period at any time by the Employer without Cause or by Employee for Good Reason, the Employer shall pay to the Employee a lump sum amount equal to the sum of all Stay-Put Bonuses not yet paid. 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. (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 4 5 Employee's annual Base Salary at the time of the Change in Control, in each case multiplied by three, (B) the Severance Bonus Amount multiplied by three and (C) the aggregate amount of any remaining Stay-Put Bonuses not yet paid to Employee. 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 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 5 6 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 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 6 7 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; (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 7 8 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. Confidential Information; Non-Competition. (a) Stock Purchase Agreement. The Employee acknowledges and agrees that pursuant to that certain Stock Purchase Agreement (herein "Stock Purchase Agreement"), dated April 14, 2000 among Employee and others and that certain Non-Competition Agreement dated as of May, 2000 between Employer and Employee, 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. 8 9 (b) Non-Disclosure of Confidential Information. (i) For the Employment Period and at all times thereafter, the Employee covenants and agrees that he will not disclose "Confidential Information" (as herein defined) to persons other than Employer and its Affiliates and their employees .and except as necessary in connection with the advancement of the interests of Employer. For purposes of this Agreement, "Confidential Information" shall mean all confidential, proprietary or secret information whether or not reduced to writing relating to the products, equipment or business of Employer and its Affiliates submitted to the Employee or received, compiled, developed, designed, produced or otherwise discovered by the Employee from time to time during the Employment Period. Confidential Information may include, without limitation, all plans, records, customer lists, forms, formulae, designs, specifications, drawings, computer programs, inventions, discoveries, methods of manufacture, price lists, trade secrets and business secrets. Confidential Information shall not include information which (i) is or becomes available to the public from a source other than the Employee; or (ii) becomes known by Employee from a third party source having the right to disclose the information. (ii) The Employee specifically acknowledges that Confidential Information, whether compiled or created by Employer or by the Employee or otherwise, derives independent economic value from not being readily known to or ascertainable by proper means by others who can obtain economic value from the disclosure of Confidential Information and that any retention and/or disclosure or other use of Confidential Information by Employee during or after the termination of the Employee's employment with Employer (except in the regular course of performing his duties hereunder) will constitute a misappropriation of Confidential Information belonging to Employer. (iii) The Employee agrees that upon termination of his employment with Employer, for any reason, voluntary or involuntary, with or without Cause, he will immediately return to Employer any Confidential Information, copies of the same, and any other property belonging to Employer, within his possession, and will not at any time thereafter copy, reproduce or otherwise facilitate the future disclosure of the same. The Employee agrees that, following such termination of employment, he shall not disclose or use any Confidential Information which he receives, compiles, develops, designs, produces or otherwise discovers from time to time during the Employment Period and that all embodiments of such information shall belong to Employer or its affiliates, as the case may be. The Employee further agrees that he will not retain or use for his account at any time any trade names, trade mark, service mark, or other proprietary business designation used or owned in connection with the business of Employer or any of its affiliates. (iv) The Employee's obligations under this Section 5(b) will survive termination of his employment for any reason. The Employee shall not be prohibited from disclosing Confidential Information to the extent required by law or judicial or 9 10 administrative proceeding (after providing Employer with notice and an opportunity to contest such requirement) to make disclosure. (c) Noncompetition. (i) Period of Covenant. The term of the following noncompetition covenant shall be during the Employment Period and a period of two (2) years after the termination of the Employment Period for any reason. Such period is hereinafter referred to as the "Noncompetition Period". (ii) Nature and Scope of Covenant. The Employee covenants and agrees not to carry on or engage in, directly or indirectly, on his own behalf or by or through any other person or entity, any business or other activity in competition with the Business (as defined below) during the Noncompetition Period within the United States (the "Restricted Territory"). Without limiting the generality of the foregoing, the Employee covenants and agrees that during the Noncompetition Period and except in connection with his employment by Employer he will not, directly or indirectly, engage in any of the following activities: (A) own any interest in (other than ownership of less than five percent (5%) of the voting securities of a publicly traded company), manage or serve as an employee of or consultant, business advisor or independent contractor, either directly or indirectly, for any individual, corporation, partnership, association, joint venture or other entity which is engaged in a business in competition with the Business; (B) solicit business similar to the Business from any customer that has done business with, or potential customers that have been in contact with Employer during the Employment Period. (C) make a loan to, or guarantee the obligations of, any individual or entity engaged in a business in competition with the Business or make a loan to, or guarantee the obligations of, any owner, officers, director, partner or shareholder thereof; (D) request, induce or attempt to influence any customer or any supplier of goods or services to the Employer to curtail or cancel any business it transacts with the Employer with respect to the Business; or (E) request, induce or attempt to influence any employee of the Employer to terminate his or her employment with the Employer, or attempt to dissuade any then current employee of the Employer from continuing employment with the Employer. 10 11 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. (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 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. 11 12 (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 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. 12 13 (j) 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 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: Randall M. Haas P.O. Box 81067 Lincoln, NE 68501 13 14 With a copy to: Demars, Gordon, Olson & Shively 1225L Street, Suite 400 Lincoln, NE 68501 Attn: William Olson Facsimile: 402-438-6329 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. (k) 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. (l) 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. (M) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NORTH CAROLINA. (N) CONSENT TO JURISDICTION. EACH OF THE PARTIES TO THIS AGREEMENT AGREES TO BE BOUND BY THE PROVISIONS SET FORTH IN EXHIBIT C TO THIS AGREEMENT. EACH OF EMPLOYEE AND EMPLOYER HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT IN CHARLOTTE, NORTH CAROLINA FOR THE PURPOSES OF ALL LEGAL PROCEEDINGS WHICH ARISE OUR OF OR RELATE TO THIS AGREEMENT, AND EACH OF EMPLOYEE AND EMPLOYER AGREES NOT TO COMMENCE ANY LEGAL PROCEEDING RELATED THERETO EXCEPT IN SUCH COURT. EACH OF EMPLOYEE AND EMPLOYER IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OF HEREAFTER HAVE TO THE LAYING OF VENUE IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 14 15 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/ Randall M. Haas ----------------------------------------- Randall M. Haas, Employee EX-10.32 12 g67750ex10-32.txt EXECUTIVE SEVERANCE AGREEMENT 7/24/00 /J. MATTHEWS 1 EXHIBIT 10.32 EXECUTIVE SEVERANCE AGREEMENT, dated as of July 24, 2000 (the "Agreement"), between Heafner Tire Group, Inc., a Delaware corporation (the "Employer"), and James Matthews (the "Employee"). The Employer desires to retain the Employee to supply services to the Employer in connection with Employer's business of marketing and distributing wholesale and retail tires and related products (the "Business"), 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 President of the American Tire Distributors Division of the Employer (the "Division"), 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 $250,000 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 decreased) as determined periodically by the Board of Directors. (b) Additional Compensation. As additional compensation for the Services, the Employer shall pay to the Employee an amount equal to the greater of (x) with respect to the remaining portion of calendar year 2000 and calendar year 2001, annual fixed bonus payments (the "Fixed Bonus") equal to 20% of the Employee's Base Salary for such year or parts of year on a pro-rata basis, and (y) (i)with respect to the remainder of calendar year 2000 and for calendar year 2001, an annual bonus payment at the "Lower", "Target" or "Upper" percentage payment levels, as the case may be, in accordance with the terms and conditions of the Employer's 2000 Executive Bonus Plan, or (ii) with respect to subsequent calendar years, other 2 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 April 1 of the following year. The Employee will be entitled to participate in the 2000 Executive Bonus Plan on a pro-rata percentage for the period from the date hereof to the end of the year as a Level I Employee. The Employee acknowledges that the Employer may terminate or modify its Executive Bonus Plan and other incentive plans 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) Non-Competition Payments. In consideration of the covenants contained in Section 5 hereof, the Employer shall pay to the Employee an amount equal to $137,500 in two installments. The first installment shall be in the amount of $82,500 and shall be payable on the date which is ninety (90) days from the date hereof. The second installment shall be in the amount of $55,000 and shall be payable on the date which is one hundred eighty (180) days from the date hereof. (d) 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. (e) 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 on a basis consistent with the other Division Presidents and for the partial year 2000 a pro-rata contribution from the date of this Agreement to the end of the year and each full year thereafter during the Employment Period based on an annual Employer contribution level of $16,000 per year in accordance with the Heafner Tire Group, Inc., deferred compensation program as that program is revised from time to time by the Board of Directors. 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 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 2 3 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. (f) 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. (g) 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 in the event of (i) the Employee's conviction of or plea of guilty or nolo contendere to a felony involving moral turpitude, (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 involving moral turpitude, 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. 3 4 (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 2000 Executive Bonus Plan in effect on the date hereof (the "Effective Date Plan Percentage"), (ii) a material 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) 1.5. 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. (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 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 5 6 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 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 6 7 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; (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 7 8 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. Confidential Information; Non-Competition. (a) Non-Disclosure of Confidential Information. (i) For the Employment Period and at all times thereafter, the Employee covenants and agrees that he will not disclose "Confidential Information" (as herein defined) to persons other than Employer and its Affiliates and their employees and except as necessary in connection with the advancement of the interests of Employer. For purposes of this Agreement, "Confidential Information" shall mean all confidential, proprietary or secret information whether or not reduced to writing relating to the products, equipment or business of Employer and its Affiliates submitted to the Employee or received, compiled, developed, designed, produced or otherwise discovered by the Employee from time to time during the Employment Period. Confidential 8 9 Information may include, without limitation, all plans, records, customer lists, forms, formulae, designs, specifications, drawings, computer programs, inventions, discoveries, methods of manufacture, price lists, trade secrets and business secrets. Confidential Information shall not include information which (i) is or becomes available to the public from a source other than the Employee; or (ii) becomes known by Employee from a third party source having the right to disclose the information. (ii) The Employee specifically acknowledges that Confidential Information, whether compiled or created by Employer or by the Employee or otherwise, derives independent economic value from not being readily known to or ascertainable by proper means by others who can obtain economic value from the disclosure of Confidential Information and that any retention and/or disclosure or other use of Confidential Information by Employee during or after the termination of the Employee's employment with Employer (except in the regular course of performing his duties hereunder) will constitute a misappropriation of Confidential Information belonging to Employer. (iii) The Employee agrees that upon termination of his employment with Employer, for any reason, voluntary or involuntary, with or without Cause, he will immediately return to Employer any Confidential Information, copies of the same, and any other property belonging to Employer, within his possession, and will not at any time thereafter copy, reproduce or otherwise facilitate the future disclosure of the same. The Employee agrees that, following such termination of employment, he shall not disclose or use any Confidential Information which he receives, compiles, develops, designs, produces or otherwise discovers from time to time during the Employment Period and that all embodiments of such information shall belong to Employer or its affiliates, as the case may be. The Employee further agrees that he will not retain or use for his account at any time any trade names, trade mark, service mark, or other proprietary business designation used or owned in connection with the business of Employer or any of its affiliates. (iv) The Employee's obligations under this Section 5(a) will survive termination of his employment for any reason. The Employee shall not be prohibited from disclosing Confidential Information to the extent required by law or judicial or administrative proceeding (after providing Employer with notice and an opportunity to contest such requirement) to make disclosure. (b) Noncompetition. (i) Period of Covenant. The term of the following noncompetition covenant shall be during the Employment Period and a period of eighteen months after the termination of the Employment Period for any reason. Such period is hereinafter referred to as the "Noncompetition Period". (ii) Nature and Scope of Covenant. The Employee covenants and agrees not to carry on or engage in, directly or indirectly, on his own behalf or by or 9 10 through any other person or entity, any business or other activity in competition with the Business (as defined above) during the Noncompetition Period within (i) the United States (ii) the Northeastern and Mid-Atlantic United States, (iii) the states of New York, Pennsylvania, West Virginia, Virginia, Maryland and North Carolina and (iv) the geographic area within 100 miles of any location from which the Business is now or hereafter conducted (the "Restricted Territory"). Without limiting the generality of the foregoing, the Employee covenants and agrees that during the Noncompetition Period and except in connection with his employment by Employer he will not, directly or indirectly, engage in any of the following activities: (A) own any interest in (other than ownership of less than five percent (5%) of the voting securities of a publicly traded company), manage or serve as an employee of or consultant, business advisor or independent contractor, either directly or indirectly, for any individual, corporation, partnership, association, joint venture or other entity which is engaged in a business in competition with the Business; (B) solicit business similar to the Business from any customer that has done business with, or potential customers that have been in contact with Employer during the Employment Period. (C) make a loan to, or guarantee the obligations of, any individual or entity engaged in a business in competition with the Business or make a loan to, or guarantee the obligations of, any owner, officers, director, partner or shareholder thereof; (D) request, induce or attempt to influence any customer or any supplier of goods or services to the Employer to curtail or cancel any business it transacts with the Employer with respect to the Business; or (E) request, induce or attempt to influence any employee of the Employer to terminate his or her employment with the Employer, or attempt to dissuade any then current employee of the Employer from continuing employment with the Employer. 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 10 11 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. (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 11 12 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. Except as provided above in Section 6(b), 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 the arbitration 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. (j) 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: 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: James Matthews 9504 Nelson Lane Manassas, Virginia 20110 With a copy to: Morgan, Lewis & Bockius 1800 M Street, N.W. Washington, District Of Columbia 20036-5869 Attn: Robert J. Smith Facsimile: 202-467-7176 13 14 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. (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. (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 EMPLOYEE AND EMPLOYER HEREBY IRREVOCABLY AND, WITH RESPECT TO ANY CLAIMS BROUGHT UNDER SECTION 6(B) OF THIS AGREEMENT OR WITH RESPECT TO THE ENFORCEMENT OF ANY ARBITRAL AWARD AS PROVIDED IN SECTION 6(G) OF THIS AGREEMENT, UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT IN CHARLOTTE, NORTH CAROLINA FOR THE PURPOSES OF ALL LEGAL PROCEEDINGS WHICH ARISE OUR OF OR RELATE TO THIS AGREEMENT, AND EACH OF EMPLOYEE AND EMPLOYER AGREES NOT TO COMMENCE ANY LEGAL PROCEEDING RELATED THERETO EXCEPT IN SUCH COURT. EACH OF EMPLOYEE AND EMPLOYER IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OF HEREAFTER HAVE TO THE LAYING OF VENUE IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 14 15 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. HEAFNER TIRE GROUP, INC. By: ------------------------------------- Donald C. Roof President and Chief Executive Officer /s/ James Matthews ---------------------------------------- James Matthews, Employee EX-10.33 13 g67750ex10-33.txt AMEND. NO. 4 TO SECOND AMENDED LOAN AGREEMENT 1 EXHIBIT 10.33 EXECUTION COPY AMENDMENT NO. 4 AND WAIVER to SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS AMENDMENT NO. 4 AND WAIVER is entered into as of March 30, 2001 by and among HEAFNER TIRE GROUP, INC., a Delaware corporation, WINSTON TIRE COMPANY, a California corporation, THE SPEED MERCHANT, INC., a California corporation, CALIFORNIA TIRE COMPANY, a California corporation (the "Borrowers"), the financial institutions party from time to time to the Loan Agreement (as hereinafter defined) (the "Lenders"), and FLEET CAPITAL CORPORATION, a Rhode Island corporation, as administrative agent (the "Administrative Agent") for the Lenders. Preliminary Statement The Borrowers, the Lenders and the Administrative Agent are parties to the Second Amended and Restated Loan and Security Agreement dated as of March 6, 2000, as amended by Amendment No. 1 dated as of July 20, 2000, Amendment No. 2 dated as of February 2, 2001 and Amendment No. 3 dated as of February 14, 2001 (the "Loan Agreement"; terms defined therein, unless otherwise defined herein, being used herein as therein defined). The Borrowers are in default of certain financial covenants set forth in the Loan Agreement as a result of which the Lenders are entitled to exercise their remedies under the Loan Agreement (the "Existing Defaults"). The Borrowers have requested that the Lenders waive the Existing Defaults and amend the Loan Agreement as hereinafter set forth and the Lenders have agreed to grant such waivers and so to amend the Loan Agreement, upon and subject to the terms and conditions of this Amendment. Statement of Agreement NOW, THEREFORE, in consideration of the Loan Agreement, the Loans outstanding thereunder, the mutual covenants set forth therein and herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: Section 1. Amendment to Loan Agreement. Subject to the provisions of SECTION 3, the Loan Agreement is hereby amended by: 2 (a) amending Section 1.1 Definitions by deleting therefrom the definitions "Applicable Margin", "Borrowing Base", "EBIT", " EBITDA" and "Revolving Credit Facility" and substituting therefor the following respective definitions: "Applicable Margin" from and after the Amendment No. 4 Effective Date means as to each Type of Loan, the Tier I rate per annum set forth under the appropriate caption on the pricing matrix attached hereto as ANNEX B, subject to quarterly adjustment as follows: From and after delivery of the consolidated quarterly financial statements of Heafner and its Consolidated Subsidiaries for the Fiscal Quarter ending on or about June 30, 2001 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 Leverage Ratio reflected in such financial statements and the related certificate. "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) the lesser of (A) 65% (or 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 Eligible Inventory consisting of tires, at such time, and (B) $100,000,000, PLUS (iii) the lesser of (A) 50% (or such lesser percentage as the Administrative Agent may in its reasonable credit judgment determine from time to time) of the lesser 2 3 of cost determined on a FIFO (or first-in-first-out) accounting basis and fair market value of Eligible Inventory other than tires, at such time, and (B) $40,000,000, MINUS (iv) the sum of (A) the Letter of Credit Reserve, PLUS (B) the Rent Reserve, PLUS (C) the Dilution Reserve, PLUS (D) the Minimum Availability Reserve, PLUS (E) any Additional Reserves. "EBIT" for any specified accounting period for a specified Person, means Net Income of such Person(s) for such period before provision for net interest expense and income taxes PLUS, in the case of EBIT of Heafner, 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 of Heafner for such specified period. "EBITDA" for any specified accounting period for a specified Person means EBIT for such period for such Person PLUS depreciation and amortization expense deducted in computing such EBIT. "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 $180,000,000 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. (b) amending Section 1.1 Definitions by adding the following definitions thereto in the appropriate alphabetical order: "Amendment No. 4" means the Amendment No. 4 and Waiver to the Second Amended and Restated Loan and Security Agreement between the Borrowers, the Lenders and the Administrative Agent dated as of March 30, 2001. "Amendment No. 4 Effective Date" means the date on which Amendment No. 4 shall have become effective in accordance with its terms. 3 4 "EBITDA - Heafner Group" means for any specified accounting period, EBITDA of Heafner and its Consolidated Subsidiaries other than Winston on a consolidated basis for such period, as reported in accordance with GAAP. "EBITDA - Winston" means for each of the four Fiscal Quarters of Fiscal Year 2000 (i) ($657,000), (ii) ($3,251,000), (iii) ($3,842,000) and (iv) ($13,009,000), respectively, and for any specified accounting period ending after the last day of Fiscal Year 2000, EBITDA of Winston for such period, as reported pursuant to SECTION 10.1(C). "Leverage Ratio" means as of any specified date, the ratio of (a) total Debt of Heafner and its Consolidated Subsidiaries on a consolidated basis as of such date to (b) the sum of (i) EBITDA - Heafer, plus (ii) EBITDA - Winston for the period of four consecutive Fiscal Quarters ended on or most recently before such date; PROVIDED, HOWEVER, that from and after the earlier of the date on which (x) Heafner no longer owns, directly or indirectly, any shares of the capital stock of Winston or (y) a balance sheet of Winston prepared on a basis consistent with the financial statements prepared and submitted pursuant to SECTION 10.1(C) would reflect no assets or liabilities, EBITDA - Winston shall not be included in the calculation of the Leverage Ratio. "Minimum Availability Reserve" means $15,000,000 or such greater amount as the Administrative Agent may in its reasonable credit judgment determine from time to time. "Series C Preferred Stock Purchase Agreement" means the Share Purchase Agreement dated as of March 30, 2001 among Heafner, Charlesbank Equity Fund IV, Limited Partnership, and The 1818 Mezzanine Fund, L.P., as in effect on the Amendment No. 4 Effective Date and as amended after the Amendment No. 4 Effective Date in accordance with the terms of this Agreement. (c) amending Section 4.6(b) Termination of Agreement by amending subpart (iv) thereof by substituting the phrase "the earlier of March 30, 2001 and the Amendment No. 4 Effective Date" for the phrase "the Effective Date" the three times it appears therein; (d) amending Section 8.12(c) Cash Receipts and Disbursements Forecasts; Borrowing Base Certificate in its entirety to read as follows: (c) Cash and Collateral Reporting. The Borrowers shall deliver to the Administrative Agent (i) not less frequently than weekly the forecasted cash receipts and disbursements, in form and substance satisfactory to the Administrative Agent, of Heafner and its Subsidiaries, on a consolidated basis, for the succeeding 13 weeks, (ii) not later than Wednesday of each week, a Borrowing Base Certificate prepared as of the close of business on the preceding Friday, (iii) not less frequently than weekly, as requested by the Administrative Agent, a weekly summary accounts payable aging, and 4 5 (iv) on the 20th day of each calendar month, a Borrowing Base Certificate prepared as of the last Business Day of the preceding Fiscal Month. (e) amending Section 10.1 Financial Statements by redesignating subsection (c) as subsection (d) and inserting therein immediately following subsection (b) a new subsection (c) to read as follows: (c) Winston 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 Fiscal Month that is the last Fiscal Month of a Fiscal Quarter), copies of the unaudited balance sheet of Winston as at the end of such Fiscal Month and the related unaudited statements of operations and cash flows for Winston 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 Winston to the maximum extent possible as if it were a continuing operation (subject to audit adjustments) for the applicable period(s); (f) amending Section 10.3 Officer's Certificate by amending subsection (a) thereof in its entirety to read as follows: (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 and 11.5 as at the end of each respective period and the calculations necessary to determine the Leverage Ratio as at the end of each respective period, and (g) amending Section 11.1 Financial Covenants in its entirety to read as follows: SECTION 11.1 Financial Covenants. (a) Minimum EBITDA. Permit EBITDA - Heafner Group or EBITDA - Winston, for any period specified on SCHEDULE 11.1(A) attached hereto, to be less (or more negative) than the amount set forth opposite such period on SCHEDULE 11.1(A). (b) Minimum Fixed Charge Coverage. Permit the ratio of (i) the sum of EBITDA - Heafner Group, plus EBITDA - Winston, plus, during the period from the Amendment No. 4 Effective Date through the last day of the first Fiscal Quarter of Fiscal Year 2002, $12,000,000 (attributable to the amount of equity contributed in cash to Heafner on or immediately prior to the Amendment No. 4 Effective Date), minus cash taxes paid, minus Capital Expenditures (other than Financed Capex) to (ii) the sum of interest expense, plus scheduled principal payments on Debt (other than the Loans), in each case for Heafner and its Consolidated Subsidiaries (and Winston, to the extent not otherwise included therein) on a consolidated basis, for any period specified on SCHEDULE 5 6 11.1(B) attached hereto, to be less than the ratio set forth opposite such period on SCHEDULE 11.1(B). (c) Minimum Tangible Capital Funds. At any time during any Fiscal Month specified on SCHEDULE 11.1(C) attached hereto, permit the sum of Net Worth (including, without duplication, any amount of equity contributed in cash to Heafner from time to time on or after the Amendment No. 4 Effective Date, but excluding the effect of any gain or loss recognized by Heafner in connection with the disposition of Winston, and excluding up to $3,379,000 attributable to an adjustment to deferred taxes of Heafner resulting in a negative adjustment to Net Worth effective December 30, 2000), plus the outstanding principal amount of the Senior Notes, minus the aggregate net book value of all intangible assets, to be less than the amount set forth opposite such Fiscal Month. (h) amending Section 11.4 Acquisitions in its entirety to read as follows: SECTION 11.4 Acquisitions. Acquire, after the Amendment No. 4 Effective Date, any Business Unit or Investment or, after the Amendment No. 4 Effective Date, maintain any Investment other than Permitted Investments. (i) amending Section 11.5 Capital Expenditures in its entirety to read as follows: SECTION 11.5 Capital Expenditures. Make or incur any Capital Expenditures (excluding Financed Capex) in the aggregate in excess of (i) $6,750,000 for Fiscal Year 2001 and (ii) $12,000,000 for any Fiscal Year thereafter, PROVIDED that any amount of such allowance not used in a Fiscal Year may be carried forward, but only to the succeeding Fiscal Year. (j) amending Section 11.11 Amendments of Other Agreements by redesignating clause (iii) thereof as clause (iv) and inserting a new clause (iii) immediately following clause (ii) thereof to read as follows: (iii) the Series C Preferred Stock Purchase Agreement (k) amending Section 15.9(b)(iii) in its entirety to read as follows: (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, EXCEPT that the Required Lenders may reduce the Minimum Availability Reserve to an amount less than $15,000,000, "Eligible Assignee", "Proportionate Share", "Ratable", "Ratable Share", "Commitment Percentage", "Secured Obligations", or "Commitment"; (l) amending Section 15.2(a)(iv) by deleting therefrom the phrase "two times per year" and substituting therefor the phrase "three times per year"; 6 7 (m) further amending the Loan Agreement by deleting Annex A - Commitments and Annex B - Pricing Matrix and substituting therefor a new Annex A - - Commitments and a new Annex B - Pricing Matrix in the forms attached hereto as ANNEX 1 and ANNEX 2, respectively, and adding thereto new Schedules 11.1(a), 11.1(b) and 11.1(c) in the respective forms attached hereto as ANNEXES 3, 4 and 5. Section 2. Waiver. Effective in accordance with SECTION 3 hereof, the Lenders hereby waive compliance and the effects of noncompliance by the Borrowers with (a) the provisions of Section 11.1(a) (Minimum Net Worth) and Section 11.1(c) (Minimum Interest Coverage Ratio) of the Loan Agreement as of and for the Fiscal Year ended December 30, 2000 and (b) the provisions of Section 9.4 (Conduct of Business) to the extent that classifying the operations of Winston as "discontinued" would otherwise result in a violation thereof. Section 3. Effectiveness of Amendment. The provisions of SECTIONS 1 and 2 of this Amendment shall become effective as of the date hereof on the date (the "Amendment Effective Date") on which the Administrative Agent shall have received (1) an amendment fee in the amount of $450,000 for the Ratable account of the Lenders and (2) the following documents, each of which shall be satisfactory in form and substance to the Administrative Agent and in sufficient copies for each Lender: (a) at least seven copies of this Amendment duly executed by the Borrowers, the Subsidiary Guarantors and the Lenders; (b) a certificate of the president or chief financial officer of Heafner stating that, to the best of his knowledge and based on an examination sufficient to enable him to make an informed statement, after giving effect to the Amendment, (i) all of the representations and warranties made or deemed to be made under the Loan Agreement are true and correct in all material respects on and as of the Amendment Effective Date, and (ii) no Default or Event of Default exists; and the Administrative Agent shall be satisfied as to the truth and accuracy thereof; (c) evidence satisfactory to it that the Investors (as defined in the Series C Preferred Stock Purchase Agreement) have made or committed to make an additional cash equity contribution to Heafner in an aggregate amount not less than $12,000,000 on terms and conditions satisfactory to the Administrative Agent and the Lenders in their reasonable discretion; (d) an appraisal of all Inventory of the Loan Parties performed by Hilco Appraisal Services, LLC, or another qualified independent appraiser acceptable to the Administrative Agent, in form and substance satisfactory to the Administrative Agent; 7 8 (e) evidence satisfactory to the Administrative Agent that, effective as of the last day of Fiscal Year 2000, the net assets of Winston shall appear on the consolidated balance sheet of Heafner and its Consolidated Subsidiaries as "held for sale" and the business of Winston shall be accounted for as a discontinued operation; and (f) such other documents and instruments as the Administrative Agent may reasonably request. Section 4. Additional Event of Default. The failure by the Investors (as defined in the Series C Preferred Stock Purchase Agreement) to satisfy timely their respective commitments to make additional cash equity contributions to Heafner in an aggregate amount not less than $12,000,000, in each case upon the terms set forth in the Series C Preferred Stock Purchase Agreement, shall, at the option of the Required Lenders, constitute an Event of Default under the Loan Agreement. Section 5. Representations and Warranties. Each Borrower hereby makes the following representations and warranties to the Administrative Agent and the Lenders, which representations and warranties shall survive the delivery of this Amendment and the making of additional Loans under the Loan Agreement as amended hereby: (a) Authorization of Agreements. Each Borrower has the right and power, and has taken all necessary action to authorize it, to execute, deliver and perform this Amendment and each other agreement contemplated hereby to which it is a party in accordance with their respective terms. This Amendment and each other agreement contemplated hereby to which it is a party has been duly executed and delivered by the duly authorized officers of such Borrower and each is, or each when executed and delivered in accordance with this Amendment will be, a legal, valid and binding obligation of such Borrower, enforceable in accordance with its terms. (b) Compliance of Agreements with Laws. The execution, delivery and performance of this Amendment and each other agreement contemplated hereby to which such Borrower is a party in accordance with their respective terms 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 such 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 or by-laws or any shareholders' agreement of such Borrower or any of its Subsidiaries, any material provisions of any indenture, agreement or other instrument to which such Borrower, any of its Subsidiaries or any of such Borrower's or such Subsidiaries' property may be bound or any Governmental Approval relating to such Borrower or any of its Subsidiaries, or 8 9 (iii) result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by such Borrower other than the Security Interest. Section 6. Effect of Amendment. From and after the Amendment Effective Date, all references in the Loan Agreement and in any other Loan Document to "this Agreement," "the Loan Agreement," "hereunder," "hereof" and words of like import referring to the Loan Agreement, shall mean and be references to the Loan Agreement as amended by this Amendment. Except as expressly amended hereby, the Loan Agreement and all terms, conditions and provisions thereof remain in full force and effect and are hereby ratified and confirmed. The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Administrative Agent and the Lenders under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents. Section 7. Counterpart Execution; Governing Law. (a) Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed signature page of any party hereto by facsimile transmission shall be as effective as delivery of a manually delivered counterpart thereof. (b) Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York without giving effect to conflicts of law principles thereof. 9 10 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their respective officers thereunto duly authorized as of the date first above written. BORROWERS: HEAFNER TIRE GROUP, INC. [CORPORATE SEAL] Attest: By: /s/ Richard P. Johnson ---------------------------- Name: Richard P. Johnson ---------------------- /s/ J. Michael Gaither Title: President & CEO - ---------------------- --------------------- [Assistant] Secretary WINSTON TIRE COMPANY [CORPORATE SEAL] Attest: By: /s/ Richard P. Johnson ---------------------------- Name: Richard P. Johnson /s/ J. Michael Gaither ---------------------- - ---------------------- Title: Chairman [Assistant] Secretary --------------------- By: /s/ David H. Taylor ---------------------------- Name: David H. Taylor ---------------------- Title: Vice President ---------------------- 10 11 THE SPEED MERCHANT, INC. [CORPORATE SEAL] Attest: By: /s/ Richard P. Johnson ---------------------------- Name: Richard P. Johnson /s/ J. Michael Gaither ---------------------- - ---------------------- Title: Chairman [Assistant] Secretary --------------------- By: /s/ David H. Taylor ---------------------------- Name: David H. Taylor ---------------------- Title: Vice President ---------------------- CALIFORNIA TIRE COMPANY [CORPORATE SEAL] Attest: By: /s/ Richard P. Johnson ---------------------------- Name: Richard P. Johnson /s/ J. Michael Gaither ---------------------- - ---------------------- Title: Chairman [Assistant] Secretary --------------------- By: /s/ David H. Taylor ---------------------------- Name: David H. Taylor ---------------------- Title: Vice President ---------------------- 11 12 FLEET CAPITAL CORPORATION, as Administrative Agent and as a Lender By: /s/ Stephen Y. McGehee --------------------------------- Stephen Y. McGehee --------------------------------- Senior Vice President --------------------------------- BANK OF AMERICA, N.A., as Syndication Agent and as a Lender By: /s/ ??????????????? --------------------------------- Name: --------------------------- Title: --------------------------- FIRST UNION NATIONAL BANK, as Documentation Agent and as a Lender By: /s/ John T. Trainor --------------------------------- Name: John T. Trainor --------------------------- Title: Vice President --------------------------- MELLON BANK, N.A., as a Lender By: /s/ Roger D. ?????? --------------------------------- Name: Roger D. ?????? --------------------------- Title: V.P. --------------------------- PNC BANK, NATIONAL ASSOCIATION, as a Lender By: /s/ John W. Speiser --------------------------------- Name: John W. Speiser --------------------------- Title: Vice President --------------------------- 12 13 GUARANTORS: Acknowledged and consented to this 3rd day of April 2001: T.O. HAAS TIRE COMPANY, INC. By: /s/ J. Michael Gaither ----------------------------- Name: J. Michael Gaither ----------------------- Title: Vice President ---------------------- T.O. HAAS HOLDING CO., INC. By: /s/ J. Michael Gaither ----------------------------- Name: J. Michael Gaither ----------------------- Title: Vice President ---------------------- HAAS INVESTMENT COMPANY By: /s/ J. Michael Gaither ----------------------------- Name: J. Michael Gaither ----------------------- Title: Vice President ---------------------- 13 14 ANNEX 1 COMMITMENTS - -------------------------------------------------------------------------------- LENDER COMMITMENT COMMITMENT (IN $) PERCENTAGE - -------------------------------------------------------------------------------- Fleet Capital Corporation 32.50% 58,500,000 - -------------------------------------------------------------------------------- First Union National Bank 22.50% 40,500,000 - -------------------------------------------------------------------------------- Bank of America, N.A. 22.50% 40,500,000 - -------------------------------------------------------------------------------- Mellon Bank, N.A. 11.25% 20,250,000 - -------------------------------------------------------------------------------- PNC Bank, National Association 11.25% 20,250,000 ================================================================================ TOTAL 100% 180,000,000 - -------------------------------------------------------------------------------- 14 15 ANNEX 2 PRICING MATRIX
- -------------------------------------------------------------------------------------------------------------------- Tier LEVERAGE EURODOLLAR RATE BASE RATE UNUSED COMMITMENT RATIO LOANS LOANS FEE - -------------------------------------------------------------------------------------------------------------------- Tier I > 5.50 to 1 3.25% 2.00% 0.500% - - -------------------------------------------------------------------------------------------------------------------- > 5.00 to 1 and - Tier II < 5.50 to 1 3.00% 1.75% 0.500% - -------------------------------------------------------------------------------------------------------------------- > 4.50 to 1 and - Tier III < 5.00 to 1 2.75% 1.50% 0.500% - -------------------------------------------------------------------------------------------------------------------- > 4.00 to 1 and - Tier IV < 4.50 to 1 2.50% 1.25% 0.375% - -------------------------------------------------------------------------------------------------------------------- > 3.50 to 1 and - Tier V < 4.00 to 1 2.00% 0.75% 0.375% - -------------------------------------------------------------------------------------------------------------------- Tier VI < 3.50 to 1 1.75% 0.50% 0.375% - --------------------------------------------------------------------------------------------------------------------
15 16 ANNEX 3 SCHEDULE 11.1(a) EBITDA - Heafner Group The period of four consecutive Fiscal Quarters ending with: EBITDA - Heafner Group - ------------------------------ ---------------------- The last day of the first Fiscal Quarter of Fiscal Year 2001 $37,000,000 The last day of the second Fiscal Quarter of Fiscal Year 2001 $37,000,000 The last day of the third Fiscal Quarter of Fiscal Year 2001 $34,000,000 The last day of the fourth Fiscal Quarter of Fiscal Year 2001 $35,000,000 The last day of the first Fiscal Quarter of Fiscal Year 2002 $36,000,000 The last day of the second Fiscal Quarter of Fiscal Year 2002 $37,500,000 The last day of the third Fiscal Quarter of Fiscal Year 2002 $39,500,000 The last day of the fourth Fiscal Quarter of Fiscal Year 2002 and the last day of each $41,000,000 Fiscal Quarter ending thereafter 16 17 Minimum EBITDA - Winston Period EBITDA - Winston - ------ ---------------- The first and second Fiscal Quarters of Fiscal Year 2001 ($8,000,000) The first, second and third Fiscal Quarters of Fiscal Year 2001 ($8,000,000) The period of four consecutive Fiscal Quarters ending on the last day of Fiscal Year 2001 ($8,000,000) The period of four consecutive Fiscal Quarters ending on the last day of the first Fiscal Quarter of Fiscal Year 2002 ($3,400,000) The period of four consecutive Fiscal Quarters ending on the last day of the second Fiscal Quarter ($300,000) of Fiscal Year 2002 Each period of four consecutive Fiscal Quarters ending thereafter $0 17 18 ANNEX 4 SCHEDULE 11.1(b) Period Ratio ------ ----- The second Fiscal Quarter of Fiscal Year 2001 1.70 to 1 The second and third Fiscal Quarters of Fiscal Year 2001 1.60 to 1 The second, third and fourth Fiscal Quarters of Fiscal Year 2001 1.50 to 1 The period of four consecutive Fiscal Quarters ending on the last day of the first Fiscal Quarter of Fiscal Year 2002 1.20 to 1 The periods of four consecutive Fiscal Quarters ending on the last day of the second and third Fiscal Quarters of Fiscal 1.00 to 1 Year 2002 The periods of four consecutive Fiscal Quarters ending on the last day of the fourth Fiscal Quarter of Fiscal Year 2002 1.10 to 1 and the last day of each Fiscal Quarter ending thereafter 18 19 ANNEX 5 SCHEDULE 11.1(c) During the Fiscal Month Tangible Capital Funds - ----------------------- ---------------------- April, 2001 $28,000,000 May, 2001 $28,000,000 June, 2001 $30,000,000 July, 2001 $30,000,000 August, 2001 $30,000,000 September, 2001 $34,000,000 October, 2001 $34,000,000 November, 2001 $34,000,000 December, 2001 $34,000,000 January, 2002 $34,000,000 February, 2002 $34,000,000 March, 2002 $34,000,000 April, 2002 $35,000,000 May, 2002 $35,000,000 June, 2002 $37,000,000 July, 2002 $37,000,000 August, 2002 $37,000,000 September, 2002 $40,000,000 October, 2002 $40,000,000 November, 2002 $40,000,000 December, 2002 $40,000,000 Each Fiscal Month thereafter $40,000,000, as increased by $2,000,000 on the last day of the Fiscal Months of June and December of each Fiscal Year commencing on the last day of the Fiscal Month of June, 2003 19 EX-11.1 14 g67750ex11-1.txt COMPUTATION OF PER SHARE EARNINGS 1 Page 1 EXHIBIT 11.1 HEAFNER TIRE GROUP, INC. Computation of Earnings Per Share (Unaudited)
Year Ended -------------------------------------------------------- December 30, December 31, December 31, 2000 1999 1998 -------------- ------------ ------------- Average shares outstanding during the period 5,286,917 5,203,896 6,062,322 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 5,286,917 5,203,896 6,062,322 ============== ============ ============= Income applicable to common shareholders: Loss from continuing operations before extraordinary charge (1,555,000) (1,249,000) (2,685,000) ============== ============ ============= Income (Loss) from discontinued operations (39,938,000) (5,339,000) 177,000 ============== ============ ============= Loss on disposal of discontinued operations (1,200,000) -- -- ============== ============ ============= Net Income (loss) $ (42,693,000) $ (6,588,000) $ (4,724,000) ============== ============ ============= Income (loss) per basic common share: Loss from operations before extraordinary charge (0.29) (0.24) (0.44) Income (loss) from discontinued operations (7.55) (1.03) 0.03 Loss on disposal of discontinued operations (0.24) -- -- Net Income (loss) $ (8.08) $ (1.27) $ (0.78) ============== ============ ============= Income (loss) per diluted share: Loss from operations before extraordinary charge (0.29) (0.24) (0.44) Income (loss) from discontinued operations (7.55) (1.03) 0.03 Loss on disposal of discontinued operations (0.24) -- -- Net Income (loss) $ (8.08) $ (1.27) $ (0.78) ============== ============ =============
EX-12.1 15 g67750ex12-1.txt 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 30, December 31, December 31, 2000 1999 1998 (unaudited) (unaudited) (unaudited) ------------ ------------- ------------- Consolidated pretax income (loss) from continuing operations 1,657 1,632 (2,573) Interest 26,447 22,000 13,408 Interest portion of rent expense 7,051 5,640 3,263 ------ ------ ------- EARNINGS 35,155 29,272 14,098 ====== ====== ======= Interest 26,447 22,000 13,408 Interest portion of rent expense 7,051 5,640 3,263 ------ ------ ------- FIXED CHARGES 33,498 27,640 16,671 ====== ====== ======= RATIO OF EARNINGS TO FIXED CHARGES 1.05 1.06 -- ====== ====== =======
EX-21.1 16 g67750ex21-1.txt CHART OF SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 HEAFNER TIRE GROUP, INC. Corporate Structure Chart Heafner Tire Group, Inc. ------------------------ | | | ----------------------------------------------------------- | | | | Winston Tire The Speed California T.O. Haas Holding Co. Company Merchant, Inc. Tire Company T.O. Haas Tire Company Haas Investment Company -----END PRIVACY-ENHANCED MESSAGE-----